Trade in the Twilight of the Bush Administration

Resident Scholar Philip I. Levy
Resident Scholar
Philip I. Levy
We may be at the most critical juncture in U.S. trade policy for a dozen years. The renewal of Trade Promotion Authority, the fate of the Doha round of WTO talks, and the U.S. free trade agreement agenda all hang in the balance. The Democratic assumption of control of Congress this year means that long-unresolved tensions with Republicans on trade must now be confronted. The confluence of all these events will require some difficult policy choices that will set the tone for U.S. economic interaction with the world for years to come.

From a straight economic standpoint, the Doha round of trade talks are the most important. While this is the 9th round of global trade talks, it is the first to be held under the auspices of the World Trade Organization, created in the 8th (Uruguay) round of talks. In many ways, the Doha talks are meant to settle the unfinished business of the Uruguay Round. The earlier talks were the first in decades to deal with agricultural issues, but instead of seriously reducing existing barriers then, they opted to defer the pain and set the stage for future liberalization. The Uruguay Round talks were also the first in which developing countries were major participants. After the conclusion of the Uruguay Round in 1994, many developing countries were unhappy with the balance of the agreements. They felt their concessions on issues such as intellectual property protection outweighed the promises they received on agriculture, textiles, and apparel. This was a major motivation for the development focus of the current round's launch in Doha, Qatar in 2001.

The history helps explain the current impasse in the Doha talks. Since the modest agricultural liberalization of the Uruguay Round, the European Union has not found any new enthusiasm for scaling back the Common Agricultural Policy, while the United States has increased its intervention in agricultural matters (compare the Freedom to Farm Act of 1996 with the 2002 farm bill).

The Doha talks face two major hurdles: agriculture and the level of developing country engagement. Beyond these, there is the daunting complexity of the issues themselves.

What's more, there's a fundamental difference of opinion about the meaning of a "development" round. Many developing nations interpreted this as a promise of liberalization by large countries without any required reciprocity. This would be in the world trading system's long and unfortunate tradition of "special and differential treatment" for poorer countries. In contrast, the U.S. interpretation has been that developing nations would now be full participants and their top issues would be prominent on the agenda. Reciprocity would be required, particularly from the large developing nations like Brazil, South Africa, India, and China.

Thus, the Doha talks face two major hurdles: agriculture and the level of developing country engagement. Beyond these, there is the daunting complexity of the issues themselves. Negotiators estimate that after agreement is reached on the broad outlines of a deal, at least a year will be required to handle the details. Difficult issues of great importance to the United States, such as services market access, have barely advanced at all, awaiting progress in the other negotiating areas.

The round is not near completion, therefore. Nor will the old trick for wrapping up a difficult negotiation work--i.e., to declare victory with the limited accomplishments at hand and promise to reconvene before long. The problem is that the United States has pushed hardest for an ambitious agreement and has been the most willing to table bold offers of concessions. These offers have been contingent on other countries' reciprocity. To stop now would be to let others' pocket U.S. offers without offering anything in return. If the United States were to accept this, it would benefit from the unilateral liberalization, but such a lopsided deal would not likely be palatable for Congress.

In the history of WTO rounds, the expiration of U.S. negotiating authority has played a critical role. It has generally set the endpoint that signaled the need for posturing to end and hard bargaining to commence. Although the expiration of Trade Promotion Authority (TPA) is fast-approaching, the effective deadline has long since passed (given the lags required to handle details). TPA expiration will still present some important choices. A straightforward renewal of TPA for WTO negotiations would permit discussions in the Doha talks to continue. If TPA were to lapse, the talks could still continue, though the de facto hiatus would be more apparent than without TPA. A lapse in negotiating authority would virtually guarantee that no real progress is made until 2009.

The failure of a global trade round (as opposed to a postponement) is uncharted territory. At best, it would leave key issues in trade unaddressed and shake countries' confidence in the WTO's usefulness as a negotiating forum. At worst, it could cause countries to lose interest in the WTO. That could lead to uncomfortable questions about why anyone should obey WTO dispute rulings on existing agreements. The penalties for disobedience in the WTO are often rather small; the main incentive for obedience has been a desire to respect and uphold the institution. If the institution is no longer seen as useful or viable, that incentive could disappear. The alternative to progress on Doha may not be the status quo ante; it could be a major step backwards.

With WTO negotiations stymied, U.S. trade strategy has turned to the pursuit of free trade agreements (FTAs) on a bilateral or regional basis. From an economic standpoint, FTAs are distinctly inferior to global liberalization. There is the risk that orders will go not to the cheapest producer but rather to the producer with the greatest tariff preference. Further, in a world of globally integrated production, the proliferation of different rules across different agreements makes life inordinately difficult for business. For these reasons, prominent economists have decried the turn toward FTAs.

There are two principal counterarguments in FTAs' favor. First, if they help lead toward multilateral liberalization, other sins would be forgiven. Second, they are often undertaken for primarily political rather than economic reasons.

The failure of a global trade round (as opposed to a postponement) is uncharted territory. At best, it would leave key issues in trade unaddressed and shake countries' confidence in the WTO's usefulness as a negotiating forum. At worst, it could cause countries to lose interest in the WTO. That could lead to uncomfortable questions about why anyone should obey WTO dispute rulings on existing agreements.

The U.S. approach to 'competitive liberalization' has been explicit in enlisting FTA partners to play a constructive role in WTO talks. At one level, that works the way any alliance would work, with increased contact and understanding leading to better cooperation. At another level, FTAs can address key obstacles that also plague WTO talks. For a developed country like South Korea, this can involve a willingness to address agricultural liberalization, a long-standing sensitive area. For developing nations like those in Latin America, it can mean an acceptance of the idea of deep and reciprocal trade liberalization. Deepening here refers to a move beyond border barriers such as tariffs and quotas into questions such as investment and service regulation. The United States has demonstrated a comparative advantage in services trade (financial services, express delivery, etc.) and a large fraction of world trade in goods takes place within multinational corporations (hence the importance of investment to trade). Whereas developing countries have opposed efforts at dealing with these issues at the WTO, investment and services are central to U.S. FTAs. Not only do developing nations concede the principle of negotiating in these areas when they sign an FTA with the United States, their negotiators gain valuable experience in their discussions with U.S. counterparts.

The geopolitical aspect of FTAs is no less important. They are an important tool of U.S. foreign policy. An FTA signals allegiance, U.S. interest, and U.S. support in a way that WTO membership cannot. The two biggest FTAs-in-waiting illustrate the point. Adoption of the South Korean FTA would not only constitute a significant market opening but would also provide a major boost to U.S. standing in Asia. At a time when China has been proposing regional configurations such as "ASEAN plus three" which just happen to exclude the United States, the South Korean FTA would restore the United States to the center of commercial discussions in the region. Japan has already expressed interest in an accord with the United States if South Korea successfully concludes one. On the other hand, if the United States were to fail to adopt the agreement, it would have serious negative foreign policy implications and diminish American influence in the region.

The effects of rejecting the Colombia FTA would be similar. To snub a major regional ally, one that sits next door to a consistently and increasingly hostile Venezuela, could greatly diminish support for the United States within Latin America.

For decades trade policy was seen as an important part of foreign policy and received bipartisan support on that basis. That bipartisan support ended in the early 1990s with the introduction of labor and the environment as wedge issues. Disputes over these issues led to the lapsing of trade negotiating authority in the mid-1990s after the Uruguay Round. Labor and environment were also the leading subjects of the May 10 agreement this year between the Administration and Congress. Before considering that agreement, it's worth exploring the issues themselves.

There are at least two explanations for the push to include binding labor and environmental measures in trade agreements. One possibility is that this could be motivated by an altruistic concern for the citizens of FTA partner countries. The argument could be that the countries fail to realize their own self-interest or have democratic deficiencies such that the United States is better positioned to determine appropriate labor and environmental legislation for them. Aside from the objectionable paternalism, this neglects the evidence that progress on labor rights and environmental quality have historically advanced with economic development. It is trade and growth that will bring progress on these fronts, not additional regulation.

An alternative possibility is that trade agreements are just serving as a lever to get partners to adopt measures that will do them no good but will help us. The notion that the United States will benefit by compelling trading partners to raise their costs is highly dubious. There is also the very real danger that overloading the trade agreement lever will break it. In most cases, the United States market is already open to FTA negotiating partners. The United States typically requests a series of politically difficult liberalization measures from partners that will enhance U.S. market access. If one then adds on undesirable regulatory measures, there comes a point at which partners will balk. That point will differ depending on the partner country. The fact that some small, particularly eager country is willing to accede to U.S. demands does not mean that the approach will work worldwide.

To date, labor and environmental measures in U.S. FTAs have required partners to enforce their own laws. This maintains a degree of respect for their autonomy to set their own domestic policy. The May 10 agreement purports to push beyond this into enforceable commitments based on international understandings. The crossing of this threshold was justified by the promise that the Peru and Panama FTAs, completed and before Congress, would be passed. It was also heralded as a return to the bipartisan era of trade policy.

Much of the scaffolding is already in place to build a modern open trading system from the ground up that would enhance trade and growth and could be expanded. The principal obstacle to this vision is U.S. willingness.

The Panama FTA is minor, but the Peru FTA is an important signal of support for President Alan Garcia, who has been engaged in ideological battles against anti-democratic allies of Venezuela's Hugo Chavez. It is not as significant as the Colombia or South Korea FTAs, however, nor as vital as the extension of trade promotion authority--all items left unsettled by the May 10 agreement. Nor does the return of bipartisan trade support seem imminent. It is too late for this Administration to launch serious new liberalization efforts and the next Administration, whether Democratic or Republican, will need to reach its own understanding with the next Congress. Those 2009 discussions will undoubtedly take the ill-advised labor and environmental requirements of the May 10 accord as the starting point for discussion. Rather than laying the groundwork for future liberalization--the great promise of FTAs--this moves the United States away from international sentiment about the appropriate scope of trade agreements. The passage of the Peru FTA seems scant recompense for such a lasting move in the wrong direction.

It may seem odd to assess the pros and cons of FTAs without bringing up U.S. jobs gained or lost, wages driven up or down, or new waves of trade flows. These factors are the standard fare of contentious debates over FTA passage. Those debates have been remarkably disconnected from economic reality. The acrimonious debate over adopting the Central American –Dominican Republic Free Trade Agreement (CAFTA-DR) in 2005 serves as a prime example. The countries involved had largely free access to the U.S. market before CAFTA was adopted through the Caribbean Basin Initiative; 80 percent of goods entered the United States free of any tariff. The countries involved--Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua--are also small. The detailed 2004 study of the U.S. International Trade Commission of CAFTA-DR's likely effects reached the following conclusion:

[G]iven the small economy and market size of the CA/DR region relative to the United States . . . (increases in trade) would be from a small initial level and, thus, are likely to have a minimal impact on production, employment, or prices in corresponding U.S. sectors.

This minimal impact was found even in sectors with more significant liberalization, such as textiles and apparel. This is not to say that CAFTA-DR was unimportant. It bolstered an important region of major interest to the United States. It helped lay the groundwork for future hemispheric negotiation. But the direct economic impact on the United States will likely be negligible. Yet the agreement passed in the House of Representatives by a vote of 217 to 215.

For an FTA to have a significant economic impact on the United States, the partner country has to be large and the agreement has to remove major barriers to trade. For the kind of labor impact that is commonly feared, a large trading partner would have to have not only lower wages, but also comparable productivity. If another country's workers are half as expensive but half as productive at producing a particular type of good, there is no cost advantage.

The United States has prospered by pursuing a relatively open trading regime in recent decades, which means that major barriers are relatively scarce. In those instances in which there are still significant barriers to free trade (e.g. sugar), those areas have been largely exempt from major liberalization in FTAs (sugar was excluded entirely from the FTA with Australia).

A clearer understanding of the true costs and benefits of trade liberalization agreements may help foster a more constructive dialogue toward a new trade policy. With a durable bipartisan consensus on the importance of trade, there are feasible policies that could promote international economic integration and prosperity and strengthen U.S. standing in the world. Without such a consensus, the challenges of both internal and external divisions are daunting.

It is not within the United States' power to single-handedly bring the Doha round to a successful conclusion. Should the United States seize the opportunity to send positive signals by removing trade-distorting agricultural subsidies in the next farm bill, there is hope that other countries would respond. Key countries such as Brazil seem poised to play a leadership role in breaking the deadlock that exists. A necessary but not sufficient condition for this progress to take place would be Congressional passage of new Trade Promotion Authority. For this to be meaningful for the WTO, such a bill would have to be free of poison pills. In this instance, that means labor and environmental requirements that have been already been roundly rejected in the WTO context.

If domestic fears can be overcome, this could open the way for a return to the bipartisan backing of trade and foreign policy that prevailed through the Cold War.

Ideally, rather than adding new burdens to the trade agenda, the next TPA would lay out a path of open and inclusive trade liberalization. It would authorize work on stitching together existing trade agreements and leave an open door for any country that wished to adopt the high standards of liberalization and join. The United States has been explicitly pushing toward this goal in the Middle East, with the President's goal of a Middle East Free Trade Area by 2013. In other regions the possibilities are tantalizing. While negotiations for a Western Hemisphere Free Trade Agreement of the Americas have stalled, agreements have been negotiated with hemispheric partners from Canada to Chile. The open door policy, laying out explicit and objective requirements for joining, would not only offer an immediate opportunity for countries such as Uruguay but would also make clear to important allies such as Brazil that they are not being excluded. Further, it would make clear the commitment to high standards in trade agreements that the Congress has consistently demanded. In Asia, agreements have been negotiated with Australia, Singapore, and Korea and negotiations have been launched with Thailand and Malaysia. Japan seems interested and New Zealand would be a natural addition (albeit one with agricultural prowess--traditionally a sticking point).

Thus, much of the scaffolding is already in place to build a modern open trading system from the ground up that would enhance trade and growth and could be expanded. The principal obstacle to this vision is U.S. willingness.

Unfortunately, U.S. trade policy discussions have devolved into domestic policy discussions with trade serving as a proxy for forces that cannot be opposed (technological change and domestic competition). There is ample room for good policy here. There must be policies within the United States to address insecurities about the rapid pace of economic change. There should be a well-thought out safety net that limits the risks faced by individual workers. However, trade agreements should be seen as major instruments of foreign policy, not primarily domestic concerns. Until domestic concerns are addressed, though, trade policy may suffer as the surrogate for all the modern economic challenges that face the U.S. populace.

If domestic fears can be overcome, this could open the way for a return to the bipartisan backing of trade and foreign policy that prevailed through the Cold War. TPA extension would be a major step in the right direction, but only if done properly. It will not immediately cure the ills of the Doha talks, and if it is done with terms that are anathema to the rest of the world, the victory will be Pyrrhic. If such terms are inescapable, it would be better to wait and let the world wonder whether the United States has lost its commitment to global economic leadership than to act and remove all doubt.

Philip I. Levy is a resident scholar at AEI.

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