October 1991

Another Great Victory of Ideology
Over Prosperity

What the Bush Administration should learn from the instructive failure of the "Uruguay round" of trade talks

by Robert Kuttner
In September of 1986 the United States led the major nations on an improbable crusade to bring unmitigatedly free trade to the world. Not surprisingly, it failed. Why the so-called "Uruguay round" of trade talks stalled last winter makes sad reading, because it shows how painfully the ideology and negotiating strategy of U.S. policy-makers is at variance with U.S. commercial interests. The Bush Administration may have won the shooting war against Iraq, but it has been losing a more important war to save the U.S. standard of living.

In retrospect, the American strategy for these trade talks was oddly contradictory, if not self-defeating. The United States is among the world's most open markets. Most foreign producers can sell here at their pleasure, while U.S. firms attempting to compete overseas often face impenetrable barriers or preconditions. Yet in the trade round U.S. negotiators spent most of their energy attacking the relatively open European Community for its farm policies, and gave a virtual free ride to far more protectionist nations like Japan, Korea, and Brazil. The goals of the farm lobby, representing about 10 percent of U.S. exports, tended to crowd out other U.S. negotiating goals, and the impasse over agriculture subsidies ultimately swamped the entire round last December.

To understand why the American strategy for the trade round was so badly out of sync with U.S. interests, one needs to consider the logic of the global trading system and the U.S. role in it. Since 1948 commerce among nations has been governed under the auspices of the General Agreement on Tariffs and Trade. The GATT is less an international organization than a standing diplomatic conference. The joke has it that "GATT" stands for General Agreement to Talk and Talk.

Two basic political features of the GATT stand out. First, the United States, as the world's largest economy and as a devout believer in laissez-faire, is the system's special patron. Other nations tend to be rather more opportunistic about using the trading system to seek advantage for their own industries: U.S. officials care more about the system as a whole, viewing it as a potent and relentless engine of free markets, domestically and globally.

Second, GATT enthusiasts in the United States and elsewhere tend to believe that the logic of liberal trade is cumulative; commerce must become progressively freer of government intrusions, lest the whole system slide backward into protectionism. A favorite, and misleading, GATT metaphor is that "free trade is like a bicycle: you have to pedal ever faster or you tip over."

The GATT became the world's sole trading regime in 1950 by default, when a proposed, more powerful, International Trade Organization failed to win ratification in the United States and elsewhere. Since then the GATT framework has been useful mainly for negotiating reciprocal reductions in tariffs levied by nations on manufactured goods. Entire areas of trade, such as banking, insurance, farm products, and textiles, are not covered by the GATT. It largely lacks jurisdiction over bilateral assaults on free trade, as when Mexico requires that about half of the content of American auto "imports" be produced locally, or when Japan locks out Korean Hyundais. The GATT also fails to regulate a wide variety of de facto barriers to open commerce, such as subsidies, quotas, cartels, and preferential financing schemes. Nor is the GATT a true framework of common rules. For example, it does not cover such commercial basics as the protection of intellectual-property rights--patents and trademarks. And it lacks a judicial enforcement mechanism to carry out its rulings, which means that national decisions about whether to comply with the GATT are political--they are up to the nations involved.

As the economist Albert O. Hirschman observed nearly fifty years ago, trade between nations, even when conducted by private firms, is necessarily a political act, because the rules of commerce vary so widely from nation to nation. Brazil and Argentina, for example, lack effective laws against commercial piracy. The government of Korea routinely extends credit to large export firms at very low interest rates, and sometimes even subsidizes the principal as well. Japan does not allow foreign stock brokerages to operate in Tokyo on a par with Japanese ones. Germany allows interlocking ownership between large banks and corporations--which is prohibited in the United States. Other important industries, such as civil aviation and petroleum, are regulated or private cartels. In GATT jargon all of these are known as "non-tariff barriers." Taken together, they are far more damaging and insidious than tariffs, which are, as economists say, "transparent"--you know precisely what you are up against.

Since there is no world government, and hence no common body of commercial law across national frontiers, trade law must be understood as a mechanism to permit commerce among economies that play by different rules. Far from trade's being governed by an invisible hand, any movement toward freer commerce or common rules or reciprocal results must be negotiated and constructed, piece by piece.

Despite the GATT, with its high principles of multilateralism and nondiscrimination, disputes that arise from this most imperfect meshing of national commercial systems often must be settled bilaterally and politically. This will remain true until a global body of commercial law exists. When U.S. auto makers complain that Mazda or Toyota is "dumping" mini-vans (pricing them below cost to drive out domestic competitors), they must take their complaint to the U.S. government, not to court. Although the U.S. government could levy penalty tariffs against the import, it often prefers to negotiate a deal with the foreign government. This is not a judicial proceeding; the U.S. government is free to accept or reject the petition. U.S. diplomats usually have bigger fish to fry with the Japans, Koreas, and Brazils; generally the Departments of State, Treasury and Defense--all with other missions--advise against "getting tough" with allies over trade disputes.

Trade affects economic prosperity, investment, and jobs--matters that are hardly trivial. But our prevailing ideology holds that these matters are the proper business of the marketplace; diplomatic leverage should be reserved for the high politics of war and peace. The use of America's geopolitical influence to advance its economic interests is deemed protectionist. The only fit goal for trade policy is to nudge the world toward ever freer markets--a conceit that our trading partners are happy to indulge. For our mentality allows smaller and weaker nations the benefits of strategic trade policies, and denies them to the United States.

One legacy of reciprocal tariff reduction is a hallowed but misleading concept known as the most-favored-nation principle. Countries granted most-favored-nation status are able to sell products in foreign markets at the lowest prevailing tariff rate. This principle, which covers GATT members, was intended to ensure that the products of all major trading nations would be traded subject to the same strictures, regardless of their national origin. This ideal is called nondiscrimination. However, with the rise of non-tariff barriers, nations that played by mercantilist rules, using subsidies, quotas, piracy, targeting, and limits on imports, nonetheless enjoyed free access to our markets under the nondiscrimination doctrine. These emerging forms of discrimination were thrown into relief at the Tokyo round (1973-1979), which encouraged but did not require GATT members to adhere to codes of conduct. Thus, despite the GATT's nominal principles, discrimination has been central in the trading system.

Looking at the trading system in the early 1980s, the Reagan Administration had three broad concerns. First, despite nominally low tariffs, all the non-tariff barriers added up to a global system of covert protection, which was swamping both the ideal of free trade and the U.S. trade balance. Second, our trade imbalance was reaching dangerous levels--more than $156 billion by 1986. This was partly the result of an overvalued dollar, which priced many U.S. products out of world markets, but it also reflected the fundamental asymmetry in the openness of different nations. Generally the United States was the world's most penetrable major market. Among the advanced industrialized countries America rook roughly 57 percent of the total manufactured exports from the Third World; Japan took only 12 percent. And third, as one domestic industry after another was losing out to foreign competition, Congress was making increasingly protectionist noises, most notably about Japan. This threatened not only harmonious relations with our leading Pacific ally but also America's credibility within the GATT as the champion of liberal trade.

The Reagan Administration hoped that a new, ambitious trade round might address all three problems. By pulling down all the covert barriers to free trade, a round could try to make other nations operate their economies more like ours, according to market principles, free from government distortions, and using norms of "transparency" that would give all economic contestants the guarantee of equal treatment and also avenues of legal redress. That, in turn, would give U.S. exporters new access to foreign markets, temper our trade imbalance, and damp down protectionist pressures.

In 1982 William Brock, then the U.S trade representative, decided, in line with the bicycle theory, that it was time for a new round of trade talks that would finally address the several covert forms of protection not remedied by tariff reduction. After a few false starts the round finally began in 1986, at Punta del Este, Uruguay, and became known as the Uruguay round.

At Punta del Este the Reagan Administration persuaded other nations to accept a remarkably sweeping negotiating agenda. It included bringing all forms of "services"--banking, insurance, engineering, films, broadcasting, aviation, and shipping--and also agriculture and textile trade under the GATT for the first time. It included, as well, working out common rules for the use of subsidies, a common understanding of what constituted dumping, rules for the consistent protection of intellectual property and for fair play on domestic-content and licensing requirements, and mechanisms for beefing up the GATT's ability to enforce its own rulings. The agenda was utopian. It called for nothing short of a common framework of global commercial law--a major delegation of national sovereignty--to be achieved in four years. In line with the usual procedures, working groups in each functional area were to begin technical discussions immediately, a "midterm" review by cabinet-level negotiators was set for late 1988, and the round was to be concluded by 1990.

The politics attendant to the Uruguay round were difficult, domestically and internationally. The domestic challenge for the Administration was to build a coalition of economic interests--farmers, bankers, multinational corporations--that would be net winners if the round succeeded. The international politics necessary for success was even trickier. Most of the world's nations do not have America's appetite for ever freer trade as an end in itself. Japan and, to a lesser extent, the European Community are relatively content with their present blend of private capitalism and state-led mercantilism. The EC Commission considers its Common Agricultural Policy essential to its emerging political union. The Japanese have grown wealthy on chronic trade surpluses. Most Third World nations that have industrialized have done so with heavy state involvement--through subsidies, limitations on imports, state financing, and state-assisted piracy.

Even though the United States was the world's most open market, and even though American firms were the primary victims of foreign mercantilism, the logic of a U.S.-inspired trade round required the United States to begin by offering concessions rather than making demands. U.S. demands for the opening of foreign markets are generally more effective in quiet bilateral negotiations, in which the United States is able to throw around its economic and political weight. But multilateral negotiations are conducted in broad daylight, and the rituals of the GATT tend to elevate small, poor nations to the same status as big, rich ones. "Carla Hills [the current U.S. trade representative] is a tiger in bilateral negotiations," says the trade lobbyist for a major industry association. "She is a pussycat in the GATT."

For the new round to begin at all, the United States had to offer Third World nations such carrots as the prospect of freer exports of textiles and farm products to the rich markets of the United States and Europe, and also relief from the sticks that the United States sometimes wields, such as Section 301 of the 1974 Trade Agreements Act, a tough provision that allows the United States to retaliate in order to pry open foreign markets. In return, the United States hoped to persuade Third World nations to run their economies more in the American image--to allow foreign banks entry, to privatize state-subsidized industries, to get rid of domestic-content requirements, and to offer U.S.-style patent protection. This logic caused the identified villain of the round to become the European Community, with its protected agriculture. Japan, by far the most protectionist of the major industrial nations, kept a very low profile and enjoyed something of a free ride.

As the round progressed, the United States found itself oddly on the defensive. America was preaching free trade, and "Third World nations took us at our word," one trade negotiator recalls. The Americans found themselves pressed to abolish textile quotas, to open farm markets, to swear off "voluntary" restraint agreements that had limited import penetration in steel. India and other poor nations proposed to expand the definition of services to include "labor services," which is to say they sought the free immigration of low-wage workers attached to foreign construction companies.

In most of the fifteen working groups scant progress was made. In the important intellectual-property area the working group tentatively agreed only to an incomplete and vague set of principles. In the meantime, some nations, notably Mexico and Chile were persuaded to adopt U.S.-style patent protection by U.S. trade officials who employed the old-fashioned method--threatening retaliation if they refused. By the time the round collapsed, major industries that had been expected to be key supporters, such as the pharmaceutical and telecommunications industries, considered the intellectual-property proposals worse than nothing.

The round ended with the working group on subsidies and dumping far from agreement. Many nations view regional, industrial, and environmental subsidies as legitimate tools of economic development. The United States, in principle, argues that "trade-distorting" subsidies should be prohibited. But in a sense all subsidies distort trade, because they cause products to be priced differently from the way they would have been priced in the absence of the subsidy. The United States sponsored what it called a "traffic light" system. Some subsidies, such as environmental ones, would get a green light; others, such as explicit export subventions, would get a red light, and be prohibited. Yellow-light subsidies could be challenged if they seemed to distort trade. Negotiators never could agree on either a precise test or an enforcement mechanism--but several nations pressed the United States to get rid of its own anti-dumping laws in exchange for this minimal move toward global standards.

The group working on freer trade in financial and other services failed even to agree on a common framework. American negotiators belatedly realized that freer trade in telecommunications, as long as it left foreign state telecom monopolies intact, would provide foreign producers with freer access to the U.S. market without adequately opening foreign markets. European nations and others, citing "cultural" concerns, refused to provide free access to American films and TV programs. Nor was there much progress in dealing with the subtle, covert ways in which some nations coerce U.S. manufacturers to produce overseas as a condition of doing business.

Much to the relief of many U.S. industries, which feared that other U.S. objectives would be traded away in exchange for progress on the farm question, the round finally came a cropper over agriculture. The liberalization of farm trade had been the special objective of Clayton Yeutter, who served as U.S. trade representative from 1985 to 1989 and as Secretary of Agriculture from 1989 through February of this year. Yeutter repeatedly deemed agriculture the crucial issue for the entire round. He grandly proposed that all nations should eliminate all farm subsidies and price supports by the year 2000--an objective that neither the European community nor many U.S. farmers took seriously. By the time the round collapsed, the Europeans were willing to support a 30 percent cut in subsidies over a ten-year period, while the Americans were insisting on a 90 percent cut in export subsidies and a 75 percent cut in internal supports. Although Europe is committed in its domestic policy to reducing the cost of its farm program, there is virtually no support there for a completely free market in farm products, which is viewed as dangerously unstable. The U.S. position on farm trade was an epic case of the best being the enemy of the good.

Last February, Bush Administration officials endeavored to resurrect the failed round, working through GATT officials. Arthur Dunkel, the GATT director-general, persuaded the Europeans to soften their bargaining position on agriculture. That gave the Americans the necessary fig leaf, and they agreed to come back to the table. In May, by a close margin, Congress authorized the Administration to negotiate for another two years. At this writing, discussions at the working-group level have resumed, attempting to pick up where the failed negotiations left off. However, heads of state meeting in London at the July summit of the industrialized nations were embarrassed that the agriculture talks--the make-or-break issue for the round--remained deadlocked.

In the meantime, the United States embarked on an ambitious effort to negotiate a free-trade agreement with Mexico. This plan aroused the criticism of groups not normally involved in trade policy. Environmentalists realized that free trade with Mexico, whose health, safety, and environmental standards are significantly weaker than those of the United States, would be an invitation for U.S. companies to flee south, and also a deterrent to tough standards at home. Some eminent free-traders, among them the Columbia University economist Jagdish Bhagwati, who was recently named the senior economic adviser to the GATT, warned that a preferential arrangement with Mexico could seriously undermine the GATT ideal of nondiscrimination, and that it would also invite new demands for bringing regulatory and social policies into harmony as a condition of trade generally. Many Europeans took the Mexico deal as an ominous sign that the United States was giving up on the multilateral GATT. U.S. support simultaneously for a more comprehensive GATT and for a preferential North American trade bloc is just one more sign of the general incoherence of our trade policy.

Congress's backing of a U.S.-Mexico free-trade arrangement was conditional. It must win legislative approval again when the draft agreement is completed, presumably in 1992. The surprisingly strong criticism of the Mexico deal led to widespread recognition of the uncomfortable reality that when you import a nation's goods, you also import its social, labor, and environmental standards. The deal further underscored the fact that free trade is in reality a delegation of sovereignty--not to an international government but to a global market with uneven rules. Therefore, the gains from trade between any two nations are only as reciprocal as their actual conduct of trade. If Japan's markets are significantly less open than our own, and opening them is a low diplomatic priority for Japan, there is no assurance that "freer" trade will be a net gain for the United States. If Mexico's wages are one seventh our own, and U.S. firms flee to Mexico, there is no assurance that the predicted rise in Mexico's purchasing power will compensate for the loss of our jobs.

Although the collapse of the Uruguay round last December was accompanied by dire economic prophesies, there could be worse outcomes than for this trade round to fizzle again. That, at least, would force the United States to revise its goals.

A more modest but attainable trade-policy goal would be to acknowledge the radical disparity in the rules by which diverse economic systems play, and to seek a trading system that accommodates diversity rather than demanding nominal conformity. Concretely, this would mean a shift in the operating principle of the GATT, from unconditional to conditional free trade. Nations that agreed to a common set of practices on subsidies, pricing, intellectual-property protection, social standards, and, generally, the right to do business would enjoy free access to one another's markets. Nations that did not agree would retain the right to operate more mercantilist or exploitive economies internally--but their access to other nations' markets would be conditional and would have to be negotiated, country by country and sector by sector. Ironically, a step backward from the utopian ideal of perfect free trade would enhance both the health of the multilateral trading system and the competitiveness of the United States.

The stakes are anything but academic. It matters whether the products made in the United States--and the jobs, the investment capital, and the knowledge embedded in those products--get roughly equal access to world markets. By viewing the trading system in utopian terms, denying that the policies of other nations affect our access, and insisting that the only kind of national security is military, the United States is slowly squandering both its standard of living and its economic influence in the world. To revise our trade strategy will require an acknowledgment that we have economic interests to defend and advance, in addition to ideological goals for the world.

Another Great Victory of Ideology Over Prosperity

Another Great Victory of Ideology
Over Prosperity