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Bush's Dangerous UN Trade Offer
Alan Tonelson
Monday, September 26, 2005

How nice it would be to think that, after the bruising fight over the Central America Free Trade Agreement, President Bush has learned something about how to do trade policy right. And how completely unjustified this conclusion would be.

Bush seems determined to continue the overall strategy pioneered by Bill Clinton of focusing U.S. energies on expanding trade with regions too small, too poor, too broke, too protectionist, or some combination of these traits to be anything but big net exporters to the United States, not big net consumers of American-made products. Obviously, this is a tried and true formula for expanding the trade deficit – which the International Monetary Fund has just reminded the world once again is the greatest threat to global financial stability.

Yet the President plans to follow up his victory on New Haven-sized Central America with a new series of free trade agreements with the likes of Thailand, Malaysia, and Egypt; with a Free Trade Area of the Americas that would expand NAFTA to all of Latin America, and with a world trade agreement designed to channel most of its benefits to developing countries. In other words, U.S. trade policy will continue to be an outsourcing policy in disguise unless Congress develops some more economic smarts.

The President also seems on the verge of repeating a separate major mistake that has plagued
U.S. trade policy for decades – wildly overestimating America’s ability to deal with nontariff trade barriers (NTBs) through conventional trade liberalization strategies. The latest example: his September 14 challenge to the UN economic summit “to eliminate all tariffs, subsidies and other barriers to free flow of goods and services as other countries do the same.�

Trade barriers come in two fundamentally different varieties. The first are the so-called quantitative trade barriers – tariffs and quotas. The second are the NTBs – a constantly expanding, highly diverse set of government regulations and policies that are ostensibly aimed at activities outside trade, but that have the inevitable effect of limiting or distorting trade flows. Examples can range from food safety regulations that imports fail to meet to subsidies for favored sectors of national economies to sales and consumption taxes that by nature penalize imports and promote exports to set-asides for disadvantaged domestic groups to – you guessed it – currency manipulation.

It might indeed be great, as the President claimed, to sweep away all these barriers – especially since in the last 30 years, as easily identifiable quantitative barriers have fallen, NTBs have multiplied. But when it comes to NTBs, it’s an impossible task. Even the very effort to get rid of them is likely to leave American domestic companies, workers, and farmers much worse off, not better. In fact, ongoing efforts on this front have already hopelessly confused U.S. policymakers and even many victims of the barriers. Of course, as Washington has floundered, foreign mercantilists prosper and America’s deficits keep ballooning.

Targeting NTBs is futile and probably counterproductive for the United States first of all because it’s so hard to create international consensus on defining legitimate regulations versus those that are thinly disguised trade barriers.

Some cases are obvious – like Tokyo’s legendary claims that American-made skis were unsafe in Japan because Japanese snow is so uniquely slippery. There’s also the European Union’s insistence that gas hose connectors must have fixed or welded connections. Let’s not forget Japan’s current requirement that imported produce be fumigated to kill even pests that can already be found in Japan. And how about Korea’s practice of forcing pharmaceutical makers to submit proprietary data in order to get their drugs approved for importation – and then leaking the info to their domestic rivals?

At the same time, many NTBs about which Washington loudly complains seem to be examples of sovereign countries’ clear right to protect the well-being of their citizens. Thus the U.S. Trade Representative’s office accused Japan of overreacting to “the discovery of a single imported cow with BSE [mad cow disease] in Washington State� in December, 2003. Yet Tokyo’s alleged alarmism looked more reasonable once U.S. authorities found a second such cow last June.

Similarly, is it completely indefensible for the European Union to ban all agricultural products using growth hormones? U.S. officials insist that these substances are perfectly safe, and have produced reams of scientific data to prove their point. But when exactly can anyone be certain of their long-term effects? And should the EU really have any grounds for attacking the military subsidies Washington provides for Boeing – especially since the EU provides its own subsidies to defense firms, and since many of the American subsidies were ultimately spent on Europe’s defense?

These aircraft subsidies – subject of a big transatlantic trade dispute – reveal two other formidable problems with attacking or eliminating NTBs. First, everyone – including the member states of the World Trade Organization and the tribunes who rule on trade cases in the WTO – agrees that countries must be allowed to subsidize and protect national security-relevant industries (although the WTO has shown signs of claiming the right to define a valid national security subsidy). Does Bush really want to challenge this principle, and in the process risk further increasing America’s dependence on foreign-produced defense goods?

Success in eliminating NTBs could also undercut many other values and practices Americans – including many Republicans and conservatives – hold dear. It could doom set-asides in federal contracting for constituencies like veterans, along with racial minorities and women. It could completely open up the U.S. broadcasting media to foreign ownership – including foreign government ownership. And it could completely destroy the principle and practice of federalism itself.

The second big obstacle to going after NTBs has to do with fungibility. As long as some NTBs remain legal and in place, Washington will encounter problems stemming from the fact that most of these myriad practices and supports can be substituted for each other. Their particular forms can be changed from illegal to legal almost at will in order to ensure that the same purposes are accomplished and the same beneficiaries aided.

Thus as soon as an export subsidy is outlawed, the same flow of money can be called a national security subsidy – especially if the beneficiary is one of a zillion industries that supply the defense sector. As soon as a production subsidy is proscribed, a government can decide to keep energy prices for producers artificially low. Or land prices. Or as many Asian governments have shown, an entire national currency – and thus an entire national production base – can be kept artificially cheap.

Even more troubling for the United States – European and Asian governments are masters of this subterfuge. They have been actively supporting big chunks of their economies for decades. Washington’s experience with subsidies and other mercantile practices is much more limited.

Finally, there’s the problem of evidence. Foreigners know all about U.S. NTBs because Americans dutifully and legalistically write everything down in black-letter legal and regulatory codes, as well as in budget line items. Few foreign governments are so meticulous and transparent, and many don’t even come close. Their governing and administrative systems are much less formal than America’s. They endow bureaucrats with considerable power and autonomy, and consequently many of their most important NTBs literally exist inside the minds of these officials.

As a result, NTBs can be introduced, lifted, or changed with a simple phone call or two – i.e., much faster than American businessmen, trade lawyers, and government investigators can even identify a problem. So America’s trade partners will always find it much easier to identify and eliminate U.S. NTBs than vice versa.

All of which means that a meaningful U.S. effort to abolish NTBs or greatly reduce NTBs will tie America up in a double policy bind. When U.S. policymakers can’t pin down the existence of foreign NTBs, they’ll literally be fighting phantoms. When NTBs can be identified, the record shows that challenges quickly turn into hopelessly subjective, and in fact unresolvable, arguments about what’s kosher and what’s not. Diplomats might as well debate which color is nicer – red or blue.

Moreover, there will be no escaping these binds as long as there exists no meaningful international consensus on acceptable and unacceptable economic behavior, or even on the need for simple fairness or consistency in trade and other international policies.

Therefore, if President Bush wants to make significant progress against NTBs, he’ll need to go unilateral. The U.S. government will have to set out its own standards and rules, and when the foreign protests begin, act as judge, jury, and court of appeals. Consensus among Americans on these subjects will of course be difficult to forge, and the outsourcing multinationals will resist the principle of unilateralism with all the cash-stuffed envelopes they can hand out. But building a national consensus on these issues will be infinitely easier than building a global consensus. What will not be unusually difficult is enforcing America’s writ once the national mind is made up. America’s role as by far the world’s biggest consumer market will see to that.

Putting the unilateralism back into U.S. trade policy would, of course, constitute a revolution just as profound as that which would result from eliminating all trade barriers. But unlike Bush’s total elimination of trade barriers, it’s a revolution that could strengthen the U.S. economy, and in the process put the world economy on a much sounder footing.

Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).