The Economist
Trade should be high on the list of priorities for the new American president. But America and Europe must learn to share leadership with other countries
MORE than at any other time in history, a growing economy today needs to be an open economy. And trade policy is essential to an open economy: when doing business with foreign countries, you need agreed ground-rules. But who makes the rules, and what should they be? For half a century, America and Europe have led the way in answering these questions. Now that hegemony is under challenge.
World trade policy has been in a state of flux since last year's debacle in Seattle, when members of the World Trade Organisation (WTO) tried unsuccessfully to launch a new round of trade talks. Contrary to popular wisdom, the reason for the collapse in Seattle was not the presence of several thousand disgruntled demonstrators. Instead, it was a failure of the self-appointed vanguard of America and Europe to respond to the concerns of developing countries. Since Seattle, the big two have been further distracted by a string of ugly bilateral trade disputes and by their efforts to shepherd China into the WTO. It comes as no surprise, therefore, that developing countries are looking to new champions and new arrangements to foster trade.
To understand why many countries are no longer inclined to give America and Europe the benefit of the doubt, consider worldwide trade growth since the Uruguay round of trade talks was completed in 1994. Trade has risen significantly faster than GDP. But despite the round's mission to improve market access for developing countries' exports, the share of global exports originating from America and Europe has also grown. This partly reflects faster growth in rich economies, particularly America. But protectionist subsidies and price-supports have also shown a nasty habit of growing along with GDP. In any event, many developing countries now feel that they were short-changed in the Uruguay round, and they are determined not to let that happen again.
Rising stars
This has come as something of a surprise to the big two, who with Japan and Canada have often negotiated as a "quad" group. In some cases, the unexpected power of smaller countries has resulted from the consensus-driven nature of multilateral bodies originally conceived by the big powers. In the Organisation for Economic Co-operation and Development (OECD) and the WTO, all members have veto power over the biggest. Now, some of them are using it.
Mexico, for example, held up the OECD's new guidelines for foreign investment in June. It was concerned that standards related to labour and the environment were too restrictive. Mexico is also stonewalling on a bilateral agreement with China that it needs to enter the WTO. That accession, as recent months have made clear, is America's top priority in trade policy. And Mike Moore, the WTO's director-general, says that China's entry is "probably more important than a new round."
Another country that is emerging as a heavyweight is Brazil, which has gone through several changes of approach in the past few years. It began as a largely closed economy, known mostly for its skirmishes with Canada over domestic subsidies to makers of regional jets. Then the government decided to revolutionise Brazil's agriculture with a commitment to genetically modified (GM) crops, ripe for export. With the zeal of a convert, Brazil became a cheerleader for a new round of top-level trade talks in the WTO, with standards for GM foods as a headline issue. Brazil's outspoken support for a new round was music to the rich traders' ears. But on second thoughts, Brazil has decided to make an agreement on agriculture, based on access to rich countries' markets, a precondition of a new round.
This closely parallels the line taken by India, a leader of poor countries in trying to ensure that America and Europe deliver on the market-access promises they made in the Uruguay round. In exchange for acceptance of international standards for intellectual-property rights, poor countries were meant to get a warm welcome for their exports of labour-intensive goods such as farm products and textiles. That was supposed to include an end to export subsidies, which make crops artificially cheap on world markets, in both America and Europe. But although America has a timetable for eliminating such subsidies, and Europe plans at least to scale them back, neither has proposed to scrap them until long after they had hoped to complete a new round of trade talks. In the meantime, intellectual-property rights have risen up to bite the rich countries back: India, for instance, has decided that knowledge of some plant remedies originated with its folk medics, and is trying to stop western pharmaceutical companies from using the relevant chemicals without paying royalties. This sort of gesture might seem petty, but it demonstrates developing countries' new determination to get what they can from the system.
Egypt and South Africa have also gained in influence. They are not superstars, but they have enough of the right ingredients--developed industries, educated people, relatively strong legal systems and decent infrastructure--to make a difference. Other countries have banded together to find strength in numbers. The Cairns Group, whose membership includes Canada and crop exporters from the Pacific and South America, has followed the Americans and Europeans in putting forward its own comprehensive proposal for agricultural reform. Next week, all of Africa's trade ministers, including the 20 members of the Common Market for Eastern and Southern Africa (COMESA), will meet in Gabon. All of these countries share a single mission: to see to it that rich countries honour past commitments, and to offer alternatives to their proposals in future.
Sleeping giants awaken
Even the most prodigious grumblings and stallings of Brazil, India, Mexico and their cohorts may soon be put to shame. When China enters the WTO, perhaps by the middle of next year, America and Europe will face a contender with the potential to be a heavyweight champion-and a prickly one, to judge by its recent behaviour. Exactly when and on what terms China will join the WTO is still in question, thanks to the country's foot-dragging on technical issues and over the timetable for implementation of trade agreements. China has always wanted to be a part of the next WTO round. In September the prospect of new talks appeared sufficiently distant to merit some backsliding on accession. China is balking at accepting greater commitments to free trade than other developing countries, to which the WTO normally grants special treatment. But China, as the big twohave emphasised, is no ordinary developing country.
The latest talks in Geneva this week have yielded agreement on most of the legal requirements of China's accession. Trade bigwigs from America and Europe still insist that China could join the WTO by the end of the year, in time to become part of Bill Clinton's presidential legacy. This optimism may be misplaced, but even a conservative estimate, taking into account technical details yet to be fixed in the multilateral pact, is that China will accede by the third quarter of 2001. One of the surest signs that China is truly close to accession comes from just outside its own borders. Russia, another messy candidate for WTO membership, restarted talks with America, Canada and Europe this week after a period of dormancy in its seven-year-old application. Lagging too far behind China in WTO membership would be embarrassing to Russia, as well as isolating it from a key policymaking unit.
Pretty soon, indeed, the WTO's chamber may look a lot more like the United Nations Security Council; all the juggernauts will be represented, and each will have veto power. Observers of the UN might shudder to think of China and Russia as potential consensus-breakers in yet another big international organisation, but at least in the case of the WTO, all countries will have the same power. As Mr Moore puts it, consensus is both "our strongest point and our weakness."
Given this consensus-based system, and after the Seattle fiasco, it seems bizarre that Charlene Barshefsky, America's trade representative, chose to announce last month that she and Pascal Lamy, Europe's trade commissioner, had nearly agreed on an agenda for a new round of trade talks at the WTO. Closed discussions have continued in Washington over the past week. It may sound like a stitch-up, but Mr Lamy still tries to put the best possible spin on it: "We don't want to give the impression that the rest of the world just has to sign up as well." He has talked to other countries about the agenda, including those he calls his "allies" (Japan, South Korea and the East and Central European countries) and some who do not merit that term (Argentina, Brazil, Chile, Egypt and South Africa). But many other, smaller countries may be left waiting by the telephone. And even those to whom Mr Lamy deigns to speak may not see their wishes heeded; to Brazil's contention that a deal on agriculture must precede a round, his answer is blunt: "That will never work."
The lure of regionalism
To complicate the negotiations, the WTO is no longer the only game in town. Bilateral and regional trade agreements have flourished during the past two decades, to mixed effect. Although deals between small groups of countries can contribute to a climate of liberalisation by fostering trade, they can also damage it by diverting trade away from more efficient producers. Mr Moore, as is his obligation, has consistently criticised countries for circumventing the WTO to draw up their own deals. But both the North American Free-Trade Agreement and the Australia-New Zealand free-trade area have landed on the positive side of the fence (meaning that they seem to have expanded trade inside and outside the blocks), according to Anne Krueger of Stanford University. On the other hand, Mercosur (Argentina, Brazil, Paraguay and Uruguay) has been a cause of trade diversion. Though no data are available yet on Japan's recent spate of bilateral deals, both Ms Barshefsky and Mr Lamy cautiously welcome them as signs of further liberalisation within the context of the WTO's multilateral system.
The most recent bilateral agreement to make news, last month's pact between America and Jordan, promises to create more of a stir. For the first time, America extracted a pledge that its partner would not lower labour and environmental standards in order to reap trade gains. Poor countries see this deal as a worrisome and subtly protectionist precedent; Mr Moore thinks it might drive some wayward souls back into the arms of the multilateral system. But it remains to be seen whether the new president, whoever he is, will persist with this kind of deal.
In any event, he is likely to oversee the genesis of the Free Trade Area of the Americas, perhaps the biggest trading block of all. The FTAA has been founded on the notion that it can exist within the context of the WTO. But, as Ms Krueger points out, the risks to the multilateral system's survival can only mount as the world is increasingly carved up into free-trade blocks. Regionalism in trade, in short, makes it more and not less important to keep the process of WTO trade liberalisation going.
Clashes of the titans
America and Europe also have their own problems to solve, even as they worry about China, the new round and other countries' deals. The past month has seen modest progress on their three biggest disputes: Europe's import regimes for hormone-treated beef and bananas, and America's Foreign Sales Corporation (FSC) tax code, which gives exporters subsidies through tax credits. Although the end may not be in sight for these trade tiffs, the summer's uneasy stalemates have for now been broken.
The long-running dispute over Europe's ban on imports of hormone-treated beef now looks the most likely to be settled. Negotiators appear to have agreed on a framework for a deal: America will drop the beef-related portion of its punitive tariffs on European goods (the "carousel" sanctions) in return for greater access to Europe's market for hormone-free beef. American retaliation, worth $117m a year, would then be phased out over several years to give beef producers time to reduce hormone use.
Talks on Europe's regime for importing bananas have also taken some halting but constructive steps. The latest proposal from Brussels was panned by the United States and its partners in Latin America, but the setback was shortlived; the same seven countries from Latin America turned around two weeks later to back an old proposal from Caribbean producers, mostly former colonies Europe has sought to protect. Another breakthrough came when Dole, the bigger of America's two banana giants, added its support to the Caribbean proposal. But the other big firm, Chiquita, rejected the plan. It is now up to the American government and producers in Africa and the Pacific to decide how to proceed. In the meantime, America continues to impose $191m in punitive tariffs on European goods, in accordance with the WTO's ruling that Europe's regime discriminates unfairly against producers and shippers in the Americas.
Although the beef and banana disputes topped the transatlantic trade agenda over the summer, they faded a little from the limelight as Mr Clinton delayed the announcement of a new carousel of targets for the sanctions. Now the biggest flashpoint is America's system of tax subsidies for its big exporters through FSCs. Europe won a ruling in the WTO that requires America to replace the tax code or make restitution for damage to European companies. Congress missed the initial deadline, October 1st, for passing new legislation. The European Commission extended the deadline to November 1st, but that date has also passed with the House of Representatives and Senate unable to agree on a compromise. The deadline for action within the auspices of the WTO's dispute-settlement body is November 17th. After that, Europe can impose sanctions retroactive to November 1st or, if a new FSC tax code is passed, ask for a review of its compliance with the WTO's rules. In trade policy, however, few deadlines are ever absolute. Mr Lamy simply says, "My options are open."
At the bottom of these and a host of similar trade disputes, one can usually find political horse-trading with industries seeking protection. Trent Lott, the Senate's majority leader, is about to supply an example. His move to give Chiquita, which has plantations in Latin America, a veto over any settlement of the dispute on bananas, has made many wonder if Congress sees trade as anything more than a political football.
Europe faces some of the same internal concerns. In September, it began to implement an agreement with America, Canada and Japan to grant unrestricted access to its markets to the world's poorest countries. But a proposal by the European Commission in September to end duties and quotas on the world's 48 poorest economies on all goods except arms has run into what Mr Lamy calls "not unexpected difficulties" among member countries. The biggest problem is sugar, which some members want to make an exception to the policy.
Europe and America also face a challenge over their domestic public opinion. GM foods offer just one example. One goal of a new trade round will be to institute WTO-wide standards for importing GM foods. But until definitive proof of their safety is reported by a European authority--the words of foreign watchdogs seem to make little difference--sensationalist fears of strange diseases or mutant species will restrict Europe's ability to make a deal. The artificial protection of farmers in America and Europe is another example. The WTO is determined to eliminate export subsidies throughout its membership, but try telling that to the House of Representatives--or to the French government. Frustration with rich countries' intransigence reaches from grass-roots protesters in Seattle and Prague all the way to the top; even Mr Moore bemoans the snail's pace at which America and Europe have implemented reforms to their markets for agricultural products and textiles. "Sometimes I feel like joining the kids outside," he says. "When they say the system's unfair, they're not always wrong."
Window of opportunity
In constantly juggling the conflicting goals of domestic protection and the opening of new markets, America and Europe have made a habit of offering small carrots--and occasionally big sticks--to prospective trading partners. But as Ms Krueger puts it, "there's a difference between [America's and Europe's] power as agenda-setters and their actually doing something." And emerging economies have given notice that they will no longer be easily appeased.
The days when two trading blocks could set trade policy for the world have gone. The big powers' positions, and those of their smallest trading partners, are clear and entrenched. For that reason, it may be the emerging powers who will increasingly take the lead. The new American president and his European colleagues will have to get used to that if they are to preserve and strengthen the world's multilateral trading system. And, given the risk of a downturn in the global economy some time during the next four years, that task is more urgent than ever.
c Copyright 2000 The Economist Newspaper Limited. All rights reserved.:
