Reciprosity For Disaster

Mix free-trade rhetoric with mercantilist assumprions. Add subsidized flour, eggs, and milk. Bake in a slow oven.

Brink Lindsey from the August/September 1991 issue

Supporters of free trade in this country spent the last decade on the defensive. The large merchandise trade deficit, as well as Japanese gains at the expense of highly visible U.S. industries, gave rise to intense pressure for new protectionist measures. Under these adverse conditions, advocates of open markets adopted a policy of tactical retreat, making measured concessions in the hopes of staving off a rout.

Now, however, free-traders are on the offensive with two major initiatives: 1) multilateral talks to liberalize global trade under the Uruguay Round of General Agreement on Tariffs and Trade (GATT) negotiations; and 2) a proposed North American free-trade agreement involving the United States, Canada, and Mexico. Through these are separate and distinct sets of negotiations, their fates became linked in the recent congressional battle over extending fast-track authority.

Fast-track authority allows the president to negotiate trade agreements that are then subject to an up-or-down vote in Congress (no congressional amendments to the agreement are allowed). Fast track is essential if these negotiations are to proceed, since no country will bargain seriously with us if the resulting agreement can be picked apart on Capitol Hill. Opposition to extension, spearheaded by organized labor, was fierce; nevertheless, heavy White House pressure enabled both the Uruguay Round and the North American FTA to clear this preliminary hurdle. Whether agreements can actually be reached, and whether these agreements can get through Congress, remain highly uncertain.

The current free-trade strategy suffers from more than these practical difficulties, however. The strategy is flawed in its basic conception. Whether unwittingly or through an excess of cleverness, supporters of free trade have adopted the same basic assumptions as those that underlie the protectionist position. As a result, these supporters are unlikely to succeed in any significant opening of markets. Furthermore, this strategy may actually end up making matters worse.

The case for free trade, when made properly, doesn’t depend on whether other countries adopt like policies. In other words, it pays for us to maintain open markets for foreign imports and investment even when our trading partners refuse to reciprocate. Similarly, the government should allow Americans to enjoy cheap imports even when their low price is due to foreign government subsidies. In sum, free trade enriches and invigorates our economy regardless of whether the rest of the world engages in “fair” trade, however that term is defined.

This unilateralist position, however, isn’t advocated by supporters of free trade, at least not within the public-policy establishment. Instead, the official free-trade position—as evidenced by both the Uruguay Round and the North American FTA—is to negotiate with other countries for reciprocal reductions in trade-impeding and trade-distorting measures. The underlying assumption here is that free trade is worthwhile only if everybody does it. More specifically, these negotiations proceed on the premise that open-import markets are the price a country must pay to obtain freer access for its exports.

Thus, in the terminology of GATT, trade liberalization is expressly characterized as a “concession,” as if it’s contrary to national interest, has no intrinsic merit, and can only be justified by reciprocal concessions. Likewise, free-trade agreements are based on a one-for-one swap of market access; it’s presumed that a country has no interest in removing its trade barriers unless another country agrees to reciprocate. In this regard, it’s telling that the metaphor of disarmament is now commonly used in discussing trade negotiations. Carla Hills, the U.S. trade representative and the leading official voice of free trade, has repeatedly pledged that she won’t engage in “unilateral disarmament” during trade talks.

This “imports bad, exports good” mind-set is pure mercantilism and is flatly incompatible with a proper understanding of international trade. Contrary to mercantilist thinking, the biggest gains from trade occur on the import side, since through open markets we are able to buy cheaper and better products than we could make for ourselves. Exports, on the other hand, are desirable primarily because they allow us to pay for more imports. The reciprocity-based approach now adopted by the free-trade side rests on economic assumptions inimical to those who truly support open markets and free trade.

Of course, it’s always possible that a policy can work well in practice even when it sounds rotten in theory. Indeed, the reciprocity approach to free trade has a plausible argument to support it: Unilateral free trade is desirable in and of itself, to be sure, but it’s just as clear that multilateral free trade is preferable, not only for the world as a whole but also for our own country. A unilateral and unconditional declaration of open markets on our part, though, would rob us of the leverage we need to convince other countries to drop their mercantilist policies. So let’s reduce our own trade barriers, but let’s do so in a way that persuades other countries to do likewise. Maybe this approach relies on mercantilist assumptions, but if you’re going to try to persuade mercantilist countries to change their ways you have to speak their language.

This argument, though plausible, won’t bear up under scrutiny. To understand why, it’s necessary to look more closely at the background of the current free-trade initiatives. GATT, since its founding in 1947, has served as the basic institutional framework for the postwar era’s relatively open world trading system (relative, that is, to the 1930s and 1940s). GATT imposes limits on what member countries can do to impede or distort trade and provides a mechanism for negotiating further reductions in trade restrictions. The key to this mechanism is the “most-favored nation” principle that says any member country must extend “concessions” to all GATT members on an equal basis.

GATT’s primary mission has been to reduce tariffs on manufactured goods, and in that narrow task it has been highly successful. During the course of seven negotiating rounds, average duty rates have dropped from over 40 percent when GATT was founded to around 5 percent today. Unfortunately, loopholes in GATT’s coverage and the rise of nontariff trade barriers have severely undermined its effectiveness. GATT is now commonly denigrated as the “General Agreement to Talk and Talk.”

From the beginning, GATT made an exception for trade in agricultural products. This was primarily at the insistence of the United States, which needed high tariffs and import quotas to maintain its system of farm price supports. And starting in the 1960s, international trade in textiles has been subject to an increasingly complex web of quantitative restrictions, first under the Short Term Arrangement, then the Long Term Arrangement, and finally the Multifiber Agreement (currently in its fourth incarnation and about to be extended for a fifth). In these areas, then, the free-trade principle has been abandoned entirely in favor of “managed trade” alternatives.

 In addition to opening up these explicit loopholes, countries have also managed to outflank GATT. In other words, they have replaced old-fashioned tariffs and quotas with new, more subtle means of protectionism. Beginning in the 1970s, the United States and the European Community began resorting to “voluntary export restraints” to limit import competition. Under these arrangements, foreign exporters “agree” to place quantitative limits on their shipments to the country in question. Since these restraints are allegedly voluntary, they fall outside GATT strictures against government-imposed import quotas. The United States has used voluntary export restraints to control imports of color televisions, automobiles, steel products, and machine tools.

Meanwhile, the 1980s saw the rise of “unfair trade” laws as a protectionist device. The most prominent of these laws is the antidumping law, in which the government imposes special duties on companies that it says sell for less in the export market than they do at home. Again, the United States and the E.C. have been the most aggressive users of this law, but proliferation is now well under way; at last count, 28 countries had adopted antidumping laws, including even the Soviet Union. In an ironic twist, other countries are now beginning to turn these laws against U.S. and E.C. producers.

By the mid-l980s, then, the effectiveness and prestige of GATT had fallen to an all-time low. The Reagan administration, rather than allowing GATT to trail off into oblivion, decided to commit the United States to leading a major new negotiating round designed to rejuvenate the GATT system. Thus, under strong American encouragement, an eighth round of talks was formally launched in 1986 at a meeting of GATT members in Punta del Este, Uruguay (hence the “Uruguay Round”). The United States pursued an ambitious negotiating agenda; it put forth proposals to bring agriculture and textiles under multilateral control and to extend GATT coverage to such novel areas as intellectual property rights and international trade in services. The Bush administration continued on this same tack, maintaining that the successful completion of the round was its number-one trade policy priority.