Reciprocity for Disaster

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

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. Though 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-1980s, 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.

It now appears, however, that the final outcome of the Uruguay Round will fall well short of initial expectations. The round was supposed to conclude in December of last year, but negotiations broke down over the E.C.'s refusal to reduce agricultural export subsidies. Talks have started up again, but because the U.S. fast-track negotiating authority was due to expire at the end of May, everything was put on hold by the battle in Congress over fast-track extension. Even now that fast-track authority has been restored, agriculture is by no means the only subject that remains to be settled; there are 15 separate negotiating areas, and in most of them there are significant, and in some cases huge, differences that must be bridged. Thus, there is every indication that if agreements in these areas can finally be reached, they will contain only modest, incremental reforms, not the sweeping liberalization envisioned earlier in the process.

There is little reason to think that future rounds can do any better. Even if the United States were totally committed to the goal of worldwide free trade—and at present, of course, there are deep political divisions over whether achieving this goal is desirable—it quite simply lacks the clout to bring the other 96 GATT member countries along with it. Economic power is too evenly distributed these days and mercantilist policies are too deeply entrenched. Recall that trade negotiations are now discussed in terms of "disarmament." Try to picture arms-control talks involving 97 countries, and you'll have a fairly good idea of the likelihood of major breakthroughs in GATT.

As a parallel to negotiations in GATT, the Reagan administration also pursued liberalization on a bilateral or regional basis by entering into free-trade agreements, or FTAs. The United States negotiated its first free-trade agreement—with Israel—in 1984, though here foreign policy rather than economic considerations were primary. In 1988, the United States signed an FTA with Canada, its biggest single trading partner. Here again, the Bush administration is following in its predecessor's footsteps, having announced plans for a North American free-trade zone including Canada and Mexico.

Free-trade agreements offer a workable method for achieving significant liberalization between the signatory countries. Unlike GATT with its 97 members, a meaningful FTA is much easier to negotiate, given that it involves only two or three countries. The U.S.-Canada FTA, for example, provides for the elimination of all tariffs within 10 years. Also included, for the first time ever in a trade agreement, are rules guaranteeing market access in a wide range of service industries. Furthermore, the agreement prohibits most import and export restrictions on energy trade.

Nevertheless, FTAs have serious limitations. First, even under the best conditions they will still leave substantial trade barriers in place. The United States retains the right to bring antidumping and other unfair-trade cases against Canada; U.S. dairy quotas are still intact; the Canadian beer industry continues to receive protection; and the agreement leaves major industries such as trucking, railroads, and shipping uncovered. In any agreement with Mexico, restrictions on foreign investment in Mexico are sure to remain in force. On the U.S. and Canadian sides, there would assuredly be mechanisms to discourage the relocation of labor-intensive manufacturing operations into low-wage Mexico.

Such holdover protectionism isn't the main problem. There simply aren't that many viable FTA partners. Consequently, attempts to push the FTA concept beyond its limited range are likely to lead in one of two directions. First, there is the prospect of watered-down agreements, with perhaps tariff elimination and a few cosmetic changes here and there, but otherwise leaving the status quo comfortably in place. This might be what a U.S.-E.C. free-trade agreement would look like.

The second, more dangerous possibility is that the United States will negotiate FTAs that are in fact managed-trade accords, with market access in various sectors doled out on a quota basis. Such full-scale cartelization of trade would be far worse than the mess we have now, and it's by no means unthinkable that we could wind up with such agreements, particularly with Japan.

In sum, the reciprocity-based free-trade strategy provides only limited benefits; it tinkers at the margins. Meanwhile, it diverts political energy away from dismantling all the protectionist policies from which our country currently suffers. Worse, it actually reinforces existing trade barriers and even increases the likelihood that politicians will add new ones.

In the first place, trade negotiations strengthen current mercantilist policies by turning them into "bargaining chips." Even the most blatantly indefensible measures are shielded from reform in order to avoid "unilateral disarmament." A perfect example of this can be seen in last year's budget agreement. Congress agreed to cut farm subsidies by roughly $15 billion from projected levels over the next five years. But lawmakers expressly conditioned many of these cuts on achieving a trade agreement that cuts E.C. subsidies. If this condition isn't met, up to $7 billion in subsidies could be reinstated.

The reciprocity approach also increases the chances of additional protectionism. Starting with a policy that conditions improved access to American markets on reciprocal improvements in other countries, it's only a small step to conditioning existing market access on liberalization abroad. Indeed, Washington has already taken this step. Under heavy pressure from the protectionist Congress, both the Reagan and Bush administrations have made frequent use of Section 301 of the trade law and a number of related provisions, all of which authorize retaliation against our trading partners unless they reduce barriers to American exports.

The United States has managed to wring some rather minor concessions out of other countries by means of such threats. On the other hand, in some instances intimidation has failed and the United States has actually instituted new trade barriers as punishment. It is entirely possible one of these disputes could someday blow up into a large-scale trade war. By accepting the principle of reciprocity, free-traders have fallen into a trap in which it becomes extremely difficult to resist ever-more-aggressive applications of that principle.

More generally, the reciprocity-based free-trade strategy helps to frame the whole trade debate in terms that favor the protectionist lobby. The special interests that seek a protectionist bailout rarely admit that they were out-competed by their foreign rivals. Rather, they claim that they are the victims of "unfair competition.'' "We aren't afraid to face foreign competition,'' they say. "But it has to be on a level playing field." A policy of trade negotiations lends credence to this ploy by focusing attention on other countries' import barriers and "unfair" practices. Protectionists need only point to the latest U.S. negotiating agenda to make a case that the playing field is indeed unfairly slanted against American companies.

Logically, of course, this argument doesn't wash. Trade barriers abroad have little or no connection to whether U.S. industries can beat out foreign competition in the American market. The Big Three aren't losing out to Honda, Toyota, and Nissan because they are unable to export to Japan. Likewise, "unfair competition'' is generally a bogeyman. The death of the U.S. consumer-electronics industry can't be blamed on Japanese "dumping" or industrial policy. Japanese companies dominate the market for the simple reason that they offer high-quality products at reasonable prices. Nothing unfair about that.

Logic, however, isn't what matters here; rhetoric is. Protectionists need some sort of cover to disguise their special-interest pleading. The reciprocity approach to free trade, by ceding to protectionists the "fairness" issue, helps to give them the cover they need.

Advocates of free trade should therefore get off the reciprocity bandwagon. Rather than worrying about the rest of the world, we should urge the unilateral elimination of all U.S. trade restrictions. Such a dramatic shift in policy would not only be best for the American economy generally but would also promote U.S. exports. Moreover, unilateral free trade may actually do more to encourage liberalization abroad than reciprocity ever could. By opening our markets unconditionally, we would allow American companies to purchase components and materials at the lowest possible prices, thus lowering the companies' costs and making them more competitive in export markets. In addition, when we import more, our trading partners earn more dollars in foreign exchange, thereby allowing them to buy more goods and services from American firms.

And if the United States did adopt an unconditional free-trade policy, its calls for open markets around the world would gain the moral authority that they now lack. Instead of trying to cajole, browbeat, and coerce other nations into curtailing their mercantilist policies, our approach would be much simpler, more eloquent, and ultimately more persuasive: We would practice what we preach and lead by the power of example. No doubt many countries would continue in their foolish and destructive policies. The experience of the past two years in Eastern Europe, however, should teach us not to discount the possibility of dramatic moves toward freedom, nor to underestimate the importance of role models in inspiring and guiding those moves.

What are the chances that the United States will embrace unilateral free trade? At present, absolutely nil. The chances won't get any better, though, until supporters of open markets give up the reciprocity temptation. It's time to concentrate our energies on perfecting liberty here at home.

Brink Lindsey is an international trade attorney with Wilkie Farr & Gallagher in Washington, D.C.