US hits out as free trade slips on banana skin

FREE TRADE has had two staunch supporters in America in recent years: Newt Gingrich and Bill Clinton. Gingrich has done the honourable thing after the Republicans' defeat in the mid-term elections: he has resigned as speaker of the house and as a congressman. And Clinton has decided he owes the Democrats' victory to the trade unions, who turned out their members and the black vote in large numbers.

They were so large, in fact, that they offset the 54%-to-46% margin by which the Republicans won the white vote. Exit polls show that 89% of black voters supported Democratic candidates, as did 64% of union families. Since the Democrats' victory is widely seen as a vindication of the president's position that neither his odd sexual proclivities nor his perjury should result in impeachment, Clinton is doubly grateful to those who stood by him.

So it should come as no surprise that he emerged from a meeting with representatives of the steel industry and its unions to warn America's trading partners he would not tolerate "the flooding of our markets" with cheap imports. It should also not surprise that vice-president Al Gore, who badly needs union support for his bid to become the next president, has warned Europe that America will not be the market of "only resort" for nations struggling to export their way to economic recovery.

Robert Rubin, the Treasury secretary, is trying to persuade his colleagues that even a partial closing of America's markets would exacerbate the financial turmoil in Asia and in Brazil, but his is an increasingly lonely voice. White House officials who want the president to get tough with other countries are telling him America cannot be the only free trader in a world dominated by countries whose unfair tactics are driving America's trade deficit to record levels.

With exports plummeting and imports soaring, it seems likely that America's current-account deficit will rise 50% to $236 billion this year. It could jump to $300 billion in 1999 - or 3.5% of anticipated gross domestic product, matching the record levels reached in 1986 and 1987.

But these numbers alone are not driving the administration to take a hard line. More important is the fact that other countries do not seem to be playing by the same rules as America. Look at bananas. America, upset by European rules that discriminate against imports of bananas grown in Latin American countries in which American companies operate, filed a complaint with the World Trade Organisation (WTO) - and won.

But it was to no avail. Europe, led by strange bedfellows, France and Britain, refuses to comply with the WTO ruling. This has provided ammunition for American politicians who want the administration to take unilateral action on unfair trading practices, rather than rely on WTO procedures. So, as "a measure of frustration that the European Union continues to disavow its obligations", to quote Jay Ziegler, spokesman for Charlene Barshefsky, the American trade representative, America is planning to retaliate by imposing 100% duties on as much as $1.6 billion of European exports to America, including cheap wine, cheese, cosmetics and toys.

Sir Leon Brittan, the European trade commissioner, professes outrage that America "is setting itself above the law and resorting to the principle of might is right". This is from a man who sees no problem with European restrictions on the import of audio-visual products, America's second-largest export after aircraft, and whose EU restricts sales of Japanese cars to 11% of the European market and has set quotas on the imports of Russian steel, forcing the Russians to divert more of it to America.

If the trade deficit were expected to fall in the near future, all this fury could be dismissed as signifying little. But the deficit is heading up, not down. Greg Mastel, director of studies at the Economic Strategy Institute, a Washington think-tank, believes the current-account deficit could hit $320-330 billion next year. He says the Asian economies and Russia are in "a deep and long trough" and expects the pressure now felt by the steel industry from cheap imports to manifest itself in cheap semiconductors, machine tools and, eventually, cars. When that happens, "we will see complaints, and many anti-dumping cases will succeed."

Mastel says that domestic steelmakers will prove Russian producers are dumping steel in America and this dumping is injuring them. He expects such a decision, embodying those findings, to be handed down in January. If the American economy slows, other industries hit by imports will file similar requests for relief. And they will probably get it, says Mastel, since the laws governing dumping are fairly automatic in application, making it unnecessary for Clinton or Congress to act.

Rarely have so many events come together to threaten the trading system. The Asian and Russian crises are unleashing a flood of imports; these goods are displacing domestic products in a slowing American economy, resulting in layoffs; Europe is refusing to do what America considers to be its share to aid the struggling economies by opening its markets; the EU trade representative has antagonised Americans with what the Financial Times describes as his "pugnacious intervention . . . both ill-timed and politically unwise"; the president is beholden to the unions for his ability to avoid impeachment; and Clinton's anointed successor badly needs union support. That combination of circumstances could just be more than the free-trading system can survive.