Free Traders Put On The Defensive

The Sunday Times (London)

27 June 1999

Free-trade advocates heaved a sigh of relief last week when the Senate refused to allow members from the sixteen states with large steelworker constituencies to move forward with a bill that would have imposed quotas on steel imports. But they may be sighing too soon. When the great baseball player, Yogi Berra, his team far behind in the standings, was asked if he was prepared to give up hope, he famously replied, "It ain't over 'til it's over." His team went on to win the division championship.

Protectionists in America are in a similar position. They don't believe the battle is over. It has merely shifted to new ground. In the case of steel, the Clinton administration persuaded several Democratic senators to vote against quotas by promising to take other action to stem the flow of imports. Which it has done. Japan has already been found guilty of dumping hot-rolled steel, and the threat of similar action has induced several countries to curtail their sales in America.

But steel is only one part of the problem facing free trade advocates in America. And perhaps the smallest part. David Aaron, the Undersecretary of Commerce for International Trade told reporters, "We worry that the [Asian] financial crisis of 1998 will materialize into the trade crisis of 1999." America's trade deficit is headed towards record levels, as fully employed, increasingly rich consumers suck in cheap imports. Economists rightly argue that there is nothing intrinsically dangerous about a rising trade deficit; more pragmatic politicians argue that a soaring deficit is grist for the protectionists' mill.

And they are right. The Clinton administration has been steadfast in its support of free trade, even threatening to veto any steel quota bill, and initiating a new Uruguay-style trade-opening round later this year. But its job is being made increasingly difficult by its Japanese, Chinese, and European trading partners.

Start with the Japanese. For some time Japan has been promising to put its economic house in order by stimulating its economy and reforming its financial system. And it has indeed made progress on both fronts. But Japan has also decided to export its way out of its recession -- with the American market as its principal target. Any doubts that this is Japan's strategy were dispelled when the government intervened in foreign exchange markets to prevent the yen from rising further against the dollar, since a dearer yen would make Japanese goods less attractive here.

Then there is China, which now runs a trade surplus with America second only to Japan's. And rising: in the first four months of this year America's exports to China's far-from-open market fell by more than 10%, while Chinese exports to America rose by 10%.

Worse still, China has an appalling human rights record, a recently uncovered espionage network within America's nuclear research labs, a history of attempting to influence American policy by pumping illegal contributions into the Democratic party's campaign coffers, and a record of not adhering to its agreements.

These malfeasances are uniting politicians and pundits who normally support free trade against allowing China continued unimpeded access to American markets. Bill Kristol, editor of The Weekly Standard and as staunch a free market advocate as you can find, says that "Free trade is normally the right thing. But it doesn't trump every other consideration, most importantly national security, as Ronald Reagan understood." And Tom Duesterberg, a free trade advocate and scholar at the Hudson Institute, says that we have to make certain that any trade agreement with China includes enforceable provisions requiring it to play by the rules and to enact the reforms that an opening to the world are supposed to induce. He doubts that those are attainable.

Europe, meanwhile, has decided to make America the consumer of first resort for its goods and services, as well as for those of the recovering Asian economies. While European officials publicly frown about the fall in the Euro, they privately chortle about its stimulating effect on their esports and their mostly stagnant economies. Germany remains the sick man of Euroland, and the green shoots of recovery that observers thought they saw in France are now withering. Euro devaluation is seen as a tool with which to build a recovery.

But only one tool. Another is subversion of the rules of the World Trade Organization. "The Europeans," says Mr. Aaron, "are fond of wrapping themselves in the WTO and accusing us of acting unilaterally, but that is exactly what they are doing themselves." When the EU slips on a banana skin, as it did in the recent dispute before the WTO, it refuses to abandon its illegal practices. Or at least it delays doing so for so long as to antagonize even its friends in America.

The banana dispute, of course, pales in comparison with the brawl that is shaping up over agricultural products. Charlene Barshefsky, the US Trade Representative, last week challenged the EU to abandon its Common Agricultural Policy (CAP), which she says is responsible for 85% of the world's agricultural export subsidies and is the "largest distortion of any sort of trade". Add to that EU restrictions on American beef and other foodstuffs produced with modern scientific methods, and you have a prescription for some nasty arguments when the trade negotiators convene at year end for the Clinton round of trade talks.

At that time Al Gore's election campaign will be in full throat. Clinton is committed to his vice president's election, seeing such a victory as a vindication of his own policies. But normally Democratic constituencies will be pressing for a tough line on trade. Hollywood moguls, an important source of funds for Democrats, want EU quotas on American audiovisual products removed; Ohio, Pennsylvania and other states want something done about steel imports; Texas ranchers want to sell more beef in Europe, and don't want the EU to be allowed to hide behind health and safety concerns; textile and apparel manufacturers want the products of China's gulag barred from this country. The grievances mount. An election approaches. That coincidence is bad news for free traders.