Free Trade is starting to run out of friends

SUNDAY TIMES (LONDON)

February 27, 2000

Alan Greenspan knows that without cheap imports the American economy would return to its inflationary ways, but the average congressman doesn't know that and the trade unions don't care

WITH a wink and a nod Vice-President Al Gore has let his trade- union backers know that they need not fear any large trade-opening initiatives from a Gore administration. At a closed meeting in New Orleans, Gore promised the executive council of the AFL-CIO, America's largest trade-union organisation, that he would do two things if they use their money and their foot soldiers with sufficient generosity to propel him into the White House next year.

First, he would renegotiate the agreement reached by his boss, Bill Clinton, with the Chinese to arrange for China's admission to the World Trade Organisation (WTO). Since the Chinese are unlikely to look kindly on an American move to reopen a done deal, and may well walk away if they feel they have been duped, Gore would accomplish the unions' goal of scuttling the entire agreement.

Second, Gore gave his word that any future trade-opening deal would require the developing countries to adhere to the developed world's environmental and labour standards, something the developing countries simply will not do. They know that such agreements would rob them of the advantages they have in world markets, just as would an agreement by the developed countries to adhere to the technological and capital-intensity standards of the developing world.

From Gore's point of view, his deal with the unions has two advantages: it pleases a constituency that he badly needs if he is to succeed Clinton and it leaves him free to say that he is for free trade while at the same time adopting the agenda of America's protectionists.

In the end, none of this may matter. For it is increasingly likely that even a president devoted to the cause of freer trade would not be able to win support for new agreements from Congress. The politics and economics of present-day America are stacked against any such move.

Let us start with the trade deficit, which last year ballooned by more than $ 100billion to a record $271billion, despite a spurt in America's exports in November and December. The American economy is growing far faster than the economies of Asia and Europe, enabling its increasingly rich consumers to suck in imports of everything from cars to trainers.

From a political point of view, it is significant that the principal imbalances are in trade with China, Japan, Mexico and Canada. The goods deficit with China (the total for goods and services is not yet available) hit a new record of almost $ 69billion, providing ammunition for those who want to deny China the advantages of WTO membership. The deficit with Japan was even larger, $ 74billion, proving to protectionists and quasi-protectionists that all of America's hard bargaining to get a fair deal from its wilier trading partners is for nought. And the $ 55billion deficit with Mexico and Canada is taken as proof that trade-opening agreements such as the North American Free Trade Agreement (Nafta) benefit foreign workers more than American ones.

The argument that America's overstretched economy is benefiting from the labour forces and resources of its trading partners does not seem to resonate in the halls of Congress. Alan Greenspan and his colleagues at the Federal Reserve may know that without cheap imports the American economy would return to its inflationary ways, but the average congressman does not know that and the trade unions do not care. Indeed, labour leaders know that imports stand between them and the surge in wages that Greenspan fears and they desire.

Not that Greenspan is unworried about the trade deficit. The Fed chairman thinks the imbalances in the economy, of which the trade deficit is one, cannot be sustained. At some point foreigners will want something more for their goods than pieces of paper with pictures of American presidents on them. They will want higher interest rates if they are not to unload their dollars on world markets, driving the dollar down and inflation in America up.

That is one reason Greenspan has signalled that he is prepared to raise interest rates again, and perhaps again, and even yet again, if that is what it takes to cool Americans' ardour for an ever-increasing amount of the world's goods and services. Were Greenspan to carry out his threat, the cries of the protectionists would surely be heard in the land, arguing that it would be far better to stem the flood of imports with tariffs and other protectionist measures than to risk a recession, drive down share prices and increase unemployment by raising interest rates.

America's beleaguered free traders are not being helped by their so-called friends or by their trading partners. Clinton says he is on a mission to persuade Americans that imports are good for them, while at the same time supporting the inclusion in any new agreements of the labour and environmental standards that he knows the developing world cannot accept if it hopes to export its way to prosperity. Meanwhile, China, eager for congressional approval of its WTO membership deal, shot itself in the foot last week with its threat to use its armed might against Taiwan if that nation goes forward with plans to deepen its military and diplomatic ties with America.

So much for free trade's friends - its enemies include the European Union, which is proving silly in a dispute over bananas and refuses to open its agricultural markets to American products, preferring to defend inefficient farmers rather than have lower food prices; Japan, which despite its huge trade surplus continues to press for help in lowering the value of the yen, something that would only increase its exports and reduce its paltry imports; and the French, who continue to set quotas on the import of America's second-largest export category, audio-visual products.

In short, the best free traders can hope for in the next few years is to hold on to the gains made in the past decade - and that will not be easy.