A Renaissance for U.S. Trade Policy?

LIBERALIZATION IN RETREAT

U.S. trade policy has been facing widespread criticism around the world. Under threat of congressional action, the Bush administration initiated an investigation of steel imports, imposed tariffs of up to 30 percent on a sizable portion of foreign steel shipments to the United States, and launched an effort to organize global steel production -- all within the past year. The administration and Congress have agreed to roll back some apparel imports from the Caribbean and Central America. Sharp new tariffs have been slapped on lumber imports from Canada, a nation with which the United States supposedly has free trade. Both Congress and the president have backed a new farm bill that perpetuates substantial subsidies for U.S. agriculture, even though the United States has railed for years against such practices abroad. All these steps have reinforced the concern that America is pursuing a unilateralist rather than a globally cooperative foreign policy.

Moreover, these protectionist initiatives have surfaced at a time when the global trading system is already under severe strain. U.S. trade retaliation against Europe is still in place from a previous dispute over beef. Europe is considering up to $4 billion of counteraction against U.S. tax subsidies for exports -- a practice found illegal under the rules of the World Trade Organization (WTO) -- and is fighting Washington's new steel measures. Last year, Japan and China engaged in a cycle of retaliation and counterretaliation. There has been continuing concern about trade wars among the largest economies, and the recent U.S. actions are widely viewed as throwing fuel on the fire. U.S. backtracking on liberalization gives other countries an excuse to do likewise and reduces the prospects for future reduction of barriers.

At a more subtle level, some of the most crucial components of the global system are coming under considerable stress. The WTO's new dispute-settlement mechanism, a crowning achievement of the 50-year drive to forge an effective rules-based trade regime, could crack under the intense pressure of a rapidly growing case load; politically sensitive cases that should be negotiated rather than litigated are proliferating. The advent of scores of additional members has turned the WTO into an extremely unwieldy organization, pushing more and more countries to turn to regional and bilateral deals instead. Repeated financial crises and disappointing growth, as seen currently in Latin America, reinforce hostility toward globalization. The United States, which championed the global system from its outset after World War II through the completion of the latest negotiations in the Uruguay Round a decade ago, has been viewed as taking steps that add to these pressures rather than resolve them.

The administration should see this drumbeat of criticism as a highly desirable reminder of the costs of protectionist trade measures and the breadth of support for continued liberalization. But the legitimate questions about U.S. trade policy can be understood only by putting current developments into broader historical perspective, along three dimensions. One is the most recent context, deriving from the evolution of the globalization debate in the United States in the 1990s and its deep impact on U.S. trade policy. The second looks back over the past 40 years and the frequently tawdry tactics that politicians have had to use to exercise the justly renowned "U.S. leadership of the system." The third is more optimistic, drawing from the postwar negotiating record the hope that renewed progress in the global trade regime is more possible than most observers believe.

THE STALEMATE OVER GLOBALIZATION

The Clinton administration enjoyed a spectacular start on trade. It completed the Uruguay Round in 1993, subsequently concluded its three follow-on sectoral compacts, and won congressional approval for both the round and the North American Free Trade Agreement (NAFTA). It launched the Free Trade Area of the Americas (FTAA) and the Asia-Pacific Economic Cooperation initiative (APEC) aiming to achieve "free and open trade and investment" in that huge and dynamic region by 2010 or 2020. President Bill Clinton's first two years in office in fact represented the zenith of postwar U.S. trade policy while reaffirming the traditional bipartisanship of that policy by concluding major deals that had been launched by the first Bush and Reagan administrations.

But the situation deteriorated rapidly thereafter. The president received no negotiating authority from Congress after the expiration in June 1994 of "fast track," which greatly strengthens the president's hand by forcing Congress to approve or reject trade agreements without amendments, within a set time period. Very little progress was made in pursuing the FTAA, and APEC did nothing to approach its ambitious goals. The effort to launch new global negotiations in the WTO collapsed in the debacle at Seattle in 1999. Initiatives to conclude bilateral deals with several small countries (Jordan, Singapore, and Chile) were left incomplete. Even the legislative successes of Clinton's last year -- the implementation of permanent normal trade relations with China and the substantial freeing of trade with Africa and the Caribbean -- were replete with limitations and required enormous expenditures of presidential and private-sector effort despite carrying virtually no costs for the United States. Hence the forward momentum of liberalization stalled badly, opening the door for protectionist and mercantilist pressures to fill the vacuum quickly -- as they have traditionally done.

Most important, nothing was done to overcome the domestic stalemate over globalization that plagued the United States throughout the 1990s and underlay the stagnation of trade policy. Clinton said repeatedly that one of his greatest frustrations in office was his inability to convince the country, and especially his own party, to support globalization despite its enormous contribution to the sharp improvement in U.S. economic performance in the 1990s.

The three congressional rejections of fast-track authority in the 1990s, as well as the paper-thin majorities that granted such authority to President George W. Bush in 2001-2, were influenced by a number of partisan as well as intraparty considerations. More broadly, however, the legislative stalemate reflects the basic political fact that the U.S. public is split almost evenly over the wisdom of further globalization. But studies at the Institute for International Economics point the way toward overcoming the stalemate -- because the single key variable that determines public attitudes is education. Workers with college experience welcome globalization, regardless of where they are currently employed, because they feel they can take advantage of it. Workers with a high school diploma or less, who still constitute half the labor force, fear the required adjustment and thus oppose it even if they have good jobs now. The number of actual job losses due to globalization is relatively small, but some workers do take substantial lifetime earnings hits. As a result, many other workers think, "There but for the grace of God go I." But the split in opinion would shift to solid proliberalization majorities in the short run if the government were seen to be credibly helping those workers who lose from increased trade. The key steps would be improved social safety nets to cushion their transition and training programs to improve their skills.

Yet very little was done on these crucial domestic adjustment fronts in the 1990s, even by a Democratic administration that was ostensibly sympathetic to such measures. Indeed, its failure to effectively implement the modest domestic adjustment provisions of NAFTA badly hurt its effort to win fast-track authority in 1997. The legitimate debate over the costs of globalization shifted toward issues that hold very little promise for helping American workers (such as international labor standards) and wind up pitting the United States against the entire developing world. Hence the stalemate persisted, undermining U.S. trade policy and, through it, the global system.

LESSONS FROM THE PAST

The Bush administration thus faced a Herculean task in regenerating U.S. trade policy when it took office in early 2001. Moreover, the overall climate for trade policy had soured badly. The U.S. economy slowed sharply from the middle of 2000 through the end of 2001, with unemployment jumping from four to six percent. The continued climb of the dollar through 2000-1 meant that it was at least 20 to 25 percent overvalued, and the strong dollar in turn lifted the annual current account deficit to almost $500 billion by 2002. Making matters even worse, the terrorist attacks of September 11 generated new pressures to "close the borders."

The new administration nevertheless placed high priority on getting trade policy back on track. To do so, it correctly decided to pursue the two-part strategy that had worked repeatedly throughout the postwar period: the launch of far-reaching new international negotiations and congressional passage of fast-track legislation (renamed trade promotion authority, or TPA) to authorize their pursuit. The new negotiations, which the administration planned to conduct simultaneously at the multilateral, regional, and bilateral levels, would restart the forward momentum of liberalization on the international front. They would further open world markets and write new trade rules while seizing the initiative from the antiglobalization forces. Passage of TPA would achieve the same outcome domestically. Neither part of the package was possible without the other: other countries would not negotiate seriously with the United States unless the president had congressional authority to make commitments, and Congress would not provide that authority without a clear indication that doing so would bring substantial benefits to the United States through extensive concessions by other countries.

That strategy had been successfully deployed in the three prior cycles of postwar U.S. trade policy. It produced the Kennedy Round under John Kennedy and Lyndon Johnson, the Tokyo Round under Richard Nixon, Gerald Ford, and Jimmy Carter, and both the Uruguay Round and NAFTA under Ronald Reagan, George H.W. Bush, and Clinton. Indeed, the approach has been deployed by administrations and Congresses controlled by both parties.

It is far too early to know whether George W. Bush's version of the strategy will work. But so far the first two steps have been navigated successfully. Working closely with the European Union (EU), the administration forged an agreement at Doha in November 2001 to launch a comprehensive new round in the WTO that could wind up tackling virtually all relevant trade issues, as well as completing the accession of China and Taiwan to the WTO. Combined with the

existing prospects for an FTAA and bilateral negotiations both inherited from Clinton (Chile and Singapore) and newly envisaged (Australia and perhaps New Zealand, Central America, Morocco, southern Africa, and possibly Thailand), the Doha Round paves the way for a substantial package. Indeed, it should bring enough benefits both to the United States and to other countries to persuade all of them to complete the deals. This strategy also clearly reaffirms the global rather than unilateral approach of the United States in a policy area that is even more crucial to other countries than it is to Washington.

Congressional passage of TPA in the summer of 2002 was a major step forward. The new legislation authorizes the administration to participate in all these negotiations without facing crippling amendments from Congress that could have limited their scope. It even unilaterally lowers U.S. barriers to a significant volume of textile imports from a number of developing countries, an unprecedented element in a trade authorization bill. Both Doha and the TPA were very close calls, and the domestic legislative battle left partisan wounds that may bedevil U.S. trade policy into the future. But they put in place the building blocks for new advances in the global trading system and for U.S. trade policy.

Indeed, the new version of the presidential negotiating authority may carry the seeds of a fundamental transformation of U.S. policy toward globalization, especially toward trade and other international economic issues. The TPA legislation dramatically expands the Trade Adjustment Assistance program to sharply increase worker eligibility and financing for both safety-net provisions and retraining, and it starts providing partial coverage for losses of wages and health insurance by trade-dislocated workers. These reforms, championed by Senate Democrats, could begin to allay the fears of globalization. And if implemented effectively, they could begin shifting public attitudes within the United States in a more supportive direction.

This last outcome would be further strengthened if the new trade-related steps were coupled with continued improvements in the American educational system. Such progress would empower more workers to take advantage of globalization rather than feel victimized by it. Lifting the education level of the average American worker from high school to junior college would garner a solid majority for globalization; our studies show that, on average, each additional year of formal education increases support for globalization by 10 percent. These domestic policy approaches offer far more promise for helping globalization's victims in the United States than even the most ambitious reforms of international labor standards. The revealed preference in the new legislation for such a strategy may turn out to represent a lasting reorientation of the policy debate.

ONE STEP BACKWARD, TWO STEPS FORWARD

The context laid out above is necessary to assess the administration's recent protectionist steps. None of these steps is defensible on its merits. All of them, in fact, represent extremely bad policies. Most of them were directly related to electoral politics. But they were also essential components of restoring an effective U.S. trade policy. The entire strategy could not have even begun without congressional passage of TPA. The three key votes on that legislation in the House of Representatives carried by margins of three or fewer. Hence there was literally no room to spare. Unsavory political bargains simply had to be struck to get the basic approach off the ground.

The most obvious example was the blatant rollback of some of the previous textile liberalization for the Caribbean and Central America to win the final three votes in the initial House action of December 2001. (That said, the final legislation did include much more significant liberalizing steps for the same products from the same countries.) But it is also noteworthy that nine more steel-caucus members voted for TPA than for fast track in 1998. The administration's initiation of the safeguard case on steel imports in the summer of 2001 and its subsequent decision to impose relief in early 2002 were presumably critical to avoiding large losses of votes from this group. And in the case of the farm bill, the administration did not block the congressional initiatives to sustain the increased support levels of recent years and to undo earlier efforts to decouple farm policies from trade flows -- again, all to avoid losing TPA support. The political economy of trade policy was obviously in play in motivating all these deviations from a liberal approach.

History reveals that such domestic maneuvering is a sad but true constant of U.S. trade policy. Every president who has wanted to obtain the domestic authority to conduct new international liberalizing negotiations has had to make concessions to the chief protectionist interests of the day. The entire history of U.S. postwar trade policy can be characterized as "one step backward, two steps forward." On all previous occasions, the gamble has succeeded, and the ultimate benefits have turned out to be well worth the costs.

In 1961, for example, Kennedy faced the prospect that the textile lobby would block congressional approval of the Trade Expansion Act. That bill would have enabled him to launch the Kennedy Round -- a centerpiece of both his overall foreign policy, especially with the newly unifying Europe, and his economic policy. Kennedy thus directed his administration to negotiate the first comprehensive U.S. import quotas on cotton textiles, paving the way for more than 40 years of extensive protection for that sector. But he extracted in return a promise from the industry to support his legislation. He also applied new "escape clause" protection to carpets and glass, even though Europe retaliated and triggered a minor trade war. The strategy worked. The Kennedy Round achieved a major breakthrough in across-the-board reduction of tariffs and set a benchmark for all postwar trade talks.

Nixon encountered a similar dilemma a decade later. To combat the first widespread surge of postwar protectionism and pave the way for Congress to approve the launch of the Tokyo Round in 1974, including the initial fast-track authority, Nixon had to go even further than Kennedy did. He converted the cotton textile quotas into a more sweeping arrangement (the Multi-Fiber Agreement), installed a temporary surcharge on most imports and a permanent tax subsidy for U.S. exports, and devalued the dollar twice before eventually floating it. Later on, the Carter administration extended new protection to the shoe, steel, and color television industries, thereby maintaining the necessary domestic consensus to support the negotiations and eventual congressional approval of the Tokyo Round.

These trade-offs became even more extensive in the mid-1980s, when protectionist pressures reached their postwar peak due to the dollar's massive overvaluation and the resulting record trade deficits. Reagan, in the words of his secretary of the Treasury, James Baker, "thus granted more import relief to U.S. industry than any of his predecessors in more than half a century." His administration installed "voluntary export restraint agreements" on automobiles, steel, and machine tools; substantially tightened the existing quotas on textiles and apparel; negotiated an agreement to expand U.S. exports of semiconductors; and accepted the infamous "Super 301" authority that permitted retaliation against "priority foreign countries" of whose trade policies the United States disapproved. But it was able to win renewal of fast-track authority in 1988, which the subsequent administrations used to achieve both NAFTA and the Uruguay Round.

Hence the same approach has played out in all three of the previous postwar trade-policy cycles in the United States. The president adopts the two-part strategy described above. He successfully seeks international agreement to launch new negotiations. But he is blocked from obtaining the necessary domestic authority by the protectionist interests of the day. He thus has no choice but to placate those interests sufficiently to neutralize their opposition to his proposed negotiations. With those interests assuaged, Congress provides the needed authority. The president then completes the international negotiations. He essentially trades protection that is modest and temporary (albeit long-lived for textiles and frequently renewed for steel) for liberalization and international rule-making that is sizable and permanent. In all three episodes, the net outcome has represented major progress for the U.S. economy, for U.S. trade-policy leadership and hence overall foreign policy, and for the world trading system and economy as a whole.

It is of course impossible to know whether this occasion will record similar success. But the administration has added several innovations to the traditional strategy that enhance the prospects. In particular, its simultaneous pursuit of regional and bilateral as well as multilateral negotiations generates substantial pressure on other countries to cooperate via a process of "competitive liberalization." For example, a bilateral trade accord with Central America will increase the incentives for Mercosur (South America's major trade bloc) to agree on an FTAA; in turn, the latter will encourage the EU to agree to reduce barriers globally. This dynamic should restore the forward momentum of liberalization. Along with periodic roundups of partial deals in the WTO, it should also generate early tangible results that will help sustain domestic support for the policy in the United States while it awaits the results of the Doha Round (which are likely to be delayed until 2007). In any event, the strategy would never have gotten off the ground without TPA. Hence the protectionist steps were necessary evils for achieving the greater goals.

For the price to be worth paying, however, the payoff from the negotiations that have now been authorized must be considerable in both economic and foreign-policy terms. The recent turmoil in South America is a reminder of just how great the gains could be, in both respects, from an FTAA that replicated even partially the enormous payoff to Mexico (and thus to the United States) from NAFTA. Thus it is essential that the Doha Round, in particular, be comprehensive in its coverage. Everything must be on the table so that each country's goals can be achieved and each will, in turn, be willing to satisfy the objectives of the other key players. A mini round would simply not be worth the effort.

For that reason, U.S. Trade Representative Robert Zoellick was correct and courageous in reversing the Clinton administration's refusal to place the most politically sensitive U.S. trade policies on the table (a position that had produced the failure at Seattle). These include high tariffs on textiles, apparel, and other industrial products; high agricultural tariffs, quotas, and subsidies, whose importance is now greatly heightened due to the farm bill; and antidumping and countervailing duties, the chosen U.S. instruments of "process protection" in recent years. Unless Washington is willing to put its most sensitive restraints on the table too, other countries will not be able to overcome their domestic political constraints and meet U.S. demands for reductions in their tariffs, liberalization of their farm supports and services sector, and strengthening of the global trading rules. The administration also deserves credit for its steadfast resistance to congressional efforts to hamstring its negotiating position by excluding such issues from the talks before they even start. Elimination of the Senate's Dayton-Craig amendment, which would essentially have taken antidumping (and countervailing duties) off the table, was particularly important in this regard.

SECRETS TO SUCCESS

Critics of current U.S. trade policy, even if they accept the analysis to this point, will still point to two huge obstacles: implacable congressional hostility to liberalization of present antidumping practices and the new farm bill. They believe that the whole approach is bound to founder on one or both. But again, history suggests a potentially brighter interpretation.

With respect to antidumping, it must be remembered that the United States has entered the last two multilateral trading rounds with at least one apparently non-negotiable demand from Congress each time. But in both cases, a skillful blend of international and domestic politics overcame this hurdle and permitted a comprehensive negotiating outcome to succeed. In the Tokyo Round, that issue was countervailing duties. At that time, the Treasury Department, which managed the issue in those days, could increase duties against any foreign practice that it deemed a subsidy as long as a domestic U.S. interest group offered a petition, whether or not the industry was suffering any injury. Needless to say, foreign outrage over this practice was intense.

The U.S. negotiators overcame that seemingly intractable problem with a twofold approach. First, they rolled that specific U.S. practice into negotiations over a much broader subsidies code that, for the first time, brought international discipline to bear on the export subsidies deployed by most countries. They then obtained commitments from more than 30 countries to eliminate or sharply reduce their existing subsidies and, in turn, embedded that agreement in the Tokyo Round agreement itself, which advanced a number of other important U.S. trade objectives. Congress was persuaded that the United States would now be better protected against foreign subsidy practices and that the overall package was in the national interest. Thus it endorsed the Tokyo Round by overwhelming majorities in both chambers.

Approaching the Uruguay Round in the late 1980s, the domestic political constraint for the United States was textile and apparel trade. Yet the three administrations involved in the negotiations agreed to a total phaseout of the long-standing import quotas and the entire Multi-Fiber Agreement. The strategy was again twofold. It sought to achieve specific benefits for the sector itself through reductions in foreign barriers to U.S. textile exports (and parallel agreements that actively promoted U.S. textile exports under NAFTA) and an overall outcome from the Uruguay Round that met many top U.S. goals.

In both these cases, the impossible was in fact achieved. As the Doha Round unfolds, creative U.S. negotiating should be able to craft and sell a similar strategy with respect to antidumping. As it did in the Tokyo Round, it could install new disciplines on other countries' practices (including their continued export subsidies and the lack of transparency in their antidumping procedures, which are of increasing concern to U.S. exporters). Such an approach would also enable Washington to achieve a comprehensive outcome that will advance major U.S. interests and improve the global trading regime.

The new farm bill created another firestorm over U.S. policy and complicated the prospects for the global system. But here, too, the problem can be converted into an opportunity. Fortunately, the administration has already begun to move in that direction with its aggressive proposals for using the Doha Round to dramatically reduce agricultural tariffs, phase out all export subsidies, and sharply cut domestic support levels -- including its own. It won widespread support from the farm community for this approach and was able to launch it even before final passage of TPA.

The farm bill's increased supports for American agriculture, of course, will increase the incentive for other countries to negotiate on the topic to produce a reversal of the new U.S. actions. The United States can use that incentive to increase its leverage in the agriculture talks as long as it is willing to roll back its new subsidies as part of a multilateral deal -- and in fact cut them even further, as it has clearly and forcefully said it will. Furthermore, the new farm payments are technically within the bounds that the United States accepted in the Uruguay Round. As a result, in negotiating terms the effect will be identical to many developing countries' insistence on negotiating tariff reductions on the basis of their much higher "bound" rates (the highest tariff allowed) rather than their much lower applied rates. Even the farm bill, if properly managed, can thus turn out to enhance the prospects for a successful Doha Round rather than sounding its death knell, as has been widely suggested.

THE ROAD AHEAD

The Bush administration has a very long road ahead over the next several years to convert these strategic purposes into a successful conclusion for Doha and the other negotiations it will be undertaking. The domestic politics of trade are now much more difficult than in the past. Trade has tripled its share of the economy over the past generation and therefore become enormously more important to the United States. The traditional bipartisanship of trade policy has been severely eroded as congressional partisanship has risen; only 20 to 25 Democrats supported TPA in the three key House votes. Global and even regional trade negotiations are far more complex now because of the much larger number of countries involved and the far broader (and more complicated) array of issues to be tackled. There is also the fact that an organized group of developing countries (as well as the EU) can now block any outcome. Finally, the end of the Cold War eliminated the security glue that compelled the largest trading countries to keep their disputes from disrupting their alliance systems.

But the first two major hurdles -- the launch of the Doha Round and the passage of TPA -- have now been cleared. History suggests that these initial steps may be the hardest parts of the entire enterprise; their payoffs are much less tangible than the ultimate outcomes, and Congress is quite properly reluctant to reject a "done deal" that other countries have already processed politically. There will be many more close calls, both internationally and domestically, down the road. But the alternative would have been a prolonged U.S. absence from serious international trade negotiations, which would mean increasingly heavy costs for the United States as the rest of the world negotiated additional deals on its own and expanded discrimination against American exports. The United States and the world would have suffered severely from the continued absence of effective participation from the largest trading nation and traditional champion of open markets.

The historical perspectives described here suggest that the prospects for an eventually favorable outcome are quite good. The administration will have to negotiate skillfully abroad to bring home a series of saleable packages, but its innovative additions to the traditional strategies offer excellent promise for doing so. It will have to use the intervening years to make Trade Adjustment Assistance and education reform work at home, chipping away at the opposition to globalization. But the new legislation provides an effective foundation for building the stronger domestic political base that is essential. The year 2002 may thus turn out to represent a renaissance for U.S. trade policy rather than the demise that has been so widely feared.