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U.S. Trade Policy — Leading By Example

How can trade policy boost U.S. leadership in the international system?

December 16, 2004

How can trade policy boost U.S. leadership in the international system?

Remember the mid-1960s? They have entered the annals of trade history as the high point of the — ultimately failed and discredited — policy of import substitution, which was carried to its extreme in Latin America.

Since then, there has been a virtual revolution in trade policy among developing countries. Nearly all are now deeply integrated into the international trade system. Trade, as an engine of development, has landed a knock-out blow.

But it was not the elegance of Ricardian theory of comparative advantage, nor the general force of liberal trade ideas, that thankfully brought down import substitution.

Rather, it was the exemplary economic performance of those East Asian countries that chose an outward-oriented export strategy, which changed trade policy throughout much of the global South.

There is a lesson in this for all nations — not just in the developing world: the possibility of leadership in trade policy through the force of example

At the outset of the second Bush Administration, there is much speculation about what the Bush team can do to revitalize its diminished global respect.

Can the United States regain respect and lead the world toward free trade, not so much by narrow, often bilateral exchange of "concessions" — but by its own example of free trade?

Is the administration's self-acclaimed strategy of "competitive liberalization" the only way to move ahead?

It aims at establishing a dynamic maze of bilateral and regional trade agreements in order to advance the cause of global trade liberalization.

Whatever the real merits of that strategy — and there are many doubters — I do indeed believe the United States can exercise power by setting an example. But the examples set by the United States in the past have not always supported liberal trade.

After World War II, the United States strongly supported non-discrimination — that is, the most favored nation principle — but it has backtracked on this principle in recent years.

In the early postwar years, the United States set illiberal examples by exempting its agriculture from GATT rules.

It also undermined GATT principles through the Short Term Cotton Textile Agreement, which ultimately morphed into the highly restrictive Multifiber Arrangement. Both examples were widely copied by other nations — leading to severe distortions of global trade.

More recently, the notion of U.S. leadership by example in the trade area has been tarnished by new tariffs on the long-protected steel industry — and by the expansion of agriculture subsidies in recent farm legislation.

U.S. leadership in trade is also being undermined by a trade deficit of roughly $600 billion — or close to 6% of GDP. While in a narrow sense this represents an open market to foreign exporters, a trade deficit of this size is ultimately a weakness in the international trade system.

With all of this in mind, what does it really mean to "lead by example?" There are two criteria. First, the policy must be available to the U.S. unilaterally, not dependent on foreign reciprocation.

True leadership by example persuades — but does not negotiate for followership. Which is why I am not proposing an agenda for international negotiation.

Second, to be domestically and internationally credible, trade leadership policies must be in the U.S. economic interest. There is no merit in leading to trade policies that harm U.S. interests.

If ever trade policy by example were possible, now seems an ideal opportunity. President Bush claims to have earned “political capital” in the recent election — and he intends to spend it.

The question is on what. I suggest that the returns on taking unilateral steps toward a more liberal trade policy are among the highest President Bush can earn with this political capital.

Moreover, the traditional Republican rhetoric on free trade — plus the Republic margins in the House and Senate — argue that the time is now.

What then are the elements of leadership by example? All of us would have our own agenda — I offer mine with no special ranking.

1. Reform the U.S. arsenal of unfair trade laws, especially anti-dumping codes and statutes. Antidumping laws have become the protectionist instrument of choice worldwide, and this trend needs to be reversed.

2. Resist the use of special safeguards against China, despite their availability under earlier U.S.-China trade agreement. Limited safeguards have always been available under GATT — special China safeguards smacks of discrimination and protectionism.

3. Commence a unilateral phase-out of all trade-distorting agricultural subsidies.

4. Review U.S. tax laws to remove artificial incentives for foreign investment, but then pledge a permissive policy toward outsourcing. Outsourcing is here to stay; Creative education and labor market policies can turn it to U.S. advantage.

5. Put all bilateral, regional and preferential trade agreements on the back burner — and concentrate on wrapping up the global round of WTO/Doha negotiations.

Also, initiate a serious multinational inquiry of how the global trade system slipped away from the ideals of non-discrimination and most-favored-nation status to the current chaotic discriminatory and opaque mishmash of FTA (Free Trade Agreement) arrangements.

6. Make aggressive efforts to improve the Trade Adjustment Assistance regime, both as a compensation and a labor market efficiency program.

7. Despite general qualms about GSP (Generalized System of Preferences), consider whether it could be used to help soften the effects of dismantling the MFA (Multifibre Arrangement) on countries such as Bangladesh and Sri Lanka and others. At the same time, the United States should announce a unilateral phase-down of textile/garment tariffs, which are unconscionably high.

8 . Reflect a little more before appealing or circumventing each and every adverse WTO ruling. The DISC, FISC saga of tax measures set a truly poor example of respect for U.S. trade law. For over 30 years, the US evaded GATT strictures on export subsidies. More respect for the rules may help the U.S. to regain respect.

9. Enact a fiscal policy that reverses the direction of the U.S. federal budget deficit, increases national savings, helps turn around the trade deficit — and restores U.S. authority in the international economic system.

So why should the Bush Administration pursue this agenda? Simple. Putting the national interest in free trade ahead of domestic special interests would be a mark of true global statesmanship. It might also be a good first step on the road to restoring U.S. leadership in the international trade system.

Adapted from Charles Pearson’s remarks, “Trade Policy By Example,” given at the Evian Roundtable hosted by Johns Hopkins University, November 15, 2004.