Trade Tension May Be Rising

Growing protectionist sentiments in this country, which have escalated tensions between the United States and some of its key trading partners, are threatening to stall the global movement toward freer trade.

That in turn could provoke trade wars that would slow global economic growth and penalize American consumers through higher prices for a wide variety of goods, including clothing and television sets, some economists fear.

Signs of growing trade tensions are appearing almost daily, with the United States as the focal point.

“If you look around the world, there are a lot of reasons to think leaders are actually interested in trade liberalization,” said Columbia University economist Jagdish Bhagwati, pointing to economic reforms in China and India. “The one problem is really at our end. Americans are terrified by trade. We worry that if we trade with relatively poor countries, we’re going to be impoverished ourselves.”

More than a dozen bills pending in Congress seek to penalize China for unfair trade practices, moves that could lead to retaliation by the Asian nation.

The U.S. and the European Union are locked in a brewing battle over alleged government subsidies to their respective aircraft giants, Boeing Co. and Airbus. Europe and Canada last month imposed more than $40 million in tariffs on U.S. goods because Congress has refused to amend an anti-dumping law deemed illegal by the World Trade Organization.

Sugar growers, textile manufacturers and labor unions have teamed up with congressional Democrats, seeking to derail a proposed trade agreement with Central America. Failure to ratify that measure could undermine more ambitious efforts to enact broader free trade initiatives encompassing all of the Western Hemisphere and the entire world, experts warn.

Opponents of these free trade initiatives say their opposition stems mostly from wanting to ensure a level playing field or to protect worker rights. But free trade supporters fear that a retreat by the leading champion of free-market capitalism will open the door for an escalation in tit-for-tat measures that will ignite inflation and spook financial markets.

“If the U.S. really starts playing hardball, does that tip the balance and do other countries start taking similar measures in the middle of a global slowdown in growth?” asked Jason Kindopp, an analyst with Eurasia Group, an international consulting firm.

Most economists and lawmakers, liberal and conservative, agree in principle that America’s post-World War II push to free up capital and encourage trade across borders has been good for global growth. The removal of tariffs and other trade barriers has allowed American companies to expand their markets overseas, seek out the cheapest producers and provide lower prices and more choices to consumers.

But though the benefits of trade are distributed broadly across an economy, the pain is generally concentrated in regions or industries that are threatened by low-cost competition. In response to pressure from farmers for protection, the U.S. government passed the Smoot-Hawley Tariff Act of 1930, which many believe was a key factor fueling the Great Depression.

More recent examples of an upsurge in protectionist sentiment included the backlash against surging Japanese imports and investment in the 1980s and the prolonged political battle over passage of the North American Free Trade Agreement in 1994.

But some analysts say the present unease with free trade is broader and deeper, triggered by shifts in the global economy that have accelerated domestic job churn at a time when pensions and other parts of the social safety net are eroding.

U.S.-European trade ties are fraying at a time when the process of European integration is under siege. In recent days, French and Dutch citizens voted down the European Union constitution, in part because of fears about low-cost imports and cheap labor.

Tensions increased Tuesday, when the Bush administration announced it was filing a case with the WTO over billions of dollars in alleged subsidies for Europe’s Airbus. The Europeans fired back a counter-claim against purported government aid to Boeing.

In the latest sign of increased U.S.-China discord, China’s Commerce Minister Bo Xilai said Friday that U.S. curbs on Chinese textile exports were “trade protectionism.”

Earlier in the week, China said it was rescinding taxes aimed at slowing its textile exports and threatened to file a complaint with the WTO if the U.S. and Europe pushed forward with those restrictions on Chinese textile products. In addition, China said it might reconsider promises to open up its agricultural and service sectors if the textile curbs weren’t removed.

The U.S. also is threatening sanctions if China doesn’t move more quickly to revalue its currency, the yuan. U.S. manufacturers say the Chinese currency -- which is pegged to the dollar -- is undervalued by as much as 40%, giving that nation’s exporters an unfair advantage.

“This kind of rhetoric from both countries is not healthy and is in fact quite dangerous,” said Donald Tang, vice chairman of Bear Stearns & Co. and chairman of the Asia Society Southern California.

The implications of a deterioration in trade relations with China are particularly significant, given that nation’s international stature and its importance as a global manufacturing center and financier, analysts say.

Economists warn that a trade war with China would wreak havoc in the U.S. economy, since that nation is a leading supplier for retailers such as Wal-Mart Stores Inc., Target Corp. and Home Depot Inc. and one of the fastest-growing markets for U.S. high-technology and service firms.

If Congress were to move forward with tariffs on Chinese goods, it would raise costs for U.S. importers and consumers and could trigger retaliation by China against U.S. products, such as airplanes and wheat, economists warn. That could push up prices, fueling inflation.

“Trade protectionism can lead to some very ugly outcomes,” said Tobias Levkovich, U.S. equity strategist for Citigroup Smith Barney, who predicts that “cooler heads will prevail.”

But with the U.S. trade deficit topping $618 billion last year, trade has become an increasingly contentious battleground on Capitol Hill, where fierce partisanship has made it difficult for moderates to cross party lines on controversial issues.

Analysts said the Democratic Party had grown more skeptical of trade in recent years as globalization accelerated the loss of American jobs, particularly in heavily unionized sectors such as manufacturing. Even moderate, pro-trade Democrats have lined up against the proposed Central American Free Trade Agreement, saying it doesn’t have strong enough protections for workers.

Democratic critics of U.S. trade policy, many of whom supported NAFTA and the creation of the WTO, say the protectionist label is unfair. They say they are only trying to ensure that U.S. firms get a fair shake, that countries such as China play by the rules and that the rush to open new markets doesn’t lead to labor exploitation or environmental abuse.

“We don’t believe that you have to give up everything in the interest of free trade,” said Maryland Rep. Benjamin L. Cardin, the top Democrat on the House Ways and Means Committee.

Others argue that the disaffection with trade can’t be blamed solely on Democrats, pointing out that the agenda in Congress is controlled by the Republican leadership. In the Senate, there is strong bipartisan support for legislation that would impose a 27.5% tariff on Chinese imports if that country doesn’t revalue its currency within six months. Senate leaders have agreed to bring that bill to a vote by the end of the summer.

“I haven’t seen so little support for free trade in the last 20 years in Congress,” said Tim Kane, an economist at the conservative Heritage Foundation.

Robin Bew, chief economist for the Economist Intelligence Unit, a London-based political risk firm, gives the Bush administration credit for trying to keep trade liberalization on track, largely by striking bilateral trade deals with smaller countries such as Morocco and Singapore.

But the administration has also drawn heat, particularly in the developing world, for signing a bill that boosted farm subsidies to record levels and for imposing steel tariffs in 2002.

Given the waning support for trade liberalization across the globe, Bew said he was “pretty pessimistic” that President Bush or Europe’s leaders would invest the political capital needed to finalize a WTO-sanctioned global trade pact by 2006. He said the chief hurdle was getting the largest developed countries to give up huge farm subsidies while persuading poor countries to open their markets faster.

The Bush administration denies that it has caved to protectionist pressures, arguing that it has intervened in the market only when U.S. firms were threatened by unfair trade practices. The administration has refused requests to challenge China at the WTO over alleged currency manipulation and labor violations.

America’s trade policy struggles are being watched closely elsewhere in the world.

Brazil, like many other developing countries, is feeling its own pressures from low-cost Chinese competition and recently imposed restrictions on Chinese apparel imports. But the chief headache is its relationship with the United States. Brazilian farmers are angry that the Bush administration has not moved more quickly to amend a U.S. cotton subsidy program that was declared illegal two years ago by the WTO.

Pedro de Camargo, a former Brazilian trade official and head of that country’s leading farm group, said the Bush administration’s inability to hold the line against powerful farm lobbies, such as the sugar and cotton industries, has hurt its credibility in Latin America.

If the Bush administration is unable to get CAFTA passed, it would have much more difficulty convincing other countries that it has the political support for other trade initiatives, such as the proposed hemisphere-wide Free Trade Area of the Americas, one of the president’s top trade priorities when he took office.

Already, friction between the U.S. and Brazil has led to a stalemate in talks over the FTAA, which would create a free trade zone stretching from Alaska to the tip of South America. In happier times, the U.S. and Brazil agreed to co-chair the FTAA talks.

“How can the United States even sit at a negotiating table for the FTAA if you’re unable to sign a free trade agreement with Central America?” De Camargo said.