A World of Trading Places

The official birth of the integrated Western European Common Market--12 nations and 340 million inhabitants--is still four years away. Yet the entire world economic system is already experiencing powerful prenatal shocks. This is the beginning of a new era of great trading blocs, with Western Europe becoming unified for the free flow of goods, capital--and people.

Meanwhile, a basic dispute over farm policies between the European Economic Community and the United States stymied a conference in Montreal last week involving 100 member states of the General Agreement on Tariffs and Trade (GATT). This set the stage for deep transatlantic differences to emerge, and when the meeting adjourned at the end of the week after an all-night session, Australian delegate Michael J. Duffy warned, “We’re staring down the barrel of an all-out trade war.”

The conference was largely overshadowed in the media by the simultaneous New York visit of Soviet leader Mikhail S. Gorbachev (whose country is not a GATT member). Yet in terms of long-range impact on international trade relations--and therefore on jobs and living standards everywhere in the West--the Montreal gathering was one of the most momentous postwar events.

Preparations for the integrated European market and the GATT effort to liberalize world trade are both at a halfway point; this is why bitterly contentious issues have all surfaced at the same time. What is truly at stake is whether growing protectionism or survival of free-trade practices will prevail in the next decade and into the next century.

The European Community held its own summit on the Greek island of Rhodes early this month, to examine progress since the 1986 decision to proceed with full integration. The summit declared itself reasonably satisfied so far, although formidable obstacles persist. Meanwhile, its principal message was addressed to the United States: The integrated market will not be “fortress Europe.”

The Montreal session was part of the broadest undertaking in four decades to eliminate or reduce tariffs and other constraints on exports and imports; and because the GATT meetings overlapped the creation of an integrated European market, they are regarded by all participants as crucial in world trade patterns.

Not so incidentally, the Montreal meeting was 10 days after the reelection of Prime Minister Brian Mulroney in Canada. Mulroney’s victory assures Parliament ratification of the free trade agreement with the United States, covering $150 billion in annual commerce and setting up the largest two-nation trading relationship in the world. Had opponents won the November election (the U.S. accord was the pivotal issue), the cause of free trade might have been set back everywhere, including in the European Community.

Still, the road ahead is long, strewn with huge boulders of protectionism, nationalism and political special interest in every country.

The European-American dispute over farm policies is a dramatic illustration of underlying trade tensions. Conflict stems from a standing U.S. demand that all leading food-exporting nations abolish subsidies to their farmers over a defined period (President Reagan initially proposed total elimination by the year 2000), versus absolute European opposition.

The European Community, according to its delegate in Montreal, would be willing to freeze, then cut back subsidies--but no more. Positions taken at the conference emphasized the depth of disagreement, so basic that several hints of transatlantic trade wars began surfacing.

Each rival position is based on valid domestic, economic and political realities, illustrating how difficult it is to assure fair treatment and prosperity for all sides as the world shifts toward new economic structures for both industrialized and developing nations.

Subsidies to farmers in Europe, Canada, Australia and Argentina add up to a whopping $220 billion annually, making those producers more competitive--in prices--than U.S. farmers. The United States, the world’s greatest producer, believes that farm subsidies paid by European governments increase food costs and encourage overproduction at a time of endemic surpluses on international markets (U.S. farm subsidies are not usually tied to production). As Washington tries to cut trade deficits with food exports, it insists on “free competition.”

To Europeans, however, the U.S. proposition is politically unbearable. Expensive as the subsidies are for European nations, the political fact of life is that there are 12 million farmers in European Community countries and only 2.5 million in the United States. Moreover, small European holdings cannot compete in unsubsidized production with huge land tracts in North America, Australia and Argentina. No government in Eastern Europe would be likely to survive an elimination of subsidies. In Montreal, Canadian farmers last week joined 2,000 farmers from 24 nations in a street demonstration demanding the maintenance of subsidies (even though the Canadian government is against them).

If the farm-subsidies question is not resolved by 1990--GATT talks resume in April--the United States may begin applying its own export subsidies from a $2.5-billion fund approved as part of this year’s trade legislation. The law allows retaliation against perceived unfair practices by other countries. Last week in Montreal, Sen. Patrick J. Leahy (D-Vt.), chairman of the Senate Agriculture Committee, suggested that there would be new U.S. pressures for a stronger “export-oriented farm bill” if the Europeans do not compromise on the subsidies.

Contradictions persist. Despite Montreal agreement on important concessions to Third World exporters of tropical products to industrialized countries, the United States has conditioned its implementation on overall liquidation of export subsidies. Perhaps most frustrating of all, even as governments quarrel about worldwide food gluts, hunger and starvation cause everyday tragedies in much of the Third World.

History tells the world that excessive protectionism is the road to disaster: The protectionist U.S. Smoot-Hawley Act of 1930 is widely believed to have contributed to the Great Depression. The October, 1987, market crash was blamed in part on fears of fresh protectionist legislation.

In Europe, trade conflict with the United States could trigger a nationalist backlash within the European Community, complicating completion of the Common Market integration by 1993 and creating dangerous economic strains. Britain and most of its European partners are already at odds over fundamental integration concepts, notably the harmonizing of the value-added tax (VAT) in the Common Market. France, too, opposes VAT equalizing on grounds that economic conditions throughout the EC vary too widely to make it practicable. And Britain refuses to join the European Monetary System through which continental currencies are linked.

The greatest peril, however, is a world breakdown in trade agreements. This is perhaps as important an issue for the Bush Administration in terms of national security as the strategic relationship with Mikhail S. Gorbachev. Trade affects all U.S. deficits, jobs and the general welfare. Europe is well on the way to integration, existing obstacles not withstanding, and, increasingly, all Europe will be perceived as a single trading bloc by the United States.

One U.S. response might be a “fortress North America,” a rival bloc in concert with Canada. Japan, together with the new “tigers” of South Korea, Taiwan and Singapore, could turn into still another major world trading bloc. If each bloc acted in terms of selfish advantage, the result could be chaos and confrontation.

From Rhodes to Montreal to Washington, the events of last week are a global warning that the time has come for statesmanship, great caution and vast imagination if world trade is not to careen out of control.