Forget Free Trade and Aim for the Attainable: Fair Trade

The Bush Administration faces a decision that will define U.S. policy toward the world trading system for years to come. Under the 1988 Trade Act, the Administration has until May 30 to identify nations that violate free-trade rules, and to devise sanctions to bring them into compliance.

The leading candidate is, of course, Japan, with its chronic trade surpluses and its elusive strategies of importing mainly raw materials and targeting industrial exports.

The Japanese, invariably, have warned that to be stigmatized as a trade violator would be a loss of face, with chilling consequences for U.S.-Japan relations. The usual editorialists, invariably, are warning against “Japan bashing.” The State and Commerce departments, also invariably, can’t agree on a game plan.

The dilemma is a revealing reflection of how the United States ties itself into knots over trade policy. The trade-law provision, (“Super 301” in trade jargon) was a compromise between trade hawks led by Rep. Richard Gephardt (D-Mo.), who sought an amendment requiring a rough balance in the trade accounts, and trade doves who merely wanted more aggressive efforts to export laissez-faire, and hence products.

By the usual logic of free trade, the Super 301 provision was a nice middle ground. It was a procedural victory for the legalists, but a moral one for the hard-liners. No numerical targets were set. Rather, the United States would work more systematically to pry open foreign markets, but not to manage trade balances.

However, the compromise was built on faulty assumptions. The reality is that nobody really practices or even desires free trade in the textbook sense. The Europeans have a mixed system, which blends capitalism with mercantilism. Many industrializing nations use capital subsidies and market-closing measures as tools of development.

And the United States of America, the very temple of free trade, commits multiple “sins,” ranging from protected markets in textiles and steel, to farm stabilization subsidies and auto quotas, to immense spillovers from defense contracting that turn American aerospace firms into export champions.

The main difference is that other nations that practice a mercantilist form of capitalism are rather more coherent about what they’re doing. They’ve figured out how to turn their brand of mercantilism into export gains and growth industries, while the United States sins ineptly and blushes like a demi-virgin.

The American penchant for free trade as a holy grail reflects less ideological purity than America’s leadership of the Western alliance. If you’re trying to manage a balky alliance, offering your trading partners the prospect of ever-freer export markets for their goods is a very handy carrot.

The United States is no longer sufficiently dominant to indulge in one-way free trade. Yet instead of recognizing that the world has changed, the Bush Administration preaches legalisms intended to create a celestial “level playing field,” where sinners all repent and everyone plays by American rules.

So, as the May 30 deadline approaches, the Administration finds itself divided in its goals and painted into a diplomatic corner of its own making. If we were consistent in our legalism, half of the countries of the globe would wind up on the list of trade malefactors--including ourselves.

The reality, not acknowledged in the 1988 trade act, is that geopolitical considerations profoundly influence the decision on which government the United States permits to commit which sins against free trade. Take Brazil, a notorious mercantilist. Brazil is also saddled with debt and desperately needs to export. Scratch Brazil from the blacklist.

Similarly, South Korea hardly practices U.S.-style capitalism. But South Korea is a front-line nation in what used to be the Cold War. Do we humiliate the South Koreans and fuel their urge to merge with their countrymen to the communist North?

Or consider Western Europe, with its high-tech subsidies and its steel cartel and its indulgence for family farmers and high-priced edibles--and its increasingly promiscuous foreign policy.

Good grief! Are we to indict the whole world?

That, actually, is one solution. If trade ambassador Carla Hills put everyone on the list, it would minimize the sting. But of course that would also fail to solve the problem that led to the 1988 trade law, namely the fact that nations play by different rules, leading to horrendous U.S. trade deficits.

It would make far more sense for the United States to acknowledge that the real goal should be balance in the trading system, and not a crusade to bring laissez-faire to a skeptical world. That would require giving more authority to supra-national agencies like the General Agreement on Tariffs and Trade, which is the appropriate party to complain against Japan’s free-riding.

But the United States does not quite seem ready to make that leap. So whatever decision the Administration makes, May 30 poses no-win choices. And the near future is likely to bring more disingenuous legalism, and more awkward finger-pointing.

DR, McNally Chicago Tribune