World View : Clearing the Maze for Free Trade : The latest round of global trade talks are limping toward a finish. The economic implications are vast.

Four years ago, the governments of more than 100 countries, rich and poor, set out on an unprecedented round of negotiations aimed at overhauling the ailing global trading system and ultimately stimulating the entire world economy.

They vowed that the new arrangement would reflect the economic realities of the 21st Century--governing not only traditional manufactured goods, but telecommunications, banking, copyright protection and a host of other issues that did not even exist when the first attempt to write global trade rules took place in the late 1940s.

What is more, the new worldwide trade compact those 100 countries envisioned would finally tackle the thorny issue of agriculture, declaring that no nation’s sacred cows (or crops, for that matter) would stand in the way of free trade.

Proponents argue that success of the new talks--now in their climactic stage--could mean a bonanza to the world economy so large that it defies comprehension. Although some criticize these figures as vastly inflated, the Bush Administration contends that the U.S. economy alone would stand to gain $125 billion in just the first year--the equivalent of more than $600 for every man, woman, and child in the country.

A failure, adherents warn, would raise the risk of a new round of trade battles--precisely what the world does not need as the global economy begins to falter. Indeed, many economists blame the last great binge of protectionism, in the 1920s, for turning a garden-variety recession into the Great Depression.

Trade officials fear that without a worldwide agreement, countries will coalesce into three “trading blocs”--the European Community, the Americas and Asia--that will wage economic warfare against one-another, cutting off export opportunities for firms outside their respective blocs and making almost everyone the poorer.

But with the official meeting to wrap up a new agreement set for Dec. 3-7 in Brussels, the final days of trade talks in Geneva have turned into what former U.S. Trade Representative William E. Brock III calls “a thoroughgoing mess.”

Brock was the leader who initially proposed--and argued most passionately for--these talks. As the Ronald Reagan Administration’s top trade official, he had played the biggest role in getting them moving. Now he says ruefully: “I’m beginning to wonder whether my pride of parenthood is something I ought to brag about.”

The key to success is for the leaders of the United States and other major trading nations to convince all sides that the benefits they gain will far outweigh the damage that some of their industries may suffer. The new trade accord is “a win-win situation, where there are conspicuous losers and a broad array of winners,” asserts Robert Z. Lawrence, a Brookings Institution international economics specialist.

So far, however, indications are that much of the world remains unconvinced of that.

Recriminations are flying as the European countries refuse to make deep cuts in their farm export subsidies, and the United States insists upon special protection for some of its service industries. The Japanese, despite their position as the world’s most formidable exporters, still will not open their own markets to rice imports. Now, a group of crucial agricultural exporting countries, including Australia, Canada and the United States, are threatening to walk out altogether.

And that is just the beginning. Even if the negotiating countries do strike a deal--which is far from certain--U.S. participation in the arrangement will hinge on approval of the accord by Congress, where special interests will be battling furiously.

“As difficult as it may be to reach agreement, it will be equally difficult, perhaps more so, to gain Senate approval of any final product,” says Sen. Lloyd Bentsen (D-Tex.), who chairs the Senate Finance Committee under whose jurisdiction any new trade accord would fall. The situation in the House, if anything, is even more bleak.

Amid the self-interested squabbling, it is sometimes difficult to remember that free trade was an important part of the utopian future that allied leaders envisioned in the plans they laid just before the end of World War II.

At Dumbarton Oaks and Yalta, the leaders sketched out an international organization, the United Nations, that would settle international political disputes and make war unnecessary. At Bretton Woods, N.H., they set up the International Monetary Fund and the World Bank, creating a financial system designed to restore the economic health of war-ravaged countries. And in 1947, almost two dozen of the world’s most important trading countries met in Geneva to launch the General Agreement on Tariffs and Trade, under which they would eliminate barriers that hindered international commerce.

Certainly, none of these ideas worked quite as their planners had hoped, but for many years, the trade accord was a remarkable success. As tariffs fell, international trade grew at a rate that was half-again as fast as increases in world production. The ranks of countries joining the trade compact grew steadily--by more than a dozen in the last decade alone. Today, 100 countries are members, and another half dozen are seeking to get in.

The basic idea at work is this: The freer the trade among nations, the better off they all will be. Everyone can win.

When a country seeks to shield one of its industries from international competition, either by raising tariffs or other import barriers or by subsidizing exports, it often hurts the very businesses that it seeks to help.

Missed Opportunities

These protected businesses become bloated and unresponsive to the changing demands of the markets. They do not concentrate on what they do well. They miss opportunities to streamline or find the market niche they are best positioned to fill. Before the crunch of the early 1980s, the U.S. auto and steel industries were prime examples of just such failures.

International competition, on the other hand, assures that companies will be lean and efficient and that consumers will be able to buy the highest quality and newest technologies at the lowest prices. For all the anguish that Japanese car makers have caused the U.S. automobile industry, few would dispute that they also have forced Detroit to build better cars.

The central principle in the overall international trade agreement is a provision called the “most-favored-nation” clause, which--typically for global trade jargon--actually means the opposite of what it says. Under that principle, if a participating nation grants a good trading deal to any one participant, it is required to extend that same concession to every other country with which it trades.

In other words, no one is allowed to be any better off than anyone else. (The United States, for example, has denied MFN benefits to countries such as the Soviet Union, which refused to liberalize its emigration policies, but Washington is in the process of restoring them now that Moscow has relented.)

The problem is, free trade works only if everyone participates. For all the success that the general trade agreement showed in its early years, it started fraying amid changes and political frictions in the 1970s.

With world growth slowing, economically pressed countries began rebuilding their trade barriers with hundreds of new protective arrangements, often trying to camouflage what they were doing.

Just this month, for example, the European Community announced that it was banning imports of American pork because U.S. packing plants do not meet its sanitation standards. U.S. government and meat-industry leaders insist that the health regulation is nothing but protectionism that will cost U.S. hog farmers and meat packers up to $50 million a year in lost overseas business.

The United States tightened its own trade laws in 1974 and strengthened enforcement procedures even further when the trade deficit became a red-hot issue in 1988. Current law gives the President broad powers to punish foreign countries whose trading practices are deemed unfair to U.S. companies. Although many would argue that this law clearly violates the international agreement, it has been invoked in 11 major cases since 1986.

In this increasingly hostile atmosphere, more and more governments seem to feel that free trade is for suckers. They talk about leveling the playing field, but what they mean is beating protectionist countries at their own game.

Bolstering their argument is the fact that the 43-year-old trading system established after World War II is no longer in step with the times. It does not, for example, have any rules covering services--increasingly important businesses such as banking, retailing, transportation and telecommunications. Service industries now account for more than two-thirds of this country’s gross national product and employ three-quarters of its work force.

Nor do existing trade rules adequately protect so-called “intellectual property”--copyrights, patents and the like--threatened in recent years by piracy and counterfeiting and a proliferation of cheap knockoffs of just about everything from Louis Vuitton handbags to Paul Simon tapes to Flight Simulator computer game software.

Incredible as it may seem, agriculture also is exempted now. Industrialized countries were looking to the developing world as the most promising market of the future, but these Third World nations have little incentive to lower barriers to investment, manufactured goods and services if they cannot obtain greater access for their agricultural exports in return. Particularly for countries that are saddled with huge debts, the ability to sell textiles and farm products overseas offers the best hope for prosperity and stability.

A System in Disarray

To be sure, the effort to forge a new trade compact has come a long way since Brock’s initial proposal. When the United States tried to force a discussion of these issues at a meeting of trade ministers in Geneva in 1982, the session broke up in disarray. But by 1986, the trading system was splintering so badly that everyone was ready to acknowledge that it needed a complete overhaul.

With great fanfare, the trade ministers announced the current round of negotiations at a meeting in Punta del Este--naming it the Uruguay Round (in hopes of attracting more developing countries to the talks), despite the fact that bargaining actually is taking place at the international trading system’s headquarters in Geneva.

The current round is the eighth since the trading system was established, and it is by far the most ambitious. It seeks agreements on services, intellectual property and agriculture, as well as tightening up procedures for punishing violators of international trade rules.

But as it goes into its final days, the needed compromises have yet to emerge. While some bargaining is always left until the 11th hour in any political negotiation, the chasm among the various interests is so large that free-trade proponents fear for the survival of the trading system.

“Unfortunately, it’s not posturing,” Brock laments.

Of all the areas where differences remain, the one that looms largest is the effort to reduce trade barriers affecting agricultural products. When Deputy Trade Representative Julius Katz was asked last summer to name the biggest stumbling blocks, he replied, “Agriculture, agriculture and agriculture.”

U.S. Agriculture Secretary Clayton K. Yeutter estimates that Europe’s policy of heavily subsidizing its farmers to grow and export their crops costs European taxpayers and consumers $250 billion a year.

American farmers insist that they are far more efficient than their European counterparts and that they could beat them in a fair fight for world markets. But up against heavy subsidies and barriers to imports, they have lost most of the European markets and are slipping in other areas of the world as well.

The United States has demanded that the accord require the major trading nations to reduce their barriers and internal subsidies to agricultural trade by a staggering 75%, with a 90% cut in government subsidies for agricultural exports. These moves would hurt heavily subsidized U.S. farms as well, with the chief victims being dairy, sugar, peanut and cotton farmers. But the benefits to agricultural exporters, such as grain and oil seed farmers, would outweigh the damage to the other groups, trade officials say.

Just as important, opening up trade in agriculture is the single biggest inducement that will draw the developing world into the agreement. The participation of Third World countries is crucial to striking a meaningful deal on services.

But Europe, which is concentrating on solidifying its position in advance of unifying to create the world’s largest single market in 1992, has yet to move very far toward the U.S. demands.

Germany, in particular, is resisting cuts because the government of Helmut Kohl does not want to alienate that country’s farm sector in advance of the new German national elections, scheduled for Dec. 2--the day before trade negotiators are scheduled to present their finished package in Brussels.

France, another country with heavy subsidies, is also standing firm.

Although farmers are only 8% of the European work force, their influence far outweighs their numbers. Ireland’s Ray MacSharry, the European Community’s agriculture minister, notes that 57% of EC land is devoted to agriculture, a much higher proportion than elsewhere in the developed world.

If that land is abandoned, MacSharry contends, the entire fabric of rural life will be torn--ultimately robbing vacationing European city-dwellers of their easily accessible countryside. Others fear that out-of-work farmers would flee to European cities, as they have in the United States over the past 50 years.

While the United States and other agricultural exporters denounced the initial European offer on subsidy cuts as far too meager, Brussels’ proposal triggered protests in France by farmers who felt that it went too far.

About 2,000 farmers congregated in eight locations in western and central France last week and blocked roads by dumping beef carcasses on them. The next day, thousands more descended on the trade negotiations headquarters in Geneva, ringing cowbells and riding tractors.

Some have questioned whether the Bush Administration will be willing to exert much pressure on the Europeans while it needs their cooperation in the Persian Gulf crisis. But U.S. Trade Representative Carla Anderson Hills has vowed to “leave no stone unturned” in her efforts to force them into an agreement.

Last week, she brushed aside a suggestion that it may already be too late. “The problem, you see, is not time--time isn’t going to fix the problem,” Hills said. “The problem is political will. We could solve this in three days if we had the demonstrated political will to deal with the issues.”

A Minefield of Trade Barriers

It isn’t just high tariffs that countries use to keep out foreign goods and services. A sampling of other tricks of the trade:

South Korea’s strict import-licensing restricts a variety of fruits, vegetables, fruit juices and beef.

The European Community bars imports of U.S. beef if cattle have been fed growth hormones.

Mexico gives preference to domestic firms in bidding for government contracts.

India bars foreign firms from selling insurance.

Brazil restricts the sale for foreign-made computers.

Oman has no copyright laws so that virtually all videos, cassettes, and computer software sold there is pirated.

Japanese laws make it virtually impossible for a foreign firm to take over a domestic company.

Greece taxes foreign firms more harshly than domestic ones, requires them to export a percentage of everything they produce and to hire a certain proportion of Greek workers.

Taiwan gives generous subsidies to its shipbuilders.

The United States imposes tough quotas on sugar and textile imports.

Source: U.S. Trade Representative’s Office AMERICA’S STILL-UNCOMFORTABLE TRADE DEFICIT Figures in billions of dollars

Deficit Exports Imports 1981 $22.3 $238.7 $261.0 1982 27.5 216.4 244.0 1983 52.4 205.6 258.0 1984 101.7 224.0 325.7 1985 126.5 218.8 345.3 1986 138.3 227.2 366.1 1987 152.1 254.1 406.2 1988 119.1 321.8 440.9 1989 109.0 364.0 473.0 1990 109.0* 400.0* 509.0*

* projected

Source: U.S. Commerce Department

GLOBAL TRADE NEGOTIATIONS THROUGH THE YEARS

Here is a list of the major global trade negotiations held since the current world trading system was established, in 1947: 1947 23 Countries--Geneva: Delegates completed some 123 negotiations that provided for 45,000 tariff concessions affecting about $10 billion worth of trade. 1949 13 Countries--Annecy, France: Negotiators worked out about 5,000 additional tariff cuts. 1951 38 Countries--Torquay, England: Talks provided for average cuts of 25% on some 8,700 tariffs. 1956 26 Countries--Geneva: Further tariff reductions amounting to $2.5 billion. 1961 26 Countries--Geneva: The Dillon Round: Tariff cuts on 4,400 categories covering $4.9 billion worth of trade. 1967 62 Countries--Geneva: The Kennedy Round: Average 50% tariff cuts covering about $40 billion worth of trade. Separate agreements on grains, chemical products and predatory pricing practices. 1979 99 Countries--Geneva: The Tokyo Round: Tariff cuts covering more than $300 billion worth of trade. Reduction of tariffs on manufactured goods in major industrial countries to an average 4.7%, from 7% before. Special tariff preferences for developing countries. New codes covering subsidies and penalty duties, government procurement practices. 1989 105 Countries--Geneva: The Uruguay Round: Launched in Punta del Este, Uruguay. Seeks to write new rules covering trade in agriculture, services, intellectual property and investment. Hopes to liberalize trade in textiles, tropical products, and tighten rules for settling trade disputes between countries.

Total World Trade, in Billions 1950: $57.9 1951: $78.2 1952: $75.0 1953: $75.9 1954: $78.6 1955: $85.5 1956: $95.5 1957: $102.5 1958: $97.3 1959: $103.2 1960: $118.3 1961: $123.1 1962: $128.6 1963: $140.9 1964: $157.5 1965: $171.3 1966: $187.8 1967: $197.2 1968: $220.4 1969: $251.8 1970: $288.6 1971: $325.3 1972: $388.7 1973: $638.8 1974: $779.7 1975: $804.6 1976: $916.7 1977: $1,066.3 1978: $1,233.6 1979: $1,574.5 1980: $1,901.2 1981: $1,869.5 1982: $1,719.2 1983: $1,685.7 1984: $1,784.5 1985: $1,807.8 1986: $1,990.4 1987: $2,347.9 1988: $2,686.2 1989: $2,891.7 Source s : International Monetary Fund , U.S. Trade Representative’s Office

THE U.S. POSITION IN THE URUGUAY ROUND U.S. Goal: Major cuts in government support for farmers. Status: U.S. and European negotiators far apart. U.S. Goal: Liberalization of textile trade over 10-year period while keeping some tariffs on imports. Status: Asian exporters seek deeper cuts or elimination of tariffs. U.S. Goal: Rules for the first time governing trade in services, with goal of increased trade. Status: Talks off to a good start but only first step. U.S. Goal: Strong international rules protecting patents, copyrights and trademarks. Status: Third World countries resisting enforcement mechanism. U.S. Goal: rules to end or curtain local involvement and other requirements for foreign investment. Status: Impasse due to opposition of developing countries. U.S. Goal: Tighter anti-dumping procedures to keep producers from selling cheaper abroad than at home. Status: Agreement seems near, though some poor Asian nations oppose. U.S. Goal: An expanded definition of the kinds of subsidies considered detrimental to imports. Status: Opposition from European nations, which subsidize many industries. U.S. Goal: Elimination of tariffs on electronics, drugs, steel and other goods. Status: Europe concurs on drugs; otherwise wants only percentage cuts.

Tumulty reported from Washington and Havemann reported from Brussels.