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Stalled Talks a Symptom of Worldwide Trading Ills

PAUL R. KRUGMAN <i> is professor of economics at Massachusetts Institute of Technology. </i>

International trade negotiations almost never end in open failure. When countries are unable to agree on substance, they nearly always find some face-saving way to end the negotiations. After all, trade disputes are not life-and-death issues, and talks can always be resumed.

So it is remarkable that the current negotiations over world trade under the General Agreement on Tariffs and Trade (GATT) appear to be headed for complete breakdown. A meeting in Brussels last month, which was supposed to complete the so-called Uruguay Round of negotiations, ended in disarray. Although talks have now resumed in Geneva, few expect any good result. Indeed, U.S. Trade Representative Carla Anderson Hills, America’s chief trade negotiator, gives only a 30% chance of reaching an agreement.

How could such a breakdown happen? On the surface, the problem was an impasse over agricultural trade. But at a deeper level, the breakdown of the Uruguay Round is a symptom of the underlying crisis of the world trading system.

The agricultural issue is straightforward enough. World trade in agricultural products is grossly distorted by government actions. The United States is not without sin--for example, in our outrageous protection of sugar. Other industrial nations, however, are far worse.

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Japan has high barriers against rice, beef and citrus. Worst of all, the European Community--a densely populated region that would, under free trade, be the world’s largest importer of food--sets support prices for its farmers so high that they grow massive surpluses, which must be dumped on world markets through export subsidies. Most of the cost of this policy is borne by European consumers and taxpayers, but significant costs also fall on farmers in other countries, including the United States.

So the United States, understandably, led a coalition of food exporting countries in demanding a worldwide move to freer trade in agricultural products. Europe, unsurprisingly if not justifiably, opposed this initiative. This is all the stuff of normal trade negotiation. Characteristically, the United States has been aggressive and clumsy in its diplomacy; equally characteristically, the Europeans have been self-centered and irresponsible in their unwillingness to act responsibly. Twenty years ago, the result would have been a negotiation that achieved little, but ended with joint expression of noble sentiments.

This time, however, the United States really meant it. Our initial demands went far beyond what was politically realistic in Europe. We then retreated to a second, more modest set of demands, backed by a number of other countries--and dug in our heels. Without real concessions by the Europeans, there would be no agreement. With a pigheadedness that is shocking if not exactly surprising, the Europeans responded by putting domestic politics completely ahead of global responsibility, and refused to make even modest concessions. And so there will probably be no agreement.

Why was the United States so aggressive? Not because agriculture itself is so crucial. Instead, the problem is one of dealing with the eroding credibility of the whole trading system.

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Once upon a time, trade negotiations were straightforward. Countries protected domestic industries with tariffs levied as goods crossed borders, or with explicit import quotas. The task of trade negotiation was to get countries to remove those barriers.

Over the last 40 years, however, government policies toward international trade have become more and more subtle and sophisticated. Industries are protected, not by explicit tariffs, but by regulations that favor domestic products or selective government procurement. Open export subsidies are out, but other policies, like the government-provided capital that allows Europe’s Airbus Industrie to compete with Boeing, can serve the same function. While trade negotiators have tried to keep up with the changing nature of the game, the GATT system has come to seem ever less relevant.

And then there is Japan. Japan is, on paper, very open to foreign goods and investors. Tariffs are low, and except on agricultural goods, import quotas are rare. Investors are free to acquire or establish subsidiaries.

Unfortunately, the de jure openness of Japan’s economy is notoriously absent de facto . A cartel-ized industrial system closes ranks to keep out outsiders, especially foreigners, and as a result foreign firms find selling in Japan difficult and investing in Japan almost impossible. There is no way to deal with this through normal trade negotiations, yet the failure to make progress discredits the trade negotiators.

So what are trade negotiators to do? The inside story of the Uruguay Round is that it was driven by U.S. political necessity. U.S. trade negotiators could not deliver results on the real issues of industrial competition in general and Japan in particular. Their only hope for saving their own credibility was to buy time with a striking success in an area in which old-fashioned trade negotiations are still relevant: agriculture.

For in agriculture the game is still played by the old rules. There is no subtlety or obscurity about the policies that produce wheat surpluses in Europe or $40-a-pound beef in Japan. A reduction of European support prices or an easing of Japanese quotas would produce concrete, visible results for U.S. exports; and a measurably successful trade negotiation would give the whole trading system a new political lease on life. In other words, U.S. trade negotiators sought a big win on agriculture, not so much for its own sake but to compensate for losses on other fronts.

Unfortunately, the ploy failed. In the end, Europe demonstrated its continuing political immaturity by refusing to make even token concessions: Europe’s leaders, it turns out, are willing to sacrifice the world trading system for the sake of a few thousand farm votes. And so U.S. trade negotiators have returned home empty handed.

What does this mean? It is not the end of the world, or even of world trade. But from now on our main energies will go toward negotiating with our neighbors, not with the world at large. The United States will become less inhibited about subsidizing or protecting industries, and the rest of the world will respond in kind. It will be a world of shrinking horizons, of regional trading blocs instead of globalization. So much for the New World Order.

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