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TRADE BLOCS : Commerce: A debate rages over whether the formation of rival groups will end in global disaster or merely simplify the rules among natural trading partners.

TIMES STAFF WRITER

To hear Jack Valenti, president of the Motion Picture Assn. of America, tell it, there is another Evil Empire rising across the ocean.

The 12 nations of the European Community claimed they were merely trying to protect their common culture from American sitcoms and game shows when they imposed a directive in late 1989 requiring that at least half of all European programming originate there.

But in Valenti’s eyes, they were “stringing their trade bows tight, and the smell of export conquest is in their parliamentary nostrils.” In Europe, he said during a recent speech at Georgetown University, “there’s a war going on at this very minute that could shatter your future.”

Beneath that purple prose, the veteran film industry lobbyist was ringing an early warning bell of what some economic analysts regard as a potential disaster.

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Even as the Cold War ends and talk of a Soviet Evil Empire fades into history, the world, they say, may be splitting into rival trade blocs.

If so, those blocs--in Europe, the Americas and Asia--may be heading toward an economic disaster that could rival the 1930s, these critics warn. Then, protectionist alliances destroyed two-thirds of global trade in the space of two years, helped turn a garden-variety recession into a staggering depression--and set the stage for World War II.

European countries--which will become a single, 12-nation economic force by the end of 1992--are not the only ones forging new trading blocs with their neighbors:

* The United States, Canada and Mexico are well on the way to turning their neighborhood into a single free-trade zone--one that President Bush hopes will eventually stretch from Point Barrow to Tierra del Fuego.

* Asian countries, fearful of being shut out by two big new trading powers, are showing new interest in Malaysian Prime Minister Mahathir Mohamad’s suggestion that the region form its own trading bloc.

Other plans for regional economic alliances are also being examined, such as a proposal to establish a free-trade zone among the Assn. of Southeast Asian Nations within 15 years. Besides Malaysia, the ASEAN members are Indonesia, Thailand, Singapore, the Philippines and Brunei.

“We need a strong bloc to countervail others that are forming,” Mahathir says. And with Japanese investment already spreading throughout Asia, there is a growing belief that Tokyo could use its influence to control trade in that region as well.

But leading economists and trade officials say trading blocs are not necessarily a bad development.

Studies so far show no indication that trade is becoming more regionalized. In fact, many argue that lowering regional tariffs and quotas will boost trade worldwide by spurring economic growth in areas whose geography already provides natural incentives for commerce.

Countries that form blocs would be each others’ main trading partners “even without special arrangements,” writes Paul R. Krugman, a Massachusetts Institute of Technology economist. “As a result, the potential losses from trade diversion (from other regions) are limited, and the potential gains from trade creation are large.”

Some analysts argue that European integration could increase output on that continent by as much as another 10%. Already, German and British banks are looking toward offering their services all through the 12 countries of the European Community.

Likewise, investors are likely to find Latin America far more attractive if it is hitched to the powerful U.S. economic engine, they say. Already, the maquiladora program, in which more than 2,400 cross-border manufacturing plants have sprung up along the U.S.-Mexican border, gives a foretaste of the possibilities.

“The major regional initiatives currently under way are more likely to represent the building blocks of an integrated world economy than stumbling blocks which prevent its emergence,” argues Robert Z. Lawrence, an economist at Harvard University’s Kennedy School of Government.

Indeed, one top U.S. trade official adds that the kind of free-trade agreements being established in the Americas can hardly be interpreted as an obstacle to world trade. “Throwing up new barriers is one thing,” he said, “but bringing down the internal ones is another.”

The real danger, most economists believe, does not lie in these new alliances themselves. Rather, they say, what is worrisome is the prospect that they could become a substitute for the battered set of rules that is now in place, administered by the Geneva-based General Agreement on Tariffs and Trade, the 108-country compact that governs the world trading system.

“That’s the big question--is it within the context of a functioning global system, or not?” says C. Fred Bergsten, director of the Institute for International Economics and one of those who has been most alarmed about the growth of trading blocs.

GATT worked quite well for decades. But in recent years, the trading system--formed in the late 1940s, as the world rebuilt from a depression and a war--has fallen out of step with the rapidly changing global economy.

The agreement does not cover agriculture, textiles or services, such as banking. It provides no protection for copyrights, patents or trade secrets. And it establishes no single set of policies for foreign investment.

In all, about one-third of all world trade now falls outside the scope of GATT--leaving countries free to follow their own preferences in those areas.

And that, analysts say, is precisely where trading blocs can do their most damage. With GATT’s deterioration, nations are erecting non-tariff barriers that are difficult to overcome. An example is Europe’s prohibitions on U.S. pork imports, which the Europeans claim are based on health--rather than trade--objections.

The latest effort to salvage the trading system began in 1986 in Punta del Este, Uruguay, when GATT members launched the current round of trade-liberalization talks. These “Uruguay Round” negotiations were scheduled to have been concluded last December. But the final session in Brussels broke up in disarray, and the participants have had little success in reviving them.

“We’re trying valiantly to create a new world order of trade through the Uruguay Round, and we’re not prepared to give that up,” U.S. Trade Representative Carla Anderson Hills insists. “That’s still our top trade priority.”

While a new agreement is still far from guaranteed, tentative signs in recent weeks have been encouraging--in part, because the European Community may be moving closer to an agricultural policy that the rest of the world will find less objectionable.

“I sense a certain spring in the air--that is, a certain thawing,” says Hills, who is not usually given to unbounded optimism.

Meanwhile, even as the global trade talks have remained stalled, the Europeans have continued their push toward full economic union in 1992; and the United States, Canada and Mexico have launched their free-trade talks.

In large measure, this progress reflects the fact that negotiators find it far easier to strike a deal with a handful of their neighbors than with the myriad of global interests present around the negotiating table at GATT headquarters in Geneva.

“Dealing with two or three nations, as opposed to dealing with 107, is far less frustrating,” says one top U.S. trade official.

Hills insists that the North American pact is not an either-or proposition, but rather is “entirely complimentary of our broader objectives in the Uruguay Round.” She promises that the North American Free-Trade Agreement will go far beyond anything that might reasonably be expected from the GATT talks in knocking down trade barriers between the three participating countries.

Good intentions aside, others see some danger in regional arrangements if there is no broader system to keep them in check.

“If there is no effective GATT system, (free-trade agreements) would almost certainly be viewed as alternatives to globalism,” Bergsten warns. “In that case, they would almost certainly evolve over time . . . in an exclusionary and eventually discriminatory direction.”

Adds Bergsten: “The economic costs would be significant and growing. The political effects would, at best, be worrisome.”

Some of those effects are already being felt--particularly by developing countries and fledgling democracies. Having transformed themselves politically, some are finding that the barriers being erected by newly forming trade blocs make it harder to sell their goods.

The clearest examples have involved the European Community, where regional integration has gone much farther than it has in other regions.

For the better part of the year, Poland, Czechoslovakia and Hungary have been negotiating with the EC for a form of associate membership. Among other things, that would give them greater access to European markets for agricultural products, textiles and steel--three of the things that the former Soviet satellites can produce to Western standards at competitive prices.

By summer, the negotiations had bogged down, because the EC was not willing to lower its substantial barriers--mostly in the form of prohibitive tariffs on Polish, Czech and Hungarian goods.

Then came the August coup in the Soviet Union.

Some feared the same sort of political unrest could overtake Eastern Europe if the EC did not quickly draw those countries into closer orbit. So in early September, the EC Commission--roughly analogous to the President’s Cabinet--asked the foreign ministers of the 12 EC countries for greater negotiating flexibility.

In a sharp departure from normal practices, the foreign ministers--led by their French, Irish and Belgian peers--said no.

“It’s a disgrace,” lamented Danish Foreign Minister Uffe Ellemann-Jensen. “I’m fed up seeing people speak so eloquently about helping democracy and then turning around and talking as if they are living on another planet.”

The rest of the world heaped criticism on the EC as well; at the end of September, the foreign ministers approved a somewhat more generous negotiating position.

Even that one has a catch, though: The EC would be willing to increase--by 10% a year over the next five years--the amount of duty-free imports it accepts from the three Eastern European countries. But it also would deduct from that higher quota any meat that the Soviet Union buys from the three countries with EC assistance.

In other words, it is possible that less Eastern European beef and lamb would find its way to Western Europe than before.

“All of this high-sounding rhetoric they put out about caring about poorer and smaller countries went out the window,” argues former U.S. Trade Representative William E. Brock III. “If that attitude begins to take root,” he warns, “then the fears about ‘Fortress Europe’ that were expressed early on--and that I dismissed--may have some justification.”

It is not a coincidence that most of the friction between Eastern and Western Europe involves agriculture--one of the areas that is not covered under GATT.

Yet Brock and others say that, overall, European integration has been a plus for the rest of the world. As a bloc, Europe has shown far more willingness than many of its individual countries did in participating in trade talks aimed at lowering barriers worldwide.

Once the larger European economies are committed to allowing the free flow of resources within Europe, “they will no longer be able to ensure each has a national champion in every industry,” Lawrence says. “This undermining of nationalist sentiments which drives much of the protectionism in the larger European countries will benefit outsiders.”

Times staff writers Joel Havemann in Brussels and Karl Schoenberger in Los Angeles contributed to this article.

Perspectives on Trade

“We have already seen U.S. industries devastated by European unfair trade practices. We can no longer afford to wait. We must act and act forcefully to protect U.S. trade interests.”

--Sen. Max Baucus (D-Mont.), chairman of the Senate Finance subcommittee on international trade.

“If the Uruguay Round should fail, a new wave of protectionism could destroy our hopes for a better future. History shows all too clearly that protectionism can destroy wealth within countries and poison relations between them.”

--President Bush

“The biggest losers from a world of regional blocs would be those left outside--which in practice would be primarily the poorest developing countries which could least afford it.”

--C. Fred Bergsten, director of the Washington-based Institute for International Economics.


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