Asian Crisis Could Bring New Threat: Protectionism

World leaders who ended a week of meetings here Tuesday fear that the other shoe is about to drop in the Asian economic crisis: a wave of protectionism not seen since the Depression-bound 1930s.

With near unanimity, world figures ranging from Kofi Annan, secretary-general of the United Nations, to former Secretary of State Henry Kissinger say conditions are ripe for a broad retreat from world trade, a development that would risk economic stagnation and worse.

“The spread of markets far outpaces the ability of societies and their political systems to adjust to them,” Annan said. “People do not yet have confidence. Until they do have it, the global economy will be fragile and vulnerable to backlash from all the ‘isms’ of our post-Cold War world: protectionism, populism, nationalism, ethnic chauvinism, fanaticism and terrorism.”

The stakes are particularly high for the U.S., whose economy has so far fended off the Asian crisis but which could withstand neither a shut-off of foreign markets nor an unimpeded flood of imports.

“Protectionism is the single greatest threat to global prosperity,” said U.S. Trade Representative Charlene Barshefsky.

That is one reason the Clinton administration sent a phalanx of senior officials, including Vice President Al Gore and three Cabinet members, to the World Economic Forum, this annual gathering of international political and business leaders.

With economies stalled in Asia and Latin America and growing slowly in Europe, the administration wants to revive overseas growth to reverse the slide in U.S. exports and reduce the tide of imports. In Gore’s words, the United States has become the “importer of last resort.”

“White House officials are really quite worried because everywhere they look, they see economies growing slowly or not at all,” said Jeffrey Garten, dean of the Yale School of Management and former undersecretary of commerce in the Clinton administration.

The U.S. trade deficit has ballooned and will swell further, Barshefsky says. For 1999 her office projects a record deficit in goods and services of $340 billion, up roughly $100 billion from the huge 1998 deficit.

Such a growing imbalance threatens to undermine the value of the U.S. dollar, with baleful consequences for the U.S. and global economies.

Though the rising deficit is testimony to the strength of the U.S. economy, the pattern “is not sustainable,” said George Soros, the global investor, in remarks here.

As countries ship goods to the U.S., they earn dollars that they then reinvest in U.S. government and corporate securities. And that is creating a situation similar to the financial “bubble” that arose in Japan in the 1980s, Soros said. Japan’s “bubble economy” has collapsed slowly throughout this decade; Soros offered no prediction as to when the U.S. bubble would begin to deflate.

Since the Asian crisis began in July 1997, the focus of international rescue efforts and concern has been financial, with emergency loans through the International Monetary Fund attempting to avert national bankruptcies.

That focus is turning to trade. President Clinton has proposed a new round of global trade negotiations, and a formal plan was advanced here by Sir Leon Brittan, vice president of the European Commission in Brussels, with backing from Japan.

Yet such initiatives are opposed abroad and at home.

Instead of cooperation to increase trade, the U.S. finds itself in a bitter dispute with the European Union over bananas that threatens to prompt retaliatory U.S. tariffs. Still to come is more serious opposition in Europe to imports of American beef.

Such disputes only reinforce protectionist attitudes in the U.S. Congress, where a free-trade consensus has broken down. Congress refused last year to give the White House so-called fast-track authority to negotiate trade agreements. And prospects are not good for the administration’s getting such discretionary authority this year.

One reason is opposition from organized labor, whose interests are broader than the usual job-protection rhetoric. Unions want overseas labor rights to be part of any global trade agreement. U.S. and European unions are allied in pushing for worldwide labor rights that will bring up standards in the developing world.

Reforms should include “the right to organize and to bargain collectively for wages and conditions, and some regulation on child labor,” said AFL-CIO President John Sweeney in an interview here.

Thus labor standards will be part of the new round of trade talks, Barshefsky said.

Though ridden with difficulties, a new round of global trade talks could be the answer to the Clinton administration’s prayers, analysts say. Talks could turn the protectionist tide.

First, incorporating labor’s views in the agenda for a new international trade agreement could finally bring unions here and abroad to the table. And trade talks could create opportunities for developing countries and reduce their present misery and suspicions of the world system, the U.N.’s Annan suggested.

Barshefsky sees support for international trade waning among Americans. And with 96% of the world’s consumers living outside the United States, she warns, “it would be playing with fire for Americans to move in the direction of protectionism.”

Kissinger sees a larger problem.

“The U.S. today has the reach and the power of an imperial state, yet domestic perceptions have not caught up with that reality,” he said. Such lack of understanding is not healthy, Kissinger said, but “leads to isolationism.”