This commentary is the second in a two-part series on international trade policy written by Vinod K. Aggarwal, professor at the University of California, Berkeley and director of the Berkeley APEC Study Center and East-West Center President and International Chair of the Pacific Economic Cooperation Council Charles E. Morrison.
For the first time in five years, the U.S. President is without Trade Promotion Authority (TPA), an essential so-called fast-track tool for effective trade negotiations. The TPA, that allowed the President to negotiate trade agreements on which the U.S. Congress could only vote up or down rather than allowing for Congressional amendments, expired at midnight June 30. Without the TPA many of America’s trading partners are not willing to undertake difficult and politically complex trade negotiations, only to have Congress later seek changes.
The Bush Administration hopes TPA renewal can still happen this year but that may be unlikely. Congressional Democrats blame recent trade deals struck under the TPA for sending U.S. jobs abroad. The Democratic leadership says that before getting behind TPA, the benefits of globalization must be expanded to all Americans. If not renewed this year, given the politized nature of the issue, experts believe there is little likelihood the fast-track authority will be reinstated in 2008, an election year.
A prolonged suspension of TPA will probably be little noticed by the general public, but it will place U.S. trade policy at a serious disadvantage in the fast-paced world of international trade. Aside from denying any possibility for global trade leadership that the world’s largest trading economy should have, it will slowly but surely erode U.S. competitiveness as other countries make preferential agreements among themselves while the United States stands with both hands tied behind its back.
Why is it so hard for American presidents to get negotiating authority for international trade when virtually every other major trading economy routinely vests such authority in its executive? In part, this is the result of the unique Constitution provision which requires Congress to affirmatively delegate such negotiating authority, subject, of course, to final Congressional approval. But delegation has become increasingly more problematic because of the erosion of the political support base for generalized free trade. Arguably, it happened in 2002 only because former Trade Representative Robert Zoellick was able to argue that liberal trade is an essential tool in the fight against terrorism.
Two forces are at work – the pressures of globalization and the rise of bilateralism in U.S. trade policy.
Economic analysis tells us that, spread across a whole economy, the gains from freer trade nearly always outweigh the costs. Political analysis traditionally noted, however, that the gains are widely dispersed, especially among consumers, while the costs tend to be highly concentrated, affecting specific groups of workers and industries. Globalization has greatly increased the perceptions of cost, while a shift in U.S. policy since the late 1980s to give attention to sectoral and bilateral deals have tended to weaken the political support base of freer trade.
Globalization and the technological changes that have enabled it have increased personal economic insecurity since changes in competitiveness can happen so rapidly and across an increasingly broad array of goods and now services. Consider, for example, the uproar a couple years ago when it appeared that a huge swathe of white collar jobs might be transferred to India.
Today for much of the world including the United States, China represents the cutting edge of globalization. While China’s trade was almost equally balanced between exports and imports in the 1980s and 1990s, today it has a huge and rapidly growing global trade surplus. This, in fact, is growing even more rapidly with the European Union (EU) than with the United States, albeit from a lower base. China’s failure to address these surpluses either through more permissive currency reevaluation or greater buying efforts has inflamed protectionism and negative attitudes toward China in the United States and Europe.
The shift toward bilateral and sectoral agreements in U.S. trade policy was fueled by frustration with the growing complexity of negotiating in the cumbersome World Trade Organization and by the political desire to “pick low hanging fruit” where it could be found. There was also a global policy argument – that U.S. agreements with some countries or in some sectors would stimulate other countries or sectors to seek similar agreements, a process called “competitive liberalization.”
While this seemed sound in concept, competitive liberalization fell short for several reasons. First, negotiators did not have the luxury to be truly strategic, that is, target significant trading partners. Instead, countries were selected for political reasons (Jordan, Oman, Morocco, for example, rose to the top of the list by virtue of being Muslim and not because they were important trading nations) or sometimes because, like Singapore, there were few serious trade problems in the first place. In recent years, only the agreement with Korea is significant enough to stimulate real competitive pressures.
Second, competitive liberalization works for the United States only when the United States can compete. Without TPA, the U.S. will be relegated to the side of the trading field.
Third, and perhaps most importantly for global trade negotiations, sectoral and bilateral agreements rewarded key elements of the freer trade coalition, reducing their need or interest in the WTO rounds. Sectoral agreements in information technology, telecom, and financial services in the 1990s, for example, gave these important and highly competitive U.S. industries what they wanted, while gutting the more comprehensive future Doha process of potentially key benefits. This trend accounts for the tepid enthusiasm and lobbying efforts by American firms in support of the Doha process and even the Korea-U.S. FTA.
But these problems are not simply an American phenomenon. Peter Mandelsohn, the EU’s chief trade negotiator has noted that “unlike the last global round of negotiations, when movie studios, drug companies, software makers, banks and manufacturers coalesced into a formidable free-trade lobby, the enthusiasm this time has been narrower.” And he has gone on to say that business has “failed to provide ‘countervailing pressure’ to protectionist agricultural lobbies,” turning Doha into “the Ag-only round” (Financial Times, December 12, 2005).
It has often been forgotten that competitive liberalization was intended as a global process. Instead, “Plan B” bilaterals and other minilateral agreements such as a Free Trade Area of the Asia Pacific, proposed in November 2006, become ends in themselves, undercutting rather than stimulating global freer trade by sucking both negotiating energy and political oxygen from the WTO.
With the bilateral genie out of the bottle and the Doha process in limbo, China, Japan, the EU, India and most other economies will be madly pursuing bilateral free trade agreements. “Free,” that is, for the signatories but preferential vis-à-vis outsiders including the United States. Unfortunately, there is no other country with the systemic weight or broad vision to provide true international trade leadership at the global level. But without TPA, the United States will not have a chance to put the priority back on Plan A global arrangements, or even to protect its own industries in a era of rampant bilateralism.
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