The Rushford Report Archives

August, 2003: Cover Story

By Greg Rushford

Published in The Rushford Report

            For better or worse, the direction of U.S. foreign policy under President George W. Bush has shot off in a radical new direction. The White House has announced the national-security doctrine of pre-emptive military strikes against “evil” regimes. The UN Security Council and NATO were sidelined in the search for a “coalition of the willing” to oust Iraq ’s Saddam Hussein. New potential client states like Poland have been encouraged to shift their allegiance away from Old Europeans in Paris and Berlin , and towards the New Romans in Washington , D.C. The word “hegemon” is no longer a pejorative inside the White House. At least, all of the above has been vigorously debated around the world (with the glaring exception, so far at least, of most representatives of the Democratic Party in the U.S. Congress).

            But without any real debate, U.S. trade policy in the Bush administration also has made a radical shift — one that critics fear unwisely upends more than 200 years of deeply-rooted American aversion to carving up the world into competing trading blocs. Washington has been busy negotiating preferential “Free Trade Agreements” with favored smaller countries that support broader U.S. foreign policy priorities and are willing to join in a U.S.-led “economic coalition of the willing.” While none of these countries is a major U.S. trading partner, the cumulative economic impact isn’t insignificant. “As a group, the FTA countries would constitute the world’s ninth largest economy and would be America ’s sixth largest trading partner,” noted Daniel Griswold, the associate director of the Cato Institute’s trade-policy center, in an analysis last month.

            Aspiring members of the coalition must be willing to cut their own deals with America that discriminate against other countries, regardless of their obligations as members of the World Trade Organization to treat all trading partners equally. Eyebrows are being raised in respected economic circles, and in the WTO’s headquarters in Geneva . So, on with the debate.           

            U.S. Trade Representative Robert Zoellick doesn’t apologize for using the levers of trade to link economic policy to U.S. national security priorities. Zoellick also insists — with some credibility, given his prominent role in launching the WTO’s ongoing Doha Round of multilateral trade liberalizing negotiations — that he is not trying to undermine, or marginalize, the WTO.                     The USTR vehemently rejects suggestions that his top priority is anything but multilateral. Let the laggards in the WTO take notice that the Doha negotiations aren’t the only game that America can play, the Zoellick “competitive liberalization” strategy proclaims. The Business Roundtable, National Association of Manufacturers, and other influential corporate business lobbies support Zoellick’s negotiating strategy — with the caveat that the administration’s top priority remains multilateral.

            Zoellick’s strategy is also supported by trade-watchers who have good free-trade credentials. “FTA’s provide institutional competition to keep multilateral talks on track,” Griswold’s recent study declared. “If other members of the World Trade Organization become intransigent, the United States must have the option of pursuing agreements with a `coalition of the willing’ in pursuit of trade liberalization.” 

            But to other top-rank trade-watchers, the new shift in U.S. trade policy is alarming. Last month, two of America ’s leading trade economists, Columbia University ’s Jagdish Bhagwati and the University of Maryland ’s Arvind Panagariya, warned in the Financial Times that the new American emphasis on creating a web of bilateral and regional trading blocks “poses a deadly threat to the multilateral trading system.”     

            In a recent speech, WTO Director-General Supachai Panitchpakdi noted his concern for “the increasing spread and popularity” of bilateral and regional trade arrangements, of which he said there appeared to be around 300 in the world. “These arrangements raise difficult issues, not just about their compliance with WTO rules, but also about the use of resources,” Supachai declared. “If I may say, some of these regional and bilateral arrangements are taking away the resources and the efforts needed to concentrate and press ahead with our multilateral trade negotiations.”         

            Economists Bhagwati and Panagariya asserted in their July 14 FT column, “We are witnessing possibly the biggest divide between economists and politicians in the postwar period.”

The Bush agenda

Since he came into office in 2001, Zoellick has concluded FTAs with Jordan , Singapore , and Chile . The USTR also is presently negotiating FTAs with Australia, Morocco, Bahrain, five Central American Common Market countries (Guatemala, Honduras, El Salvador, Nicaragua, and Costa Rica), and also five members of the Southern African Customs Union (South Africa, Botswana, Namibia, Lesotho, and Swaziland). And if the USTR has his way, America ’s economic coalition of the willing will grow even further. Negotiations are ongoing to create a Free Trade Area of the Americas , which would unite the entire hemisphere (except Fidel Castro’s Cuba ). Other countries that have been floated — with varying degrees of seriousness and administration enthusiasm —as possible FTA candidates include Turkey, Egypt, Thailand, Taiwan, the Philippines, New Zealand, Colombia, the United Kingdom, and even Japan and South Korea.

            To be sure, the Bush administration didn’t invent the idea of FTAs. President Ronald Reagan’s administration negotiated an FTA with Israel that came into force in 1985. Shortly before leaving office, Reagan wrapped up a U.S.-Canada FTA that was launched in 1989. Then, negotiations to expand the Canada deal to include Mexico in the North American Free Trade Agreement were launched by the first President Bush and completed by President Bill Clinton in 1993. Late in his administration, Clinton began FTA talks with Chile , Singapore and Jordan that the current President Bush has now concluded.

            What’s new in the Bush administration is first, the significantly broadened scope of present FTA aspirations. And second, Bush has specifically, and publicly, linked FTAs with other U.S. foreign policy goals. To supporters, the idea of linking economic policy to national security priorities makes perfect sense, and is obviously in the American national interest. But critics see an underlying arrogance that, sooner or later, will be self-defeating.

Punishing enemies

Bush and U.S. Trade Representative Robert Zoellick are in the business of using trade levers to reward friends and punish adversaries. If members of the economic coalition don’t support U.S. national security policies, there are going to be “consequences.” Indeed, it sometimes seems as if something like Richard Nixon’s famous enemies list is now at the center of U.S. trade policy.

            Prime Minister John Howard of Australia , who has supported the war to topple Saddam Hussein, is a friend. New Zealand Prime Minister Helen Clark, who has been publicly critical of Bush over Iraq, and whose country unhelpfully does not allow nuclear-powered U.S. Navy vessels visiting rights, is not a friend. (Besides, the heavily subsidized U.S. farm lobby has not warmed to the idea of an FTA that would force American farmers to compete with unsubsidized New Zealand farmers on an equal footing.) So John Howard is rewarded with negotiations for a proposed U.S.-Australia FTA, while Helen Clark is not.

            Make no doubt about it: the proposed U.S.-Australia FTA is designed to inflict some damage on New Zealand ’s economy. By definition, Australians will be given special access to the American marketplace that will be denied to New Zealand . The American Chamber of Commerce in New Zealand rightly worries that Kiwis who want to export to the United States will be put at a competitive disadvantage vis a vis Australia. Moreover, the U.S.-Aussie FTA will obviously encourage potential investors in New Zealand to set up shop in Australia instead.

            Since both Australia and New Zealand are free-trade oriented leaders who are playing important roles in the WTO’s Doha negotiations, it is difficult to see how punishing New Zealand — and creating inevitable political tensions between Canberra and Wellington — advances the Bush administration’s declared multilateral trade liberalizing agenda. A genuine multilateral agenda would not pit one valued U.S. ally against another.

            Understandably, the New Zealand government has so far downplayed its concerns. But late last month, Minister for Trade Negotiations Jim Sutton came to Washington and fired off a warning shot in remarks delivered to DC’s Global Business Forum. New Zealand agrees with the Bush administration that FTAs can create healthy pressures to foster genuine multilateral trade liberalization, Sutton noted first.

            But Sutton went on to express his country’s worries about being left out of the U.S.-Australia negotiations. “Preferences granted under FTAs can also disadvantage non-partners,” he noted. “Competitive liberalisation should reward those who are prepared to liberalise further and faster than is possible under the WTO. But countries that are prepared to engage in such liberalisation should not suffer trade and investment diversion by being denied the opportunity to negotiate.”

            New Zealand isn’t the only country to face the consequences of Bush’s displeasure.

             The president has stalled FTA negotiations with Egypt . The president is miffed because Cairo has declined to support Washington ’s WTO challenge to the Europeans over genetically modified food. And when Chile ’s President Richard Lagos declined to support Bush on Iraq , the president conspicuously delayed signing the U.S.-Chile FTA. Bush relented after pressure from U.S. business interests who were upset that the delay would only cost them lost business. While no real economic harm was done, in Santiago the lingering memory is of Yankee pettiness.

            When President John F. Kennedy established the Office of the Special Trade Representative in 1962 (the STR has morphed into the USTR), the idea was that the president’s trade negotiator would do trade, and the Secretary of State would do diplomacy. But these days, it often seems as if the USTR is a branch of the State Department. While Bush certainly didn’t invent the idea of using economic leverage to advance U.S. foreign policy goals, this used to be a much more subtle, behind-the-scenes game.  

Upending history

The Bush administration’s bilateral- and regional strategy is a significant departure from some 200 years of deep-rooted American preference for a multilateral trading system. This aversion to trade-distorting schemes has defined who we are.

            “The American revolution was fought in part over the  British insistence that the colonies trade with Britain and not with France ,” notes Washington lawyer David Palmeter. “The Declaration of Independence condemns King George III ‘for cutting off our trade with all parts of the world.’” 

            In 1778, Benjamin Franklin negotiated an alliance with France that helped the colonies win their independence from England . As Walter Isaacson observes in his brilliant Benjamin Franklin: An American Life, “the commercial rights that the Americans granted were mutual, nonexclusive, and permitted a system of open and free trade with other nations.” In a letter to Congress, Franklin made it clear that “no monopoly of our trade” had been granted. “None are given to France but what we are at liberty to grant to any other nation.”

            James Mathis of the University of Amsterdam ’s Law School has noted that George Washington’s famous farewell speech pledged “to hold an equal and impartial hand, neither seeking nor granting exclusive favors or preferences.” And early in the nineteenth century, John Hay advocated an open door for trade with China . Number three of Woodrow Wilson’s Fourteen Points was “the removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance.”

            When the General

Agreement on Tariffs and Trade was established after World War II, the first and foremost principles were enshrined in GATT Articles I and III. Article I required all signatories to grant all of their trading partners most-favored-nation tariff treatment. Article III requires signatories not to discriminate in favor of some trading partners over others, the so-called “national treatment” principle. (Article 24 of the WTO grants member countries an exemption to strike special bilateral and regional customs unions and special trade arrangements. “This was supposed to be a very limited exemption, but in practice you can drive a truck through it,” Palmeter explains.

            Americans have always tended to view discriminatory trading schemes like the sort that the European Union has cut with many of its trading partners and former colonies as evidence of European cynicism at its worst. In the 1930s, Cordell Hull railed against British Imperial Preference schemes for the Commonwealth as “the greatest injury, in a commercial way, that has been inflicted on this country since I have been in public life.”

            Four decades later, the U.S. traditional view of preferential trading arrangements was still as strong as ever. “The US has expressed opposition to [ Europe ’s] preferential trading arrangements with non-member countries often and forcefully,” noted a classified November 14, 1972 memo written by Robert Hormats and other National Security Council aides to Henry Kissinger. One of the issues that aggravated the Nixon White House in in 1972 involved a special trade deal that the EU was cutting with Israel .

            But a decade later, the United States and Israel negotiated an FTA of their own. And now, official Washington has fully embraced the FTA concept. Bring me more free-trade deals, Bush has told Zoellick.

            “I call it a European disease,” Bhagwati laments. “Now the Americans have contracted it.”

Freeing trade

Their supporters insist that FTAs are actually antidotes that cure rampant protectionism. Look at the US-Canada FTA, they say. After Canadians made the difficult decision to open their markets to competition from their superpower neighbor south of the border, they soon realized that Canada could compete with all comers. Protectionism in Canada is now very much diminished as a prevailing political force.

            Then, after Mexico joined Nafta in 1993, that country also became much more open, politically as well as economically. “The openness, capital flows and competition generated by Nafta have done more than alter commerce; they put limits on government power,” Mary Anastasia O’Grady observed in the Wall Street Journal last month. “Gone are the days when the government could print pesos, put loyalists on the state payroll, hand out tortillas and buy an election. Increased competition from abroad and more intense scrutiny from investors has forced greater transparency on fiscal matters and more accountability for peso stability.”

            FTA supporters also argue that Nafta itself prompted a nervous, watching Europe to stop stalling on completing the multilateral Uruguay Round of trade liberalization negotiations that created the WTO in 1994. “Competitive liberalization” works, in this view. More recently, Jordan has been championing more open markets in the closed Muslim world — sparked by the US-Jordan FTA, the Bush administration maintains. “Our FTAs are encouraging reformers — many in fragile democracies — in Latin America, Africa, the Middle East, and the Asia-Pacific region,” Zoellick asserted in a recent op-ed column in the Wall Street Journal. “These partners have become some of the WTO’s foremost champions for open markets.”

            It is easy to see why many in the US business community support FTAs. In 1994, the Clinton administration — unwisely bowing in the direction of the protectionist wing of the Democratic Party — failed to secure from Congress the necessary fast-track trade negotiating authority when the Uruguay Round’s implementing legislation was being enacted. With the United States out of the multilateral game, other countries felt free to carve up the world with a rash of FTAs that excluded the United States (a spaghetti bowl of FTA tangles, as Jagdish Bhagwati has dubbed it). The Bush administration finally got fast track (now called Trade Promotion Authority) in August 2002.

            Predictably, American companies felt the results on the bottom line. Just one of (too) many examples: “In February, the EU and Chile entered into a free trade agreement,” James W. Owens, a Caterpillar Inc. group president, told a May 7 audience at the Institute for International Economics. “Since then EU exports to Chile have skyrocketed by 30 percent, while U.S. exports to Chile have remained flat.”

            The WTO’s multilateral talks “are by far the most efficient and comprehensive way to promote trade liberalization,” Owens emphasized. “But as a practical matter, we’ll take freer trade whenever and wherever it can be obtained.”

            Don’t let the perfect be the enemy of the good, FTA supporters reason.

Distorting trade

            Zoellick professes not to understand why economists are so critical of FTAs. All he is doing is “advancing free trade on multiple fronts,” the USTR reasoned in his July 10 Wall Street Journal column. “ America ’s FTAs break new ground — they establish prototypes for liberalization in areas such as services, e-commerce, intellectual property for knowledge societies, transparency in government regulation, and better enforcement of labor and environmental protections.”

            But it’s not that simple. Often, the prototypes are really protectionist.

            Former USTR negotiator Doral Cooper, who negotiated the 1985 FTA with Israel (and who supports Zoellick’s negotiating strategy) rightly notes that the Israeli accord was a true free trade deal, with no trade-distorting rules of origin. But that was the last one. Jordan didn’t get the same deals that Israel did. Mexico under Nafta got different rules of origin than Canada had previously gotten from the U.S. , and so on.

            In fact, to call these deals “Free Trade Agreements” is simply wrong. They are not free trade, they distort free trade. Economist Mac Destler of the University of Maryland scornfully dubs FTAs “discriminatory trade agreements.” Others call them by the milder Preferential Trade Agreements. By whatever name, FTAs all have rules of

origin that reward the signatories and punish trading partners who are not privy to them.

            In Nafta, for example, Annex 401 has 175 pages of specific rules of origin. This is followed by some 200 pages that detail various “exceptions from most-favored-nation treatment.” There are pages of detailed “reservations,” more pages of “quantitative restrictions,” and a catchall category of “miscellaneous commitments.”

            These carve-outs are all driven by lobbyists who have finagled special deals for their industry. In the US-Canada FTA, for example, the Detroit auto lobby successfully lobbied for a rule of origin for automobiles that gave duty-free treatment only for cars made of 50 percent local content. Then in Nafta, the rule of origin was changed, requiring 62.5 percent for light-duty vehicles, engines, transmissions, and 60 percent for other vehicles and parts. The driving idea wasn’t economics. Detroit wanted rules that put Japanese rivals at a tariff disadvantage.

            Or take tomato paste, from which catsup is made. David Palmeter discovered that under the US-Canada FTA, tomato paste from third countries like Chile got preferential treatment. But under Nafta , Mexico — a big tomato paste country — managed to get tomato paste from Chile excluded.

            As always, the U.S. textile lobby has managed to get special treatment. Jordan didn’t get the same rule of origin for clothing that Israel had gotten. In Nafta, clothing from Mexico is exported duty-free to the United States if it is made from American yarn or fabric, the so-called yarn-forward rule. Singapore and Chile got essentially the same yarn-forward rule. “The problem with this is that it effectively kills business,“ Washington lawyer Brenda Jacobs points out. “If you don’t produce yarn in your own country, this rule of origin has little or no commercial value.”

            And African countries have even more stringent rules under the African Growth and Opportunity Act. “It makes no good business sense to ship U.S. yarn and fabric to Africa , which is more expensive than that which comes from Asia ,” adds Jacobs. 

            Still not convinced? Take tuna, a highly political fish indeed. Under Nafta, the U.S. agreed to give Mexico duty-free treatment on canned tuna by 2008. As I have reported previously, helping Mexico (and other Latin and Caribbean countries that have gotten onto the tuna preferential scheme) hurts Muslim tuna workers in canneries in the southern Philippines , who are stuck with U.S. tariffs ranging from 12.5 percent to 35 percent (see, Tuna Troubles, The Rushford Report, September 2002). 

            And in the U.S.-Chile deal, while 87 percent of two-way trade in goods will become tariff free upon enactment, this still leaves special carve-outs to protect various U.S. protectionist lobbies: sugar, butter, milk powder, cheese, avocados and — this is really unforgivable for those of us who enjoy affordable Chilean cabernet — California wine.

            So, what’s the answer? Arvind Panagariya calls for a “moratorium” on any more FTAs, hoping to spark more focus on the WTO’s Doha Round. This is, of course, advice that the Bush administration isn’t going to take. One reason — difficult to quantify but always present — is the force of bureaucratic self-interest. There is a reason why the US-Australia FTA is being negotiated in Hawaii and not, say, Fargo . It seems that the efforts to launch a true a debate over this radical shift in traditional US trade policy have come too late to have much practical impact.

            Love them or not, FTAs are here to stay.