The Bear’s Lair: Gloomy trade outlook

By Martin Hutchinson

WASHINGTON, Feb. 21 (UPI) — The Institute for International Economics Tuesday held a seminar in which the domestic imperatives and the international imperatives for the U.S. trade agenda were examined separately. From the seminar, it became pretty clear that the potential deals that might benefit world trade and the world economy were not the ones that Congress was likely to approve.

There are three groups of potential trade agreements that are "in play" as it were. The first is bilateral agreements, with various countries, similar to those signed with Singapore, Chile, Jordan, Morocco and Australia in the last couple of years. The second is a regional agreement, the Free Trade Area of the Americas. The third is the Doha round of world trade talks, in which trade barriers could be lowered around the globe.

Bilateral trade agreements are essentially marginal in the overall scheme of world trade, although they can play a useful role economically if they’re with the right countries. Singapore and Australia are examples of countries where a bilateral agreement makes sense; they are firm U.S. allies, significant players in world trade, have living standards close to those of the United States, and have their own capabilities that are complementary to those of the United States, as entrepot in Singapore’s case and as supplier of natural resources and farm products in Australia’s case. Unfortunately, the U.S. farm lobby ruled many of the goods that Australia can supply more cheaply, such as sugar, out of the U.S./Australia agreement, so its benefit is less than might be expected.

However, not all countries with which the United States has signed bilateral trade agreements provide such obvious mutual benefits. Morocco and Jordan, with which agreements have been signed, may be key U.S. allies in the War on Terror, but they offer neither obvious trade benefits nor a clear congruence of political goals — neither country is a democracy. In these cases, the bilateral trade agreements are purely political in nature; they offer an appearance of close association without its reality, and have very little to do with actual or potential trade patterns.

The same generally applies to the potential Central American Free Trade Area agreement. Although in this case there is an obvious role for Central America as supplier of cheap labor to the United States, there is very little reciprocal benefit beyond cheap labor and no obvious political comity since Central America like the rest of Latin America tends to resent rather than admire its successful Northern neighbor.

Much more sensible is another potential free trade agreement currently under discussion, with Thailand, where that country’s well established democracy, its remarkably successful recovery from the 1997-98 Asian crisis, and its wide range of manufacturing capabilities make it a very interesting trade partner indeed.

In general, potential close trading relationships should be chosen with three factors in mind: they should be politically closely aligned with the United States (i.e. not non-democracies) they should have economies with sustained rapid growth (i.e. not Latin America) and they should have living standards that are well above subsistence level (i.e. not China, India or the poorer parts of central America.) That way, the trading relationship will be politically untroubled, will speed rather than retard growth, and will not produce intense subsistence-wage competition for the less educated Americans.

Thailand fulfills all three of these criteria. However a free trade agreement with the country apparently has little chance of passing Congress, according to Reps. Phil English (R.-PA) and Sander Levin (D.-MI) Tuesday. This, if nothing else, demonstrates that economic considerations are well down the list of reasons why bilateral trade agreements get negotiated. Nevertheless, they are clearly "flavor of the decade" as Latin American and East Asian countries are signing them with each other, not just with the United States.

The main problem with the dense web of bilateral trade agreements that is currently being constructed is the barriers that overall, they put against world trade. If A has a bilateral agreement with B and B has a bilateral agreement with C, but A doesn’t have a bilateral agreement with C, then trade between A and C will inevitably flow through B to take advantage of the two bilateral trade agreements. Meanwhile D, who maybe has cheaper costs than all of A, B and C, but no bilateral trade agreements, is likely to find himself out in the cold because he can’t compete with the artificially bi-lateralized A-C trade. There are lots of Ds around — think China and Bangladesh, countries with large impoverished populations that are consequently threatening to the rich West in a bilateral arrangement. Bilateral agreements tend to cut across existing multilateral arrangements such as the "most favored nation" agreement, and thus make new multilateral agreements more difficult. They are at best a qualified benefit to world trade, not even that if signed primarily for political rather than economic reasons.

The Free Trade Area of the Americas, second, is a long standing Bush family dream that fortunately stands little chance of success. From the U.S. point of view, it would focus U.S. business relationships towards the sclerotic economies of Latin America, rather than towards the rapidly growing and more competitive economies of east Asia. From the Latin American point of view, it would increase ties with the United States, any advice or technical assistance from which is resented, while weakening ties with Europe and East Asia, both of which are seen in Latin America as a welcome diversification from undue U.S. influence.

In terms of economic management, business methods and workforce diligence, East Asian patterns, of relatively equal wealth distribution, entrepreneurial business management and a highly diligent workforce managed by egalitarian methods are precisely those needed by Latin America in order to improve its economic performance (as U.S. businessmen and advisors have been telling them for a century now, being met only with scorn.) Closer ties with East Asia, and greater economic distance from the United States, is unquestionably the way forward for the region.

Politically, FTAA has little chance of passage, and it’s unclear why the United States would want it. A number of Latin American countries, notably Venezuela, Argentina, Bolivia and to a great extent Brazil, have governments that are motivated primarily by distrust and resentment of the United States. Pushing for deeper ties with such regimes is at best counterproductive, at worst suicidal. The Doha round of world trade talks, left for dead after the Cancun meeting of 2003, was partially revived at Geneva last summer. Unlike other free trade initiatives, this one would include everybody, which is why people are uncomfortable about it — free trade is most threatening with countries of large population and very competitive capabilities, precisely those with which the comparative advantage gain from free trade to world GDP is greatest.

To get a Doha trade agreement, the United States and Europe are going to have to reduce their agriculture subsidies drastically, a step that should be welcomed by all rational taxpayers and consumers in those polities. Conversely, Third World countries are going to have to tighten drastically their rules on intellectual property and open their markets to service imports, both steps that should greatly benefit their economies, though I wouldn’t mind betting that the principal winners from service sector trade liberalization will be other Third World countries such as India, that have acquired service sector capabilities and have much lower costs than the West.

From the meeting Tuesday, it was clear that the U.S. political community is not focusing on Doha, although at the international level it remains moderately salient. Carlos Perez de Castillo, one of the candidates for the next president of the World Trade Organization, was optimistic that the world would get close to a Doha round deal at the next trade meeting in Hong Kong in December, but others were skeptical that the progress on services necessary to close a deal would be made by then. Either way, the Administration’s failure to appoint a successor to outgoing Trade Representative Robert Zoellick, appointed Deputy Secretary of State January 7, indicates the modest priority that trade matters receive currently in the United States.

Free trade is like riding a bicycle; if you don’t move forward, you’re likely to fall off. The lack of urgency on Doha, which could bring real benefits but requires tough political decisions, suggests that the tangle of politicized bilateral trade deals is about all we can expect for the moment. For the world economy, this is bad news indeed.

Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005)