Will Washington return to supporting freer trade?

The Bush Administration's new trade unilateralism spells bad news for America and the world

Susan Ariel Aaronson Yale Center for the Study of Globalization Washington

Despite its initial support for open markets, the Bush administration has taken several steps that could undermine the rules-based trading system that has brought great benefits to the United States. Given America's declining global stature as well as mounting trade and budget deficits, this strategy is not in the interest of the American people. And this strategy can't help the U.S. to deal effectively with a myriad of issues -- from AIDS to terrorism -- that need global solutions.

In the dark days of World War II, American and British postwar planners drafted a new approach to governing the world economy. They developed a set of rules to govern when and how nations could apply trade barriers, and created the General Agreement on Tariffs and Trade (GATT) to act as a forum for multinational trade negotiations.

In 1993, policymakers strengthened the GATT's institutional standing, and created a new international organization, the World Trade Organization (WTO), with stronger dispute settlement mechanisms. Americans have generally benefited from that system of rules with rising wages, a broad supply of competitively priced goods and services, increased economic opportunities, and relative international economic stability.

When the Bush Administration first came into office, it seemed to support the WTO, and talked frequently about the links between open markets and democracy. After the Sept. 11 terrorist attacks, U.S. policymakers hoped the new Doha round of WTO talks would restore investor confidence. These talks were supposed to focus on the needs of the developing world. Many WTO members also hoped to bring agriculture and services fully under the WTO's purview.

At Doha, U.S. Trade Representative, Ambassador Robert Zoellick, showed leadership by achieving key U.S. objectives on services and agriculture, and making significant concessions on important issues for the developing world.

But in the months that followed, the Bush Administration's actions made a mockery of U.S. leadership in the global economy. In July 1999, a WTO panel had ruled that the U.S. Foreign Sales Corporation (FSC) law, enacted in 1971, constituted an illegal export subsidy. When a country loses such a decision at the WTO, it has essentially 3 choices: It can change the offending law, pay compensation to the affected exporters, or accept retaliation.

Instead of accepting the WTO's decision in a time of mounting budget deficits, the Bush Administration dropped the ball. Without strong Presidential leadership, Congress couldn't develop an acceptable alternative to the FSC. In August 2002 the WTO ruled that the EU could impose US$4 billion in penalties because the U.S. was unlikely to comply with its commitments.

In 2002, the U.S. again took steps that weakened the WTO and American economic credibility. Although the Bush Administration stated that bringing agricultural trade under the WTO's purview was a top priority, President Bush signed a record-high farm subsidy bill. Developing countries can't compete with America's subsidized products, such as sugar or textiles, even though they often have comparative advantage.

Moreover, American unwillingness to reduce its subsidies led other countries to believe they did not have to reduce theirs, and that in turn made a WTO agreement on agriculture unlikely.

The U.S. also adopted an intransigent attitude towards public concerns about genetically modified foods. In May 2003, joined by Canada and Argentina, the U.S. challenged the EU's five-year-old moratorium on genetically modified foods. All three claimed that their farmers were losing sales in bio-engineered corn and soybeans.

The U.S. pushed Egypt to join the dispute, but Egypt dropped out under pressure from its major trading partner, Europe. The Bush Administration then canceled plans for a free-trade deal with Cairo, signaling that it was more important to protect core voting constituencies than to help allies.

In 2003, the U.S. did not just abdicate leadership, it undermined the WTO's multilateral and nondiscriminatory approach to trade. When the members of the WTO met in September at Cancun, Mexico to jumpstart the round, the U.S. (along with the EU) refused to yield on issues that would benefit developing countries.

Moreover, both the U.S. and the EU insisted on including new issues such as investment and competition policies, further complicating the negotiations. The Cancun ministerial meeting made little progress and eventually broke down.

In the months that followed that failure, Ambassador Zoellick warned that the U.S. would not wait for another multilateral effort: "We will move towards free trade with the can-do countries." He stressed that the "won't do" countries would not receive the benefits of American largesse. He termed this strategy "competitive liberalization" in the view that competition with the WTO might spur even greater trade liberalization.

Moreover, the Bush Administration announced in mid-December that it would permit only those nations that supported it in the war to bid directly on Iraq contracts. This policy not only seems to violate WTO rules, but also could undermine the transparent nondiscriminatory approach to government procurement that the U.S. has long advocated.

Finally, in January 2003, the WTO dispute settlement body decided that a U.S. law which allows American corporations to receive anti-dumping fines collected by the government is an unfair subsidy. It set a deadline of Dec. 27 for the U.S. to change the 'Byrd Amendment', but Congress didn't act. On Jan. 15, the EU asked the WTO for permission to impose sanctions: New duties on American exports.

America's efforts to promote global freer trade have given way to bilateral and regional trade agreements. The U.S. Trade Representative is currently negotiating a total of 14 bilateral or regional free trade agreements. Meanwhile, trade officials are also negotiating the Free Trade Agreement of the Americas and the Doha Round.

At a time when the U.S. commitment to internationalism is already suspect, this strategy tells our trade partners that the U.S. is more interested in cutting bilateral or regional deals that it can dominate than committing to the more difficult multilateral negotiations.

Finally, this approach makes it harder for policymakers to work with our allies to develop comprehensive solutions to global problems such as terrorism or public health that can affect trade.

It was not until January 2004, some four months after the Cancun talks, that the U.S. reaffirmed its commitment to multinational trade talks under the WTO. Zoellick wrote a letter to the other members of the WTO warning them they must work together to achieve a new round. Although the letter signaled flexibility, it offered few ideas on how to meet the special needs of developing countries.

Nor did Zoellick reach out to his fellow citizens, explaining how a successful new round could benefit them as taxpayers (who pay for agricultural subsidies), consumers, or producers. Without such an explanation, given public concerns about trade, Congress is unlikely to approve changes to long-standing U.S. policies in order to promote global political and economic stability.

Leadership entails making hard choices, helping and inspiring other countries to make hard choices, and taking risks in the broader interest of global political economic stability. Over the last two years, however, the Administration has not only undermined the WTO, it has also contradicted its professed desire to lead the global economy.

The writer is Senior Fellow and Director of Globalization Studies at the Kenan Institute, Kenan Flagler Business School, University of North Carolina.