Stop Politicking, Fix Trade Policy

Early on, the Bush administration seemed willing to break with years of indifference and think seriously about America’s hugely unbalanced, unfair trade relationships. Instead, it played electoral politics. As a result, U.S. trade policy critics were handed all the ammunition they needed to compel President Bush last week to rescind the steel tariffs he imposed in 2002. The tariffs, scheduled to be in effect for three years, were designed to protect the ailing U.S. steel industry from cheap imports while it regained its economic strength. The whole sorry episode is a model of political miscalculation.

A reassessment of U.S. trade relations is long overdue. Over the last 10 years, the annual U.S. merchandise trade deficit ballooned to half a trillion dollars, a debt that imperils the dollar and may yet short-circuit the current economic recovery. During this time, manufactured imports rose from 20% of the U.S. domestic market to well above 50%. One result has been the loss of 3 million blue-collar jobs and the decimation of such sectors as plastics and metalworking. Hundreds of billions of dollars and some of the most advanced technologies in the world were transferred wholesale to nondemocratic countries often hostile to U.S. interests.

These trends attracted little attention throughout the 1990s in part because paper assets like stocks or dot-com companies were thought to more than offset any loss of “hard” industries. Rising manufacturing productivity was supposed to reduce factory jobs, much as farm labor was cut back after the Industrial Revolution. If overseas producers didn’t mind dumping their wares at bargain prices, which accelerated these trends, so much the better.

The end of the bubble economy showed that digital-related jobs were no more immune from recession than old-fashioned assembly-line employment, a realization that served to spotlight America’s disproportionate loss of manufacturing jobs; factory employment grew in Mexico, Canada and most of Asia.

For a while, the administration’s “safeguard” steel tariffs appeared to work. The staunchly free-trade Economist magazine called the result a “miracle at Bethlehem,” in reference to the Pennsylvania home of bankrupt behemoth Bethlehem Steel. Yet, the politics behind the protection doomed the whole enterprise. The tariffs were selectively imposed to benefit firms in electoral swing states. Politically favored steel exporters -- Canada, Mexico, Israel and Jordan -- were exempted from the measures. Other economic sectors equally deserving of protection -- aircraft, plastics, film production -- were ignored. Such a haphazard, self-interested approach to trade made it impossible to build widespread support for the tariffs, at home and abroad.

The European Union and other steel exporters challenged the legality of the tariffs before the World Trade Organization. In theory, the WTO is supposed to function as an international court over world trade. Countries aggrieved by another’s trade policies can seek review of the questionable practices and be granted relief, if warranted.

In practice, countries must build support for their positions to prevail in the organization. Much of the WTO’s analysis of trade disputes reduces to arcane squabbles over the “true” meaning of vaguely drafted trade agreements. A party to a dispute that lacks widespread support has little chance of surviving the review. The Bush administration had already lost 14 of 19 actions brought against U.S. policies in the WTO.

Unsurprisingly, the WTO reviewing panel repudiated the U.S. position on virtually every front. It found that the steel safeguards lacked a “proper” justification. Here is a passage from the WTO’s Nov. 10 ruling rejecting the U.S. interpretation of the word “reasoned” in safeguard agreements. It makes President Clinton’s tortuous definition of “is” during his Monica S. Lewinsky troubles read like Shakespeare.

“[T]he word ‘reasoned’ which the United States defines in terms of the verb ‘to reason,’ is, in fact, used in Article 3.1 [of the Agreement on Safeguards] as an adjective to qualify the term ‘conclusion.’ The relevant definition of the intransitive verb ‘to reason’ is ‘to think in a connected or logical manner; use one’s reason in forming conclusions.’ The definition of the transitive verb ‘to reason’ is ‘to arrange the thought of in a logical manner, embody reason in; express in a logical form.’ ... Thus, the competent authorities are required ... to ‘give an account of’ a ‘judgment or statement which is reached in a connected or logical manner or expressed in a logical form,’ ‘distinctly, or in detail’ ” (citations omitted).

The Bush administration’s attempt to negotiate a compromise to extend the tariffs went nowhere with the Europeans, who threatened to aim $2.2 billion in retaliatory tariffs at products from states dear to the president’s political base. The administration had little choice but to rescind the tariffs or face a trade war.

There’s no evidence that the administration has learned the main lesson of this sad episode -- that halfhearted trade measures do more harm than good. Its recently announced quotas on some Chinese textile and duties on color TV imports, said to reflect U.S. displeasure with Chinese currency policies, will affect only a fraction of the trade between the two countries and do nothing to reverse a trade imbalance that will probably approach $130 billion in China’s favor by year’s end. The move has further tarnished U.S. trade motives, making future initiatives, no matter how justified, easy targets for global skeptics.

The serious reappraisal of our growing reliance on imports and imported capital that once seemed forthcoming from the administration is now, after the steel-tariff fiasco, all the more urgent. Among the issues it should address:

* At what point, if any, should U.S. companies and workers be protected from price competition based solely on the unwillingness (or inability) of a trading partner to assure its citizens a reasonable wage, protect its environment, abide by global currency rules or allow reciprocal access to its market?

* To what extent is our current economic recovery fueled by capital borrowed from abroad in the form of our half-trillion-dollar -- and rising -- annual trade deficit? What happens if the rest of the world tires of funding U.S. consumption or, as seems to be happening with Europe and the rising euro, demands a bigger return on its money? Worse, what if perceptions the U.S. is enjoying an undeserved consumer windfall provoke a political backlash, particularly in countries where authoritarian governments have artificially reduced domestic demand for strategic reasons?

* How much of America’s apparently booming productivity is a byproduct of an unprecedented flood of cheap imports, especially in manufacturing sectors, repackaged as “U.S. made” though little real value is actually added to the finished goods? What’s the long-term consequence if much of the productivity gain turns out to be another example of accounting fool’s gold?

* Historically, the transfer abroad of manufacturing technologies and industries seems linked with a nation’s loss of influence and power. Has the world changed so dramatically that this relationship is no longer a concern?

* Does the remarkably diverse U.S. workforce require a broad-spectrum economy to generate the best jobs for the greatest number of people? Or can America afford to restructure toward the deindustrialized model of, say, Belgium or New York City?

Regrettably, the Bush administration seems in no hurry to undertake such a far-reaching assessment of U.S. trade policy. Instead, it has traded away important opportunities to pursue national commercial priorities in a politically expedient, but ultimately counterproductive, fashion.