Towards trade wars

Protectionist moves by the United States increase friction among the world's major economies, and this is likely to cause greater acrimony in multilateral trade forums such as the WTO.

THE dust that was kicked up by the United States' decision to increase steel tariffs sharply was yet to settle down. However, a new standard in unilateral action by a nation that purports to be the leader in establishing multilateral rules was set by the passage of the U.S. Farm Bill by both legislative chambers early in May. Defying global concerns, President George Bush signed the Bill into law shortly afterwards, providing for a 70 per cent increase in federal subsidies to the farm sector. In the view of most analysts, this could have breached the bounds that were imposed on agriculture subsidies in the Uruguay Round of trade negotiations concluded in 1994. After the hard-fought agreement at the Doha Ministerial Conference of the World Trade Organisation (WTO) last November, this could set back the new round of negotiations in an area that developing countries have vital interests in.

The reaction was immediate, though it did not come from the developing countries. The heads of the three bodies that exercise oversight of the global economy jointly issued a strong denunciation. Without naming the U.S., Mike Moore, the Director General of the WTO, Horst Kohler, the Managing Director of the International Monetary Fund (IMF) and James Wolfensohn, the President of the World Bank, issued a joint statement of an unprecedented sort decrying protectionism: "Such actions will hurt growth prospects when fostering growth is most essential. And they send the wrong signal, threatening to undermine the ability of governments everywhere to build support for market-oriented reforms."

Across the Atlantic, officials of the European Union (E.U.), who had relented under intense pressure to put agricultural subsidies on the agenda for the Doha round of trade negotiations, could barely conceal their fury. The farm bill, said E.U. Agriculture Commissioner Franz Fischler, "marks a blow for the credibility of U.S. policy in the WTO, where the U.S. has presented a trade oriented agenda wholly inconsistent with the new Bill".

The new farm bill represents another irritant for the E.U., which is scheduled to decide in June upon a range of retaliatory measures for U.S. steel tariffs. E.U. President Romano Prodi has already indicated that sanctions of an equivalent amount on U.S. products are imminent. With the farm bill, European anxieties about the unilateralist course of action that the U.S. seems irrevocably committed to, have been heightened. The E.U.'s external relations commissioner, Chris Patten, mournfully told a British audience early in May: "America's overwhelming pre-eminence has generated increasing pressure within the U.S. to abandon her internationalist past in favour of an unapologetic pursuit of national interest, imposing her will unilaterally and resisting outside obligations that might constrain her freedom of action."

Shortly after the farm bill became law, the U.S. Senate overwhelmingly approved the grant of "trade promotion authority" to President Bush. Under U.S. law, this empowers the President to engage in the WTO trade negotiations, on the understanding that Congress will either approve or disapprove of the new deal as an integral whole. It will not, in other words, tamper selectively with elements of it. The U.S. House of Representatives had granted the President this authority by a one-vote margin last December. Within the format of WTO negotiations, this power is considered vital, since a "trade round" is called so because it is conducted under the "single undertaking" clause, where a number of parallel agreements in diverse areas are negotiated in tandem and take effect concurrently. Since the WTO membership is expected to follow the "all or nothing" principle, it is considered vital that the U.S. President be able to negotiate on the understanding that his efforts will not be dismantled selectively by a recalcitrant U.S. Congress.

Trade promotion authority has, however, come at a price. The U.S. Senate has resolved that it will retain the power to veto any change that is proposed in the anti-dumping regulations that are currently applied. The Bush administration has indicated that this serious qualification in its negotiating powers is not acceptable, but has little option as long as the legislative wing remains susceptible to a multitude of special interests, which have been feeling the heat of economic recession. Certain premature forecasts of the end of the downturn were shattered by unemployment figures for April, which showed the jobless rate running at 6 per cent, the highest figure in nearly eight years.

All this amounts to a very uncertain mandate for the Doha round, which unlike all preceding ones is supposed to address the specific needs of developing countries. Negotiations now are expected to become hostage to the growing imbalances in the world economy, most starkly highlighted by the U.S. trade deficit. All through the economic boom of the 1990s, the U.S. was importing capital on an unprecedented scale, first to finance its budget deficit and then to fund private consumption. On current reckoning, the U.S. needs to import $1 billion a day to meet its balance of payments deficits. Successive years of profligacy have seen the U.S. external debt multiply from 12.9 per cent of its Gross Domestic Product (GDP) in 1997 to an estimated 22 per cent today.

Towards the closing years of the Clinton administration, an incipient correction had seemed under way. The federal budget, buoyed by massive corporate tax accruals, moved strongly into surplus, engendering the promise that the national debt could be paid back over a number of years of sustained growth. This calculation was scuttled first by the economic recession. And with the tax cuts that Bush pursued obsessively through his election campaign and implemented with religious zeal as his first priority on assuming office, the budget surplus has been transformed into a gaping deficit.

If the U.S. is to sustain its role as the single engine driving the world economy, then its imports of capital will need to increase substantially. This is not a likelihood in the estimation of most clear-eyed economists. First, there is a growing disenchantment with the unilateralist course of action that the U.S. has felt increasingly at liberty to adopt. Secondly, the collapse of some of the big names in the U.S. corporate pantheon - notably Enron and Global Crossing - and the declining fortunes of the high-technology industry have diminished faith in the integrity of U.S. financial markets. Finally, economies like Japan, which have contributed large volumes of savings to finance the U.S. deficit, are under pressure to retain their capital domestically in a bid to reverse their own plunging fortunes.

The growing loss of synchronicity between the world's major economies is only likely to engender greater acrimony in multilateral forums such as the WTO. In this regard, the recent actions on steel and farm subsidies are best seen as the warning shots of bitter trade wars in the near future.