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Free Trade Hits Low Tide as Range of Issues Converge

Free trade has had a long run of expansion and widespread acceptance, but a conglomeration of issues is threatening to bring it's growth and commercial and...

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WWD Sourcing Horizons issue 05/13/2008

WASHINGTON — Free trade has had a long run of expansion and widespread acceptance, but a conglomeration of issues is threatening to bring it’s growth and commercial and political popularity to a standstill.

The World Trade Organization has projected that the pace of global trade will slow to its lowest rate in six years — an estimated 4.5 percent — this year because of the sharp economic downturn in the U.S. and turmoil in financial markets.

The U.S. economic woes — being called a recession by many economists even though it doesn’t fit the traditional definition of two straight quarters of negative gross domestic product growth — triggered by the subprime mortgage crisis and weakening housing market and rising energy prices has forced the issue of free trade to the sidelines, as the government focuses on ways to stimulate the economy to stave off a recession.

“We’re definitely at a point of a greater protectionist sentiment than we’ve seen in quite a while,” said Andrew Bernard, director of the Center for International Business at the Tuck School of Business at Dartmouth.

One of the underlying factors has been the lack of economic progress in the middle class over the past seven to eight years, Bernard said.

“That will accumulate into a real desire to find the culprit,” he said, adding that trade is an easy “boogeyman for folks to point to.” But he said the antitrade sentiment will lessen once the economy turns around.

Bernard doesn’t expect any more movement on the trade front this year because of the presidential election and the downturn in the economy.

Job losses, trade and the economy have weighed heavily on voters’ minds in this election year, leaving the Democratic presidential candidates and their colleagues in Congress reluctant to carry the mantle of free trade and prompting promises of more programs for workers affected by international trade and a halt to the Bush administration’s aggressive trade expanding philosophy.

There’s also ongoing problems of tainted imports from China, the biggest U.S. supplier, ranging from inferior medicines and toothpaste to leaded jewelry. In addition, labor and pollution problems in China have raised costs and disrupted sourcing plans for may companies.

In a broader view, efforts to reach a global trade accord to reduce or eliminate tariffs on a wide range of products, including apparel and textiles, has been stalled by differences between rich and poor countries over agricultural subsidies and reaching a consensus on a tariff-reduction schedule. Developing countries have pushed the U.S. and European Union to eliminate or sharply decrease billions of dollars of subsidies to their farmers that they claim drive up commodity prices around the world and make it difficult for them to compete with their agricultural exports, notably cotton.

With Congress considering a $300 billion bill funding farm programs for five years that maintains most agriculture subsidies, there is a real question in the trade arena about whether the global trade talks, known as the Doha Round for the city in which it was launched in November 2001, will be doomed. Exacerbating the situation has been a food shortage sparked by soaring food prices and record energy costs that has prompted many developing nations to erect new export barriers on food, placing further stress on the Doha Round.

The U.S. placed third in the value of its exports in 2007, which reached $1.1 trillion, according to the WTO. But it was the world’s top importer last year, posting a 5 percent increase in the value of shipments to $2 trillion.

Many trade experts argue that a significant amount of trade liberalization has already occurred, although agriculture is one key area that has remained largely untouched.

The U.S. has 10 bilateral free trade pacts, seven of which were negotiated by the current Bush administration, as well as two regional accords — the North American Free Trade Agreement with Mexico and Canada and the Central American Free Trade Agreement with five Central American countries and the Dominican Republic.

The Uruguay Round, which took effect in January 1995, made great inroads in lowering trade barriers, including the complete elimination of quotas on apparel and textile imports in 2005.

“Most trade liberalization has already been accomplished,” said Terry Miller, director of the Center for International Economics and Trade at the conservative Heritage Foundation.

“As long as we can hold the line, it won’t be catastrophic for the U.S. economy,” he said.

There is still more to be done, Miller said, particularly in the area of agricultural subsidies, which he argued should be eliminated. He estimated that 90 percent of all trade liberalization has been achieved, adding that the U.S. and other countries are working on the “last 10 percent.”

For some trade veterans who have helped shape the evolution of trade liberalization, the notion that most markets are already open to U.S. exports and barriers eliminated is implausible.

“There is more work to be done in the field of agricultural products, but there is also more work to be done in the industrial products sector,” said Rep. Jim McCrery (R., La.), the ranking Republican on the House Ways & Means Committee, pointing to markets such as Colombia and many others that ship the majority of their products to the U.S. under duty free trade preference programs, while maintaining high barriers on U.S. exports. “When you look at it country by country, there are still a number of tariffs and nontariff barriers to manufactured goods from the U.S. and there is still a lot of work to be done on that front.”

McCrery, who has worked closely with Ways & Means chairman Charles Rangel (D., N.Y.) to build a bipartisan relationship on trade, does not hold out much hope for trade expansion in the near term.

“In my lifetime, antitrade sentiment has never reached the level it is at now,” he said.

He said a group of freshmen House Democrats who were elected on antitrade platforms has held back Democratic leaders from pursuing more aggressive trade liberalizing agreements.

“It makes it tougher,” McCrery said. “On the Democratic side of the aisle, with each new person stepping forward to run in an open seat or even a challenger role running on antitrade platforms, it may get worse before it gets better.”

Democrats have been recasting the trade agenda since taking control of Congress in 2006, placing a premium on helping U.S. workers who have lost their jobs because of international trade, but many still see a future for free trade.

“There is room to expand trade in the world,” said Rep. Jim McDermott (D., Wash.), a senior member of Ways & Means. “There are all kinds of things we will undoubtedly do. We’re not saying that this is all the trade there will ever be.”

McDermott is even pressing for more trade liberalization for least developed countries and sub-Saharan African countries. He has two trade bills before Congress — one that would give duty free treatment to the world’s poorest countries, including Cambodia and Bangladesh, and a second that would eliminate a restriction on the use of third-country denim in denim apparel production in the sub-Saharan African countries.

But McDermott warned that the days of negotiating free trade deals with small economies such as Oman, Singapore and Chile have passed.

“I think the bilaterals were a decision made largely by the Bush administration, although there were a few under Clinton, but they really got rolling under Bush because they couldn’t figure out how to deal with the Doha Round of agriculture subsidies,” said McDermott. “The Bush administration started picking off countries such as Jordan and Oman, but these are minor economies and the big issues we need to deal with are China, India and Brazil.”

Even organized labor, which would like to see an end to free trade expansion for a while and a reform of trade policy that takes into account the impact of trade on U.S. workers, expects to see global trade expand despite the current impasse on trade.

“There are a lot of people who are still mired in the last trade debate as though there are only two choices: protectionism or free trade,” said Thea Lee, policy director at the AFL-CIO. “Really, there are an infinite number of choices. I think how we manage our integration into a global economy is pretty important, whether we are investing more at home in viable domestic manufacturing infrastructure, research and development or training.”

While Bernard of the Tuck School said protectionism is high right now, his long-term perspective on trade expansion is much more positive. Bernard said he expects the global food crisis and continued pressure on food and agricultural prices to spark a renewed interest in negotiating lower barriers on agricultural products, an area that he believes will lead to trade expansion.

Gary Hufbauer, senior fellow at the Peterson Institute of International Economics, said the long-term outlook for world trade remains strong, although he acknowledged, “I realize that this year it is growing more slowly and maybe next year it will grow more slowly.”

Hufbauer said international commerce is subject to cyclical turns, such as a recession or weakening currencies, but he does not attribute the recent slowdown to a move away from expanding global free trade.

“I wouldn’t credit this slowdown [in global trade] to a protectionist trend,” he said. “I recognize that the liberalizing agenda is not looking well right now and the U.S. may be the major country where it is lagging the most.”

He said he expects other countries to move ahead in forging their own free trade deals as the U.S. takes a pause.

“Come three or four years after that, our firms will notice it and trade will come back on the agenda,” Hufbauer said. “The U.S. will feel compelled at some point to get back in the game.”

Mickey Kantor, former U.S. trade representative under President Bill Clinton from 1993 to 1996, said there is “more skepticism” in the American public about trade and a “political reaction to that,” adding that “trade is losing its credibility” because of a lack of leadership in the White House under President Bush.

But Kantor dismissed the notion that free trade has run its course and the U.S. is moving in a more protectionist direction.

“We haven’t had a protectionist policy in this country since Smoot-Hawley passed” in 1930, said Kantor. The Tariff Act of 1930, more commonly known as the Smoot-Hawley tariff, named after the two lawmakers who sponsored the bill, imposed extremely high tariff levels on a vast array of imports under President Herbert Hoover, and cemented a period of economic isolationism and protectionism.

“No one is going to return to Smoot-Hawley tariffs or protectionism,” said Kantor.

Kantor said the interdependent nature of global trade will naturally pressure countries to open markets despite the politics in the U.S.

“Even if we never have another trade agreement, trade will grow exponentially,” Kantor said. “In the kind of world we live in — an interdependent globalized world — how you implement a rules-based system that not only benefits everyone but is fair and reasonable is something that every country is struggling with.”

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