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America's Trade Policy

What it is. What it could be.

A presentation by
Alan Wm. Wolff
Partner, Dewey Ballantine LLP

At the Center for Asia and the Emerging Economies


Tuck School of Business at Dartmouth

Hanover, New Hampshire


November 1, 2002
America’s Trade Policy
What it is. What it could be

Alan Wm. Wolff1

The events of September 11 pose significant policy questions for America about
its role in the world. The terrorist attacks ended the post-Cold War period of drift in U.S.
foreign policy. There is now a clearer sense of purpose. This has been most evident in
the case of direct military intervention, first in Afghanistan and potentially in Iraq. It has
also created an entirely new area for policy focus -- homeland security, a subject not
given much attention since the Civil Defense measures of the 1950s and ‘60s. My
purpose today is to suggest that September 11 should also cause a re-appraisal of
America’s trade policy as part of a review of its foreign economic policies.

To understand what adjustments are needed in policy, it is useful first to survey


briefly how U.S. trade policy came to be established and how it is applied today. As
Abraham Lincoln said many years ago

If we could first know where we are, and whither we are tending, we could better
judge what to do, and how to do it.2

American policy is a product of the nation's experience.

Determinants of American trade policy

a. origins

i. the beginning -- macroeconomic lessons, obtaining reciprocity, providing


equity.

The history of the policies applied today begins in 1934 with the Reciprocal Trade
Agreements Act. With it, Franklin Roosevelt and Cordell Hull set out to reverse
America’s long-established policy of high tariffs3 and reduce a tariff wall that was topped

1
Mr. Wolff is Managing Partner, Washington, D.C. Office, Dewey Ballantine LLP, and chairs its
International Trade Practice. The views expressed here are the author’s and not necessarily those
of the firm or any of its clients.
2
Acceptance speech, June 1857 Illinois Republican State Convention, quoted in Shelby Foote, The
Civil War, Vol 1., at p 30, Vintage Books, 1986.
3
Tariffs averaged 8% in 1789, but averaged above 30% by 1816, and dipped only once, in 1857 to
about 16%. Smoot-Hawley, took tariffs up to a 53% average, from their 1922 average level of
38.5%. The 1890 tariff had averaged 48.4%. Carbaugh, International Economics, 1980, at p. 146,
up but not created by the1930 Smoot-Hawley tariff. The Smoot-Hawley tariff was not
the first blow against international trade in that era, nor did it cause the Great Depression,
but it contributed to the lengthening and deepening of the Depression by strangling
international trade. Roosevelt and Hull, recognizing that the prior U.S. policy of erecting
trade barriers had been a terrible error, negotiated a series of individual trade agreements
with a number of countries. Under these bilateral agreements, tariff concessions were
exchanged and promises given that the benefits granted to one nation would be granted to
all other signatories of trade under a most-favored-nation clause.

In order to persuade Congress to grant authority to negotiate reciprocal tariff-


lowering agreements, the President proposed that there would be an “escape clause” in
each agreement allowing for the reimposition of duties if liberalization resulted in an
influx of imports that caused injury to a domestic industry. In addition, unfair trade
practices would be countered, through antidumping duties whenever injurious dumping
took place, countervailing duties against subsidization, and through exclusion of imports
where patents were violated or other unfair methods of competition were practiced.

There was thus a political bargain struck that became the basis for opening the
U.S. market. If trade caused injury, the government would act under pre-established
procedures. A permanent tariff barrier or individual enactment by Congress of increased
tariffs would no longer be necessary.

This program left three important legacies for American policy. The first is an
abiding faith that expanding trade serves the national economic interest. The second was
a hard-headed Yankee-trader attitude that trade concessions granted would in fact be
reciprocated, that they would be bought and paid for by other countries with their own
market opening measures. The third is that equity would be provided – industries harmed
by trade would receive protection, unfair foreign practices would be countered.

This program of bilateral agreements continued through the 1930s until the
outbreak of World War II, after which the thread of bilateral agreements was taken up
again in 1947 and woven into a tapestry consisting of a comprehensive multilateral
agreement called the General Agreement on Tariffs and Trade (GATT).

ii. postwar reconstruction and economic development

U.S. government support for the Bretton Woods institutions (the IMF and the
World Bank) and the further opening of markets through an International Trade
Organization got its impetus from its insight that the Second World War had economic
origins. While the ITO did not come into being, a multilateral trading system under the
auspices of the General Agreement on Tariffs and Trade (GATT) was constructed, to aid
in postwar reconstruction of the former industrial economies and in economic
development of the less developed nations. This policy was sold to the Congress and the
American people as clear-eyed realism, to remove the conditions that give rise to extreme

citing the Twenty-Second Annual Report of the President of the United States on the Trade
Agreement Program -- 1978, as the source of most of this data.

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governments of the right or the left. Through trade, America was supporting its
geopolitical goals abroad while fostering economic growth at home.

iii. creating a bulwark against international communism

The advent of the Cold War provided an additional motive for these free trade
policies. Trade agreements would be a tool used to promote economic development that
would curb the spread of world communism. Again this would promote economic
growth at home. The Trade Expansion Act of 1962 provided the necessary authority.

iv. diluting the effects of preferential trading arrangements

An additional motivating element for opening markets was to dilute the


discrimination against American goods inherent in the creation of the European common
market. A united Europe was backed for political reasons -- to avert further European
wars, but it had its costs in trade diversion. Multilateral trade agreements, by lowering
barriers for all countries' products, would dilute the adverse affects of the Common
Market on America’s trade. A similar line of reasoning was implicit in the request to
Congress in 2002 for a new trade negotiating mandate. The assertion was made that
other countries were entering into hundreds of trade agreements that did not involve the
United States and that the United States could not forge agreements of its own. Implicit
in this reasoning was that the failure of Congress to grant the President “negotiating
authority” was leading to harmful discrimination against American goods and services.

v. promoting regional integration

It was a post World War II article of faith that multilateral trade agreements were
superior to bilateral and regional agreements. The largest permissible exception, made
for geopolitical purposes, was the European Common Market. But economic integration
on a regional basis became more compelling as time went by. Canada and the United
States decided that they were really one market -- indeed, clearly it made more economic
sense to ship products north and south than east and west within Canada. The need then
became apparent that it was in U.S. interests to enhance economic growth in Mexico as
an alternative to political and economic instability that could result in a wholesale
migration northward of the Mexicans, and a North American Free Trade Agreement
(NAFTA) was created. While expansion of U.S. exports was given as a reason to enter
NAFTA, 4 as important as a rationale was the felt need to increase the political and
economic stability of America's southern neighbor.

4
Presumably in part attributable to NAFTA, U.S exports to Mexico have grown during the period
1990-2001 by a compound rate of 12.4%/year, compared to 5.1% with the rest of the world minus
Mexico. Of course other factors would contribute significantly, including the relative value of the
dollar to other U.S. export markets, level of demand in those markets, etc.

3
The first Bush Administration proposed that this experiment in economic
integration be extended southward in an all-inclusive Free Trade Agreement of the
Americas, which has been the subject of desultory negotiations ever since.

vi. promoting the rule of law

Another element of U.S. trade policy, bringing the rule of law to trade relations --
long cherished in the abstract, became concrete in the Uruguay Round -- with wholly
unanticipated results. By “rule of law,” I am referring not to the historical GATT
objectives of transparency in regulation nor the newly-won protection of intellectual
property rights, but the use of legal process to resolve trade disputes among nations. In
this, we and our trading partners got what we asked for. In prior times, GATT
contracting parties brought cases, but prevailing before a panel did not result in the
decision being implemented by the losing party. What was missing, it was felt, was
making the process binding. In the Uruguay Round, binding dispute settlement was
made the jewel in the crown of the new World Trade Organization.

Current Trade Policy -- Continuity with some odd results

National policies, like people, are the product of their antecedents and their
environment. Current trade policy is in part an amalgam of the forces of the past, with
some strains stronger than others.

a. free trade as an article of faith

The dominant strain of official policy today, with majority support (although
razor thin) in Congress, is the macroeconomic precept that openness of markets leads to
growth of the world economy. This is an article of faith, and it is the foremost driver of
current trade policy. Editorial Boards of the newspapers and journals written by and for
what the British call “the chattering classes” cannot tolerate any deviation in it.

The macroeconomic faith is so strong that the notion of providing equity has
fallen into some disfavor. Providing equity is little understood by editorial writers and is
embraced only by those who run for election (or those close to those who run). The
feeling that the cause of equity is no longer being well-served by trade agreements
accounts in substantial part for the diminishing support for trade agreements in the
Congress and more broadly in the American electorate.

The geopolitical policy rationale has changed with the times. It is no longer an
objective of trade policy to deprive fascism and communism of the economic discontent
on which they fed that motivates policy makers, but the idea that economic growth
nurtures democracy. Economic development in poorer countries is also still considered
to be well-served by the economic growth that opening markets brings.

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b. multilateral negotiations

Current programs are in part just the carrying forward of prior Administrations’
initiatives. The strong hold of macroeconomic faith, as well as inertial motion, are more
responsible for the U.S. pressing for and obtaining a new Round of WTO negotiations
than any specific gains that U.S. negotiators, or the private sector they ostensibly
represent, seek or can even envisage. A new WTO round must, of necessity be a “good
thing,” given that the past eight rounds were. It is impolite to ask what specific benefits
might be obtained. The price of launching the negotiations was putting “equity” (trade
remedies, especially antidumping) in harms way. Impairing the use of trade remedies by
the United States is the principal negotiating objective of Japan, Brazil and a number of
other countries that developed their economies through neomercantilist means. These
countries require a guaranteed open United States market, regardless of how open their
own economies might be.

This is not to say that there are not gains to be made for the United States and for
developing countries in multilateral negotiations. It is, however, unclear how extensive
those gains will be. They are likely to be less sweeping than the major achievements of
the Uruguay Round, which created obligations for trade in services for the first time, and
which first protected trade-related intellectual property rights.

c. Plurilaterals and bilaterals

Regional integration is also a continuing element of modern policy. The U.S.


goal is to extend the NAFTA southward to the antipodes. This would be a second major
departure from multilateralism, following the creation and continuing expansion of the
European Common Market.

More striking, the deviations from multilateralism have morphed into a sub-
multilateral species of its own, with the use of bilateral agreements known as free trade
agreements (FTAs). The first agreement of this kind outside North America was with
Israel, and then one was concluded with Jordan. An FTA negotiation is underway with
Chile. From there, a series of increasingly random deals with Singapore, Morocco,
Australia, etc., have been announced. A cynic might say that these agreements are
justified because if the word “free trade” appears in the title of the agreement, it must be
good. They may be beneficial, but the amount of economic analysis given to these
agreements appears to be limited. After all, articles of faith require no proof; no
compelling justifications are needed. And the amount of consultation with the private
sector is likewise very limited.

No clear trade rationale need be offered for free trade agreements with Israel and
Jordan. And perhaps the same might be said of an FTA with Morocco. Regional foreign
policy concerns dominate. Chile can be explained as the thin edge of a wedge toward an
FTAA, otherwise the rationale would fit with many another distant country. Singapore
could have utility as a template for other agreements. The use of the FTA trade tool may
have resulted in something like a French pointillist painting: It is somewhat hard to judge

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as a coherent whole until the canvas is filled in. Trade negotiators in the past have been
more comfortable with the real life equivalent of an Andy Warhol painting of a can of
Campbell’s soup, namely concrete concessions bought and paid for. Trade negotiations
was not thought of as a nonpresentational art form. If the resulting canvass looks like
something by Jackson Pollock, we have a problem. This path of trade policy is an odd
development, and it is too early to say whether it will contribute to or detract from the
world trading system, or do not much of either.

d. the “rule of law”?

An increasing part of trade policy, however, is apparently on automatic pilot. The


international trade agenda has been captured to a surprising extent by a phenomenon that
those seeking tort reform in the United States would recognize – this is to settle most
matters through litigation.

Binding dispute settlement in the new WTO has not worked out as well at all as
was hoped. In fact dispute settlement is no longer an element of conscious policy as
much as it is an independent external force that shapes policy.

This is dramatically illustrated by two recent cases – the EU’s WTO case against
the FSC and the WTO’s condemnation of the Byrd Continuing Dumping Offset
provision. In both of these cases, the results for the U.S. and for the international trading
system have been distinctly negative.

There was no detectable harm to EU interests from the U.S. tax measure known as
the FSC (Foreign Sales Corporation). No European business interest that urged the EU
Commission -- the bureaucrats in Brussels who run the European Union -- to bring this
case. The EU brought the FSC case solely for two reasons: because it wanted to and
because it could.

Taking these separately: The EU wanted to bring the case because the U.S. had
won two unrelated WTO cases against the EU, one having to do with beef hormones and
the other bananas. In each instance, the EU was clearly in the wrong. It was blocking
entry of hormone-fed U.S. beef without sound scientific evidence that there was harm to
consumers from eating this beef. In the bananas case, the EU was discriminating against
Central American bananas in which a politically influential American had an interest as
an investor. Winning for the U.S. was like shooting fish in a barrel. And, having won,
and the EU being unwilling or unable to implement the WTO panel decisions, the U.S.,
compounding its error, retaliated against EU goods seeking entry to the United States.

The EU looked around for a case in which the U.S. would be the fish in the barrel
at which it could take a sure shot. This was the FSC. The EU and the U.S. had agreed in
a 1981 compromise that the FSC would be an acceptable measure, solving an old
problem under the GATT, namely that the trade rules allow taxes on goods to be rebated
on export, but taxes on persons (including corporations that export) cannot be. There is
no sound economic basis for this distinction. The EU now ripped up that agreement, shot

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its fish, and got WTO authorization to retaliate against $4 billion in American exports to
Europe, the damage it claimed.

This explains in part why the EU wanted to bring the case -- its ignoble purpose
being to solely to satisfy a grudge. But the second reason was that it could do so. This
trade madness – U.S. retaliation over beef hormones and bananas and the $4 billion in
potential EU retaliation - came about because the creators of the WTO believed that
binding dispute settlement was a great idea. Instead of relying upon trade diplomacy,
they would take their cases to three draftees from rosters of dispute settlers that the WTO
kept for this purpose, and after an equally binding appellate process, the result would be
effectively final, and retaliation could follow noncompliance. Were the EU and the U.S.
mature enough to avoid getting themselves into this mess? Apparently not.5

From several points of view, there is a far greater problem with WTO dispute
settlement than its abuse by the WTO’s members. What is even worse is the lack of
judicial restraint. Let me explain. It is human nature for panelists to want to provide a
judicial solution to the controversy put before them. But international trade agreements
are riddled with ambiguities and holes where the parties to the negotiations could not
reach agreement. The interpretation by panels of agreements among sovereign countries
is not supposed to provide solutions to problems that the signatories could not resolve in
the negotiating process. The WTO panels are not permitted to expand the obligations and
rights of the parties beyond their clear commitments. That would be usurping a legislative
function. But with binding dispute settlement, as it is now constructed, that is exactly
what the panels do – settle disputes outside of their legal authority to do so.

The most recent example of this abuse is the condemnation by the WTO dispute
settlement process of Senator Robert Byrd’s compensation program for industries injured
by dumping. Dumping is selling at less than “normal value” and is actionable when it
causes injury. This practice is unconditionally condemned by the WTO GATT rules. It
is a cornerstone of the international trading system because countries are not to utilize a
protected home market or domestic subsidy to destroy foreign producers.

When an antidumping case is brought, if successful, the relief offered is very


limited. The relief is also only prospective. It puts a stop to further dumping or imposes
an offset for the dumping if the dumping does not stop. The remedy historically does not
result in any compensation to the injured domestic producers.

5
There is seemingly no barrier to bringing a case, not even shame. When Japan decided to dump
almost all of its excess hot rolled steel (the largest commodity steel product) in the United States
when its Asian markets collapsed in the Asian Financial Crisis, it was not the United States that
brought a case in the WTO, it was Japan complaining about some of the details in the imposition
of antidumping duties. American steel producers were grievously injured, but there was no
impediment to the U.S. government being sued. It was a one-way bet for Japan. Slice a bit off the
U.S. antidumping law and it was a win. The WTO procedures allow for no counterclaims, and
indeed what would the basis be? There is no clear ground in the WTO for claiming that a
government and its producers decided to direct a vast amount of dumped product into the market
of another.

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Senator Byrd proposed that this be changed, and the U.S. Congress agreed with
him. If dumping duties were collected, because dumping persisted, any monies collected
could, under certain circumstances, be allocated among the victims of the dumping. This
was simply the U.S. Treasury foregoing revenue in favor of assisting those harmed. No
greater penalties or impositions of any kind were to be placed on foreign goods.

When a WTO panel recently found that this domestic assistance was prohibited
by the WTO rules, it created an obligation for the United States to which U.S. negotiators
had never agreed. Presumably, another panel will -- when the Congress refuses to change
U.S. law -- allow other countries to retaliate against U.S. exports, even though no harm
can be shown to trade.

Thus, in the name of the “rule of law,” the opposite results of those intended have
been achieved: the panels have fostered confrontations among nations who have a major
stake in maintaining amicable relations and have usurped the function of crafting
international agreements that should belong solely to sovereign nations. The availability
of dispute settlement has also had the perverse effect of undermining the use of conscious
and more rational policy making to determine priorities.

Most doctrinaire free traders applaud WTO decisions that constrain the use of the
policies that were designed to provide equity to domestic industries. But conservatives
worry about America’s sovereignty being impaired by WTO panels legislating new
obligations.6 And the Congress worries that the political bargain that permitted the
creation of the President’s trade agreements program is being undercut.

e. the special case of China

That the United States made bringing China into the WTO a major element of
policy was motivated by several policy objectives, all of them familiar to students of the
post-war history of trade policy. At one level, U.S. business saw China as a market of
vast potential, not necessarily in every case for products that would ultimately be
consumed in China but as much for inputs into products that China would ship to the rest
of the world. China was the most rapidly growing market in the world, and while not
every company could realize near-term profits, China held the promise of major returns
in the future.

There was also a geopolitical purpose served, whether or not it was articulated.
The hope was that a China which was increasingly integrated into the world economy
would be a more stable participant in the international political system and that the cause
of human rights and eventual democracy in China would also be served. That the
accidental bombing of the Chinese Embassy in Belgrade or the Hainan plane incident

6
See Free Trade, Sovereignty, democracy, by Claude E. Barfield, The WTO’S Increasing
Challenge to National Sovereignty, at the American Enterprise Institute website, www.aei.org.

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were manageable may well have been dividends of this Western policy of making China
increasingly part of the fabric of international trade.

f. the mandate of Congress (Trade Promotion Authority)

The Trade Act of 20027 could have been a vehicle for establishing national trade
policy, but it is not clear to what extent it has done so. Congress has expressed itself on
several policies, for example that agreements negotiated not weaken the trade laws. But
the extent to which this direction is considered by the negotiators remains to be seen.

It is important to understand what Trade Promotion Authority is to assess its


potential impact on policy. The name “Trade Promotion Authority” is something of a
misnomer. The United States Constitution gives the President complete authority to
negotiate agreements with foreign governments. Without the approval of Congress,
however, the President cannot as a practical matter implement any trade agreements. In
the area of Foreign and Domestic Commerce, the Constitution vests all powers in the
Congress. This division of powers, known as a system of checks and balances, was
purposefully created by the Founding Fathers. They were not seeking efficiency, but
democratic government. To achieve this, constraints were required. The original
Constitutional constraint, as with the War Power, proved unworkable in the last half of
the 20th Century.

Since the President can negotiate trade agreements but cannot implement them,
and the Congress can approve agreements but cannot negotiate them, the conduct of
international trade relations in modern times has required an agreement between the two
branches of government on the scope of the negotiations and on the nature of the
congressional approval process. This need became painfully apparent after the Congress
rejected or failed to act on all trade agreements requiring its approval, starting with the
still-birth of an International Trade Organization in 1947. After years of failure to reach
agreement on a negotiation and approval process, the Congress passed the Trade Act of
1974, creating “fast track.” Under this process, the Congress would tell the President in
general terms what the U.S. negotiator’s objectives should be in trade negotiations and
then would commit itself by a change in its rules to give an up-or-down vote on the
President’s agreements, with no amendments possible and limits on debate.

As trade objectives have become more diffuse and less predictable, the guidance
given by Congress as to what should be negotiated has become less meaningful. Will the
new authority be used to negotiate a free trade agreement with Morocco, or with all of the
Americas? Which U.S. laws and practices will require change as a result of multilateral,
plurilateral and bilateral trade agreements reached in the WTO? Will these agreements or
binding WTO dispute settlement affect U.S. remedies against unfair trade practices,
environmental regulation, antitrust laws, or agricultural programs?

7
PL 107-210, August 6, 2002.

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With the complexity and variety of trade agreements, and the less active role of
the Congress in setting the conditions for trade, the interest in Congress and the
effectiveness of Congressional oversight have waned. At the same time, with the end of
the Cold War -- which was deemed to require trade agreements to fight communism --
and after the passage of NAFTA -- which brought home in some quarters that trade could
cost jobs -- popular support for trade agreements has been eroding.

The result is that trade promotion authority (TPA) enacted this year is something
of a blank check given the President by the Congress. But the vote in the House to issue
the check was only 215-212, and the vote in the Senate was just short of two-thirds (66-
30, with four not voting). This is like the Board of Directors of a company passing a vote
of confidence in its CEO, by 9 to 8. In addition, in considering TPA in the Senate, 62
Senators defeated a motion to table a provision passed by voice vote that trade remedy
amendments could be subject to normal legislative procedures and not fast track
(although this provision did not survive in the final bill). Thus the President’s trade
negotiators may (with some risk) assume that they have a free hand to negotiate whatever
they want, but they do not really know if the blank check given them by the Congress
will be honored. This is an unsure mandate that will have to be used with great caution
and wisdom.

g. trade relief

One additional subject that I was asked to address is the President’s steel decision.

Since the beginning of the Trade Agreements Program and the GATT, and carried
through into the WTO, provision is made for what used to be called an “escape clause”
and is now called a safeguard measure: If an industry suffers serious injury due to an
increase in imports, it can be protected with trade measures for a limited period. This
breathing space allows it time to adjust to the import competition.

Steel has for over thirty years been the subject of trade actions of all kinds –
voluntary restraint agreements (now outlawed), antidumping and countervailing duty
actions, and safeguards. The reason for this level of attention is to be found not in any
political influence that steel industry might be supposed to have had over two generations
of trade policy makers and members of Congress, but in the harmful effects of foreign
industrial policy on the American industry. For most countries of even medium size,
being self-sufficient in steel has been one of the key indicia of being industrialized.
Making steel was also part of social policy, in that it created a working middle class, as
steelworkers were more highly paid than workers in many other industries. Vast
subsidies were granted by governments to assure the development of their national steel
industries. And, as steel is a capital-intensive industry, every new or reconstructed
national industry planned to have capacity beyond the needs of its home market. By
dumping their excess steel abroad at anything down to its marginal cost, average costs at
home could be lowered by a greater utilization of capacity. Dumping is a sound business
strategy.

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But the math of all countries being net exporters cannot work. Up until recent
times, China and the United States have been dumping grounds, and all other major steel
producing nations were major net exporters. Now China has decided to become self-
sufficient in steel and a net exporter itself.

With the collapse of Asian demand during the Asian financial crisis and the
collapse of the Russian economy, a vast amount of foreign excess steelmaking capacity
became a major problem -- the excess amounting to over twice the total annual steel
consumption in the United States. Steel surged into the U.S. market. Over 34 American
steel producers went into bankruptcy in the last few years. On December 7th of last year,
the independent bipartisan International Trade Commission unanimously recommended
that relief be granted to the industry. On March 5th of this year, the President announced
a three-part program to promote steel industry recovery: Tariffs on most kinds of steel
(but excluding imports from NAFTA countries and from most developing countries, as
well as a large number of individually designated products); a call for talks on excess
capacity to be held in the OECD, and a request for discussions in the OECD that could
lead to negotiations of disciplines on subsidies in the steel sector.

The reaction of the major steel exporting countries was predictable. Many of the
leading steel exporting countries, following the lead of the EU, have taken the U.S. to
WTO dispute settlement to seek to get the American steel safeguard action declared
WTO-illegal. While the President’s steel decision should be considered wholly within
U.S. rights, no WTO panel (five to date) has ever approved of a safeguard action.

For the U.S. industry, the primary relief for steel, however, is not safeguards but
the imposition of antidumping duties -- measures not involving the President or
Executive Branch discretion. These are entirely separate measures, and WTO challenges
to these measures abound in the steel sector.

* * * * * * * *

This is what U.S. trade policy appears to be at present: It consists largely of a


strong belief in free trade to be given effect by a new round of multilateral trade
negotiations, a hoped-for Free Trade Agreement of the Americas, and a series of bilateral
free trade agreements wherever and whenever the opportunity permits. There are a few
exceptions -- concessions to political reality some would say, or simply the provision of
equity, such as for steel.

American Trade Policy for the 21st Century

Those of us who are not in government have the luxury of considering the
fundamental questions, not driven primarily by what is the “IN box” on any given day or
by the need to continue programs inherited from prior administrations. We have greater
freedom to look at policy as it should be. What are we to conclude?

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a. It’s the economy, …

National policy at times of peril is driven by concern over national security, and
economic policy must of necessity follow. During World War II, Franklin Roosevelt
declared that America was to be the “arsenal of democracy.” For Truman, the American
economy was to be the engine of post-War reconstruction in Europe through the Marshall
Plan. The strength of the American economy has been essential to the conduct of each
President’s foreign policy in the modern era, from World War II through the Cold War to
the present. The Soviet Union had enormous military capability and a poor economy.
America was strong in both. The Soviet Union is no more and America is the sole Super
Power. The strength of the economy mattered.

Is the strength of the American economy less important in the 21st Century than it
was in the 20th? After the collapse of the Soviet Union, there was a sense that America
faced no direct external threats. There were many serious local trouble spots – the
Balkans, the Indian Subcontinent, the Koreas, the West Bank, East Timor, the Taiwan
Straits. U.S. military planning called for an ability to fight two medium sized conflicts at
the same time. But until September 11, a succession of wars seemed improbable.

September 11 has been a wake-up call in a number of ways. America is


awakening to find itself cast in a role that was a matter of conjecture in 1989 with the
collapse of the Soviet Union, but whose meaning is becoming increasingly clear. The
word “hegemon” is used now by political scientists to describe the United States. In the
Gulf War, the United States led a coalition, but it carried by far the greatest part of the
burden. In Afghanistan, it operated not quite, but largely, alone. If the United States acts
against Iraq, the joint action could likely consist largely of U.S. effort and, but for Britain,
a foreign contribution limited to approval or positive neutrality. There is no argument
about whether the United States should be the world’s policeman, it is. The only
questions are when and how to act.

On what countries can the United States depend absolutely to carry a full share of
the burden of action? The United States has crossed a threshold into a new era of self-
reliance. The strength of the U.S. economy matters, and not just in a financial sense. The
composition of the economy matters. What are the industrial capabilities of the nation?
How closely linked is industrial power to staying on the leading edge of science and
technology, of having the foremost universities in these fields?

There are historical parallels. The position of being a dominant world power has
always been founded on economic strength. This was true for Great Britain, whose
power ebbed in part because its economic base ceased to support its world role. It was
also true for Ancient Rome. While the purposes America seeks to foster differ -- it seeks
to promote democracy, and the world powers that preceded it sought empire -- the
relationship of the ability to project power broadly in the world and the strength of the
Nation’s economy is the same.

At present clearly there is a deep concern in the Congress that the dominant policy
theme of the Executive Branch is that the openness of the U.S. market is a paramount

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objective, regardless of circumstances. Clearly, the underlying assumptions of current
American trade policy need to be revised. The core purpose of U.S. trade policy must
now be to maintain a strong domestic economy as the necessary foundation for
America's world role.

Changing assumptions does not call for a complete discontinuity in policy. The
fundamental precept should remain that it is the role of trade policy to foster the growth
of the American economy in the context of a growing world economy through expanding
international trade. The Free Trade for the Americas initiative should still be pursued, as
should incremental trade liberalization in the Doha Round, for example in financial
services and rules curbing market distortions in agriculture.

The core purpose – maintaining a strong domestic economy – will, however, alter
how trade policy is made and will change individual trade decisions. Foreign industrial
targeting – the promotion by governments of particular industries that alters
competitive outcomes – must be studied, understood and, where necessary,
countered. There is only one clear example of the U.S. government understanding a
problem of this nature and taking effective corrective action over a sustained period of
time. This was the case of Japanese promotion of semiconductors -- computer chips --
through an array of Japanese government measures, including toleration of private
restraints of trade that afforded protection of the Japanese home market and government-
sponsored research and development. Over a period of more than a dozen years, the
Reagan, Bush and Clinton Administrations succeeded in opening the Japanese market
and halting Japanese dumping of semiconductors,. It was an extraordinary effort.

It is necessary to identify problems, and have the research and analytical


capabilities to present sensible policy options and then devote the resources needed to
implement the course chosen. This is a task that the U.S. government, despite its laissez-
faire heritage, must become better-equipped to undertake. It almost took too many years
to understand fully the impact of the Japanese measures for promotion of
semiconductors.

The policy-tools to address industrial challenges once they are identified


must be clearly available. The competitive challenge in semiconductors was met with
direct trade action – three antidumping cases and President Reagan’s trade retaliation
against Japan for violating its agreement, as well as with a series of industry-led measures
to fund university research, improve the protection of intellectual property, and cooperate
to improve process technology through SEMATECH, in which the Department of
Defense was an important partner in the venture’s early years. This quarter-century
industry effort, with substantial government involvement at a number of stages, is
unparalleled in modern American history.

The record in steel is far less positive. Steel trade has been a problem since the
late 1960s. Foreign governments’ industrial policies were the root cause. The U.S.
reaction can be seen as consisting of a series of policy cycles: ad hoc protective
measures, always entered into reluctantly, followed by what one observer has called
“buyer’s remorse,” and lastly a fading of policy interest, only to be followed by another

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crisis. What is needed is a sustained program of trade action. My preference is for
vigorous enforcement of the remedies against unfair trade, together with domestic policy
measures that promote consolidation in the industry to improve its international
competitive position.8

RECOMMENDED ACTION: To support the principle objective of maintaining a


strong domestic economy, it is imperative to work and act aggressively against foreign
trade and investment distortions that cause harm to the American economy. The
composition and strength of specific sectors of the economy matter.

The GATT system, incorporated into the WTO, as it stands today, is to some
extent self-policing. Dumping is condemned, and certain subsidies are prohibited. Self-
help measures are the primary (and the only effective) tool available for use against some
of the more prevalent unfair trade practices. Since foreign industrial targeting will
generally give rise to dumping and will often involve subsidies, it is essential that
remedies against unfair trade (primarily through use of antidumping and
countervailing duties) be vigorously enforced.

In this regard, it is imperative that the U.S. negotiators not agree to weaken the
trade remedies in the Doha Round, in the FTAA, or in bilateral agreements. In addition,
the serious problem of binding dispute settlement being abused by WTO panels who are
legislating new limits on trade remedies that were not agreed to by the parties must be
cured. We cannot afford to see the trade remedies further impaired by the fiat of WTO
panels. Indeed, the damage that has been done must be reversed.

b. Foreign economic policy

Focus on keeping the domestic economy strong is not a call for autarky or
isolation. Relationships with and the economic health of other participants in the trading
system matter.

i. the European Union

The EU is a necessary partner for all multilateral economic initiatives. Since the
U.S. and the EU each accounts for a substantial part of world trade, the two will find
themselves at odds more often than either would like over a variety of issues that affect
trade. It is important for them to work harder at resolving these matters amicably.
Binding dispute settlement has trapped the EU and the U.S. into a confrontation over
matters that would hardly have been chosen by either as major objectives of policy --
beef, bananas and a tax measure about which no European company had complained.
There needs to be a substitute for the current ad hoc approach to problem-solving

8
For the record, the author of this paper had substantial involvement in public policy measures
affecting these industries -- in semiconductors from 1980 to the present, and in steel from 1979
until the present.

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between the two. I have suggested for several years that two should neither threaten nor
impose retaliation against each other.

ii. China

The integration of China into the world economy, enhanced through China’s
accession to WTO membership is the right course of action. It is designed to foster a
more durable, non-confrontational relationship with this emerging large power. As I
mentioned earlier, this may have already paid dividends in the Belgrade embassy
bombing incident, and perhaps even more so in the case of the American plane downed in
Hainan. Trade policy is also a human rights policy in a number of respects, lifting the
standard of living and fostering the conditions for evolution toward democracy, an
important goal of U.S. policy. There will be many challenges to face in the trade arena.
One challenge will be implementation of the WTO accords by China. Fortunately, the
Chinese and U.S. governments have stated that have every intention of seeing that this
occurs. An equally difficult issue will be to find ways to deal with the adverse affect of
Chinese competition on developing countries – a serious problem as yet without the
prospect of any acceptable solutions.

iii. Russia

The answers with respect to Russia lie not with trade policy but with investment
guarantees. The United States and Europe have a very large stake in the recovery of the
Russian economy. A de-stabilized Russia or a Russia reverting to an expansionist
dictatorship with or without Communism would be extremely serious adverse
development for U.S. interests. This is a problem that was not dealt with at a time of
maximum opportunity in 1989 and the years following. It remains one of central
challenges for Western and particularly U.S. policy makers today.

iv. The developing countries

It is an error to consider trade policy toward developing countries as if the latter


were a homogeneous group. A central focus of U.S. policy should be the Free Trade
Agreement for the Americas. The multilateral effort in the WTO at present has less clear
prospects. The Doha Development Agenda is thought of by developing countries to be a
negotiation primarily about their interests, and so it should be. In the Doha Round, the
emphasis should be on creating an environment in which flows of inward foreign
investment are more likely to occur. Free trade in information technology products under
the International Technology Agreement will enhance the prospects of developing
country signatories to attracting more investment. Capacity building, more easily talked
about, than done, must also be a high priority.

A key question is what foreign economic policy can do to broaden and enhance
the development of Muslim nations whose peoples may sympathize with Al Qaeda?
Over time trade can help create a middle class with a more liberal education so as to
create a larger group that has a greater stake in stability rather than violent change. This

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is a sufficiently important question that it will need to have priority attention from policy
makers. The potential Doha agreements provide only one tool to address these
challenges. It is likely that more tailored development programs through the international
financial institutions or on a bilateral basis will be needed.

Additional market access for LDCs needs to be carefully considered and real
progress made. This should not be achieved, however, at the expense of remedies against
unfair practices. That would not and should not receive approval by Congress.
Development should not be encouraged through trade-distorting measures. Dumping
usually occurs because a foreign market is not open or because of subsidies. The
corrective is to open the home market or curb subsidization that distorts trade and injures
foreign industries. In the meantime, antidumping and countervailing duty measures will
need to be applied as necessary.

v. Systemic reforms

The United States has decided that it cannot accept binding adjudication of its
actions in the political and military arenas, but trade interests were apparently seen as
insufficiently important to merit similar care. Now, decisions by rogue WTO dispute
settlement panels need to be dealt with. There is a continuing loss of sovereignty as
WTO panels repeatedly legislate new restrictions on the use of trade remedies against
dumping, anti-subsidy and safeguard measures. Part of the answer to this problem may
lie in bilateral truces arranged with major trading partners, such as the European Union.
The United States should also discourage litigation by imposing costs on those who bring
cases that lack merit. It should also refuse to implement decisions where there is no trade
impact or where a panel’s decision seeks to impose an obligation that goes beyond those
undertaken by the U.S. negotiators.

The infirmities of the WTO dispute settlement system will continue to erode
support in the United States for its WTO membership. The Doha Round has no current
potential to address the fundamental problems with dispute settlement as no participant in
the negotiations has put proposals on the table for discussion sufficient to solve the
problems.

Trade diplomacy should be restored to its central role in managing trade issues.
Litigation is only one tool in trade relations, and not the most promising. However,
litigation, to the extent resort is had to it, should be conducted in a manner calculated to
present the strongest possible case by the United States. U.S. Government resources
devoted to this task are insufficient.

vi. reviving the partnership with Congress

“Trade Promotion Authority” actually consists largely of an agreed-upon


legislative process. Winning the approval of Congress of trade agreements and seeing
them implemented will require the development of trust derived from a close working
relationship between the negotiators and the Congress. The trade negotiators long ago
won a fight with Henry Kissinger’s State Department to share classified communications

16
between the U.S. trade negotiators in Geneva and their superiors in Washington. The
Trade Representative’s office once considered that it had two masters -- the President and
the Committees of jurisdiction in the Congress. That relationship needs to be restored.

vii. winning public support for the U.S. trade agenda

The “public” is a general term encompassing within it, it is to be hoped, a


coalition of interests whose support is necessary and obtainable if trade agreements are to
be approved by Congress and implemented. It is a much broader group than it once was.
In the 1970’s, there were one thousand representatives of industry, agriculture and labor
spread among more than two dozen advisory committees and this was considered a
broad-based representative advisory mechanism. Not only are services, investment and
intellectual property interests have been added to the other commercial interests to be
represented, but in addition there is an interest in a creation of a civil society, in which
the promotion of human rights and democracy are central. The environment was not a
trade issue a few decades ago and is now an important trade issue. To the extent that
progress can be made against corruption that affects trade, this is also relevant. In short,
the different perspectives brought by segments of the “public” to trade negotiations make
the crafting of agreements and obtaining support for them a much more complex process
than when tariffs and simple nontariff barriers were being addressed.

* * * * *

Conclusion

At the end of the process, there is a broad public interest which must be served.
At its root level, that is what this paper is about. Fundamentally for any large agreement,
whether a Free Trade Agreement for the Americas or a comprehensive negotiating result
from the WTO Doha round, it is the President who will have to make the case to the
American people that the agreement in question serves the best interests of the United
States. In the post-9/11 world, those interests have been irrevocably clarified. New
agreements will have to be measured by this new yardstick. Trade agreements must
serve to foster an American economic base that will support its new world role.

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