by C. Fred Bergsten, Peterson Institute for International Economics
Speech given to a conference titled "Restarting Fast Track"
Institute for International Economics
February 3, 1998
Trade policy has become a contentious political issue in the United States after almost six decades of bipartisan consensus. The Congressional debate over NAFTA in 1993 was the most divisive battle over trade since the Smoot Hawley tariff. The controversy over the merits or demerits of NAFTA continues to rage. The two camps fought to a virtual standoff last fall over whether new fast track negotiating authority should be extended to the President.
Trade has become the new "third rail" of American politics, both between and (maybe especially) within the parties. Fortunately, it now appears politically feasible to discuss previously untouchable topics like Social Security and Medicare. Trade was banished by both presidential candidates from the 1996 election campaign, however, after playing a divisive role in the Republican primaries (as in Democratic primaries in earlier years). Hence an opportunity to join the debate was missed. Nor did last year's conflict over fast track significantly advance the discussion.
Any Congressional action on fast track in 1998 is unlikely to progress much further in resolving the basic clash between proponents and opponents of globalization. A new consensus on which US trade policy can rest in the early twenty-first century will require much more analysis of the impact of trade and investment on our economy, including the effects on losers from the process; much more interaction between the two sets of views; and much more public education and participation in the debate. The Institute for International Economics, like many others around the country and elsewhere in the world, is working on all those aspects of the issue.
But the immediate question is how the United States should proceed in the interim while, hopefully, a stable consensus for the long run is being developed. Today's conference will not attempt to discover how to generate more votes for the legislation that failed in late 1997. It will ask a series of questions concerning the policy issues surrounding that legislation:
Papers have been prepared and distributed on each of these topics, and will be summarized at the outset of each segment of the conference. Leading members of the Congress from both parties who have been active on trade policy, especially from the House where the debate has been much more intense than in the Senate, will launch the discussion of each topic. My own remarks will be followed by overview perspectives by three of the Members who have played especially important roles in the previous and continuing debate.
In setting the stage for the conference, and hence the 1998 debate on fast track, we need to recognize the multifaceted impact of a major new development of perhaps overriding importance: the Asian economic crisis. This year, and perhaps next, are likely to be "lost years" for much of Asia including Japan—zero or negative growth, large rises in unemployment, widespread bankruptcies, unstable markets and possible political disruption. Growth in China, the other megamarket in Asia, will be dampened to a lesser but still substantial extent. There are several implications for the United States and specifically for US trade policy.
On the one hand, continued openness of the American market is essential for a successful resolution of the Asian crisis. Each of the troubled emerging market economies in the region must be able to strengthen its trade and current account balance in order to restore its economic health and regain global confidence. All these countries continue to rely on the US market for a sizable portion of their exports and thus must be able to continue selling here. Any American retreat from openness would shatter the prospects for successful resolution of the crisis.
Even more importantly, the International Monetary Fund and the United States are insisting that the Asian nations remedy their problems by accelerating the liberalization of their own economies. Every one of the troubled countries has thus committed itself to further opening its economy, particularly its financial sector but other key sectors as well, far beyond what had been achievable in all the US and WTO negotiating efforts of the past decade or more. Moreover, the APEC heads of state agreed at their summit meeting in Vancouver in November to eliminate barriers by early 1999 in nine major sectors with a global trade value of more than $1.5 trillion. Any US rejection of market liberalization could jeopardize this "potential silver lining" in the cloud of the crisis.1
Failure to legislate new fast track authority would of course not produce any new closure of US markets. Nor would it necessarily mean a reversal of the basically open US trade policy of the past sixty years. Such an outcome, however, would almost certainly be viewed around the world—notably including in Asia—as heralding a US move in those directions. It would clearly strengthen the forces within the Asian countries (and perhaps elsewhere) that would respond to the crisis by rejecting global norms in favor of protectionism, mercantilism and even xenophobia.
There would be some justification for such a reaction. We know from history that trade policy is dynamically unstable; it either moves forward steadily toward further liberalization or it retreats toward protection. The opponents of fast track could indeed be expected to follow up a confirmation of their victory of last year by seeking subsequently to roll back the liberalization of the past, perhaps starting with NAFTA and then moving on to broader arrangements if they continued to prevail. Other countries would thus be correct to react with some alarm to a toppling of the bicycle of liberalization in the United States.2
A strategy of "retreat rather than compete" by the Asian countries would almost certainly worsen their crises, causing enormous damage to the countries themselves. It would also cause enormous damage to our trade and investment interests, undercutting a source of substantial economic growth for the United States over the past three decades and an even more promising prospect for the future. It would raise the specter of renewed instability in a region where we have had to fight three wars in the past sixty years. We certainly do not want to encourage such an outcome.
On the other hand, the improvement of Asian trade balances—due to both the sharp declines of their exchange rates and the recessions they will experience over the next year or two—will produce a sizable further deterioration in our own external position. A new global analysis by my colleagues at the Institute suggests that, even if the Asian currencies bounce back substantially from their present levels (as is likely), the US trade deficit will rise by about $50 billion in nominal terms and by perhaps $100 billion in real terms.3 (The large difference reflects the sharp improvement in our terms of trade resulting from the rise of the dollar against the Asian currencies.) The real effect drives our economic growth and probably our trade politics, so the impact will be substantial (even if there are no more major market shocks that could retard our investment and consumption levels by additional amounts).
The United States is not alone in this situation. Our new study suggests that Europe will experience an even greater deterioration in its trade balance as a result of the Asian adjustment. The existence of this burden sharing is unlikely, however, to obviate much of the additional pressure on US trade policy from the further large deterioration in our position. Our merchandise deficit is already approaching an annual rate of $200 billion and the postulated increase could bring it near the share of GDP that obtained at the previous record levels of the middle 1980s. Our net foreign debt has already soared past $1 trillion and, in absolute terms, is by far the largest in the world.
Fortunately, the continued strength of the US economy enables us to absorb this trade deterioration with some equanimity at least for now. Indeed, the decline in net foreign demand will help keep inflationary pressures at bay (and the Federal Reserve from raising interest rates as Chairman Greenspan strongly implied last week). With its very high rates of unemployment, Europe may in fact be more tempted to react with new trade restrictions. We will have to work closely with the Europeans to assure that they do their share to ease the crisis—and to avoid another source of pressure on our own policies which could further undercut the outlook. Any appearance of retreat by the United States itself would of course make that task much more difficult as well.
The net effect to date of the Asian crisis on legislative strategy, in both the Administration and Congress, is apparently to shift priority to the bills that would provide new resources for the IMF and—despite the President's reiteration, in his State of the Union message, "to renew my request for the fast track negotiating authority necessary to open more new markets"—to relegate fast track to a much lower priority. I strongly support the IMF bills, testified in favor of them last Friday before the House Banking Committee, and will be doing so again tomorrow before the Senate Finance Committee. But the foregoing analysis suggests that passage of fast track authority is also an essential component of the American response to the Asian crisis. Any indication of significant US slippage on trade would be as serious as rejection of IMF support in undermining the prospects for Asian policies that will produce successful and constructive resolution of their problems—resolutions that promote the economic and security interests of the United States as well.
I therefore conclude that early passage of fast track has become imperative. We must reject the view that we must choose between the IMF and fast track. President Clinton was wise to link these issues in last week's State of the Union address and call for Congressional action on both. I would hope that both the business community and organized labor would recognize the substantial risks to their interests from US failure to move forward on either the IMF or trade policy fronts.
It would be desirable if the President could have fast track authority in time for the second Summit of the Americas in Chile in April and the fiftieth anniversary celebration of the GATT/WTO in Geneva in May. He clearly needs new authority to take full advantage of APEC's agreement to eliminate barriers by early 1999 in a number of sectors of substantial export interest to the United States. The United States will need the forward momentum provided by fast track to counter the negative international reaction to the spate of anti-dumping cases that will surely be launched here against "cheap exports" from Asian countries with weakened currencies. But the most compelling reason for prompt action is the direct impact that our domestic outcome, on fast track as well as on funding for the IMF, will have on policies, performance and fundamental attitudes in Asia—which is still the largest, potentially most dynamic, and potentially most unstable region in the world—and perhaps in Europe and other regions as well.
As noted at the outset, however, there are a large number of Americans (including members of Congress) who have doubts about the wisdom of this course. Hence the Institute decided to hold this conference to explore whether changes in the legislation could, at least for an interim period while the more fundamental debate proceeds, provide adequate responses to their concerns.
To respond at least partially to those concerns, it seems to me essential that Congress adopt, in parallel to the fast track trade legislation, a series of domestic measures that would (1) continue to strengthen the safety net for all temporarily displaced workers and (2) further enhance the ability of all Americans to benefit from trade rather than be hurt by it.4 The President's explicit linkage of trade and domestic supports in his State of the Union message, especially his call for a single "G.I. Bill for Workers," may point the way to a Congressional consensus on which we could proceed for at least the moment. This is the key issue with which we will wind up today's conference in the hope that creative ideas may emerge, as on the other policy topics, that will pave the way for positive action on trade during the current session.
The bottom line is three-fold. We need to link our international efforts and our domestic policies more closely than ever before, We need to link the economic and security elements of our foreign policy as never before. We need to link the trade and financial components of our international economic strategy more closely than ever. Misplaced efforts to choose domestic over foreign, or security over economics, or finance over trade would doom the achievement of all these goals. The United States clearly needs an integrated strategy for 1998. We hope that this conference will make a useful contribution to moving in that direction.
2. See C. Fred Bergsten, "American Politics, Global Trade," The Economist, September 27, 1997.
3. Asian Competitive Devaluations, Li-Gang Liu, Marcus Noland, Sherman Robinson, and Zhi Wang, Institute for International Economics, Working Paper Number 98-2, January 1998.
4. As proposed in Dani Rodrik, Has Globalization Gone Too Far?, Washington: Institute for International Economics, March 1997, which reputedly provided much of the conceptual foundation for President Clinton's remarks on these topics in the State of the Union message.