World Trade After Seattle: Implications for the United States

Gary Clyde Hufbauer is Reginald Jones senior fellow at the Institute for International Economics. This policy brief draws on the conference on “The World Trading System: Seattle and Beyond,” organized by senior fellow Jeffrey J. Schott and chaired by Director C. Fred Bergsten, that the Institute hosted in Seattle on November 30 during the WTO ministerial conference.

© Institute for International Economics. All rights reserved.

Seattle leaves a huge question mark over the U.S. role in world trade policy. Faulty preparation and flawed tactics were abundant—both in the street and between the delegations. The Battle of Seattle may acquire the same instructive value for future diplomats as Pearl Harbor has for military officers.

But this Policy Brief is not about preparation and tactics. The Seattle outcome might have been far different—if the U.S. Trade Representative had not swept concessions off the table months before the ministerial conference. Or if the police had cordoned downtown Seattle on Monday. Or if President Clinton had left the phrase “trade sanctions” out of his Tuesday interview. Or if France had agreed on Friday to the eventual elimination of agricultural export subsidies. But this Policy Brief is not about “might have beens.”

Instead, this Policy Brief is an attempt to size up the direction of world trade policy after Seattle. In particular, it focuses on strategies that open market forces might adopt to regain the initiative.

World Trade Game Score (since WTO 1994): Backlash 7, Open Market 3

By my score, the global Backlash forces, in the United States and elsewhere, have enjoyed seven victories since the WTO agreement was reached in Marrakesh in 1994. They defeated renewal of U.S. “fast-track” negotiating authority twice (scored only once in my count). In addition, the Backlash forces have stalled the Free Trade Agreement of the Americas (FTAA) in the Western Hemisphere and have slowed European Union enlargement. Kindred forces in Japan defeated the Early Voluntary Sectoral Liberalization” proposals in the Asia Pacific Economic Cooperation forum (APEC) at the Kuala Lumpur meeting in November 1998. Together with the French (concerned about U.S. cultural imperialism), the nongovernmental organizations killed the Multilateral Agreement on Investment (MAI) in December 1998. Meanwhile, the U.S. Congress has stalled a twin vote on NAFTA parity for the Caribbean Basin countries (Caribbean Basin Initiative [CBI] Parity) and the Africa Growth and Opportunity Act (AGOA). From a media exposure standpoint, their crowning glory was Seattle.

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Against this count, the Open Market forces have achieved three important victories since the WTO was established in 1994. They signed off on the Information Technology Agreement at Singapore in December 1996. They crafted the Basic Telecommunications Agreement in February 1997. And they adopted the Financial Services Agreement in December 1997. These were all solid achievements—even if they were not media spectaculars.

A Rest Stop Or a Turning Point?

Ten years from now, Seattle could be seen as only one more pause in the long march toward open markets. The march that began in 1947 with the establishment of the GATT has been interrupted many times. Europe had a difficult time negotiating current account convertibility in the 1950s. Oil shocks in the 1970s threatened the world trading system. Agriculture was particularly tough in the Uruguay Round. Yet on each occasion, progress resumed.

On the other hand, ten years from now, Seattle could be seen as the turning point—the event that marked the end of the policy-driven open markets agenda for much of the world. If this is the outcome, many countries could build new barriers, especially in areas not already covered by international rules (such as financial services and e-commerce). Three points are worth making in handicapping “rest stop” versus “turning point.”

First, the Backlashers have not yet succeeded in rolling back liberalization. NAFTA stands and prospers. Mercosur has so far survived Brazil's currency devaluation. In the aftermath of the Asian crisis, none of the ASEAN members nor Korea has reversed its trade commitments. In the tax arena, more legislators are worried about “runaway headquarters” (Chrysler/Daimler Benz) than “runaway plants.” The Tobin tax and its kissing cousins remain academic toys.

But in the aftermath of Seattle, the Backlashers can claim three achievements. They enlisted sympathizers who want the WTO to encompass moral values, not just economic virtues. In the process, they turned trade and investment talks into a political “third rail” (to borrow Marc Noland's phrase). And they probably added years to the life expectancy of stratospheric agricultural barriers, sky-high textile and apparel tariffs, the U.S. antidumping laws, and other formidable barriers.

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Make no mistake: rollback is their goal. Hard-core labor Backlashers (fortified by sympathy from Clinton) want wide latitude to impose trade sanctions against offensive production processes. They want to extend textile and clothing quotas well beyond the 2005 phase-out date. They want tougher antidumping laws, and easier access to normal safeguards. They welcome capital controls. In time, they will resurrect the Burke-Hartke concept (dating from the early 1970s) of imposing import quotas and heavier taxes on the foreign operations of multinational firms. The “new” Backlashers want to put new trade agreements in peril until social issues are addressed. Both Backlash camps would dearly love to rewrite or even dissolve NAFTA.

Unless the Open Market forces regroup and adopt a winning strategy, “turning point” seems more plausible than a “rest stop.”

Next Battle: China

China is the next battle and it could prove decisive. It is hard to know how China and the WTO intersected in the minds of top administration officials, but three scenarios are plausible.

• First scenario: Clinton may have cut an implicit behind-the-scenes deal with AFL-CIO leaders: I'll trash Seattle and you don't trash China. A deal along these lines would give something dear to business (better access to Chinese markets) and something dear to the AFL-CIO (no new trade talks without labor sanctions). From what we know about the sequence of events, this scenario seems far more plausible as an after-the-fact rationale for hopeless fumbling in Seattle than a Machiavellian before-the-fact game plan. It is not at all clear that the AFL-CIO leaders will sign on to their part of the “bargain,” namely, stopping short of a “take no prisoners” battle against China.

• Second scenario: In vintage Clinton style, the “technical” talks over the details of China's accession to the WTO could be strung out and the normal trade relations (NTR) vote pushed forward to 2001, when a new president is sitting in the White House. This would deny Clinton an important legacy, but it might reduce the “China factor” in the U.S. presidential election and avoid embarrassing demonstrations in Washington.

• Third scenario: Clinton has simply lost control of trade and investment policy. Evidence for this scenario is a string of events since 1996: The loss of fast track in 1997. The MAI burial in 1998. The China fiasco in April 1999. Haphazard preparations for Seattle. Finally, Clinton's “trade sanctions” interview, which eliminated all prospects of reaching an accord with developing countries on labor issues. Under this scenario (favored by Marc Noland), China will be Clinton's last trade debacle—a big effort, but not big enough to round up the votes for permanent NTR. In the end, Congress votes the usual one-year extension.

Can the Open Market Forces Regroup? Lots of Generals, Not Many Soldiers

Missing from the ranks in the battle for open markets are business firms and consumer groups. The most energetic soldiers are economists. As Stalin famously remarked, “How many divisions does the pope command?” That said, many strategic concepts have been offered for regrouping the Open Market forces and sparking public enthusiasm for globalization. Everyone wants business and government leaders to speak out more forcefully in favor of free trade and investment. Beyond that common theme, strategies differ. For brevity, I will summarize the ideas of leading strategists in caricature.

Jagdish Bhagwati and Daniel Tarullo: “Back to basics.” Focus the WTO on border barriers. Reconsider the TRIPs agreement (as T. N. Srinavasan has urged). Bhagwati goes further: forget about regional groups—they're a nuisance at best, and more likely harmful. In other words, get the WTO out of difficult national sovereignty questions, and don't burden commerce with a spaghetti of FTAA, APEC, Pacific-5, and other new regional arrangements.

• Problems: Where do you put the “social issues”? Will U.S. and European business firms push for new trade agreements that can be easily nullified behind the border? As a practical matter, several regional groups now seem healthier than the WTO—debilitated as it is by the splits within the Quad and between the United States and developing countries. In the regional arena the European Union is rapidly moving ahead on new deals with Mexico, Mercosur, and the Lomé Convention countries.

Robert Samuelson: “Let the markets work.” With dramatic cuts in transportation and communications costs, the ascendancy of multinational corporations, the rise of e-commerce, plenty of globalization will occur even if trade ministers take a 10-year holiday. Moreover, thanks to the overwhelming success of the U.S. economy, sensible countries will enthusiastically sign on to the Washington consensus and Anglo-Saxon capitalism, without another USTR or IMF mission abroad.

• Problems: Mercantilism has dominated commercial policy for 350 years (today it's called “reciprocity”). Who hears the death rattle of this enduring ideology? What about growing underbrush that threatens to choke e-commerce and other new realms? C. Fred Bergsten's “bicycle theory” worked well at explaining past swings between liberalization and protection. Has this piece of political economy now vanished?

Larry Summers: “Go with the Living Ism.” In 1991, before he became a senior U.S. official, Larry Summers famously proclaimed his love for all the “isms”—bilateralism, regionalism, multilateralism. Now that the WTO has run into difficulties, this strategy would call for deepening NAFTA (especially with Canada), the Pacific-5 (Australia, New Zealand, Singapore, the United States, and Chile), working on bilateral issues, and doing a few sectoral deals. Just be pragmatic.

• Problems: The NGOs killed the MAI, and some see a threat in the CBI and Africa. Will they pass up the next bilateral or regional deal? Indeed, in the regional context, won't they insist on a heavier loading of social issues? The same virus that hit Seattle could easily spread.

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I. M. Destler and Peter Balint: “Bring in the social issues.” These are the natural next step in the long GATT/WTO journey from tariffs, to quotas, to services, to intellectual property rights, to phytosanitary standards. Go with the flow. Reasonable people can find reasonable solutions that both improve production conditions worldwide and respect national sovereignty.

• Problems: India, Brazil, and China have an automatic response: “Not on your life.” Will the United States and Europe put their own miserable treatment of illegal immigrants on the table? What about state environmental standards and layoff laws? Finally, what concessions will the United States and Europe make to get social clauses? Will they accelerate the elimination of Multifiber Agreement (MFA) quotas, slash textile and apparel tariffs, and reform their antidumping laws? Will they liberalize stratospheric restrictions on sugar, dairy, peanut, tobacco, and other specialty agriculture imports?

Dani Rodrik and Robert Litan: “Buy off labor.” This strategy sees the United States (not Europe) as the main stumbling block to open markets, and identifies organized labor as the key opponent. Hence the prescription. Enlarge the U.S. social safety net across the board, as Rodrik advocates. Or, in Litan's formulation, provide for a realistic, but degressive (e.g., lasting 2 to 3 years), make-up payment for a portion of the wages lost (e.g., starting at 75 percent of the loss) by all dislocated workers who find new jobs. Ensure that dislocated workers have health care and moving allowances.

• Problems: Who will spend the necessary money for a wide social safety net? Gore is already attacking Bradley for wanting to increase the health care budget. My estimate for degressive wage make-up costs across the board is about $15 billion annually. Wage insurance limited to trade-impacted workers would come cheap, about $500 million annually. But labor has disdained all forms of Trade Adjustment Assistance (TAA) for 15 years. Why would it love this wrinkle? Besides, there is no meaningful distinction between workers displaced by technology or restructuring and workers displaced by trade. If labor alone is bought off, will other social causes be satisfied?

President Clinton: “Y'all come.” The central problem is process, not substance. Invite responsible NGOs into the negotiations. Allow them to bring disputes in the WTO. Broadcast the proceedings live on television and the Internet. A more open party will be a better party.

• Problem: No one believes this solution. Probably not even Clinton.

Sizing Up the Problems

If the next U.S. president wants to restart the trade engine, he will need to commit the same level of political resources as he might devote to major tax, budget, or labor legislation. Gone are the days when important policy-driven progress toward open markets can be achieved without bitter political battles. There is no low-cost-lunch strategy.

If the new “third rail” proves too hot for the next U.S. president and his G-7 counterparts, then the open markets agenda will depend on the two forces inherent in Robert Samuelson's analysis: the technology revolution in transportation and communications, and the winning appeal of Anglo-Saxon capitalism. In a pre-Seattle trip to Asian capitals, Fred Bergsten found considerable enthusiasm for new regional institutions ranging from trade to money. Asian leaders are tired of dancing to Washington's economic tune. They want to write their own songs. Seattle can only reinforce these sentiments. If Washington and Brussels falter, the future trade agenda could be led by an Asian renaissance.

If the “third rail” turns out to be a Washington problem—and not so serious in Brussels, Tokyo, and Ottawa—the other G-7 powers might well pursue their own regional initiatives. The European Union might negotiate free trade arrangements with Mercosur and the Lomé Convention nations, adding to its extensive free trade network with Eastern Europe, North Africa, and Mexico. Japan could surprise everyone by negotiating a free trade agreement with Korea. And Canada might join the Northeast Asian party. A burst of regional energy along any of these lines would disadvantage U.S. exporters.

The U.S. Trade Calendar in 2000

Multiple trade issues loom on the congressional calendar. In the wake of Seattle, these issues present inviting targets for Backlash demonstrations, attracting new financial support and more media attention. Accordingly, a few thoughtful Open Market protagonists think that the best strategy—in an election year—would “cool down” trade and put off issues until 2001. Here is how “third rail” countertactics might play.

• String out the technical talks on China's accession to the WTO, and simply go for a one-year renewal of NTR in July 2000. (Clinton's “second scenario” for dealing with China.)

• Don't even mention “fast track.” At most, hold quiet consultations with Ways and Means and Senate Finance Committee leaders on possible new formulations and new labels.

• Hold off on CBI Parity and AGOA.

• Keep FTAA, APEC, and Pacific-5 talks at a strictly technical level.

• Avoid a media event of the House and Senate votes on continued U.S. membership in the WTO. (Under the 1994 legislation that ratified the Uruguay Round agreements, upon the request of a single member, the House and the Senate each vote up or down on continued U.S. membership in the WTO every five years.)

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• Downplay a possible adverse decision by the WTO appeals panel in the Foreign Sales Corporation case. (In a case brought by the European Union, a WTO panel found that this U.S. tax provision, designed to promote exports, violates the Uruguay Round Code on Subsidies and Countervailing Measures. The WTO appeals panel will issue its decision by March 2000.)

“Firewall” in 2000?

A different strategy for Open Market forces next year is to stand and fight. In this strategy, an all-out battle would be waged to welcome China in the WTO with permanent NTR legislation. Likewise, CBI Parity and AGOA would be the next priority.

The argument for this strategy is simple. Unless the Open Market forces build a firewall, the Backlash forces will gain momentum and financial support. If trade policy is stalled in 2000, it will be that much harder to restart the engine in 2001.

A New Strategy for 2001

Fact One. Steven Kull's polls show broad-based moral concern in the United States about labor and environmental conditions abroad (even if better conditions abroad translate into higher consumer costs at home). His polls also show that the American public is worried about U.S. job dislocation, even when workers can find new jobs at the same or better pay, and even when a flexible economy means lower prices at the local shopping mall.

Fact Two. Americans sharply disagree on the benefits of free trade, polarizing by income level. According to a Wall Street Journal poll, only about 32 percent of all U.S. adults think that the United States has been hurt by free trade agreements. (By contrast, 35 percent think the United States has been helped, and 24 percent think that trade agreements haven't made much difference.) However, 54 percent of adults with income under $20,000 think that the United States has been hurt by free trade agreements, while naysayers drop to 25 percent among households with income over $50,000.

Fact Three. Meanwhile, developing countries violently oppose a working group on labor in the WTO, and they were enraged by Clinton's mention of trade sanctions. Developing countries hold a well-grounded fear that the concerns and worries of ordinary Americans will be hijacked by the AFL-CIO and extreme Backlash groups—and turned into formidable trade barriers. Putting these three facts together, the time has come to address labor and environmental concerns, but with a strategy that

• would not entail new WTO rules;
• would be accepted by the U.S. business community;
• and would broaden the base of U.S. public support for freer trade.

If this strategy can be crafted, then the way would be clearer for Congress to grant the next president authority to conduct trade and investment negotiations. No plausible strategy can avoid a political battle. The right strategy could improve the chances of an Open Market victory.

Six Linked Concepts of the New Strategy

• First, create a permanent independent U.S. commission, insulated from daily political life, to create and authorize labels certifying that imported and domestic products and services are made in ways that meet core labor and environmental standards. The labels would be optional, not mandatory, both for importers and domestic producers. For producers, the labels should become a “badge of honor,” enabling concerned consumers (business or household) to purchase certified products, at a premium price if necessary. The Global Reporting Initiative (www.globalreporting.org) has already published its suggestions for an appropriate framework.

• Second, dedicate a portion of capital gains taxes to creating a fund for degressive wage insurance (and health care and moving allowances) for all dislocated workers, as Robert Litan has urged. Individual capital gains taxes are running above $50 billion annually; hence earmarking 30 percent for degressive wage insurance and associated benefits should prove adequate. The basic rationale is that globalization and technology are shifting part of national income to capital; some of these gains are in turn captured by the capital gains tax. It is only fair that a slice of the rewards generated by the new economy be returned to those shaken up by its dislocations. Earmarking would foster harmony between winners and losers. For earmarking to have meaning, however, less money would be dedicated to the fund in years when capital gains plunge and tax receipts drop.

• Third, replace the antiquated and inefficient U.S. system for taxing the worldwide income of U.S. multinationals (a system that raises very little revenue) with a new system that allows a broad exemption for income earned abroad. However, the broad exemption would be conditioned on certification that the U.S. parent corporation, all its foreign subsidiaries, and its principal suppliers exceed core labor and environmental standards in their operations and appropriately disclose their labor and environmental performance. Again, an independent commission (not the IRS), drawing on the work of the Global Reporting Initiative, would set certification and disclosure standards.

• Fourth, in parallel with domestic initiatives on labor and the environment, the administration should launch negotiations in the International Labor Organization (ILO) to establish a worldwide system for certifying observance of core labor standards, by both firms and countries. Likewise, as Daniel Esty has proposed, the administration should enlist international support for creating a Global Environmental Organization (GEO). Among its tasks, the GEO would certify the observance of recognized environmental standards. Both the ILO and the GEO would issue periodic “report cards” on national performance, just as the IMF and the WTO do on trade and macroeconomic policy.

• Fifth, authorize the president to negotiate new trade and investment agreements to reduce barriers. Congress would vote these up or down on a “no amendments” basis, within the life of the Congress (if submitted during its first session). In other words, new authorizing legislation should call for enabling legislation on a “slow track,” not a “fast track.”

• Sixth, the authorizing legislation should give the president authority to pursue trade and investment negotiations in various forums—WTO, APEC, FTAA, Pacific-5—after giving advance notice, plus a list of specific objectives, to Congress. (After receiving notice, each house of Congress should have a 60-day window to disapprove the launch of negotiations—a variant of the “narrow track” idea floated by Representative Phil English.) The president should be permitted, but not required, to seek agreement on plurilateral or multilateral measures (in the ILO and the GEO as well as in trade organizations) that would reinforce the labor and environmental provisions already adopted by the United States (as outlined above). Broad presidential authority would enhance America's ability to achieve its goals—since the president would be tied neither to a single forum nor to unattainable objectives.