Six months ago, the prospects for freer global trade seemed a lone bright spot in a dark world. Two months after the terrorist attacks on September 11th, 142 countries agreed to launch a new round of multilateral trade negotiations at Doha, in Qatar. A month later, China, the world's most populous country, joined the World Trade Organisation and with it the multilateral trading system.
Even better was the fact that the United States and the European Union, the world's biggest traders, so often at loggerheads in the past, worked in close alliance at Doha. The two sides' trade supremos, America's Robert Zoellick and Europe's Pascal Lamy, were longstanding personal friends and fellow long-distance runners. Several simmering bilateral trade disputes, from bananas to Irish music, seemed to have been largely diffused. Transatlantic tensions, in short, appeared to have given way to a joint leadership that was at last pushing for freer trade.
How quickly things change. The world economy is looking unexpectedly brighter this year; but the transatlantic trade relationship has turned disturbingly dark. In March President George Bush, supposedly an advocate of free trade, slapped ?safeguard? tariffs of up to 30% on foreign steel, in America's most protectionist single action for two decades. He has also accepted several other protectionist measures, in an attempt to persuade Congress to grant him trade negotiating authority.
Worst of all, Mr Bush is now poised to sign a farm bill laden with new subsidies for farmers. This matters hugely, because liberalisation of trade in agricultural products is central to the Doha agenda. And the Europeans, notoriously protective of their own Common Agricultural Policy, are likely to grab any excuse to avoid reforms that might hurt their politically powerful farmers.
The sad story begins with steel. The European Union, led by Mr Lamy, is heading a counter-offensive against American tariffs. Along with Japan, China and others, the EU has formally complained to the WTO. It is also demanding compensation from America for the cost of the steel tariffs. If the Bush administration does not offer such compensation by June 18th, the Europeans intend to slap tariffs on up to $336m-worth of American products. (The global trade rules, they say, allow this. America, furious, says they do not.) The Japanese, too, are threatening imminent tariffs, if only on a token $5m-worth of goods.
To make their annoyance even clearer, the Europeans have chosen to hit Mr Bush where it hurts most?in electorally sensitive districts. Tariffs may be imposed on a motley list of products from textiles (wounding North Carolina) to Tropicana orange juice (hurting Florida). Worse still, the Europeans have reacted with some protection of their own: days after Mr Bush's decision, they introduced their own safeguard tariffs to stop any steel diverted from America from flooding Western Europe's markets.
The Bush administration is incensed by both these moves. It accuses the Europeans of undermining the multilateral WTO-based system. The Americans are adamant that their steel tariffs are fully consistent with global trade rules. It is Europe, Bush officials insist, that is acting as ?judge and jury? and in flagrant disregard of them. The administration has also made veiled threats that, if the EU actually introduces any tariffs, it will impose its own tariffs against Europe's own newly-minted safeguard protection.
Both sides take great pains to insist that their actions are consistent with global rules. Indeed they often argue, perversely, that they are imposing tariffs only in order to help free trade. Yet such double-think cannot hide the fact that they are dancing on the edge of a slippery slope leading to tit-for-tat protection.
The EU/US summit held in Washington last week made little progress towards solving any of these arguments. Mr Bush spoke lamely about finding the same spirit of co-operation in trade policy as in foreign policy. Trade officials on both sides toned down their rhetoric, but there was no breakthrough.
Several weeks remain before the EU deadline of June 18th. Both sides are keen to avoid outright confrontation if they can. Within Europe, several governments are queasy about Mr Lamy's tough stance. Sweden and Germany have publicly voiced doubts about the legality and advisability of immediate retaliatory tariffs. In private, the British are also worried. But Mr Lamy needs only a qualified majority of member states. This week all 15 governments supported the submission to the WTO of the list of proposed tariffs. Unless the Americans make substantial progress towards offering compensation of their own, the EU's tariffs are likely to go ahead.
Either way, the atmosphere of trust that had begun to be built up between Mr Lamy and Mr Zoellick, which played such a big role in Doha, has been strained, and at a time when the growth of world trade has faltered because of the slowdown in the world economy (see chart 1). Even if retaliation for steel tariffs is avoided, last year's transatlantic rapprochement is over.
How much does this matter? Optimists point out that, for the past four decades, the relationship between the world's two biggest traders has always been marred by disputes. They have not impinged all that much, it is claimed, on progress towards freer global trade. Like an old married couple, the Americans and Europeans bicker about relatively minor issues but make sure that their broader trade relationship does not break down.
It is true even today that Messrs Lamy and Zoellick work together professionally and effectively. Unlike their predecessors, Leon Brittan and Charlene Barshefsky, the two men have not compounded the disputes with personal animosity. There are also signs that Washington is looking for a face-saving compromise that offers the Europeans just enough, perhaps by excluding specific European steel products from the tariffs, to stop them from retaliating.
Yet there are three reasons why the steel row could prove more consequential, and more dangerous, than previous disputes. First, it is by no means the only one in town. Second, the steel dispute has exposed grave weaknesses in the young and fragile system for multilateral dispute settlement. And third, there is plenty of worrying evidence, going far beyond steel, that America's commitment to free trade under the Bush administration shrivels when it runs into political pressure at home.
On June 17th, the day before the Europeans may impose retaliatory tariffs on steel, an arbitration panel at the WTO is due to announce how much retaliation the Europeans may levy against the United States on a separate issue: the foreign sales corporation-tax subsidy. Under American tax law, American firms get a tax break on their foreign sales, something the Europeans claim is an illegal export subsidy. The WTO, arbiter of global trade rules, agrees with Europe, and has ordered America to come into line. Until it does, the Europeans have the right to impose sanctions (ie, tariffs) commensurate with the impact of this illegal subsidy.
The level of permitted retaliation will be somewhere between $1 billion and $4 billion. That is far more than any previous WTO-authorised retaliation. (America's tariffs against Europe over bananas were worth a mere $191m.) Europe does not have to impose tariffs immediately?indeed, European businesses would be horrified at the prospect of any such thing?but it will be free to do so at any time and in any amount up to the limit permitted after June 17th. In short, Europe has an extra WTO-approved weapon to brandish.
To his credit, Mr Lamy has made clear that he has no intention of linking the tax subsidy and the steel dispute. He wants to see concrete evidence that America intends to revise its tax laws: at minimum, new tax legislation introduced into Congress this year. Mr Bush last week assured the Europeans that America was committed to falling into line with the WTO. Unfortunately, Congress, which must write and approve America's tax laws, may be less keen. Many lawmakers are already furious at the notion that the WTO has any role in domestic tax changes. Their willingness to comply in an atmosphere of transatlantic trade fights is likely to be minimal.
Indeed, there may be further escalation. America itself could challenge the legality of European tax systems in the WTO. Several congressmen have already muttered that, if you look closely enough, European countries may have tax provisions that are illegal under WTO rules.
America could also take the Europeans to task in the WTO over some separate issue where Europe is at fault: for instance, its attitude towards genetically modified organisms (GMOs). The European Union has imposed a moratorium on any new GMOs in Europe. This moratorium almost certainly breaks WTO rules. America has so far held off litigating, in part because such a strategy is politically risky: it would go down extremely badly in Europe and could whip up anti-GMO feeling among consumers in the United States. Nonetheless, the GMO weapon remains in the American arsenal.
Any escalation in this trade sniping could undermine the political legitimacy of the WTO.
Although it has the trappings of a trade court, the WTO's dispute-settlement mechanism cannot solve deep political differences?from the tax code to consumer health and safety?between countries. The steel dispute is already testing it to its limit. There is a sharp difference between the way trade agreements are first made, in sometimes mutually contradictory compromises between politicians, and the way they are interpreted afterwards by sharp-eyed lawyers. The safeguard agreement, for example, in the opinion of one trade lawyer, is like ?a piece of Swiss cheese?. Both America and the EU claim to have kept to the letter of multilateral trade rules, while both sides have undermined their spirit. If the disputes accumulate, the WTO risks being clogged up as hundreds of inconsistencies and loopholes in numerous agreements are taken to litigation. At worst, this could undermine the WTO's entire dispute-settlement system. The WTO, after all, is still young, an institution in need of nurturing rather than smothering with work.
The agreement at Doha set the agenda for a new round of trade negotiations. These talks, now under way in Geneva, are due to be finished by January 1st 2005. Their goals are ambitious and aimed particularly at helping poor countries.
Trade barriers in agriculture and textiles, two areas where rich countries have long been most protectionist, are to be brought down. Anti-dumping rules, another oft-misused form of protection, are to be revised. The Doha agenda is based on a gamble: that poor countries, who felt they were given a raw deal by the previous Uruguay round of trade negotiations that ended in 1994, will now feel that rich countries are prepared to open their markets. If poor countries are not convinced of this, the Doha round will fail.
That is the biggest potential consequence of the latest transatlantic trade spats. Across the globe, countries have seen Mr Bush put politics above principle. This has had little direct impact in Geneva so far, but that is only because the Doha negotiations are still mired in procedural difficulties rather than substance. Worries are already being voiced about America's commitment to multilateralism and to free trade in general.
It has not escaped other WTO members' notice, for example, that the Bush administration has exempted America's free-trade partners, notably Mexico and Canada, from the steel tariffs. To many, this decision (which the Europeans claim is against the WTO's rules) sends a dangerous message: sign up for bilateral deals with the world's biggest trader, and you will avoid its protectionism. That message is particularly pernicious. A web of bilateral trade deals offers far less global liberalisation than multilateralism, but it may reduce the political impetus to push for the tougher global trade agreements.
To many outsiders, America's overall commitment to free trade seems equally flimsy. On top of slapping tariffs on Canadian lumber, it has acquiesced in congressional efforts to backtrack on textile-trade liberalisation that was already agreed with Caribbean countries. And it has agreed to congressional demands to make future liberalisation harder in sensitive agricultural sectors, such as peanuts and citrus fruit.
Most such concessions have been made in the battle to win Trade Promotion Authority (TPA), the negotiating power which the Bush administration needs to conclude the Doha round. TPA was passed by the House by one vote in December. It is now bogged down in the Senate in a fight over health care for displaced workers. The Democratic leadership in the Senate has complained that the White House is not putting enough effort into getting TPA through. It is far from certain to pass.
Many Washington free-traders argue that all such protectionist measures have been a price worth paying for the greater good of winning TPA. In politics, they argue, you often have to take one step back to move two paces forward. Unfortunately, America seems now to be taking at least two steps back. The strongest evidence, besides steel, is the egregious farm bill that has just been agreed to by the House and the Senate.
According to the official numbers, the farm bill will increase government spending on agriculture by 80%?an additional $82 billion over ten years.
Those estimates, according to most observers, are likely to be extremely conservative. The bill extends, or re-introduces, subsidies on a host of farm products from honey to chickpeas. For America's biggest crops, soyabeans, corn and wheat, it invents new payments that are related to prices and production and hence are highly trade-distorting?exactly the opposite of what the Doha round is meant to be about.
In the Uruguay round, pushed by America, countries agreed to cut and set ceilings on their trade-distorting agricultural subsidies.
America's ceiling is currently $19.1 billion. The European Union, which has long been a far greater villain than America in agricultural protection, has a ceiling of euro69 billion. In 1996, Congress passed the Freedom to Farm Act, which aimed to phase out subsidies for most agricultural products. America's trade-distorting support was already well below its permitted ceiling and had seemed likely to fall further.
Unfortunately, as prices fell in the late 1990s, farmers howled and received a series of emergency payments that pushed up total support. The new farm bill entrenches this support and undoes all the other progress made in 1996. Trade-distorting subsidies may rise so much, Europeans think, that America will break its Uruguay-round commitments. Congressional staffers deny this, claiming they have taken great care to stay within the WTO's limits. If these limits are breached all the same, the farm bill also contains a clause that allows the agriculture secretary, in theory, to cut subsidies.
In the meantime Europe's Common Agricultural Policy has been moving away from price- and production-based subsidies towards direct payments to farmers that have far less impact on trade. A decade ago, over 90% of Europe's farm subsidies were highly trade-distorting. But in 2000 the EU spent only around 20% of its total support for farmers in this way. It is no small irony that Europe's top man on agriculture has, with some justification, accused America of ?flunking? farm reform.
To be fair, the Bush administration was not responsible for the farm bill. Ann Veneman, Mr Bush's agriculture secretary, suggested a more sensible approach to farm support, unlinking subsidies from production and focusing more on the environment. She was ignored by Congress. The political clout of farm states in an election year led to this gross subsidy-fest, with lawmakers falling over themselves to dole out cash to farmers.
Unfortunately, the same political considerations have made impossible any principled objections from Mr Bush. He has said he will sign the bill.
The signal to the rest of the world is unambiguous. American officials in Geneva may be talking about freer trade in agriculture, but Washington politicians are sending American farmers exactly the opposite message.
Add together steel, the TPA compromises and agriculture, and America's commitment to freer trade looks laughable. Its trading partners, poor ones in particular, could be forgiven for doubting Washington's ability to stand up to domestic interests. This doubt threatens the Doha round.
Europeans will be reluctant to push politically tough liberalisation of their own agricultural policy if they see America doing the reverse. Poor countries will be even more suspicious of the multilateral system if they reckon America is unwilling to deliver its part of the bargain. Such backsliding may not cause an immediate world economic crisis. But in the long run it could put globalisation itself at risk.
Author: Amit Guptor
