Participants' Reports
Birth of a new regime?
US trade policy in the context of the new national security doctrine
by Bernhard Speyer
For some time now, scepticism about the benefits and the desirability of a rules-based multilateral system has been growing in the US. It is often assumed that under the current Administration scepticism has turned into an outright disregard for this system leading to a policy of unilateralism, based on the unique position of the US as the world's pre-eminent military and economic power. This assumption, of course, is disputed; nonetheless, this paper will take this as the starting point of analysis.
Along with other policy areas, it could have been expected that the idea of unilateralism would spill over into the field of trade policy, too. Indeed, concerns that this might happen were clearly visible at the IMF / Worldbank spring meeting in April 2003. As Jeff Garten observed in an article around the time: "For the Bush administration, trade and finance could well come to be seen less as ways to create wealth around the world than as instruments of a more audacious foreign policy."
At first glance, these concerns do not seem entirely far-fetched: After concluding the FTAs with Chile and Singapore, the US has now plans for such agreements with Australia, Thailand, Morocco and Bahrain. In addition, there are prospective regional trade agreements with Central America, the members of the South African Customs Union (SACU) and the FTAA.
Many of these agreements, however, had their origins well before the current Administration assumed office: the FTAA, for instance, goes back to the Bush (sen.) administration, negotiations with Chile started in 1992. Hence, there arguably is little evidence for a fundamental policy change taking place – at least for now. As policy shifts and a distancing from the multilateral system built in the post-war era under US leadership has clearly been evident in other policy areas, this raises the question of why such a change did not take place in trade policy.
There are four possible candidates to explain this phenomenon: (1) A lack of instruments to pursue a more unilateralist policy, (2) the time dimension, (3) the strength of the existing multilateral system (GATT / WTO), or (4) acceptance by the Administration of the fact that US security interest (which can safely be regarded as the prime policy objective of the Bush Jr. Administration) would best be served by the maintenance, if not the extension of the multilateral system.
What might motivate a shift in policy
The hypothesis that trade policy could have become the subject of a strategic policy shift rests on the assumption that trade policy principally is conceivable as an instrument to support the overriding policy objective of the war against terrorism. As such, a strategic shift in trade policy would have made sense if it could either be used to (a) punish countries that refused resp. were unwilling to join the alliance against terrorism; (b) to reward countries which joined the coalition of the willing, or (c) to act as policy tool in the war against terrorism.
Seen more broadly, a possible shift in trade policy could also be perceived in the context of the new National Security Doctrine. (Note that I am hypothesizing here, not stating that this were official US policy!) Trade liberalisation enables other countries to grow more quickly. Strictly speaking and brought to a logical conclusion, this stands in contrast to the stated aim of avoiding a situation in which any country would come into the position to be able to challenge the US. Mounting such a challenge requires a sufficient economic power base, of course – and, hence, it cannot be in the interest of the US to provide countries, which are potential adversaries, with the opportunity to grow economically. It is therefore no surprise that the NSD explicitly states: "We want our allies [emphasis added, BS] to have strong economies for their own sake, for the sake of the global economy and for the sake of global security." Playing simultaneously, on the one hand, the benign hegemon for the global trading system and, on the other hand, the empire clearly is not compatible in the long term.
No lack of instruments: the lure of bilateralism
If the US refrained from altering the strategic concept of trade policy it certainly was not for lack of instruments. Trade policy offers ample opportunity and mechanisms for discriminating between trading partners. Most obviously, bilateral trade deals – typically free trade agreements (FTA) or preferential trade agreements – can be used to selectively award benefits to trading partners. The – from a economic perspective – greatest downside of FTAs, viz. a discrimination of countries not partner to the FTA, is, from a political perspective, its greatest advantage.
Multilateral trade policy, in contrast, if conducted within the GATT / WTO framework is based on the non-discrimination principle, i.e. concessions offered to any one trading partner are extended, on an equal basis to all other parties to the agreement. While being optimal from a social welfare perspective, non-discrimination entails the problem of free-riding, i.e. passing on benefits stemming from trade liberation, even to those countries which have not responded with trade liberalisation themselves.
Consequently, bilateral trade deals are, in principle, an instrument which can be used to selectively reward some countries and to withhold those benefits from others, which, in the eyes of the US, are undeserving to receive them. Avoiding the multilateral system ensures that market access can be denied to countries which are members of WTO – and thus would benefit, due to the non-discrimination principle, from any market access offered by the US in a multilateral trade round. The reward, in turn, consists in granting, on a discriminatory basis, preferential access to the US as an export market. Given the fact that US trade barriers are already relatively low, the potential benefits are admittedly fairly limited – though there are substantial tariff peaks in some products categories in the US, too. However, as is evidenced by the motivation of those countries that have concluded FTAs with the US – in particular Canada and Mexico – more important than lower tariff barriers is the expectation that concluding an FTA reduces the chances of becoming the target of US trade policy action, especially anti-dumping.
Unlike the EU, which has always been a champion of discriminating trade agreements, the US has been a late converter to such discriminatory deals. It has been argued that for Europe, which lacks a common foreign policy, preferential trade deals were a kind of surrogate foreign policy. Quite in contrast, the US, while not entirely innocent as regards mixing trade and foreign policy either, traditionally was the guardian of the GATT / WTO system having been one of the few GATT members which did not have an FTA until the early 1980s.
Things changed, when, in the first Reagan Administration, the US started to use bilateral trade deals as a threat to spur other countries, notably the EU, into launching a new multilateral trade round. The FTAs with Canada and, less so, Mexico, can be seen in this light. Noticeably, though, going the bilateral route was expressively motivated as part of a multi-faceted trade policy strategy. Put differently, it broadened the options used in trade policy, but it did not change trade policy for non-trade reasons. In other words, the strategic dimension of bilateralism, in those days, was largely one of trade politics – trying to use bilateral deals to coax third countries into multilateral negotiations.
Nonetheless, some elements of other policy dimensions was inherent in US bilateral trade policy even then: The US-Mexico FTA clearly had a security dimension to it (immigration, stability at the southern border) as much as the US-Israel and the US-Jordan FTAs had a diplomatic dimension. The FTA with Chile, which was finally concluded in 2003, falls somewhere between those categories: On the one hand, it was clearly designed to support Chile's fledgling democracy, on the other it had a trade politics element to it with an eye to coax Brazil and Argentina into talks on the FTAA.
There is a way – is there a will?
The analysis above shows that the instruments for a discriminatory trade policy clearly are available. Given the abovementioned examples of previous bilateral trade deals which had a political dimension to them, it can safely be concluded that the US would have used the instrument, had the Bush Administration concluded it could usefully be employed as part of the war against terrorism. The question then is: Did the Administration do so?
The evidence at this point is inconclusive:
- There are two obvious example of trade policy being used as a political statement in this sense: the April 2002 offer to Morocco and the May 2003 offer to Bahrain to negotiate an FTA. For the US, such an FTA had very little economic rationale to it, but was a post-9-11 political demonstration designed to show that the US was willing to strike trade deals with Muslim countries, too. The Bahrain agreement was explicitly couched as a first step in the President's strategy for advancing economic reform in the Middle East.
- The announcement to start an FTA with Australia (November 2002) can be seen as a reward for Australia's support on the Iraq issue (it certainly seems to be seen like this in Australia), especially considering that New Zealand, who has its own FTA with Australia and was critical of the US policy in the Middle East was not invited to join.
- On the other hand there is no obvious political message in the proposed FTA with Thailand (announced in November 2003).
- Finally, there is even a counter-example in the shape of the conclusion of the Chile FTA: Here, the US resisted the temptation to punish Chile for not supporting the war in Iraq in the UN Security Council. However, it must be said that the signing of the deal was delayed; more importantly, it might well be argued that the US-Chilean FTA was too advanced to be called off.
Time dimension: Is it just too early to tell?
A theoretically possible explanation for the fact that not more bilateral trade deals are being pursued, which could be explained by the change in the security doctrine, is the time dimension. This explanation actually comes in different forms:
- First, it might be conjectured that trade policy somehow was forgotten so far in the strategic shift of US security policy. Given the comprehensive and determined strategic orientation of US policy towards the objective of homeland security, this must be regarded as very unlikely and can safely be dismissed.
- Second, it can be argued that launching, let alone implementing a comprehensive policy of bilateral and regional trade deals requires a sufficient lead-time and is time- and resource-consuming. It is certainly true that the USTR's resources were and are already stretched by the ongoing Doha Round negotiations as well as with the conclusion of the Chilean FTA and the other FTAs under negotiations. Yet, had the Bush Administration decided to use trade policy to make a policy statement, such a policy shift would at least have been declared, if not necessarily executed at the same time.
- Third, the timing of a strategic shift in trade policy-making would have been awkward had it followed closely on the heels of the launch of the Doha Round in December 2001. The Doha ministerial took place under the impression of September 11 and the decision to launch the Doha Round was considered by all participants – including the US – to be a clear political signal that the international community was standing together. Consequently, the potential political costs which would have been created by openly moving away from the multilateral WTO track so shortly after Doha, would have been immensely high even for a determinant unilateralist government.
Strength of the multilateral system
Let us now turn to the argument that discriminatory trade deals are discouraged by the strength of the multilateral trading system. This requires, first and foremost, a clarification of what is meant by "strength". Certainly, strength does not refer to the systems ability to prevent the emergence of bilateral and regional trade deals which have, in fact, proliferated in recent years. Since 1990 roughly ten preferential trade agreements have been concluded every year, with 170 of them being in force at the moment and a further 70 under negotiation. While Art 24 of the WTO agreement (as GATT did) sets strict requirements to digressions from the principle of non-discrimination, neither GATT nor WTO have managed to enforce those rules. If ever there was hope that this would happen one day, this hope must be considered gone, given that, by now, all WTO members have committed the original sin of concluding discriminatory trade deals, including erstwhile teetotallers such as Japan and the US.
Rather, "strength" refers to the two following interconnected questions:
(1) Can, in the eyes of the US, bilateral trade deals be considered a serious alternative to the WTO system,
(2) to what extent is the US able to shape the world trading system on its own?
For the US, bilateral trade deals are a poor substitute for progress in the multilateral trading system. First, a reasonable and substantial size of export opportunities can only be realised in the multilateral framework: Bilateral trade deals with mostly small countries usually do not generate an additional trading volume which would justify the costs of negotiating these deals and the political costs of getting them through Congress.
Secondly, the US is not in the position to shape the world trading system on its own, but can only do so in collaboration with the other large trading nations. Regime-building, such as disciplines for services trade, intellectual property rights and standards, makes only sense economically on a multilateral basis. Likewise, it is only in the multilateral setting that the US will gain market opening in those sectors of particular interest (services, agriculture) and in those markets that are economically relevant.
The value of the multilateral trading system
Eschewing bilateral trade deals may also reflect the insight that US security interests are actually served best by extending the benefits of the multilateral trading system. This view would be based on the assumption that free trade increases prosperity, which in turn will reduce the potential for conflict and, hence, make the world, and, by extension, the US a safer place. In addition, binding in countries into the disciplines of a rules-based system, reduces the extent of power politics, gives countries a stake in the system and fosters constructive engagement. This, of course, repeats the foundations of the post-World War II Bretton Woods Systems, the ideas of liberal internationalism.
The National Security Doctrine makes this link, when it welcomes the US' "responsibility to lead in th[e] great mission" to "further freedom's triumph over all [its] foes" and then declares that the concept of "free trade" arose as a moral principle even before it became a pillar of economics.
Contrary to what many in the Administration may belief, international institutions like the WTO also help to make US leadership more acceptable to other countries. The fact that membership in international organisation does constrain America's room for manoeuvre is superficially right. At the same time, however, the submission of the US to internationally binding rules increases the credibility of the US. As Charles Kupchan pointed out: "By obliging Washington to adhere to common rules, [international institutions] increase confidence in the purpose and predictability of US power."
Is the multilateral trading system safe then? Actually, no!
The collapse of the Cancún ministerial showed that dangers to the multilateral trading system could stem as much from other sources as from US unilateralism. The first stumbling block proved to be the demand of the EU to establish negotiations on the “Singapore issues” (investment, competition, transparency in government procurement, informal trade barriers), which was unacceptable to developing countries. The second key issue was the demand of the Group of 21 developing countries led by Brazil for the termination of agricultural export subsidies and for big cuts in domestic, not trade-distorting farm subsidies by the EU and the US. Third, there was strong disagreement on the ways of reducing barriers to merchandise trade, with a large number of emerging market countries showing no readiness to liberalise.
While, thus, the failure at Cancún had many causes, most observers would agree that intransigence by the Group of 21 was key. This is new insofar, as previously it had been conflicts of interest between industrial countries – usually on agriculture, which had blocked progress. Now, the new-found assertiveness of some Emerging Market WTO members – foremost China, India, Brazil and South Africa – poses the greatest threat to progress on the Doha Round. These countries still have to learn that with greater weight in the global economy comes greater responsibility for maintaining the system. The triumph they celebrated in Cancún may therefore be short-lived. It is therefore not entirely surprising that the first cracks appear in the united front of the G21 (though US pressure certainly played a part here, too.)
As a consequence of the failure in Cancún, bilateralism and regionalism are creeping into the system for another reason than a US policy shift motivated by security concerns. After the failure of the Cancún ministerial, EU trade commissioner, Pascal Lamy, openly mused that the collapse of trade talks could lead the EU to re-examine its commitment to multilateral trade negotiations. Likewise, the US announced that the failure at Cancún would lead the country to pursue bilateral deals with renewed vigour and that the US would work with the can-do countries, leaving the won't do countries on the sidelines.
For any progress to occur in the multilateral setting emerging markets would have to scale down their demands regarding farm trade and show flexibility on industrial tariff reductions while the EU would have to scrap most of its rule-making ambitions. There is a need for a broker between those two stances – and the US would in principle be a candidate for this role, but it is unclear whether it is willing to do so.
In the absence of more willingness of all WTO members to rescue the world trading system, regional and sectoral trade agreements will become more fashionable again. They may be the only forum available to achieve progress on rule-making issues given the heterogeneity of WTO membership and EM unwillingness to move. The necessary political guidance for substantial multilateral liberalisation has not yet been forthcoming, despite substantial flexibility on the part of the EU and the US. The Doha Development Agenda may have raised expectations to a level the WTO cannot comfortably satisfy, short of political redistribution of producer rents from the “North” to the “South”. A return to more accommodative diplomacy on all sides could happen once the political and economic costs of the failure to liberalise start to look high and higher, but the odds are not high. The run-up to the next Ministerial in 2004 might therefore not only be the next, but also the last chance for the WTO.
Conclusion
The world trading system is under threat – yet again, one hastens to add. There certainly have been dangers to the multilateral system before, but there are two key differences this time: First, it is unclear, whether the erstwhile guardian and founder of the system, the US, will subordinate its trade policy under the new security doctrine, effectively turning trade policy into an instrument of foreign and security policy. While the evidence is mixed, the danger is certainly real. Second, the multilateral system must find a way to incorporate stronger and more assertive emerging markets, which evidently have not yet found a way to play a constructive role in the WTO system, as became apparent at Cancún.
The combination of these two developments is a dangerous mixture. Without transatlantic co-operation the maintenance of the multilateral trade system, let alone its the further development will not be possible. More disconcertingly: Even unity of the transatlantic alliance may no longer be enough. Thus, much as security policy is in need of a new order reflecting the radically different geopolitical landscape, which developed after 9-11-1989 and 9-11-2001, so is the global trading system.