Raising the barricades
Sep 18th 2003
From The Economist print edition
If the global economy falters,free trade will suffer
“I'M MAD as hell,” roared the man on stage.,Mad as hell about what is happening to the
manufacturing sector in America.”“This is a trade war with China,” shouted his colleague,“and
it's time to fight that war head on.”
The audience cheered in approval,Patriotic songs played in the background,interspersed with
extracts from George Bush's address to the nation after September 11th,Banners waved,
“Leave China in the sink,” said one.,Free trade is a myth,” said another,
This was August 1st,dubbed Manufacturing Awareness Day in Connecticut by a new anti-China
trade group called,Mad in USA”,In recent months,several such grassroots groups have sprung
up across America's manufacturing heartland,They represent mainly smaller businesses (big
firms are buying from China,or moving their manufacturing there),and promote a mixture of
protectionism and patriotism,On the website of,Save American Manufacturing”,a Wisconsin-
based group,a cartoon Uncle Sam urges you to,join the fight to stop the de-industrialisation of
the United States”,
As yet these groups are small,but China-bashing is a growing phenomenon,With 2.7m
manufacturing jobs—one in six—lost during the past three years,people are looking for a
scapegoat,Japan served in that capacity when its trade surplus with America was soaring in the
1980s; now it is China's turn,
Over the summer,complaints about China have become a big political issue in Washington,DC,
Congressional committees have held hearings about unfair competition from China,and
particularly its cheap currency,Mr Bush's rivals sense a winning issue,Joseph Lieberman,a
Democrat contender and supposed free-trader,has accused China of,economic attack”,Mr
Bush's economic team is worried that the China issue will escalate as the election nears,
particularly if the jobs outlook remains glum,
They are right to be concerned,The political backlash in America is likely to gain momentum as
China's role in the global economy becomes ever more prominent (see chart 13),This is not a
temporary blip that relies on a cheap currency,It is a structural shift based on economic
reform,huge reserves of cheap labour and a rapidly improving infrastructure,
China's integration promises vast benefits for the global
economy,but it comes at an awkward time,During the
1990s,protests against globalisation,though vocal,were
relatively ineffective,Political pressure for protection in
rich countries was subdued as economies boomed,Now,
with weak economic growth and higher unemployment,
the potential for protest is much greater,The loss of
blue-collar and,increasingly,white-collar jobs is more
keenly felt as firms outsource or move their factories
abroad,In poor countries,too,the,China threat” seems
more acute when export markets are weak,
And there are more China-related shocks on the way,At
the end of 2004,the Multifibre Arrangement,a quota
system that has governed,and distorted,the world
textile market for decades,is scheduled to expire,Apart
from agriculture,textiles and clothing are among the last
products where governments rather than markets
determine trade patterns,China,with its army of low-
paid workers,will be a big winner from the demise of
this regime,According to Mr Lardy,its share of the American clothing market,for instance,
could zoom up from 12% in 2002 to 30% once restrictions are lifted,
America's small but highly protectionist and politically sensitive textile industry will be hurt,and
will shout,But it is other developing countries that will feel serious strain,Textile production is
the first rung on the manufacturing ladder for many poor countries,The quota system has
guaranteed such countries access to America and other rich-country markets,Without quotas
many will lose out to China,Their protests will coincide with rising anti-China sentiment in
American manufacturing,creating an atmosphere in which protectionism could flourish,
America's government has plenty of tools to use,Under the terms of China's entry into the
WTO,a number of,safeguards” allow countries to slap tariffs on Chinese goods if they are
deemed to be causing,market disruption”,These temporary safeguards can be used for all
goods until 2014,For textiles there are additional,even more broadly defined safeguards that
apply until 2008,
So far the Bush administration has shown remarkable restraint in their use,Of a handful of
safeguard applications filed by American industries,two have reached the White House,one by
American producers of pedestal actuators (devices used in,eg,electric wheelchairs) and
another by American producers of wire coat hangers,Both were turned down,
One reason for the restraint is a desire to maintain cordial relations with China,not least for
geopolitical reasons,Since September 11th the Bush team has courted China as an ally in the
war against terrorism,Its help is particularly crucial in dealing with North Korea,But as the
election looms,domestic political considerations will play an increasing part,The Bush team has
jettisoned its free-trade instincts in the pursuit of votes before,and may well do so again in
2004,Many trade-watchers in Washington fear the introduction of a mass of safeguards and
anti-dumping tariffs,and a rapidly souring economic relationship with China,especially if there
is no movement on the yuan,
Nor is China the only area where trade spats are likely to intensify,The transatlantic trade
relationship,too,will see more disputes,particularly if the euro rises,An appreciating euro will
put European industry on the defensive,though that defensiveness is unlikely to translate into
a flurry of anti-dumping and safeguard actions,Europe's trading relations are handled at the
level of the European Union,not individual countries,which makes Europe's trade policy less
litigious than America's,The hurdles that a European firm must clear to persuade the European
Commission to press an anti-dumping case are much higher than those faced by an American
firm,
That does not mean Europeans are less protectionist; simply that the tactics are different,
There may be political pressure in Europe to enforce rulings the WTO has already made against
America,notably in the case about America's foreign-sales corporation tax,a tax break given to
American exporters,The WTO has ruled that the American tax break was an illegal export
subsidy and given the Europeans permission to levy up to $4 billion in retaliatory tariffs,So far
they have held off,waiting for America's Congress to rewrite the offending parts of the tax
code,But it is far from clear that such a change will actually be passed,The chances are that
the dispute will rumble on,and pressure in Europe for retaliatory tariffs may rise,
Americans,for their part,increasingly view Europe's regulatory requirements—ostensibly
designed to protect consumers or the environment—as a form of protectionism through the
back door,One example is the continuing row over genetically modified crops,America has
threatened to appeal to the WTO over the moratorium the Europeans have imposed on
approving GM crops,American producers reckon that even assuming the moratorium is lifted,
Europe's new labelling requirements for GM products are too onerous and protectionist,
A potentially even bigger fight looms over Europe's proposed regulations on chemicals,which
require manufacturers and users of chemicals to give extensive information on the health and
environmental effects of all their products,Here,too,Americans smell European protectionism,
After Cancun
Set beside the huge importance of the transatlantic trade relationship,each of these issues is
an irritant rather than a threat,There is little risk that transatlantic trade will be engulfed by a
wave of protectionism,even if the dollar plummets,But at a time when economies are already
fragile,such trade spats add unwelcome political tensions,More important,after the collapse of
last week's WTO ministerial talks in Cancun,they make it even less likely that the Doha round
of global trade talks can be revived,
The Doha round,launched soon after the September 11th attacks,has ambitious goals,geared
particularly to helping poor countries,Dubbed a development round,it aims to free up farm
trade,long the sacred cow of global protectionism; slash remaining tariffs on industrial goods;
and liberalise trade in services,The potential benefits for the global economy,and especially for
poor countries,would be considerable,According to the World Bank,a successful Doha round
could raise poor countries' income by $350 billion a year and lift 144m more people out of
poverty by 2015,
These gains are now in serious jeopardy,Last week's ministerial summit in Cancun—which was
supposed to mark the mid-point of the round—collapsed in disarray on September 14th,with
rich and poor countries unable to agree about the scope and ambition of the Doha round,Poor
countries,particularly African ones,refused to extend the negotiations into new areas,and
accused the rich countries of refusing to make serious efforts to dismantle their egregious farm
subsidies,Negotiations are to continue in Geneva,but the official deadline for finishing the
talks—December 31st 2004—now looks certain to be missed,
At first sight,that should not matter too much,Experience shows that trade rounds always drag
on much longer than planned,Doha's predecessor,the Uruguay round,took eight years to
complete,rather than the three originally scheduled,But this time is different,The WTO,an
organisation already short on credibility,has been dealt a body blow,Moreover,the
environment in which the talks take place is likely to become increasingly hostile to freer trade,
Europeans,under pressure from an appreciating euro,will find it harder to sell more farm
reform at home,Poor countries,worried about China,will become even more leery about
lowering their own barriers,America,with its growing trade deficit,will find it ever harder to
argue for free trade,And the president's fast-track negotiating authority—under which
Congress can approve but not alter trade agreements—runs out in 2007,If the mood in
Congress turns against trade liberalisation,the authority may not be renewed,
These risks are not lost on Mr Bush's trade team,They are one reason why Bob Zoellick,
America's top trade man,is a strong proponent of,competitive liberalisation”,America is
simultaneously negotiating global,regional and bilateral trade deals because the momentum
has to be kept going,Engaging Congress in new trade deals,he says,stems the slippage
towards protectionism,
Underlining his point,President Bush has just signed free-trade agreements with Chile and
Singapore,In the past year,the Bush team has initiated bilateral trade deals with all the
Central American countries and five countries in southern Africa,as well as Morocco and
Australia,It has also promised to start trade talks with Bahrain and the Dominican Republic,
More are likely to follow,After the failure of the Cancun talks,Mr Zoellick said that America
would now push on the bilateral and regional route,
Bilateral trade deals,particularly with small countries,are much easier to get through Congress
than multilateral ones,But success at bilateral trade deals coupled with a lack of progress on
the Doha round would gradually create a different kind of global integration,From an economic
perspective,a spaghetti bowl of bilateral trade agreements is much less desirable than progress
towards multilateral free trade,Moreover,America's choice of bilateral free-trade partners so
far suggests politics plays as much of a role as economics in defining the administration's
agenda,
Already free-traders argue that America is interested more in economic,coalitions of the
willing” than in global free trade,Jagdish Bhagwati,an economist at Columbia University and a
vocal free-trader,says America's behaviour is that of a selfish hegemon,The country's appetite
for bilateral deals,he claims,is undermining the global trading system,That is unfair,because
the Bush team has worked harder than many others to make progress on the Doha round,
Certainly the Americans share some of the blame for the collapse at Cancun,Their
unwillingness to offer poor African countries more concessions on cotton was particularly
unhelpful,But poor countries' intransigence was just as much of a problem,
Whoever bears the responsibility,though,bilateral trade deals are no substitute for progress
towards multilateral free trade,On current trends,depressingly,it seems that the global trade
system is heading for second-best,
Copyright? 2004 The Economist Newspaper and The Economist Group,All rights reserved,
