Fundamentals Of U.s. Foreign Trade Policy

Economics, Politics, Laws, And Issues

Stephen D. Cohen

• Publisher: Taylor & Francis
• Year: 2019
• Print ISBN: 9780367007409
• eBook ISBN: 9780429719967
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

This unique text integrates for the first time the three critical aspects of U.S. foreign trade policy formulation and implementation: economics, politics, and laws. In a comprehensive and nonjudgmental manner, a political scientist, an economist, and a legal scholar combine efforts to present a well-rounded view of the nature and impact of trade p

Part One
Overview

1 The Content and Context of Trade Policy

Foreign trade can be described as existing on two different levels. Outwardly, it consists of an economic transaction in which goods and services are exchanged for money (or other goods) by persons or entities in two different countries. Inwardly, it is a political process in which difficult choices must be made among competing values, priorities, and interest groups. Whatever the level of analysis, foreign trade is important. The international exchange of goods and services has increased in value and volume to the point at which it has become a pivotal factor in both the conduct of international relations and national economic performance.

Foreign trade policy is a convergence point. To understand trade policy in the broadest sense, it should be viewed as the end product of an official process involving decisions that need to reconcile economic and political substance at the same time that they need to advance governments' domestic and foreign concerns. These decisions are seldom taken independently of numerous trade statutes and international agreements that play a critical role in determining the content of trade policy's substance and process. In the United States, the trade laws passed by Congress set guidelines and boundaries for the executive branch's implementation of policy. Although laws are often a factor influencing specific trade policy decisions, trade statutes themselves emerge as outgrowths of a larger process: They are the manifestation of a political interpretation of what good economic policy should be.

The foreign trade policy of the United States consists of an infinite number of pressure points and is constrained by domestic laws and international obligations. It is filled with inconsistencies and shortcomings that baffle and annoy casual observers. These negative traits can best be explained by understanding the multiple forces that form the guiding principles of and the implementation of day-to-day actions in U.S. trade policy. The objective of this book is to provide that understanding by means of a detailed explanation of what this policy is and why it takes the forms that it does.

The economics and politics of U.S. foreign trade policy are two distinct phenomena shaped and guided by different forces. They do not necessarily move toward the same goals for the same reasons. The disconnect between politics and economics is observable in the dramatic 1934 shift in U.S. policy priorities from a historical embrace of protectionism to a forceful pursuit of global trade liberalization. This policy about-face did not occur and continue because the scholarly output of economists succeeded in converting official Washington to the belief that a liberal trade policy was in the national interest. Rather, the change was sustained by emergence of a critical mass in the private sector's support for reducing U.S. trade barriers in return for enhanced opportunities to increase American exports.

In Hegelian terms, the economic thesis that a market-oriented global trading system was most compatible with U.S. economic interests grew increasingly dominant beginning in the mid-1930s. The political antithesis that politicians elected to national office should protect constituents from import competition suffered a relative decline. The result was a reorientation of the policy synthesis that continues through the present. The emphasis on escalating U.S. import barriers was abandoned. The new emphasis consists of an ongoing series of trade liberalization initiatives whose perceived economic virtues are partially constrained by legislated relief measures. The latter consist of relatively circumscribed, case-by-case provisions giving domestic interest groups the opportunity to petition for relief from alleged import-induced economic hardship or for the government's assistance in attacking foreign trade barriers.

Our study's integrating theme is that the task of formulating and conducting U.S. trade policy is an inherently difficult, inconsistent, and imprecise process. Trade policymaking involves both reconciliations and trade-offs among a variety of economic goals and political necessities. The executive and legislative branches of the government as well as the private sector usually must sort through numerous conflicting views in the effort to determine what constitutes "good policy."

U.S. trade policy exists on many planes of reality. The U.S. government (like its counterparts) professes to believe in free trade while increasing its trade barriers; it professes to believe in a global trade regime based on universal rules while negotiating exclusionary free trade agreements with other countries; and it professes to believe in export promotion while restricting exports to one country after another. There is method to the madness. The complexity and paradoxes of U.S. trade policy are due mainly to the existence of four principal factors, the first three of which are burdened by limited and often contradictory data:

1. the frequent conflict between economic logic and political necessity;
2. the conceptual disagreement among economists as to whether optimal trade policy is one that relies on free markets or one that incorporates repeated government intervention;
3. the intricate, ever-changing linkage between trade and other economic and political policy sectors, both domestic and foreign;
4. the diffusion of authority between the executive and legislative branches in formulating trade policy. Major limitations on presidential action are imposed by a voluminous, still-growing body of congressionally passed laws that affect all aspects of the conduct of U.S. trade relations.

In this chapter we review universal fundamentals of trade policy that influence its formulation and conduct, thereby establishing the rationale for the content of subsequent chapters. A concluding section deals with the unique characteristics of U.S. trade policy that differentiate it from worldwide concepts of trade policy.

A Narrow Definition of Trade Policy

Throughout history, trade policy—in a literal, narrow sense—has consisted of a constantly evolving series of official objectives, laws, and actions designed to influence the flow of imports and exports of goods and services in a manner different from what would otherwise occur in a free market. At any point in time, governments choose from among a wide spectrum of trade policy actions that fall between the two poles of total inaction and aggressive, comprehensive intervention. At one extreme, a government could adopt a completely free trade stance and consistently refuse to act for any reason to directly affect the flow of its exports and imports. Under this scenario, a country would totally avoid official import barriers and export controls or incentives. In addition, a country would dismiss the notion that the trade-restricting and -distorting policies maintained by its trading partners were on balance economically injurious to it. If a sovereign government ever chose this extreme course of policy action (none has), it would effectively have chosen to have no trade policy. At the other policy extreme, a government could essentially opt out of participating in the international economy by adopting pervasive, highly restrictive import barriers and by exporting little or nothing.

Defined in a narrow sense, trade policymaking in the United States (and in virtually every other country) is the act of determining how to find the optimal point along the policy continuum illustrated in Table 1.1. Calculations of the optimal trade-off between market orientation and interventionism must be made separately for imports and exports, the two core components of trade policy.

Import policy determines the relative openness of the home market to competition from foreign-produced goods and services. It does so mainly by judging where, at any given time, the most economically advantageous and politically comfortable location is on a spectrum that spans two poles:

TABLE 1.1 Trade Policy Spectrum

Intrusive Government Intervention	Moderate Government Intervention	Free Market Orientation
Extensive import protection; extensive export restraints; industrial policy supporting targeted industries	Ad hoc measures	Avoidance of import and export barriers; minimal governmental support of domestic industries

1. pursuit of "liberal" (or freer) trade based on an international division of labor. In this instance, market forces are emphasized; import barriers are reduced; all countries are encouraged to produce the goods that they can produce relatively efficiently and import those they cannot produce relatively cheaply; and the private sector is allowed to determine the amounts, kinds, and sources of foreign-made goods available to domestic consumers.
2. emphasis on "protectionist" measures. In this case, domestic production is given a maximum shield from fair foreign competition in order to retain existing production and jobs and in some cases to encourage the development of new industries. The desires to minimize hardships on domestic workers and companies or to support economic planning goals take preference over the alternative priorities of minimizing prices and maximizing consumption.

Erection of new import barriers under certain circumstances, however, can be in full conformity with internationally recognized trade standards. Retaliatory import duties imposed when exporters engage in the practice of recognized unfair foreign trade practices (described in this chapter) and injure domestic producers is considered legitimate self-defense, not protectionism.

Export policy has three basic dimensions: (1) use of governmental personnel and funds to promote foreign sales; (2) export controls that use domestic laws to restrict export of certain goods to unfriendly countries; and (3) export enhancement efforts through official pursuit of improved access to foreign markets. As with import policy, export policy for any given country at any given time is to be found on a continuum between a noninterventionist, free market approach and an aggressive, interventionist posture. The first approach allocates responsibility for export enhancement to private sector efforts and exchange rate realignments. The interventionist posture, in turn, can be tilted in one of two opposite directions. The first is an export-at-all-costs approach; in this instance, government officials adopt tunnel vision—to avoid being distracted by alternative strategies—and mount an extensive, expensive campaign to maximize overseas sales, presumably in an effort to achieve the largest possible trade surplus. A government tilted in the second direction is quick to embrace export restraints because of its willingness to subordinate the priority of export maximization to ethical and national security concerns. This approach condones the blockage of shipments abroad as the means of applying pressure on foreign governments to alter what are deemed to be their undesirable human rights, political, or military policies.

Trade policy also can be divided between proactive and reactive actions. The former are initiatives conceived to advance a country's perceived self-interests. For example, a trade policy decision to impose a new import barrier to enhance a favored domestic industry is proactive (but a possible violation of the theory and practice of liberal trade). A "passive" variant of proactive trade policy would be decisions not to act, for example rejecting pleas from a domestic industry for import protection. In other cases, trade decisions can be defined as being defensive in nature when they are taken in response to actions or policies originating in other countries.

Economists generally wish to maximize consumption, and virtually every one of them would agree that for maximizing efficiency and global welfare, an essentially open system that encourages trade flows is preferable to a tightly closed system that stifles trade. Nevertheless, the political leaders of the United States and those of every other sovereign country are, for a variety of reasons, unwilling to accept a totally hands-off approach to trade flows. The desire of politicians to seek favor with the electorate is incompatible with their placing complete trust in the invisible hand of the market to determine the composition, volume, and value of its imports and exports of goods and services. The result, simply stated, is that an interventionist, market-altering strategy dominates the conduct of all countries' trade policies. To achieve these ends, government officials—in accordance with the terms of foreign trade statutes—make a steady stream of specific decisions, conduct endless rounds of trade negotiations with other countries, and implement numerous operational programs to moderate imports, increase imports, promote exports, restrict exports, assist domestic producers to compete more effectively, and so on. Trade policy in one sense is the collective outcome of the twists and turns of these actions. Given constant changes in the political and economic environments, the import and export policies of the United States and most other countries are subject to constant evolution—and occasional revolution.

The Political-Economic Context of Trade Policy

If politics is about making important and difficult decisions affecting national welfare, then the trade policy process in the United States and elsewhere has been politicized. The foreign trade sector is an increasingly important variable in the performance of domestic economies, and the ability of national politicians to remain in office is closely linked to domestic economic performance, mainly the ability to deliver on promises of more jobs and less inflation. Conflicting opinions about optimal trade policies in response to an open-ended number of contingencies have assured a constant procession of difficult decisions.

Inspired by certain cherished economic principles, observing the need to be responsive to domestic and foreign political pressures, and operating within legislative constraints, U.S. trade policymakers are confronted by the need to make an endless series of value judgments in situations where the "correct" response is more a perception than an empirically demonstrable or self-evident truth. Virtually every significant trade issue will generate two or more rational alternatives as to which policy option will best serve the national interest. Political necessity and economic logic frequently are not congruent. In a sense, trade policy is the cumulative outgrowth of responses by usually well-intentioned policymakers to a barrage of intellectual and emotional stimuli and to a nonstop array of unique circumstances. Consistency, coherence, and wisdom are therefore frequently in short supply in a process involving so many difficult decisions.

Jobs, production, profits, and investment decisions at home and abroad are inevitably affected by what is and is not imported and exported. Ostensibly economic actions therefore closely dovetail with the classic definition of politics: the determination of who gets what, how, and when. Most trade policy decisions create winners and losers at home. The ability of consumers to enjoy inexpensive goods produced abroad comes at least partially at the expense of fellow citizens' jobs or salary levels. Conversely, import restrictions that prevent lower-cost foreign-made goods from disrupting favored domestic sectors often are tantamount to governmental subsidies bestowed on relatively inefficient producers, with consumers paying for them in the form of higher prices. In this case, foreign producers are penalized along with domestic consumers.¹

Foreign trade also affects politics on the global level. Extensive commercial relations between countries create networks of interdependence, cooperation, and friendship. The exclusion of commercial relations between countries can create divisiveness and hostility.

In the absence of applicable universally accepted truths as to what constitutes economic logic, trade policy should be viewed as the end result of imperfect choices about economic options—a political process. Policymakers make decisions about relative importance and desirability offered by conflicting constituencies and policy options. Trade policy dilemmas abound because, more often than not, any given trade action involves contradictory rather than complementary effects on political and economic as well as domestic and external objectives; in short, the impact of a typical trade action is favorable to some...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Tables, Boxes, and Figures
• Preface and Acknowledgments
• List of Acronyms
• PART ONE: OVERVIEW
• PART TWO: ECONOMICS
• PART THREE: POLITICS AND ADMINISTRATION
• PART FOUR: MAJOR CONTEMPORARY ISSUES
• Appendix A: U.S. International Trade in Goods and Services: Balance of Payments Basis
• Appendix B: U.S. International Trade in Goods: Balance of Payments Basis, 1980-1993
• Appendix C: Commodity Composition of U.S. Goods Trade with the World: Census Basis, 1993
• Appendix D: Country Composition of U.S. Goods Trade with the World: Census Basis, 1993
• Appendix E: U.S. Manufactures Trade, 1987 and 1993
• About the Book and Authors
• Index