Breaking New Ground in U.S. Trade Policy

James P Dorian

• Publisher: Routledge
• Year: 2019
• eBook ISBN: 9780429714573
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

This book reexamines the U.S. trade policy, discussing challenges that prompted the Committee for Economic Development to construct a modern framework and reaffirm its support of the multilateral trade system. It presents recommendations essential to bolstering U.S. competitiveness in the future.

1
Introduction

As the 1990s dawn, the United States finds itself coping with the economic, political, and even psychological legacy of a decade of international deficits of unprecedented size. It is confronted by more formidable foreign competition across the entire spectrum of tradable goods and services, including those on the leading edge of technology, where U.S. preeminence was virtually unchallenged for decades and mistakenly thought by some to be unchallengeable. The United States faces troubling questions about our will, both as private competitors and as a nation, to make the hard choices necessary to meet this tougher competition successfully, erase the deficits, and rebuild a solid foundation for rising living standards for ourselves and for our children.

In 1988, near the peak of the political turbulence these developments produced, Congress overhauled U.S. trade law. The new law, the Omnibus Trade and Competitiveness Act of 1988, accelerated the momentum of the more aggressive trade policy upon which the Reagan administration embarked in its second term. More than ever before, U.S. trade policy is now focused on remedying conditions of unfair trade that aftlict American producers at home and abroad. The new law provides a framework for the development of policy toward unfair trade practices that will continue to evolve for some time to come.

While still digesting the results of the Tokyo Round of multilateral trade negotiations of the 1970s, the United States began to prod its trading partners in the mid-1980s to launch a new round. Frustrated by the lethargic response of the world trading community to the U.S. challenge, the Reagan administration served notice that it would not permit the inertia of the multilateral system to thwart its goals. The United States, it said, was ready to deal with like-minded. countries. First Israel and then America’s largest trading partner, Canada, stepped forward to conclude bilateral free trade agreements with the United States. These agreements are the first major departures by the United States from a multilateral approach to trade liberalization in more than forty years. The implications of these agreements and the basic question of whether a multilateral approach or some alternative will best serve U.S. interests in the future continue to be assessed.

A new round of multilateral negotiations, christened the Uruguay Round, was eventually launched in 1986. One of its prime missions, in the view of the United States, is to bring within the discipline of international rules several new areas of commerce. One of the most challenging is international investment, which is today inextricably linked to international trade. Even if the Uruguay Round succeeds in bringing new discipline to what negotiators call “trade-related investment measures,” the time has come for the world to adopt a comprehensive, integrated approach to international investment issues: a General Agreement on Tariffs and Trade (GATT) for investment. Negotiating such an accord should be a top priority of U.S. international economic policy following the Uruguay Round.

These three key issues—unfair trade, the choice between multilateral and alternative approaches to trade liberalization, and the challenge of negotiating an international investment accord—are the focus of this policy statement. What new policies and approaches should the United States pursue?

In considering appropriate policies, our studies and experience have convinced us that open markets are the best means to achieve broad-based improvements in economic welfare. ^* Regardless of whether U.S. international accounts are in surplus or deficit, an open world trading system is in this country’s interest.

Trade improves welfare by encouraging specialization, a dynamic process in which participants produce the goods and services that they can produce best and buy what others produce best. Market-driven trade improves welfare by encouraging competition, a process that spurs innovation, efficiency, and excellence. Trade also improves welfare over time by forcing countries to face up to the need for adjustment to the inexorable process of change as the world economy evolves.

These three basic ideas—specialization, competition, and adjustment—lead to the key principles that should guide the nation’s trade policy. First, trade policy should facilitate the optimal allocation of resources through specialization. Second, trade policy should promote market-based competition rather than impede it. Third, trade policy should facilitate adjustment to change rather than retard it.

Three corollaries follow. First, although circumstances (including the need to protect the national security) will arise that will force the United States to deviate from the foregoing principles, deviations should not divert us from our long-term commitment to open markets at home and abroad. We must strive to minimize the number and duration of deviations. Second, “strategic intervention” by government to gain international competitive advantage runs counter to the market principles on which the U.S. economy is based and which this country has long espoused internationally. Moreover, it is ill suited to our economy and political system. The belief of proponents of managed trade that the United States can no longer “afford” free trade is misguided, and their prescription that the United States should adopt more interventionist policies would constitute a cure worse than the disease. ^*

Third, there should be a set of guiding principles for dealing with countries whose trade practices diverge from international norms and adversely affect U.S. interests. To the maximum extent possible, the foreign practices should be dealt with through the GATT remedial process. If the practices are not covered by GATT, the United States should aim to negotiate an appropriate expansion of the GATT rules. If compliance with applicable GATT rules or an expansion of the rules to cover the practices in question is not agreed to by the foreign nation involved, the United States should try to moderate or remove the damaging foreign practices by measures that are themselves market-opening in their impact. If restrictive measures must be employed, they should consist of devices that are market-oriented.

Trade policy is important to U.S. economic growth and broadly rising standards of living. Although trade policy can contribute only marginally to restoring balance in America’s external accounts, opening markets at home and abroad can do much to facilitate U.S. economic adjustment, improve our productivity, and enhance our competitiveness.

The U.S. external deficits are primarily a macroeconomic problem rather than a trade problem. They represent an excess of U.S. expenditure over output. The federal budget deficit, combined with traditional levels of private consumption and investment, has meant that as a country, the United States has been living beyond its means. This excess spending spills over into a huge net inflow of foreign products, financed by borrowing savings from countries, such as Japan and Germany, that have current-account surpluses.

An inexcusable fault of our political leaders in the 1980s, both in the executive branch and in Congress, has been their excessive preoccupation with symptoms (i.e., with trade deficits) and their failure to come to grips with the principal underlying cause (i.e., the inadequacy of U.S. domestic savings, the main element of which is our federal budget deficit). We must do better in the 1990s.

To the extent that trade constitutes any part of the problem, it must be forthrightly addressed by appropriate policies. We should always bring all the policy tools available to us to the task of solving our problems. Equally important, the timely and effective resolution of trade issues is essential to sustain political support for open trade policies that are in the country’s interest. But it is important to hold realistic expectations about what trade policy can and cannot achieve.

Unfair Trade Practices

Concern with unfair trade has deep roots in the history of U.S. commercial policy, dating at least from Alexander Hamilton’s Report on Manufactures in 1791. Campaigning against unfair trade was a central theme of Reagan administration trade policy. But the term unfair trade is not used in major international trade agreements, and although it appears in the 1988 trade act, it is not defined. Our understanding of unfair trade and our policies toward it continue to evolve. We focus here on four specific types of unfair trade practices that we think cause most of the troubles.

Dumping od Subsidies

Why should the United States worry about foreign dumping and export subsidies since it benefits from access to lower-cost products? The case for firm action against dumping and subsidies rests on the principle that trade flows should be determined by market forces and on the political reality that unless U.S. trade policy is based on a rule of law that is perceived as fair, it will not muster the political support essential to its survival.

Clearly, then, U.S. producers should have the opportunity to obtain relief from these unfair trade practices. It must be remembered, however, that relief does not come free even if it entails no budgetary expenditures. The cost is borne in the form of higher prices paid by domestic users of the product. Protection for one industry can diminish the competitiveness of another. The United Sates must therefore guard against a proliferation of unfair trade actions that have no basis in rational economic principles but instead are proxies for outright protection.

Dumping.The proliferation of antidumping cases in recent years and the growing reliance on an arbitrary standard—the so-called constructed-value standard—for calculating margins of dumping suggest that the antidumping law as now applied has become a back door to protection. To remedy this problem, dumping margins should, whenever possible, be calculated by using actual price comparisons. When price comparisons are not possible and a constructed-value approach must be employed, average variable costs should replace average total costs as the basis for determining whether dumping exists.^*

Export Subsidies. U.S. exporters are at a disadvantage relative to their competitors in Western Europe and Japan because of concessionary export credits. The U.S. Export-Import Bank’s “war chest” of approximately $100 million a year is woefully inadequate to match the mixed credit resources available to exporters from other countries. The best solution would be for major trading nations to ban all export credit subsidies so that no country stands to gain an unfair advantage.

In the meantime, the United States needs to match foreign export credits to persuade its trading partners to negotiate an end to all export credit subsidies. One way to make it easier for Congress to finance an adequately expanded war chest for matching such credits would be to alter the budgetary treatment of the Export-Import Bank. Since defaults on the bank’s loans are rare, the budgetary cost of its lending should reflect only the losses represented by interest subsidies, not total lending, as is now the case.

No adequate policy tool exists to address a related problem: the loss of U.S. export sales to competitors whose governments provide export subsidies to promote their sales in third-country markets. To combat _ this unfair practice, the United States should provide a countervailing subsidy to match other countries’subsidies. To avoid any budgetary impact and also to discourage America’s trading partners from subsidizing exports, the countervailing subsidy should be financed by imposing a special duty on U.S. imports from the subsidizing country. Prior authorization for this duty should be obtained from the Subsidies Committee of GATT in order to avoid triggering a retaliatory spiral.

Agricultural products are exempt from the international ban on export subsidies in large measure because governments have long intervened in agriculture to buffer farmers from wide fluctuations in prices and incomes. Costly domestic support programs create a need to subsidize agricultural exports in order to dispose of the surpluses that supports generate. Therefore, to deal with the root causes of the export-subsidy problem in agriculture, the issue of domestic support programs must be addressed. In the meantime, pressure to reduce domestic government supports should be exerted by including agricultural export subsidies in the ban on export subsidies. A five-year transition period for phasing out agricultural export subsidies should be adopted. Addressing this issue as well as the related problem of agricultural protection is critical to the success of the Uruguay Round.

Domestic Subsidies. Domestic subsidies are a vast gray area. International agreement (GATT) proscribes export subsidies on nonprimary products but permits subsidies that are not specifically related to exports. The only obligation is to try to avoid adverse effects on a country’s trading partners. The GATT Subsidies Code goes further, explicitly recognizing the legitimacy of domestic subsidies as instruments of industrial policy.

International discipline over domestic subsidies should be strengthened. First, the Subsidies Code should explicitly identify potentially troublesome domestic subsidies as well as those unlikely to have significant trade-distorting effects. Second, new rules should be developed to provide more effective remedies for the trade-distorting effects of government targeting of particular industries for special assistance and support.

The steel industry provides an excellent example of the multiple economic distortions that can result from a prolonged pattern of subsidization and protection. Because of the importance of steel, countries are unwilling to allow the industry to be fully exposed to international competition; hence, it is one of the most heavily subsidized and protected industries worldwide. Confronted with this situation, the U.S. steel industry has sought relief from foreign unfair trade practices.

Under President Reagan, the United States negotiated a number of voluntary restraint agreements (VRAs) to limit foreign exports of certain products to the United States. VRAs are a particularly undesirable form of import protection. ^* They rigidify patterns of trade by fixing the market share of foreign suppliers, they can produce extraordinary profits (the difference between the protected U.S. price and the world market price) for foreign exporters, and they also can undermine U.S. efforts to strengthen international trade rules and get rid of other countries’ restrictions on competitive U.S. products.

CED therefore strongly supports the U.S. government’s decision to seek an international consensus on steel trade that would provide effective discipline over government aid and intervention and that would lower barriers to global trade in steel. We also concur with the decision to enforce vigorously the laws against injurious dumping and subsidization after the VRAs are lifted in 1992. The normal remedy is offsetting tariffs, a less pernicious form of protection than rigid quotas.

Unfair Restrictions on Access to Foreign Markets

The emphasis of U.S. trade policy shifted during the 1980s from combating unfair imports through antidumping and countervailing duties to pursuing more open foreign markets for American exporters. The statutory basis for the drive against unfair foreign market access restrictions is Section 301 of the Trade Act of 1974.

Section 301 is based on the reasonable principle that the United States should use access to its vast domestic market as leverage to open markets abroad. Indeed, the principle of reciprocity underlies eight rounds of multilateral negotiations to liberalize trade in which the United States has been a leader. However, the way in which the principle is applied in Section 301 departs sharply from tradition. Its main deficiency is its unilateral character. Section 301 can be used to attack foreign practices not illegal under internationa...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Responsibility for CED Statements on National Policy
• Purpose of This Statement
• Acknowledgments
• Special Acknowledgment
• 1 Introduction
• 2 The Evolving Global Landscape
• 3 Unfair Trade
• 4 Multilateral Versus Alternative Approaches
• 5 Trade and Investment
• Memoranda of Comment, Reservation, or Dissent
• Objectives of the Committee for Economic Development
• CED Board of Trustees
• CED Honorary Trustees
• CED Professional and Administrative Staff
• Statements on National Policy Issued by the Committee for Economic Development
• CED Counterpart Organizations in Foreign Countries