A New Kind of Trade War

By Eric Roston

On the eve of the day that changed everything, America was charging into a new era of globalization, with capital soaring through an increasingly borderless world. New technologies in communication and transportation whisked us, and our voices and documents, farther and faster than we had dreamed possible a few years earlier. But then as summer slipped into fall, an act of terrorism sparked a human catastrophe that would halt trade and other peaceful international exchanges for years.

The terrorist attack was the assassination of Archduke Franz Ferdinand of Austria, which led to the dark day of Aug. 4, 1914, when German troops entered Belgium and started the first world war.

Trade has never got along very well with terror or war. International commerce contracted sharply after the outbreak of World War I. A round of protectionist measures in the 1920s and '30s contributed mightily to the Great Depression and World War II. And in the wake of the Sept. 11 terror attacks, shipments were held up for days at the U.S. borders with Canada and Mexico, and at airports around the world, forcing Detroit assembly lines to shut down for lack of parts and spurring U.S. and foreign executives to seek suppliers closer to home.

But in today's war against terror, the Bush Administration and trade promoters in Congress and business are battling to resist the historic pattern in which commercial shipping becomes target practice and borders become moats. Since Sept. 11, President Bush and his emissaries have emphasized that agreements to lower trade barriers can help attract and hold allies to the antiterror campaign by bringing needed jobs and income to impoverished regions. "The launch of a new global trade round is important for economic recovery in the short term and for economic growth over time," U.S. Trade Representative Robert Zoellick told TIME. "A signal that the world's trading nations are committed to open markets would inject additional confidence into financial markets."

In the attacks' aftermath, Chinese, U.S. and European negotiators resolved the last issues holding up the Asian giant's membership in the World Trade Organization. Bush signed into law a trade agreement with Jordan, and the Senate ratified another with Vietnam. Eleven days after the attacks, Bush lifted sanctions on Pakistan and India adopted in May 1998 when the two nations each conducted nuclear weapons tests. Bush delivered yearlong trade privileges to Indonesia, the world's most populous Muslim state. And he sought to encourage a new round of trade expansion by the WTO when he backed an amendment to a farm bill that would have directed billions of dollars to conservation programs instead of farm subsidies that the WTO frowns upon. (The House defeated that amendment on Oct. 4.)

Beyond these initiatives, the Administration's boldest move, which some call foolhardy, has been to use the crisis as a prod for Congress to reinstate the President's ability to negotiate "fast-track" trade deals with other countries--pacts that Congress can approve or reject but not amend. Such trade-promotion authority, as it is called, has proved essential to winning landmark deals like the North American Free Trade Agreement treaty among the U.S., Canada and Mexico, and is widely considered indispensable to future progress in trade talks. Even Secretary of State Colin Powell, recently writing in the Wall Street Journal, says that "we need--America needs--trade promotion authority in our tool box" to help create a more secure world.

But most labor unions oppose it, as do many environmental groups and others who believe that the fruits of expanded trade flow mostly to the wealthy and pit workers in the U.S. against those elsewhere who will labor for lower wages and under worse working conditions. "For the vast majority of workers, the negative distributional effects of trade over the last two decades almost certainly outweighed the positive growth effects, causing them a net loss of real income," economists Dean Baker and Mark Weisbrot wrote early this month in a briefing paper for the Center for Economic and Policy Research, a liberal think tank in Washington.

Other economists fear that new trade deals might at least initially benefit other countries more than the U.S. Of particular concern: if the U.S. emerges from its slump faster than the rest of the world, the U.S. trade deficit, which in 2000 reached a record $375 billion, could swell further and eventually destabilize the economy.

Zoellick believes, however, that extending trade privileges through bilateral agreements may one day offer new opportunities to impoverished people in countries such as Pakistan and the Philippines, and help the leaders of those countries maintain their pro-market, pro-U.S. stance. "Many developing countries are struggling to maintain economic reforms under difficult conditions," Zoellick says. "U.S. leadership on trade helps them maintain their commitment to open, competitive economies."

That's a long-term project. But Zoellick has sold it as an urgent priority required for economic stimulus and for building a coalition against terrorism. That tack offended several lawmakers, just as the administration prepared for the mid-October Asia-Pacific Economic Cooperation forum and the scheduled WTO talks on Nov. 9-13. "For them to say that this is an emergency, and we need it now, is ridiculous," says Representative Ellen Tauscher, a pro-trade California Democrat who expects to "hold my nose" and vote to grant Bush and Zoellick their wish.

A bipartisan meeting in House Speaker Dennis Hastert's office undercut the short-term stimulus argument. Asked by Representative Dick Armey if trade-promotion authority should be included in the President's economic stimulus package, Federal Reserve Board Chairman Alan Greenspan endorsed the authority in general but said that there would be no immediate stimulative effect. After all, the typical recession ends after 10 months, and most of the big market-opening treaties the U.S. is negotiating are years away.

The recent bilateral treaties with Jordan and Vietnam could bring quicker benefits and have attracted widespread attention as breakthroughs into the Arab world and the land of a former foe. But their dollar value is small: Vietnam and Jordan rank 70th and 98th among U.S. trade partners.

King Abdullah of Jordan visited President Bush in the White House Sept. 28, just in time to discuss cooperation against terror and receive the goodies he had negotiated with the Clinton Administration last year. Jordan is one of the smallest U.S. export markets, taking in just $306 million in U.S. goods last year. But many companies hope to make fresh inroads because duties on industrial and agricultural goods will disappear over the next decade. U.S. wheat and barley growers and telecommunication and pharmaceutical companies are expected to benefit, as are small firms such as Quigley of Doylestown, Pa., maker of Cold-Eeze lozenges; like many companies, it has sought contacts in Jordan but conducted no business there yet. U.S. workers might also benefit as some American companies that manufacture goods for export to the Middle East shift their plants from Europe back home to take advantage of the agreement. The impact will be far more significant for Jordanian exporters of pharmaceuticals and textiles. Pharmaceutical companies--"young but strong," according to one observer--hope to make up on the world stage business lost after the adoption of international intellectual-property conventions. Clothing manufacturer Al-Zay, based in Amman, will export Italian-style men's suits to U.S. department stores.

The U.S. companies moving into Vietnam include those that can help the nation of 80 million people build a reliable, modern infrastructure: makers of equipment for telecommunications, electricity generation, medicine and avionics. Hal Katersky, CEO of InterGlobal, a livestock-wastewater treatment company, says, "We couldn't export there before. We think Vietnam is a great market. We've been there six months, [but] haven't sold anything yet."

Other countries have secured temporary help because of U.S. diplomatic needs. President Megawati Sukarnoputri of Indonesia--a country plagued by violent anti-U.S. rioting since early October--stopped by the White House Sept. 22, when President Bush agreed for one year to lift 5% to 10% tariffs on 11 Indonesian goods, including copper, plywood sheeting, rattan, sorbitol sweetener and tuna. This deal was designed to deliver some help to Indonesia, with minimal impact on U.S.-based industries.

Some Latin American countries are trying to use the new mood in Washington to get trade openings they have sought for years. They want tariff reductions on products ranging from T shirts to footwear, leather goods to sugar. Colombia is struggling to move through Congress an expanded Andean Trade Preferences Act that would establish a graduated duty system, starting with no tariff, for textiles and apparel. "An important number of U.S. buyers shy away from Colombia because of the internal conflict," says Ronald Bakalarz, president of Stanton & Co., a Bogota-based footwear company. "But the more employment we create, the fewer people will feel compelled to join the guerrillas."

In March, Argentina's Finance Minister Domingo Cavallo indicated that his country could seek a bipartisan accord with the U.S., but he quickly backpedaled, calculating that Argentina would have more leverage as a participant in Mercosur, the four-nation South American common market dominated by Brazil. That may have to do, as objections from U.S. and Latin American labor unions and from some industries worried about U.S. competitors could hold up a 34-nation Free Trade Area of the Americas agreement. The project received no mention within President Bush's International Trade Agenda, announced in May, and negotiations shouldn't be completed until 2005.

Some U.S. industry leaders--including influential ranchers and growers of citrus and tomatoes in Florida and California--fear the competition that more pacts with individual nations would bring. And critics like Jagdish Bhagwati of Columbia University contend that the carve-outs and privileges encoded in bilateral treaties may trip up multilateral talks, the point of which is to give all member nations access to markets, without discrimination. "Bilats make us nervous," says Chandler Keyes, a lobbyist for the National Cattlemen's Beef Association. "Countries we think about doing bilats with have strong agricultural-export economies, so there's not much we're going to gain."

An FTAA agreement would open rich new markets for U.S. manufacturers, such as heavy-equipment maker Caterpillar and computer giant IBM, as well as firms in banking and insurance. But it would not help American agriculture much, farm groups say. An operational FTAA would increase U.S. agricultural exports by a paltry 2%. "The game is in the WTO," says Audrae Erickson, a lobbyist for the American Farm Bureau. "We have essentially maxed out in the U.S. market, where we compete against heavily subsidized competitors," says Erickson. "And if we don't have access to the world's markets, the agricultural community will have a very hard time climbing out of its recession."

If a regional agreement such as the FTAA is difficult to enact, establishing a round of WTO talks will take a Herculean effort. Though WTO Director-General Mike Moore has spent a busy few weeks in coalition building, the U.S. refusal to discuss its antidumping restrictions for industries such as steel, combined with Europe's and Japan's agricultural protections, may scuttle even the most preliminary agreement to negotiate.

Still, there is enormous political pressure to get something done. "We need to launch a round even more than we did before Sept. 11," says Anthony Gooch, a spokesman for the European Union's Trade Commissioner, Pascal Lamy. "This is really a burning priority in economic terms." One result of the terrorist attacks may be to nudge the 142 member nations into a show of unity. "Sept. 11 will make people more conscious of the public relations costs of failure," says Richard Cooper, a Harvard economics professor. "And that might induce parties to be more flexible."

A major impediment to a WTO round is agriculture, the sector that most nations guard almost as vigilantly as their own sovereignty. Negotiators must tackle how far and how fast the U.S. might be willing to lower production and export subsidies--an Administration goal designed to help persuade other countries to do the same. But the White House will need to persuade farm belt members of Congress first. Even trickier is Europe's insistence that developing countries bring their investment and environmental rules in line with Western standards; developing countries have long sought access to big agriculture markets.

China is the Asian country best positioned to pull through the global downturn. The economy is still on track to grow 8% this year even as its exports to the U.S. slacken, and Beijing's coming membership in the WTO will require market reforms that by some estimates will boost GDP by 4%.

American farmers will harvest the benefits of China's membership. Beijing promised to limit agricultural subsidies and to cut tariffs from 21% to an average of 17%. American soybean growers expect some of the biggest payoffs. They now face tariffs that can reach to more than 50%, but after China's accession those barriers will fall to only 9% by 2006.

But what's good for American farmers is rotten for China's. By some estimates, WTO entry will drive 10 million more Chinese farmers to look for work in overcrowded cities, where they will compete for jobs with people laid off from state-owned enterprises. "Cutting agricultural subsidies will be the most difficult thing China has to do for WTO," says Pu Yonghao, a senior economist at Nomura International in Hong Kong. "There are serious doubts whether they will be able to pull it off without too much social unrest."

Western investors will suddenly find in China whole industries open to them that were closed before. Right now, overseas telephone companies can't directly operate phone networks in China. Within three years of China's joining the WTO, though, the companies will be allowed to own 49% of the country's operators. Corporations like Xerox will be allowed to sell and service their own copying machines, instead of having to work through Chinese agents. Automakers expect sales in China to soar after tariffs that now double the price of a car fall to only 25%. That increase will probably kill off most of China's 136 automakers or force them to consolidate into a few regional companies.

When the U.S. launched its war on terrorism, President Bush lifted the sanctions that had been imposed on nuclear neighbors Pakistan and India. The White House hoped that lifting the sanctions would help enlist the South Asian powers in the war effort while also bringing long-term economic benefits.

The U.S. sanctions had prohibited the sale of military-related goods and the extension of loans or credit for reasons other than food or humanitarian needs. U.S. makers of engines, engine parts and electronic devices saw their exports to India fall from $297 million in 1997 to $97 million a year later. Similarly, exporters of construction, transportation and mining equipment experienced a drop in exports to Pakistan from $129 million to $38 million. "It'll take six months to be able to reinitiate contact with the agencies" that were under sanction, says Frank Folmsbee, sales and export manager for Aries Electronics, a Frenchtown, N.J., maker of electronic components. Aries (with $25 million in annual revenue from manufacturing and export sales) lost approximately $3 million a year as a result of the sanctions.

New momentum in international trade may have awakened a great bear. In July, Secretary of the Treasury Paul O'Neill visited Russia, which he found to be a changed place. President Vladimir Putin, he said, had made great progress welding disparate, warring fiefdoms into one administration, an achievement reflected in the Kremlin's ability to con-duct potentially fruitful trade negotiations.

Russia, a great, sentimental hope for corporations through the mid-'90s, looks increasingly serious about its WTO bid and is beginning to undertake the legal reforms necessary for membership. Could the former Soviet republic be a touchstone for advancements on a global scale? Russia's stock market capitalization, about $50 billion, still only approaches that of the United Parcel Service, and what passes for a recession in the U.S. would be a great achievement for Russia. Progress there is incremental, but, some say, palpable. "We're working, in a determined way, to bring to reality some of the things we'd worked individually on for a decade without very much success," O'Neill recently told members and guests at the annual dinner of the National Foreign Trade Council--a consortium of U.S. companies promoting free trade that was founded in 1914.

--With reporting by Hannah Beech/Beijing, Ruth Morris/Bogota, Hannah Bloch/Islamabad, Jason Tedjasukmana/Jakarta, Aisha Labi/London, Yuri Zarakhovich/Moscow, Daren Fonda/New York, Andrew Downie/Rio de Janeiro, and Matthew Cooper and Sally B. Donnelly/Washington

TIME.com For more about international trade negotiations, see our website at time.com/global

With reporting by Hannah Beech/Beijing, Ruth Morris/Bogota, Hannah Bloch/Islamabad, Jason Tedjasukmana/Jakarta, Aisha Labi/London, Yuri Zarakhovich/Moscow, Daren Fonda/New York, Andrew Downie/Rio de Janeiro, and Matthew Cooper and Sally B. Donnelly/Washington