A New Era in Trade Challenges the New President

The breakdown of the international trading system in a dispute with Europe over animal feed is the biggest trade crisis looming before the incoming Clinton Administration.

But it won’t be the only one. In Asia, the rise of China may present a greater problem than continuing trade frictions with Japan--which is suffering economically but still building an ever larger trade surplus with the U.S.

And the enormous remnants of the old Soviet Union--Russia, Ukraine, Georgia, Kazakhstan, Armenia and the rest--may erupt in turmoil between now and Inauguration Day next Jan. 20 because former Communist party leaders want to seize power and run a semi-state economy like that of Korea or Japan.

Compared to all that, Clinton may find questions of trade with Mexico a welcome relief. Those are the challenges for a new president in a new era. It has become a cliche in recent years to say that economics has replaced military power as the dominant subject and source of influence in the world. The prospects before Clinton confirm the cliche. The disputes are about trade and economic development, the stakes are jobs and living standards.

Forty years ago China was feared because its troops were marching into Korea. Today, even as China’s economic development is hailed with great expectations, there is fear that its masses of low-wage workers will send goods flowing into the world and undercut jobs in the industrial countries.

For half a century, U.S. policy favored an open trading system because we wanted to promote prosperity, and prevent the spread of Communism.

Now we want open trade because we depend on it for jobs. The U.S. stake in global commerce goes beyond the $421 billion in merchandise it exports--and the $487 billion it imports. It is also the leader in services, such as air travel where U.S. based airlines are expanding around the world, in banking and financial services, consulting and computer software.

The U.S. global account is fed by education--where U.S. universities attract students and scholars from all corners of the earth--and by entertainment, where movies, television shows, music videos and the like rank second only to Boeing airplanes as U.S. exports.

That is why the dispute with Europe is so critical. It threatens the successful conclusion of negotiations on the General Agreement on Tariffs and Trade, or GATT. That 108-nation multilateral trading system, first concluded in 1947, has brought down tariffs worldwide--from an average 40% to 5%--codified trade rules and resulted in unprecedented prosperity for the world’s people.

Negotiations have been going on since 1986 to expand GATT to cover agriculture and services, information and intellectual property--the patterns on integrated circuits, the songs on compact discs. But this dispute, over protein-rich cattle feeds from soybean, sunflower and rapeseed oil, threatens those negotiations and ultimately the whole of GATT.

The dispute in itself is serious. U.S. exports of soybean products to the 12-nation European Community amount to more than $2 billion a year. But they could be $1 billion greater if the Europeans didn’t subsidize farmers to produce the protein-rich feed ingredients. International trade courts have ruled against the subsidies, and the EC has agreed to cut back farm production. But politically powerful French farmers are blocking the cutbacks, and pushing the world toward trade war.

The U.S. government is retaliating by threatening French wine exports but the threat lacks leverage. “Wine growers have less political clout than grain farmers in France and the EC,� says Robert Paarlberg, agricultural expert and author of “Farm Trade and Foreign Policy.�

In the past, U.S. moves were more indirect, and potent: Negotiators played the defense card--suggesting that U.S. defense of Europe would be hampered if Congress got mad over trade. But the Cold War is over, Europe feels secure, and the defense card is no longer trump.

More ominously, the real story is that Europe is less than eager to see GATT expanded, says Harald Malmgren, a Washington consultant and one-time U.S. trade negotiator. “Transatlantic trade means less to European nations than trade among themselves and with Scandinavia and Eastern Europe,� says Malmgren. The EC sends 8.6% of its exports to the United States, more than 80% to other European countries.

Also, European countries are uncompetitive in most aspects of agriculture and the information industries--software, advanced electronics--where U.S. business is strong. So when France tries to persuade its EC partners to block GATT expansion, it finds support--especially from Germany which these days is putting reunification with its Eastern states before every other question.

But it’s in the U.S. interest that Europe not turn inward--25% of U.S. exports go to the EC. That’s why diplomatic efforts to settle the soybeans dispute in the next 30 days will be intense.

Yet those efforts are likely to fail, suggest former U.S. trade officials, and Clinton may take office facing a growing trade war with Europe--not to mention other trade problems. Japan, for example, is still trying to live off exports to others while its domestic economy languishes. And the economy continues to worsen in the former Soviet Union, an area that will become a great market or a great problem in the next four years.

As to Mexico, Clinton was already on the job last week, talking by telephone with President Salinas on how to implement the free trade agreement.

Still, Washington sources report that he doesn’t want to spend a lot of his first year in office on trade questions. If so, the appointment of the next U.S. Trade Representative better be a good one. Because in the new era, trade and global economics don’t give a new President a honeymoon.