America’s China Policy Is Not Working
The Dangers of a Broad Decoupling
Virtually last among the world's major industrial nations-but by no means least-the United States has now agreed to offer some form of tariff preferences to imports from developing countries. President Nixon's Latin American policy address last October, followed by his statement on November 10, signaled what amounts to a major shift in U.S. policy by calling for a broad system of generalized preferences, with the proviso that if this cannot be achieved, the United States may extend regional preferences to Latin America alone.
The President's statements represent a significant departure from earlier U.S. views. When the less developed countries (LDCs) raised this issue as their major demand at the first U.N. Conference on Trade and Development in 1964, the United States-unlike the majority of the world's other rich nations-was resolutely opposed. Indeed, George Ball, then Undersecretary of State and Chief U.S. Delegate to the Conference, left little doubt about the intention of the United States to resist what he considered a policy shift unrelated to real economic development needs and undesirable from almost every other economic, political and commercial policy standpoint.
In subsequent years, U.S. opposition notwithstanding, the pressure for preferences as a major means by which the rich nations would contribute to economic development in Latin America, Africa and Asia grew more insistent. It remained the single most important question debated at the second U.N. Conference at New Delhi and was pressed by Latin American countries in regional councils and in meetings with U.S. officials.
During the last two or three years, under mounting pressure and increasingly isolated from developed and developing countries alike, the United States gradually shifted its position. As the world's most important industrial nation, virtually alone in opposition to the LDCs' insistent demands, with various regional preference arrangements a fait accompli and facing the threat of undesirable extensions, Washington found itself in an increasingly onerous and untenable situation. Hence, when a Special Committee on Preferences was created within the OECD after the Delhi meetings, U.S. representatives actively participated. From this group there emerged late in 1969 a series of individual proposals by major OECD countries, including the United States. Their common feature was a stated willingness to grant some form of general preferences on industrial products to all developing countries around the world. These proposals were submitted to UNCTAD last November. The road, therefore, appears open for the launching of preference negotiations between developed and developing countries sometime this year.
The case for preferences has been argued on several grounds, some economic and some political. The economic case rests on the developing countries' urgent need for increasing their volume of exports and their earnings from export sales, with particular emphasis on manufactured goods. Preferential tariffs or-better yet-duty-free entry into the world's major markets for raw materials, semi-manufactured and manufactured products alike would, it is argued, contribute materially to achievement of this objective in several aspects.
They would: (a) make LDC exports more competitive in major world markets; (b) reduce LDC dependence on a few traditional commodity exports by diversifying the source of export earnings to include more processed goods; (c) increase LDC export revenues by capturing part of the tariff component, world competition permitting; (d) augment foreign exchange earnings; (e) encourage foreign investments in LDCs; and (f) accelerate industrial development by placing within LDC reach larger total markets at home and abroad, with beneficial effects on cost structures arising from economies of scale.
Those familiar with the reality of commercial policies of industrialized countries and the economic development problems of LDCs know that there is another side to the story. For one thing, the developing countries are more different than alike in economic potential and in ability to compete in world markets, regardless of tariff levels. Tariff preferences may or may not be of benefit to relatively developed LDCs, such as Mexico or Brazil. Their situation, however, is most certainly worlds apart from that of the least developed of the LDCs-typically one-product economies with little real scope for industrialization and export diversification.
Secondly, we know from the experience of India and Pakistan, most of French- speaking Africa or, for that matter, from the history of our own economic relations with the Philippines, Cuba and Puerto Rico that the preferences these countries enjoyed at various times in their history did not, alone, help to achieve any of the above objectives. Puerto Rico is a good case in point. For decades, its products had duty-free entry privileges into the U.S. market-with little or no effect on either the volume of export earnings or the pace of industrial growth. What eventually made the difference in launching Puerto Rico on the road to export diversification and growth was not preferences but "Operation Bootstrap," with its emphasis on internal structural reforms, investment incentives, labor training, improved marketing techniques, and the like. In French-speaking Africa, long accustomed to regional preferences in Metropolitan France, the system hindered rather than helped development by obscuring the need for internal reforms and by orienting these countries toward high-cost production for an artificially protected preferential market rather than for competitive sales in world markets at large. Suffice it to add, moreover, that neither pre-Castro Cuba nor the U.S.-Philippine relationship is a much more brilliant example of the efficacy of tariff preferences in action.
Third, most LDCs enjoy their greatest comparative advantage in processing raw materials and in relatively simple, labor-intensive manufactured goods. Hence, the benefits from preferences for a wide range of more sophisticated industrial products are likely to remain more theoretical than real. Even Brazil will, for a long time to come, be world-competitive in textiles rather than in jet aircraft, i.e. in goods where the principal limiting factor is not tariffs but restrictions on access to major industrial markets.
The preference question being as much a political issue as an economic one, there are those who, while recognizing the limits of the economic case, have argued for favorable action on essentially pragmatic and political grounds. Since the LDCs have focused so heavily on this issue-and precisely because its trade effects are likely to be limited or, at least, amenable to some form of limitation-the argument that it is politically wise and not too costly for the world's rich countries to accede to LDC demands has had considerable force. For UNCTAD, an organization born out of the frustration of the world's LDCs over the ever-widening gap between rich and poor countries, success on the preference question would be of considerable value and do much to defuse the increasingly acrimonious debate over trade discrimination against LDC exports. Politically and psychologically, some evidence of progress and some sign of hope are needed. Preferences have emerged as the number-one candidate for this role.
Finally, in the case of the United States yet another factor, partly economic and partly political and tactical, has played an important part. This relates to the long-standing U.S. antipathy to already existing regional preference arrangements between the EEC and Francophone Africa and between the United Kingdom and Commonwealth countries. There is indeed much merit in the firm U.S. view that regional preferences threaten to divide the world into relatively closed trading blocs of one or more rich countries, each with its favored appendages of LDC client states. The latter enjoy preferences for their exports in the rich country and sometimes, as a quid pro quo, provide reverse or reciprocal preferences for industrial products from the donor country. The European regional arrangements-quite apart from their inherently dubious economic and political implications-have discriminated both against U.S. exports to Africa and, more importantly, against Latin American exports to Europe. Clearly it would be preferable, instead of opting for a parallel closed system between the United States and Latin America, with or without the reciprocal feature, to eliminate regional schemes in Europe in favor of an open, nondiscriminatory world system between all developing and developed countries. This would be much the preferable solution, whatever the merits of preferences per se.
A world system of preferences will be a success to the extent to which it deals with both the political and economic aspects of the problem. This can be accomplished in one of two ways. Ideally, if a scheme can be evolved which provides real opportunities for expanded LDC trade, economic benefits would ensue and, to a degree at least, the present stress in relations between developed and developing countries would be eased. Similarly, agreement on a system of preferences can be envisaged which, while not providing substantial economic benefits for LDCs, could nevertheless improve political relations by removing present elements of discrimination between groups of developing countries or, at the least, by demonstrating the willingness of the rich countries to meet the LDCs' principal UNCTAD demand.
Yet another outcome is possible, however. For there is real danger that the type of preference system which the industrialized countries can accept will meet neither the economic nor the political requirements of the situation. On the one hand, the rich countries may so circumscribe their offers-particularly in the very manufactured products of greatest potential interest to LDCs-that no important additional trade flows will ensue. If this occurs, heightened disillusionment and frustration in LDCs could well leave relations with these countries worse off than ever before.
If, on the other hand, the industrialized countries can overcome domestic pressures and offer a relatively generous and comprehensive world preference scheme, it is still likely that this will, at best, yield less than sensational results. Under the right circumstances, the benefits to some LDCs might be quite important in the longer run. But the effects almost surely will not be immediate nor will they measure up to the high hopes of LDCs, engendered over the years by the intoxicating fervor of national rhetoric and international debate.
In either case, then, the road to preferences will not lead trading relations between the world's rich and poor nations to a state of universal happiness. The potential for some improvement of LDCs' export earnings is real; but the danger of an adverse effect on international trade relations is no less real. The challenge confronting the industrialized nations lies in their willingness and ability to make the hard choices necessary for agreement on a system of preferences which will represent an improvement rather than a deterioration of the present situation.
What would the major characteristics of such a system have to be?
First, preferences should be general, worldwide and comprehensive rather than regional and limited. All industrialized countries should participate and all developing nations should be beneficiaries. If existing regional arrangements in Europe were supplanted, discrimination against Latin American and Asian countries would be eliminated and the proliferation of regional spheres of influence between major powers and LDC client-states avoided. The economic and political benefits flowing from access for all LDCs to all of the world's major markets are beyond dispute.
Second, introduction of a new system of general and worldwide preferences should entail the elimination of remaining "reverse" or "reciprocal" preferences where this archaic and pernicious hangover from another age is still in effect.
Third, preferences should apply to all products-agricultural, mineral and industrial, and including raw materials, semi-manufactures and manufactured goods. There should be a minimum of exceptions, particularly for the semi- processed or labor-intensive manufactured goods of greatest potential export interest to LDCs.
Fourth, there should be simple and exceptional methods for temporary suspension of preferences when LDC exports can be shown to threaten serious damage to domestic industries in the developed markets and when adjustment assistance is not possible. Relief measures should be subject to multilateral justification and entail transitional suspension of preferences for a relatively short time period as the preferred technique. In accord with existing GATT rules, resort to quota restrictions or other quantitative limitations should be avoided.
Fifth, since the average level of prevailing post-Kennedy Round tariffs is rather low, preferences should as a rule involve duty-free entry without limitations, rather than preferential tariff rates or tariff quotas. The greater the extent to which this objective can be achieved, the more substantial the benefits likely to accrue to LDCs.
Sixth, there should be a clear understanding that the introduction of preferences is not to inhibit the continuing effort of the world's major trading nations to dismantle tariffs on a most-favored-nation basis. The firm intent to do so should be clearly stated. It should be underscored by limiting the duration of preferences to a period of no more than 10 years, at the end of which MFN tariffs might, whenever possible, come down to zero levels, thereby eliminating the preferences in effect for LDCs. Obviously, the aim of eliminating tariffs, worldwide, would have to be coupled with a concomitant effort to deal with nontariff barriers, and no system of preferences should be allowed to entail the substitution of new or additional nontariff restrictions to world trade.
The detailed provisions of an eventual world preference scheme will remain uncertain until the real negotiations between industrialized countries and LDCs have been joined. Furthermore, the U.S. Congress has still to be heard from and there is, at this point, little real evidence that Congressional reaction to a Presidential request for authority to grant preferences is likely to be positive.
A great deal of work has, however, been done by potential donor countries within the OECD and late in 1969 summary outlines of their plans were submitted to the UNCTAD Secretariat. This documentation will form the basis for eventual negotiations with the developing countries and provides the best evidence, so far, of what the major countries seem ready to accept.
What has emerged is not particularly encouraging. Most important, perhaps, is the intention of all major countries to limit the coverage of preferences in a number of important ways. Practically all agricultural products are to be excluded by restricting the application of preferences essentially to the industrial sections of the Brussels Nomenclature. Furthermore, the United States is proposing to except all textiles, shoes and petroleum products. This is a significant limitation in itself and if the experience with exceptions lists in the Kennedy Round is any guide, other major countries will almost certainly not agree to be much more liberal.
The present list of definite U.S. exceptions is subject to a further possibly critical qualification in that it is the initial one, not yet submitted to Congressional review and approval. Any U.S. preference plan, whatever its nature, will require specific new legislation, and prospects of Congressional approval for wide-ranging preferences involving relatively unrestricted duty-free entry of LDC products into the U.S. market are cloudy at best. The dozens of protectionist bills introduced into the Congress since the end of the Kennedy Round are not a particularly good omen and it has required all of the considerable skill and ingenuity of no less a Congressional power than the Chairman of the House Committee on Ways and Means to block these measures. The nature and extent of these proposals attest to the strong protectionist sentiment in the Congress, which is focused precisely on those products of highest export interest to LDCs.
It is worth recalling that what was considered a resounding success in the Kennedy Round involved agreement on a halving of tariffs rather than on their complete elimination, as is now suggested. Even then, the Kennedy Round lists of products totally or largely excepted from 50 percent cuts went, in the case of all major trading nations, considerably beyond textiles, shoes and petroleum. Anyone who has lived through the months of interagency struggle in Washington over minutiae in the exceptions list knows the herculean efforts required to keep the pressures of protectionist sentiment within bounds. That situation is no different in London, Paris or Bonn. One cannot but reflect with awe, therefore, on the task ahead for the Nixon administration in dealing with the exceptions issue when the preference question comes before Congress.
Conditions will be less favorable in 1970 than they were in the 1960s. The Trade Expansion Act of 1962 provided the President with general authority to cut tariffs in half. No Congressional approval of specific exceptions was needed and protectionist pressures thus could not be usefully deployed against individual Congressmen. The reverse is true today, and if present circumstances had prevailed in the early 1960s, U.S. exceptions lists for the Kennedy Round would almost certainly have looked very different indeed. Questions of trade policy, in particular those relating to sensitive labor- intensive imports from LDCs, touch the most delicate political nerves and arouse strong and passionate fears in all major developed countries. It is not overstating the case, then, to say that the outcome of the struggle over the exceptions lists may, in the end, determine the fundamental success or failure of the impending preference negotiations.
Another major problem relates to the nature of the preferences themselves. While all major trading countries have agreed to offer zero duties rather than preferential duty rates, only the United States, the United Kingdom and the Nordic countries seem prepared to adopt a straightforward and unqualified rule to this effect, subject only to the exceptions lists and escape clause action when special difficulties arise. The EEC and Japan, for their part, have added at least two important qualifications. In the first place, they propose to set specific annual ceilings in value terms for each product, limiting these to the total value of the preceding year's imports from all LDCs plus a small annual growth factor of five percent of the value of the preceding year's imports from non-LDC sources. Secondly, preferential imports of a given product from a single LDC will not be allowed, as a rule, to exceed 50 percent of the total ceiling fixed for each product. This provision is intended to limit the advantages accruing to the more advanced LDCs and provides that any such country which exceeds 50 percent of the total ceiling in any one year is no longer entitled to any preferential treatment in the following year.
These provisions would have some very undesirable results. In the first place, they restrict the developing countries' opportunities to expand trade and are potentially much less liberal than the proposals by the United States and other countries. Secondly, they amount, in fact, to the introduction of an elaborate tariff quota scheme requiring the establishment of a whole set of administrative arrangements, with all that this implies. One of the major advances of the postwar trade negotiations under the GATT rule has been precisely the elimination of quota mechanisms to limit trade. The reappearance of this machinery for the administration of tariff quotas carries with it the danger that its application is available for other purposes.
There is yet another aspect of the tariff quota concept which gives rise to concern. The idea rests on the underlying notion that it is valid to calculate fixed formula ceilings beyond which, automatically, imports from LDCs are presumed to cause problems in the markets of the industrialized countries. This runs counter to a basic principle underlying U.S. and European postwar trade policies, namely, that it is necessary to show damage or disruption before restrictive action should be taken against imports from any source. It would be exceedingly dangerous to abandon this concept-a step many protectionist groups have been urging for a long time. If the EEC and Japan adopt this notion in the context of a preference scheme, there is no doubt that the pressure to adjust the administration of general U.S. trade policy along similar lines will increase accordingly.
Finally, the EEC system involves a continuation, albeit in attenuated form, of regional preferences for French-speaking Africa. The special preferences now accorded these countries for tropical and other agricultural exports to the EEC would continue unchanged, since these products are not to be granted general preference treatment. Moreover, the ceilings for industrial products will not apply to the African countries either. A major potential benefit of a worldwide preference scheme-the elimination of existing regional and discriminatory arrangements-would thus not be fully achieved.
While all this limits the value of preferences to the LDCs and raises risks of new difficulties in the future, not all features of the OECD proposals have equally negative effects and a good many are quite positive and encouraging. For the first time, all major industrialized countries have joined in a common effort for a major trade initiative of potential benefit to LDCs. That, in itself, is an important step forward. It is equally encouraging that basic agreement has been achieved to provide duty-free entry, rather than merely preferential tariff rates. Moreover, the choice of what is, in principle, a multilateral and general arrangement, rather than a regional one, constitutes an important decision in favor of an open system of world trade. The prospect that reverse preferences for developed countries are to disappear is certainly a long-overdue change for the better. Finally, the proposals all envisage ten-year plans, thus underlining on the one hand the transitional nature of the arrangements and a continuing commitment to MFN as the basic rule underlying world trade and, on the other hand, opening the way to continued pursuit of a general liberalization of world trade barriers.
The shift of the position of the United States in favor of preferences has opened up a critical set of problems which the world's major trading nations must now face. The result may be progress or it may be retrogression. The challenge lies in devising a system of preferences with optimum economic and political benefit for LDCs and a positive impact on the quality of international economic relations. But the threat exists that wrong decisions may be taken or that only half-measures or sham preferences may be possible.
The role of the United States will be critical in providing the leadership necessary to negotiate improvements and avoid the more serious shortcomings of the present proposals. The scope and complexity of the difficult policy problems raised for the United States and its trading partners in the upcoming negotiations are quite considerable.
What is an LDC? The OECD proposals simply imply that any country claiming LDC status is presumed to be one. Perhaps this deceptively simple resolution of an inherently difficult and politically loaded problem is best, but it may not, in the end, prove quite good enough. Will domestic pressure groups in the advanced countries agree that Hong Kong be accorded LDC status? What about Israel? How will Cuba be treated? Must all donor countries agree on a common roster of LDCs, or can each make up its own list without doing violence to either the general and worldwide nature of the scheme or to the principle of burden sharing?
Although preferable, it will not be necessary that every developed country apply precisely the same formula so long as the effect of the different schemes is roughly equivalent. This is certainly not the case as matters now stand and U.S. policy should be strongly directed toward correcting this deficiency. No system of preferences which fails to eliminate completely the existing discrimination against Latin America in Europe should be adopted. Equally important, no major country should be allowed to limit in advance the volume of exports to be accorded preference treatment, save for a small list of exceptions. Here lies a possibly fatal deficiency of some of the present proposals and a major effort should be made to correct it.
Most importantly, it will require hard work by all countries to limit the exceptions lists and to include processed agricultural goods wherever possible. In the United States, the President's influence will be of fundamental importance in ensuring that protectionist sentiment in the Congress is kept within bounds. If this effort succeeds, LDC export earnings may indeed benefit. If it fails-and if other countries follow the U.S. lead-few if any economic benefits for developing countries will ensue and the political reactions could be unfortunate.
Whatever the difficulties in reaching agreement on a constructive global scheme, the United States should avoid a regional arrangement for Latin America alone. Does it really serve our interests to divide the free world into a number of closed trade blocs? What would the situation be for such countries as Korea and Taiwan-certainly important areas from the viewpoint of the United States and not covered by any regional scheme? The potential benefits for our likely clients under a regional arrangement, limited to the U.S. market alone and recognizing the exigencies of even a minimum U.S. exceptions list, would be small indeed. On the other hand, the cost to the free world trading system would be high. Nor is a regional arrangement a particularly useful bargaining card for a subsequent elimination of the EEC arrangements. There are many in Europe who would welcome this approach as the best means to eliminate, once and for all, world pressure against the colonial arrangements of the past. Francophone-Africa itself, given its close and historic economic ties to Metropolitan France, is unlikely to find the threat of a regional U.S.-Latin American arrangement a very potent argument for abandoning its special position in Europe.
The United States will face a serious dilemma if the preference negotiations do not lead to a successful solution of this multitude of difficult and vexing problems. If a regional scheme as suggested by President Nixon is not an alternative, then what is? In that situation, the next best choice may well be to have no preferences at all. Matters would be left as they are today, and an active effort would have to be launched to increase access of LDCs' products to the markets of the rich nations on a multilateral basis, while pursuing the postwar effort for the reduction and elimination of tariff barriers wherever possible and mounting a special attack on nontariff barriers to trade.
Given the LDCs' strong desire for preferences and the stated readiness of the world's industrialized nations to accept a generalized scheme, it is, of course, to be hoped that the current effort will be successful. Should it nevertheless fail, the United States will at least have demonstrated its good will and readiness to accept a reasonable arrangement. This fact, together with the continued pursuit of a general, open and liberal world policy on trade, would leave us in a good position vis-à-vis our trading partners, perhaps with a chance to make another effort at a later date.
Let us hope that the fight for a reasonable world preference scheme can succeed. There is opportunity for the establishment of an imaginative system yielding positive improvements in the economic conditions of the LDCs. It remains to be seen whether the industrialized countries can marshall the wisdom, courage and leadership to take advantage of this opportunity.