The Grand Bargain: A New Book Demystifies European Integration
By the close of the administration's first 100 days, President Bill Clinton's trade policy had come under heavy fire at home and abroad. Referring to the international shouting matches over computer chips, steel, minivans, aircraft manufacturing and government procurement contracts, The New York Times wrote of "a growing tension in trade relations provoked by President Clinton's new and more confrontational approach to international negotiations." The Wall Street Journal accused the administration of caring "less about principle than about making a political deal." The Economist called Washington's approach "at best incompetent and at worst a step down a slippery path towards protectionism." And The Financial Times urged Europe to side with Japan against America's new trade initiatives.
European Community ministers talked of America's "unilateral bullying" and of "having to grope in the dark" to figure out what the new Clinton team was trying to do. Japan's ambassador to theECwas more polite, saying only that America's top trade negotiator, Mickey Kantor, "is very new to trade matters." Jagdish Bhagwati, economic adviser to the director general of the General Agreement on Tariffs and Trade (GATT), said: "This should be a spring of hope, and instead we get a nuclear winter."
In retrospect, such charges are not surprising. Fundamental policy changes are never easy to accommodate, and big changes should have been expected. Well before he was elected, Clinton was promising to recast the entire intellectual basis of U.S. trade policy. Trade was to be an integral part of creating competitive industries and high-wage jobs. It was to be placed at the center of foreign policy, becoming at least as important as political and security questions. Clinton had promised to remove the ideological blinders that caused government and industry to regard one another as antagonists. He had committed his administration to putting the issues of environmental and labor practices into trade negotiations. And so it has gone.
The fact is that critics of Clinton's trade policy have fired their shots prematurely and at the wrong targets. The administration's accomplishment in changing the national mind-set on trade policy dwarfs in significance the mini-crises, rhetorical jousting and inevitable inconsistencies that have emerged in these early days. The president has focused on the most basic problems affecting America's international position. He has riveted the country's attention on the federal government's fiscal solvency, a cancerous threat to the long-term vitality of the American economy. He has given priority to improving worker productivity. He has proposed a technology policy to bolster university research, upgrade vocational training and improve the way America transforms basic inventions into commercial products. In his speeches, news conferences and meetings with foreign leaders, Clinton has put other nations on notice that America will no longer make trade concessions in deference to the NATO or U.S.-Japanese security relationship. Clinton and his trade policy makers have done all this in an astonishingly short period of time, and they have based it on the assumption that America's economic trajectory has been arching in the wrong direction for well over a decade. The Clinton team has acted as if the United States has no choice but to make bold departures from existing policies, and that the risk of inaction is greater than the dangers inherent in dramatic change. They are dead right.
THE POTENTIAL REWARDS
The gains from a successful policy could be an essential spur to domestic renewal and to the development of the new, post-Cold War foreign policy that the administration seeks. It is not just that exports have been the most important ingredient in the expansion of America's GNP these past few years, but that almost all the growth of high-wage manufacturing jobs has been attributable to sales abroad. It is not just that some 14 million workers now owe their jobs to exports, but that we will have to do much better than that if today's economic stagnation is not to undermine the very fabric of our society. A vigorous trade policy, which gains greater access for American firms to foreign markets and keeps open our markets to others, will help ensure a competitive economy at home-essential for growth with low inflation. A more effective international economic policy, based heavily on increased trade competitiveness, will enhance U.S. influence around the world at a time when our military assets will be deployed with decreasing frequency. It will also give America the resources and the confidence to make its rightful economic contributions to assist Russia and Eastern Europe in their historic transformations, and to lead in efforts to promote development in Latin America and elsewhere. Viewed from another perspective, a trade policy that fails because it does not result in greater U.S. sales abroad, or because it descends into protectionism, would be a disaster for America and the world. Such are the stakes.
The benefits of a vastly reinvigorated trade policy should not obscure the dilemmas to be confronted or the pitfalls to be avoided. In foreign policy, an aggressive emphasis on commercial diplomacy is essential, but it promises to transform radically the rules, patterns and relationships between America and virtually every major power. Despite the restrained rhetoric of summits and other high-profile gatherings, intense trade competition untempered by the need to band together against a common, Cold War enemy is likely to lead to conflict with all U.S. allies, the implications of which can only be dimly perceived.
So influential is the United States in the world trading system that a highly aggressive American trade policy will have reverberations on all the rules and patterns of international commerce. For over four decades America pushed a trade regime based on multilateral rules, including most-favored-nation (MFN) treatment and nondiscrimination. These were American principles, and they only survived because America championed them. The United States, moreover, kept the system going by being, in effect, the market of last resort for everyone else. While it should be a major American objective to build a trading framework based on multilateral rules--as would be furthered by completion of the Uruguay Round and development of the GATT--from Washington's perspective, today's aggressive bilateralism, resort to selective managed trade and refusal to accept the continuation of America's disproportionate openness are all understandable. But these departures from the original Bretton Woods ideals are likely to lead to a fundamental revamping of the trading systems as other nations react to our actions. As in foreign policy, the implications are far from clear.
A more cooperative relationship between business and government is long overdue, but establishing such a partnership is not easy. An emerging test case is the manufacture and sale of automobiles, where Washington and Detroit are talking about cooperating in development of environmental technology and nearing an apparent consensus on a strategy for better market access in Japan. Americans have little experience in making this kind of experiment work without a considerable drain on the public purse. On the other hand, business has a legitimate concern that government involvement be consistent and not driven by capricious political interests. There is a risk as well that unless the business expertise of the federal government is upgraded, the best plans will falter for lack of skilled management in Washington.
In addressing the problems of the American economy, the administration is rightfully trying to play catch-up for years of underinvestment in infrastructure, labor and technology. During the rebuilding phase, some industries are sure to ask for a temporary respite from foreign competition. Clinton, like his predecessors, will listen and is likely occasionally to grant trade relief, especially in the face of the continuing employment recession. The real question is not whether there will be some protection, but whether Washington has the courage and skill to demand and create shape-up measures for the firms being shielded. Protection without adjustment only undermines future prospects, but again, there is little experience to rely upon.
Clinton's emphasis on export competitiveness is critical, given the importance that foreign sales now play in our GNP growth and job creation. There is occasionally a sense in Washington, however, that exports are good but overseas investment by American firms is bad, because the latter exports jobs and not products. That view needs qualification: more than 25 percent of American exports go to overseas subsidiaries of U.S. firms. In addition, U.S. companies will not be competitive unless they can set up in foreign markets, be near their customers and engage in local research. In the future, Washington will be under simultaneous pressure to keep firms at home and to help them move abroad (or at least not stand in the way). Striking the right policy balance will be difficult, but crucial.
The effort to integrate trade and domestic policy will require great care. Opening foreign markets is essential to the long-term health of the U.S. economy. But hard-won victories can be quickly nullified if American firms are loaded down with new regulatory and financial burdens. The administration will have to ensure that the new costs of health care, worker retraining and additional taxes do not cripple U.S. industries. This is a difficult task, for nowhere is the balance between legitimate domestic and international goals more difficult to manage.
Consistency and coherence in trade policy could also be a problem. In abandoning the rhetoric of Adam Smith, President Clinton only recognized the reality that totally free markets are a myth. But without the kind of clear ideological direction that free market theory provides, actions will often seem inconsistent and subject to the political winds of the moment. President Reagan could exalt the "magic of the marketplace" while protecting automobiles, steel and machine tools, and still appear consistent. President Bush's image as charter member of the friends-of-GATT club allowed his chief trade negotiator, Carla Hills, to brandish a crowbar at America's trade partners with nowhere near the outcry that has greeted Clinton's get-tough message. The administration talks about substituting "pragmatism" for ideology, but pragmatism is too ambiguous a term to garner public support. A better message is called for.
In its new approach to trade, the administration is gambling on cooperative congressional behavior. In the past, the House and Senate have generally taken a harder line on commercial matters than has the executive branch. Clinton is surely hoping that an administration that shows itself to be highly aggressive in trade will be able to lead Congress without stirring up even more hawkish sentiments. It will be a delicate balance.
NEW BOOKS ON TRADE
Current literature and policy seldom mirror one another. Judging from several recent books, however, the administration's outlook on trade is rooted in many of the prevailing intellectual arguments for greater government activism. In Computer Wars, for example, authors Charles Ferguson and Charles Morris look at the future after the demise of IBM. They conclude that American computer firms--the companies on which so much of U.S. industrial leadership rests--face fierce competition from Japan, but there is no reason why they cannot survive and prosper if there are fundamental changes in U.S. patterns of savings and investment, and, in particular, if there is a stronger technology policy. In The Highest Stakes, several professors from the University of California at Berkeley claim that the national security threat "no longer refers to tanks and missiles but also to the control of markets, investment and technology." They worry that U.S. dependence on foreign sources for key industrial technologies like robotics, precision tools and magnetic components has serious military significance. The Next Battleground looks at competition for the European market, but spotlights many of the same preconditions for national or corporate competitiveness.
These are all good books, their arguments grounded in thorough research. As aids for public understanding, they are valuable because they are so clearly written. Given the pace of change in the world today, however, it is difficult for any author to be ahead of the policy curve. Moreover, none of these books analyzes a problem or industry in depth or puts it in the full context of broader trade policy. While these writings are not strong on strategy and tactics--which is not their purpose in any event--together they do raise some thoughts about a host of critical issues.
A WOUNDED EUROPE
Start with Europe. Not too long ago the United States saw the formation of a single European market as a major opportunity for American exports. This view was bolstered by a steadily rising U.S. trade surplus with the ec. But that trend may be over as intra-European trade grows faster than trans-Atlantic commerce, and as Washington loses political leverage in trade negotiations as a result of Europe's reduced need for American military protection.
Europe's economic future, meanwhile, looks bleak because of its declining competitiveness. The ec's economic problems were camouflaged by the euphoria over Europe 1992, but they were mounting nevertheless. Most European firms have never really established effective pan-continental operations. The culture of monopoly and cartels has been dismantled too slowly. Too few jobs have moved to the high-technology industries. Massive subsidies have continued to pour out for "old" industries-- agriculture, steel, shipbuilding and coal. Industrial policy that tried to pick national champions has proved to be expensive and disastrous. In The Next Battleground, Tim Jackson describes the failure of European industrial policies in automobiles, computers and consumer electronics, and he explains how European companies have fallen behind the United States and Japan in the battle for the European market. This point is underscored in Computer Wars, which bluntly asserts that in the computer industry "the Europeans are no longer a factor and show no signs of becoming one.... What is remarkable is not the failure of each country's national champion but ... the astonishing speed and devastating extent of such failure."
U.S. firms may be tempted to gloat and see clear sailing in a foreign market of some 400 million relatively well-off consumers, but this would be a mistake. As The Next Battleground notes, Japanese firms could be in a better position than their U.S. counterparts to take advantage of European weakness. And there is no chance that Europe will cede its national markets willingly. A strong defensive response, characterized by a slower-than-usual approach to trade liberalization and selective but heavy government intervention, is more likely; trade is too integral to Europe's economic, social and political fabric for there to be any other outcome.
THE RIGHT BALANCE WITH JAPAN
If Europe's weakness presents a problem, so does Japan's strength. If there is one argument reinforced in these three books, it is that Japan's industrial momentum will continue, its current recession notwithstanding. All these books take note of Japan's enormous investments in technology and work force training, as well as its constant upgrading of manufacturing techniques. What should America do about Japan? Few American experts still advocate a totally hands-off, free-market approach. Almost everyone agrees on the need to vigorously enforce U.S. trade laws. While an increasing number of Americans accept the idea that most of their competitive problems are home grown, after that, opinions diverge. Some want to attack Japan's institutional structure, such as the interlocking relationships among its firms (keiretsu), which keeps out foreign businesses. Others want to follow a managed-trade strategy in which Japan commits to targets for the market shares of foreign companies in particular industries, such as the well-publicized goal of 20 percent in semiconductor sectors. Some believe that the key is a much stronger yen, which would make Japanese exports more expensive and encourage more imports into Japan. Some look for Japan to grow faster, spend more on public investment and consumer goods, and thereby increase its demand for foreign products. In practice, U.S. pressure on all these fronts will be required, but even that will not constitute a completely adequate policy.
Beyond taking a tough line with Tokyo, there is a need to pool the respective strengths of the two economies--to build on existing links in finance, investment, technology and research, for example. Private markets and firms are moving in this direction (regardless of the barroom bluster among trade negotiators). In The Next Battleground, Jackson argues that Europe should also deal with Japan not by pushing it away, but by joining forces with its firms. Daniel Burstein's recently published book, Turning the Tables, makes important proposals for a more closely knit trans-Pacific economic community. The balance between pressure and cooperation is, of course, the most difficult issue for a policymaker.
THE WORLD BEYOND
Judged by the noise level in Washington and the thrust of the books reviewed here, it would seem that U.S. interests outside of Europe and Japan are distinctly secondary. But some of America's most significant commercial opportunities lie in other parts of the world. The World Bank, for example, estimates that growth in the developing world over the next decade will average about 4.7 percent annually, which is twice the rate of the industrial countries in the Organization for Economic Cooperation and Development. The books waiting to be written, and the policies yet to be developed, concern strategy toward these once peripheral but now crucially important regions.
The most dynamic area of the world is the East Asian rim, not just China but the entire region from Seoul to Sydney. In fact, by the turn of the century, East Asia outside of Japan will account for about one-third of the economic output of the entire developing world. With the exception of Taiwan and China, U.S. trade deficits with these countries are small. Given the projected growth rates in countries such as Indonesia, Singapore, Thailand and Malaysia, there are great opportunities for rapid growth of American sales in the entire area. From automobiles to theme parks, the demands for new goods and services are phenomenal. But penetrating and holding these markets against Japanese and local competition will require not only that U.S. firms be competitive exporters, but also that they set up operations on site.
Latin America, with the huge consumer markets of Mexico, Brazil, Chile, Argentina and others--collectively estimated at well over 400 million people--is projected to grow at twice the rate it did in the 1980s, but it is dangerous to assume that historical preference for U.S. goods and services will continue. A broad approach to cooperation on trade, investment, capital market development and regulatory liberalization will be particularly important in maintaining the momentum American firms have built there in recent years.
Eastern Europe and the former Soviet republics represent challenges totally different from Asia and Latin America. They may well turn out to be major markets and excellent locations from which to produce and distribute goods, but they will require uncharacteristically long-term horizons on the part of American firms and Washington.
Among the most vexing problems facing trade liberalization--and ones not dealt with in the books under review here--are the differences in national regulatory structure. So much of the public brouhaha over trade policy deals with such concepts as market access, dumping and fairness. But different national traditions relating to antitrust, financial regulation, environmental concerns, patent protection and similar policies underlie so many of the real obstacles to international commerce. To call these "non-tariff barriers" is to understate the problem; the various national systems constitute different kinds of longstanding bargains among domestic groups in each society.
There are two reasons why these obstacles will loom larger in the years ahead. On the one hand, tariffs and quotas have been substantially reduced, putting other barriers more clearly in the sights of negotiators. In addition, from America's standpoint, the export of services--as opposed to raw materials and manufactured goods--is booming, with a trade surplus on the order of $60 billion in 1992. But because such industries as construction, insurance and the practice of law have been so local in nature and so removed from international trade, it is in these areas that foreign regulations have evolved quite differently from our own. If the post-World War II efforts to liberalize trade have seemed tortuous to date, we have seen nothing compared to what is coming.
TRADE AND NATIONAL SECURITY
In Europe, Japan and the rest of East Asia, the nexus of trade, foreign policy and national security will cause the administration severe headaches. It is one thing to acknowledge the connection between these competing interests, as The Highest Stakes does, but it is another to deal effectively with a wide variety of situations. In addition to relationships with Europe and Japan, America's economic policy will drive some of the most sensitive foreign policy issues: whether to condition trade and aid with Russia on cooperation with the United States on Bosnia and other matters that come before the Security Council; whether to renew MFN status for China in light of its human rights violations and arms sales policies; whether to normalize relations with Vietnam so that American firms can do business alongside the Japanese and Europeans. When the issues involve high technology--as an increasing number will--still more complications arise, as when American aircraft manufacturers seek to join with Asian and European firms to pool valuable technologies, or when certain dual-use technologies could help outcasts like Libya develop weapons. Many of these issues are not new per se, but they will unfold in an environment where commercial considerations are likely to weigh more heavily on Washington than ever before, creating acute foreign policy dilemmas.
THE MEASURE OF SUCCESS
In the end, President Clinton's biggest challenge in creating a new trade policy is to further the nation's changing domestic and foreign priorities without abandoning America's postwar role in pushing the world trading system toward greater openness. Pursuing these goals in the next year, when slow growth and unemployment remain problems at home, and when Europe and Japan are mired in recession will be an awesome task.
It was much easier for America to champion a liberal, multilateral trading order when the nation was so economically dominant, but it would be a mistake to believe that the objective is not still in U.S. interests, or that American economic assets are no longer up to the task. Of the three books reviewed, only Computer Wars gives sufficient attention to the country's economic dynamism. Much of that dynamism is evident in the recent increases in American productivity and the lead that many American companies have over their foreign counterparts in restructuring their operations and work forces to meet new competition. In addition, financial problems in Japan over the next few years give the administration some breathing room before Toyota, Hitachi and others come roaring back, as they will.
President Clinton's first 100 days in office were no more than the opening act of a new trade policy. It was an important start. The president could not have been expected to do more, either as a newcomer to the Oval Office or as a leader attempting to reorient the basic thinking about trade in Washington and throughout the nation. Daunting as the initial challenge was, however, the road ahead is much tougher.