China’s New Vassal
How the War in Ukraine Turned Moscow Into Beijing’s Junior Partner
Unless there is new legislation, the President will, at midnight on June 30, 1967, lose his power to cut American tariffs in trade bargains with other countries. The situation is familiar enough. Eleven times already the country has faced the question of renewing the grant of power first made in the Trade Agreements Act of 1934. Each time, Congress has prolonged the power, sometimes enlarging and sometimes reducing it. Mixing long-run policy and short-run tactics to get the best possible terms for the renewal of trade legislation is an old art in Washington. But this renewal is different.
It is different because if the Kennedy Round-the tariff negotiations that have been going on in Geneva for the last few years-comes out as it seems likely to, we shall be on the threshold of a period in which trade negotiations among industrialized countries will take on new forms and a greatly enlarged scope. Sooner or later, though not necessarily in 1967, the President will have to be given new kinds of powers to engage in trade negotiations: an extension of the existing ones to cut tariffs will no longer suffice. (And if the Kennedy Round does not live up to reasonable expectations, the issues involved in a 1967 renewal will look different again, but for other reasons.)
Though trade negotiations may not be quite as unpredictable as dice or cards, it is surprising how much agreement there is among those who have looked into the matter as to what may come out of the Kennedy Round. The main impact will be on trade in manufactured goods among the advanced industrial areas-North America, Western Europe and Japan. Some important products will not be touched, but for many others duties will be cut in half (the largest possible reduction under American law, with a few exceptions). For still other goods there will be some kind of in-between cut, especially if one country has very high tariffs and another very low ones. Averaging tariffs is a questionable practice, but some brave souls find it reasonable to say that the total effect will be a reduction of tariffs amounting to perhaps 25 percent or, with luck, as much as 35. Something may also be done about non-tariff barriers, but for the most part this will be unfinished business, opening questions for the future. Agricultural exports are important for the United States, but it is hard to see how anything more can be expected than tariff concessions on a few products, some temporary understandings about the course of trade over the next few years in some major products and the beginning of a serious effort to negotiate in quite new ways so as to mitigate the costly clash of national farm policies in the future.
All this sounds prosaic enough. Where are the new horizons? Only as we look at the problems that will have to be dealt with after the Kennedy Round does the new prospect unfold.
The tariffs that remain after the Kennedy Round will not be negligible, and any new legislation aimed at them will have to start by renewing at least the President's existing powers. But would another 50 percent reduction be worth the trouble of going through the mill of another massive multilateral tariff negotiation? Simpler ways can be found, provided, of course, governments are willing to make further cuts. For example, tariff rates might be reduced a certain percent each year. Or levels could be set to which all countries would reduce their duties on certain products, thus producing a degree of "harmonization" which many people feel desirable. Rules can be devised to allow enough flexibility to permit each country to move a little more slowly on its hard cases if it moves a little more rapidly on others, or to permit a country with low duties to reduce them more slowly than those with higher rates. Formulas are neither magical nor scientific, but one can see that a general rule of this sort would simplify trade negotiations and probably enhance their effect.
Tariffs on trade among the industrial countries have been reduced much more than is generally realized. Many are far lower than at any time since the depression or, in some cases, since the end of the last century. The United States has quite a few rates that are one-quarter of what the were in 1934 and many that are almost as low. Within the Common Market and the European Free Trade Area, tariffs will soon disappear. If the Kennedy Round cuts duties by another quarter or a third, much of the world's trade in manufactured goods will move at tariff rates of less than 10 percent ad valorem, or not much more. Inevitably one asks, "If that much can be accomplished in twenty years without great disturbance, why not more?" Can the remainder not be removed in, say, another ten-gently, year by year?
This picture may, however, be illusory. The last quarter of a tariff may be what really protects, so that it would prove harder to remove than the first three quarters. A 10 percent tax can be very important in a highly competitive market; also, it may be equivalent to several times that much if what is being protected is only the cost of manufacturing, when raw materials are imported at low or no duties. (But then past cuts may also have been greater than they seemed.) An opposite view of things after the Kennedy Round would be that if tariffs are low enough they make so little difference to trade that they may not be worth the effort of removing. The evidence on all these points is limited and conflicting; generalizations are unwise. The fact of the matter is almost certainly that some low tariffs have a significant effect while others do not, and that negotiations will reveal more than analysis will about which further steps will be relatively easy and which very hard.
We can be sure in advance that governments will not be willing to apply simplified procedures for the reduction of tariffs to all their trade. Some of the hard cases might be attacked instead by a new way of negotiating that is taking shape during the Kennedy Round. Called the sector or industry-by-industry approach, it largely grew out of the fact that there was a danger of no significant tariff reductions being made in several major industries because one country or another wanted to hold out key products from the across-the-board cut of 50 percent. Consequently others were unwilling to make their best offers. So long as the approach was product by product, reluctance in the most timorous country blocked all action, often to the disadvantage of other parts of the same industry. In chemicals and steel, for instance, several major countries have both an export interest and a protected sector. By looking at each of these industries as a whole, the negotiators opened the possibility of working out balanced bargains covering tariffs and non-tariff barriers as well. Too little is publicly known as yet to make a confident appraisal of this technique. It suggests questions about relations between governments and businesses and among producers in various countries that will have to be looked at warily. Still it is noteworthy that Eric Wyndham White, the Director General of the General Agreement on Tariffs and Trade, has suggested that this approach could provide a way of moving toward free trade in a number of industries, particularly those with large enterprises and fairly advanced technologies.
If that technique works in the hard cases, and deep cuts are made in other across-the-board duty rates, then the Kennedy Round will have opened the prospect of the elimination of tariffs on trade in manufactured goods among industrial countries. Free trade, so long an impossible ideal for some and a worrisome spectre for others, will become, for the first time in nearly a century, something that can be seriously contemplated as a reasonable objective of policy. But the Kennedy Round has also made clear-if there was ever any doubt-that the removal of tariffs does not by itself produce free trade.
One of the advantages of the industry-by-industry approach has been to clarify the significance of non-tariff barriers in each industry and to help link their removal or modification to tariff changes. But no matter what technique is used, non-tariff barriers will have a prominent place in future trade negotiations. So far as quotas and exchange controls are concerned, the question is largely one of enforcing existing rules. But large numbers of other barriers fall outside any agreed international code and present difficult problems. Their variety is great. Some devices enhance the effect of tariffs-for example, by using artificial prices to calculate duties and assigning goods arbitrarily to customs classifications with higher duties. There are suspected abuses of legitimate practices, as in the application of anti-dumping duties. "Buy American" laws are only the best-known example of the very widespread practice of discriminating against foreign goods in governmental purchasing. Some European countries have taxes that fall disproportionately on large (and therefore largely American) automobiles. Sanitary rules, marking and labelling requirements, copyright and trademark laws, and many other regulations may also have the effect of restricting trade. So do some private business practices. Sometimes restriction is a byproduct of activities that have other major purposes, but many practices are undoubtedly subterfuges. How damaging each is, and to whom, are matters still in dispute.
These barriers are too numerous and too diverse to be dealt with in a simple, comprehensive way. Some would require detailed agreements; some might yield to a more general code; others will undoubtedly have to be dealt with case by case, or under some kind of complaints procedure. Concern with non-tariff barriers is not entirely new, but the Kennedy Round has moved them to a new position of prominence and set them firmly on the agenda of future trade negotiations. As tariffs become less restrictive, non-tariff barriers become more important; and they affect the pace of tariff reduction as well. For example, European countries may link their reductions of duties on chemicals to the modification of the "American selling price" rule which has the effect of raising United States duties on some of their products. Other non-tariff barriers are likely to be treated in the same way in the future. What Percy Bidwell christened "the invisible tariff" is becoming more visible.
This prospect that the Kennedy Round has opened leads to another one. To start talking about non-tariff barriers is to open a subject that has no logical end. All manner of government activities undertaken for all sorts of reasons may have the effect of restricting trade, or at least of putting foreigners at a disadvantage compared to domestic producers. What is a trade barrier? When will it be brought into international negotiations? These are questions of new scope for the future. For example, border taxes related to domestic turnover taxes and the like have traditionally been regarded as not affecting foreign trade. Now that idea is being called in question, but the implication of change reaches deep into national tax structures and raises questions about exchange rates as well. And as tariffs fall, national laws and policies about prices, wages and business practices take on a new international importance. The foreigner's concern with depreciation allowances, shipping laws, government-financed research and the more recondite forms of subsidy grows. Only far in the future can one imagine international negotiations covering quite so wide a range of subjects, but much sooner there will be questions about these practices and others that influence trade negotiations.
Agriculture, for so long the bad boy of international trade liberalization, is already posing similar questions. For decades large segments of agricultural trade have not only been exempted from the general process of lowering trade barriers but have been subjected to new restrictions. More than simple protectionism and the political strength of farmers went into this process. Many of the restrictions were the logical consequence of domestic farm programs like those in the United States which kept domestic prices above world levels and often sought to limit output as well. In the Kennedy Round the United States and other producers outside the E.E.C. found themselves faced with a complicated new agricultural policy applied to the whole Common Market. Close and ingenious attention had been given to working out its implications for imports with a degree of logical rigor that promised to create something very much like a self-sealing mechanism. For some important products the outside world seemed likely to be put in the position of being able to supply the Six only when their own production fell short. The effect was enhanced by an increase in production and productivity coming not only from the prices offered under the new policy but even more from a technological revolution in agriculture comparable to that which put the United States back into its historical position as a low- cost exporter.
There is no way out of this impasse if negotiations are confined to trade barriers alone. So long as countries adhere to policies of this sort, there is little hope of liberalizing agricultural trade except by agreements that affect the policies themselves, not just the tariffs, quotas and variable levies that support them. If there is to be progress at all, governments have to be willing to talk, negotiate and give undertakings about such things as price-support levels, subsidies, production control and the financing of surpluses, as well as about the regulation of imports. This awkward fact is widely recognized, but whether governments will be willing to act on these premises, will be able to reach agreement and will then be able to overcome the obvious domestic political obstacles to putting agreement into effect are questions which give some inkling of the difficulties of future trade negotiations. The most the Kennedy Round can do is to start the process-and it could fail in the effort.
Agriculture as a mid-sixties exemplar of future international trade negotiations is about as unlikely a picture as one could imagine. The reasons are peculiar to agriculture. The agreements that might be made are not at all like those to be sought in negotiations about manufactured goods. The position in agriculture has been reached through the impossibility of dealing with trade barriers in the conventional way, while in industry it results from success in removing them to the point where other barriers stand revealed. And yet the two have something in common: both indicate that the trade policy of the future, if it is to make progress at all, will entail international discussion, negotiation and perhaps agreement on a whole range of things normally regarded as domestic.
That conclusion is not quite as shocking as it may seem at first sight. Defense and its economic impact have been of mutual concern to the United States and its allies for a long time. We made the domestic economies of Europe and Japan our business from the end of the war on. It is not just our difficulties with the balance of payments that have given other countries reason to be concerned about American recessions, inflation, interest rates, wage policies and general economic health. From concern has come international discussion, sometimes negotiation and, in varying degrees, undertakings. National autonomy has not given way to international obligations but it has not been left immune either. So it is not surprising if trade, the biggest international economic nexus of all, should lead in the same direction.
At the same time that what was thought to be domestic is becoming of greater international concern, the international economy is developing in ways that raise questions about what is any longer national. Europeans and Canadians ask themselves whether American ownership of segments of their industries and American involvement in their financial systems are denationalizing their economies. In underdeveloped countries some people who long ago thought they knew the answer to that question are now beginning to wonder if the expansion of the economy that is theirs to control does not depend in part on a willingness to accept more foreign enterprise. Oil-producing countries that are financially weaker than some of the companies that operate within their boundaries are finding ways to balance the seesaw while the international companies try to become good citizens of a dozen countries at once. Americans too have some questions. In 1964, manufacturing companies in Western Europe of which Americans owned at least 25 percent, and which they usually controlled, had sales equalling $16.5 billion, over twice the amount of U.S. exports to Western Europe that year. The figures are not strictly comparable and they are obviously very different in their economic meaning, yet they raise questions. Can one fully understand the American trade interest in Europe by looking at exports alone? What is the relation of American investments to European trade barriers? More fundamentally still, what is the American economy? Clearly it is not just a geographical entity surrounded by a tariff and an invisible monetary line. Our foreign trade is not just something that crosses the customs frontier or involves the exchange of dollars for other currencies. But how to define the economy is not clear, and so there must be doubt about how to define the national economic interest as well. With the United States government and most foreign governments declaring, in common but for different reasons, their interest in American investment abroad, it takes no vivid imagination to see how the area of international discussion will broaden.
Broad as they are, these prospects opened by the Kennedy Round apply only to part of American foreign trade. The possibilities of free trade in manufactured goods, negotiations about national farm policies, greater attention to non-tariff barriers and the increasing international discussion of formerly domestic issues are relevant primarily to our trade with Western Europe, Canada and Japan. The third of our trade that is conducted with the underdeveloped countries and the less than 1 percent with the Communist countries present quite different perspectives.
Trade with the Soviet Union and the Communist countries of Eastern Europe has some of the characteristics of trade among the industrial countries of the free world, but not many. Its own peculiarities make it a realm in which different approaches are needed. This is not just a matter of the security control the United States applies to its exports to these countries. The far larger West European trade with the East still involves quotas, bilateral balancing and even barter. No one has yet found a satisfactory way of laying down a set of rules for relations between state trading bodies and private enterprises. It makes sense to permit Communist states to take part in GATT under reasonable conditions, if they want to, but it is wrong to think that this will solve many problems. What it will do is to provide a way of dealing with the problems of this trade and, as time passes, may produce a more satisfactory kind of relation, perhaps even a workable body of rules. Decentralization of economic authority in the Communist states makes it a bit more likely that they can be fitted into a reasonable system; it even gives their tariffs more meaning than in the past. Trade can expand without all the problems being solved, but not satisfactorily if they are ignored.
In relation to the Soviet Union, the United States needs more flexibility than it has had in the past so that the President can negotiate effectively. He already has considerable discretion over export controls, but its use depends on political circumstances.
He needs the power called for in a bill not passed by the last Congress to end tariff discrimination against the Communist countries in return for satisfactory commitments on their part. Not commercial advantage but the ability to negotiate should be the main American aim.
Trade with the less developed countries is different again. Our concern with their growth and stability might reasonably lead us to agree to some rather one-sided trade bargains. There is already agreement that the rich countries will not ask full reciprocity from the poor ones, at least so far as the removal of trade barriers is concerned. But this should not be taken to mean that the less developed countries have a blank check and no obligations. If their trade policies amount to nothing more than protection, restriction and the subsidization of exports, they will choke their development instead of fostering it. And even if they follow very enlightened policies, what they can do for themselves in trade depends largely on the developed countries' willingness to open their markets to the competitive products of the poor, low-wage countries.
What blend of measures will contribute most to development and a rational pattern of world trade is a subject going beyond this article. The problems are not simple. For example, a whole choir calls for tariff preferences in favor of the exports of the less developed countries. But any prescriptions ought to be written with a clear recognition that the developed countries have shown less willingness to remove barriers to imports from less developed countries than on trade among themselves. Generous talk about special treatment should always be compared with the reality of the elaborate international arrangements to restrain trade in cotton textiles, one of the few manufactured products that a number of less developed countries are able to export in quantity.
The interconnections between these two segments of trade somewhat blur the distinction implied by saying that the United States needs different policies toward these two kinds of trade. Pointing in the same direction is the fact that a simple division of countries into developed and less developed is too crude to guide policy for very long. Both considerations remind us that the basic elements of American trade policy involve more than the reduction of trade barriers. Other essentials are an agreed body of rules, an organization to look after their application and a way of discussing problems and hearing complaints. This last function becomes increasingly important not only as special categories are recognized, such as "advanced less developed countries," but also as negotiations among the industrialized countries move from the familiar field of tariffs into the unfamiliar ones of non-tariff barriers and other practices that interfere with trade but are not covered by clear-cut rules. One more fundamental of American policy is support for the principle of equal treatment. That statement may ring oddly in a world full of discriminatory trade practices and juxtaposed to acceptance of the case for special treatment of less developed countries. But there is no real inconsistency. To accept departures from the principle of non-discrimination because they permit the removal of trade barriers, as in the case of the Common Market, or to meet special circumstances, as in the case of the less developed countries, is entirely different from abandoning the framework of non-discrimination. In that direction lies the hodgepodge of bilateralism that grew up in the depression, the abandonment of past commitments and the erosion of the accomplishments of the postwar period. Quite different horizons would appear from those described in the first part of this article. Not just American political and economic interest but the rational ordering of world trade depends on constant advocacy of equal treatment.
No trade legislation in the coming year can deal with all these issues. Some are not ready for action, others not yet well enough understood for us to know just what to do. Whatever is done in 1967, whether modest or ambitious, cannot be the solvent for trade-policy problems for the indefinite future, but whatever is done, particularly if it is ambitious, ought to take account of the new prospects that have been opened by the Kennedy Round.
Whether to ask for little or to ask for much is one of the classic problems of the renewal of trade-agreements legislation. A cogent case can be made for the view that with so many new problems arising the best course would be an extension of the existing act for a year or two. That would permit the President to tie up the loose ends the Kennedy Round is bound to leave, while preparing at home and abroad for the kind of approach that will be needed to deal with the problems of the future. The contrary view is also cogent: equip the President to take broad initiatives immediately, in order to build on the momentum of the Kennedy Round and guard against erosion or stagnation here or abroad. This view has its attraction. President Kennedy took the plunge when treading water would have been understandable, and he got the greatest advance in trade legislation since 1934. But he had some advantages that are now absent: the chance to break with a stagnant trade policy; the widespread feeling that the United States had to meet the challenge of the Common Market; and the wish to find a concrete expression of "partnership." No political equivalent of that situation exists now. The idea of an Atlantic free-trade area, which attracts some people, not only lacks charisma but has a negative political charge in the present state of transatlantic relations. It might also create more trade-policy problems than it would solve.
Still, the possibilities warrant something more than temporizing and some positive action would be a better earnest of American intentions than putting the decision off.[i] It should not be too difficult to draw up sensible proposals for broadening the President's power to cut or remove tariffs; to start on the problems of non-tariff barriers; to act on some of the issues of concern to the less developed countries; and to negotiate effectively with the Communist countries. How much can be done depends on a number of circumstances that are riot now predictable-not least on what sort of agreement the negotiators bring home from Geneva and especially its agricultural provisions. And if instead of the satisfactory outcome of the Kennedy Round assumed earlier in this article there should be a very disappointing result with only dribs and drabs of unimportant trade concessions, still another situation would exist. Then the case for delay would be strong, to give time to consider whether the failure of the most elaborate effort yet made to reduce trade barriers might not mean that we needed new ideas about how to approach the subject. That kind of outcome would also raise very serious doubts about what the American people are willing-or ought to be willing-to do in trade policy.
There is another possibility, one hopes an unlikely one. That is that the Kennedy Round will become a political sacrifice, killed or made barren by some effort to strike at the United States, the demandeur who has been more interested than others in its success. If that happened, we would have many decisions to make, and trade policy would quite properly have to be looked at primarily in terms of what use it might be as an instrument of foreign policy. Choices that would be considerably less than second best from the point of view of trade-such as trying to form some kind of trading group omitting the Common Market-would have to be seriously considered. But the prospects of a broad liberalization of world trade are more likely to be set back than advanced by that course.
The less dramatic course suggested earlier does not imply a divorce of American trade policy from foreign policy. Quite the contrary, it assumes that long-run American interests are on the whole well served by persistence in the long and slow process of trade liberalization. There are moments when some foreign-policy aim can hasten the process by galvanizing the country to action it would not otherwise take. There are also risks of setting back the process in the effort to make trade policy respond too closely to relatively short-run political circumstances. Certainly the United States can afford economic sacrifices for foreign-policy ends; it makes them every day. But it is also easy to exaggerate the value of trade policy as a political weapon.
Perhaps trade relations among the industrial countries of the free world- though not East-West or North-South trade-have reached the point at which they should ordinarily be looked at as workaday matters rather than as a form of diplomacy. Certainly the prospects sketched in the earlier part of this article are not those of a preacher's promised land to be attained by those who will be moved to action by a vision. They emerge naturally out of what the advanced industrial countries will have done over the past twenty years and more. That experience has not proved that tariffs and other trade barriers are of no importance or that their removal is the key to prosperity or peace-just that they can be removed without great disturbance and with real benefit.
To look ahead to where we can go after the Kennedy Round is not the same as showing how to get there or laying down a time schedule. The balance of payments of leading countries, and perhaps especially the United States, will offer obstacles; so will difficulties of adjustment and resistance to it. Elections, diplomacy and particular circumstances in one country or another will be at work all the time, more often to slow the process than to speed it. Protectionism is not dead and sometimes takes on new forms. The creation of regional trading arrangements liberalizes segments of trade but at the same time introduces new distortions. And the external tariff of such a group may become not just a trade barrier but also a form of political cement, as we have seen in the Common Market. Broadening the range of trade negotiations to include national policies and practices not ordinarily thought of as trade barriers will itself generate new kinds of resistance and stimulate political fright.
The next stages of trade negotiation will be more complicated than those in the past. Maybe they will be harder. There is nothing inevitable about progress toward freer trade; it depends on what governments are willing to do. Trade barriers do not fall, they are removed. That governments ought to persist in their useful if sometimes pedestrian efforts is clear enough. That conclusion was valid in 1945 when the vision of a postwar liberal trading world was new and hopes of moving rapidly toward it were high. It was valid ten years later when the obstacles to free trade seemed great and the will to pursue it was flagging, and again in 1962 when the United States made its bid to link Europe's internal trade liberalization with the world. What is new in 1967 is not the validity of the case for further liberalization but the prospect that its result will be a new concept of trade relations between nations.
[i] The Council on Foreign Relations will shortly publish a succinct analysis of future needs and specific proposals for the extension of the President's powers by John Evans, an experienced negotiator who for years headed the American delegation to GATT. I have gained much from talking with Mr. Evans and from reading his manuscript.