In Praise of Lesser Evils
Can Realism Repair Foreign Policy?
FOUR U.S. PRIORITIES
In the spring of 1945, Franklin Roosevelt's last message to Congress set out his vision of the postwar economic challenge the United States would face. Predicting that "the world will either move toward unity and widely shared prosperity, or it will move apart," Roosevelt called global trade talks the chance "to lay the economic basis for the secure and peaceful world we all desire."
Sixty years later, this global vision remains at the heart of U.S. economic policy. But the international trading system has its flaws and inadequacies. The common framework established by the World Trade Organization -- a cornerstone of global growth -- is a limited one. Political inertia, slow reaction time, a tendency to produce least-common-denominator agreements, a desire for more selective trading privileges, and the system's understandable inability to address the pressing concerns of each individual member have led countries around the world to pursue additional agreements and understandings.
The Doha Round's focus on agricultural reform and manufacturing tariffs is an admirable attempt to align the treatment of industries and products that are important to the poor with that afforded the high-tech and heavy industries. But today, the United States confronts a series of challenges that are at least as urgent as Doha and which the Doha negotiations are not going to solve. Some are beyond the scope of the talks. Others, such as U.S. economic engagement with India and Russia, are bilateral in nature. Still others are fundamentally regional or may require involvement by wealthier nations in concert with the United States. Whatever the outcome of the Doha Round, four issues in particular will remain pressing for the United States.
First, global trade and capital flows are dangerously unbalanced. With a current account deficit nearing 7 percent of GDP, the United States is effectively relying on Asia's willingness to cover the U.S. budget deficit and Americans' shopping bills. Conditions in Asian countries and some other big economies mirror U.S. vulnerabilities, as these states rely on U.S. shoppers for jobs and growth. Doha is the wrong forum to negotiate the short-term reduction of such imbalances, and it is unlikely to help contribute significantly to the long-term rebalancing that could emerge from ambitious agreements among selected countries.
Second, South America is drifting. From Colombia and Venezuela to Argentina, the continent has entered its eighth year of political and economic uncertainty. This has strained the consensus of the 1990s on democracy and open markets: four elected presidents have been forced from office since 2000, and authoritarian populism is a renewed phenomenon.
Third, Asia's economic integration is a powerful challenge to U.S. leadership of the global economy, and it could unsettle international politics and diplomacy. The East Asian economies are integrating at blinding speed, and China has joined the United States, Europe, and Japan as one of the world's great economic powers.
Fourth, the Muslim world's economic decline, unnoticed in the West for more than a quarter century, has helped create the largest security problem in the world today. The greater Middle East, from Morocco to the Central Asian republics, remains the region least integrated into the trading system, the one most isolated from export markets and foreign direct investment, and the most volatile.
Each of these concerns is complex and multifaceted, and cannot be tackled by international trade policy alone. But with clearly articulated goals, trade policy and international economic agreements can play a pivotal role.
GLOBAL IMBALANCES AND SERVICES TRADE
To start, the United States, along with Japan, Europe, and China, should commit to reduce global trade and capital imbalances. U.S. finance and trade accounts are in chaos, with a current account deficit close to 7 percent of U.S. GDP -- far more than the previous U.S. record of the 1980s -- and above 1 percent of global GDP. No leading economy has ever sustained a debt buildup of this level in peacetime. And the global economy cannot be stable with so much of the world's growth and employment prospects resting on the continued willingness of Americans to borrow and buy.
All major economic powers should be willing to make some modest sacrifices to avert either a long-term buildup of liabilities that will reduce growth prospects for the next generation or a sharp financial shock and dollar crisis. Concerted action is necessary to begin redressing imbalances, supplemented by a longer-term agreement on services and technology trade that would encourage a shift in trade and consumption patterns down the road.
The first step in this effort should be a major international finance initiative. The International Monetary Fund, among others, has outlined its essential components. Deficit reduction and measures to restore private savings in the United States would need to be complemented by further currency appreciation in China and sustained reform to accelerate growth and demand for imports in Germany and Japan.
Next must come a structural shift to export-intensive growth in the United States. U.S. exports now account for only 10 percent of national GDP -- a percentage higher than that only for a few landlocked African countries, such as Burkina Faso, Burundi, and Rwanda, and comparable to that for the West Bank and the Gaza Strip. The Doha Round seems unlikely to do much about this problem. Most formal trade barriers to U.S. manufacturing exports are already down, so the challenge is more about reform of U.S. light-industry tariffs rather than export opportunities. Agriculture, which is heavily protected internationally, does offer export opportunities, but its share of world trade is likely to drop as time passes.
Services, on the other hand, which now make up a third of U.S. trade and 40 percent of U.S. exports, could quickly expand in a more open global environment. The Doha Round opened with ambitions in this field, but it has done little to date and seems unlikely to achieve much more. This does not reflect a failure of the negotiations: services trade is a more complex topic than goods trade, most services commitments require a sophisticated regulatory apparatus, and as many as half of the WTO's current members are ill equipped to negotiate or implement such obligations. Even a genuinely ambitious WTO services agreement would raise sensitive questions -- such as cross-border labor flows for rich countries and investment policy for developing countries -- that few governments are ready to confront head on.
For the next decade, the main opportunities for expanding services trade are in exchanges among the more advanced economies. Leading candidates include the United States, the EU states, Canada, and Japan, as well as smaller economies such as Australia, Hong Kong, New Zealand, Singapore, and Taiwan. Together, these countries account for more than three-quarters of commercial-services exports and imports and will yield most of the near-term growth in services trade. Rather than promote a broad global agreement, the United States should consider an agreement binding the wealthier economies and perhaps some of the more advanced developing countries to open trade in services. Alternatively, the United States and the EU, for example, could negotiate a separate services free-trade agreement. Either approach would create a model for future agreements at the WTO.
LATIN AMERICAN DRIFT
The United States and the Latin American democracies should reshape and unite their existing individual free-trade agreements, including the North American Free Trade Agreement (NAFTA), into a single hemispheric agreement. The Mercosur countries -- Argentina, Brazil, Paraguay, and Uruguay -- and small Caribbean democracies should have the option to join as well.
The United States currently faces the risk of economic uncertainty, political upheaval, and polarization of relations with Latin America. Since the late 1990s, South America has been affected by recession, punctuated by two financial crises. Colombia remains at war. Venezuela has lapsed into authoritarian populism. Ecuador and Bolivia may be influenced to move along the same path. And the moderate democratic-socialist alternative represented by Brazilian President Luiz Inácio da Silva (Lula) is struggling, too.
As South America drifts, the United States' claim to leadership in the hemisphere is waning. The governments, the press, and the public in the region see Washington as unduly obsessed with Cuba and the International Criminal Court while indifferent to their troubles. The vision of the hemisphere embraced at the first Summit of the Americas in 1994 -- which revolved around a sense of community and shared destiny to be embodied in a hemispheric free-trade pact -- is now close to collapse.
The United States needs to restore its claim to leadership and help the hemisphere recover a sense of direction. The best way to do so would be to work in earnest to revive the Free Trade Area of the Americas as the linchpin of sustainable growth and stability in the hemisphere. Short of this, the United States should combine all of its existing agreements with countries in the region. It currently has NAFTA, a free-trade agreement with Chile, and another with the five Central American republics and the Dominican Republic; it is midway through bilateral talks with Colombia, Panama, and Peru. These six individual agreements, with their varying rules and mountains of paperwork, might do little to increase overall trade and a lot to divert trade from within Latin America. A shift in focus, with a view to uniting all these agreements, would salvage part of the earlier vision of unity; create a simpler, more efficient system better able to promote growth; and ultimately help to revive the larger hemispheric ambition. A high-standard agreement could likewise serve as a template for similar initiatives, including at the WTO.
The United States should reengage in trade and diplomacy across the Pacific by negotiating comprehensive trade agreements with Japan, South Korea, and the major economies among the Association of Southeast Asian Nations (ASEAN); intensify engagement with China, including by supporting China's membership in the G-8 group of industrialized nations; and reinvigorate the Asia-Pacific Economic Cooperation forum (APEC).
The United States faces a powerful competitive challenge across the Pacific, and Asia faces questions about great-power relationships and security. The source of this, in contrast to the challenges faced by Latin America, is a fundamentally positive development.
Over the course of ten years, Asia has accomplished the type of economic integration that took Europe five decades. The only real difference is that, whereas Europe's integration followed a blueprint designed by government policymakers, Asia's integration has been driven by investment and trade. Each year, mainland China receives $50 billion to $60 billion in foreign direct investment, with the vast bulk coming from Hong Kong, Japan, Singapore, South Korea, and Taiwan. According to Chinese government statistics, these investments have created up to 20,000 new manufacturing facilities a year, combining the benefits of China's low production costs and large reserves of manpower with the financial and technological power of its wealthier, more advanced neighbors. Trade is following quickly, as Japan, Korea, and ASEAN countries begin to turn to China rather than the United States as their main trading partner. Beijing is capitalizing on this impetus by working toward preferential trade agreements with much of Asia. An informal "Asian Union" is thus emerging across the Pacific, bolstered by rapidly improving human capital, rising research spending, and some $2 trillion in financial reserves.
This evolution naturally raises questions for both the United States and the major Asian countries. It should spur a searching debate about U.S. competitiveness. Just as Asia's finances, manufacturing competitiveness, and human capital are improving, the United States' are weakening. Large and prolonged current account deficits in the United States are increasing the country's debt load. U.S. human capital is not improving -- graduation rates in science and engineering have been stagnant for twenty years -- and restrictions on visas for foreign students since the attacks of September 11, 2001, are exacerbating the problem. Government research spending has been falling in real terms since the 1970s. And China's ambitious Asian trade agenda has no counterpart as yet in the United States. As Asia unites and becomes more competitive, the United States' role in the Pacific is visibly waning.
Asia, too, faces difficult questions. Rather than ease political tensions, the rise of China and the integration of Asia seem to be exposing a latent rivalry between Japan and China. This is in no country's interest. U.S. reengagement with the economies of the Pacific, coupled with a commitment to reform some U.S. policies at home, can help restore a political and security balance that will serve the needs of the United States, Asia, and the world at large.
As a starting point, global economic and financial institutions need to be reshaped to accommodate a China that has joined the world's major trade and financial powers; China should be invited to join the G-8, for example, and its IMF quota allocations should be increased. The APEC process needs to be revived, with a Pacific-wide focus on issues of shared concern, such as finance, energy, climate change, and aging. The United States should balance China's network of preferential agreements by using its existing trade agreement with Singapore and the one in progress with Thailand as starting points for new initiatives with Japan, South Korea, and the other big ASEAN economies. These agreements could, in turn, reenergize APEC's vision of free and open trade. Current debate over China in the United States focuses on sore points such as currency reform and intellectual-property protection. These issues must be addressed. They must also be integrated into an ongoing economic dialogue covering the full range of financial, trade, and investment issues between the two countries. That dialogue should, in turn, strengthen a multilateral system dependent on a sense of shared responsibility.
THE MIDDLE EAST
The United States must spur the WTO to address the multilateral system's greatest single failure: the economic decline and marginalization of the greater Middle East, the group of 25 majority-Muslim states from Morocco to the Middle East, Central Asia, and Muslim South Asia. These countries must be integrated into trade negotiations, manufacturing trade, and the mainstream of investment, through trade-preference policies, the early implementation of Doha commitments, and WTO membership.
The greater Middle East, once the center of international commerce and intellectual "globalization," now resembles a miniature version of the closed and fragmented world economy of the 1930s. Its share of global trade and investment has plummeted, dropping by nearly 75 percent between 1979 and 2000. While it continues to rely on quick cash from oil, countries in Latin America and Southeast Asia have moved on to value-added agricultural products and light-manufactured goods, creating more jobs and spreading money more evenly through their populations. The countries of the greater Middle East barely trade with one another; Jordan's King Abdullah has described the region as "a series of isolated islands of production," rather than the integrated economy it was for most of its history.
Middle Eastern governments participate less than those of any other region in the WTO. Eleven of the 22 Arab League members, four of five Central Asian Republics, Afghanistan, and Iran are all outside the system, leaving high barriers in place -- to their detriment. Boycotts and international sanctions have further deepened this isolation. The causes of the region's fragmentation are numerous, led perhaps by postcolonial economic nationalism, which remained popular in the Middle East and South Asia long after it lost its appeal elsewhere. The result is a range of individual countries relatively closed to outside trade and investment.
The greater Middle East has in effect experienced a quarter-century experiment in deglobalization. As its share of trade and investment has shrunk, its population has boomed from 340 million to 600 million. Per capita income in the Arab world has dropped from $2,300 to $1,600 between 1980 and 2000; in South Asia and Iran, it never got that high to begin with.
Lack of interest in the United States and Europe, meanwhile, means that Western trade regimes have begun to tilt away rather than toward the major Muslim states. Washington has lifted tariffs for clothing imported from Africa and Latin America but retains tariffs of 20 percent for T-shirts and 32 percent for sweaters and other goods from Afghanistan, Pakistan, Egypt, Turkey, and other countries. The Common Agricultural Policy's $3 billion in annual olive-oil payments, which keeps the prices of EU goods artificially low, blocks Moroccan and Tunisian oil from U.S. supermarkets even as U.S. consumption grows. Neither Europe nor the United States has made a significant effort to reform its policies. The EU's economic policy toward countries around the Mediterranean (known as Euromed) excludes most agricultural issues. The United States' proposed Middle East Free Trade Area is, at best, a decade away, and in any case would exclude Afghanistan, Pakistan, and Turkey.
Such a situation would raise political temperatures anywhere in the world. In the greater Middle East, rife with ethnic and religious rivalries, it is all the more destabilizing. Just as the global economy's collapse in the 1930s formed the backdrop for radical nationalism in Asia and Europe, the decline of Muslim economies gives radical fundamentalism a set of grievances and a recruiting pool.
The Doha Round offers no near-term solution to this volatile situation. With reform now under way in several countries, notably Pakistan and Egypt, the United States, Europe, Japan, and China should respond by launching preference programs matching those awarded to other regions and by immediately implementing Doha commitments in textiles and agriculture. Meanwhile, all WTO members need to cooperate to bring the remaining Arab states, the Central Asian countries, Afghanistan, and perhaps later a reforming Iran into the WTO system.
Where does this leave the ministers meeting in Hong Kong? Sixty years ago, Roosevelt and his colleagues had the insight and imagination to see that the policies of the past had failed. Today, by contrast, ministers have the opportunity to build on success. Through the Doha Round, they can create a trading system that better meets the hopes of the poor. With or without Doha, however, the United States faces pressing matters to which it must attend.