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November 12, 1992
"Trade Gamble - The Threatened Tariffs are a Wake-up Call to the European Trade Negotiators That It's Time to Stop Playing Patty-cake, and Start Shoving the French Farmers Toward Compromise"
San Jose Mercury News

By Timothy Taylor
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BY PROPOSING tariffs on $300 million worth of imported wine, canola oil and wheat gluten from Europe last week, the Bush administration took a high-stakes gamble with the global economy.

The tariffs are an attempt to prod Europe toward compromise in the GATT talks. This goal sounds inscrutable or pointless or both to many Americans, for whom the GATT sounds like just another acronym-heavy, ponderously dull, occasionally hostile international bureaucracy. But the General Agreement on Tariffs and Trade is a true success story, both for international coordination and economic growth.

In rebuilding from the physical wreckage of World War II, government leaders still had the economic wreckage of the Great Depression very much on their minds. And one central lesson of the Depression was that beggar-thy-neighbor policies -- in which every country tries to favor its own industry by refusing to import products -- led only to a vicious circle of greater poverty for all nations.

Starting in 1947, the reduction of such trade barriers under the GATT took two steps: encouraging countries to substitute tariffs for quotas -- that is, to use a tax on imports rather than quantitative limits on imports -- and then to reduce the level of the tariffs.

Trade barriers have dropped dramatically; the average tariff was more than 40 percent in the late 1940s; for the 100 countries that are now GATT members, average tariffs are down into the low single digits.

In turn, trade helped the world economy to surge. From 1950 to 1975, world trade increased 500 percent, helping spur an increase in global economic output of about 220 percent. But since the mid-1970s, the growth of international trade and world economic growth have both slowed down. That's not a coincidence; in a perverse way, it helps to prove the importance of trade for economic growth.

But the current round of GATT negotiations -- named the "Uruguay round" after the place where the opening talks were held -- started back in 1986 and has straggled on, without any clear end in sight. The broad outlines of a deal have been set for a couple of years now: nations with developed economies would offer less trade protection to their agriculture and textile industries. In exchange, less-developed countries would allow greater imports of services from developed economies, along with promising greater respect for intellectual property rights.

Economic studies of the deal estimate that it would create an extra $100 billion per year in global production. As the largest economy in the world, the United States stands to gain more than any other country.

But the months have been passing, and one obstacle to the deal has remained immovable: European farmers, particularly French growers of oil seeds, who do not want to surrender their government subsidies. If their objections are not overcome by January, both Europe and the United States will install new teams of GATT negotiators, who will probably have to spend months figuring out what has happened in the last seven years before real negotiations even start again.

If the already-sluggish momentum of the GATT negotiations drops any further, the talks run a real danger of simply freezing in their tracks.

So the Bush trade negotiators decided last week to give the GATT process a good swift kick. The threatened tariffs, which would take effect in early December, are a wake-up call to the European trade negotiators that it's time to stop playing patty-cake, and start shoving the French farmers toward compromise. Europe seems to have received the message.

Even if this strategy works this time around, threatening tariffs has real risks. If Europe responds by imposing counter- tariffs on American exports, then the GATT talks could unravel. If the cycle escalates, the result could be a rerun of the 1930s, when trade restrictions helped turn a staggering global economy into a Depression.

Of course, resolving the Uruguay round of GATT talks will still leave many issues for trade policy. How should regional trade agreements (like the North American Free Trade Agreement or the European single market) interact with the GATT? Will a Clinton-style industrial policy create some conflicts with free trade? How should countries deal with the risks of fluctuating exchange rates? What environmental or labor standards are reasonable for the United States to require from its poorer trading partners, like Mexico? Does the process for dealing with "dumping" need reform?

But for all trade issues, the GATT is the basic international framework under which they can be discussed and settled. A breakdown of the GATT could make resolving any of these issues far more difficult, and wipe out almost 50 years of progress toward freer trade.

Since World War II, the United States followed the policy of pursuing world peace by equipping huge armies and building weapons of mass destruction. Now the United States is trying to save the GATT talks and promote free trade by threatening to trigger a trade war.

It's a crazy, counterintuitive old world, where nations threaten to ignite what they most fear, in order to avoid those very same fears coming to pass.

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