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The World Trading System at Risk
By Jagdish Bhagwati PRINCETON UNIVERSITY PRESS
Copyright © 1991 Princeton University Press
All rights reserved.
ISBN: 978-0-691-04284-8
CHAPTER 1
Overview
The multilateral trading system, focused on the General Agreement on Tariffs and Trade (GATT), is at a crossroads. The threats presently faced by the GATT arise from a variety of fundamental changes in the world economy. These changes have produced fissiparous tendencies gnawing at many of the basic principles embodied in the GATT.
Recalling that the preamble to the GATT forcefully declares its objective as the pursuit of "reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce," and mindful of its central articles, I may justifiably cite the following as the principal principles of the GATT:
1. A "fix-rule" trading regime is to be preferred to a "fix-quantity" one. Equivalently, "managed trade" (or its populist version, "results-oriented" trade), which seeks quantitative targets of outcomes in trade instead of settling on rules and letting the chips fall where they may, is to be rejected.
2. Multilateralism, where these trade rules extend without discrimination to all members of the trading regime, is generally to be preferred to discriminatory arrangements.
3. Markets are to be opened through conventional reduction in trade barriers, and new disciplines are to be established, by resort to mutuality and balance of concessions. The trade concessions thus are to be traded on the basis of what can be called "first-difference" reciprocity, that is, changes in barriers are to be balanced in the negotiations. The overall reciprocity of openness presumably follows because, when members join, their "price" of membership includes the agreed-upon leveling of trade barriers that would implicitly establish initial balance of barriers between the new and the old members. This rules out unilaterally determined demands for unrequited concessions that could come from the strong against the weak. Equivalently, the rule of law is to prevail in negotiations toward freer trade, not the law of the jungle.
4. In the same spirit of the rule of law, the adjudication of disputes must be impartial, pitting the strong against the weak in equal contest, with both the balance of negotiations and the impartiality of dispute settlement reflecting the correct and growing perception that the GATT system is the best defense of the weak.
Permit me at the outset to consider and dismiss two wholly different sets of skepticism directed at the GATT and these principles. One comes from the scholarly direction; the other is frivolous but, reflecting the force of Gresham's law, the more pervasive. Take each, in turn.
Ingenious economists properly make their mark by proving the improbable. "Paradox gained" translates swiftly into success and professional reward. The scientific game continues relentlessly into "paradox lost," then "paradox regained," and then on in cycles that leave residues of added insights into the phenomena we seek to understand and the policies we hope to define.
But in making policy, scientific ingenuity must blend with good sense. Sir Dennis Robertson, the great Cambridge economist, once aptly described a brilliant young economist who had wandered into the policy arena as "silly-clever." Silliness from clever economists does afflict the debate on GATT principles. Thus, clever examples of national gains from discrimination, as in selectivity in the use of safeguards or in preferential tariff cuts only among a few, can certainly be constructed under certain specific assumptions. Indeed, they are routinely taught in our classrooms. But for policy, we must ask: Are those assumptions sensible? which model among the many is appropriate to the problem at hand? We must cut through the exotic underbrush to the path that leads through the forest. The principles of the GATT define that path.
But if scholarly qualifications must be judged in perspective, the frivolous criticisms recently directed at the GATT must be put in their place. A common criticism is that the GATT is in truth the General Agreement to Talk and Talk: It has delivered nothing. This is nonsense. Under GATT auspices, tariff barriers of the OECD countries went down to almost negligible levels; the Tokyo Round then began the assault on nontariff barriers in a process that is now being pursued further, along with the task of extending GATT discipline to new sectors, at the Uruguay Round.
The facile views of GATT's impotence are fashionable in the United States among several lobbies and in Congress. They principally reflect panic at the payments deficit and at the rise of Japan. Quick fixes on the trade front, using American muscle to extract trade concessions unilaterally and quickly from others, regardless of the impact on the world trading regime, therefore have a superficial but compelling appeal.
But, alas, ignorant prattle by academic economists has also fueled these sentiments. Unburdened by historical knowledge, scientific expertise, and the sustained scholarly reflection that these matters require and that the lay public automatically arrogates to them in view of either their distinction in fields other than international trade or their public visibility, these economists have entered trade policy with pronouncements that will not survive scrutiny but which nonetheless bring comfort to the political forces and the economic interests that see no virtue in the GATT and its tenets. Nothing is more important to special interests than to seek legitimacy by citing at least "one reputable academic" on their side so that the congruence of their private gain and the public good is established.
The United States thus has been witness currently, for instance, to economists (in full flight as instant converts to trade expertise) turning on the GATT with criticisms that betray ignorance of the institution and its functioning, advocating "managed trade" in the shape of imposing quantitative targets for imports of manufactures on Japan, recommending GATT-illegal tariff retribution (unmindful of treaty obligations and systemic implications for the GATT and the Uruguay Round) in case such targets on imports are not fulfilled (Dornbusch 1989), and the like. Such forays into unfamiliar territory certainly get one a place in the sun—but the sun can scorch, too. I think it is fair to say, as would have Harry Johnson who denied the benefit of his biting sarcasm to none who deserved it, that the exposure of incompetence in these matters has been its own punishment, and the GATT's supporters need fear no serious threat from this quarter.
But my good friend Lester Thurow, with his famous, or shall I say infamous, announcement at the 1988 Davos Symposium that the "GATT is dead," is another matter. His prominence, sustained interest in public policy, and role as the new intellectual force in Democratic circles lend his pronouncements special importance. But Thurow is dead wrong. While I return to his views later, a brief response should suffice presently.
For an institution whose irrelevance is implied by Thurow's claim to have discovered the corpse, it is remarkable that since 1982, the number of contracting parties (as the GATT members are technically described) has risen by 12 percent from eighty-six to ninety-six. Currently, eight more countries are negotiating their accession, China is negotiating its status, and the Soviet Union is waiting eagerly in the wings. Surely, necrophilia has not broken out! The rush to membership is an adequate riposte to Thurow: A feast attracts people more readily than a funeral.
Then again, the number of dispute settlement cases coming to the GATT has risen significantly in recent years (as is manifest from the tabulation in Appendix III), testifying to the growing importance of the institution in a role that had fallen into virtual oblivion through disuse earlier. Yet another index of GATT's continued vitality and increasing importance is the growth in the number of countries, and in the value of trade covered, in the successive rounds of trade negotiations, from the earliest Geneva Round in 1947 to the Tokyo Round in 1973-1979 and on to the current Uruguay Round (as is evident from Table 1).
But the decisive answer to Thurow's fears can be given by reminding him—an American, an ex-colonial like me (an Indian) of her Majesty's erstwhile empire—that when the monarch dies, the British say: The Queen is dead; long live the Queen. The GATT certainly is, in some key respects, in need of repair and reconstruction to profit from four décades of experience and to accommodate the needs of a changed world economy. But that is precisely what the Uruguay Round is about. So, my response to Thurow is: The GATT is dead; long live the GATT.
But the success of the Uruguay Round is not guaranteed. As the contracting parties enter the last lap of this arduous race, heading towards Brussels in December 1990, deeply troubling questions arise as to the feasibility of a successful bargain among them. The necessity of achieving success is evident; but the nature of the deal defining that success is not. Though there is an abundance of advice on the dimensions of a deal, I am prompted to offer somewhat different, and I should hope, fruitful ideas on how the final negotiations might successfully conclude.
But before I do that, I must turn to the rather serious challenges to the GATT principles of multilateralism and its corollaries that have recently arisen from several directions and taken the form of an advocacy of managed trade, aggressive unilateralism, and regionalism. Underlying these phenomena, though deriving strength also from other factors, is a common thread: the increasing sensitivity to "unfair trade" and the sense that the methods of the GATT-based multilateral trading system cannot cope with the issues that unfair trade by one's rivals forces on our attention.
CHAPTER 2
The Rise of Unfair Trade
Why have concerns about unfair trade risen to the forefront today? A conjunction of several factors drives these concerns.
But if these forces have to be understood, assessed, and, for the most part, declared as hazardous to the health of the world trading regime, it is necessary to analyze the role of free trade vis-à-vis fair trade.
Fair trade plays no role in the economic tradition, dating back to the British policy during the latter half of the nineteenth century, that emphasizes that unilateral free trade is advantageous for oneself no matter what others do. The "strategic" notion that if your trading partner has trade barriers while you don't, you might be able to use retaliatory tariffs and the like to force down those barriers and gain twice over from free trade—once from your own, then from hers—was known to both Adam Smith and Alfred Marshall. It was also dismissed by them as either inapplicable (for Britain) or unwise or both. But it is certainly not an argument based on the notion that your trading partner's tariffs and trade barriers are "unfair."
But one can take an alternative, cosmopolitan or systemic approach to free trade that yields a different answer. One can argue that a free trade regime (such as the GATT), overseeing trade among trading nations, must embody the principle of symmetrical free trade by each; otherwise, the efficient allocation of activity among trading nations that the regime must reflect will be compromised by the license taken by those who stray.
There is also the prudential argument that, even if one were not interested in cosmopolitanism and were actuated only by considerations of narrow national interest, one's own ability to sustain free trade would be imperiled in practice if one's rivals were considered to be trading unfairly, as when they deeply subsidize their firms, which then elbow one's own firms out of the marketplace despite lack of "true" advantage in efficiency. Pluralist politics will generally rule out accommodation to free trade unless trade is also seen to be fair.
Hence, historically, the liberalization of trade, as in the aftermath of the disastrous Smoot-Hawley tariff of 1930, or currently in the developing countries that dismantle trade barriers under World Bank conditionality, has been accompanied by the institution or activation of the two now-conventional fair trade mechanisms: the countervailing duty (CVD) against foreign subsidization of exports and the antidumping (AD) duty to counteract the presumably predatory effects of dumping.
The problem is that fair trade is a two-faced creature: One face is friendly to free trade; the other frowns on it, indeed, seeks to devour it, for fair trade mechanisms can be misused to allege unfair trade unfairly and thus undermine free trade. And new definitions of widening scope, of what constitutes unfair, "unreasonable," unacceptable trade, can be invented in unending improvisations. It is this other, ugly face, with its wide and menacing grin reminiscent of Jack Nicholson in his more villainous roles, that we presently see and must fear. Why?
1. Perhaps the most compelling reason for the rise of unfair trade allegations is simply the outbreak of protectionist pressures in the early 1980s in the aftermath of the second oil shock and the worldwide recession that Paul Volcker instituted to wring inflation out of the world economy.
Academic economists now distinguish between the supply of protection by governments and the demand for it by its beneficiaries, often the corporate and labor interests. In the OECD countries, with some variations, the governments have been generally skeptical of protectionism, and those who demand protection must generally wrest it from reluctant governments. Need it be doubted then that protection is easier to procure if the successful foreign rival is alleged to be unfairly trading than if one pleads for it merely by citing the difficulty of one's situation?
2. But if the allegations of unfair trade can become the handmaiden of protectionism, the implausibility with which such allegations can be made by protectionists is diminished by the increased focus on nontariff barriers (NTBs) relative to the now-negligible tariffs. The latter are transparent and indeed uncomplicated. Gertrude Stein could have said: A tariff is a tariff is a tariff. But NTBs are hard to handle. Suspicions often linger of their invisible hand strangulating trade. The Japan-bashers prosper on the allegations, as hard to disprove as they are easy to make, that Japan's invisible barriers keep out imports, frustrating other nations' trading access and nullifying their trading rights.
3. But, in addition to these reasons for the appeal of unfair trade allegations to those who seek to moderate the force of competition in trade, there are also changes in the world economy that reinforce the move of unfair trade concerns to center stage.
Perhaps the most important factor, responsible in particular for the American conversion to neurosis on this front, has been the relative decline of the United States within the world economy, leading to what I christened some years ago the diminished giant syndrome.
The diminished giant syndrome of the United States now parallels the one of Britain at the end of the nineteenth century, when the United States and Germany arrived on the world scene: In each case, concerns with the trading success of the newly triumphant countries became the order of the day. "Fair trade" and "reciprocity" were the buzz words in Britain then, as they are in the United States now.
But the panic, and the petulance about the rivals, have an extra edge in the United States today. The psychological need to be "number one" is evidently more compelling in a country where there is ceaseless ranking of institutions, corporations, the sartorially elegant, and the wealthiest. And then again, the country whose rise promotes the challenge, Japan, is one that is peculiarly susceptible to charges of unfair trade. Indeed, such allegations against Japan have been so common for at least half a century that I have suggested that today's Japan-bashers, in reviving old and fearful stereotypes about Japan, should be called regressionists rather than the revisionists they fancy themselves to be.
4. But the change in the world economy that propels more forcefully the unfair trade crusade is the increased crisscrossing of foreign investments, with associated dramatic increases in trade-to-GNP ratios of many countries, which is turning the globalized world economy into a veritable spider's web.
(Continues...)
Excerpted from The World Trading System at Risk by Jagdish Bhagwati. Copyright © 1991 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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