Aggressive Unilateralism - Essay Example

Aggressive Unilateralism Introduction The effectiveness of a trade policy can be gauged in the way it meets the country’s objectives behind the formulation of that policy. When the United States embraced ‘aggressive unilateralism’, defined as the use of retaliatory threats, both implied and explicit to gain unilateral concessions against Japan, India and Brazil on May 25, 1989 under sections 301-310 of the Omnibus Trade and Competitiveness Act of the 1988 (Bhagwati 1990, p. 1), it did so by appearing to address two pressing concerns: one domestic, and another, in line with its role as a prime mover towards global trade liberalization. The domestic concern was of course the ballooning trade deficit which stood at US$60 billion1 by the concluding years of the Reagan administration. In contrast, Japan, the world’s second biggest economy after the United States, enjoyed a trade surplus which stood at US$57 billion by 1989 (Patrick 1990, p. 245). To the American politicians, the trade deficit was a result of the unfairness of some countries in playing by the rules of reciprocity – the unfairness, in turn, impedes the competitiveness of the American economy. Thus, accordingly, a primary target of the retaliatory provisions of the 1988 trade legislation was Japan whose exports accounted for about two-fifths of the US trade deficit (Patrick 1990, p. 243). The trade law also targeted vulnerable countries, those which rely on American markets for their exports, and yet, studiously avoided targeting the European Council due to its clout and its ability to counter-retaliate no matter how protectionist its policies are (Bhagwati 1990, p. 38). As evidence shows, pursuing a trade policy to force countries to open their markets and extract other unilateral concessions unrelated to trade would only have a minimal effect on the huge US trade deficit, and would thus be ineffective. Another objective behind the policy of the aggressive unilateralism was the contradictory notion that since multilateralism as practiced under the General Agreement on Tariffs and Trade (now the World Trade Organization) was not bringing down trade barriers fast enough, retaliatory tactics would expedite global trade liberalization. Considered as GATT-illegal, Section 301’s “creative lawbreaking” would make the means ineffective because it would promote non-compliance to GATT and render the US’ stance toward promoting multilateralism “hollow” (Bhagwati 1990, p. 34-35). Some evidence has been shown that with respect to opening markets, Section 301 was successful (Bayard & Elliot 1992). However, as Bhagwati has strongly argued, the long-term effectiveness of aggressive unilateralism is in question because no other country accepts it in principle, and thus, has essentially no place in the world trading system. This paper shows that with regards to the example of addressing US trade deficit, the policy of aggressive unilateralism has proven ineffective. On the question of whether the policy would indeed promote global trade liberalization, this paper argues that on the short-term, it has been effective, but in the long-term it is bound to be ineffective. Competing over trade numbers The policy of aggressive unilateralism had its impetus from concerns that the overwhelming imports in the trade balance indicated that the United States was not getting a fair deal to be able to export freely around the world. After all, the country’s markets for foreign goods are acknowledged generally as open and the US allows foreigners to invest more than any other economy in the world. However, a closer look at the politics behind the policy of aggressive unilateralism suggests that the trade imbalance was taken as an indication that United States is no longer competitive vis-à-vis its competitors on a global level and that the country must take vigorous steps to address it.2 The fear of not being competitive thus was a primary motivation behind a tough trade policy that circumvents world trading rules. There are also indications that a fuzzy and unsystematic analysis of how trade numbers are the way they are, peculiar to the United States (Reich 1990) and how they relate to trade policy pervades much of the competitiveness paradigm (Krugman 1994). One of the rationales for targeting Japan for unilateral concessions was that since it runs a huge trade surplus, it should liberalize its trade barriers. Moreover, the argument was that because the US has a huge trade imbalance tilting towards imports, it has the right to ask other countries with no deficit to give unilateral concessions. However, this American contention doesn’t have much convincing power because other bigger factors, most of them domestic, such as savings improvement and investment levels are behind the huge trade deficit problem (Bhagwati 1990, p. 18). Japan’s relatively low import number been used to justify the view that it is not open and doesn’t play fair. According to studies, this does not indicate that Japan’s low imports mean that it is necessarily cheating in its trade practices (Bhagwati 1990, p. 20). The recognition that foreign market penetration holds other factors which are trade-unrelated has not stopped the United States from pursuing its Structural Impediments Initiative (SII). The United States Trade Representative (USTR) in particular cited Japan’s retail distribution system and high savings rate as barriers to trade. While Japan amended its retail law which allowed it to escape being labeled as an unfair trader on April 27, 1990, the SII opened the ground for linking everything to trade and for every policy to be placed on the negotiating table in order to define what is “fair” and legitimate” trade (Bhagwati 1990, p. 23). Developing countries are also at a risk with SII. For example, one of the competitive advantages of these countries is their low wages. By using SII, the United States can invoke fairness to identify policies (such as the ineffective population policies that afflict many developing countries) that result to low wages as grounds for “unfair trade practices” (Bhagwati 1990, p. 24). Concerns over the huge trade deficit of the United States have resulted to a policy of using strict application of one-on-one reciprocity with trading partners as shown by the stance towards Japan, undermining the world trading regime founded on free market assumptions of comparative advantage and efficiency. The objective policy however is global balance, not bilateral balance since it is efficient to buy from the cheapest supplier and sell to the most profitable market (Patrick 1990, pp. 241-242). Super 3013 and related unilateral policies (Patrick’s response to the charges of Makota Kuroda, formerly Vice President for International Economic Relations for Japan’s Trade Ministry), were not only ineffective, but unnecessary as well. This was because the macroeconomic and exchange rate policies of both countries were working to address the trade imbalances and to generate and to allow more US exports especially to Japan (Patrick 1990, p. 241). The lobby from export interests as well as the unjustified panic over the balance of payments (Bhagwati 1990 pp. 31-32) altogether made for a “short-run domestic political sellout” in the sudden insistence on bilateral, one-on-one reciprocity as stated under Section 301 (Patrick 1990 p. 241). One of the interesting explanations behind the apparent failure of the United States in its trade negotiations with Japan in the 1980s, is explained through the lens of someone who was part of the Office of the USTR. The insider noted the inability of the US team to be clear on what “open” with regards to the Japanese market meant and if the objective was met, there was no clarity on whether it would succeed in decreasing the deficit (Prestowitz 1988, p. 273). Moreover, according to Prestowitz in the chapter entitled US Trade Negotiations: An Insider’s Report4, compared to the Japanese who were armed with studies on the competitiveness of American industries, the US team lacked “data and analysis”. Not surprisingly, the dynamics behind the US balance of payments problem has not been given much attention so that an aligned trade policy is put into place. A big contributor to the US trade deficit it turns out are American companies, who export to the United States from their bases in other countries, and thus should be included in the complaints about trade imbalances (Reich 1990, p. 54-55). According to Reich’s analysis, American companies haven’t lost their competitiveness –they just have moved their operations elsewhere. Also, while exports from the United States fell, the overseas affiliates of the US-owned corporations exported more to make up for the drop. A key trend noted is that increasingly, American multinational corporations employ more people outside the United States, and rely on them for more complex inputs and value-added, in terms of design and research and development (Reich 1990 p.55). Conversely, more and more foreign-owned companies are employing American workers and relying on American manpower for knowledge-based inputs – among them, Dutch and British companies whose investments according to Reich exceed those of the Japanese. What are the implications of these developments to US trade policy? One implication is that they place the American worker and his skills as crucial for attracting investments, whether they are American-owned or not. As to trade policy, Reich argues “we should be less concerned with opening markets for American companies than in opening those markets to companies that employ Americans, regardless of whether they are foreign or not” (Reich 1990, p. 60). A case which clearly shows that Section 301 is “misplaced” in the context of how multinationals operate was the case of the US accusing Japan of discrimination against American company Motorola (Reich 1990, p. 60). The company has a base in Kuala Lumpur while most Americans who make cellular equipment for export to Japan are employers of Japanese companies. The misplaced focus on the competitiveness of American companies as the basis for trade policy naturally makes the country’s trade balance as a gauge whether the economy is on the right track. Recently, most world leaders have latched up on the “competitiveness” bandwagon – with then President Bill Clinton saying it all that “every nation is like a big corporation competing in the global marketplace”. However, corporations and countries are different because while the former are defined by their ability to compete in their markets, playing a zero-sum game, countries have no comparative, strictly-speaking benchmark of performance – or a “well-defined bottom line” and that international trade is not a zero-sum game (Krugman 1994, p. 31). Krugman has been assailed that on the contrary, nations have a “bottom line” in their aspiration to raise the living standard of each citizen (Thurow 1994, p. 189) and that international trade can be zero- sum game, with losers and winners (Prestowitz 1994, p. 87). What Krugman points out is that if indeed a trade balance is considered as a bottom line, a gauge for the ability of a country to export more than it imports, a deficit does not necessarily mean that a country is weak or not competitive. An example he pointed out was that of Mexico running a huge trade deficit in 1990 after foreign investments poured in. The trade deficit is not for trade policy to be addressed and neither should it tied to competitiveness5 which entails more domestic factors than international ones. Moreover, the danger in thinking that the US is getting left behind due to international competition and for which imports are driving workers away from high-wage jobs, is precisely why trade policy turns to aggressiveness, such as what the US has exhibited towards Japan (Krugman 1994, p. 39-40). Trade-offs between the means and the end The United States, after the end of the Second World War has an avowed policy towards freer international trade, and was at the forefront of negotiating multilateral negotiations leading to the inception of the GATT (which became the WTO in 1995). The continuous dismantling trade barriers under a multilateral set-up was the key goal of GATT, and the United States, acknowledged as the country with the freest market economy, naturally should lead the way. The international trading system is premised on the acceptance of different approaches to resolving trade differences as countries around the world are in different stages of economic development. There are also mechanisms in place to accommodate these differences – for example, developing countries are given room for the protection of their industries – under the infant-industry provision of the GATT/WTO. At the same time, the international trading system in principle follows the free-market paradigm of perfect competition, in which every time a trade barrier in the form of tariffs are brought down, this must be applied to all member economies, so that trade is enlarging or welfare-maximizing (Lamy 2002, p. 1401). So how come that the United States apparently made a leap from a multilateralist, both in principle and in practice to a unilateral demander in the 1980s? Aside from the trade deficit that started to become unmanageable at the start of the decade, the United States saw a shift in its comparative advantage from manufacturing (where countries from the East6 became more and more the leading players) to agriculture and services. However, these sectors are precisely where there are high trade barriers and where GATT/WTO rules are difficult to enforce (Bhagwati 1990, p. 26). The United States also saw that its markets have low average trade barriers, and was compelled to even the playing field in other markets, and for other countries to liberalize their markets fast enough to accommodate US exports. In addition, at that time, major industrial nations delayed the Uruguay Round of negotiations, setting back the timetables for global trade liberalization. Section 301, with its timetables and retaliatory provisions, apparently would whip countries into liberalizing their markets more quickly than GATT would. In the name of market liberalization how did the policy of aggressive unilateralism fare in achieving this goal? An empirical study done by Thomas O. Bayard and Kimberly A. Elliot published in 1992 assessing the results of 301 cases since 19757, concludes that the critics of the policy critics “exaggerate its evils, but fans exaggerate its merits”. The study found that in over half of the cases overall, and in two-thirds of the cases have led to at least partial market opening. Disputes over the agricultural sector stood out, and more cases on services arose in the 1980s compared to the 1970s. It has also noted that the imposition of US retaliation has been rare – that is, only 8 out of 89 investigations or less than 9% as of July 1992. Counter-retaliation was limited to just one party (by the European Council). In terms of trade impact, the numbers are small – US$10 million in a quarter of the case and three-quarters, the value is less than US$200 million (Bayard & Elliot 1992, p. 687). Cases were noted to increase in the 1985-1989 period8, a 50% increase relative to the period from 1980-1984. The authors presented two hypothetical models in undertaking the study – one that gave the mechanism of 301 negotiation a range of movement (“although the US makes unilateral demands of its trading partners in section 301 cases, it rarely makes take it-or-leave-it offers; outcome is still negotiated”) and two, a bargain-game approach that predicts the success of negotiations “when the economic and political costs to the target of complying with the demand is lower than the costs of defiance”. The second approach is more difficult to use to predict the outcomes of 301 because naming and quantifying the costs cannot easily be done and to undertake a study base on this would be very costly (Bayard and Eliot 1992, p. 692). While the authors clearly defined a successful outcome of a 301 negotiation as when the US has at least partially achieved generally improved market access – they also wrote that success can be more broadly defined when the outcome results into the strengthening of the multilateral trading system, rather than just improved market access for just a few firms. Two factors contribute to an at least a partially successful outcome: one, when the targeted barrier is transparent and clearly inconsistent with international rules and two, when the targeted country is relatively dependent on the US market. The use of public and explicit threats contributes to a successful outcome, but the “effect is less robust” (Bayard & Eliot 1992, p. 698). Again, the use of aggressive tactics is noted with Japan – the most frequent target of self-initiated cases. Notably, the US was more aggressive than Japan, than with the EC9, the most frequent target (mostly on agricultural disputes). With Japan, the USTR has been more successful than with the EC. While the study noted that the variable that changed the most during the period of the study, is the “public threat category” (increase from 0 to 70%), the authors observed that “contrary to conventional wisdom, the 1988 Trade Act”, which puts more teeth on the retaliatory provisions by issuing timetables, “did not significantly improve the chances of a successful outcome” (Bayard and Eliot 1992, p. 204). However, the authors’ note that “ this is not definitive”, is a more circumspect assessment as when the study was concluded, less than four years had passed when the 1988 law was enacted, so there would be very few cases to look into – as compared to the cases that spanned from 1975. One of the strongest findings of Bayard and Eliot in their 1992 study was that a more successful outcome is more likely in a 301 negotiation if it involves transparent barriers and the international rules are clear (Bayard & Eliot 1992, p. 705). If anything, this finding in itself indicates that countries are more willing to negotiate under the rubric of multilateralism, not within the unilateral stance of the United States. In 1989, for example, Japan refused to negotiate under Super 301 conditions, but considered the three sectors10 named by the USTR as barriers open for discussion under existing bilateral arrangements. Clearly, the long-term effectiveness of the policy of aggressive unilateralism is not bright, as the world trading system moves toward the solution of trade disputes through a paced, multilateral-led set-up. Moreover, at least one party, the European Council has continually stood its ground against aggressive tactics of the US, offering an option that even the less-powerful states could emulate. The insistence of the US to open markets in the name of “fair trade” poses dangers to the world trading system, “for if everything becomes a question of fair trade, the only outcome will be to remove, altogether, the possibility of ever agreeing to a rule-oriented trading system” (Bhagwati 1990, p. 24). The danger starts itself from imposing conditions of what constitutes free trade and yet, not giving other countries the right to define what fair trade is. “Fairness” is a value-laden concept and more qualitative, rather than say, the concept of efficiency, which is easier to define and can be easily quantified. Moreover, even the American pride in its market openness that it places before the world for emulation by other countries – cannot be absolutely used as standard, as every country is unique in its structural make-up that has bearing on its economy and trade practices. Finally, Bhagwati contends that the “altruistic” rationale of the US to use the weapon of aggressive unilateralism to save multilateralism sounds hollow as it is not being clearly fair to others (i.e. it does not grant reciprocity of rights, for others to define what an unfair trade practice is) (Bhagwati 1990, p. 34). The international trading system not only operates under free-market assumptions but more importantly, its very purpose through inception of the WTO is to erect legally binding trade agreements that would apply to every member state. The policy of aggressive unilateralism as practiced by the United States makes use of brute political power that circumvents the legality of the global trading system. In slamming this policy as GATT/WTO-illegal, Bhagwati writes, “honoring a treaty commitment is to reaffirm one’s respects for orderly procedures and the rule of law in dealing with nation states” (Bhagwati 1990, p. 34). Reference List: Bayard, T. and Elliot, K. 1992. Aggressive Unilateralism and Section 301: Market Opening or Market Closing. Washington DC: Institute for International Economics. pp. 685-706. Bhagwati, J. 1990. Aggressive Unilateralism: An Overview. In, Bhagwati, J. and Patrick, H. (eds). Aggressive Unilateralism: Americas 301 Trade Policy and the World Trading System. Ann Arbor: University of Michigan Press. pp. 1-45. Clyde, P. 1988. U.S. Trade Negotiations: The Players. In, Trading places: How We Allowed Japan To Take the lead. Basic Books, pp. 250-271. KRUGMAN, P. 1994. Competitiveness:A Dangerous Obsession. Foreign Affairs, (73)2, pp. 28-44. LAMY, P. 2002. Stepping Stones or Stumbling Blocks? 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