Free trade: Pause or fast-forward

Two months ago an economist named Lawrence Mishel addressed the fraught politics of trade at a US House committee hearing. He was not against trade, Mishel began; transactions among consenting adults are seen as a good thing by all respectable economists, and Mishel clearly wanted to be one of them. And yet, while proclaiming his support for trade, Mishel opposed actual trade deals. "We need a new approach to globalisation," he counselled. "A strategic pause. No more trade agreements."

A moment later Mishel probably wished he hadn't said that. Representative Charles Rangel, the Ways and Means Committee chairman, bore down on the witness with the full weight of his twinkly-eyed, gravelly-voiced, mustachioed pizzazz.

"I'm 76 years old," Rangel deadpanned. "All this business about pausing and stopping and waiting ... Can you put this on fast forward?"

After that hearing, pro-trade Democrats had new spring in their steps. Never mind the protectionist wind blowing from the midterm elections; Rangel wanted a legacy. He was more likely to achieve that with trade than entitlements, which the Democrats have demagogued to death, or tax reform, terrain that has been fouled by the administration's crude tax cuts.

But two months on, the trade agenda is faltering. Late Sunday the administration secured a free-trade pact with South Korea barely in time to submit the deal to Congress before its fast-track negotiating authority expires. What is clear is that the administration has failed to persuade Congress to extend fast track, which is essential for the completion of the far more important Doha round of global trade talks.

Mishel is not the only economist who welcomes this "strategic" logjam. Harvard's Dani Rodrik, a long-standing globalisation sceptic, argued recently that "closed markets may have been a fundamental problem during the 1950s and 1960s; it is hard to believe they still are." But this complacency is wrong. The Peterson Institute for International Econ-omics calculates that the removal of remaining trade barriers would boost global income by $500 billion a year. Whether or not you accept this particular number, there's no doubt further liberalisation can unlock huge benefits.

Only reason

But that's not the only reason to resist "strategic pause" protectionists. If the United States refuses to do new trade deals, its partners will push ahead with agreements among themselves, reducing tariffs for each other's products while shutting out American ones. And if they are denied a chance to gain access to US markets via negotiation, foreigners will seek it via litigation.

We know this is possible. In one celebrated instance, Brazil complained that US subsidies depress world prices for cotton, injuring producers in Brazil as well as in poor West African countries. After losing that case, the US cancelled millions of dollars of subsidies.

The Brazil precedent shows that other US farm payments are vulnerable. Daniel Sumner of the University of California at Davis, who advised Brazil on cotton, calculates that US subsidies for corn, rice and wheat have similarly injured foreign farmers. While the Doha talks progressed, no developing country was interested in paying lawyers to bring further agricultural cases. If Doha is dead, follow-up is likely.

By itself, of course, this would be welcome. If WTO litigation forces cuts to farm subsidies, US taxpayers will be among the winners. But the worry is that a series of verdicts against the United States could stoke protectionism. Congress will yap about unelected foreign judges trampling US sovereignty.

If the legitimacy of WTO panels is undermined, the fallout will go beyond trade policy. Before the WTO was created in 1995, there was no neutral place to resolve trade disputes, which consequently degenerated into fights that poisoned international relations. Even an instinctive free-trader such as Ronald Reagan bashed Japan repeatedly with unilateral trade weapons, with the result that, by the early 1990s, the US-Japan military alliance looked shaky.

Today such bashing is relatively rare, because such sanctions run afoul of WTO panels. But the unilateralist urge remains: Look at the imposition of trade sanctions last Friday on Chinese paper, and watch Senator Max Baucus' fulminations this week against China's currency policy. If a "strategic pause" on trade leads to a flood of anti-US WTO litigation and then to a congressional revolt against the WTO, we will be back to the unfettered unilateralism of the 1980s.

And you thought anti-Americanism was as bad as it could be?

Sebastian Mallaby is a fellow for International Economics with the Council on Foreign Relations.