A New Kind of Trade War

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Some U.S. industry leaders--including influential ranchers and growers of citrus and tomatoes in Florida and California--fear the competition that more pacts with individual nations would bring. And critics like Jagdish Bhagwati of Columbia University contend that the carve-outs and privileges encoded in bilateral treaties may trip up multilateral talks, the point of which is to give all member nations access to markets, without discrimination. "Bilats make us nervous," says Chandler Keyes, a lobbyist for the National Cattlemen's Beef Association. "Countries we think about doing bilats with have strong agricultural-export economies, so there's not much we're going to gain."

An FTAA agreement would open rich new markets for U.S. manufacturers, such as heavy-equipment maker Caterpillar and computer giant IBM, as well as firms in banking and insurance. But it would not help American agriculture much, farm groups say. An operational FTAA would increase U.S. agricultural exports by a paltry 2%. "The game is in the WTO," says Audrae Erickson, a lobbyist for the American Farm Bureau. "We have essentially maxed out in the U.S. market, where we compete against heavily subsidized competitors," says Erickson. "And if we don't have access to the world's markets, the agricultural community will have a very hard time climbing out of its recession."

If a regional agreement such as the FTAA is difficult to enact, establishing a round of WTO talks will take a Herculean effort. Though WTO Director-General Mike Moore has spent a busy few weeks in coalition building, the U.S. refusal to discuss its antidumping restrictions for industries such as steel, combined with Europe's and Japan's agricultural protections, may scuttle even the most preliminary agreement to negotiate.

Still, there is enormous political pressure to get something done. "We need to launch a round even more than we did before Sept. 11," says Anthony Gooch, a spokesman for the European Union's Trade Commissioner, Pascal Lamy. "This is really a burning priority in economic terms." One result of the terrorist attacks may be to nudge the 142 member nations into a show of unity. "Sept. 11 will make people more conscious of the public relations costs of failure," says Richard Cooper, a Harvard economics professor. "And that might induce parties to be more flexible."

A major impediment to a WTO round is agriculture, the sector that most nations guard almost as vigilantly as their own sovereignty. Negotiators must tackle how far and how fast the U.S. might be willing to lower production and export subsidies--an Administration goal designed to help persuade other countries to do the same. But the White House will need to persuade farm belt members of Congress first. Even trickier is Europe's insistence that developing countries bring their investment and environmental rules in line with Western standards; developing countries have long sought access to big agriculture markets.

China is the Asian country best positioned to pull through the global downturn. The economy is still on track to grow 8% this year even as its exports to the U.S. slacken, and Beijing's coming membership in the WTO will require market reforms that by some estimates will boost GDP by 4%.

American farmers will harvest the benefits of China's membership. Beijing promised to limit agricultural subsidies and to cut tariffs from 21% to an average of 17%. American soybean growers expect some of the biggest payoffs. They now face tariffs that can reach to more than 50%, but after China's accession those barriers will fall to only 9% by 2006.

But what's good for American farmers is rotten for China's. By some estimates, WTO entry will drive 10 million more Chinese farmers to look for work in overcrowded cities, where they will compete for jobs with people laid off from state-owned enterprises. "Cutting agricultural subsidies will be the most difficult thing China has to do for WTO," says Pu Yonghao, a senior economist at Nomura International in Hong Kong. "There are serious doubts whether they will be able to pull it off without too much social unrest."

Western investors will suddenly find in China whole industries open to them that were closed before. Right now, overseas telephone companies can't directly operate phone networks in China. Within three years of China's joining the WTO, though, the companies will be allowed to own 49% of the country's operators. Corporations like Xerox will be allowed to sell and service their own copying machines, instead of having to work through Chinese agents. Automakers expect sales in China to soar after tariffs that now double the price of a car fall to only 25%. That increase will probably kill off most of China's 136 automakers or force them to consolidate into a few regional companies.

When the U.S. launched its war on terrorism, President Bush lifted the sanctions that had been imposed on nuclear neighbors Pakistan and India. The White House hoped that lifting the sanctions would help enlist the South Asian powers in the war effort while also bringing long-term economic benefits.