Trying to control protectionism’s tide

John Hay,Iain Guest December 6 1982

Trying to control protectionism’s tide

John Hay,Iain Guest December 6 1982

Trying to control protectionism’s tide


John Hay

Iain Guest

The invitations indicated that the event would be pleasant enough. It was intended as an 8 a.m. gathering for key officials attending a special session of the General Agreement on Tariffs and Trade (GATT) that would feature 40 minutes of Lake Geneva scenery and Swiss cuisine. But when a puffy-eyed Allan MacEachen,

Canada’s external affairs minister and the session’s current chairman, did not emerge from Friday’s breakfast until 4 p.m., hopes that the talks would be able to stop the trend toward a crippling international trade war rapidly began to fade.

Indeed, many observers viewed the efforts to stem the growing tide of worldwide protectionism as doomed from the start. The major problem: even before the Geneva meetings began last week the United States and the European Economic Community (EEC) had solidly boxed themselves into opposing

corners. The United States demanded decreased protectionism and an end to export subsidies, while the EEC—and France in particular—argued that the trade walls are needed to insulate their economies from the effects of an economic slowdown in the United States and other countries. “There are certain problems that people don’t see eye to eye on, that’s for sure,” a weary MacEachen said last Friday. “We wouldn’t have spent eight hours together if they did.”

No country depends more heavily on free and expanding trade for its economic well-being than Canada—and none is more threatened by protectionism. Out of every $10 of Canada’s gross national product nearly $3 is earned from exports. (The comparable figure for the United States, by contrast, is 85 cents for every $10.) At the same time, exports directly provide almost 1.2 million jobs. They also account for about 70 per cent of the output in the transportation equipment industry, 60 per cent in the paper and related industries, 55 per cent in machinery and primary metal and 50 per cent in the wood industries. Not only that, but Canada has succeeded in running up a trade surplus every month since late 1979. Even though sales to the rest of z the world have remained at ° about last year’s levels, falling 9 imports (a direct result of the I deepening recession) are leading o to a 1982 export surplus that ° may hit a record for the third £ straight year.

But the twin perils of world recession and protectionism have left Canadian trade offi-

cials distinctly pessimistic about the future of international trade. A confidential government document, the basis for a policy paper on trade due to be published sometime next year, asserts that “the immediate economic prospects offer little room for optimism.” The official study adds that “an early return to the rapid growth experienced in the 1960s is unlikely.”

Protectionism has raised doubts about GATT’s very ability to mitigate the “rule of the jungle” in trade relations; that is, its ability to defend smaller countries against the dominating power of the trading giants. Warns the Ottawa document: “A major issue for the 1980s will be whether or not the GATT can be adapted to meet this challenge. In the absence of a GATT-like trade instrument, Canada would be left to deal with the big powers one on one.”

That concern forced the Canadian negotiators at GATT to take positions more by necessity than by choice. One of the Canadian aims was to draw the growing array of nontariff import barriers into the territory of GATT rules. Known as safeguards, those measures are designed to protect domestic industries from foreign competition. The barriers are now being erected by most industrial countries that are ignoring the provisions of GATT, and they effectively shrink trade volumes. To that end, Ottawa and Washington have forced Japan into making “voluntary” commitments to restrain car exports to North America. Still, Canada contends that there is less chance of small countries being victimized by large ones if such safeguards are applied only under GATT guidelines and are open to GATT overview.

Canada also sought to breathe life into the GATT procedures for settling trade disputes. Currently, parties to a dispute can take the issue to a GATT panel for judgment. But Canadian officials complain that the panels too often are incompetently manned and take too long to reach decisions. Moreover, GATT has no means of enforcing a decision it has rendered. In one such case, a panel ruled that the United States breached GATT terms when it allowed U.S. firms to establish domestic international sales corporations (DISC), which enjoy a big tax break on export income. It contended that, in effect, DISCS are straight export subsidies which clearly infringe on GATT rules. But Washington has still not changed its DISC law to meet GATT’s objections.

Canada also had other objectives going into the talks. Among them:

• The opening of talks on reducing export subsidies for agricultural products. This year alone the EEC has budgeted $15.2 billion for farm subsidies, $6.8 billion of that for exports. Such largess has made the EEC a net exporter of wheat, barley, sugar and beef. As well, the subsidies impede access to the EEC food market itself and shoulder other exporters (especially Australia and the United States) out of their traditional third-country markets. Washington has threatened to launch retaliatory subsidies of its own if the EEC does not desist—starting a costly trade war and catching Canadian farmers in the cross fire.

• Alert GATT members that Canada wants fisheries products eventually to be covered by GATT’s free-trade provisions, along with better access to foreign countries for such key exports as processed minerals, petrochemicals and metal and forest products.

• Integrate developing countries more fully into the GATT system. Poor countries complain that many of their exports—textiles, shoes and many commodities—face unfair barriers in rich countries. Washington, on the other hand, wants at least the better-off poor countries to dismantle some of their own trade and investment barriers. All of the contested areas are multisided issues with no quick solutions.

The darkest period in international trade occurred between 1913 and 1948. Then, the volume of international commerce grew at the paltry rate of less than one per cent a year. After the Second World War, however, largely as a result of the world financing and trade reforms initiated by Britain’s John Maynard Keynes and then U.S. Treasury Secretary Harry Dexter White, the GATT was formed to provide the industrial nations with open international markets. The outcome exceeded the hopes of even the most ardent free-trade apostles. Between 1948, when the GATT rules took full effect, and the oil crisis of 1973, international trade expanded by a stunning seven per cent a year, outstripping the growth rate in the world’s total industrial and agricultural output. But the slowdown caused by unrealistically high energy prices, combined with a growing flood of cheap exports from low-wage developing states—which the system was never designed to accommodate— brought the heady era of expansion to an abrupt end. This year total world trade grew by less than one per cent.

Though the GATT ministers were unable to reach any significant accord on many specific problems, there was a clear agreement on the awesome immensity of the world’s economic morass. As a recent study by the GATT staff concluded, the entire globe faces “what is, in most respects, the worst economic situation since the 1930s.” Even in the wealthy Western countries, unemployment now averages more than eight per cent (it is a record 12.7 per cent in Canada). World production is stagnant, with output of oil and minerals actually declining. As a result, world trade is also stagnant, and by some measures it is falling. Last year, for the first time since 1958, the value of total world trade declined from the previous year. The GATT report finds no evidence of improvement this year.

Understandably, those frightening developments have prompted queasy memories of the Great Depression of the 1930s and especially of the competitive protectionism that throttled production and employment virtually everywhere. Without foreign markets a trading country cannot produce and employ its workers. Without production it cannot afford to import the products of other countries.

As a haunting lesson in the effects of protectionism, the GATT study cites the U.S. Smoot-Hawley Tariff Act of 1930— a high-trade barrier against which U.S. trading partners promptly retaliated, opening the vicious trade war of the 1930s. As a result, many U.S. companies and farmers dependent on exports lost their incomes and could not repay their bank debts. In turn, many of the banks themselves collapsed.

A similar peril now hangs over the world’s banks on a much vaster scale, as entire countries teeter on the brink of defaulting on their loans, with some nations already virtually bankrupt. The less developed countries of the world now owe a staggering $500 billion (U.S.)—mostly to banks in the industrial countries. During the commodity boom of the 1970s, borrower countries assumed that their exports would pay for their loans. But, while interest charges have ballooned, commodity prices have touched postwar lows. In the storm that followed, non-oil-producing poor countries ran up a staggering combined trade deficit of roughly $50 billion. Now, they can afford neither their debt charges nor the goods and services they would otherwise import from the rich industrial countries. Making their plight still worse—and more

dangerous for everyone else—is the proliferation of devices being used by rich countries to keep out imports from the poor.

Indeed, every government is feeling the pressure for greater protection from domestic labor and businesses currently running for cover behind tariffs, quotas and so-called “voluntary restraint” agreements with foreign exporters. In the United States even the philosophical free traders of the Reagan administration are feeling the political heat.

Said U.S. Trade Representative William Brock last week: “Recession, unemployment, a huge and

growing trade deficit and -

increasing frustration with unfair trade barriers have brought the political coalition necessary to preserve an open American market to the verge of collapse.”

Like all conflicts, trade wars have changed since the 1930s. Tariffs have almost become obsolete, replaced by more complicated weaponry. In part, that is a tribute to the tariff-cutting success of the Tokyo Round of GATT negotiations, which concluded in 1979. In Canada’s case, 66 per cent of all imports last year entered the country duty free. With progressive tariff cuts built into the GATT pact, the proportion of tarifffree trade into Canada could reach roughly 80 per cent by 1987—when the Tokyo Round cuts take full effect.

At the same time, however, governments have been infinitely more inventive in designing nontariff barriers that have similar effects. For one thing, they can make use of the safeguards provided under GATT, ostensibly to permit countries to protect themselves against sudden threats to orderly production and marketing. Canada, for one, has imposed limits on footwear imports. The GATT treaty also provides for import limits to be negotiated with textile exporters under the Multifiber Arrangement. MFA negotiations are always suspect, however, because they pit relatively weak poor-nation producers against rich and powerful importers. The outcome is always resented by the producing countries, and the MFA has become one of the chief grievances of the less-developed countries seeking more access to markets. Like other importers, Canada insists that the MFA protects its uncompetitive domestic textile industry.

There is also a variety of trade barriers erected without GATT approval. And both the United States and Canada

have resorted to them. When its own car industry was threatened, Washington arm-twisted Japan into “voluntarily” restraining its exports to the United States. Canada, worried that it would be swamped in a spillover from the controlled U.S. market, then exacted a restraint agreement as well, providing a clear example of protectionism begetting still more protectionism.

That was not all. Because the U.S. auto industry is mired in recession, legislation has been introduced in Congress requiring vehicle imports to contain 90-per-cent U.S. con_

tent. Sources say the bill has 220 sponsors in the 435-member House of Representatives. Brock calls it “probably the worst piece of economic legislation to have a chance at passage in 50 years.” Still, it provides Brock with a convenient stick to wave when he demands that other countries dismantle their own protectionist policies.

Among Brock’s leading targets are the EEC’s farm export subsidies. Those subsidies not only enable EEC farmers to sell more cheaply against the competition but they also encourage EEC farmers to flood world markets with surplus production—which drives prices down further.

On top of that, there is a traditional guerrilla tactic of protectionist wars: bureaucratic harassment. And the Japanese, who for years have used an impenetrable web of rules and regulations to turn away imports, have recently run into a similar French version of obstructionism.

France has ordered that the hundreds

of thousands of videotape recorders coming into the country, mainly from Japan, must all pass through the tiny customs house in the inland city of Poitiers (site of a battle between the Moslem Saracens and France’s Charles the Hammer in A.D. 732)— 150 km from the sea and manned by just four customs officers. Nobody who has tried to export to the Japanese is feeling much

0 sympathy for them, al-

1 though Hitachi pleaded in Í full-page newspaper ads that “We are not Sara£ cens.” (Faced with a pos| sible legal challenge in the * European Court, France

hinted last week that the restrictions may be

lifted on Jan. 1.)

But, in the end, the fate of the GATT negotiations lies with Brock and an unofficial delegation of 10 U.S. congressmen. If they return to Washington unable to convince Congress that the meeting was a success, it is unlikely that the United States will be restrained from launching a highly restrictive trade program. Said Georgia Senator Mack Mattingly: “I will meet fire with fire.”

Mattingly is threatening to launch a bill to subsidize the sale of the $2-billion

_ U.S. milk surplus. While

some EEC members, who see the Soviet Union as the primary benefactor of cheap U.S. milk, call the move a bluff, the U.S. delegation claims that its intent is serious and has, in fact, promised to aid allies—such as New Zealand—who would be hurt by the dumping. If Mattingly and others succeed in launching a U.S. trade battle, no country—ineluding Canada—will sur3 vive unscathed.