Trade Blocked

Trade Blocked

Mini Teaser: A foreign economic policy that emphasizes regionalism and stresses Latin America will have at least three negative consequences.

by Author(s): Bernard K. Gordon

In December 1994, just before Mexico's financial collapse, Bill Clinton convened the "Summit of the Americas" in Miami. It was attended by the leaders of all thirty-four Western hemisphere nations--except Castro, who was not invited--and it ended with a call to establish a "Free Trade Area of the Americas" by the year 2005. As a down payment, Mr. Clinton said NAFTA would soon be expanded to include Chile--repeating an offer made by George Bush in 1992, who in 1990 had introduced the idea of a Western hemisphere free trade area, "stretching from the port of Anchorage to Tierra del Fuego."

Chile was receptive to the NAFTA invitation for both economic and political reasons. Membership would have meant not only guaranteed access to markets for its wine and fruit exports, but symbolic U.S. approval for its post-Pinochet democracy as well. The United States also had good reasons to welcome Chile: Its economic reforms, including wholesale privatizations, nearly-total tariff reductions, and receptivity to foreign investment have made it a model for the rest of Latin America. Thus, despite its small population and market, Chile would have been an easy NAFTA partner for the United States, so much so that had it been brought into the deal along with Mexico, the whole NAFTA idea might have smelled a lot better than it does now.

But in the wake of the Mexican collapse, President Clinton could not make good on his 1994 commitment. He needed Congress to extend its "fast track" legislation to Chile--the law that provided for NAFTA's passage in the first place--and by 1995, Senator Dole was leery of anything that smacked of new trade deals. With the coming presidential election in mind, Dole shelved the fast track vote until after November 1996. When he did that he dashed more than Chile's hopes; he also ended, at least temporarily, all talk of expanding NAFTA. The president may have been quietly thankful, given the heat he took from organized labor over NAFTA, but the rest of us might well use the delay to take a second hard look at the whole concept of regional free trade areas.

One reason to do so is that despite the legislative respite, the administration's trade plans for the hemisphere have not changed. Under U.S. sponsorship, the Miami agenda now has its own momentum. Two follow-up meetings already have been held: one in Denver last June, when the region's trade and other ministers met; and another this past March, when they convened again in Cartagena, Colombia. When Secretary of State Warren Christopher went to Brazil in March 1996, he not only reaffirmed the administration's commitment to hemispheric free trade in less than a decade, but called for a second, post-election summit next year.

The broader reason, however, to re-examine the regional concept is that it is fundamentally incompatible with America's economic and security interests. A foreign economic policy that emphasizes regionalism--and especially that stresses Latin America--will have at least three negative consequences: it will leave the United States with the crumbs at the global economic dinner table; it will drive East Asia's dynamic economies into tighter relations from which only Japan can emerge dominant; and it will almost certainly resurrect a world based on competitive blocs. As Jagdish Bhagwati has concluded in a devastating critique of regionalism from an economic perspective, regionally based "free trade arrangements, aside from being preferential trading arrangements . . . are a particularly damaging institutional arrangement to legitimate in the world trading system."

It did not always seem that way. Back in 1985, when hopes seemed dismal for ever seeing a satisfactory end to the GATT Uruguay Round, regional trade deals sounded good to many Americans. President Reagan's Council of Economic Advisors termed them an acceptable "second best", and talks about a U.S.-Canada Free Trade Area then moved into high gear. First, a little-noted deal with Israel was signed; then the arrangement with Canada was completed; and after that President Clinton inherited the Bush plans for Mexico that became NAFTA. But that was then; today, after three decades of talking about "regionalism" and with ten years of U.S. prodding behind us, regional economic blocs are actually beginning to take shape. The United States ought not to like what it is now seeing.

The Only Global Exporter

Regional trading blocs are emerging despite the completion of the GATT Uruguay Round and the creation of the World Trade Organization (WTO), a package that gave the United States most but not all of what it wanted. Now the task, as with the recent talks on a global telecommunications regime, should be to complete the WTO agenda on a global rather than a regional basis. The United States has an enormous stake in that outcome, which becomes clear if we look at recent patterns of U.S. worldwide exports. It is those exports--rather than income gained from foreign investment--that account for most of America's trade-related jobs. Depending on industry and location, a standard rule of thumb is that between 23,000-25,000 jobs are created for each additional billion dollars worth of merchandise exports.

In 1993, America's merchandise exports totaled $465 billion, and 79 percent went to three regions: the Pacific, Western Europe, and North America (Canada and Mexico). By 1994, U.S. exports had grown to $520 billion, and the three-region share had risen to 84 percent. In 1995, America's exports rose another 12 percent--to $584 billion--and as the diagram on the previous page shows, the three regions again took 84 percent.

The message of this illustration is that the United States is a uniquely global exporter. The Pacific region has become--very slightly--its largest market, and under current conditions will grow further, but the main point is that the United States continues to hold a massive and roughly equal export presence in all three major world economic regions. As your broker might say, no other major exporting nation is so well diversified. Neither Germany nor Japan, the world's second and third largest exporting nations, respectively, has anything like America's globally balanced export distribution, and that unique role explains the high U.S. stake in the world's multilateral trading system.
In Japan there is a clear two-way spread: Americans buy 30 percent of Japan's exports and Asians take 40 percent of Japan's exports. Japan considers itself "omnidirectional", but its exports to the rest of the world count for much less than those to Asia and America; the EU represents less than 15 percent of Japan's exports, and the entire (non-U.S.) Western hemisphere, including Canada and Mexico, takes only 6 percent. German exports are even more geographically concentrated, in this instance in just one region. As the diagram below shows, nearly three quarters of Germany's exports are bought by other Europeans; its EU partners in Western Europe alone account for 50 percent. In contrast, all of Asia and the Pacific represents just 11 percent of German exports, and the United States takes only 8 percent.

These figures underline the point that America is a uniquely tripolar exporter, with about a third of its exports to Pacific Asia, another third to Canada and Mexico, and a quarter to Western Europe. While that should mean that Washington would not want to do anything to detract from its global role--least of all in the Pacific--America's policies and rhetoric have been sending a different signal. As reflected in Clinton's call for a Western hemisphere free trade area, Washington's message is that it cares less about global exports than it used to, and that it would be satisfied instead to hunker down in its own backyard. As Henry Kissinger has put it, "A Western hemisphere-wide free trade system . . . would give the Americas a commanding role no matter what happens."

It is particularly hard to justify a Western hemisphere free trade area as a U.S. policy goal because only Canada and Mexico and not the entire "Western hemisphere" as such constitute America's major markets in this hemisphere, as they have for the last century. (Until 1958, Cuba was the only other significant U.S. export market nearby.) Indeed, the markets of all the nations of South and Central America combined represent only 9 percent of U.S. exports.

This may surprise those who believe that South and Central America are the "natural market" for the United States--the Carmen Miranda school of world trade politics--but it is true just the same. In South America, the largest and best known economies are those of Argentina, Brazil, and Chile, but from the perspective of U.S. exporters they are all small markets. This becomes apparent when one compares the three countries' combined U.S. imports with those of just one small Asian or European country. In 1995, the combined population of Argentina, Brazil, and Chile (209 million people) bought $19 billion from the United States, while South Korea, with a population of 46 million, accounted for $25 billion. Singapore and Holland--both with small populations--ranked just behind with $15 billion and $17 billion, respectively.


These figures do more than underscore the small role played by South and Central America in U.S. exports. They help explain why Europeans and Asians have begun to react to America's stress on the Western hemisphere with raised eyebrows, and in some cases with worried talk about how best to respond. In Europe, for example, where there has long been anxiety about America's alleged "over-emphasis" on Asia, the Miami summit revived talk of creating "special" EU-US trade ties. Britain's Prime Minister John Major and Foreign Minister Malcolm Rifkind took the lead, and their calls were echoed by EU Trade Commissioner Leon Brittan. The issue was then brought into sharp focus by German Foreign Minister Klaus Kinkel, who in April 1995 offered a concrete and cleverly packaged proposal. Responding to U.S. plans both to expand NAFTA and intensify Pacific region cooperation through the Asia Pacific Economic Cooperation (APEC) initiative, Kinkel noted that "there is no trans-Atlantic equivalent to this", and then urged specific action: "After the successful completion of the Uruguay Round the creation of a Trans-Atlantic Free Trade Area (TAFTA) should be seriously envisaged."

The foreign minister's proposal, aided by the easily remembered "TAFTA" label, succeeded in placing the issue on the agenda in both Europe and the United States. In early June 1995, Secretary of State Christopher spoke in Madrid on "Charting a Trans-Atlantic Agenda for the 21st Century." Borrowing a phrase popularized by Newt Gingrich, he said the Atlantic Alliance could not be maintained "by nostalgia alone"--it needed an economic dimension. Though anxious to avoid another NAFTA-type bruising in Congress, Christopher gave TAFTA his support, putting it squarely in the context of Clinton's Western hemisphere and Asian goals:

"A hallmark of the Clinton presidency is its focus on global economic growth. . . . His efforts include leading the way to the Miami agreement . . . on a free trade area in the Americas by the year 2005 [and] APEC's decision to achieve free and open trade and investment in the Asia-Pacific region by 2010. . . . Our vision for the economic relationship between Europe and the United States must be no less ambitious. The long term objective is the integration of the economies of North America and Europe, consistent with the principles of the WTO."

The qualifiers in that speech ("long term objective . . . consistent with the principles of the WTO") are important, but the more basic point is that trans-Atlantic "free trade" has emerged as an issue likely to be debated seriously. Europe's skeptics include France and, for very different reasons, the existent economic institutions of the WTO and the Organization for Economic Cooperation and Development (OECD). The French say TAFTA will be impossible to implement because of Europe's "special problems" in agriculture, textiles, and services, while Renato Ruggiero, the new WTO director, warns that any new regional economic group will undermine the newly established global rules. As the Dutch state secretary for economic affairs put it, TAFTA would mean that "trade relations will be governed by the right of the strongest rather than by multilateral rules of the game."

But several of Britain's leaders strongly favor the German initiative, though it needs to be said that European supporters and critics alike see it as an issue not only of domestic economics and politics, but also in terms of how it might affect their standing with America--all the more reason why Washington should be wary. French opposition stems from the usual protectionist reasons; those Germans who favor it hope that more direct economic relations with the United States might speed the structural reforms their economy so badly needs; while Britain's support reflects the hope that closer U.S. ties can save them from Brussels and EMU. Indeed, Foreign Minister Rifkind has repeatedly backed the TAFTA proposal, and in May 1996 Margaret Thatcher returned to a theme she had pressed as prime minister. In a speech devoted primarily to strengthening and expanding NATO, Lady Thatcher put TAFTA precisely in that political and security context:

"The most practical way forward . . . is to merge the North American Free Trade Area with the European Union, including the countries of Central, and perhaps in time, Eastern Europe. A Trans-Atlantic Free Trade Area would be able to push effectively toward global trade liberalization. It would prevent trans-Atlantic trade wars from jeopardizing wider trans-Atlantic links. It would bring our Atlantic civilization closer together."

American discussion of TAFTA has just begun, and supporters of the proposal have so far shaped the debate. The reasons are clear. A segment of American thinking clearly has become uncomfortable with the "Pacific tilt" in U.S. trade policy, and believes that, on balance, economic exchanges with Asia have damaged America. Clyde Prestowitz, for example, whose labor-supported Economic Strategy Institute has produced the main U.S. rationale for TAFTA, points to Pacific-region trade deficits as evidence that U.S. exports there are not as large as they seem. The ESI report, Shrinking the Atlantic, argues that because the United States has uniquely close historic, cultural, and political ties to Europe, now is the time to "start the United States and Europe down the path toward an economic parallel to NATO." This is of course another way of saying that Asia is somehow too "different" to do business with fairly or successfully, whereas the United States and Europe, with common cultural roots, share similar approaches in economics and politics. From there it is no leap at all to believe, with Mrs. Thatcher, that those common roots must inevitably bind the United States to Europe.

The Carmen Miranda School

The "natural market" view of American trade policy is no less critical of the supposed "Pacific tilt" in American policy, but this school argues that the United States must give its emphasis to the Western hemisphere rather than Europe. Leaving aside that in today's world "natural markets" no longer exist--least of all for an economy as large and diversified as America's--it is no coincidence that Western hemisphere supporters in the United States also insist that dealings with Asia have damaged America. Both groups share, in other words, a disposition to base their case for closer U.S. economic ties with Europe or Latin America less on the objective assets of those regions than on the supposed demerits of trading with Asia.

The catalogue of their complaints is as familiar as it is outdated, and the complaints are often simply wrong. Western concerns about Asia's economic "difference" have centered on Japan for more than a hundred years, and in a richly documented study Gary Saxonhouse shows that the West simply has not been able to accept Japan as legitimate:

"First, Japanese competition was illegitimate because it was based on labor cheaper in cost than labor in its trading partners. When labor was no longer cheap, competition was unfair because capital was cheaper in Japan. [Then] it was argued, Japan's dumping abroad was done at the expense of its exploited labor. Later it was argued Japan had to dump because by giving its labor force job security it was treating it rather too well. First it was argued that Japan's tariffs were high and its quotas numerous. When tariffs and quotas were largely harmonized with practices in the other advanced industrialized economies, it was then argued that it was Japan's unique economic institutions and their attendant informal barriers that were really keeping foreign products out. Finally, even as Japan's informal barriers were melting under continued structural change in the Japanese economy, demands came to be made for guaranteed market shares for foreign products in Japan. . . . Throughout the long history of these complaints, Japan's trading partners have rarely been prepared to concede that Japan's participation in the international economic system is legitimate."

None of this has made much of an impression on those reared in the Carmen Miranda school. When they compare Latin America and Asia as markets for U.S. exports, the comparison is typically made in zero-sum terms: Asia is seen as distant, largely closed, and not quite fair; Latin America as proximate, open, and receptive. In 1993, for example, John F. Purcell, the "developing nations" adviser to New York's Salomon Bros., concluded rather remarkably that it is mainly Latin Americans who buy U.S. goods: "Everybody's worried about the economy. Where is the place that we, the United States, export, and from which we could get the most jobs? It's not Japan or Europe. It's Latin America. . . ." Similarly, a recent book on U.S. trade and investment in Latin America states as fact that East Asians buy little from the United States. It argues that while Mexicans spend their dollars on American products, Asians use theirs only to buy Treasury bills:

While developing countries in Asia tend to use their trade revenues from the United States to purchase government bonds, thereby supporting the U.S. trade deficit, Mexicans use their export receipts from the United States to buy U.S.-made goods and services.

Even as prominent a scholar as Sidney Weintraub, in his advocacy of NAFTA, claimed that trade with Mexico is good for America, but trade with Asia is not:

"There is an advantage for the United States to have imports, if they come at all, come from Mexico rather than from some other country, say, an Asian tiger. The reason is that most of Mexico's foreign exchange earnings turn right around and are spent in the United States. Most imports into Asian countries come from non-U.S. sources, such as Japan."

There is no logical or evidential basis for such a statement. Of course "most imports"--in almost all countries--"come from non-U.S. sources." How could it be otherwise unless the United States dominated all world trade? Nor is it true that most Asian countries import primarily from Japan. The reality is that Asia's extraordinarily valuable import markets are very diversified, and no one source dominates. Even in Korea and Taiwan, despite Japan's proximity and colonial-era ties to both, U.S. and Japanese exports are nearly equal at 23 percent and 28 percent respectively. And in the ASEAN nations--where Japan has been heavily present from the time it began paying reparations in the 1950s--the United States has long held a rock-steady 15 percent share. In South America, allegedly America's "natural market", the import shares of the United States and the EU are roughly equal, at 27 percent and 23 percent, respectively. In Europe, which Americans tend to think of as the other "traditional" market, the American share is much smaller. In 1994, it held just 7 percent of Germany's market, and, as the following chart illustrates, that is also the pattern for the entire EU. In Asia, in other words, despite Japan's prominence and many American complaints, the United States is no shrinking violet.

The Asian Counter-Threat

It is in Asia, however, that the most disturbing reactions to Washington's talk of new economic ties with Latin America, as well as the newer issue of U.S.-European "free trade", have occurred. The focal point of the Asian response is a proposed "East Asia Economic Caucus" (EAEC), an idea that originated ostensibly with Malaysian Prime Minister Mahathir, and that he has been pressing for several years. The EAEC is for Asians only: It would include China and Japan, but exclude the United States, and is decidedly not the kind of Asian regionalism the United States wants to see materialize.

Yet in response to the current drift of American trade policies, it is precisely the kind of proposal likely to gain support. Mahathir defends his EAEC idea by saying that the United States is not genuinely a Pacific nation, and cites as proof Washington's support for NAFTA and its planned extension to South America. That the proposed EAEC has an even more base, and seemingly racist, coloration is suggested by its other non-members: the only other Pacific economies excluded are Australia, New Zealand, and Canada--this despite Malaysia's long-standing defense arrangements with the first two.

While it has been fashionable in the United States to discount his EAEC proposal, Mahathir is having some success. In March 1996, a first-ever Europe-Asia trade meeting convened in Bangkok. Known as "ASEM", it brought together Europe's trade ministers with their counterparts and other leaders from East Asia. The Asian contingent at ASEM precisely reflected Mahathir's ideas: China and Japan were represented, along with all the ASEAN countries, but the United States, Canada, Australia, and New Zealand were excluded.

Even more troubling are the warning signs from Japan. Ryutaro Hashimoto, Japan's new prime minister, has spoken specifically about Japan's likely response to American plans to expand NAFTA. In his book Vision of Japan, Hashimoto reports on a 1991 meeting he had with Henry Kissinger that bore directly on the EAEC issue. He told Kissinger that "if America ever forgets it is a Pacific nation, we will be obliged to change the nature of the relationship." When Kissinger asked whether this meant that Japan would support Malaysia's EAEC proposal should the United States seek to expand NAFTA into Central and South America, Hashimoto wrote that he answered, "Precisely":

"As a member of the cabinet I myself don't endorse Mahathir's plan. At the same time, though, if America expands NAFTA, blockading itself within the North and South American continents, and shows a stronger inclination toward forming a protectionist economic bloc than at present, we will be forced to focus on Japan as an Asia-Pacific nation and this will inevitably change the nature of the Japan-U.S. relationship. . . . I hope you won't push us that far."

Warnings rarely come more clear than that, and now that Hashimoto is prime minister the admonitions he expressed to Kissinger need even more to be kept in mind. Hashimoto has long been regarded as a "nationalist" in the Japanese context, and became prime minister directly in the wake of his mid-1995 confrontation with former U.S. Trade Representative Mickey Kantor. The issue then was Japan's auto imports, and Hashimoto cleverly turned an intended photo opportunity--the American's gift of a Kendo sword--into a shot in which Kantor appeared to be holding the sword against Hashimoto's throat. Most Japanese and many Americans believe that Hashimoto's resistance to the United States was a key factor in his elevation to prime minister.

He has, moreover, been a prominent sponsor of the veterans' groups that have difficulty coming to grips with Japan's World War II record and that worship annually at the Yasukuni memorial--both a Shinto shrine and a right-wing icon. Indeed, Hashimoto is president of the Association of Bereaved Families, the largest of those groups. Likewise, Hashimoto's sympathies are with the "Asian" school that has long characterized Japanese thinking. Its roots go back several generations, when leading Japanese first began to complain that their country was seen as an outsider in American (and British) thinking. That perspective fueled Japan's self-image as the "leader of Asia", and resonated strongly with the Japanese at the time; it was not merely a propaganda tool used by Japan's prewar military. Today, that strand of thinking focuses on "Japan as an Asia-Pacific nation"--a theme that reflects a powerfully re-emerging sense of Japan's "Asian identity." The Japanese scholar Noda Noboru has put this into its political context by calling it the "Dangerous Rise of Asianism", and by pointing out that in Japan, "pro-Asian sympathies tend to go hand in hand with anti-American sentiments."

Of course, concern with Japan's Asian identity has its skeptics at home. They include opposition leader Ichiro Ozawa, who believes that Japan's close ties to the United States are absolutely central for Japan's security, and for Asia's peace and stability. Nevertheless, Japan's "Asian identity" can be drawn on by Japanese and Asians already resentful over what they see as America's hectoring on trade conflicts and human rights differences, while that same America supports "free trade areas" that must--if Bhagwati, Krueger, and other trade economists are correct--inevitably discriminate against Asians.

American policy today, in other words, confronts once again the law of unintended consequences: Economic regionalism, which once seemed an acceptable and even a good idea, must now reckon with the strong likelihood that its fulfillment will bring to fruition a world America never wanted. A Western hemisphere trading bloc, like blocs in the other world regions, is simply irreconcilable with the global political and trading interests of the United States. It is not too late to avoid this folly, and avoid it we should.

Essay Types: Essay