Another Great Victory of Ideology
What the Bush Administration should learn from the
instructive failure of the "Uruguay round" of trade talks
by Robert Kuttner
In September of 1986 the United States led the major nations on an improbable
crusade to bring unmitigatedly free trade to the world. Not surprisingly, it
failed. Why the so-called "Uruguay round" of trade talks stalled last winter
makes sad reading, because it shows how painfully the ideology and negotiating
strategy of U.S. policy-makers is at variance with U.S. commercial interests.
The Bush Administration may have won the shooting war against Iraq, but it has
been losing a more important war to save the U.S. standard of living.
In retrospect, the American strategy for these trade talks was oddly
contradictory, if not self-defeating. The United States is among the world's
most open markets. Most foreign producers can sell here at their pleasure,
while U.S. firms attempting to compete overseas often face impenetrable
barriers or preconditions. Yet in the trade round U.S. negotiators spent most
of their energy attacking the relatively open European Community for its farm
policies, and gave a virtual free ride to far more protectionist nations like
Japan, Korea, and Brazil. The goals of the farm lobby, representing about 10
percent of U.S. exports, tended to crowd out other U.S. negotiating goals, and
the impasse over agriculture subsidies ultimately swamped the entire round last
To understand why the American strategy for the trade round was so badly out of
sync with U.S. interests, one needs to consider the logic of the global trading
system and the U.S. role in it. Since 1948 commerce among nations has been
governed under the auspices of the General Agreement on Tariffs and Trade. The
GATT is less an international organization than a standing diplomatic
conference. The joke has it that "GATT" stands for General Agreement to Talk
Two basic political features of the GATT stand out. First, the United States,
as the world's largest economy and as a devout believer in laissez-faire, is
the system's special patron. Other nations tend to be rather more opportunistic
about using the trading system to seek advantage for their own industries: U.S.
officials care more about the system as a whole, viewing it as a potent and
relentless engine of free markets, domestically and globally.
Second, GATT enthusiasts in the United States and elsewhere tend to believe
that the logic of liberal trade is cumulative; commerce must become
progressively freer of government intrusions, lest the whole system slide
backward into protectionism. A favorite, and misleading, GATT metaphor is that
"free trade is like a bicycle: you have to pedal ever faster or you tip
The GATT became the world's sole trading regime in 1950 by default, when a
proposed, more powerful, International Trade Organization failed to win
ratification in the United States and elsewhere. Since then the GATT framework
has been useful mainly for negotiating reciprocal reductions in tariffs levied
by nations on manufactured goods. Entire areas of trade, such as banking,
insurance, farm products, and textiles, are not covered by the GATT. It largely
lacks jurisdiction over bilateral assaults on free trade, as when Mexico
requires that about half of the content of American auto "imports" be produced
locally, or when Japan locks out Korean Hyundais. The GATT also fails to
regulate a wide variety of de facto barriers to open commerce, such as
subsidies, quotas, cartels, and preferential financing schemes. Nor is the GATT
a true framework of common rules. For example, it does not cover such
commercial basics as the protection of intellectual-property rights--patents
and trademarks. And it lacks a judicial enforcement mechanism to carry out its
rulings, which means that national decisions about whether to comply with the
GATT are political--they are up to the nations involved.
As the economist Albert O. Hirschman observed nearly fifty years ago, trade
between nations, even when conducted by private firms, is necessarily a
political act, because the rules of commerce vary so widely from nation to
nation. Brazil and Argentina, for example, lack effective laws against
commercial piracy. The government of Korea routinely extends credit to large
export firms at very low interest rates, and sometimes even subsidizes the
principal as well. Japan does not allow foreign stock brokerages to operate in
Tokyo on a par with Japanese ones. Germany allows interlocking ownership
between large banks and corporations--which is prohibited in the United States.
Other important industries, such as civil aviation and petroleum, are regulated
or private cartels. In GATT jargon all of these are known as "non-tariff
barriers." Taken together, they are far more damaging and insidious than
tariffs, which are, as economists say, "transparent"--you know precisely what
you are up against.
Since there is no world government, and hence no common body of commercial law
across national frontiers, trade law must be understood as a mechanism to
permit commerce among economies that play by different rules. Far from trade's
being governed by an invisible hand, any movement toward freer commerce or
common rules or reciprocal results must be negotiated and constructed, piece by
Despite the GATT, with its high principles of multilateralism and
nondiscrimination, disputes that arise from this most imperfect meshing of
national commercial systems often must be settled bilaterally and politically.
This will remain true until a global body of commercial law exists. When U.S.
auto makers complain that Mazda or Toyota is "dumping" mini-vans (pricing them
below cost to drive out domestic competitors), they must take their complaint
to the U.S. government, not to court. Although the U.S. government could levy
penalty tariffs against the import, it often prefers to negotiate a deal with
the foreign government. This is not a judicial proceeding; the U.S. government
is free to accept or reject the petition. U.S. diplomats usually have bigger
fish to fry with the Japans, Koreas, and Brazils; generally the Departments of
State, Treasury and Defense--all with other missions--advise against "getting
tough" with allies over trade disputes.
Trade affects economic prosperity, investment, and jobs--matters that are
hardly trivial. But our prevailing ideology holds that these matters are the
proper business of the marketplace; diplomatic leverage should be reserved for
the high politics of war and peace. The use of America's geopolitical influence
to advance its economic interests is deemed protectionist. The only fit goal
for trade policy is to nudge the world toward ever freer markets--a conceit
that our trading partners are happy to indulge. For our mentality allows
smaller and weaker nations the benefits of strategic trade policies, and denies
them to the United States.
One legacy of reciprocal tariff reduction is a hallowed but misleading concept
known as the most-favored-nation principle. Countries granted
most-favored-nation status are able to sell products in foreign markets at the
lowest prevailing tariff rate. This principle, which covers GATT members, was
intended to ensure that the products of all major trading nations would be
traded subject to the same strictures, regardless of their national origin.
This ideal is called nondiscrimination. However, with the rise of non-tariff
barriers, nations that played by mercantilist rules, using subsidies, quotas,
piracy, targeting, and limits on imports, nonetheless enjoyed free access to
our markets under the nondiscrimination doctrine. These emerging forms of
discrimination were thrown into relief at the Tokyo round (1973-1979), which
encouraged but did not require GATT members to adhere to codes of conduct.
Thus, despite the GATT's nominal principles, discrimination has been central in
the trading system.
Looking at the trading system in the early 1980s, the Reagan Administration had
three broad concerns. First, despite nominally low tariffs, all the non-tariff
barriers added up to a global system of covert protection, which was swamping
both the ideal of free trade and the U.S. trade balance. Second, our trade
imbalance was reaching dangerous levels--more than $156 billion by 1986. This
was partly the result of an overvalued dollar, which priced many U.S. products
out of world markets, but it also reflected the fundamental asymmetry in the
openness of different nations. Generally the United States was the world's most
penetrable major market. Among the advanced industrialized countries America
rook roughly 57 percent of the total manufactured exports from the Third World;
Japan took only 12 percent. And third, as one domestic industry after another
was losing out to foreign competition, Congress was making increasingly
protectionist noises, most notably about Japan. This threatened not only
harmonious relations with our leading Pacific ally but also America's
credibility within the GATT as the champion of liberal trade.
The Reagan Administration hoped that a new, ambitious trade round might address
all three problems. By pulling down all the covert barriers to free trade, a
round could try to make other nations operate their economies more like ours,
according to market principles, free from government distortions, and using
norms of "transparency" that would give all economic contestants the guarantee
of equal treatment and also avenues of legal redress. That, in turn, would give
U.S. exporters new access to foreign markets, temper our trade imbalance, and
damp down protectionist pressures.
In 1982 William Brock, then the U.S trade representative, decided, in line with
the bicycle theory, that it was time for a new round of trade talks that would
finally address the several covert forms of protection not remedied by tariff
reduction. After a few false starts the round finally began in 1986, at Punta
del Este, Uruguay, and became known as the Uruguay round.
At Punta del Este the Reagan Administration persuaded other nations to accept a
remarkably sweeping negotiating agenda. It included bringing all forms of
"services"--banking, insurance, engineering, films, broadcasting, aviation, and
shipping--and also agriculture and textile trade under the GATT for the first
time. It included, as well, working out common rules for the use of subsidies,
a common understanding of what constituted dumping, rules for the consistent
protection of intellectual property and for fair play on domestic-content and
licensing requirements, and mechanisms for beefing up the GATT's ability to
enforce its own rulings. The agenda was utopian. It called for nothing short of
a common framework of global commercial law--a major delegation of national
sovereignty--to be achieved in four years. In line with the usual procedures,
working groups in each functional area were to begin technical discussions
immediately, a "midterm" review by cabinet-level negotiators was set for late
1988, and the round was to be concluded by 1990.
The politics attendant to the Uruguay round were difficult, domestically and
internationally. The domestic challenge for the Administration was to build a
coalition of economic interests--farmers, bankers, multinational
corporations--that would be net winners if the round succeeded. The
international politics necessary for success was even trickier. Most of the
world's nations do not have America's appetite for ever freer trade as an end
in itself. Japan and, to a lesser extent, the European Community are relatively
content with their present blend of private capitalism and state-led
mercantilism. The EC Commission considers its Common Agricultural Policy
essential to its emerging political union. The Japanese have grown wealthy on
chronic trade surpluses. Most Third World nations that have industrialized have
done so with heavy state involvement--through subsidies, limitations on
imports, state financing, and state-assisted piracy.
Even though the United States was the world's most open market, and even though
American firms were the primary victims of foreign mercantilism, the logic of a
U.S.-inspired trade round required the United States to begin by offering
concessions rather than making demands. U.S. demands for the opening of foreign
markets are generally more effective in quiet bilateral negotiations, in which
the United States is able to throw around its economic and political weight.
But multilateral negotiations are conducted in broad daylight, and the rituals
of the GATT tend to elevate small, poor nations to the same status as big, rich
ones. "Carla Hills [the current U.S. trade representative] is a tiger in
bilateral negotiations," says the trade lobbyist for a major industry
association. "She is a pussycat in the GATT."
For the new round to begin at all, the United States had to offer Third World
nations such carrots as the prospect of freer exports of textiles and farm
products to the rich markets of the United States and Europe, and also relief
from the sticks that the United States sometimes wields, such as Section 301 of
the 1974 Trade Agreements Act, a tough provision that allows the United States
to retaliate in order to pry open foreign markets. In return, the United States
hoped to persuade Third World nations to run their economies more in the
American image--to allow foreign banks entry, to privatize state-subsidized
industries, to get rid of domestic-content requirements, and to offer
U.S.-style patent protection. This logic caused the identified villain of the
round to become the European Community, with its protected agriculture. Japan,
by far the most protectionist of the major industrial nations, kept a very low
profile and enjoyed something of a free ride.
As the round progressed, the United States found itself oddly on the defensive.
America was preaching free trade, and "Third World nations took us at our
word," one trade negotiator recalls. The Americans found themselves pressed to
abolish textile quotas, to open farm markets, to swear off "voluntary"
restraint agreements that had limited import penetration in steel. India and
other poor nations proposed to expand the definition of services to include
"labor services," which is to say they sought the free immigration of low-wage
workers attached to foreign construction companies.
In most of the fifteen working groups scant progress was made. In the important
intellectual-property area the working group tentatively agreed only to an
incomplete and vague set of principles. In the meantime, some nations, notably
Mexico and Chile were persuaded to adopt U.S.-style patent protection by U.S.
trade officials who employed the old-fashioned method--threatening retaliation
if they refused. By the time the round collapsed, major industries that had
been expected to be key supporters, such as the pharmaceutical and
telecommunications industries, considered the intellectual-property proposals
worse than nothing.
The round ended with the working group on subsidies and dumping far from
agreement. Many nations view regional, industrial, and environmental subsidies
as legitimate tools of economic development. The United States, in principle,
argues that "trade-distorting" subsidies should be prohibited. But in a sense
all subsidies distort trade, because they cause products to be priced
differently from the way they would have been priced in the absence of the
subsidy. The United States sponsored what it called a "traffic light" system.
Some subsidies, such as environmental ones, would get a green light; others,
such as explicit export subventions, would get a red light, and be prohibited.
Yellow-light subsidies could be challenged if they seemed to distort trade.
Negotiators never could agree on either a precise test or an enforcement
mechanism--but several nations pressed the United States to get rid of its own
anti-dumping laws in exchange for this minimal move toward global standards.
The group working on freer trade in financial and other services failed even to
agree on a common framework. American negotiators belatedly realized that freer
trade in telecommunications, as long as it left foreign state telecom
monopolies intact, would provide foreign producers with freer access to the
U.S. market without adequately opening foreign markets. European nations and
others, citing "cultural" concerns, refused to provide free access to American
films and TV programs. Nor was there much progress in dealing with the subtle,
covert ways in which some nations coerce U.S. manufacturers to produce overseas
as a condition of doing business.
Much to the relief of many U.S. industries, which feared that other U.S.
objectives would be traded away in exchange for progress on the farm question,
the round finally came a cropper over agriculture. The liberalization of farm
trade had been the special objective of Clayton Yeutter, who served as U.S.
trade representative from 1985 to 1989 and as Secretary of Agriculture from
1989 through February of this year. Yeutter repeatedly deemed agriculture the
crucial issue for the entire round. He grandly proposed that all nations should
eliminate all farm subsidies and price supports by the year 2000--an objective
that neither the European community nor many U.S. farmers took seriously. By
the time the round collapsed, the Europeans were willing to support a 30
percent cut in subsidies over a ten-year period, while the Americans were
insisting on a 90 percent cut in export subsidies and a 75 percent cut in
internal supports. Although Europe is committed in its domestic policy to
reducing the cost of its farm program, there is virtually no support there for
a completely free market in farm products, which is viewed as dangerously
unstable. The U.S. position on farm trade was an epic case of the best being
the enemy of the good.
Last February, Bush Administration officials endeavored to resurrect the failed
round, working through GATT officials. Arthur Dunkel, the GATT
director-general, persuaded the Europeans to soften their bargaining position
on agriculture. That gave the Americans the necessary fig leaf, and they agreed
to come back to the table. In May, by a close margin, Congress authorized the
Administration to negotiate for another two years. At this writing, discussions
at the working-group level have resumed, attempting to pick up where the failed
negotiations left off. However, heads of state meeting in London at the July
summit of the industrialized nations were embarrassed that the agriculture
talks--the make-or-break issue for the round--remained deadlocked.
In the meantime, the United States embarked on an ambitious effort to negotiate
a free-trade agreement with Mexico. This plan aroused the criticism of groups
not normally involved in trade policy. Environmentalists realized that free
trade with Mexico, whose health, safety, and environmental standards are
significantly weaker than those of the United States, would be an invitation
for U.S. companies to flee south, and also a deterrent to tough standards at
home. Some eminent free-traders, among them the Columbia University economist
Jagdish Bhagwati, who was recently named the senior economic adviser to the
GATT, warned that a preferential arrangement with Mexico could seriously
undermine the GATT ideal of nondiscrimination, and that it would also invite
new demands for bringing regulatory and social policies into harmony as a
condition of trade generally. Many Europeans took the Mexico deal as an ominous
sign that the United States was giving up on the multilateral GATT. U.S.
support simultaneously for a more comprehensive GATT and for a preferential
North American trade bloc is just one more sign of the general incoherence of
our trade policy.
Congress's backing of a U.S.-Mexico free-trade arrangement was conditional. It
must win legislative approval again when the draft agreement is completed,
presumably in 1992. The surprisingly strong criticism of the Mexico deal led to
widespread recognition of the uncomfortable reality that when you import a
nation's goods, you also import its social, labor, and environmental standards.
The deal further underscored the fact that free trade is in reality a
delegation of sovereignty--not to an international government but to a global
market with uneven rules. Therefore, the gains from trade between any two
nations are only as reciprocal as their actual conduct of trade. If Japan's
markets are significantly less open than our own, and opening them is a low
diplomatic priority for Japan, there is no assurance that "freer" trade will be
a net gain for the United States. If Mexico's wages are one seventh our own,
and U.S. firms flee to Mexico, there is no assurance that the predicted rise in
Mexico's purchasing power will compensate for the loss of our jobs.
Although the collapse of the Uruguay round last December was accompanied by
dire economic prophesies, there could be worse outcomes than for this trade
round to fizzle again. That, at least, would force the United States to revise
A more modest but attainable trade-policy goal would be to acknowledge the
radical disparity in the rules by which diverse economic systems play, and to
seek a trading system that accommodates diversity rather than demanding nominal
conformity. Concretely, this would mean a shift in the operating principle of
the GATT, from unconditional to conditional free trade. Nations that agreed to
a common set of practices on subsidies, pricing, intellectual-property
protection, social standards, and, generally, the right to do business would
enjoy free access to one another's markets. Nations that did not agree would
retain the right to operate more mercantilist or exploitive economies
internally--but their access to other nations' markets would be conditional and
would have to be negotiated, country by country and sector by sector.
Ironically, a step backward from the utopian ideal of perfect free trade would
enhance both the health of the multilateral trading system and the
competitiveness of the United States.
The stakes are anything but academic. It matters whether the products made in
the United States--and the jobs, the investment capital, and the knowledge
embedded in those products--get roughly equal access to world markets. By
viewing the trading system in utopian terms, denying that the policies of other
nations affect our access, and insisting that the only kind of national
security is military, the United States is slowly squandering both its standard
of living and its economic influence in the world. To revise our trade strategy
will require an acknowledgment that we have economic interests to defend and
advance, in addition to ideological goals for the world.
Copyright © October 1991 by Robert Kuttner. All rights
The Atlantic Monthly; October 1991; Another Great Victory of Ideology Over Prosperity; Volume 268, No. 4;