PK on FT

["Devine, James" <jdevine@xxxxxxx>]

May 24, 2002/New York TIMES

America the Scofflaw
By PAUL KRUGMAN


Early in the Reagan administration I spent a year on the staff of the
Council of Economic Advisers. While there I got a disillusioning look at how
economic policy is really made. But one favorable surprise was how seriously
U.S. officials took our international trade agreements.

The Reagan administration, despite its free-trade rhetoric, was quite
willing to protect industries for political gain; the most notable example
was the "voluntary" restraint on Japanese car exports. Still, it was a firm
rule that trade interventions had to be "GATT-legal" -- that is, they
couldn't violate the General Agreement on Tariffs and Trade. (The GATT has
since been incorporated into the rules of the World Trade Organization.) And
that scrupulousness continued up to the end of the Clinton years. Everyone
understood that there were certain things that you didn't do, no matter how
convenient they might be in terms of short-term political advantage.

In those days, in other words, responsible people ran our international
economic policy.

When the Bush administration imposed steep tariffs on imported steel, it
became clear that this is no longer true. In sheer economic terms, the steel
tariff is not that big a deal. But it demonstrates an unprecedented contempt
for international rules.

The immediate threat is that other nations will strike back; the European
Union has threatened retaliatory tariffs, and earlier this week Japan,
Brazil, South Korea and China said they would follow suit. (Mr. Bush really
has unified the world, at least on this issue.) But as a wise trade expert
once told me, the big danger when the U.S. flouts the rules isn't
retaliation, it's emulation: if we don't honor trade agreements, who will?

Why do we need trade agreements anyway? The costs that tariffs and import
quotas impose on domestic consumers almost always exceed the gains they
provide to domestic producers. Nonetheless, if we didn't have trade
agreements, protectionism would usually win. Consumers don't realize that
they are hurt by steel tariffs or sugar quotas, but the steel and sugar
industries know exactly what they're getting.

The reason we manage to have fairly free trade is that the world -- under
U.S. leadership -- has evolved a system that pits the self-interest of
exporters against the power of industries that would prefer not to compete
with imports. Each country agrees to accept the exports of other countries
in return for access to their markets. In the language of trade
negotiations, the parties to such an agreement make "concessions"; but the
real purpose of those concessions is to protect ourselves from our own bad
instincts.

The system depends on the proposition that a deal is a deal. A country that
has, say, agreed to allow imports of steel won't renege on its promise
simply because the domestic political winds have shifted. Trade agreements
do include "safeguards," special circumstances under which temporary tariffs
are permitted; but the conditions under which you can do that are fairly
restrictive.

And the steel industry clearly didn't meet those conditions. In particular,
steel imports have lately been declining, not rising. When the Bush
administration nonetheless decided to give the steel industry the protection
it wanted, it was in effect saying -- as it has in so many other areas --
that the rules don't apply to yours truly.

The administration insists that it is simply standing up for U.S. interests.
Robert Zoellick, the trade representative -- who used to be a genuine
free-trader, but these days sounds like a broken man -- declared that "Uncle
Sam is not going to be Uncle Sap for these people." But if you believe that
this is about the national interest, I've got a terrorist threat against the
Brooklyn Bridge you might be willing to buy.

What it's really about, of course, is raw, short-sighted politics -- the
same politics that has led the administration to revoke crucial trade access
to Caribbean nations, with devastating prospective effects on their
economies, to help out a single South Carolina congressman. In the case of
steel, Karl Rove weighed three electoral votes in West Virginia against the
world trading system built up over 60 years, and the answer was apparently
obvious.

Mr. Bush will soon have trade promotion authority -- what we used to call
"fast track" -- which he says he needs in order to negotiate new trade
agreements. But what good are new agreements if we won't honor the old ones?

JD