"Sometimes," U.S. Trade Representative Robert Zoellick said recently, "tragedy also presents opportunities for those who are alert." Sure enough, in the collapse of the World Trade Center, the alert Mr. Zoellick saw an opportunity to appeal to wartime patriotism in order to put new trade deals on a congressional "fast track."
Fast-track authority allows a president to negotiate trade agreements and thenpresent an amendment-proof text to Congress for an up or down vote. The fasttrack, ordinarily a routine courtesy, has been in trouble lately. Led byDemocrats angry over Bill Clinton's trade policies, Congress in 1998 refused toreauthorize the fast-track rule. Today, a majority of House Democrats also wantto deny it to George W. Bush unless he guarantees that trade agreements willprotect workers and the environment as well as investors. Such considerations arenow irrelevant, argues Zoellick, because unregulated trade is an essential weaponin the president's war on terrorism.
Delighted with Zoellick's new offensive, the Republican-controlled Ways andMeans Committee approved his bill in mid-October, 26 to 13, with only twoDemocrats supporting it. The business lobby, fresh from convincing the House topass an absurd set of corporate-tax giveaways, is rolling out the lobbyists andtelevision ads to add fast track to their list of post-September 11 triumphs. Atthis writing, the bill has not yet been scheduled for floor action because theRepublicans still lack the votes.
Whatever the fate of fast track this year, Zoellick's campaign is both symboland substance of a new effort to smother the globalization debate. For its part,the antiglobalization movement that has dogged the global economic establishmentfrom Seattle to Genoa is already in some disarray because of the public's suddendistaste for street demonstrations.
But free-trade policies were already in big trouble before September 11. Forone thing, the U.S. economy is no longer capable of sustaining the bigger tradedeficits needed to buy third-world allies more access to U.S markets. Foranother, laissez-faire trade is no longer credible as the economic savior of thethird world. Since the global system shifted to an essentially unregulated systemof capital movements and currency speculation, global growth has slowed andinequality widened. Heavily Muslim East Asian countries such as Indonesia andThailand, with no particular prior sympathy for radical Islamists, were savagedby global currency traders in the late 1990s. Not surprisingly, they are lessthan resolutely pro-American in the current crisis.
Zoellick makes two arguments in his case for trade as an economic"counteroffensive" against terrorism. First (as he wrote in The WashingtonPost): "Trade is about more than economic efficiency. It promotes the values at the heart of this protracted struggle." Just so. One such value, at the core of U.S. trade policy for the last 20 years, is that American-style capitalism is so superior a way to organize society that we are fully justified in forcing third-world countries to adopt it.
Zoellick argues for expanding agreements such as the Uruguay Round and NAFTA,the North American Free Trade Agreement. In both cases, U.S. trade negotiatorsrequired poor countries seeking access to our markets to remake their economiesin our image. Reinforced by pressure from the U.S. State and TreasuryDepartments, as well as the International Monetary Fund and the World Bank,fragile political economies have been forced to downsize and privatizegovernment, deregulate agriculture, and open up their borders to volatile hotmoney from first-world financial markets.
But others around the world do not necessarily share our faith in what GeorgeSoros calls "market fundamentalism." Indeed, the world is full of dispossessedpeople who blame their wretchedness on what they believe are the consequences ofthe economic and cultural values that we celebrate. In the same issue of TheWashington Post that carried Zoellick's op-ed, a dispatch from Pakistan told us that the country's Taliban followers are drawn to its radical faith by poverty, corruption, a breakdown in public services, and the moral laxity of Western culture. A week later, the Post quoted a sociologist from Mali: "People want schools, they want medical attention for their children, but who is listening to them? Islamists, who provide them with water and fertilizer to believe the solutions are found in religion. And many see violence as the only resort--and why not, if there is no solution on Earth for them?"
The promise of prosperity promoted by free trade remains largely unfulfilled.Compared with the previous two decades, the last two have seen slower economicgrowth among the world's poor countries, an increase in the number of peopleliving on less than a dollar a day, and worsening inequality. Western-inspired,free-market "reforms" often enrich a thin layer of globally connected elites,while ripping up the implicit social contracts that have protected ordinarypeople. This process has often created acute political instability.
For example, politically radical Islam emerged in Iran in reaction to theU.S.-backed shah, a model economic reformer (and despot). The shah introduced anexport-oriented agribusiness to his country that displaced large numbers of smallfarmers, abandoning them to a global market in which they could not compete andto a global culture whose immodesty shocked them. Many turned to thefundamentalist ayatollahs--not for theological reasons, but seeking a refugeagainst Western values that seemed brutal and inhuman.
This has not yet happened in sinkholes of vast inequality like Saudi Arabiaand similar Muslim states allied with the United States, but only because thevalues of justice and democracy have been subordinated to the "values" ofoppression and torture under a police state. There could be no more fittingsymbol of this than the decision of the World Trade Organization (WTO) to holdits first meeting after the Seattle riots in Qatar, a Persian Gulf sheikdomfirmly connected to the global marketplace through its exports of oil and itsimports of most of its consumer goods. It is also a despotic theocracy wherepolitical parties cannot exist, political demonstrations are banned, and thegovernment controls the media. Qatar was demonstration-proof--an ominous sign ofhow the movement for laissez-faire trumps its supposed handmaiden, the movementfor democratic rights.
The United States, of course, did not create the poverty that plagues so manyparts of the world. Indeed, humanitarian efforts associated with the ColdWar--such as the Peace Corps, early USAID programs, the Alliance for Progress,and World Bank development loans--often improved the conditions of the poor. Butin the last 20 years, particularly the last 10, American policies have ignoredthe maldistribution of income, wealth, and power. Zoellick's belief that more ofthe same will strengthen America's hand in the war against terrorism ispreposterous.
Zoellick's second argument is that freer trade policies have been uniformlygood for America. While trade has brought cheaper imports, it has also cost jobs.More ominously, current policies are producing an unsustainable trade deficit.Despite assurances that trade expansion under NAFTA and the WTO would reduce thetrade deficit, the gap between imports and exports has expanded. Last year itdrove the current account deficit (the total of all international financialtransactions) to a record $450 billion--4.3 percent of our gross domestic product(GDP). Nobel Prize-winning economists Franco Modigliani and Robert Solow havewritten that the large and growing deficit in our international trade balance"may well be the greatest potential danger facing the economy in the years tocome."
To finance this deficit, we as a nation have had to borrow from othercountries and sell them more of our assets. Each year we must then devote more ofour income to interest on the debt and the repatriation of profits to investorsin other countries. This net foreign debt is now 16 percent of GDP and will beroughly 40 percent of GDP within five years. By way of comparison, Argentina,whose economy is collapsing under the weight of its external debt, last year owed50 percent of its GDP to foreign investors.
The United States, of course, is not Argentina. Our dollar is the world's mostimportant reserve currency. We also have better credit and more assets to sell.But as a matter of simple arithmetic, we cannot forever borrow in order to buymore from the rest of the world than we sell. The interest burden will eventuallybe so heavy that foreign investors will cease financing the rising debt at lowrates. When that happens, the dollar will free-fall and interest rates will spikeupward, with devastating economic consequences. Our country will then face adrastic devaluation of the dollar and a draconian reduction in real incomes inorder to run a surplus in world markets.
Washington's indifference to the trade deficit is extraordinary when comparedto its bipartisan distress over the federal government's fiscal deficit when itreached the vicinity of just 4 percent of our GDP--or over projections that theSocial Security Trust Fund might run a deficit in the year 2038. Yet, on ourcurrent path, the trade deficit will touch off a serious economic crisis longbefore the Social Security Trust Fund needs a modest tax increase to cover itsobligations.
Conventional wisdom among economists is that the root cause of trade deficitsdoes not lie in trade policies. One argument blames the low U.S. savings rate,which requires us to borrow to finance imports. Another faults the overvaluationof the dollar, which makes our imports expensive and our exports cheap. Stillanother locates the problem in the slow growth of Europe and Japan, whichconstrains demand for U.S. exports.
But even if one accepts those diagnoses, the Bush administration is notoffering remedies. Indeed, it is deliberately moving in the opposite direction.Its 10-year, $1.3-trillion tax cut will clearly reduce the national savings rate.The White House opposes a cheaper dollar and has been unwilling to use itspolitical clout to pressure Europe and Japan into faster growth.
The result of all these factors, according to the U.S. Trade Deficit ReviewCommission, is that U.S. consumers and businesses chronically import more thanthey export. With the trade gap structured to grow faster than our income,agreements to expand trade have had the perverse effect of widening the tradedeficit even further and thus increasing U.S. borrowing from overseas. As thedebt grows, so does America's vulnerability to a crisis, especially in the midstof a war.
Given the risks and danger, Congress should tell Zoellick to cool his heels.Instead of more counterproductive trade agreements, we need a return to balanceddevelopment policies that could help the world's poor and balanced trade policiesthat benefit ordinary Americans during a time of military and economic peril.
