New Multilateral Round Vital to Counter Drift Toward Three-Bloc World

The Risk of a Transatlantic Trade War
The first is the immediate and severe risk of a trade war between the United States and the European Union. There are over a dozen serious sectoral and functional conflicts between the United States and Europe at this moment. The United States has already retaliated on beef and bananas. Europe is threatening to retaliate over U.S. export tax subsidies and the “carousel provision” of U.S. trade legislation that requires the President to rotate his retaliation in order to make it bite harder. New conflicts are threatening over steel and anti-dumping issues more broadly, and over aircraft subsidies. The “agricultural peace” clause, which is keeping that most volatile of all sectors under control for now, expires in the next two years.

We have heard just this week in both Washington and Brussels that the linkages between these issues could produce a trade war. The new U.S. Trade Representative, Bob Zoellick, our former Trilateral colleague, has made very clear that, if Europe does not meet his test on bananas, he will be forced to implement the carousel provisions and increase U.S. retaliation. The Europeans have made clear that if the United States does that, it will have no choice but to hit the United States over its $4 billion of export tax subsidies through the FSC Provision. In short, the United States and Europe are very close to a trade war. Good diplomacy has kept it under wraps and a bit quiet at the moment, but there should be no illusions among us. It may seem perverse and anomalous in this world of new technologies to be fighting over beef, bananas, even aircraft and steel, but that is still the reality of the global trading system and it is putting us literally, in my view, on the brink.

A Potential East Asian Bloc
The second huge challenge to the trading system emanating from within the Trilateral world is more subtle, but perhaps even more serious and potentially more disruptive not only to the trading system, but to Trilateral relations more broadly. We face the real potential of a true Asian trading bloc for the first time in history, as Kusukawa-san began to discuss. We discussed this issue last April in Tokyo and at the initial meeting of the Pacific Asian Group in Seoul in November. But there have been enormous developments even since November. As Mr. Kusukawa mentioned, there are a number of bilateral regional arrangements underway within East Asia, such as between Japan and Singapore. But much more significant is that Zhu Rongji proposed a China-ASEAN Free-Trade Agreement at the Ten-Plus-Three summit in Singapore in December, which was converted by the heads of state into a serious study of a full East Asian Free-Trade Area. That study comes on top of an initiative already taken a year earlier after the Japan-Korea FTA talks to broaden it to include China. A Northeast Asia free-trade arrangement is being seriously analyzed by designated think-tanks in the three Northeast Asian countries.

The critical point is that all three Asian economic powers have reversed their positions on this issue. Until recently it was only Japan, China, and Korea that participated in no regional agreements. The rest of the world did so. China, as I say, has proposed an East Asian Free-Trade Agreement. Japan is pursuing aggressively a series of bilateral agreements and is involved in the efforts to create Northeast Asian and East Asian free-trade agreements. Korea has similarly reversed its position. All of these initiatives are in addition to the substantial Asian movement toward an Asian Monetary Fund, though they don’t now call it that. My guess is that within the next two or three months they will announce the initial steps, including about $50 billion of currency swaps, coordinated exchange rate arrangements, and early warning systems to prevent crises. What all this means is that, within a few years, Prime Minister Mahathir’s East Asian Economic Group could exist, albeit with a different name and with different motivations. Nevertheless, it would bring together more than one-third of the world economy into a new meaningful, effective regional economic grouping.

The Imperative of a New WTO Round
From a U.S. standpoint, this raises the possibility of what I call two-front economic conflict. From a global standpoint, it raises the prospect of a three-bloc economic world for the first time in history. The prospect of a three-bloc world combined with the existing U.S.-Europe problems would pose an enormous two-fold challenge to our global trading system, and the world economy and polity more broadly. What it suggests is the absolute imperative of reinforcing, re-strengthening, and reestablishing at the center of the global economic system an effective, functioning, multilateral umbrella—in the trade case, in the World Trade Organization.

I don’t want to be totally negative about regional organizations, and as all of you know, I have never been. Indeed, the post-World War II history is a story of steadily ratcheting-up of liberalization driven sequentially by regional and global initiatives. Every time the Europeans took a new step toward greater trade integration or economic unity, the United States and others responded by calling for a global round; in turn, the Europeans responded and barriers were reduced worldwide. There has been a positive dynamic, but it has required firm, cooperative leadership by the global powers. The issue is whether that same kind of leadership will continue in the future if a third major economic regional grouping in Asia emerges.

It is clear that the only way to resolve these potential risks is for the WTO to be reinforced, reestablished, and reinvigorated at the center of the trading system. Only that kind of multilateral step will subsume the major bilateral disputes—like those between the United States and Europe—within a broader enterprise, provide a broader strategic vision that can overcome the captured politics of individual sectoral problems, and therefore resolve trade disputes without digressing into conflict at the global level. A new forward momentum is required in the global trading system through the WTO. This momentum can only be achieved by the launch of a major comprehensive new round of multilateral trade negotiations.

Launching a new trade round requires the Trilateral powers to get together. The United States, the European Union, and Japan are going to have to agree to get it going and soon. At Seattle, they were in total disarray. They disagreed fundamentally over a whole series of issues and the meeting broke up in total failure. The challenge between now and this year’s WTO Ministerial in Qatar is for the Trilateral countries to get their acts together and overcome these enormous threats and challenges that I described. The EU, for its part, is obviously going to have to be willing to talk seriously about agricultural reform. Yet we hear from the French and some other Europeans, “We can’t possibly do that until after our election; maybe we can’t do it until after 2006. We don’t know if it’s possible.” For its part, the United States has been stalemated over these issues for five or six years. As you know, our President has had no new negotiating authority since 1994 and therefore the United States has been unable to participate actively in, let alone lead, any multilateral trade initiative. The United States was unable to put forward any kind of balanced proposal at Seattle and that was enough to create a complete failure there, although the disagreements with Europe and Japan made it even worse.

Underlying Difficulties in the United States
There is no doubt in my mind that the new Administration in the United States is going to do everything it can to overcome this stalemate. President Bush and Bob Zoellick have both made crystal clear (including in testimony by Mr. Zoellick to the U.S. Congress) that they put high priority on getting the United States back in the trade act in broad terms and in launching a new round in the WTO. The issue is whether they will be able to do so in light of the situation in the Congress and American policy more broadly. Indeed, the battle lines were already drawn this week. Bob Zoellick laid out the Administration’s broad views and Sandy Levin, who leads the Democrats on the House committee responsible for trade, laid out his views at the same time. The two sets of views were opposite in both substantive and tactical terms, indicating that there is a great deal of work to be done at home over these next few months.

Jay Mazur described quite colorfully yesterday some of the opposition to globalization in the United States. But I must tell you, it’s not just Jay Mazur. The Institute for International Economics has just published a study showing that, over a series of 600 polling questions over the last thirty years or so, the American public is basically split right down the middle on the question of globalization. The split in the Congress accurately reflects the public. Americans with at least some college education love globalization; but those without are very anxious about globalization’s disruptive effects and worry about dislocation. Another IIE study shows that, of all the American workers dislocated by trade—of which there are several hundred thousand per year—about one-third take annual lifetime earnings losses of 30–40 percent. It’s a small number of the total population, but it has a significant effect. Other workers fear they may go that same way and, therefore, are leery of the whole process. This polling also shows that if we put effective domestic programs in place to help dislocated workers, then support for globalization and open trade goes up sharply. The challenge to us domestically is to put programs like that in place.

In sum, there are deep underlying difficulties in the United States in moving ahead and the outcome is uncertain. Our underlying economic outlook is getting worse. The slowdown of the economy—though I think it will be relatively short-lived—will certainly push unemployment up. Since our trade deficit is hitting about $500 billion this year with steady growth in that number, we will hear charges that the trade position is hurting the economy rather than helping it, which, of course, it does. (Parenthetically, I might note that the trade deficit requires the United States to borrow $2 billion net from the rest of the world every working day, which raises the potential risk at some point of a sharp fall in the exchange rate of the dollar. This risk, in my view, will be exacerbated by the large tax cut now being proposed in the U.S. Congress because any such tax cut must in fact be financed mainly by the rest of the world, given the low level of private saving in the United States.)

The Necessity of a Broad Agenda
The bottom line is that our work is cut out for us in all parts of the Trilateral regions. It is clearly imperative to launch a new multilateral trade round quickly to deal with the immediate threat of a transatlantic trade war and to make sure that the incipient new regional developments in the Pacific are channeled in a constructive direction. To do so, the agenda has to be broad. Europe has to be ready to talk about agriculture; the United States has to be ready to talk about its anti-dumping laws, as well as competition and investment policies; the developing countries have to be ready to talk about labor and environmental issues. The history of the GATT is that big is beautiful in terms of launching and moving forward with trade initiatives. Everybody’s interest has to be on the agenda if a launch is to be effective.

If we are unable to launch a new trade round and restore the forward momentum to the global trading system very quickly, then I think we have to face the serious possibilities that there will be a trade war across the Atlantic and that within five years we could easily have a new Asian regional bloc that could detract from the stability of the system. The challenge to all of us in the Trilateral world is to do everything we can within each of our regions to move this issue toward positive and constructive resolution over these next few months. The outcome, I think, will be essential not only to the world economy, but to Trilateral relations and even to world politics more broadly.