Now For The Slow Track

Is the U.S. push for worldwide free trade running out of steam?

For 50 years, Corporate America has counted on Washington to harangue a protectionist world into demolishing trade barriers. The result: robust global growth. From the Tokyo and Uruguay rounds of multinational trade talks to the North American Free Trade Agreement and market-opening deals with Japan and Europe, the U.S. government has helped to spur a golden era of export-fueled economic expansion. Since 1991, in the U.S., exports have risen 46%, while the economy itself has grown 22%.

Is that era now in danger of ending? On Nov. 10, after an arm-twisting and dealmaking campaign failed to scare up the votes he needed, President Clinton gave up on a bill to give him "fast-track" authority to negotiate trade deals without congressional intervention. Clinton is gamely talking about getting his fellow Democrats--many avowedly anti-free trade--in line for another vote next year, but the prospects are slim. The picture didn't improve when, days after Clinton's fast-track drive stalled, five companies in apparel-making and other import-sensitive businesses cut 15,000 jobs.

"TIME-OUT"? Now, government officials and business leaders around the world are wondering whether an end to the U.S. crusade for free trade means that the rapid integration of the global economies will slow or even reverse. If nothing else, nations "may end up taking a time-out" on economic integration, predicts former top Commerce Dept. trade official David J. Rothkopf.

For U.S. exporters, it's a pause that distresses. While there's little sign of a retreat to protectionism, business execs are leery about the U.S. sitting on the sidelines as other nations expand multilateral trade blocs and move toward linking them--the way the European Union now cooperates with Mercosur in South America.

The biggest immediate impact from Clinton's defeat "will be the absence of additional opportunity," particularly in Latin America, laments Joseph T. Gorman, chairman and CEO of TRW Inc. "Mercosur will continue to lead, the Europeans will continue to gain an advantage," and the U.S. will be more isolated by regional barriers, says Gorman. In April, Clinton had hoped to lead a 34-nation summit in Santiago to fashion a hemispheric free-trade zone. Now, South American nations will likely proceed more slowly.

Not that the Administration is conceding anything. "We have no intention of ceding our global leadership role to anyone else; we are undaunted," insists U.S. Trade Representative Charlene Barshefsky. And indeed, routine trade negotiations--with Japan on glass imports, with Korea on autos, with Europe on pharmaceuticals--can proceed as planned. Even global talks on telecommunications can go forward as before because no U.S. laws would be affected (table).

Nor will a congressional setback for the U.S. President slow the rush toward globalization. Still, the defeat comes at the same time as the dollar continues its unrelenting five-year climb and growth remains sluggish in economies around the world. The combination is expected to limit U.S. export growth, while the strong economy guarantees that U.S. consumers will suck up more and more increasingly cheap imports. As a result, the current account deficit appears headed for $115 billion by yearend. Economists fear that the growing trade deficit may shave as much as a half percentage point from gross-domestic-product growth in 1998.

EMPTY-HANDED. The loss of fast track also doesn't help to tilt the balance back to the U.S. In major trade talks, such as the Asian-Pacific Economic Cooperation forum, which Clinton will attend empty-handed on Nov. 25, other nations will be reluctant to put their best offers on the table. They know that Congress, busily looking over the President's shoulder, might eventually demand more concessions. Also, the fact that Clinton won't be able to push through major market-opening deals, "gives every leader around the world the excuse they need not to buck local economic interests," says I.M. Destler, a trade policy expert at the University of Maryland.

That worries U.S. business, which has counted on America's aggressive trade negotiators to open markets, protect their copyrights, and monitor cheating. Upcoming World Trade Organization deliberations on intellectual-property-rights protections for the Internet are expected eventually to involve nearly all of the organization's 103 members. And fast-track authority "brings foreign governments to the negotiating table," insists Bradford L. Smith, associate general counsel for Microsoft Corp.

Indeed, because Clinton didn't have fast-track authority, Chile lost interest in talks to join NAFTA in 1995. Today, trade with Chile remains stifled by 11% tariffs not applicable to Canada, Brazil, and Mexico. To get around the tariffs, Caterpillar Inc. is considering shifting the manufacturing of its heaviest bulldozers and earth movers from the U.S. to its Brazilian plant. AXIA Inc., an Oak Brook (Ill.) appliance-parts supplier, has watched customers such as General Electric and Whirlpool move production south. "Pretty soon, we're going to have to follow them because we won't be able to deliver an American product that is competitive anymore," says AXIA CEO Dennis W. Sheehan.

Intel Corp. had hoped that a hemispheric free-trade agreement might reduce tariffs on computers and semiconductors that average 12% throughout South America. Now, the chipmaker can only dream--or continue to shift production to the South. The company is already building a testing and assembly plant in Costa Rica.

Electronic Data Systems Corp. CEO Lester M. Alberthal Jr. says that such production shifts may have to continue. Without fast track, "America loses out," he concludes.

What next? Fast-track opponents are not relenting. House Minority Leader Richard A. Gephardt (D-Mo.), who lined up 163 Democratic votes against the fast-track bill, will soon submit his own fast-track legislation. It will include provisions requiring U.S. negotiators to make minimal labor and environmental standards a prerequisite for trade expansion with other nations. And the Administration will also try to address the contentious issue surrounding fast track.

Will guarantees for labor rights and environmental protection in other countries take their place beside provisions on investment and copyright protections in the trade agreements of the future? Business lobbyists are adamant: Don't muddy free-trade talks with labor and environmental provisions. "When you start to pile on important but unrelated items, that gets in the way of finalizing the most effective trade agreements," says Arthur D. Collins, president and chief operating officer of Medtronics Inc., a $2.5 billion manufacturer of pacemakers and medical devices. He credits the Administration's trade agenda with helping his company establish a manufacturing operation recently near Shanghai.

But business may have no choice but to confront the growing public fears that free trade leads inevitably to economic and social disruption. "The polls show there is a lot of uncertainty among Americans, so those of us who believe in its benefits are going to have to start thinking about how we address their fears," says Commerce Secretary William M. Daley. "Putting some minimal labor and environmental standards in fast track is the best way to build a constituency for free trade," says Susan A. Aaronson, a trade historian at the Brookings Institution.

Finding a compromise seems like a tall order, with the wounds in the Democratic Party still fresh and with labor and business continuing to snarl at each other. But if both sides can agree on a compromise to include labor and the environment, Clinton might well regain his trade negotiating authority--and America could recoup its stature as the chief missionary for the gospel of free trade.

    Before it's here, it's on the Bloomberg Terminal.