2005's Global Trade Hot Spots

Key issues in U.S. international trade policy will come to the fore this year. But supporters of liberalization face many obstacles

By Paul Magnusson

U.S. multinationals are declaring 2005 a "crossroads year for U.S. international trade policy," and in many ways, they're right. While trade issues took a back seat to national security concerns in the wake of September 11, many will return to the fore this year, driven by legislation on Capitol Hill and looming negotiating deadlines.

The end of 2005 could find the U.S. entering some of the most significant new trade agreements in decades, or bowing out of the biggest one of all -- the 148-nation World Trade Organization. While raising fears of inflation, the U.S. dollar's continuing plummet -- it has already plunged about 15% against a broad range of currencies -- could eventually put a brake on America's runaway trade deficit. Then again, the dollar could stabilize as the trade gap climbs relentlessly higher.


  One thing is for certain: The U.S. is about to set a dubious record -- the largest yearly trade deficit in the history of nations (see BW Online, 1/13/05, "A Rising Trade Gap Sinks Growth"). November's 2004 monthly figure of $60.3 billion surpasses previous records and puts the U.S. on the path to top $600 billion for the year, nearly 6% of U.S. GDP and above the 5% mark where economists say warning bells start ringing.

Explaining the reasons for the massive shortfall to a skeptical Congress is likely to fall to America's new top trade negotiator, the as-yet-unnamed successor to U.S. Trade Representative Robert B. Zoellick, who'll soon leave his post to become the Deputy Secretary of State. Pursuing a free-trade agenda in the face of rising deficits and jobs lost to outsourcing won't be an easy sell for the next trade rep.

As Congress is scheduled to take up a series of trade bills in the spring and summer, opponents of the Administration's policies are insisting that free-trade deals have encouraged the movement of more than 2 million manufacturing jobs offshore during the Bush years. They argue that this has decimated the ranks of American info-tech service providers and threatens to cut U.S. wages and living standards. Incomes of technology professionals declined an inflation-adjusted 3.68% in 2002, according to the Institute of Electrical & Electronics Engineers. Outsourcing of tech jobs to India and China have become a hot political issue.


  Supporters of the reelected President's approach -- principally U.S.-based multinationals -- argue that it's time for action, not talk. The U.S. should push ahead with a 148-nation global trade deal, called the Doha Round, while expanding the 1995 North American Free Trade Agreement (NAFTA) among the U.S., Mexico, and Canada to include Central America and the Dominican Republic. The ultimate goal: A hemispheric free-trade zone integrating 34 market economies in North and South America.

However, further liberalization of global trade faces many obstacles. Among them:


Try as they might, Commerce Secretary Donald Evans, Treasury Secretary John Snow, and Zoellick have been unable to persuade Beijing to allow its currency to float against the dollar. China's hard peg of the yuan against the greenback has provided the country's exports with a 33% price subsidy, according to Peter Morici, a trade economist at University of Maryland's business school. The bilateral deficit with China is a quarter of the U.S. total with all nations and has cost America 1.5 million jobs since 1989, according to a study by the labor-backed Economic Policy Institute.

As Evans wrapped up his last trip to China as a Cabinet officer on Jan. 12, his Chinese counterpart came close to publicly dismissing the Commerce Secretary's efforts as short of the mark. Said Chinese Commerce Minister Bo Xilai: "I should say that 70% of what you have done is pretty good," causing Evans to protest, ""Oh, hey, that's almost flunking, that's almost failure."

The Chinese minister was talking about the Bush Administration's refusal to grant the country formal "market status" as a trading partner rather than Beijing's intransigent dollar policy. But the standoffs are mounting. The U.S. has also failed to persuade China to crack down on intellectual-property theft. U.S. software makers estimate that 95% of all computer programs in the Middle Kingdom are pirated. The loss in legitimate sales worldwide is estimated to be $52 billion yearly, with China the biggest offender.

Regardless, U.S. industry is still focused on investing in the country, even if it means some piracy, says John J. Castellani, president of the Business Roundtable, a group of CEOs of major corporations. "Some companies may not be bringing their latest technology there because they know it's at risk, and that makes China a less robust trade environment," he says. The Roundtable's legislative strategy is to push for free-trade deals.


The U.S. and the EU averted a nasty confrontation over subsidies for commercial aircraft on Jan. 11. But that truce may be only temporary. Each side has brought a complaint against the other before the World Trade Organization, insisting that Boeing (BA ) and Airbus are each receiving illegal subsidies from their respective governments.

Rather than take the case to the WTO court, the two antagonists have agreed to keep talking for three more months to try to negotiate a settlement that will at least reduce the level of taxpayer subsidies to the two aircraft makers.  Meanwhile, other disputes are festering, which could make it more difficult for the two economic giants to reach agreement on a plan for further global trade talks.

The EU, for example, has refused to allow imports of many foods with characteristics -- such as size or taste or resistance to disease -- that have been enhanced by gene-splicing. European farmers have helped lead the opposition to genetically modified foods as a way of protecting small, inefficient farms on the Continent, according to Washington. The Europeans respond that it's the consumers who reject the products of modern food engineering. The U.S. has already brought a complaint to the WTO.

The Doha Development Round

The WTO's 148-nation talks are a year behind schedule -- and may slip further. No new ministerial meeting is scheduled until December. But the U.S. services industry is depending heavily on completion of the round, which would expand the WTO's jurisdiction over this rapidly growing sector of the U.S. economy, in which America still maintains a trade surplus.

However, developing countries have refused to bargain on issues dear to the rich nations, such as intellectual-property rights, unless the wealthy countries also give up most of their massive farm subsidies. Most of the world's nations depend on agriculture for their employment and export earnings. But they have been unable to compete with the U.S., Europe, and Japan, which shower their farm sectors with $300 billion or more in government support each year, developing nations charge. So far, the two groups are at an intense stalemate.

Meanwhile, riled by WTO rulings that have gone against the U.S., Congress will vote this summer on a resolution to end U.S. membership in the 10-year-old, Geneva-based trade group. "The WTO is an experiment that flopped," contends Lori Wallach, director of Global Trade Watch, a group affiliated with Ralph Nader's Public Citizen. Few expect such a drastic move by a business-friendly Republican Congress, but heated rhetoric and a closer-than-expected vote could damage prospects for a Doha agreement.

Central America

The Bush Administration has negotiated the Central American Free Trade Agreement with five nations and the Dominican Republic in the Caribbean -- but hasn't been able to secure enough votes to pass it in Congress. Critics of NAFTA -- the AFL-CIO, environmentalists, and some farm groups -- vow to kill the deal. If the vote is taken, it will likely be in the summer or early fall, when lawmakers may also consider whether to deny President Bush renewed authority to negotiate trade deals on a "fast track," without congressional consultation. Business groups are gearing up a big lobbying effort to retain trade-negotiating authority for the President and get CAFTA passed.

All in all, these are some of the biggest trade issues to surface in a decade, making 2005 a year to watch.

Magnusson is a correspondent in BusinessWeek's Washington bureau

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