BRIDGE NEWS - April 13, 2000

Free Trade's Long March Takes a Detour

Free Trade Supporters Must Demonstrate The Virtue Of Markets Extends Beyond Mere Wealth Creation

by Sanjay Mongia and Peter Morici

WASHINGTON—The groups that brought you the "Battle in Seattle" during the World Trade Organization conference last December are poised for an encore at the spring meeting of the International Monetary Fund and World Bank, beginning April 16 in Washington.

Although few people expect riots in the nation's capital, the loud voices of protest confirm the smoke and tear gas that filled Seattle's streets still pollute the debate over globalization.

Before Seattle, some commentators observed globalization was an irreversible phenomenon that would help the poor by lifting living standards across the globe.

But the collapse of the WTO talks and the controversy around the IMF and World Bank meetings show a large segment of the world's population doubts the governing institutions of the international financial and trading regimes improve the human condition.

The discussion on the future of globalization has evolved into a reassessment of social and cultural norms, and the loudest voices today against trade come from groups once confined to the fringes of past debates.

Previously, the outcome of trade battles rested on economic costs and benefits—specifically, the employment and wage effects.

Recall that the fight over the North American Free Trade Agreement centered on the "giant sucking sound" presidential candidate Ross Perot claimed would sink American wages and move U.S. jobs to Mexico.

However, the current fervor over globalization has been obscured by issues like genetically modified foods, environmental conditions, e- commerce, Third World debt, labor standards and human rights that had been peripheral to the trade debate.

The backlash against globalization is spawning the ambitions of labor, environmental and human rights organizations. Their leaders are threatening to dismantle the established order in Washington.

Their targets are the denial of "fast-track" trade authority for the President, the defeat of Permanent Normal Trade Relations for China and the rejection of NAFTA expansion.

In addition, WTO rules call for a congressional review this year of U.S. membership in the WTO, and several renegade members of Congress have already seized the opportunity to sponsor legislation that would withdraw the United States from the WTO.

Disturbingly, growing signs of protectionism are emerging during a period of unprecedented prosperity for the U.S. economy: Unemployment is at 4.1 percent, inflation remains tame, the federal budget is in surplus and the stock market continues to ride the bull.

But, during an election year, critics of free trade are counting on a politically incendiary weapon in their arsenal—the record U.S. trade deficit, which totaled more than $271 billion in 1999.

Regrettably, exaggerated fears of the trade deficit camouflage ideological opposition to globalization. A more sophisticated critique, however, would recognize that the cyclical widening of the trade deficit following the Asian crisis in 1997 affirms the relative strength of the American economy.

The U.S. economy remains an island of prosperity and stability in a sea of volatility and slow growth, and our market has been able to absorb rising imports that are the byproduct of the world's excess capacity.

The buying spree by prosperous American consumers, in turn, has prevented a global economic catastrophe. The trade deficit is a snapshot of economic conditions across the globe. It should remind Americans of our collective wealth and our appetite for consumption, but is not a legitimate excuse for protectionism.

Of course, annual current account deficits hovering near $300 billion are daunting, and borrowing 1e billion dollars daily from the rest of the world to finance the deficit is an accumulating burden. Nevertheless, statistics are being exploited in an effort to mislead the public about the causes and effects of the trade deficit.

Aside from its cyclical component, much of the deficit is a result of structural barriers to global commerce, which can only be eliminated by a rules-based trading system with an effective enforcement mechanism.

In the case of the WTO, it makes sense to empower, not dismantle, the WTO to rid unfair trade practices, industrial policies and other protectionist measures embedded in the world economy.

But critics of globalization have seized the momentum. The lingering voices of protest are a reminder that the aftermath of Seattle affects more than the future of the World Trade Organization. The collateral damage from this tremor threatens the free trade agenda.

In the new political landscape, heavy-handed tactics intended to silence critics will not resurrect enthusiasm for liberalization.

Free traders must instead engage their opponents in an open forum and demonstrate that the virtue of markets extends beyond the mere creation and accumulation of wealth. An optimal trading system would promote shared prosperity and assure optimal gain for the maximum number of participants in the global economy.