LONDON — Former Prime Minister Margaret Thatcher once famously described — or is alleged to have described — the Japanese language as an unfair obstacle to trade. How, she is said to have demanded, could foreign suppliers possibly penetrate the rich Japanese market when it was protected by an impenetrable language barrier?
True or false, the story illustrates the absurdity of carrying the principle of trade liberalization to extremes, where every difference, cultural, historical or natural, becomes an “unfair” restraint on free trade, and where trade negotiators find themselves dragged into the most intimate nooks and crannies of every nation-state in their zeal to hunt out practices that might give the slightest trade advantage to one country.
Once found, goes the doctrine, any such advantage must be ironed out so that the “playing field” of world trade can be well and truly level. If workers get longer holidays in one country, then the same must apply to all. If taxes are notably lower in one economy, then this is unfair and they must be raised. Every kind of subsidy, direct or indirect, must be exposed. Nothing short of that will do.
Currently, there are two prominent examples of this overzealous approach which, far from promoting free trade, threatens to destabilize world trade and world politics.
The first has arisen, sharply but predictably, as the preliminary trade negotiations have commenced on China’s full entry into the World Trade Organization. Things are not going well. The European Union, which wanted to secure a sort of paving deal between Europe and China, prior to full WTO entry by China, has come up against a brick wall.
To the Chinese, the EU demands clearly seem intrusive and excessive, raising questions of domestic economic and social policy that the Chinese see as no business of the outside world. Certainly they want to play by world trade rules, but no one told them that this meant allowing “foreign devils” to take over Chinese enterprises, or changing their internal tax and subsidy systems, let alone their labor practices and numerous timeless customs and attitudes. So the EU negotiators, after four fruitless days in Beijing, have returned home empty-handed, having asked for much too much and got nothing.
In the United States, the preparations for Chinese WTO entry are going even worse. The environmentalists and the trade unions are in full cry against Chinese “violations” of human rights and environmental standards. They want any trade deal with China to impose all kinds of changes on Chinese economic life that have little or nothing to do with trade and everything to do with social policy — which is not want the Chinese want or expected at all.
Some gentle outside pressure would have been a useful support for Chinese reformers as they struggle to undo generations of controls and to unravel state enterprises wallowing in subsidies. But shrill Western demands for more foreign ownership and internal tax changes, and even shriller demands for labor reforms and state-of-the art Western environmental standards are guaranteed to frighten off the Chinese and slam shut the half-open door.
The other rapidly escalating punch-up on the trade scene is between the U.S. and the EU — again — and concerns U.S. export subsidies. It seems that for many years, U.S. exporters, including many foreign firms based in the U.S., have been winning big tax concessions on the income they receive from exports — by setting up “foreign sales corporations.”
EU officials have claimed that these are illegal and distort trade, and now the WTO has supported their view. In return, the U.S. asserts that the EU is still riddled with export subsidies and arrangements such as value-added tax rebates on exports, and wants to know when these are going to be checked. The atmosphere is turning distinctly nasty.
What has gone wrong? After all, everyone wants to see freer trade, so why all the argument? The answer is that politics has been allowed to enter into trade discussions in far too insistent and heavy-handed a manner. The approach has been elephantine, when it should have been delicate and feline. Wise trade negotiators should be prepared to settle for a few concessions at a time rather than demanding sweeping and instant reforms that no government can concede, or be seen to conceding, to outside powers.
Real progress in liberalizing world trade and investment and knowledge flows is only going to come slowly, with great patience and deep respect for differing national practices and customs. This will often mean unspectacular agreements negotiated behind closed doors with no opportunities for glory.
The WTO has fallen flat on its face at Seattle by being pushed into an attempted world trade round for which no one was ready and that was far too ambitious in scope. One would think that officials round the world had learned from this bitter experience. But have they?
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