Not As Free As You Think

Headlines tell us that world trade is threatened by the struggle between rich and poor nations that erupted at the last big summit in Cancun. The leaders of the two camps, Washington and Beijing, are now trading tariff threats and counterthreats. After Cancun, follow-up talks in Geneva folded early as well. Last week EU Trade Commissioner Pascal Lamy called on Europe and the United States to design trade deals so that poor countries could sign on later. "After the failure in Cancun," said Lamy, "it's clear that business as usual is not an option."

But look more closely. The specter of North-South trade wars tends to obscure the fact that commerce is a rich nation's game. The flow of exports and imports between developed nations accounts for 80 percent of world trade. Last week both the United States and the European Union sent out peace signals in their own steel trade dispute before Lamy made his gesture of welcome to the developing world. What that message amounts to is this: if we can't get 148 nations to agree to something, we'll start cutting bilateral deals with our most important partners.

The more threatened trade becomes, the more important it is for Washington and Brussels to cement their most critical alliances first. Trade reps on both sides of the Atlantic are openly challenging the widespread perception that trade among rich nations is already free, and that all the easy cuts in trade barriers have been made. Two weeks ago at the Confederation of British Industry (CBI) annual conference in Birmingham, England, Chancellor of the Exchequer Gordon Brown said that further cuts could boost Europe's wealth by 100 billion euro per year and create 1 million new jobs. The study from which he took these figures, done by academics from the Centre for Economic Policy Research, says the United States stands to gain nearly as much. Sharing a platform with U.S. Treasury Secretary John Snow, Brown said, "It's time for us to make the effort to move beyond damaging trade and regulatory disputes."

That's beginning to happen. Trade negotiators on both sides emphasize that disputes--the key ones being taxes on U.S. foreign subsidiaries and steel--are only about 2 percent of the $500 billion in annual transatlantic trade. The issue of how to tax U.S. foreign subsidiaries remains a sticking point, for reasons we'll return to below. But in response to U.S. hints last week that it would withdraw new tariffs on European steel, the EU said it would delay imposing $2.2 billion in retaliatory tariffs on everything from American orange juice to pajamas. At the same time America and the EU announced new agreements on common accounting standards, which settles no current trade dispute but should nonetheless give a boost to transatlantic commerce. In Birmingham, Brown and Snow pledged further university links like the extremely successful MIT-Cambridge alliance, a joint forum on productivity challenges and a technology transfer fund to share ideas across the Atlantic.

Progress toward free trade among rich nations is often exaggerated because tariffs, the simplest form of barriers, have fallen to little more than 3 percent on average in the United States and EU. The CEPR study notes, however, that the huge volume of transatlantic trade means that further tariff cuts would still yield major benefits. All told, tariffs account for 70 percent of the economic losses attributable to trade barriers. The costliest examples are the sectors that have fought off cuts, like agriculture, where U.S. tariffs run about 11 percent and the EU's more than 17 percent. Agricultural tariffs cost consumers an estimated $100 billion a year in higher prices worldwide, with most of those costs falling on Americans and Europeans.

The remaining losses are attributable to nontariff barriers, which include everything from obstacles to foreign ownership in service industries to quality standards whose real purpose is to block import competition. Standards legislation in particular is rife with the absurd--the transatlantic poultry trade is thwarted by battles over the meaning of "sanitary." European tires have trouble getting through Customs because the United States doesn't recognize the EC as a "country" of origin. The current steel trade war got started after the United States raised steel tariffs to ward off cheap Asian goods, and the EU got worried those goods would get dumped on them. Such antidumping cases cost American consumers an estimated $4 billion a year, and while Washington has a reputation for using the dumping charge as a weapon, "the EU has, on average, just as many antidumping cases as the U.S.," says CEPR fellow Ian Wooton.

From the European perspective, the most troubling developments are new U.S. protectionist moves inspired by 9/11. American agencies are moving to bar foreign investment, even from European allies, in "critical infrastructure" areas. New U.S. requirements for airline-passenger data are bumping up against European data-protection laws. The United States is signing deals with individual European states on cargo-port inspections, which often overlap with Europewide inspection laws already in place. CBI director Digby Jones says he's heard from numerous American companies that are under pressure from state and federal officials to move business home. "That's a heck of a way to thank a country that has been America's best friend," says Jones.

The solution may lie in focusing on who really gains from trade. The CEPR notes that the amount of business done by transatlantic subsidiaries of EU and U.S. companies exceeds trade flows themselves. There is more EU investment in Texas alone than U.S. investment in Japan. The U.S. investment in the Netherlands in the past decade was twice that in Mexico, and 10 times that in China. A large chunk of U.S. imports from the EU (and from China) are produced by American firms, just as many of the EU's imports from the United States are made by European firms. Rich nations that impose trade barriers are thus hurting their own companies. With the next round of World Trade Organization talks beginning in Geneva next month, there's a patriotic case for cutting barriers--and not only on transatlantic routes.