Commentary

U.S. Protectionism Imperils Free Trade Talks With Latins

On his tour of Mexico, Peru and El Salvador, which starts today, President Bush is sure to sing the praises of the Free Trade Area of the Americas. Too bad his administration hasn’t yet figured out the dance steps that accompany the tune. If the stumbling doesn’t stop soon, the president’s big plan for hemispheric free trade is likely to fall flat on its face.

The root of the problem is the administration’s unwillingness to stand up to protected U.S. industries. Consequently, its credibility in urging other countries to face down their protectionist lobbies is abysmally low. The U.S. trade negotiating posture with Latin America currently boils down to “do what I say, not what I do.” Unsurprisingly, this is not going over well.

The decision earlier this month to slap new tariffs and quotas on imported steel provoked howls of protest around the world. But here in the Americas, all countries except Brazil were exempted. And Brazil’s major export item, semi-finished steel slab, received a duty-free quota of 2.5 million tons—more than the current volume of shipments. So steel is a non-issue for the FTAA, right?

Wrong. Brazil is furious, and with good reason. Its quota is less generous than it appears. Take for example, the case of CSN, Brazil’s largest steelmaker. It recently purchased an ailing U.S. mill, Heartland Steel, intending to supply it with slab from Brazil. Now it must choose between supplying Heartland and servicing its existing customers.

All in all, the quota falls short of expected demand for Brazilian slab this year by about a million tons. Meanwhile, one reason that slab is such a large part of Brazil’s current steel exports to the U.S. is that exports of finished steel products have been hammered already by antidumping actions.

The U.S. antidumping law has hobbled exports of many products from South America. Steel has been the main target, but farm goods have also been hit hard. Frozen concentrated orange juice from Brazil has been subject to antidumping duties since 1987; the duty rate for the leading exporter is presently 16%. Chile was socked with cases against fresh salmon and preserved mushrooms in 1998; U.S. imports of Chilean salmon fell from $32 million that year to $13 million in 1999, while imports of Chilean mushrooms dropped to zero. Late last year Argentine honey was hit with antidumping duties ranging from 27% to 55%.

The U.S. has come under strong pressure to accept rules in the FTAA that would limit antidumping abuses. Brazilian President Fernando Henrique Cardoso has issued what amounts to an ultimatum: no antidumping reform, no FTAA. Yet the U.S. position thus far has been to stonewall any efforts to rein in antidumping mania.

U.S. farm trade barriers are a major source of trade tension in the region. High tariffs currently block access to the U.S. market for many highly competitive Latin American farm goods—including sugar, citrus products and beef. Yet the “trade promotion authority” legislation now making its way through Congress creates special consultation procedures designed to hinder tariff reductions for these and over 200 other “import-sensitive” agricultural commodities. These so-called “speed bump” provisions call into question U.S. seriousness about opening agricultural markets to Latin American competition.

Massive subsidies to U.S. farmers further distort markets to the detriment of Latin American producers. Making a bad situation even worse, the House and Senate have passed new farm legislation that would boost outlays by more than $70 billion over 10 years. Both versions of the bill include counter-cyclical payments tied to production levels, despite the fact that such payments are considered trade-distorting under current World Trade Organization rules. Indeed, the new farm bill threatens to raise the U.S. level of restricted subsidies above the controlling WTO limits.

Subservience to the textile lobby rounds out the picture of U.S. trade hypocrisy. In a last-minute deal in December, to pick up votes for trade promotion authority, the House leadership and the administration agreed to seek new restrictions on trade preferences for Caribbean, Central American and Andean textiles. Specifically, duty-free treatment for textiles under the Caribbean Basin Trade Partnership Act and the Andean Trade Preferences Act would apply only to fabrics for which all dyeing, finishing and printing processes had been performed in the U.S. The new restrictions would substantially reduce the value of the duty exemptions.

Steel, antidumping, agriculture and textiles—in all of these areas the Bush administration has sided with protection-seeking U.S. industries in violation of its avowed free-trade principles. The perennial excuse is “political reality”—the need to appease powerful interests in order to win congressional support for trade-opening deals.

While some amount of compromise is unavoidable, this administration has offered nothing but. Not once has it told a protectionist business lobby to take a hike. Not once has it advanced a proposal—whether in the WTO, FTAA, or any other context—to reform a major U.S. trade barrier. Not once has it spent a dime of the political capital that comes with an 80-plus percent approval rating to fight for the national interest in open markets against parochial interests in protectionism.

Official FTAA negotiations are supposed to get underway by May 15. But those negotiations will go nowhere unless the Bush administration changes its ways. After slashing trade barriers impressively during the late 1980s and early ’90s, Latin America now has little enthusiasm for further liberalization. Free trade is in bad odor as free-market reforms generally have not gone far enough to bring lasting prosperity. Many governments in the region would be all too happy to see FTAA talks drag on forever; that way they can maintain existing trade barriers as “bargaining chips” in negotiations that never end. U.S. trade hypocrisy gives the foot draggers all the excuse they need.

President Bush declared last May that “open trade is not just an economic opportunity, it is a moral imperative.” Fine words, and true, but so far, only words. It’s time to make them mean something.

Brink Lindsey is director of the Cato Institute’s Center for Trade Policy Studies. He is the author of the book “Against the Dead Hand: The Uncertain Struggle for Global Capitalism” (John Wiley & Sons, January 2002).