European Union leaders labored last week in Nice to prevent a potential military split between the United States and Europe, in the end coming up with a compromise that scotched over differences. A bigger problem, however, is how to keep the commercial peace across the Atlantic. In this domain neither European nor American leaders have exactly shined. The tit-for-tat protectionism that has been unleashed is sending us further into trade-war territory, with ominous implications for business and consumers on both sides of the Atlantic.
Just last month, the European Union unveiled a broad list of imports from the United States -- worth $4 billion -- that would face punitive tariffs if the United States did not eliminate a provision of its corporate tax code that the EU claims amounts to a subsidy for exporters. Intending to ameliorate the situation, the U.S. Congress managed to pass a major revision of its disputed Foreign Sales Corporation law last month exempting income generated from manufacturing abroad as well as from exports. But the EU could still pull the trigger and impose sanctions if the revised code fails a World Trade Organization review in the new year.
Meanwhile, the U.S. government has postponed the announcement of a new hit list of EU imports that would be subject to equally punitive tariffs. The so-called "carousel" legislation requires the administration of President Bill Clinton to rotate a list of imports (worth $300 million) that have been targeted for tariffs because of EU trade barriers against imported bananas and beef from hormone-treated cattle. The Clinton administration claims the law is ambiguous enough to allow the postponement, but Congress may decide to put new teeth in the law early next year. EU officials have made it clear that if the U.S. enforces the carousel law, the EU will start the countdown for sanctions over the FSC law. An escalating trade war may not be far off.
Although the EU and the U.S. have temporarily backed away from the abyss of a trade war, their saber-rattling has exposed the danger of relying on trade retaliation to enforce trade-liberalizing agreements. This growing threat of trade retaliation as an instrument of enforcement is an ominous development for trade, and a lose-lose proposition for all countries involved. There are, moreover, alternative dispute-setting mechanisms.
Contrary to press reports, when the WTO approves the imposition of sanctions it is not "rewarding" or "compensating" the country that has decided to levy them. It is merely saying that it will not contest this extra cost that the sanctioning country has imposed on itself and the target. Of course, the sanctioning country decides to levy such tariffs in the hope that doing so will convince the other country to improve its trade policies. Retaliation should be seen as nothing less than a fine that both parties pay but nobody collects.
Despite their free-trade rationale, WTO-sanctioned retaliations promote protectionism. Domestic producers clamor for "enforcement" not just to open foreign markets, but to close their own markets to foreign competition. That's why, in the dispute over beef, for example, America's National Pork Producers Council is lobbying so hard for the new carousel hit list to include all EU pork products.
Proliferating trade retaliation undermines the WTO's main mission of promoting freer trade. It reinforces the mercantilist notion that trade liberalization is a "concession" countries grant to persuade each other to open their markets, rather than a favor they do for themselves. It puts a WTO stamp of approval on economically destructive practices while feeding the fears of those, like American protectionist Pat Buchanan and French farmer-activist Jose Bove, who see globalization as a threat to national sovereignty.
All this threatened pain promises little gain. Nations bring down the trade barriers they have raised for domestic reasons -- not because of outside pressure from a "hegemonic" power or international body. The EU maintains its ban on beef from hormone-treated cows not because of credible scientific evidence that the beef is harmful to humans, or even primarily to protect the domestic beef industry, but because a large majority of constituents opposes its sale within the EU. Sanctions, however painful, won't alter that hard political reality.
None of this should excuse the EU's intransigence. The beef and banana import regimes make no scientific or economic sense. The EU's banana quotas gouge domestic consumers to enrich a few favored distributors, with only a fraction of the benefits trickling down to banana producers in former European colonies. On a global level, the EU's defiance has weakened the international trading system. But trade sanctions are hardly the answer.
One alternative to retaliation would be to emphasize compensating trade liberalization as a "payment" for violating WTO commitments. Instead of facing the mutual assured destruction of trade retaliation, the nonconforming party would have to lower trade barriers on other imports to compensate the plaintiff (and reward its own consumers in the bargain). Domestic pressure to conform would then come from import-competing industries rather than exporters.
Another alternative would be to suspend certain WTO privileges of members who refuse to implement WTO rulings. A WTO member who refuses to comply with a dispute settlement ruling after a certain grace period would temporarily lose the privilege of lodging complaints against other members. The world would be spared the hypocrisy of the EU talking tough about its neighbor's export-friendly FSC tax law while refusing to budge after a string of losses on beef and bananas.
The WTO dispute-settlement mechanism does not need sanctions to work. The world's trading nations made remarkable progress on trade liberalization through four decades of the General Agreement on Tariffs and Trade with virtually no resort to sanctions. Enlightened self-interest, and a bit of social pressure to be a member in good standing, proved enough to keep most WTO members on the right track.
Trade sanctions, in contrast, are a dangerous ride to nowhere.