Coming Trade Wars?
(Neo-Mercantilism and Foreign Policy)
Commercial and financial issues are starting to replace traditional diplomatic and security questions as the main stuff of foreign policy. This shift in priorities is in part a consequence of the receding threat of war between the superpowers. But, just as important, a sweep of world-wide economic adjustment is also under way, changing the framework of international politics.
Commercial and financial issues are starting to replace traditional diplomatic and security questions as the main stuff of foreign policy. This shift in priorities is in part a consequence of the receding threat of war between the superpowers. But, just as important, a sweep of world-wide economic adjustment is also under way, changing the framework of international politics.
Two-thirds of the world’s people live in the developing nations, and by the year 2000, this ratio is expected to rise to about five-sixths. The political outlook for these countries and their relations with the developed world depend heavily on economics. For the political issues of development are mainly economic issues. Income growth is the developing world’s political imperative, affecting the fate of its political leaders, bringing about changed trade and financial flows, and dominating diplomacy between rich and poor countries.
More immediately, there is a fundamental change in economic relationships among the major powers. The United States is no longer the world’s largest trading unit, for the European Economic Community (EEC) has surpassed it, even excluding internal trade among the six members. If Britain and others join the EEC, economic power relationships will shift more quickly and massively. Meanwhile, Japan is moving up fast. World trade is growing faster than Gross National Product, and investment flows are altering the shape of national interests. Trade itself is becoming increasingly sensitive to changes in national economic conditions. As Richard Cooper wrote two years ago, "Transportation costs have fallen somewhat, tariffs and other barriers to trade have fallen much more, ‘horizons’ have broadened to provide greater receptivity to foreign goods." Cooper added, "the accumulation of capital and the international transmission of technical knowledge have caused a convergence in the potential structure of production in industrial countries so that national advantages arising from climate, resources, or unique technological skills are less successful in insulating a country from foreign competition than they once were."
These trends have made trade and financial questions more politically explosive. National economies increasingly depend upon international mechanisms for adjustment which can help them to weather shifting patterns and levels of trade, without having to resort to extraordinary restrictions.
Many governments have not yet faced up to these slowly evolving but powerful forces of economic change. In the U.S., contrary to the theorizing of the American New Left, international economic issues rarely hold the high level attention of foreign policy-makers. Foreign economic policy is still considered a tedious and technical subject in the upper reaches of Washington officialdom. The broad policy consequences of economic actions are hardly ever considered by Secretaries of State. Presidents never give international economics anything like the time and attention they devote to military and diplomatic problems. This lack of high policy level attention to shifting economic forces has already allowed some major problems to erupt into conflict, while others fester. It has also permitted, and even encouraged, the strengthening of domestic special-interest groups within a number of countries, which work against international cooperation. One current example is the Japanese textile crisis.
The breakdown of U.S.-Japanese negotiations on textile trade in 1970, followed by a flurry of Congressional activity to shape restrictive import legislation, was not a minor technical slippage in our commercial machinery. It was a confrontation in basic foreign policy which arose over economic issues. The textile trade had become a political hot potato in Japan months before the breakdown. Parliamentary debate and public discussion in Tokyo focused on such questions as whether Japan should again, as so often in the past, capitulate to U.S. pressure, whether doing so put an unacceptable strain on Japan’s export economy, and whether Japan should not reduce its ties to the United States and turn more toward the Asian sphere and China. Two key politicians, Foreign Minister Aichi and International Trade and Industry Minister Miyazawa, threatened to resign over the U.S.-Japanese confrontation.
The American position was that Japan must limit its exports of textiles to the U.S., even though this was a violation of Japan’s rights under the international trading rules of the General Agreement on Tariffs and Trade (GATT). The reason: President Nixon had committed himself during the 1968 election campaign to provide import relief for the American textile industry.
Spokesmen for the United States explained that there was no problem with imports from Europe, and that therefore there was no need for restrictions in that quarter. The problem lay in Asia, more specifically in Japan, Taiwan, Korea, and Hong Kong. In the long run it was expected that such countries as Singapore, Malaysia, and the Philippines would also fall into the problem category. Consequently, the issue blossomed into a yellow-skin discrimination question, further inflaming Japanese opinion.
The issue was a major one in Tokyo, but Washington hardly seemed to notice. For the U.S. President, a minor campaign commitment was at stake. For his foreign policy bureaucracy it was a boring trade problem which somehow had to be solved in order to get on with more important issues such as when Japan was to get Okinawa, and under what conditions.
When the bilateral talks reached an impasse, President Nixon endorsed legislative import restrictions on textiles. Congress, given license to indulge its protectionist mood, then began to move on a trade bill. Editorialists evoked the specter of the high Smoot-Hawley Tariff of 1930, as legislators considered erecting new trade barriers not just for textiles but also for many other products. Part of the reason for this was frustration with the import and foreign investment restrictions of the Europeans and the Japanese, which have an adverse effect on the United States. Much of it reflected growing Congressional concern over unemployment, especially over the possible labor-displacing effects of imports from low-wage countries. In textiles, the allegation was that labor in the South, especially black labor, would be damaged by imports from Asia. Our regional economic and social policies required, it was said, protection of the U.S. textile industry. The same argument was then made for protection of the shoe industry and many others.
This problem was more general than it appeared. In the past year the AFL-CIO, altering its historic position, came out against free trade in many product areas. The unions even voice opposition to the free movement of capital, criticizing U.S. government policies toward multinational companies as too permissive. Labor fears that large American companies may move their production facilities to Asia and other developing nations to obtain cheaper labor (the "runaway mill" problem). Even where companies stay home, there is apprehension that labor intensive imports will slow the expansion of investment in new job creation.
This turnabout has pitted a labor problem, a vote problem, and a political commitment problem on the U.S. side against an issue of national importance on the Japanese side, reopening for discussion the foreign policy orientation of a major ally. The European countries, now strong enough to take an independent stand, have tended to side with Japan, warning the United States of the serious consequences of evading the GATT legal framework. Over time, they argue, the
U.S.-Japanese dispute could escalate to a trade war with many countries, as restrictions are piled upon restrictions. Europeans interpret the U.S. position as an attempt to pass a domestic electoral debt along to other countries.
What we are witnessing today is the fundamental clash of national policies which are primarily oriented toward solving domestic political and social problems. These policy clashes also existed in the past, but were softened by at least two mitigating factors. First, there was a continual effort after World War II to negotiate internationally in trade and monetary affairs, which produced a series of successful agreements to reduce trade restrictions and to improve monetary cooperation.
Second, the political impact and attention toward foreign policy of interest groups such as organized labor and farmers was minimal. These limiting circumstances no longer exist. Multilateral discussions are at a standstill There has been a rise in mercantilist sentiment in most of the world, while the present and future role of labor, farmers, and special interest groups has become increasingly important. Now businesses, workers, and farmers in all countries expect their governments to manipulate national economies to ensure full employment and prosperity. Where conflict arises with another country’s interests, the domestic economic requirements are expected to prevail.
Historically, mercantilism is associated with preindustrial Europe, though as a guiding doctrine it was practiced in many states for centuries. It was a conception of the role of the state that involved manipulation of the economy, but manipulation through reducing imports, stimulating home production, and promoting exports. It was thus a highly nationalistic conception of how governments should act. Its historic strength and support was finally balanced, if not toppled, by the advent of laissez-faire philosophy and internationalism.
Today, we are seeing a resurgence of mercantilism, whereby governments meet domestic economic demands with conscious policies of manipulation, passing the costs of these policies as much as possible onto other countries. This neo-mercantilism is a profoundly disruptive force in international relations. It takes many forms.
The Common Market Wall
In Europe, the Six have managed to forge a reasonably effective economic union. Their major achievement, however, is not in establishing new political institutions, but rather in consolidating European agricultural policies. This has been no mean achievement, for until recently farm policies varied wildly from government to government. European agriculture had become a serious social and political problem in certain regions. Any economic program had to include policies for caring for the needs of rural families engaged in farming. The answer was found in a new and ingenious system called the Common Agricultural Policy (CAP). Incomes were to be maintained and increased by supporting prices at high levels, without any production controls. Then, to prevent imports by cheaper suppliers from spoiling this supported market, import levies were to be assessed in an amount sufficient to bring the price of imports up slightly above domestic price supports. Imports thus became residual, filling needs in excess of domestic supplies.
Since EEC price supports were extremely high relative to world market levels (roughly twice as high for the major commodities), and since technological change relentlessly pushed up productivity, production was stimulated. To avoid or reduce enormous surpluses in some commodities it was necessary to export, but exporting was out of the question at these high internal prices. Therefore the system had to provide export subsidies to the extent necessary to meet world competition at world market rates. The import levies were used to finance the export subsidies. The result was the ultimate in mercantilism: decrease in imports, stimulation of home production to substitute for imports, and increase in exports.
The reason for building this mercantilist machine was simple enough. Economic union would not be possible without a deal between France and Germany. France had farm programs in need of support, and Germany had industrial products it wished to sell in France. Germany was willing to pay in agriculture for better industrial access, and besides, German farmers were very strongly in favor of high prices for their products. Thus internal political problems of social policy and rural and regional development were solved. To the rest of the world, particularly to efficient farm producers like the United States, the impact of the system has been costly. One effect has already been a drop of 40 percent in U.S. exports of CAP-protected products to the EC over the last three years. The CAP system began to function in 1966-67, and protection now is roughly triple what it was at the beginning of the 1960’s.
The direct economic damage to others goes even deeper. The highly subsidized prices of the EEC have become a source of intense downward price pressure on other agricultural exporters. This has caused great economic and political pain to smaller exporting countries like Denmark and New Zealand, and the beginnings of real trouble for larger ones like the United States. The new EEC agricultural system is a throwback. It is an explicit commitment to mercantilism as a way of life, having broad policy consequences for all trading nations. Even major importing countries are affected, as their own farmers feel the increased pressures of imports diverted from other markets to their own, and sold at depressed prices.
The EEC is not alone in its tendency toward further trade distortions in agriculture. The Japanese, protected by a series of quantitative import restrictions inconsistent with the GATT, and holding to a support level for rice triple the world market price, are faced with a rapidly increasing rice surplus and mounting budgetary costs. This creates pressure to maintain import restrictions on other temperate commodities in order to stimulate diversification. Japan is now trying to unload some of its mountain of high cost rice in the form of food aid, disrupting the rice markets of developing country exporters. Denmark, squeezed by widespread subsidization in world markets, has adopted a Home Market Scheme, a euphemism for export subsidies of its own. Australia and Canada have felt similar pressures, particularly in declining wheat prices during the last year (witness the political turmoil in Canada’s western provinces). This was a result, in part, of past unwillingness by the Canadian and Australian governments and wheat producers to recognize that they must share in controlling world production by restraining their own output, or else face general deterioration in world grains prices, in spite of the International Grains Agreement provisions to the contrary.
The United Kingdom has also turned toward increasing protection, justifying each move in terms of balance-of payments considerations. Both political parties in the U.K. advocate increased self-sufficiency in agriculture. An Economic Development Committee for Agriculture was established to develop import-saving policies which stimulate home production. Introduction of an EEC-type protection system is imminent. While there have been some difficulties in moving toward more self-sufficiency, and the costs are high both to the government and the consumer in the United Kingdom, there is no doubt about the direction of British policy.
The entry of Britain into the Common Market will almost certainly reduce imports from third countries, and provide a new market for the painful surpluses of the Six, easing any pressure for reform at least for a time. The entry of Denmark, a strong agricultural exporter already, will compound the difficulties for third countries.
These developments in the major commercial markets come at a time when the developing nations are finally able to step up their rates of agricultural growth as a result of the Green Revolution in rice and wheat. Some of these nations are not only becoming self-sufficient, but are also pinning hopes on potential commercial exports. This is happening at the very time when the developed countries are pressing each other’s prices downward through protectionism, artificially stimulated production, and export subsidization.
The Director-General of the GATT said recently, "The situation now seems to have reached alarming proportions and to be already out of proper control." He was speaking of the whole of world agricultural trade. Recent trends bear out this bleak assessment. What are the political implications?
Most U.S. farm organizations are export minded, and therefore supporters of freer trade. They have for many years exerted effective pressure to block protectionist moves in the U.S., and have been a crucial element in every coalition that has fought for trade liberalization. Alienation of the farm bloc, in addition to the recent shift of the AFL-CIO, means the end of the political balance in America which used to favor outward-looking trade policies. This erosion of the domestic political base has significant side effects. Agricultural export problems disturb men in Congress who must also vote on overseas defense expenditures. The export question hits them directly because it harms their constituents, and gives them a sense of insult added to injury: Europe not only does not pay its own way in defense, but also artificially undercuts America’s best export growth performers, agricultural commodities. The sentiment has a certain logic, and powerful implications for the future of Atlantic relations.
Another political implication of EEC farm policy is its effect on the policies of other countries. Recently the Mediterranean nations have all found it necessary to negotiate special discriminatory, bilateral trade agreements with the EEC to insure access for certain products, particularly in agriculture. This adds to an already considerable network of special bilateral arrangements between the EEC and most of Africa, Greece and Turkey. Even Israel is inside the discriminatory system.
The EEC-Mediterranean preferences have damaged some U.S. citrus exports, but the basic policy problem cuts deeper. Preferential, discriminatory trading arrangements have been concluded for the self-admitted reason that they seem politically necessary. The most serious problem they raise is the precedent they set for the future. As EEC enlargement takes place, the question will arise as to treatment of the remaining EFTA (European Free Trade Area) countries, and of the Commonwealth, and of U.K. dependencies (e.g., the Caribbean). The tendency will be to negotiate even more special arrangements. Growing like Topsy, a geoeconomic system which favors members and damages outsiders will be formed — a special system which is no longer so special. That it leaves Latin America for the United States to look after is only one problem. An even greater difficulty lies in the exclusion and eventual alienation of Asia. This European system will dominate world trade statistics, leaving the rest of the world to become a series of "special cases."
Taking into account the likely trade damage to the U.S. if European policies move further in their present direction, the traditional American support for European enlargement and unification is bound to be reassessed. A united Europe has been a long-time objective of U.S. policy, but the purposes of this unity were to help stabilize international relations, share the burdens of Western security, cooperate in managing the world economy, and assist the development of poor countries.
In 1966 J. Robert Schaetzel, our present Ambassador to the Common Market, wrote:
Over the full range of contemporary foreign affairs, American policy toward Western Europe has been marked by durability and rare continuity. The change of neither Presidents, Secretaries of State nor political parties has altered the lines of basic policy. The government marches with American public opinion, for that ubiquitous man in the street still feels deeply that Western Europe is vital to the United States.
This view expressed itself in the 1960’s in the policy of "partnership," the goal of dose cooperation between trans-Atlantic equals. A spokesman for this course, Schaetzel warned that it would not always be a smooth one:
The sheer magnitude and novelty of the task of unifying Europe will preoccupy the Europeans. Caught up in these affairs, their governments will be less inclined, at least in the short run, to give attention even to what they would agree are common problems, or to give an equal priority to urgent international questions.
What was not adequately foreseen was that Europe all the while was tending to consolidate an enormous economic club which not only ignored, but actively discriminated against the United States, and even against most of the developing countries. By conscious design or otherwise, this is how the Grand Design is evolving today. Trade discrimination may be a way for Europeans to demonstrate the end of U.S. tutelage, the answer to U.S. dollar domination through direct investments. Whatever the motives, the consequences are highly disruptive and damaging.
American diplomacy in the 1960’s never really coped with these problems, but focused instead on NATO political-military issues, which were of declining interest for most Europeans.
On the western side of the Atlantic, when outward-looking economic policies and multilateral initiatives to head off discrimination are urgently required, the United States instead seems to be reverting to a neo-mercantilism of its own. The symptoms first revealed themselves in the balance-of-payments program of the 1960’s, aimed at earning more while paying out less abroad. Many of these Kennedy and Johnson Administration measures were crudely mercantilistic, but they probably did not have great impact in practice (although the investment controls did relieve some apprehensions in Europe about American investment domination). The countries most affected were the developing countries, through aid-tying, "additionality," direct-investment restraints, and the decline in Congressional appropriations for foreign assistance.
From Beef to Steel
During the Kennedy Round, the greatest trade liberalization effort in history, protectionism was held back by the momentum of international negotiations authorized by the 1962 Trade Expansion Act. In 1967, when the negotiations were concluded, protectionist sentiment in Congress suddenly rose sharply. From that time to this, there has been a major push to restrict imports of textiles, shoes, steel, beef, and many other products. International political relations have been strained by U.S. diplomatic pressures on other countries to limit their exports voluntarily in order to head off restrictive trade legislation. Beef exporters in Australia, New Zealand, and Latin America have accepted such informal limitations. In steel, foreign governments have turned a deaf ear, but foreign companies proved less stubborn, and a steel producers’ voluntary export restraint agreement has emerged "spontaneously." Pressures for greater textile restrictions continue. In dairy products, a tight import quota system keeps imports from exceeding one percent of the total American market.
These developments, and others, have angered our trading partners. The situation seems, no doubt, surrealistic to some American diplomats. After all, export of beef or of milk is not a major issue of foreign policy — or is it?
The Australian government answered the question by pointing out that its troops in Vietnam cannot be paid for if Australia is not permitted to earn its way in exports. When Nelson Rockefeller visited Latin America on his 1969 mission, the major political issue raised throughout the continent was that of American trade restrictions, particularly in beef and textiles. More recently, Brazil has been threatening to reassess its entire economic relationship with the United States if we insist on restraining its quite modest cotton textile exports. In steel, the Commission of the EEC has been furious that a nongovernmental restriction program was established at U.S. instigation, in disregard of international rules and of political relations between governments. In agriculture, most countries have agreed that our dairy quotas are so excessively strict as to be absurd, which undermines our case against the damaging agricultural policies of others. Finally, the failure of Congress for such a long period after the Kennedy Round to repeal the infamous American Selling Price legislation, even though it was negotiated as a separate trade deal during the Kennedy Round, made many Europeans feel that negotiating with Americans was a waste of time.
The political repercussions of these neomercantilist policy changes spread slowly, but they spread inevitably. Because they involve special interest groups, companies, workers, and farmers, their political effects are far reaching and persistent. Unless high Washington policy makers start paying more attention to economics, the problems ahead will be amplified.
The Rich and Poor
They will be especially painful in relations with the developing world. At the dose of the 1960’s a number of reviews of the progress of the developing countries were set in motion. For preparation of Development Decade II, the group of "wise men" under Professor Tinbergen was formed. For the World Bank, the Pearson Commission prepared a report. For the Inter-American Development Bank, Raul Prebisch completed a survey of Latin American problems and prospects. In Washington, the President’s Task Force on International Development made its recommendations.
This many-faceted appraisal revealed several fundamental problems. During the 1960’s the developing countries performed, on the average, better than anyone expected, growing at 5 percent per year. In the face of population growth, however, their per capita income grew by only half as much, and the income gap between rich and poor countries widened. The reports concluded that growth could be somewhat accelerated if the external flow of aid resources was increased. Among the recommended measures: official aid should be raised in each donor country to 0.70 percent of GNP (Pearson) or 0.75 percent (Tinbergen), and private investment flows should also be raised. The greatest stress was placed on trade: "The first requirement for rapid international development is continued vigorous expansion of world trade." Since trade accounts today for nearly 80 percent of total foreign exchange resources (aid and investment adding up to only 20 percent), trade will have to provide the engine for further growth.
The obstacles to improved trade performance are numerous. The developing countries themselves have tried for a time to follow mercantilist policies, keeping imports tightly restricted, stimulating home production and subsidizing exports. Their efficiency by world standards is consequently low, with home-produced parts and materials more costly than imports, and investments distorted toward less efficient sectors. They find themselves competing with each other’s mercantilist policies, as well as with the aids to exports provided by some developed countries for their own trade. Even in agriculture, where the Green Revolution has raised productivity and expectations in a number of developing countries, there are problems. The farm price support levels for these countries are often set at twice the world-market level, to stimulate production and provide higher rural incomes. Thus the Philippines has been able to export rice, but only by means of heavy subsidies.
Poor-country access to rich-country markets, where the demand is, and where hard currencies could be earned, is hampered by many obstacles. The tariff structures of the rich countries tend to work against the production prospects of developing nations. Tariffs against raw materials are low, or zero; but against processed products they are high, in order to protect processors in the rich countries. Moreover, the relative competitive position of most developing nations is weak because of their own distorted economies, unrealistic exchange rates, and marketing inexperience.
The Shadow of UNCTAD
The 1964-69 UNCTAD (United Nations Conference on Trade and Development) confrontation of rich and poor on this issue eventually resulted in 1968 in an agreement by the developed countries to grant general tariff preferences for the manufactures and semi-manufactures of developing nations. The United States reluctantly ended its opposition to the concept of general preferences, primarily because this seemed the only answer to the proliferation of discriminatory preferences negotiated by Europe. While agreeing in principle, the developed nations ran into numerous difficulties in finding a common approach for implementation. Impasses developed for a time over two issues: the types of safeguards to be maintained against excessive or disruptive imports from the beneficiary nations, and the principle of nondiscrimination itself. The former problem reflected U.S. desires for a common system providing equal conditions of access in all countries. The latter problem arose over the U.S. policy objective that existing discriminatory arrangements be ended, particularly those involving "reverse preferences" granted by developing countries to some products of some developed countries. The United States favored one general system applicable to all developing nations equally, as a one-level departure from Most Favored Nation tariff rates. Washington essentially lost on both these issues, because political sentiment for maintaining the special deals was too strong both in Europe and in the African beneficiary countries. As for safeguards, each country agreed to go its own way.
Now the signatories are preparing to move ahead with implementation. But the political outlook for this is not good. The United States Congress must pass implementing legislation, and in its present mood may extract a heavy price in the form of new trade restrictions. Beyond that hurdle lies one more fundamental. The Asian countries have been the most successful exporters of manufactures. Textiles are their greatest industrial success. The reaction in Europe, Canada, and the United States has been to insist on "voluntary" import restrictions, penalizing Asians because of their successes. Using the international agreement on cotton textiles under the GATT, the United States has restricted many countries, and it is now pressing to broaden the product coverage of restrictions to other forms of textiles.
The problem is not limited to textiles. Any labor-intensive products which achieve a high level of export success appear to be labor-displacing to the recipient countries. These effects are especially felt, or at least feared, in low-wage, high-unemployment regions of the developed countries. Pressures exist continually for new "voluntary" restrictions on more and more products. Since the developing nations have no real bargaining leverage, and little power to retaliate, they are easily convinced of the wisdom of voluntary export restrictions by threats of worse treatment if they fail to cooperate (voluntary restrictions are always less harmful than legislated quotas, they are told).
One small example of the kind of trouble they face is the story of what happened to Taiwanese canned mushrooms in 1968. The Taiwanese had built up in two or three years an enormously successful export business to Germany and the United States. Then the Germans imposed import restrictions. The U.S. industry had not been hurt, due in part to very careful marketing by the Taiwanese to avoid intrusion on existing American sales channels. The prospect of possible diversion of extra quantities of canned mushrooms from Germany to the U.S. was, nonetheless, too much for the American mushroom industry to bear. Certain members of Congress and the Secretary of State were quickly mobilized to force Taiwan to roll back its export plans and hold to "voluntary" export targets. Taiwan protested in vain that a large number of workers would be affected, and that these restrictions would make investors wary of further development efforts in other export fields. Despite the complaints, export quotas were quietly established.
Though this is a tiny example, it is not unique, and it is not limited to the United States. In Ottawa, Paris, Bonn, the same pressures arise. If broad textile restrictions are in fact negotiated internationally, we may expect other labor-intensive products to be next in line.
The agricultural import restrictions, tropical products taxes, and other nontariff barriers in all of the developed countries add to the trouble. These forms of protectionism are in fact far more significant in trade volume than any possible benefits flowing from tariff preferences. Moreover, if preferences actually begin to work, drawing in foreign investment to produce for preferred access to the markets of developed countries, other kinds of trade restrictions could well result. Labor unions will certainly complain about runaway mills. Success in any export line will breed restrictive reactions. In this psychological context, the incentive to produce for export is not very great, and it is not surprising that the governments of developing countries have trouble encouraging private investment in the export business.
While these problems are brewing, foreign aid has not only stagnated, but actually begun to fall off. In real terms, the total flow from developed countries has dropped significantly in the 1960’s.
The Europeans and Japanese have picked up a bit, but the United States aid levels are falling dramatically.
In over-all outlook for the developing countries, then, the prospects for accelerating trade and stepping up aid are not at all good. This will have international political implications. Until recently, the main export earnings of developing nations have come from commodities, in agriculture, minerals and fuels. For products like cocoa and coffee, it is a handful of landowners who directly feel the ups and downs of international markets, and government bureaucrats who get excited about world market injustice. In minerals, the big multinational companies dominate.
Exports of manufactures have been gaining in recent years. Their growth rate is more than double that of commodity exports. Thus, their share is moving up steadily. Some degree of industrialization is necessary for over-all development in most of the developing nations, and much of this will turn on export opportunities for manufactures. Unfortunately, there will be numerous frustrations for these kinds of exports. They will encounter restrictive policies abroad, and the economic losses caused by trade restraints will hit different kinds of people from those affected in the past. In manufactures, they will often hit local business investors and managers; workers finding regular employment for the first time in the cities; families dependent on salaries and not on food raised on small rural plots, some of which could be stored for eating in bad times. When these people are denied the success they have earned, and are living together in concentrated areas, their frustration seems bound to generate intense pressure on their governments and politicians. These pressures will be even more intense than the constituent pressures on the local level we already experience in the rich countries. The international problem will become jobs here vs. jobs there, votes for me vs.votes for him.
The foreign policy stakes must inevitably rise in this context. What was once a question of working out a frustrating technical problem in cocoa prices internationally, among bureaucrats, now becomes a frustrating political problem of satisfying urban workers and voters that the great industrialized countries cannot tell them what to do, where to sell, and how much to earn.
The dimensions of this problem are growing steadily, because the employment outlook in the developing nations is extremely bad. The population problem is inexorably becoming an unemployment problem. As the labor force of the poorer countries grows steadily, new job opportunities fail to keep pace. Even if population growth were slowed dramatically tomorrow, unemployment would grow for decades afterward. It is further compounded by migration from rural areas to cities, so that it becomes concentrated politically, with no rural family system to provide basic "social security." The dimensions of this problem are not yet fully understood, and there are a number of urgent studies under way around the world. According to the Pearson Report:
Progress must be made in solving the unemployment problem if social and political turmoil is not to arrest the development process. For it is in the volatile cities of the developing world that agricultural stagnation and industrial unemployment combine to produce their gravest consequences. Urban growth is almost universally twice as rapid as the growth of the population in general, and some of the largest cities have even higher rates of expansion. Rural stagnation stimulates a flow of migrants from the land, and urban death rates are often lower than those in the countryside while fertility remains high.
It must be asked whether urban trends can be left to be the by-product of other forces in society. If present trends continued, the largest city in India would have over 35 million inhabitants by the year 2000.
In such cities, the amount and rate of unemployment will be staggering. Prebisch gave some idea of the problem in his 1970 report, concluding that this was now the number one problem of Latin America. He pointed out that the proportion of the labor force employed in manufacturing had actually gone down, from 35 percent in 1950 to 30 percent today. To break out of this explosive situation, more industrial job opportunities must be created. But this requires more exports of manufactures, either to the developed countries or to other developing countries, or both. Although trade with each other offers hope for the developing nations, their attempts to improve trade among themselves have tended to run afoul of the extreme mercantilism that each practices.
Even though the main ingredient to relieving unemployment must lie in domestic policies which favor extensive use of labor, politicians will tend to blame foreign protectionism whenever there are riots of unemployed urban workers. This political aspect will be accentuated whenever a particular factory has to lay off workers or slow down working hours to accommodate export restrictions.
While these problems grow, the debt-service problem will be unfolding relentlessly, putting ever-tighter constraints on some of the developing nations as a consequence of the steady increase in loans to sustain their development plans. This mix of circumstances can no longer be dismissed as a series of technical side-issues.
The Politics of Economics
In other words, economic issues will increasingly be the mainstream issues of foreign relations in the closing years of this century. Economic issues involve the internal domestic interest groups and politics of each country. Particularly in the developing countries, where a broadening of popular participation in economic development is taking place, economic questions will steadily rise to the top of political priorities.
One easily senses the major political importance of specific economic issues in the course of international negotiations. In the heat of negotiations, those most close to these specialized problems express freely the intense political pressures upon them. Country delegations divide even among themselves, with the hardest, most painful negotiations occurring within countries or blocs. Being specialized, and highly political, the issues tend to be handled by a small number of people, with frequent reference to ministers, cabinets, and even heads of state, by-passing the normal bureaucracies in the inevitable negotiating crunches.
It is not widely known that even in the United States, relatively small trade and international corporate business issues often rise all the way to the President for quiet decision. The reason is not that the interagency committees below him are inadequate, or filled with stubborn bureaucrats, but rather that potent domestic and international issues can only be reconciled by a political decision at the very top. But despite the fact that such issues reach the President’s desk, they are rarely conceived and decided in terms of broad foreign policy. Each problem that comes along is handled as an isolated issue.
The interconnection of the domestic and foreign interests of the United States will become even more pronounced in the next few years. The prosperity of our farm sector is increasingly dependent on our world trade position. The prosperity of our multinational companies is increasingly dependent on the interaction of domestic and foreign policies on trade, investment, taxation and antitrust laws. American labor has already begun to reassess its entire view of economic policy, as I have mentioned earlier, because it recognizes the direct linkage of its own interests with international policies and commitments.
In the European countries, private commercial interests have less apparent influence on their parliaments than U.S. businessmen exert on our Congress. Nonetheless, whether in London or Brussels or Rome, domestic economic blocs are a large factor in politics. In Europe and Japan, power — usually the number two position in the cabinet — is concentrated in the hands of Ministers of Economics and Finance, or Chancellors of the Exchequer. The men who hold these posts usually aspire to party leadership, and therefore treat balance-of-payments problems with utmost seriousness. Thus economic questions receive high-level attention, even though special interests and parliamentary lobbies are somewhat more muted than in America.
The Need for Reappraisal
To cope with the complex and dangerous problems of this new decade, there is need first of all to recognize that domestic economics have great impact on international relations, while foreign economic developments, as never before, are coming to have a crucial influence on domestic politics. This is true of all countries, large and small, developed and developing. Our American decision-making process treats each economic issue as essentially isolated from other major questions, and tries to resolve it on its own merits or in response to the special domestic pressures it generates. This process should be replaced with a conscious attempt to consider integrally the major political and economic policy questions, and frame guidelines for dealing with them in continuum, rather than in vacuum.
A major policy reappraisal should begin with awareness of the growing power of mercantilism. As pointed out earlier, the neomercantilism we see today in every country is at heart an attempt to pass on to other countries some or all of the economic and social costs of domestic adjustments. In the case of the Common Agricultural Policy, for example, the Europeans have taxed imports, thus reducing import sales while gaining revenues. The revenues are used to push domestic surpluses onto world markets, further taxing the exports of competitors by depressing their potential profits elsewhere. All exporters thus end up paying part of the cost of Europe’s social program for its rural population. The American textile restriction program has a similar effect. It penalizes Asian exporters and American consumers in order to provide special benefits to Southern mills in areas of low wages and high availability of black labor. Neo-mercantilism, sector by sector, whether aimed at industry relief or rural poverty, must inevitably repress the interests of other countries, in particular sectors, in particular regions.
This neo-mercantilism takes other forms as well, such as the continuation of the range of economic policies which bring persistent balance-of-payments surpluses to Germany and Japan. Sometimes other countries, confronted by temporary balance-of-payments problems, resort to arbitrary trade restriction measures, bypassing the internationally agreed rules without a second thought, as have Canada, the United Kingdom, and France in recent years. Without better international mechanisms in the future, we can expect payments crises to lead to more such disruptive, inefficient policies. Resistance to making really fundamental changes in the international monetary system, or to developing effective institutional arrangements for economic policy coordination, are symptoms of this world-wide mercantilistic trend.
Passing along to others the costs of one’s own special problems does, of course, make home politics easier in the short run. It also allows the building of intimate ties with selected countries on the basis of discrimination against the rest of the world. In the long run, however, it works to the detriment of all, rupturing foreign relations, stirring antagonisms, misallocating resources, and serving special rather than general domestic interests.
International initiatives having major economic consequences require active domestic support. The domestic forces in our society which are outward-looking need to be mobilized, their objectives pursued in concert. Where the United States might once have accepted some damage to its international economic interests as the price to pay for a political objective, we must now treat foreign economic policy as essential to the viability of any foreign policy at all. This is simply good politics. For if government is to "march with American public opinion," it must respond to the pressures of that opinion, which generally are expressed through economic interest groups. American opinion today is becoming less abstract, less concerned with dreams of unity, and more caught up with the question of how to ensure that we and Europe can cooperate and avoid harming each other, while Europeans get on with their internal affairs.
To stress the primacy of economics and the need for multilateral cooperation in the years ahead is not to preach economic imperialism, or let the profit motive control social policy. To put it that way is to miss the real shared benefits to be gained in a shift away from today’s mercantilist trend.
The Asian Future
Consider, for example, the developing countries of Eastern Asia, now moving ahead economically at great speed. They are being caught in increasing dependence on Japan, their growth spurred by the phenomenal rise of the Japanese GNP. Growing more than 10 percent annually (discounting inflation) year after year, Japan already has the world’s third largest GNP, after the United States and the Soviet Union. The Japanese are intensifying their foreign aid effort in Eastern Asia, spurred by American pressures. An Asian Co-Prosperity Sphere is in effect being raised from the dead, with the unconscious encouragement of the United States to help it along.
The United States has poured into East Asia vast expenditures, in addition to arms and men, which, diffusing throughout the economies of the area, has stimulated another great part of Asian economic growth. Our military disengagement from the Far East, now begun, is bound to have economic consequences that increase political stress in the region.
Our political objective could probably be best defined as preventing the domination of Asia by any one power, and doing so by encouraging new national and regional centers of political and economic strength able to keep power in balance. To achieve that objective, and to ensure reasonable conditions for the economic future of friendly countries, we should have comprehensive economic policies ready for implementation as the U.S. military withdrawal proceeds. The Far East is potentially the strongest economic growth area of all of the developing world, and if the United States retains no strong economic presence there, Japan will be left alone to dominate the region. That is almost certainly a prescription for increased political tension in Southeast and Eastern Asia.
Our present neo-mercantilist policies toward Asia run counter to American foreign policy objectives. We have military strategies and policies, but no coherent economic plans.
The other half of President Nixon’s Guam doctrine is missing. This reflects an unawareness of the importance of international economics. Offending the budding Japanese giant, and the other free nations of Eastern Asia, by indelicate handling of trade issues seems profoundly bad foreign policy. Trade problems are an essential ingredient in our overall Asian political posture, and the more we disengage militarily, the more we bring economics to the fore.
In Europe, our economic policies have been relegated to technical level discussions, while policy makers concentrate on reviving the tired NATO defense debates of earlier decades. Europe is moving ahead toward its own objectives, convinced that the Americans are not much concerned about the major shift in trans-Atlantic economic structure which is inevitably occurring. No significant effort is being made to put Atlantic relations on a course that is relevant to the issues of the 1970’s and 1980’s. Such a course requires new and improved institutions, and consultative frameworks, to regulate policies toward multi. national companies; toward pollution control; toward the harmonization of balance-of-payments trade policies; toward economic relations with Eastern Europe. These are the issues which will concern Europe in the next two or three decades, because Europe is unifying along economic lines.
More generally, we need to develop international agreements, codes of conduct, and modes of cooperation, which tackle the neomercantilism problem directly. This means directly addressing the problem of how to carry out domestic programs without passing the costs on to other countries. It means gradually revising past laws, regulations, and policies which manipulate the interests of other countries for the benefit of small domestic lobbies.
One application of this principle was embodied in the General Agreement on Tariffs and Trade. In certain cases, the GATT provides that when a nation restricts trade for domestic protection reasons, it must compensate other countries, or accept retaliation from them. This particular provision relates to a highly technical set of precedents and procedures, but its broad legal sense is an example of one way of dealing with the problem.
Many types of difficulties cannot be resolved so simply as this. With multinational companies, the problem is to provide some common set of guidelines for intra-company pricing, taxation, antitrust, and the sovereignty rights of governments. Perhaps the most complicated problem in economic cooperation lies in the field of government regulation of pollution and environmental adjustment. If each nation goes its own way, some will be lax and others strict; some will require costly investment programs, and others none at all. In the absence of any framework of agreed procedures, this in itself will tend to disrupt world trade, investment, and production. Cooperation in such areas, where the problems are pressing and growing, could have a high political payoff.
To grapple with the economics of the future, some governments may have to restructure themselves. This is a particularly pressing need in the U.S. government, where international economic issues are handled in highly compartmentalized fashion. Coordination and policy guidance are provided by more than a dozen different interagency committees (each with subcommittees) and numerous high-ranking officials in many cabinet departments and agencies and on the President’s personal staff. In this bureaucratic setting, it becomes nearly impossible to mesh economics with the other aspects of foreign affairs.
Not just in Washington, but in the universities as well, we need analyses and proposals for new foreign policy departures which recognize that economic questions will be the most potent element in the world politics of the next two or three decades.
More and more political leaders, in the years ahead, may find themselves asking the question, "Growth for what?’ Governments may increasingly try to manipulate national economies toward desirable social ends. If we travel in this direction, as I think we shall, the danger of disruptive trade wars and other neo-mercantilist clashes will loom ever larger.
Our ability to look ahead and begin to grasp the foreign economic policy issues which are now upon us will directly affect American economic interests, and the interests of every other major country. The consequence of an inactive foreign economic policy, and a heavy reliance on military related discussions and institutions, is to evade most of the political forces at work in the world today. Such evasions will ultimately come home to haunt politicians, for failure to promote external economic interests will eventually produce domestic reactions.
Finally, and most important of all in the long run, are our problems in dealing with that two-thirds of the world’s population living in the developing nations. The politics of the Third World is and will be primarily economic. The developed nations cannot block that inevitable trend, which seems likely to dominate world politics through the close of this millennium. Relationships with the poor nations will be a function of the degree of neo-mercantilism in the rich countries. There may be wars, heavy pressures, new dependencies on one or another great power; but in the end, economics will be the driving force which brings presidents, dictators and ministers up, and brings them down. Economics, in the years immediately ahead, will be powerful politics. Neo-mercantilism will be its scourge, driving nations into international conflicts, as have ideologies and military imbalances in the past.
Intense effort to seek, step by step, area by area, more positive policies, and international codes of conduct in economic relations, is the direction we should now travel. Yet the basic forces at work today, the structures of governments, the disdain of diplomats and political theorists for these issues, all seem to portend worsening problems among the rich, and heavier repression of the weaker nations. If trade wars come, they will come hard.
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