April 30, 2002

April 30, 2002 | Backgrounder on Trade, Economic Freedom

Needed: A New Vision for U.S. Trade Policy

The Bush Administration has taken several positive steps to regain the U.S. leadership position on trade. Last November, for example, it agreed to review antidumping laws at the World Trade Organization (WTO) talks in Doha, Qatar, helping to advance a new trade round. In December, the U.S. House of Representatives voted to give the President trade promotion authority (TPA)--a key tool for negotiating trade agreements that the Chief Executive has lacked since 1994. The Administration is also moving forward on several bilateral free trade agreements.

But such highlights cloud the fact that U.S. trade policy is still faltering. Before the United States can regain its international credibility on trade, it must go beyond paying mere lip service to market liberalization and take serious action to achieve it.

True, the Bush Administration inherited a disappointing record on trade from its predecessor, but it also has yet to effect fundamental improvements in that record. Its recent tariff action on steel imports is one more in a current laundry list of protectionist policies that frustrate America's trading partners. Agriculture subsidies, textile tariffs and quotas, and antidumping measures mar the nation's trade record and ultimately limit trade. Americans lose access to better products, and businesses lose opportunities to grow. The United States simply cannot move ahead by raising or continuing to maintain such barriers to trade.

America needs more trade, not less. With 96 percent of the world's consumers living outside of the United States, the U.S. economy depends to a significant extent on international trade. Agricultural products from one out of every three acres planted in the United States are exported. U.S. Trade Representative Robert Zoellick has estimated that jobs supported by exports pay as much as 13 percent to 18 percent more than non-export jobs pay.2

It is important that, as America emerges from the recent recession, policymakers do not continue to hamper the growth of job opportunities for U.S. workers through
policies that limit trade. Yet today, the United States is party to only three of the world's 150 trade and investment agreements. It is falling behind. Only by reaching out to potential trading partners and dismantling America's protectionist policies can the Bush Administration begin the real process of market liberalization.

What is needed now is a new vision for U.S. trade policy, one that leads to free markets and promotes opportunity, innovation, and choice. Specifically, the Administration should press for TPA, move forward with bilateral trade negotiations, exempt future bilateral trading partners from the steel tariff, halt the imposition of a tariff on Canadian lumber, and reject the farm bill that is now in conference committee.

A Lackluster Record on Trade

America's trade record since implementation of the North American Free Trade Agreement (NAFTA) can only be described as lackluster. President Clinton failed to rally Congress's support for trade promotion authority, then known as fast-track negotiating authority, and Congress still has not granted it for President Bush.

Trade promotion authority from Congress is a valuable foreign policy tool; it gives the President and his Administration the ability to negotiate beneficial trade agreements because it assures potential trade partners that the agreements they negotiate will be presented to Congress for a straight up-or-down vote without amendment. Countries are hesitant to negotiate with the United States when it is likely that Congress could amend any agreements they sign or delay them indefinitely for political reasons.

Too often, the Clinton Administration caved in to political interests on trade issues. For instance, President Clinton succumbed to pressure from Members of Congress representing farm states by implementing a tariff on Australian and New Zealand lamb in exchange for their support on another issue. Representative John Boehner (R-OH) criticized the hypocrisy of this action during a House Agriculture Committee hearing:

You have two countries that have probably done more to deregulate their Ag sectors in their economies, and for that matter, their entire economies--probably two countries who have done more to follow our lead than any two countries in the world, and yet we slap them with these severe sanctions. And I am concerned about what kind of message we are sending to the rest of the world as we proceed here.3

Although this particular tariff no longer exists, the debacle remains fresh in the minds of America's trading partners.

America also protects the agriculture sector through farm subsidies, which function as non-
tariff barriers to trade. Subsidies not only encourage overproduction, but also artificially lower prices, thus encouraging consumers to shun foreign goods and keep them out of the market.

While the United States justifiably complains about the subsidies imposed by the European Union (EU), U.S. dairy and sugar subsidies exceed those of the EU.4 And although the 1996 "Freedom to Farm" law5 was enacted to wean farmers from subsidies, natural disasters soon took farm policy down a different path. As with any business, farming is risky; and farmers, like businessmen, should not expect to be bailed out by the taxpayer whenever a crisis occurs. Unfortunately, these disasters caused the federal government to step in with economic assistance payments. The result: Rather than rely on market forces to help them recover, farmers grew accustomed to receiving a check in the mail and now expect the subsidies.

American companies depend on protection from foreign competition through the imposition of antidumping laws, which allow governments to impose duties on imports that have been sold for less than "normal value" and threaten to cause injury to the domestic industry.6 Companies wishing to escape competition use these laws to tilt the playing field rather than to level it.

The U.S. government has allowed industries to request antidumping protection through Section 301 of the 1974 Trade and Tariff Act.7 Originally, this provision gave the President great discretion to retaliate against "any country that applied unjustifiable or unreasonable import restrictions or any export subsidies that reduced the sale of U.S. goods abroad."8 In 1988, Section 301 was amended to become what is known as Super 301:

Super 301 orders a National Trade Estimate, showing foreign barriers to US trade and their costs. On this basis, USTR is required to investigate countries with consistent patterns of unfair trade practices. If these practices are found to be unjustifiable or unreasonable, USTR must attempt to persuade the countries in question to halt them within a specified period of time. If these practices continue, then the president must retaliate against an equivalent value of the foreign country's goods.9

Though Super 301 has expired, some members of the Senate have discussed making it a permanent part of trade law.10

The number of antidumping cases is escalating. Between 1980 and 1989, the United States initiated about 40 cases per year; in 2000, it initiated over 300 cases.11 According to The Region, a publication of the Federal Reserve Bank of Minneapolis, "Ironically, the voice of free trade--the United States--is antidumping's largest historical user."12

The Clinton Administration ignored global pleas for new international rules that would stiffen the requirements for using the antidumping mechanism. Moreover, the Continued Dumping and Subsidy Offset Act of 2000,13 also known as the Byrd Amendment, encourages this abuse because it "requires the U.S. Customs Service to establish a special account for duties collected from antidumping and countervailing measures and to transfer the duties to injured U.S. industries."14 It also gives industries incentives to seek protection, since they would be rewarded financially at the same time. By allowing such abuse, the practice has backfired; other countries have begun to use the same practices against American exports.

An industry may also seek relief under the Trade and Tariff Act's Section 201, otherwise known as the "escape clause." To do so, an industry must satisfy two conditions:

First, it must persuade the International Trade Commission (ITC) that the industry has been seriously injured or threatened with serious injury, and that rising imports are the most important cause of such injury. Second, once half or more of the commissioners who review the case recommend trade relief, the industry must persuade the president that trade relief is justified as serving the national interest.15

Thus, even when U.S. trading partners are operating by the rules, Section 201 can be used if a domestic industry is inefficient or simply failing due to its own actions. Clearly, U.S. trade policy is riddled with counterproductive provisions.

Continuing the Missteps

The United States tried to regain its leadership role on trade at the recent round of WTO talks in Doha, Qatar, with U.S. representatives agreeing to negotiations to clarify and improve "disciplines under the Agreements on Implementation" of Article VI of the 1994 General Agreement on Tariffs and Trade (GATT), as well as subsidies and countervailing measures.16 In other words, they agreed to review U.S. antidumping laws.

Moreover, in December 2001, the House passed legislation authorizing trade promotion authority for the President (H.R. 3005), and U.S. negotiators are currently working to complete bilateral trade agreements with Singapore and Chile and beginning negotiations with other countries. But much more must be done.

Although the Trade and Development Act of 200017 had liberalized the textile market, the House leadership made a written promise to several Members in December 2001 to amend it. The promise was

not to move any trade legislation until the 2000 Trade and Development Act was "corrected" to require that U.S. knit and woven fabrics undergo all dyeing and finishing operations in the United States to get benefits under the Caribbean Basin Trade Partnership Act.18

In other words, the United States preaches the virtues of open markets to developing countries but at the same time espouses action that, if implemented, would hurt those very countries the most. While the average American tariff is around 2 percent, the average tariff on textile and clothing imports is 17 percent.19

According to The Economist, Secretary of Commerce Donald Evans recently told the textile lobbies that they "have a friend in us" and "that you can trust us." The article elaborated by noting that, in a speech before "the Gaston summit [a regional textile summit], a man from Mr. Bush's trade office said nothing about freer trade."20 As a leader on trade, however, the U.S. leadership should be moving toward liberalization and away from protectionism.

In another misstep, President Bush in March 2002 imposed a 30 percent tariff on certain imported steel products, including tin mill products, hot-rolled sheet, cold-rolled sheet, coated sheet, hot-rolled bar, and cold-finished bar. The U.S. steel industry has complained about foreign competition and a tilted playing field, but it had already received over $1 billion in subsidies between 1980 and 1992.21

Prior to the President's decision, approximately 80 percent of all steel imports were already subject to tariffs under U.S. antidumping laws.22 The new tariffs on steel protect it even more while leaving other products vulnerable to foreign retaliation for this decision. In fact, U.S. trading partners are reviewing options for retaliation that include $5 million in sanctions from Japan and $335 million in tariffs from the EU.23

The Administration's steel decision was followed by another measure to impose countervailing and dumping duties on Canadian lumber. The United States has accused Canada of subsidizing its timber and dumping it into the United States. Canadian logging companies cut wood on government land, whereas American companies tend to cut wood on private property, which costs more to harvest. According to the Canadian loggers, cutting the tree down is "only a small portion of what it costs a Canadian company...[which] have to build their own roads, re-forest logged lands, and pay the cost of planning their sales."24

The Economist notes that "for years American companies were themselves accused of receiving subsidies; stumpage prices for trees cut down on federal land were long criticised as too low. Then they were quiet on the subject."25 When Canada was close to making a deal with the United States, the U.S. negotiators insisted that the reforms agreed upon would be subject to monitoring by two key congressional committees. Canada objected. It wanted an independent binational monitor.26 Asking for a neutral party to monitor an agreement is not unreasonable. Rather than imposing a tariff, the United States should have continued negotiations and made another offer.

The farm bill that is currently in conference committee in Congress (H.R. 2646/S. 1731) will greatly increase U.S. subsidies to the agriculture sector. EU Agriculture Commissioner Franz Fischler has said that most of this agricultural support will "clearly be linked to production."27 If the President signs this bill into law, it is most likely to begin another farm-style "arms race" of tariff and non-tariff barriers.

Regarding the tariffs on lamb, Representative Boehner told the House Agriculture Committee that he was "concerned about what kind of message we are sending to the rest of the world as we proceed here."28 This concern should apply as well to the current farm legislation.

Regaining U.S. Credibility on Trade

While the Bush Administration continues to press for TPA, it is moving ahead with bilateral trade agreements with Chile and Singapore and has agreed to negotiations within the WTO to review its antidumping laws. But there are many more steps to take.

For the United States to regain its credibility and advance trade globally, several tough changes in U.S. trade policy must be made. Specifically, the Administration should:

  • Press Congress to pass trade promotion authority. While the President has mentioned the importance of TPA in various speeches, he should be more fervent in seeking this important trade negotiating tool, which would enable U.S. Trade Representative Robert Zoellick to negotiate trade deals more quickly. The United States has been sitting on the sidelines while the rest of the world is obtaining trade agreements that leave U.S. interests and exports out in the cold. Although the House passed TPA legislation in December, the Senate has been dragging its feet. The President should meet individually with Members of the Senate who have concerns and should be proactive by making visits to the Hill until he gains this authority.
  • Ensure that the final TPA legislation does not include protections for certain industries. The purpose of free trade legislation is to liberalize sectors, not to protect political interests. Trade legislation that is written to protect the citrus-growing, textile, or other industries not only hampers trade but also weakens U.S. credibility.
  • Complete the bilateral trade agreements currently in negotiations and initiate new agreements. America should complete the deals it is negotiating with Chile and Singapore and move forward to negotiate bilateral agreements with Australia, New Zealand, Taiwan, and Uruguay to advance market liberalization. The benefits of such deals extend beyond economic expansion. Trade is not just good economic policy; it is good foreign policy. Trade strengthens America's allies, engages its potential adversaries, and--when withheld--can harm its enemies.
  • Exempt future bilateral trading partners from the steel tariff. The global reaction to the steel tariff has been one of outrage. The United States already exempts its NAFTA partners, Canada and Mexico, as well as Jordan and Israel, from the tariff, and it should not extend this harsh measure to countries with which America negotiates trade deals in the future.
  • Liberalize the agriculture sector by rejecting the new farm bill. The United States should put an end to policies that protect its agriculture sector and distort the market. President Bush should start this process by vetoing the farm bill now in conference committee if it comes to his desk. Even without this expensive new measure, which will cost every American household $4,400 over 10 years,29 many other subsidies still distort the market. The United States cannot credibly point its finger at the EU's agricultural subsidies while it continues to subsidize its own farmers so heavily.
  • Resume negotiations on Canadian lumber. Canada is America's top trading partner. According to the U.S. International Trade Commission, U.S. exports to Canada exceeded $176 billion in 2000.30 The imposition of countervailing and dumping duties on Canadian lumber is protectionist. The United States should revoke the tariff decision and instead persevere to resolve this issue with its neighbor and NAFTA trade partner.

Conclusion

For far too long, U.S. trade policy has been "do as we say, not as we do," but America, which lost ground recently on trade issues by implementing some protectionist measures, can take positive steps to regain its credibility. For American businesses to gain more access to foreign markets, U.S. policy must change.

Market liberalization is the best way to increase trade opportunities, but it will require Washington to adopt a new vision for trade policy--one that reduces, not raises, barriers to trade and grants the President the authority to conclude trade agreements quickly. Only by such actions will America regain its credibility and leadership role in the global trade arena.


Sara J. Fitzgerald is a Trade Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation.


1. The author thanks Aaron Schavey, Policy Analyst, and Anthony Kim, Research Assistant, in the Center for International Trade and Economics at The Heritage Foundation for their assistance with this paper.

3. Representative John Boehner, in hearing, 1999 WTO Ministerial in Seattle, Committee on Agriculture, U.S. House of Representatives, October 20, 1999.

4. "Rising U.S. Agricultural Support," ABARE Current Issues, October 7, 2001, p. 5.

5. The full title of the legislation is the Federal Agricultural Improvement and Reform Act of 1996 (Public Law 104-127).

6. Brink Lindsey and Dan Ikenson, "Coming Home to Roost: Proliferating Antidumping Laws and the Growing Threat to U.S. Exports," Cato Institute, Center for Trade Policy Studies, Trade Policy Analysis No. 14, July 30, 2001, p. 3.

7. 19 U.S.C. 2483.

8. Charles K. Rowley, Willem Thorbecke, and Richard E. Wagner, Trade Protection in the United States (Fairfax, Va.: Locke Institute and George Mason University, 1995), p. 220.

9. Ibid.

10. Rossella Brevetti, "Baucus Warns TPA Could Stall Unless Bush Is Flexible on TAA," Bureau of National Affairs, Daily Report for Executives, April 12, 2002.

11. Lindsey and Ikenson, "Coming Home to Roost," p. 5.

12. Ronald A. Wirtz, "Anti-Dumping: The Free-Trade Antacid," The Region, December 2001.

13. Public Law 106-387.

14. Daniel Pruzin, "WTO Chief Appoints Panelists to Decide Byrd Amendment Case," Bureau of National Affairs, Daily Report for Executives, November 2001.

15. Rowley et al., Trade Protection in the United States, p. 213.

17. Public Law 106-200.

18. "Hayes Says He Will Insist House Leaders Keep Vow to Roll Back CBI Textile Benefits," Bureau of National Affairs, Daily Report for Executives, March 22, 2002.

19. "Tangled Up in Textiles," The Economist, March 28, 2002.

20. Ibid.

21. Aaron Schavey, "The Ailing Steel Industry Needs Less Government Intervention, Not More," Heritage Foundation Backgrounder No. 1519, February 22, 2002.

22. Ibid.

23. Paul Blustein, "Trade Partners Trading Threats," The Washington Post, April 27, 2002, p. E1.

24. "You've Stumped Us," The Economist, March 28, 2002.

25. Ibid.

26. Peter Morton and John Greenwood, "U.S. Lumber Pact Offer `a Bad Deal,'" National Post, March 30, 2002.

27. "EU Commissioner Blasts U.S. Congress for Increased Subsidies to American Farmers," Bureau of National Affairs, Daily Report for Executives, March 13, 2002.

28. Boehner, "1999 WTO Ministerial in Seattle."

29. Brian Riedl, "The Farm Bill's $6 Billion Price Hike Is Just the Tip of the Iceberg," Heritage Foundation Executive Memorandum No. 807, March 29, 2002.

About the Author

Sara J. Fitzgerald Policy Analyst
Center for Trade and Economics (CTE)