Global Policy Forum

Multilateral Institutions Like The WTO Will Take A Hit. And Bilateral Deals Will Either Suffer Or Surge, Depending On Geopolitical Alignments House Rules Committee Chairman David Drier (R-Calif.) got two calls this week, one worried, one hopeful. Chile's ambassador called to complain that the Bush Administration is foot-dragging on an almost-completed trade deal. The reason: Chile, a member of the U.N. Security Council, opposed the President's plans to attack Iraq. Then, Bahrain's Finance Minister phoned, asking for a sit-down with Drier to propose free-trade talks with Washington -- as payback for Bahrain's support for the U.S. initiative in Iraq.

Welcome to a new battlefield for trade. In ways big and small, the Iraq war is realigning America's commercial relationships with other countries, brightening the prospects of some nations while dashing others' hopes for easier access to America's insatiable consumers. Longer term, the war and its diplomatic aftermath may have a chilling effect on the 146-nation trade talks sponsored by the Geneva-based World Trade Organization, while stimulating some low-flying bilateral deals.

In the short term, some countries are expecting a payoff for their war support. First among them: Australia, which is just beginning free-trade talks with the U.S., and Jordan, which finished talks last year and now looks forward to a reward in the form of access to the world's largest market.

DISTURBING TREND

Besides Chile, losers that rebuffed Washington's efforts on the war include Russia, which needs U.S. support in order to join the WTO; Mexico, which wants liberalized U.S. immigration laws; and Morocco, where trade talks with the U.S. had to be moved to Geneva because of the threat of angry mobs. Egypt, which was seeking a bilateral trade agreement with the U.S., saw its prospects fall after Egyptian President Hosni Mubarak warned that the war would create "a hundred Osama bin Ladens."

For Dreier, one of the Administration's unofficial lieutenants on trade matters, the interplay between international diplomacy and trade is disturbing. "We should be doing more trade with countries like Chile, not less," he says (see BW Online, "Cut Taxes? No, Heal the World").

Some U.S. exporters share that fear. Noting that the European Union enjoys a free-trade agreement with Chile, William Lane, Caterpillar's (CAT) Washington lobbyist, says: "Going slow on the deal with Chile means [Chileans] will be buying French wines with no tariffs, instead of California wines with an 8% tariff."

WHAT'S THE POLICY?

While the forces of globalization have been slowed since September 11 and the wars in Afghanistan and Iraq, economic integration worldwide has too much momentum to be stopped cold. Rather, it's the capacity of the U.S. and the rich nations of Europe to write the rules of globalization, through big institutions such as the WTO, that has suffered a big set-back.

Just as the war in Iraq is coloring America's relations with each trading partner, it's also affecting the Geneva-based forum where hundreds of trade ministers and officials meet to draw up globalization's blueprints. The war "has raised the question of whether U.S. foreign policy is still devoted to building up such international institutions for peace and stability as the U.N. and the WTO," says David Aaron, a top Commerce Dept. official in the Clinton Administration and former U.S. ambassador to the Paris-based Organization for Economic Cooperation & Development (OECD).

Even more important, the war is straining relations between the most powerful WTO members, making it harder to get agreement on broad new rules. Even before the fighting, Europe, Japan, and the U.S. were struggling to compromise on the key issue of the so-called Doha Round of WTO negotiations: lowering trade barriers to agricultural products worldwide.

SUBSIDY CONFLICTS

Now, positions are hardening. Among European nations, France has been most resistant to U.S. proposals to reform farm policies. Developing nations, which cast two-thirds of the votes in the WTO, have been insisting that the wealthier nations open their markets to the kinds of goods that poor nations are best at producing: food staples, clothing, and textiles.

In addition, poor nations want the rich ones to stop subsidizing their own farm production. Today, European farmers derive 35% of their income from government subsidies, U.S. farmers about 20%, according to the OECD. Yet farmers in developing nations -- where upwards of half of the population can be employed in the agriculture sector -- get little or no direct help from their governments.

The U.S. has proposed sharp cuts in such subsidies, but Europe and Japan have refused to go along. Warns Senate Finance Committee Chairman Charles Grassley (R-Iowa), himself a farmer: "If the WTO agricultural talks are unsuccessful, the Doha Round will not progress any further" on other issues. Knocking down national barriers in the interests of trade expansion is what big multinational organizations such as the WTO and the U.N. are all about. But as wealthy countries squabble over war and diplomacy, they're less likely to come to agreement on trade. Congressman Drier may be fielding a lot more of those complaining phone calls in the months ahead.

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