The Politics of Free Trade Agreements

Seeking to address the liberalization concerns of WTO’s less-developed members, the Doha Development Round was supposed to culminate in 2005 with a new trade agreement.

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The envisioned deal concerned the reduction of trade barriers in commodities and services, as well as a new international framework for intellectual property rights. But soon after negotiations began, governments from developing countries — India, Brazil, China, and South Africa — and NGOs (non-governmental organization) began to worry that international negotiations were an obstacle to the governmental protection of developing sectors and regulation of financial services. After the failure of the Cancún proceedings in 2004, trade scholars worried that Doha might not be completed by its original deadline, but kept the hope that negotiations would continue. However, trade talks came to a deadlock in 2006, 2009, and 2011, mainly due to differences in agricultural policies. The US and the EU even backed out of previous agreements to reduce export support and agricultural subsidies, arguing that they did not want to weaken their bargaining positions too early in the Round.

Read also: ITC publishes business guide on new WTO trade facilitation agreement by ITC Communications

Attempts to reconcile disagreements among countries since then have been largely in vain. But in December 2013, new tailwinds seemed to push the Doha Round to more favorable shores. The Bali Ministerial Conference, which concluded with the signing of a package deal on trade customs collection and a post-Bali development agenda, was touted to have “achieved what many believed was impossible”: bringing together the 160 WTO members for the first time in twelve years. But even though the Bali package does not have much to do with free trade — it facilitates the collection, but not the reduction, of custom duties — the agreement still wasn’t signed by all members in July 2014. This time, India vetoed the ratification to gain more bargaining power for Prime Minister Modi’s program of domestic food subsidies. Reuters reported that “trade diplomats in Geneva have said they are ‘flabbergasted,’ ‘astonished,’ and ‘dismayed,’ and described India’s position as ‘hostage-taking’ and ‘suicidal’.”

Perhaps commentators would have been less surprised if they had identified the negotiation deadlock as only the symptom of a more pervasive underlying cause: the national — read: political — interest of all countries at the negotiations table. The bread and butter of WTO member states is the extent to which they can encroach upon private enterprise, and control both product and financial markets. Under these circumstances, committing to open one’s borders to international trade is simply idle talk. Free exchange and competition would undermine the leverage of domestic interest groups, and cut through the structure of government intervention.

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Danger of the Euro-Zone’s Declining Economy

As unemployment rises, another quarter of recession may occur in the European economy. On Friday, February 21 some European nations forecasted missing their government deficit targets despite many rounds of spending cuts. The region’s economy is expected to grow later this year, but the 17 country union has spent the last three years in the slumps.

 

The Obama administration worries how the European Union’s declining economy will affect the United States.  President Obama hopes that talks of free-trade with the European Union will promote American and European trade. A key question is whether such an agreement is mainly focused on trade or on developing a political counterbalance to China.

International Business, Trade and Their Terminologies

For decades, the use of the term “Most Favored Nation (MFN)” status has led to demonstrations and even street battles. Now, the problem has gone away, since governments have changed the terminology and only speak of “Normal Trade Relations (NTR)”, a goal that seems to be acceptable to all. Definitions which shape our understanding of core issues such as “fairness,” “market gaps,” “dumping,” and “natural,” can be changed or amended, and thus present us with new realities.

Many of today’s business executives discover that their activities are but one integral component of society. Politics, security, and religion are only some of the other dimensions that historically, and maybe again in the future, are held in possibly higher esteem than economics and business by society at large. Those who argue based on business principles alone may increasingly find themselves on the losing side.

THIS IS HOW TO MAKE MANUFACTURING GROW

By Paul Freedenberg and Michael Czinkota

U.S. manufacturing competitiveness depends heavily on the government’s application of export controls. Export controls are a principal means of defending a nation’s high technology advantage over potential adversaries. In the United States it has been 23 years since the last major re-write of the Export Administration Act (“EAA”), the legislation that provides the basic authority for the President to control exports. In the interim, U.S. practices have become ineffective and inefficient. Unless there is an update of the export control system, U.S. manufacturing will lose international competitiveness.

During the Cold War, the export controls of the U.S. and its allies successfully isolated the Soviet Union and denied — or at least delayed — its acquisition of the high technology necessary to strengthen its military.

Today, there is no longer unanimity among allies about the nature of the threats faced. Nor is there any longer a U.S. veto that can be wielded when there is disagreement. The current export control forum, the Wassenaar Group, is mostly concerned with keeping dangerous technology out of the hands of terrorists and rogue states.

However, some potential adversaries do not fit the Wassenaar Group profile.  For example, China and Russia are certainly not rogue states, though the U.S. Government retains a restrictive licensing policy towards them. In fact, the U.S. Government is consistently more limiting than its European allies with regard to licenses for products and technologies destined for markets like China.  Delays combined with foreign availability of products have meant lost business for U.S. firms and trade frictions with China.

Take example: China is the largest and fastest growing machine tool market in the world. The U.S. still tightly licenses five-axis machine tools, because they are considered to be the most sophisticated. U.S. export licenses can take from six months to a year to gain government approval.  The Swiss, Germans, and Italians readily take advantage of this delay by licensing products with identical capabilities in weeks.  Over the past decade the U.S. has lost 50 percent of its share in this fast-gowning market, with domestic Chinese and foreign producers grabbing the lost market share. At the same time, the domestic U.S. market has shrunk by 50 percent.  The effect on the U.S. defense industrial base has been predictably negative.

Similar problems have occurred in semiconductor manufacturing equipment and scientific instruments. Without the cooperation between allies, the export control system cannot work.  It costs American jobs and does not accomplish its objectives.

The U.S. Government may view China as a potential threat and seek to deny it the highest levels of technology, but our allies stand ready to supply China with whatever products and technology it wishes to acquire. The key issue is to develop an effective export control system that also receives support from other high technology exporting nations.

In the summer of 2009, President Obama told his cabinet that he wanted to change export controls.  The Government is now working on reforms to provide a better definition of items on the military-oriented Munitions List and those which constitute dual use technologies.  Other reforms will  deal with encryption, the mechanics of license processing, with speeding up licensing time and, most importantly, with shortening the list of products that require an individual validated license.

These reforms are a good first step.  Export controls can be more relevant and effective if they are targeted and administered better.  But more needs to be done by the Congress in concert with the Administration:

  1. We need a better defined purpose for export controls, which our allies are willing to support.
  2. We need to broaden the list of countries to which we have few or no controls, so that we can concentrate our efforts on rogue nations such as Iran and North Korea.
  3. Export control implementation must be restructured.  Combining and better defining the control lists should reduce endless inter-agency debates and shorten company waiting periods.

 

Our current system does not make sense for the 21st Century.  The President deserves strong Congressional support in his efforts to harmonize and rationalize a licensing system that neither serves our national security nor our economic interests effectively.  For the sake of a revitalized manufacturing sector, this is one of the few issues upon which both parties as well as the executive and legislative branches should be able to agree.

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Paul Freedenberg served as Under Secretary of Commerce for Export Administration under President Reagan and is Chairman of MK Technology in Washington, D.C. Michael Czinkota is a former senior advisor in the Commerce Department. He is a professor of at Georgetown University’s McDonough School of Business and the University of Birmingham in the U.K.