Trade Policy for the 1990s: Multilateralism or Bilateralism?

TRADE POLICY FOR THE 1990s: MULTILATERALISM OR BILATERALISM? Richard Pomfret ? "uring the 1980s international economic pressures have revealed the central role trade policy plays in the management of the global economy.1 In Europe, continuing unemployment and, in the United States, the dollar appreciation of the first half of the decade contributed to domestic pressure for protection from imports. The widening trade surpluses of Japan and other Asian nations incited their trading partners, with the United States taking the lead, to demand easier market access. Although the launching of the Uruguay Round in October 1986 showed that policymakers recognized the dangers of national protectionist responses, the evident dangers drew attention away from an increase in discriminatory trade policies that also undermine the basic GATT (General Agreement on Tariffs and Trade) principle of equal treatment for all contracting parties. Why is the unconditional most favored nation clause (MFN) of GATT article I (that all nations be treated equally as the "most favored" one) increasingly ignored both in the policies of the major trading nations and in the Uruguay Round negotiations? Discriminatory trade policies, though they may be beneficial to participants, are globally undesirable. The architects of the postwar trading system recognized that nations might be tempted into bilateral 1 . This essay draws heavily from my forthcoming book, Unequal Trade: The Economies ofDiscriminating International Trade Policies (Oxford, United Kingdom: Basil Blackwell, 1988). Richard Pomfret is associate professor ofeconomics at TheJohns Hopkins SAIS Bologna Center. He was previously research fellow at the Institut für Weltwirtschaft at the University of Kiel (West Germany), assistant professor ofeconomics at Concordia University (Montreal), and visiting fellow at La Trobe University (Melbourne). 121 122 SAIS REVIEW deals with harmful global consequences and so made nondiscrimination the cornerstone of GATT. Yet, the postwar evolution of discriminatory trade policies has had a significant impact on world trade in the 1980s. The Problem with Discriminatory Trade Policies The basic economic cost of discriminatory trade policies is global resource misallocation. By distorting the relative prices of imports from different sources, such policies may encourage purchase from a trading partner that is not the least-cost producer. This involves misallocation ofglobal resources and a presumption of harm to the country introducing discriminatory treatment of its imports. In some cases a discriminatory trade policy may benefit the country that employs it (for example, if the trade creation gains from reduced barriers to imports from favored sources exceed the losses from trade diverted away from the least-cost source), but it is not the "first-best" solution. From a global perspective nondiscriminatory trade liberalization will always be superior. In addition, discriminatory trade policies typically involve higher transaction costs than policies that treat all trading partners equally. Nonpreferred countries have an incentive to source their exports through a preferred country, to use false labeling and other measures in order to gain easier access. From the importing country's perspective such practices are more difficult to monitor than evasion of nondiscriminatory trade barriers. From a global perspective both the attempted evasions and the costs of devising and enforcing rules of origin involve uncompensated welfare losses. The political consequences of abandoning nondiscrimination are potentially more serious. Discrimination politicizes international trade in several ways. Negotiating trade barriers on a country-by-country basis promotes hard bargaining and, depending on the outcome, can generate grievances on the part of affected countries. Such disagreements can have a significant effect on the international trading system. According to a 1919 U.S. Tariff Commission report, the "frequent controversies" caused by discriminatory trade policies were a major reason for the United States to adopt unconditional most favored nation treatment (that is, nondiscrimination ) in the early 1920s. Though discriminatory policies may be determined by national legislatures as reprisals against trading partners that do not play "fair," they are likely to be seen in a different light by the country imposing the policy and by the country affected. For example , recent Western criticisms ofJapan reflect, at least in part, a perception of foreign markets as more intricately organized and more difficult to penetrate than one's own. Because discriminatory measures affect geographical trade patterns, they can also be used as a political tool to TRADE...