Trading on Terrorism:

"Sometimes," U.S. Trade Representative Robert
Zoellick said recently, "tragedy
also presents opportunities for those who are alert." Sure enough, in the
collapse of the World Trade Center, the alert Mr. Zoellick saw an opportunity to
appeal to wartime patriotism in order to put new trade deals on a congressional
"fast track."

Fast-track authority allows a president to negotiate trade agreements and then
present an amendment-proof text to Congress for an up or down vote. The fast
track, ordinarily a routine courtesy, has been in trouble lately. Led by
Democrats angry over Bill Clinton's trade policies, Congress in 1998 refused to
reauthorize the fast-track rule. Today, a majority of House Democrats also want
to deny it to George W. Bush unless he guarantees that trade agreements will
protect workers and the environment as well as investors. Such considerations are
now irrelevant, argues Zoellick, because unregulated trade is an essential weapon
in the president's war on terrorism.

Delighted with Zoellick's new offensive, the Republican-controlled Ways and
Means Committee approved his bill in mid-October, 26 to 13, with only two
Democrats supporting it. The business lobby, fresh from convincing the House to
pass an absurd set of corporate-tax giveaways, is rolling out the lobbyists and
television ads to add fast track to their list of post-September 11 triumphs. At
this writing, the bill has not yet been scheduled for floor action because the
Republicans still lack the votes.

Whatever the fate of fast track this year, Zoellick's campaign is both symbol
and substance of a new effort to smother the globalization debate. For its part,
the antiglobalization movement that has dogged the global economic establishment
from Seattle to Genoa is already in some disarray because of the public's sudden
distaste for street demonstrations.

But free-trade policies were already in big trouble before September 11. For
one thing, the U.S. economy is no longer capable of sustaining the bigger trade
deficits needed to buy third-world allies more access to U.S markets. For
another, laissez-faire trade is no longer credible as the economic savior of the
third world. Since the global system shifted to an essentially unregulated system
of capital movements and currency speculation, global growth has slowed and
inequality widened. Heavily Muslim East Asian countries such as Indonesia and
Thailand, with no particular prior sympathy for radical Islamists, were savaged
by global currency traders in the late 1990s. Not surprisingly, they are less
than resolutely pro-American in the current crisis.

Zoellick makes two arguments in his case for trade as an economic
"counteroffensive" against terrorism. First (as he wrote in The Washington
Post
): "Trade is about more than economic efficiency. It promotes the values
at the heart of this protracted struggle." Just so. One such value, at the core
of U.S. trade policy for the last 20 years, is that American-style capitalism is
so superior a way to organize society that we are fully justified in forcing
third-world countries to adopt it.

Zoellick argues for expanding agreements such as the Uruguay Round and NAFTA,
the North American Free Trade Agreement. In both cases, U.S. trade negotiators
required poor countries seeking access to our markets to remake their economies
in our image. Reinforced by pressure from the U.S. State and Treasury
Departments, as well as the International Monetary Fund and the World Bank,
fragile political economies have been forced to downsize and privatize
government, deregulate agriculture, and open up their borders to volatile hot
money from first-world financial markets.

But others around the world do not necessarily share our faith in what George
Soros calls "market fundamentalism." Indeed, the world is full of dispossessed
people who blame their wretchedness on what they believe are the consequences of
the economic and cultural values that we celebrate. In the same issue of The
Washington Post
that carried Zoellick's op-ed, a dispatch from Pakistan told
us that the country's Taliban followers are drawn to its radical faith by
poverty, corruption, a breakdown in public services, and the moral laxity of
Western culture. A week later, the Post quoted a sociologist from Mali:
"People want schools, they want medical attention for their children, but who is
listening to them? Islamists, who provide them with water and fertilizer to
believe the solutions are found in religion. And many see violence as the only
resort--and why not, if there is no solution on Earth for them?"

The promise of prosperity promoted by free trade remains largely unfulfilled.
Compared with the previous two decades, the last two have seen slower economic
growth among the world's poor countries, an increase in the number of people
living on less than a dollar a day, and worsening inequality. Western-inspired,
free-market "reforms" often enrich a thin layer of globally connected elites,
while ripping up the implicit social contracts that have protected ordinary
people. This process has often created acute political instability.

For example, politically radical Islam emerged in Iran in reaction to the
U.S.-backed shah, a model economic reformer (and despot). The shah introduced an
export-oriented agribusiness to his country that displaced large numbers of small
farmers, abandoning them to a global market in which they could not compete and
to a global culture whose immodesty shocked them. Many turned to the
fundamentalist ayatollahs--not for theological reasons, but seeking a refuge
against Western values that seemed brutal and inhuman.

This has not yet happened in sinkholes of vast inequality like Saudi Arabia
and similar Muslim states allied with the United States, but only because the
values of justice and democracy have been subordinated to the "values" of
oppression and torture under a police state. There could be no more fitting
symbol of this than the decision of the World Trade Organization (WTO) to hold
its first meeting after the Seattle riots in Qatar, a Persian Gulf sheikdom
firmly connected to the global marketplace through its exports of oil and its
imports of most of its consumer goods. It is also a despotic theocracy where
political parties cannot exist, political demonstrations are banned, and the
government controls the media. Qatar was demonstration-proof--an ominous sign of
how the movement for laissez-faire trumps its supposed handmaiden, the movement
for democratic rights.

The United States, of course, did not create the poverty that plagues so many
parts of the world. Indeed, humanitarian efforts associated with the Cold
War--such as the Peace Corps, early USAID programs, the Alliance for Progress,
and World Bank development loans--often improved the conditions of the poor. But
in the last 20 years, particularly the last 10, American policies have ignored
the maldistribution of income, wealth, and power. Zoellick's belief that more of
the same will strengthen America's hand in the war against terrorism is
preposterous.

Zoellick's second argument is that freer trade policies have been uniformly
good for America. While trade has brought cheaper imports, it has also cost jobs.
More ominously, current policies are producing an unsustainable trade deficit.
Despite assurances that trade expansion under NAFTA and the WTO would reduce the
trade deficit, the gap between imports and exports has expanded. Last year it
drove the current account deficit (the total of all international financial
transactions) to a record $450 billion--4.3 percent of our gross domestic product
(GDP). Nobel Prize-winning economists Franco Modigliani and Robert Solow have
written that the large and growing deficit in our international trade balance
"may well be the greatest potential danger facing the economy in the years to
come."

To finance this deficit, we as a nation have had to borrow from other
countries and sell them more of our assets. Each year we must then devote more of
our income to interest on the debt and the repatriation of profits to investors
in other countries. This net foreign debt is now 16 percent of GDP and will be
roughly 40 percent of GDP within five years. By way of comparison, Argentina,
whose economy is collapsing under the weight of its external debt, last year owed
50 percent of its GDP to foreign investors.

The United States, of course, is not Argentina. Our dollar is the world's most
important reserve currency. We also have better credit and more assets to sell.
But as a matter of simple arithmetic, we cannot forever borrow in order to buy
more from the rest of the world than we sell. The interest burden will eventually
be so heavy that foreign investors will cease financing the rising debt at low
rates. When that happens, the dollar will free-fall and interest rates will spike
upward, with devastating economic consequences. Our country will then face a
drastic devaluation of the dollar and a draconian reduction in real incomes in
order to run a surplus in world markets.

Washington's indifference to the trade deficit is extraordinary when compared
to its bipartisan distress over the federal government's fiscal deficit when it
reached the vicinity of just 4 percent of our GDP--or over projections that the
Social Security Trust Fund might run a deficit in the year 2038. Yet, on our
current path, the trade deficit will touch off a serious economic crisis long
before the Social Security Trust Fund needs a modest tax increase to cover its
obligations.

Conventional wisdom among economists is that the root cause of trade deficits
does not lie in trade policies. One argument blames the low U.S. savings rate,
which requires us to borrow to finance imports. Another faults the overvaluation
of the dollar, which makes our imports expensive and our exports cheap. Still
another locates the problem in the slow growth of Europe and Japan, which
constrains demand for U.S. exports.

But even if one accepts those diagnoses, the Bush administration is not
offering remedies. Indeed, it is deliberately moving in the opposite direction.
Its 10-year, $1.3-trillion tax cut will clearly reduce the national savings rate.
The White House opposes a cheaper dollar and has been unwilling to use its
political clout to pressure Europe and Japan into faster growth.

The result of all these factors, according to the U.S. Trade Deficit Review
Commission, is that U.S. consumers and businesses chronically import more than
they export. With the trade gap structured to grow faster than our income,
agreements to expand trade have had the perverse effect of widening the trade
deficit even further and thus increasing U.S. borrowing from overseas. As the
debt grows, so does America's vulnerability to a crisis, especially in the midst
of a war.

Given the risks and danger, Congress should tell Zoellick to cool his heels.
Instead of more counterproductive trade agreements, we need a return to balanced
development policies that could help the world's poor and balanced trade policies
that benefit ordinary Americans during a time of military and economic peril.

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