Comment: Trade winds may alter Gatt's course

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The Independent Online
To most people in Britain, stories about a trade war between the main industrial countries would evoke two reactions.

The first would be that it is doubtless important, but excruciatingly boring. Hasn't the Gatt round been continuing for about three years beyond the original deadline for the talks?

The second would be that antagonism is mostly the fault of the French. If British Steel is to be hit by high US duties, it is because the Americans were really out to get even with the heavily subsidised French steel producers and we have been caught in the cross-fire.

This second reaction is provoked not only by French attitudes to steel, but also their more general efforts to use every device to try to increase their exports at the expense of everyone else. Not only has French antagonism towards the US threatened EC/US trade relations; their farmers burn our lambs; and only this week they are threatening to boycott Hoover products because Hoover plans to shut down a high-cost plant in Dijon and shift production to Scotland.

That, of course, is to caricature the British view of the Gatt negotiations and of French trade policy. Gatt matters not so much because a failure to agree inhibits present trade: it matters because a new deal would help to extend international trade, particularly in services. As for the French, there is a good argument to be made that it is the US that is being unreasonable in the way it is seeking to protect US steel producers by citing EC state subsidies as a defence. Only Italy still subsidises steel on a substantial scale, for France has cut back its subsidies; and to include pre-privatisation finance for British Steel in the US case against this country seems ridiculous.

Moving in

If, however, one stands back from the detail of the present trade debate, three oddities stand out. The first is that the antagonism is almost invariably generated in declining industries; the second, that the really big trade imbalances in the world are generated by expanding industries; the third, that companies are developing ways of manufacturing close to their markets so that they are unaffected by protectionism.

Thus the steel row is about how to share the pain of a declining market for a basic product. The wider US/EC tussle is principally about agriculture: how to share the pain of overproduction of subsidised food. The trade debate between Japan and the US has thrown up such issues as Japanese imports of rice, although even if Japan vastly increased its rice imports this would do very little to correct the trade imbalance between the two countries.

In 10 years' time the nature of the present trade debate will seem curiously dated, for trade antagonism will surely focus less on the problems of particular industries that are hit by foreign competition and more on the scale of the imbalance between Asia and everywhere else. Not only is the Japanese trade surplus running at around dollars 140bn a year; a much smaller, but rapidly growing, surplus is being generated by China. The Chinese economy was not only the fastest- growing in the world during the 1980s: it is now larger than those of Germany and Japan, and second only to the US in size. The growth is underpinned by exports.

Meanwhile established companies are moving production to the market. The car industry is the best example. By the end of the century, Japanese car production in the US and Europe will have risen to such a level that physical exports of cars will be considerably smaller than they are today, but the Japanese share of the market will be much larger. The money will be made in the design and branding, not in the physical production.

If this line of argument is right, the whole trade debate is likely to change in a radical way. Gradually, the present concerns will wither away: the world steel industry will be down to a size that matches demand; agricultural subsidies will be cut back by domestic electoral pressure. There will naturally be scope for antagonism, for there will always be small interest groups seeking to be placated, but the areas of trade will not be large enough to threaten the whole system.

Instead, there will be new antagonism towards countries that are seen to be running very large trade surpluses, and using those surpluses to buy up assets abroad. Much of this will be generated in North America and Europe, and it will be directed against Japan and increasingly China. Japan, ever nimble, will be able to counter such a mood by shipping relatively few goods across national boundaries and making its profits instead from invisible trade. China, a long way behind Japan in the development cycle, will find it much harder to do so.

Invisible conflict

This suggests two new points of conflict. One will be over invisible trade. It will come to be thought unfair for countries to derive large surpluses from their investments in other countries. (There is a little evidence of this in the pre-election suggestions by the Clinton camp that it would increase taxation on foreign multinationals in the US. Japan and Britain would seem likely to suffer from this.)

The other point of conflict would be over China's place in the trade world. On the one hand, China is and will be too important a market for it to be neglected or ignored. But if its trade surplus continues to grow, that imbalance will be impossible to neglect or ignore. Some form of accommodation will have to be reached.

That accommodation is likely to take the form of more managed trade. At the moment, the Gatt principle is that if a country has a comparative advantage at manufacturing a product it should be allowed to export it with as much freedom as possible. Suppose the US and the EC see their own producers threatened by imports from China. These imports will be made by people on a quarter or a third of US or EC earnings. Yet they will be educated as well as, or better than, the populations of Europe and North America. China will have a clear comparative advantage, but there will be great pressure on European and North American politicians to say: 'Sure you have an advantage, but we cannot let our people be thrown out of work.'

If that seems unduly forceful, consider the response of France to those Hoover plans to shift production. Scotland's production costs may be 25 per cent lower, but the voters in Dijon don't care.