America the Scofflaw

SYNOPSIS: Krugman explains the system of international trade agreements and how Bush's new steel protectionism is undermining it

Early in the Reagan administration I spent a year on the staff of the Council of Economic Advisers. While there I got a disillusioning look at how economic policy is really made. But one favorable surprise was how seriously U.S. officials took our international trade agreements.

The Reagan administration, despite its free-trade rhetoric, was quite willing to protect industries for political gain; the most notable example was the "voluntary" restraint on Japanese car exports. Still, it was a firm rule that trade interventions had to be "GATT-legal" that is, they couldn't violate the General Agreement on Tariffs and Trade. (The GATT has since been incorporated into the rules of the World Trade Organization.) And that scrupulousness continued up to the end of the Clinton years. Everyone understood that there were certain things that you didn't do, no matter how convenient they might be in terms of short-term political advantage.

In those days, in other words, responsible people ran our international economic policy.

When the Bush administration imposed steep tariffs on imported steel, it became clear that this is no longer true. In sheer economic terms, the steel tariff is not that big a deal. But it demonstrates an unprecedented contempt for international rules.

The immediate threat is that other nations will strike back; the European Union has threatened retaliatory tariffs, and earlier this week Japan, Brazil, South Korea and China said they would follow suit. (Mr. Bush really has unified the world, at least on this issue.) But as a wise trade expert once told me, the big danger when the U.S. flouts the rules isn't retaliation, it's emulation: if we don't honor trade agreements, who will?

Why do we need trade agreements anyway? The costs that tariffs and import quotas impose on domestic consumers almost always exceed the gains they provide to domestic producers. Nonetheless, if we didn't have trade agreements, protectionism would usually win. Consumers don't realize that they are hurt by steel tariffs or sugar quotas, but the steel and sugar industries know exactly what they're getting.

The reason we manage to have fairly free trade is that the world under U.S. leadership has evolved a system that pits the self-interest of exporters against the power of industries that would prefer not to compete with imports. Each country agrees to accept the exports of other countries in return for access to their markets. In the language of trade negotiations, the parties to such an agreement make "concessions"; but the real purpose of those concessions is to protect ourselves from our own bad instincts.

The system depends on the proposition that a deal is a deal. A country that has, say, agreed to allow imports of steel won't renege on its promise simply because the domestic political winds have shifted. Trade agreements do include "safeguards," special circumstances under which temporary tariffs are permitted; but the conditions under which you can do that are fairly restrictive.

And the steel industry clearly didn't meet those conditions. In particular, steel imports have lately been declining, not rising. When the Bush administration nonetheless decided to give the steel industry the protection it wanted, it was in effect saying as it has in so many other areas that the rules don't apply to yours truly.

The administration insists that it is simply standing up for U.S. interests. Robert Zoellick, the trade representative who used to be a genuine free-trader, but these days sounds like a broken man declared that "Uncle Sam is not going to be Uncle Sap for these people." But if you believe that this is about the national interest, I've got a terrorist threat against the Brooklyn Bridge you might be willing to buy.

What it's really about, of course, is raw, short-sighted politics the same politics that has led the administration to revoke crucial trade access to Caribbean nations, with devastating prospective effects on their economies, to help out a single South Carolina congressman. In the case of steel, Karl Rove weighed three electoral votes in West Virginia against the world trading system built up over 60 years, and the answer was apparently obvious.

Mr. Bush will soon have trade promotion authority what we used to call "fast track" which he says he needs in order to negotiate new trade agreements. But what good are new agreements if we won't honor the old ones?

Originally published in The New York Times, 5.24.02