The World Trading System at Risk

GATT,(1) NTBs,(2) SII,(3) VERs/VRAs,(4) NAFTA.(5) These are just a few of the acronyms which have emerged in recent decades to describe institutions and mechanisms of the international trade regime. To business law professors, these concepts should be as important as contract, tort and other staples of the curriculum. At the same time that it appears increasingly likely that the GATT Uruguay Round of negotiations, which began in 1986, will culminate with an accord in 1993,(6) increased integration within the “Big Three” economic regions, centered on the United States, Germany and Japan, is picking up steam.(7) Contemporaneously with these developments, firms’ international investment and sourcing practices make it increasingly more difficult to determine just where a finished product can be said to have been “made.”(8)

These global trade and investment developments, coupled with domestic political pressures, assure that we will continue to witness change in the law and regulation governing international trade. Recognizing the need to increase understanding of the underlying issues and emerging trends, a number of authors have produced recent studies which can be of great assistance to those trying to develop enough familiarity with the area to impart useful knowledge and insights to their students. This review essay will consider three recent contributions to the international trade literature: The World Trading System at Risk, by Jagdish Bhagwati, a Columbia University economist and senior advisor to the GATT staff

Before proceeding, several cautionary notes are in order. First, a focus on these three volumes should not be regarded as an endorsement of their superiority over other very useful recent publications. Perhaps the best overview and explanation of U.S. international trade law and regulation for teaching purposes is the Practicing Law Institute’s (PLI) Antidumping, Countervailing Duty and Other Trade Actions by Thomas Vakerics, David Wilson and Kenneth Weigel, and its 1989 Supplement, which details the changes brought about by the Omnibus Trade and Competitiveness Act of 1988.(9) A detailed overview treatment of the most recent developments is provided by PLI’s most recent contribution to the literature, The Commerce Department Speaks 1992. This 1,064-page volume includes the papers presented by experts who constituted the faculty of PLI’s October programs on Developments in Import Administration and Export and Investment Abroad.(10) Many other recent volumes and special issues of law reviews have also made excellent, substantive contributions to the literature.(11)

Second, aside from a portion of Bhagwati’s third chapter which deals with “The Japan Question”(12) the three volumes under review do not purport to deal specifically with particular geographic regions or their trade relations with the United States. An increasing volume of work has, in fact, emerged examining area-specific issues. As might be expected, Japan has been the key focus of such work

Finally, it would be risky to read any accent volume on trade law and regulation without an appreciation for the free trade/fair trade debate around which much of the literature has developed. Bhagwati, for example, early on dismisses “ignorant prattle by academic economists” which has fueled sentiments to use “American muscle to extract trade concessions unilaterally and quickly from others, regardless of the impact on the world trading regime.”(17) He dismisses Lester Thurow’s 1988 announcement that the “GATT is dead,” as “dead wrong”(18) and criticizes “the continual repetition of the erroneous claims (about what the |new’ trade theory tells us vis-a-vis what the |old’ theory told us), which are to be found … in the influential writings of such prominent journalists as James Fallows and Robert Kuttner.”(19) Bovard’s opening paragraph leaves even less doubt of his underlying position:

American’s freedom and prosperity are being sacrificed on an altar

of fair trade. Protectionists have wrapped themselves in a cloak of

fairness, and each year they discover new moral pretexts to further

restrict how American citizens may spend their paychecks. Fair

trade is a moral delusion that could be leading to an economic

catastrophe.(20) The contributors to Down in the Dumps are almost all highly critical of the current practices used by the Commerce Department’s International Trade Administration (“ITA”) to make dumping and countervailing duty (“CVD”) findings, arguing that “both types of investigations are tilted systematically against importers.”(21) A positive aspect of the Brookings volume is its incorporation of comments on each paper, which enhances the sense of give and take and deepens understanding of the competing issues.

The free trade/fair trade debate was brought into clear relief during the recent presidential campaign. In responding to a question about NAFTA during the last debate, President Bush observed, “I think free trade is going to expand our job opportunity. I think it is exports that have saved us when we’re in a global slowdown.”(22) Candidate Clinton responded in part:

I have a realistic approach to trade. I want more trade…. Clyde

Prestowitz, who was one of President Reagan’s leading trade advisors,

and a life-long conservative Republican, endorsed my candidacy

because he knows that I’ll have a free and fair trade policy, a hard-headed

realistic policy . . . .(23)

Are the concepts of free trade and fair trade compatible? Professor Bhagwati’s characterization of alternatives to the GATT (managed trade, aggressive unilateralism, and regionalism, for example) as “threats”(24) does not suggest much sympathy for such a position. He begins by articulating four essential GATT principles: (1) a preference for a “fix-rule” trading regime over a “fix-quantity” one

Having defined the basic tenets of free trade within the confines of the GATT, Bhagwati characterizes fair trade as a two-faced creature:

One face is friendly to free trade, the other frowns on it, indeed,

seeks to devour it, for fair trade mechanisms can be misused to

allege unfair trade unfairly and thus undermine free trade. And new

definitions of widening scope, of what constitutes unfair, “unreasonable,”

unacceptable trade, can be invented in unending improvisations.(26) Though acknowledging that pressures for fair trade have arisen from a variety of fundamental changes in the world economy,(27) he likens the concept to “opening up a Pandora’s box,” whereby making everything a question of fair trade will likely lead to managed trade, “with bureaucrats allocating trade according to what domestic lobbying pressures and foreign political muscle dictate.”(28)

On the issue of managed trade, Bhagwati addresses three underlying notions. He begins by applying simple logic to the argument that most trade is managed anyway. The fact that trade does occur frequently “by either bypassing or flouting the GATT discipline, as with VERs on goods, are outside of its framework, as in agriculture and services,” should not lead to the conclusion that “rules do not work and more managed trade must therefore be the way to go.”(29)

Bhagwati considers it self-evident that if the current situation finds the glass half empty and half full, it would have been emptier still absent the GATT framework. He suggests that embracing more managed trade would empty the glass further, while the “Uruguay Round is properly about filling it further.”(30) Bhagwati neutralizes the second notion –that “high-tech industries are so important that they cannot be, or will not be, left to the marketplace”(31) — by acknowledging the need for further refinement of a rules-oriented approach to this sector. Either there must be “a multilateral mechanism for bringing up front the various differing ways in which different governments are alleged to be biasing the outcomes in their favor, so that the |net balance’ of such artificial advantages among the different rivals is sorted out and then eliminated,” or an official code should be developed for high-tech to achieve “an acceptable degree of harmonization.” The emphasis should not be on bilateral negotiation but on “multilateral procedures for determining fairly the broad balance of artificial supports in different countries in the industry in question.”(32) In any event, the degree to which strategic alliances have already created a high level of interdependence among the industrialized countries’ high-tech firms should defuse many potential trade frictions.(33)

The lion’s share of Bhagwati’s discussion of managed trade is devoted to refuting the notion that Japan is exotic and different and will not or cannot play by the rules. It is here that his analysis is least satisfying. First he takes on the culturalists, who assert “that Japan’s cultural uniqueness makes fix-rule trade with her impossible to contemplate.”(34) He does demonstrate that differences of economic situation, rather than cultural stereotypes, sometimes provide a superior explanation for Japanese differential behavior.(35) But while it may be that some elements of Japan’s bias against manufactured imports are economically rational, Ed Lincoln has demonstrated that “they are also consistent with a deep-seated Japanese view of itself as a unique culture, difficult or impossible for other cultures to understand.”(36)

Next, Bhagwati takes on the economists who argue that “Japan’s imports are |too few’ by the standards of the rest.”(37) He dismisses them as “simple-minded regressionists” who rely on arguments that Japan’s “ratio of manufactured imports to GNP has remained unchanged at 2% for years.”(38) Bhagwati prefers the more sophisticated econometric analyses” by Saxonhouse and Learner which show that “Japan’s total imports and imports of manufactures are well within the margin of what one would expect, given her lack of natural resources, resource endowments, etc.”(39) Their approach, however, has been regarded as controversial by many and is subject to criticism, outlined in considerable detail by Lincoln.(40) More generally, Bhagwati suggests that even if the Japanese market is open, foreign exporters’ perception that it is not “may prevent attempts at penetration, or lead to hasty withdrawal after short penetration.”(41) Lincoln also focuses on perceptions, but introduces a different perspective:

Japan could undermine [the GATT] system if it is perceived as

achieving continued economic success through protectionist trade

policies. If, on the other hand, Japan chooses to support the system

by example, through demonstrably opening its markets to imports,

and by playing a stronger role in multilateral negotiations, the

system will be more secure and viable.(42) Given the importance Bhagwati himself places on maintaining the GATT framework, Lincoln’s gloss on the role of perceptions leaves the Japan question more open than Bhagwati would have us believe.(43)

It may be instructive at this point to consider the evolution of developments under what Fallows characterizes “the two best-known trade agreements with Japan: the |voluntary limitations’ that have restricted exports of Japanese cars to the United States since 1981, and the semiconductor agreement of 1986, which declared by fiat that foreign manufacturers should get 20 percent of semiconductor sales in Japan.”(44)

Alex Taylor, in a very perceptive recent article analyzing the U.S. auto industry, concludes that a look at what happened under the VRA “should be sufficient warning against import restraints.”(45) The VRA did help the Big Three achieve windfall profits, but “instead of plowing the money back into their core business … they sought higher return by investing their cash elsewhere.”(46) Many of these investments have not proved profitable. At the same time, the Japanese can be seen to have actually benefited from the restraints. First, in the restraints’ first years, “they served only to limit supply, not depress demand,” producing extra markup by Japanese car dealers at the expense of the American consumer.(47) Second, the restraints probably had the effect of accelerating the establishment of Japanese assembly capacity in North America.(48), Finally, “given an incentive to maximize the profit on each car shipped, the Japanese decided to export more expensive automobiles”(49) accelerating the extent of Japanese competition across more product lines than had been the case before the imposition of restraints. Taylor concludes:

Clearly, Detroit would have been much better off had it confronted

the Japanese directly in 1981 rather than hidden behind import

restraints. It would have been faster to adopt Japanese production

methods and to rationalize its own factories. Instead Detroit effectively

conceded a permanent share of the U.S. market to the Japanese,

who reinvested in more American plants.(50)

Bovard, in a discussion provocatively entitled “The Slaughter of the Computer Industry,”(51) summarizes the evolution of the semiconductor agreement and lodges many criticisms against it. In particular, he cites a 1988 U.S. Systems Producers Association report which concluded that the agreement: * Contributed to the shortage in the United States of all types of

DRAMs from both foreign and domestic suppliers. * Seriously threatens to make shortages of semiconductors chronic,

encouraging continuing underinvestment by the U.S. and Japanese

semiconductor producers. * Made U.S. systems companies increasingly dependent on vertically

integrated Japanese and Korean competitors for supplies of semiconductors. * Required U.S. systems industry to pay excessively high prices to

Japanese and Korean suppliers, enhancing their profitability and

giving them access to increased funding for systems research and

development. * Increasingly concentrated DRAM production in the hands of a

small number of Japanese and Korean producers, encouraging

either cartel-like behavior or the structural problems of oligopoly

pricing. * Reduced quality of semiconductor devices resulting from the lack

of competition.(52)

However, more recent reports refute Bovard’s conclusion that “the chip agreement failed to revive U.S. semiconductor production.(53) Indeed, the popular press has trumpeted the U.S. resurgence in the world semiconductor market.(54) Why were the results of managed trade so different from the auto industry to the semiconductor industry? The answer seems to lie in the differing responses of the two industries to the “breathing space” afforded by trade protection. Where the auto industry frittered away the advantage afforded by Japan’s restraint on car exports, American semiconductor firms rebounded with “aggressive investment, innovation and marketing.” They have also benefited from their emphasis on specialized chips, while the Japanese invested in making computer memory chips, which are relatively more simple and no longer so profitable.(55) A lesson to be drawn from this experience is the importance of making sure that American firms afforded trade protection utilize it effectively

The second major hazard for the fix-rule GATT system identified by Bhagwati is the recent use of “aggressive unilateralism” by the United States “to impose on others its unilaterally defined views of unfair trade practices.”(56) The basis for such behavior lies in the use of Section 301 and “Super 301” provisions of American trade law “to demand negotiations from specified countries on |priority’ practices that the United States finds unacceptable, regardless of whether they are proscribed by GATT or another treaty, and to seek their abolition on a tight time schedule set by the United States, using tariff retaliation by the United States if necessary.”(57) Bhagwati begins his analysis of aggressive unilateralism by cataloging the three types of trade concessions identified by conventional trade theory: (1) unilateral concessions by oneself, exemplified by nineteenth century British practice

Bovard supplements Bhagwati’s analysis by discussing (in a chapter entitled “The Failure of Gunboat Economics”) the facts and context of the various Section 301 cases the U.S. Trade Representative (“USTR”) has pursued.(64) Their utility for teaching purposes is invaluable. Where Bhagwati focuses on concept and theory, Bovard provides concrete examples from actual practice to demonstrate how the United States often lacks clean hands for policies it condemns in foreign nations, and how U.S. retaliation often harms American companies and consumers.

The third threat to multilateralism identified by Bhagwati is “regionalism.” The fear is that fragmentation of the world economy into trading blocs, such as a more tightly integrated European Community (“EC”) and the U.S., Canada and Mexico under NAFTA, may undermine multilateral free trade. The phenomenon warrants careful attention because of the extent to which it has been progressing.(65) Unlike aggressive unilateralism, however, Bhagwati points out that the GATT (Article XXIV) sanctions free trade areas and customs unions.(66) He proceeds to summarize the economic theories justifying such entities,(67) the rationale for the GATT’s inclusion of Article XXIV,(68) and the collapse of early regional blocs.(69) Against this historical perspective, he suggests several reasons why the current rise of regionalism is “likely to endure and gain in strength.”(70) In view of the potential which regionalism has for undermining the GATT,(71) Bhagwati suggests several “confidence-building measures” for emphasizing the multilateral perspective.(72)

Having analyzed what he regards as the three major threats to the fix-rule GATT regime, Bhagwati concludes his study by emphasizing the central importance of the Uruguay Round. Citing European Community (EC) and U.S.-Canada FTA progress toward extending GATT-type, fix-rule discipline to neglected areas such as services, he articulates the need for the GATT framework to accommodate changes in the world economy by moving beyond its traditional confines of trade in goods.(73) Given the ambitious goals of the Uruguay Round (which began in 1986 and was originally to have been concluded by December, 1990),(74) is not surprising that key areas of the negotiation have not yet been resolved. In his last chapter, Bhagwati outlines some nontraditional deals that might be worked out among the GATT members.(75) be interesting to see bow the final resolution of the Uruguay Round compares with his suggested approach.

Clearly, the progression of the GATT to the pending Uruguay Round has been an evolutionary one. Until truly global free trade is achieved, and as the process is occurring, attempts at abuse will have to be addressed. Thus, in his opening discussion of the rise of unfair trade, Bhagwati took note of the fact that “historically, the liberalization of trade … has been accompanied by the institution or activation of the–two now-conventional fair trade mechanisms: the countervailing duty (CVD) against foreign subsidization of exports and the antidumping duty (AD) to counteract the presumably predatory effects of dumping.”(76) Consistent with these international rules, the United States has enacted a series of statutory provisions and constructed an administrative apparatus to root out unfair dumping and subsidization and apply remedial penalties.

Although unfair trade investigations for many years attracted relatively little attention, the process assumed a much higher level of visibility during the decade of the 1980s. Not only did the number of investigations mushroom,(77) but some of the proceedings gave rise to very important trade policy decisions, such as the 1982 steel VRA and the 1986 semiconductor accord with Japan

Even if these GATT-legal trade remedies may be construed, at least in part, to be “a product of GATT’s success in outlawing other forms of protection,”(80) the proliferation of cases has aroused growing controversy. Possible bias in the administration of the AD and CVD laws has become the target of increased focus.(81) The potential for protectionist abuse will multiply as the developing countries catch up with the developed countries in facilitating unfair trade investigations

The two remaining volumes under review examine in detail whether U.S. trade laws “arrive at decisions that truly offset the consequences of |unfair trade,’ or of trade that is truly harmful to U.S. economic welfare,” or whether they “consistently tilt in a protectionist direction, finding practices to be unfair that are not and recommending |remedies’ that go beyond what is necessary to offset the unfairness and thus wrongly penalize importers, consumers, and downstream producers.”(84) The two volumes complement each other. The scope of the volume edited by Boltuck and Litan is narrower by, design, with a focus on the procedures and methods used by the Commerce Department’s International Trade Administration (“ITA”) to determine amounts of dumping and subsidization,(85) while the Bovard volume ranges more broadly over the policy spectrum, targeting Congress, the President and other executive branch elements, and interest groups as well.

Growing, as it did, out of a Brookings Institution Conference, the Boltuck/Litan volume assumes a more academic perspective

Boltuck and Litan’s introductory chapter contains an excellent summary defining unfair trade concepts and explaining the arguments that have evolved to “justify” its prohibition. Dumping is defined as “the practice of charging a higher price for sales in a foreign producer’s home market than for export to the United States.”(90) Countervailable subsidies include “direct export subsidies, production subsidies, and subsidies to factors of production, when they distort International trade.”(91) The GATT incorporated these concepts because such practices can “distort international trade by shifting production to locales that might otherwise not deserve it on the basis of comparative advantage.”(92) However, Boltuck and Litan echo others in questioning whether the measures can be justified “once an effort is made to be more specific about exactly what distortions these laws are designed to correct.”(93) Whatever might be the justification for the AD and CVD laws, the ITA has considerable discretion to administer them and “has adopted certain practices and procedures which tend to systematically favor higher rather than lower dumping and CVD |margins’.”(94)

The volume contains three contributions on dumping(95) and one which combines comparisons of U.S. AD and CVD law with the GATT.(96) They catalog a list of biases built into the administration of the dumping law. First, in computing dumping margins, the ITA averages foreign transaction prices over a six-month period to determine a “benchmark foreign value,” while using individual U.S. import sales for comparison

Bovard characterizes U.S. dumping law as a bureaucratic war on low prices, with “economic xenophobia” as its foundation.(102) Discounting arguments that dumping is a serious threat to the American economy, he emphasizes the law’s impact of routinely expelling “foreign corporations from the U.S. market as punishment for normal business practices.”(103) The result, he argues, is twofold: forcing American consumers to pay more for an incredible variety of goods than would otherwise be the case, and preventing American businesses from getting vital supplies and machinery.(104) In the process of developing his arguments, Bovard provides numerous examples which breath life into the biases described in the Boltuck/Litan volume.(105) Of special interest are his very informative “short history of the crime of dumping”(106) and discussions of “the economics of dumping” and “the phantom of predatory pricing.(107)

Chapters Four and Five of the Boltuck/Litan volume deal specifically with the ITA’s administration of CVD law.(108) Aside from several technical criticisms of the way the ITA calculates the subsidy rate for export subsidies,(109) the authors seem comfortable with the methodological approach employed. They are more critical of the ITA’s practice of calculating domestic subsidies by computing the benefits they confer on domestic producers. Such benefits will distort trade only if the subsidy somehow lowers the marginal cost of production

Bovard acknowledges that “the case for retaliating against foreign subsidies is, at first glance, stronger than the case for penalizing foreign companies for differential prices or low profits.”(112) However, he questions the United States’ obsession with the specter of foreign subsidies, noting that “the U.S. government has imposed more penalties on subsidized imports than have all other governments in the world combined.”(113) If foreign subsidies pose such a grave threat, Bovard asks, why have so few foreign countries been troubled by the effect of subsidized imports?(114) Arguing that most subsidies “divert capital from economically productive uses to politically productive uses,” he observes that “foreign subsidies are decreasing as more governments become convinced of the futility and wastefulness of corporate handouts.”(115)

So, if it is not in America’s national interest to be obsessed with “misguided foreign tax and economic policies,” why have there been so many CVD cases? Bovard concludes that “the law has become a license for American government officials to create artificial advantages for American companies.”(116) The lack of any clear definition of subsidy in either the U.S. law(117) or the GATT(118) has allowed the ITA to continually change its definition of what is and is not a subsidy, transforming the CVD law “from a defensive shield against foreign subsidies into an offensive weapon for American companies to use against American consumers.”(119) Particularly in view of the substantial level of U.S. subsidization at both federal and state levels,(120) Bovard argues that our CVD law should be “stripped of the mantle of fairness

In addition to the substantive biases in the ITA’s calculation of dumping and subsidy margins, certain of its procedural practices are also criticized for unjustifiably tilting the outcomes toward domestic interests. Most of this criticism revolves around the ITA’s willingness to reject both the data submissions of foreign respondents and to substitute “best information available” (“BIA”), which is usually prices and costs alleged by domestic petitioners.(122) Aspects of unfair trade investigations which the authors identify as placing heavy burdens on foreign respondents include completing the lengthy questionnaires in English, supplying the price and cost data in a computer-readable format, adhering to required accounting conventions that, may differ from their own, and supplying all the information within the statutory timetables.(123) If use of BIA is triggered by a respondent’s failure to comply, experience demonstrates that the dumping margins are significantly higher than when BIA is not used.(124)

Though it is beyond the scope of their book, Boltuck and Litan do add a few thoughts in their introductory chapter about the injury phase of unfair trade investigations carried out by the ITC. A finding of material injury or threat thereof “by reason of the subject imports” is a condition to the imposition of duties.(125) the authors identify two different standards which have been applied to make the injury determination. Some commissioners have applied a “but for” test, asking whether the performance of the competing domestic industry would have been materially better but for the unfair pricing. Most commissioners follow a bifurcated approach whereby it is first determined whether trends in financial condition and other indicators suggest that the U.S. industry which makes the like product is in poor or worsening health

Bovard, as might be expected, disagrees. He dismisses the ITC as providing “a facade of due process to the U.S. government’s decisions to punish foreign companies” for dumping or receiving subsidies.(128) The first thing the ITC must do in an AD or CVD proceeding is determine “which American products are |like’ the imported product, and then define the American industry producing the like product.”(129) However, the vague statutory definition of “like product”(130) gives the ITC wide leeway, and Bovard, citing numerous examples, likens their determinations to “pulling a rabbit out of a hat.”(131) The statute identifies sixteen factors for the ITC to consider in making its injury determination.(132) With such a laundry list of factors,” according to Bovard, “an ITC commissioner can usually find some reason to claim a U.S. industry is being injured,” and did so in 70 percent of the AD and CVD cases during the 1980s.(133) He describes the result as a kind of reverse industrial policy, whereby “the weaker the American industry, the more likely it is that the ITC will blame foreign companies for its problems.”(134)

Having explored the substantive and procedural issues associated with U.S. unfair trade laws, both volumes turn to consideration of political factors. In the Boltuck/Litan volume, Robert Baldwin and Michael Moore begin by observing that “few U.S. industries have sufficient political clout to achieve changes in American trade policy that benefit only their particular sector.”(135) For most industries, “the only feasible means of gaining favorable changes in trade policy is by joining with other industries in seeking modifications in the way the general trade laws … are implemented.”(136) They identify four means of influencing the implementation of the laws(137) and suggest that “Congress, in response to pressures from the business community and because of its dissatisfaction with the executive branch’s policies for dealing with problems such as the decline in American international competitiveness and the huge trade deficit, has been the main political force behind all four means” of affecting the laws’ implementation.(138)

As with the other areas examined, Bovard catalogs a long and informative series of examples of congressional impact which he regards, for the most part, as negative.(139) His conclusion: “For politicians, the definition of fair trade usually corresponds precisely to the amount of protection that is politically feasible at any given time.”(140) Baldwin and Moore suggest a more benign, and to this author a more accurate, interpretation of congressional action: that statutory changes since 1974 represent not so much “a deliberate effort … to tilt the fair trade laws against foreign producers” as manifestations of Congress’s frustration with flawed laws that are not likely to achieve their intended purpose.”(141) The clear implication is that less time should be spent tinkering with our unfair trade laws and more thought be devoted to the core challenge of how the United States should “adapt to the changing patterns of international trade.”(142)

As noted earlier, this last observation was brought into sharp relief by the 1992 presidential campaign. Is a free trade, “get the government off the people’s back” approach the best way to restore American competitiveness? Or is a more government interventionist approach tending toward adoption of a rational competitive industrial policy(143) more in order? Immediate post-election developments continued the debate. President Bush expressed hope that resolution of the dispute over EC oilseeds subsidization on November 20 would “enable us to press forward the global trade negotiation to a successful conclusion.”(144) Senior congressional Democrats and representatives of major U.S. industries reacted by pressing President-elect Clinton to seek a delay in global free-trade talks until he took office,(145) to which a top trade official quickly responded that the Bush Administration would not make concessions or “settle for a bad deal” simply to get a global free trade pact before the President left office on January 20.(146)

With such appointments as Robert Reich to head the Labor Department and Laura D’Andrea Tyson to chair the Council of Economic Advisors, the new administration has clearly signaled a new approach to restoring American competitiveness, with strong ramifications for U.S. trade policy.(147) While it was long true, as Peter Ehrenhaft complained, that “we really don’t know what the effect of our trade laws is, and we have been afraid to find out,”(148) the informed conceptual analysis and rich factual content of the three studies reviewed have made a significant contribution to our knowledge of the impact of U.S. trade law. As a new set of policy-makers steers us through the minefields of trade policy and practice in a rapidly changing world where traditional approaches may no longer suffice,(149) the lessons contained in these three volumes can provide useful guidance to help avoid miscalculations. (1) The General Agreement on Tariffs and Trade is the main institution overseeing world trade. Following the 1944 Bretton Woods conference, which established the charters of the International Monetary Fund and World Bank, the GATT emerged in 1947 as a “negotiated multilateral agreement to reduce tariffs reciprocally, along with a draft of the general clauses of obligations relating to the tariff obligations.” Jagdish Bhagwati, The World Trading System at Risk 3 (1991)

NTBs are hard to handle. Suspicions often linger of their invisible hand

strangulating trade. The Japan-bashers prosper on the allegations, as hard

to disprove as they are easy to make, that Japan’s invisible barriers keep

out imports, frustrating other nations’ trading access and nullifying their

trading rights. Bhagwati, supra note 1, at 15. (3) The 1989 U.S.-Japan Structural Impediments Initiative extended the notion of unreasonable, unfair trade practices to “matters as diverse as domestic anti-monopoly policies, retail distribution systems, infrastructure spending, savings rates, workers rights, and so on.” Id. at 20-21. A senior U.S. official summarized the past summer’s SII discussions as follows:

We’ve had a good, frank, thorough discussion of the issues on implementation,

of prior commitments and on new commitments. The implementation of past

commitments has generally been good on both sides. There are laws, regulations

and guidances (that) are being changed. On the new commitments,

we’ve made good progress in the area of exclusionary business practices and

distribution systems. But, in some areas, considerable work remains to be

done. Those areas are the savings and investment area, keiretsu, and land

use. SII is a long-term or medium-term process and the policy changes are

cumulative. Over three years now we’ve produced considerable changes in

structural impediments. In many areas we believe that foreign firms will be

able to access the Japanese market more easily, and this week’s results in

terms of both implementation and new commitments will add to the removal

of barriers. I think it’s important to add that SII has been going on for

three years now and the longer the process goes on you get down to more

and more difficult issues. And I think that as you get down to the more

difficult issues, clearly it becomes more difficult to make progress as well. SII Briefing, American Embassy, Tokyo, July 29, 1992. But see James Bovard, The Fair Trade Fraud — How Congress Pillages the Consumer and Decimates American Competitiveness 253 (1991). The author characterizes the SII process as “another case of applying the ‘affirmative action’ mentality to trade and labeling a foreign country unfair if it is not doing everything possible to help boost American exports…. Judging from the comments by American officials, because Japan had a trade surplus with the U.S., U.S. government officials had a right to order Japan to restructure its society.” Id. (4) Sometimes one acronym is not enough. Both unilaterally adopted Voluntary Export Restraints (VERs) and bilateral Voluntary Restraint Agreements (VRAs) bypass the GATT discipline. Notable examples in recent years have covered exports to the United States of steel (from 28 nations), machine tools, textiles, and automobiles. Id. at 17, 23, 24, 36, 77-95. (5) The United States, Mexico and Canada began negotiations on a North American Free Trade Agreement in June 1991. On August 12, 1992, the three countries announced completion of the negotiations. Under the “fast track” procedures which Congress extended in 1991 for agreements signed before June 1, 1993, this triggered the preparation of eight U.S. private sector advisory committee reports evaluating the agreement. On September 18, 1992, following approval by seven of the committees (the labor committee opposed the agreement), the President officially notified Congress of his intention to sign the agreement. On October 7, 1992, Presidents Bush and Salinas and Prime Minister Mulroney met in San Antonio to discuss plans for implementation and witnessed their trade ministers initial the NAFTA text. Fast track procedures call for formal execution of the agreement by the three heads of government on or after December 17, 1992, but not later than June 1, 1993. The President may submit implementing legislation to Congress any time after signing the agreement

how many international borders they crossed, their country of origin … was

never in doubt. Products were manufactured in one place because economies

of scale necessitated a central location. But in the emerging high-value

economy, quantities can be produced efficiently in many different locations

and combined in all sorts of ways to serve customer needs in many places….

What’s traded between nations is less often finished goods than specialized

research, design, fabrication, management, marketing, advertising, consulting,

financial and legal services, as well as components and materials. Robert Reich, The Myth of |Made in the U.S.A.’, Wall St. J., July 5, 1991, at A6. (9) This source provides comprehensive and easily understandable coverage of antidumping and countervailing duty investigations, escape clause (section 201) and market disruption (section 406) actions, section 301 actions regarding unfair actions against U.S. exports, section 337 actions against unfair methods of competition, national security investigations under section 232, ITC section 332 special reports, and section 22 investigations of imports affecting U.S. agricultural programs. (10) This volume also includes area-specific analyses of recent developments affecting trade with Japan, Eastern Europe and the Independent States of the Former Soviet Union, Canada, Latin America, and the Caribbean. The Commerce Department Speaks 403-627 (Practising Law Institute, 1992). (11) E.g., Hans-Jorgen Blinn, The Injury Test Under U.S. Antidumping and Countervailing Duty Laws as Interpreted by the International Trade Commission and the Department of Commerce (1991)

scholarly reflection that these matters require and that the lay public

automatically arrogates to them in view of their distinction in fields other

than international trade or their public visibility, these economists have

entered trade policy with pronouncements that will not survive scrutiny but

which nonetheless bring comfort to the political forces and the economic

interests that see no virtue in the GATT and its tenets. Bhagwati, supra note 1, at 6. In his unending effort to achieve clarity, Bhagwati devotes a separate appendix to “clarifying conceptual confusions and refuting fallacies.” Id. at 99-112. (18) Id. at 7. (19) Id. at 107. See James Fallows, Containing Japan, Atlantic Monthly, May 1989, at 40-62

the results are difficult to square with economic theory or with the interests

of American consumers, although they do serve some American industries

competing against imports, at the expense of other U.S. industries. And to

the extent that other nations copy them, U.S. procedures ultimately will not

serve the interests of American exporters either, whose products will face

new forms of trade hurdles in the years ahead. Id. at 7-8. (22) Transcript of 3d TV Debate Between Bush, Clinton and Perot, N.Y. Times, Oct. 20, 1992, at A21. (23) Id. (emphasis supplied). (24) supra note 1, at 3. (25) Id. at 3-4. (26) Id. at 14. (27) (1) The outbreak of protectionist pressures in the early 1980s resulting from the second oil shock and anti-inflationary policies, (2) increased focus on NTBs, (3) the relative decline of the United States within the world economy, (4) increased crisscrossing of foreign investments, (5) flexible exchange rates, and (6) the development of theoretical models demonstrating how unfair advantage provided by foreign governments can damage one’s competitiveness. Id. at 14-19. (28) Id. at 21-22. (29) Id. at 23. (30) Id. (31) Id. (32) Id. at 45-46

Japan stood aloof from the intellectual and policy shifts that produced [the

GATT] framework. With its latecomer’s determination to catch up, amplified

by the destruction of the war, Japan had little interest in the notion of free

trade, and the main intellectual thrust was toward justifying protectionism.

Japan joined the GATT in 1955 but maintained a reservation to Article 12,

which allowed it to continue its extensive system of quota controls on imports. Lincoln, supra note 36, at 63. (43) Bovard includes a short discussion on “The Problem of Japan,” raising familiar themes. Bovard, supra note 3, at 249-254. He acknowledges at the outset that there is “no question that the Japanese have often been as creative with trade barriers as they have been with manufacturing processes.” Id. at 249. On the other hand, he cites a number of factors which shift some of the blame back to the U.S. itself: inadequate sales efforts in Japan by many American businesses, id. at 250

The U.S.-Japan bilateral relationship is bound to confront numerous pressures over the near term. The economic downturn in Japan has been quite significant. The year 1992 marked the first time in nearly two decades that Japanese GDP shrank for two quarters in a row, Paul Blustein, Japan’s Gross Domestic Product Fall,, Again, Signaling a Recession, Wash. Post, Dec. 4, 1992, at A18, and a psychologically important barrier was broken in October, when the number of people looking for jobs exceeded the number of job vacancies for the first time in 4 1/2 years. Paul Blustein, Japan’s Job Seekers Outnumber Openings, Wash. Post, Dec. 2, 1992, at A19. Resulting curbing of demand for U.S. exports, at the same time Japan’s merchandise trade surplus has been rising at record rates, see Michael Williams, Japan’s Surplus for Merchandise Trade Increases 25%, Wall St. J., Oct. 15, 1992, at All, will undoubtedly exacerbate trade frictions with the United States. (44) Fallows, supra note 19, at 51. (45) Alex Taylor III, U.S. Cars Come Back, Fortune, Nov. 16, 1992, at 56. (46) Id. (47) Id. (48) Id. at 57. (49) Id. (50) Id. (51) Bovard, supra note 3, at 243-249. (52) Id. at 247-248. (53) Id. at 248. (54) E.g., Thomas McCarroll, Chips Ahoy! America’s Semiconductor Industry, Nearly Given up for Lost, Is Making an Electrifying Comeback, Time, Nov. 23, 1992, at 62-63

The Asia-Pacific Economic Cooperation (“APEC”) forum is a 15-nation regional grouping whose members include the six ASEAN nations plus Japan, Korea, China, Hong Kong, Taiwan, Australia, New Zealand, the United States and Canada. It was proposed by Australia in 1989 as “a loose forum for discussion of Pacific economic issues and relations …. At the time of its inception, APEC was widely seen as an attempt by the Pacific trading nations . . . to form a ‘counterweight’ against any European protectionism that could result from EC-92 single market integration.” Id. at 8-9.

A Muslim trade bloc is also emerging. Five former Soviet republics (Kazakhstan, Azerbaijan, Kyrgyzstan, Turkmenistan, and Uzbekistan) and Afghanistan recently joined Iran, Pakistan and Turkey to sign the founding charter of the Economic Cooperation Organization (“ECO”). With a combined population of 300 million, the ECO has introduced a preferential tariff arrangement that cuts duties on a small range of goods to 10% and is setting up an investment bank. Ex-Soviets Join, Muslim Trade Bloc, Chi. Trib., Nov. 29, 1992, at A31.

All of the attention going to regional efforts, however, should not mask the substantial differences that remain between countries within the regions. In Europe, the hurdles which have emerged with respect to the European Exchange Rate Mechanism, Maastricht Treaty approval, and plans to remove frontier passport checks, among others, have dampened earlier enthusiasm. Ray Moseley, On the Brink of Unity, Europe Rifts Widening, Chi. Trib., Nov. 29, 1992, at Al, 14. With respect to NAFTA, at the same time it was announced that Presidents Bush and Salinas and Prime Minister Mulroney would sign the agreement on December 17, 1992, the time required for implementation may stretch beyond earlier expectations. See, e.g., Tim Golden, Mexico’s Leader Seeks to Address Clinton’s Concerns on Trade Pact, N.Y. Times, Nov. 21, 1992, at 1-2

It seeks to extend the GATT discipline to new sectors (for example, agriculture

and services), improve it in the old sectors (for example, textiles),

reexamine old issues (for example, safeguards protection), and embrace new

issues (for example, intellectual property protection and foreign investment). (75) Acknowledging the difficulty in today’s world of pursuing the old bargaining model of swapping across sectors and issues, Id. at 84-85, Bhagwati suggests an alternative model involving multiple tiers of agreement. Rather than “seeking tradeoffs between new and old sectors and issues,” the first step would be to “strike a bargain (as can be done) within goods, the traditional province of the GATT.” Id. at 85-87. Then, on the new issues, especially services, trade-related intellectual property (“TRIPS”), and trade-related foreign investment measures (“TRIMs”), a flexible approach could be adopted, “with these issues firmly embedded in the new GATT constitution but with different layers of commitments and rights for each issue.” Id. at 85, 87-94. (76) Id. at 14. (77) The decade witnessed the initiation of 451 AD investigations and 301 CVD investigations. Boltuck & Litan, supra note 21, at 2. (78) Id. at 2-3. The informal steel import quotas continued until March 31, 1992

Trade restrictions on upstream inputs, such as product components, have

also been deemed to be countervailable in some instances because they

reduce the cost of production in much the same way as a production factor

subsidy. GATT … permits [domestic subsidies] to be countervailed … to

the extent that trade is affected. U.S. law has interpreted this permission to

countervail domestic subsidies that effectively, de jure or de facto, benefit

specific industries, as opposed to generalized subsidies that benefit many or

all industries in the economy. Id. For an excellent discussion of the changes in U.S. CVD law brought about by the 1988 Omnibus Trade and Competitiveness Act, see Vekerics supra note 9, at 55-58. (92) Boltuck & Litan, supra note 21, at 9. (93) Id. On the basis of how the unfair trade laws are actually applied, they challenge each of the four standard defenses: (1) prevention of international predatory pricing, (2) responding to the “new trade theory” notion that protecting the home market of “first mover” firms can afford sufficient profits to exploit other markets abroad, (3) maintaining global efficiency by encouraging competitive prices abroad, and (4) temporarily protecting domestic industries seriously injured by import competition. Id. at 9-13. (94) Id. at 13. (95) Tracy Murray, The Administration of the Antidumping Duty Law by the Department of Commerce, in Down in the Dumps: Administration of the Unfair Trade Laws 23-63 (Richard Boltuck & Robert E. Litan eds., 1991)