APEC's Place in US Trade Policy

By Walden Bello, Focus-on-APEC, 4 September 1996

The US is the powerhouse of APEC, with a $6.7 trillion dollar economy that accounts for close to half of APEC's total GNP.

But perhaps the most telling statistic, the one that is the key to understanding the US's strategy in APEC, is its trade balance with APEC's ten Asian economies. This was a deficit of $120.2 billion in 1995, or over 75 per cent of the total US trade deficit of $159.6 billion. In 1995, the US suffered a trade deficit with all the East Asian economies, with the exception of Korea.

Turning the trade deficit with East Asia into a surplus has been the driving force of US participation in APEC, where it is leading the campaign to turn a loose consultative grouping into a free trade area with fixed rules and schedules for liberalization. While US negotiators in APEC have offered the vision of a free trade area as a win-win situation for everyone, in fact, when they speak candidly before US institutions like the US Senate, they strike a different note—one that is distinctly nationalist. For instance, C. Fred Bergsten, the head of the (now disbanded) Eminent Persons' Group, told the Senate in November 1994 that the reason an APEC free trade area is in the US interest is that: Given the fact that all of the countries in the region, outside North America in particular, have lots of trade barriers...very little would actually be required from the United States...So trade liberalization, or particularly moving to totally free trade in the region, means enormous competitive gain to the United States.

From Cold War Allies to Economic Antagonists

Washington's drive to institutionalize APEC as a free trade area cannot be understood without placing it in the context of the transformation of US foreign economic policy since the end of the Cold War.

Prior to Ronald Reagan's ascencion to power in 1981, the US's policy toward Asia consisted of subordinating economic relations with the region to the overriding priority assigned to the containment of communism. Thus, Washington, for the most part, tolerated the growing trade surpluses of its Asian allies, as well as significant deviations from free market and free trade in their trade, investment, and domestic economic practices, which could best be characterized as state-assisted capitalism. The prosperity of America's allies was regarded as one of the key weapons in dampening the appeal of communist revolution in a key battleground of the Cold War.

With the winding down of the Cold War since the mid-eighties, however, there has occurred a tectonic shift in US foreign economic policy, with the priority being assigned to opening up the markets of US allies to US goods and US investment. Pressures for this shift had been building for years, and it was based on the growing perception of both US corporate executives and trade officials that the prosperity of Japan and the so-called NICs (newly industrializing countries) had been purchased at the expense of US economic interests.

Emblematic of Washington's aggressive new approach were the words of David Mulford, then undersecretary of the Treasury, at the Asia-Pacific Capital Markets Conference in San Francisco in 1987: Although the NICs may be regarded as tigers because they are strong, ferocious traders, the analogy has a darker side. Tigers live in the jungle, and by the law of the jungle. They are a shrinking population.

Washington has employed several weapons in its drive to open up Asian markets and regain a trade and investment presence in a part of the world that has steadily slipped from the US economic orbit. APEC as well as GATT (General Agreement on Tariffs and Trade) must be seen as part of a menu of options, the most prominent of which over the last decade has been unilateral trade pressure. With the US market continuing to account for 20 to 25 per cent of the exports of many Asian economies, unilateralism, or a strategy based on the threat and use of trade retaliation, has been an attractive option.

The Unilateralist Approach

A wide range of unilateralist weapons has been deployed against Asian economies over the last decade.

• They have been subjected, for example, to anti-dumping suits and import quotas in such products as textiles, garments, cars, and steel. Between 1980 and 1991, for instance, nine out of the ten Asian APEC trade partners of the US were subjected to 55 import restrictions imposed by the US on various products.
• The more successful among them—Korea, Taiwan, Hong Kong, Singapore, and Malaysia—have been knocked off the US General System of Preferences (GSP), which accords Third World countries preferential tariffs to assist their development.
• Some economies, in particular Japan, Korea, and Taiwan, have been forced by Washington to drastically revalue their currencies relative to the dollar in order to make these countries goods more expensive in dollar terms, thus dampening demand from US consumers. The Plaza Accord of 1985, which saw a massive revaluation of the yen was followed by US pressure on Korea and Taiwan, which were forced to appreciate their currencies, the won and the New Taiwan dollar, by more than 40 per cent between 1986 and 1989.
• All have been subjected to the threat of trade retaliation under the notorious Super 301 and Special 301 clauses of the US Trade Act of 1988, which authorize the president to take retaliatory measures against those regarded as unfair traders or abettors of the intellectual property rights (IPRs) of US corporations. This year, for instance, most of the US's APEC trade partners made what is now known as the US Trade Representative's Office hit list of IPR violators: China was on top of the list as a priority foreign country; Japan, Indonesia, and Korea achieved the distinction of being on the priority watch list; and the Philippines and Thailand were placed on the watch list.

Unilateralist trade diplomacy (an oxymoron this!) has been regarded as highly successful by Washington officials. Commerce Secretary Mickey Kantor has boasted that under President Clinton's leadership, the Administration has negotiated nearly 200 agreements to open foreign markets, which has helped fuel record growth and the creation of one million jobs. Other officials promised the continuation of the same policy of achieving practical, market-based, results-oriented agreements carried out with the stated or unstated threat of invoking Super 301.

As prima facie evidence of the virtues of unilateralism, US trade officials refer to the case of South Korea. When Korea developed a $9.7 billion surplus with the US in 1987, US trade officials saw the emergence of another Japan, and they moved decisively to head it off at the pass. A whole panoply of weapons—anti-dumping suits, import restrictions, Super 301, Special 301, currency appreciation, etc.—was employed on the most successful Asian tiger in an all-encompassing assault that targetted, among other sectors, agriculture, telecommunications, maritime services, financial services, the foreign investment regime, the fishing industry, cosmetics, and government procurement practices. By 1991, the US deficit with Korea had turned into a surplus, and in 1995, Korea was the only East Asian economy with which the United States enjoyed a surplus in its trade account.

Unilateralism is, however, merely one prong of US policy towards its trading partners. The unilateralist approach is complemented by a multilateralist game plan and a regional strategy. The multilateralist prong has been an effort to make the General Agreement on Tariffs and Trade (GATT) a medium for the reduction of trade barriers globally as well as an iron framework of global rules governing trade and trade-related acitivties. The regional thrust has led to the creation of free trade areas like the North American Free Trade Area (NAFTA) and APEC, where greater concessions on trade than were obtainable under GATT can be negotiated with selected trade partners.

GATT, Free Trade, and Monopoly

While in the view of its trading partners, unilateralism contradicts multilateralism as a way of resolving trade disputes, in the US view, these are complementary approaches that are tied together by the goal of achieving freer trade. But Washington's commitment to free trade is hardly doctrinal. It is a pragmatic position based on the assessment that free trade at this point translates into US competitive advantage. Again, this is evident in the case of GATT. If the US was committed to the passage of the Uruguay Round of GATT, this was based not on a benign vision of everyone gaining from free trade in an equitable fashion, but of the US gaining disproportionately from it. As EPG chief Bergsten told the US Congress, under GATT, the US would derive greater benefits from GATT than others because while foreign tariffs on US exports would come down by 40 per cent on the average, US tariff cuts would amount to only 32-33 per cent on the average.

More broadly, Washington believes that the so-called level playing field introduced by freer trade under GATT will translate into a tremendous advantage for US corporations, whose size, resources, and technological edge, would allow them to beat a competition shorn of the artificial advantage conferred by protectionist laws, subsidies, cheap credit, state-supported research and development, and other mechanisms of the state assisted capitalism that is the hallmark of East Asian economies.

But GATT also illustrates that the US commitment to free trade is conditional, not doctrinal. For when the freer flow of resources contradicts powerful US interests, Washington supports a position under GATT that reinforces monopoly or oligopoly instead of promoting free trade. This is the case with the GATT Agricultural Accord, which is basically an entente cordiale between the US and the European Union on the question of dumping their highly subsidized agricultural surpluses on third-country markets. While the Accord commits all signatories, including Third World countries, to reduce export subsidies, it institutionalizes the direct income subsidies provided by the US government and the European Union for their farmers. As economist Brian Gardner notes, the agreement merely swaps one form of subsidization for another, taking away direct support of markets and replacing it with direct subsidization of [northern] farmers. It is estimated that in 1995, the first year of the implementation of the GATT Uruguay Round, 20 per cent of the cost of US farm production was financed by state subsidies totalling $25 billion.

This, of course, has massive implications for the Asia-Pacific countries, whose agricultural markets have been targetted by the United States Department of Agriculture to absorb 60 per cent of US agricultural exports by the year 2000, up from the figure of 40 per cent at present.

Another GATT agreement that reinforces monopoly instead of the free flow of resources is the accord on trade-related intellectual property rights (TRIPs). This accord was pushed by Washington with the full support of Bill Gates and the US high tech lobby that wanted to tighten up what it considered a loose framework of global rules that was facilitating too free and too fast a flow of technological innovation from the North to the South. By institutionalizing such draconian measures as a generalized minimum patent protection of 20 years and placing the burden of proof on those accused of patent infringement, the accord represents what UNCTAD describes as a premature strengthening of the international intellectual proerty system...that favors monopolistically contolled innnovation over broad-based diffusion.

As many observers have noted, the main targets of the TRIPs accord have been Japan, Korea, and the East Asian NICs that have successfully mounted industrialization-by- imitation, particularly in knowledge-intensive industries.

APEC's Place in Washington's Strategy

Like GATT, APEC is a key element of US trade strategy. However, APEC offers US trade officials advantages that GATT lacks.

• First of all, APEC is seen as a GATT-plus arrangement where the US can extract more trade and trade-related concessions from its partners than they were willing to grant under the GATT Uruguay Round Agreement. An example of this was the 1995 proposal of Bergsten's Eminent Persons' Group that APEC members should reduce by half the transition period for implementing trade liberalization and full adoption of other trade-related reforms that they had already committed themselves to under GATT. For instance, in this proposal, APEC's developing economies would make their legislation governing intellectual property rights GATT-consistent by 1998 instead of the Uruguay Round deadline of 2000.
• Second, APEC is seen as a framework for building institutions that lash the US economy more firmly to East Asia, which is seen as the engine of the world economy far into the first decades of the 21st century. Many Washington economic strategists worry about trade and investment trends that might marginalize the US from the Asia-Pacific, such as the fact that intra-Asian trade as a proportion of total Asian trade has risen from an already high 47 per cent in 1990 to 53 per cent in 1995. What worries people such as Clinton adviser Paula Stern is that Asia might be moving toward becoming an integrated market and production base, whose trade dependence on the US will increasingly decrease. A trans-Pacific APEC free trade area is, in this sense, a preemptive move against proposals such as Malaysian Prime Minister Mohamad Mahathir's East Asia Economic Caucus, a formation that would include only the Asian economies with the intention of forging even closer trading and investment ties among them. In Washington's view, the institutionalization of APEC would eliminate such efforts to place an artificial dividing line down the center of the Pacific, as Assistant Secretary of State Winston Lord puts it.
• Finally, APEC provides a process whereby the US can consistently pressure its Asian trading partners to go beyond limited trade liberalization in reforming their economies. Via APEC mechanisms, the US can build pressure for the dismantling of the heavy state presence in the economies of its Asian trading partners—an interventionist presence that US officials consider the mother of all trade and investment barriers to the US private sector. As Undersecretary of State Joan Spero put it before a US congressional committee: APEC has a customer. APEC is not for governments; it is for business. Through APEC, we aim to get government out of the way, opening the way for business to do business.

In sum, an APEC free trade area must be seen as an integral part of a broader foreign economic policy that employs the rhetoric of free trade but is driven by economic realpolitik, by a determined drive to regain global economic primacy for the US.

Mickey Kantor is the personification of this approach. Proudly admitting that he is a non-economist, the US Secretary of Commerce candidly declares to one and all that his mission consists of one thing, and one thing only: to pry markets wide open in order to drive down the US trade deficit. Kantor is not a doctrinal free trader but one who can just as readily appeal to nationalist sentiment as to free trade in pursuit of his perception of US economic interest. Washington insiders contend that Kantor told Clinton in depending on Clinton's political needs of the moment. Perhaps, the spirit of economic realpolitik that pervades the Clinton administration's foreign economic policy is best captured by Kantor's celebrated assertion before the US Senate in April 1994: We will continue to use every tool at our disposal—301 Super 301, Special 301, Title VII, GSP, the Telecommunications Trade Act, or WTO accessi! onto open markets around the globe.