Trade Wars on the Horizon

The growing number of trade disputes may foreshadow a return to protectionist policies that would slow economic growth.

U.S. companies rely on markets abroad to absorb about $1 trillion a year in goods and services exported from the United States. The survival and profitability of an increasing number of U.S. firms depend on the expansion of world trade, which is expected to grow at above-average rates for the rest of the decade. But a number of experts, including Federal Reserve Chairman Alan Greenspan, fear that the rising number of trade disputes looming on the horizon may reverse the critically important global movement toward trade liberalization. Those trade spats effectively cancel out some of the gains of U.S. government and business leaders who have worked for open markets, and new trade disputes threaten to create a reversion to growth-choking protectionist policies.

World merchandise trade grew by about 10 percent in 2000 — twice the annual rate recorded for 1998 and 1999 and well above the 6.5 percent average annual growth rate for 1990 to 1999. World Trade Organization (WTO) analysts predict that world trade for 2001 will slow slightly from 2000 but will remain stronger than the average rates recorded for the previous decade. The United States, European Union (EU) and Japan account for about half of all world trade. A breakdown in trade between any two of the three could bring global trade growth to a halt.

U.S.-EU Tensions

The biggest battle looming ahead is the EU's request for the WTO to hit the United States with a record-breaking $4 billion a year in trade sanctions on a wide range of U.S. goods in retaliation for an allegedly unfair tax break for U.S. exporters. The WTO will issue a decision by midyear. The U.S. tax break challenged by the EU allows about 6,000 U.S. companies to cut taxes by selling their exports through shell companies known as foreign sales corporations (FSCs). Over the past decade, major U.S. companies, including General Electric, Boeing, Motorola, Caterpillar, Allied Signal and Cisco Systems, have benefited substantially from their FSCs. If the WTO applies sanctions, they could bring a major disruption in trade between the United States and the EU.

The FSC dispute is only one of several broad challenges to U.S. trade-related policies. In late December, the EU, Japan, South Korea, Australia, Indonesia, Thailand, Brazil and Chile jointly requested formal consultations with the WTO to discuss new U.S. legislation that allows American companies to receive the proceeds of anti-dumping duties. Last August, Mexico forced the United States to appear before an arbitration panel under the North American Free Trade Agreement (NAFTA) because the United States refused to open its market to Mexican sugar imports.

The bad feelings run both ways. In December, the United States threatened a trade battle over EU approval of government loans for building Airbus' superjumbo jet, which will be the world's largest commercial passenger airplane and will end Boeing's monopoly on the global market for jumbo jets. Any attempt by the United States to impose trade sanctions is likely to incite retaliation from the EU. The United States has already imposed $308 million in penalty duties on EU goods in disputes over U.S. beef and banana traders.

Noteworthy trade skirmishes are not limited to the growing tensions between the United States and the EU. At the close of 2000, the WTO gave Canada permission to impose substantial trade sanctions against Brazil after Canada complained about Brazil's export subsidies for passenger jets.