US Trade Policy
The collapse of WTO in Cancun, September 2003, is big news. It can spell disaster for much of the developing world. As disastrous as if a terrible WMD were unleashed and followed by a globalization of chain reaction, with the multiplier effect further reducing world incomes by approximately five times the amount that would be lost in world trade, thus concomitantly increasing unemployment and world poverty by five times. And the World Bank had estimated that a new global trade deal at Cancun would have lifted, through the multiplier effect, 144 million people out of poverty.
Globalization is a ruthless and inevitable process in which the world, blasted off by the unlimited capabilities of electronic and other communications, becomes one in culture and economic and political aspirations, a process that is innately aided by much of the world population that has been psychologically programmed to desire western lifestyles. Ruthless because globalization, in essence, is not so much about redistribution of wealth, but about marginalization of the poor.
For us to fathom the global significance of the Cancun collapse, we need to understand trade, the reasons why countries trade today, (not yesterday; for yesterday, trade policy, as correctly analyzed by the classical economists, was designed purely for economic gains). Trade today is more about security (terrorism) and political power play. Trade as a subject excites as equally as terrorism, as it is equally interwoven with it.
I therefore invite the adventurous spirit to travel with me through the pages of US trade policy in a series of three articles beginning in this issue (October), and ending in December, when WTO is expecting to reconvene in Geneva. Why US trade policy? I believe that in understanding US trade policy one would understand the thought process of the US (and other affluent nations), for therein lies the germ of the contradiction between their interests and those of developing nations, a contradiction that was not only glaringly manifested at Cancun, 2003, but also at the WTO's predecessor, GATT, in Morocco 1994, when the severity of the contraction led to a formal dismantling of GATT. To make our travel less abstract and more exciting we will concentrate on a geographical area more familiar to us Latin America and the Caribbean. In short, we would be concentrating on US trade policy towards Latin America and the Caribbean.
Political Involvement in Trading
Trading, the exchange of goods and services, originally intended to satisfy the needs and wants of individuals, is as old as man himself. As man moved from individualism into organized and complex societies and later into nations with defined boundaries, interests, ideas and policies of trade were developed and shifted from individual wants and needs to that of the security and economic well-being of the whole. The study and pursuit of these interests, ideas and policies gave birth to what is now known as international political economy.
According to classical and neoclassical economics, if trading (the market mechanism) is allowed to operate in complete freedom, if all individuals and nations pursued their own interests, there would be optimum allocation of production resources, and all nations would benefit in accordance with the natural law of comparative advantage.
However, as nations advanced technologically and politically, some more than others, with significant differences observed in factor endowments, electoral systems, and efficiency in the exploitation of productive resources, maintaining sovereignty and security of nation states became the driving factor in international relations. Hence, trading became the "handmaid" of the politics of security, as it became necessary for State intervention to oversee the general economic, political and social welfare of the whole. Basically, this meant tinkering with the market system.
US commercial policy, from the adoption of the Constitution has been one evolved from traditional mercantilism, to a quasi-liberal emphasis on free trade, then after the Civil War, to protectionism, and presently to a hybrid of liberalism and protectionism. These changes, however, are all in general response to economic and security interests.
Thus, the history of US commercial policy can be described as one of movements along a continuum ranging from openness to closeness. The degree of trade openness or closeness is determined by a number of factors such as tariff levels, trade as proportion of national product, and the level of regionalization or globalization of trade according to Stephen Krasner who has also been able to provide an actual measure of these dependent variables.
By the end of WWII the US had fully emerged from its previous position of political isolationism, and all economic indicators were showing that it was established as an open market, although elements of protectionism remained imbedded in the system.
Protectionism had dominated US commercial policy during the latter part of the nineteenth century well into the Great Depression of the twentieth. For at least fifty years prior to the Great Depression, the market incentives for a more liberal trading environment existed as well as the ideas for it. Yet the policy of protectionism was maintained (and remained terribly out of sync with ideas). The shift from protectionism to pro-liberalism was sudden and there are dozens of explanations for this radical shift the shock of the Great Depression and failure of Smoot-Hawley being two of the main reasons. However, following WWII several developments helped to dramatically shape US foreign policy. Foremost were: (1) its emergence as the world's dominant political, economic and military power, having been forced out of its position of political isolationism, a position that it maintained since the Civil War, and from which it started to emerge, slowly but cautiously after WWI; and (2) the threat of communist expansion the world over and the urgency for its containment. Thus, ideological hegemony and security became its primary focus, and the implementation of aid and trade policies became the tools in achieving hegemonic and security objectives.
The Marshall Plan, a tool devised to rebuild the economies of Europe devastated by the war, served effectively in establishing US ideological hegemony, in preventing communism from taking over Europe and, at the same time, maintaining a guaranteed market for its industrial, particularly military products
But the nations of the Far East were not that fortunate. Communist infiltration into China, Korea, Vietnam and other Far East nations was easy since the US paid only half-hearted attention to these countries, as they were not considered as being geo-politically and economically important to the US as were the European countries at the time.
In terms of US security, the countries of Latin America and the Caribbean, however, required closer attention for two geo-political reasons: (1) their proximity to the US, and (2) the volatility of their political and ideological circumstances, in addition to economic problems, through the effects of globalization, presented a growing threat to the national security of the US.
Arguably, early US relations with Latin America were not primarily derived through economic interest but by US security concerns. And perhaps still are. But the security of the US was and continues to be intrinsically connected to the economic as well as political well being of Latin America and the Caribbean. Hence, by the seventies, a shift in US policy towards them was seen, with more emphasis on economic development.
This shift was facilitated by two developments: (1) the realization that although communism was being effectively contained in Latin America and the Caribbean, the economies worsened; therefore, the solution to their economic problems lay in a different direction than those previously pursued, and (2) the US, by accelerating and extending its open market policy to include the countries of Latin America and the Caribbean, it encouraged them to also free up their markets and abandon their previously pursued import substitution policy, and adopting an export oriented, market liberalization policy.
By the 1990s, in response to a wave of market alliances that was sweeping the world including Latin America, the US, wishing to consolidate its economic influence in Latin America, introduced the Enterprise of the Americas Initiative a post cold war policy. This policy was also intended to parallel the creation of European Common Market (ECM) in 1992 and Japan's integration of South Asia Markets. This policy culminated with the establishment of the North America Free Trade Area (NAFTA) and the restructuring of the General Agreement on Tariffs and Trade (GATT) through the Uruguay Round.
Initially NAFTA worked well, but by the latter part of the decade a growing disenchantment arose, both from inside and outside the US, against US liberalization policy, the policy in which NAFTA owes it origin. Thus, the opposition was focused on liberalization in general and on NAFTA in particular. We will look at some of this opposition in another part of this series and how it affects the future of US liberalization policy in the light of (a) globalization and (b) the continued need for tighter security of the US with the imminence of new security threats from non-conventional sources.
But US trade policy in Latin America has been largely determined by security concerns. For realists, security is the foremost goal, and is all about survival. For the US, the issue of security and strategic importance transcends any singular foreign relations policy, and covers all aspects of relations including foreign aid, economic assistance and military assistance.
Which brings us to a rather lengthy but necessary aside, to the question of what is meant by realism.
Realism, Structural Realism and US/Latin American Trade Relations
For us to understand the realist perspective, both structural and classical, of US trade relations with Latin America, we need to first understand the basic concept of realism.
Realism has become the most established perspective in international relations. Realism is not a single specific position, but more of an area of debate from which we can identify certain versions or branches of thought such as structural realism or classical realism. Realism claims to be realistic in comparison with the hopeless utopianism of idealism. Realists argue that the focus of research in international affairs should be on discovering the important forces that drive the relations between states.
Realists believe that the pursuits of power and national interests are the major forces driving world politics. Some of the key points of the realist perspective are:
1. Sovereign states are key actors in international relations;
2. States are motivated by a drive for power and pursuits of the "national interest". States, like men behave in a self-interested manner;
3. The central problem in international relations is the condition of anarchy, which means the lack of a central authority or world power to regulate relations between states;
4. The aggressive intent of states, combined with the lack of world government means that conflict is an ever present reality in international affairs. International relations are inherently conflictual;
5. A semblance of order and security can be maintained by shifting alliances among states which prevent any one state from becoming overwhelmingly powerful and, thus constituting a threat to the peace and security of others;
6. International institutions and law play a role in international relations, but are only effective if backed by force of effective sanctions.
For realists, security is the foremost goal, and is all about survival. Realists argue that unlike domestic politics (where governments are responsible for enforcing laws), in world politics there is no central government to enforce laws and, as a result, each state has to provide its own security. Policy makers therefore must seek power for their country.
Neo-realists or structural realists have advanced this perspective to include the role of international agencies such as United Nations, International Monetary Fund (IMF) and other institutions and the increasingly interdependent nature of international relations, an interdependence which was in large part driven by the expansion of the international economy.
Structural realists draw upon the classical liberal economic theories that suggest that a degree of governance is necessary to allow free trade and dynamic growth to take place smoothly. (Note: Classical economic theory recognizes that the state has an important and necessary role to play, but one which should be kept at a minimum).
The central concept of Neo-realist or Structural realist international political economy is hegemony. Neo-realists have found the concept of hegemony useful in explaining how the international economy, based on fundamentally liberal principles and liberal economic practices, could be carried out effectively in a world in which political authority was vested in nation-states. In the absence of an international sovereign government to maintain order among states, the concept of hegemony is used to explain how a degree of regulation, or governance is possible.
Structural realists believe that states aim to maximize wealth and that this is best achieved by securing a broadly liberal, free-market international economy. The ideas of structural realism, therefore, help us understand world dynamics and such policy movement as the restructuring of GATT, and its replacement by WTO, and now the apparent collapsing of WTO.
Later we will return to examine how realism specifically explains US trade policy with Latin America and the Caribbean. But for now we need to examine in some more details the history of US relations with Latin America and the Caribbean, and the importance of the latter to the former.
History of US Relations with Latin America and Caribbean
For a hundred year prior to WWII Latin America and the Caribbean were considered the backwater of the global trade policy arena. Because these economies were small, mostly troubled by heavy indebtedness, having limited export potentiality, and whose enclave economic structures were very vulnerable to international price fluctuations, they were generally ignored by hegemonic powers and, in turn, they themselves resorted to an inward looking policy such as import substitution for survival.
During this period the US was also contented with a general isolationist policy. In terms of specific relations to Latin America, the US treated these countries lightly, rarely requiring more than what could be secured through private commercial activities, yet somewhat concerned about any Latin America's relationship with nations outside the hemisphere that might develop into potential threats to the US. Apart from minimal colonial interests from Britain, Spain, Portugal, the Netherlands and France, Germany was the only major power that had significant investment and trade interests in Latin America.
The United States first important interest in Latin America was outlined in Franklin Roosevelt's "Good Neighbor Policy" which was basically a non-interventionist policy limiting its intervention only to the protection of lives and property of United States citizens, and also to protect the independence of Cuba, as was agreed to in a treaty between the US and Cuba, following the Spanish-American War. This policy was in some way wary of the hegemonic intention of Germany, an intention which itself was being encouraged by Latin America's chronic indebtedness, thereby offering Germany an opportunity to extend its military power in the hemisphere.
After WWII, with the defeat of Germany and weakening of the European powers, the US, forced out of isolationism and beginning to pursue its own hegemonic policy, acquired a virtual monopoly interest in Latin America. However, by the end of the war the Latin American countries (and some even before) had become some of the world's most politically unstable and economically dependent countries, conditions that were to become attractive for Marxist ideological penetration and revolutions that were sweeping the world. Communism had already taken firm roots in many of the countries. In the first two decades following WWII the Soviet Union had substantially extended influence in the poorer countries of the world Angola, Ethiopia, South Yemen, Vietnam, Laos, Cambodia, Afghanistan, Syria, Libya, Madagascar and the Congo. In the Western Hemisphere there was the imminent threat of communist take over, first in Cuba, then in Guatemala, Guyana and Nicaragua, with communist ideology quickly taking roots in the fertile soil of economic and political pauperism in several other Latin American countries.
This communist advancement to the doorstep of the United States necessitated a change in US policy, basically to one that would contain the spread of communism.
Thus, the Alliance for Progress Policy was announced in 1962 after the Cuban Missile crisis. Basically, this was all about massive economic aid to keep governments in power that respected US economic interests. The aid was spent mostly on cleaning up slums, repairing roads and rails, and providing military training and support for anticommunist forces. The Alliance for Progress, originally intended to bring about a peaceful social and economic revolution in Latin America, failed as a policy because it developed a dependency syndrome, led to reduced production and incomes, and further heightened social problems such as unemployment and inequality of income distribution.
By the seventies communism was effectively contained. But the economies worsened and it was realized that the solution to economic problems in Latin America lay not in their previously pursued economic policy of import substitution, but in following the liberalization, open market policy of export orientation developed by the US. To assist with this process and also to consolidate its economic influence in Latin America, the US introduced the Enterprise of the Americas Initiative a post cold war policy. This policy was also intended to parallel the creation of European Common Market (ECM) in 1992, and Japan's integration of South Asia Markets.
Importance of Latin America and the Caribbean to the US
It must be noted that every administration since the beginning of the Cold War in the late 1940s has regarded economic development of Latin American countries as vital to the conduct of US foreign policy. Basically, aid was granted in two reasons for economic development and for strategic security. Between 1970 and 1994, of the six countries receiving economic assistance for strategic reasons, four El Salvador, Honduras, Costa Rica and Nicaragua were in Latin America, the other two, Israel and Egypt, being in the Middle East. Initially much of the economic aid channeled to these countries for strategic reasons came under various rubrics as Economic Support Fund, PL 480 (Food for Peace Program), and other bilateral economic programs.
Apart from geo-political and economic interest, one particular strategic importance of the region is for access through the Panama Canal of US military and trading vessels.
In terms of economic importance, the Western Hemisphere, including the North American Free Trade Area (NAFTA) partners of the US, Canada and Mexico, represents the Unites States' second largest export market, accounting for some 43 percent of US exports between 1990-98. With trade with Canada removed, Latin America represents 20 percent of US exports, with the potential for a much greater market once certain trade relations are improved and a more equitable distribution of incomes is achieved in Latin American countries. As the 21st Century opens, Latin America, comprising of some thirty countries largely dedicated to democratic principles, with open or liberalizing economic policies, represent a potential US market of 800 million consumers and a national product of $10 trillion. Latin America represents a very attractive market for any developed industrialized country to exploit. Already, China and Hong Kong have made inroads into Panama following the departure of US from the Panama Canal. China's presence has created some concerns in the Pentagon of a possible conduit for illegal shipment of technology or prohibited items from the West to China. This makes it all the more imperative for an active US involvement in the region.
With regards to oil, Latin America has seven of the top 20 suppliers of petroleum products to the US, Venezuela being its largest supplier. To put matters in a geo-political perspective, Saudi Arabia provides 11.5 percent of US petroleum needs, while Canada, Venezuela, Mexico, Columbia and Trinidad and Tobago account for nearly 50 percent. To the extent the US has focused attention on Latin America over the past decade, it has sought to promote stability by supporting the establishment of democratic institutions. "Restoring democracy" was the basis for the deployment of 20,000 troops to Haiti in 1994. Earlier, concerns had been expressed about the abolition of the Peruvian Congress through the use of the military by the Peruvian President, in 1992. Other high-handed, seemingly undemocratic practices were denounced in Guatemala and Venezuela. In 1992 a dictatorship government in Guyana that held office by rigging election for 28 years was removed with the diplomatic intervention by former President Jimmy Carter. Significant democratic transitions are underway in Mexico, Argentina and Panama, all encouraged by the promise and benefits of US trade liberalization policy.
Given the importance and status of the region, the United States therefore, in terms of realism, has three broad interests in Latin America: first, consolidating democratic institutions; second, expanding economic growth through free trade and domestic economic liberalization; and third, combating illegal activities, particularly the drug trade which undermine and ultimately threaten the first two interests.
Given the strategic, security and economic importance of Latin American countries to the US, and considering the failure of previous policies to really lift these countries out of economic and political morass, it became imperative to consolidate the Enterprise of Americas Initiative into a policy that would stimulate growth and development from within the region itself. That policy was determined to be trade liberalization and regionalization of markets, as was pursued by the countries of Europe, East Asia and the Pacific with remarkable success.
Contrasted with the East Asian and Pacific countries, which pursued an export oriented path to development, the average annual growth rate in exports from 1970 to 1980 was 0.1 percent for LA and +9.5 percent for East Asia and the Pacific (EAP). For 1980 to 1991 the figures were 2.9 percent for LA, and 10.2 percent for EA/P.
The growth rate of Latin America's gross domestic product (GDP) for 1970-1980 was 5.5 percent, only marginally lower that EA/P's 6.6 percent for the same period. This, however, was primarily due to favorable terms of trade for the LA's oil producing countries. In the following decade, as oil prices fell, LA recorded a GDP growth of only 1.7 percent (lower than the population growth) as compared to EA/P's 7.7 percent.
Through the spectrum of realism, therefore, there was no other alternative than to introduce structural changes, pursue a liberalization policy, and take advantage of US markets that were opening up to them. Some, however, saw this as a snare, the globalization process in action. Stripped of their import-substitution policy, caught in the web of international trade whereby they produced what they did not consume, and consumed what they did not produce, they were trapped in a western lifestyle, a dependency syndrome in which the US, (EU and ASEAN) dictated the terms of trade of both export and import prices and quotas of developing countries. To put in raw language, that sensitive part of their anatomy was well and truly caught in the tentacles of a global bear trap.