Japanese Prime Minister Shinzo Abe was certainly busy promoting free trade last week. Following up on free trade agreements struck with Thailand and Brunei earlier this year, Mr. Abe flew to Jakarta and signed still another FTA with Indonesia on Aug. 20. Then he flew to New Delhi two days later, proclaiming that India would be the next special Japanese trading partner to participate in “an arc of freedom and prosperity” in a “broader Asia” that would include America and Australia (but not China). The intrepid traveler from Tokyo wrapped up his trip on Friday, Aug. 24, by jetting to Kuala Lumpur, where he praised the mutual benefits of bilateral economic cooperation thanks to a Japanese-Malaysian FTA that was signed in 2005. At week’s end, free traders had cause to celebrate.

Well, hardly. This wasn’t free trade — but the latest signs of the most important Japanese policy shift on international economics since the end of World War II. For more than half a century, Japan, an original signatory to the General Agreement on Tariffs and Trade in 1947, has strongly endorsed multilateral trade liberalization through the GATT and its successor international trade rules-making body in Geneva, the World Trade Organization. The core principle of the GATT and the WTO is treating all trading partners equally.

By contrast, today’s so-called free trade agreements are about treating different trading partners differently. While they lower some trade barriers for those included in the deals, the driving idea behind preferential trade is to put outsiders at a competitive disadvantage. Preferential trade is at odds with trade liberalization.
FTA advocates like Mr. Abe insist that the preferential bilateral trade deals actually create incentives for broader trade liberalization. The idea is that FTAs first inject momentum into regional trade accords like one that is currently being negotiated by the 10 members of the Association of Southeast Asian Nations. Then, the regional deals will build more pressures to help conclude the WTO’s ongoing multilateral Doha Round that holds the promise of breaking down global trade barriers. But despite the rhetoric, it doesn’t seem to be working. Of the WTO’s 151 members, only Mongolia doesn’t have any FTAs. Meanwhile, the Doha negotiations are comatose.

The multilateral WTO is being dismantled piecemeal. There were an estimated 130 preferential “free trade” arrangements at the turn of the 21st century, prompting economist Jagdish Bhagwati to liken them to a spaghetti bowl. Seven years later, the noodles that span the globe are even messier, as some 300 more FTAs have been concluded. More than half of world trade is estimated to be conducted through FTAs. So why is Japan now enthusiastically participating in such a disturbing global economic trend?

Simply put, Tokyo has followed America’s lead. Back in the 1980s whenever Japanese politicians would be temped by ideas that recalled the days of the Greater East Asia Co-Prosperity Sphere, their counterparts in Washington would offer discreet reminders that such talk wasn’t likely to be well-received throughout Asia.

But then the Americans struck their own preferential deal with Canada and Mexico, which was negotiated by the first President Bush and wrapped up by President Bill Clinton in the 1990s. The Japanese, recognizing that their manufacturers were being disadvantaged in North American markets, were steamed. Tokyo’s first response came in 2000, with the Japan-Singapore FTA.

In 2001 the United States, led by President George W. Bush’s first trade negotiator, Robert Zoellick, decided to plunge into the FTA business big time. The U.S. now has finalized 11 FTAs, nine of them by the Bush administration. So Tokyo began responding.

Japan inked its second FTA, with Mexico, in 2004, followed by the 2005 Malaysian deal, and another with the Philippines last year. With this year’s additions of Chile, Brunei, Thailand and Indonesia, Japan now has eight FTAs — part of a larger pattern of major trade distortion. The Europeans, masters of this game since Queen Victoria was Empress of India, have 21 FTAs that account for roughly one-third of world trade. China has some 20 more in some stage of negotiation. Mostly, the WTO, which is charged with leading global trade liberalization, has been left in the dark. Tokyo has only officially notified WTO officials of three of Japan’s eight FTAs, those with Singapore, Mexico and Malaysia.

Unconvinced that economic demons have been unleashed? Just look at how FTAs work at ground level. When Mr. Abe spoke last week in India of Japanese assistance in building a $100 million industrial corridor connecting New Delhi and the port of Mumbai, he was thinking that Japanese construction companies like Komatsu will build those roads, leaving in the dust Caterpillar Inc. and those big yellow bulldozers made in East Peoria, Illinois. As the Japanese ambassador to India, Yasuki Enoki, has bluntly put it to reporters, together India and Japan “can corner 60% of the Asian GDP.”

When Mr. Abe spoke about opening up Thailand’s steel and automobile sectors to foreign investment, he was thinking of the likes of Nippon Steel and Nissan, not General Motors and Hyundai. When he said in Jakarta that Japan wants to help Indonesia’s high-tech sector develop, the Japanese prime minister certainly wasn’t referring to business for Intel or Samsung.

Japan’s FTAs (like those of Americans and Europeans) talk free trade but practice protectionism. All of Tokyo’s trade bilaterals exclude Japanese rice, where tariffs remain in the stratosphere. For New Delhi, going along with Japanese agriculture protectionism is also convenient, as India has hundreds of thousands of uncompetitive subsistence farmers to “protect” from open markets. Even Thailand, the world’s biggest rice exporter, has reasons to go along. While Thai rice farmers are left out, the Japanese have opened the door for increased exports of Thailand’s shrimp, various fruits, chickens, jewelry and so on. The WTO’s Doha Round with its pressures for genuine market opening are conveniently ignored.

The FTA between Japan and Indonesia runs to 938 pages containing rules of origin, exclusions for politically sensitive products, and protectionist specifications for 40% of local content on “sensitive” — read, politically sensitive — products. There are special rules and various product exclusions for vegetables, sugar, various dairy products, fruits, tobacco and much else. Japan won’t cut tariffs for any kind of pineapples from Malaysia, Brunei or Singapore, but will gradually reduce duties for some fresh and dried pineapples from Thailand and the Philippines. But while tariffs on Thai dried pineapples are at 6% in the first year, and will be phased out entirely in six years, the Philippines’ dried pineapples will be taxed at 7.2% at first, and won’t be duty free until year 11.

This is special-interest politics, not sound economics. The Japanese boast that their FTAs give them preferential access to oil from Brunei, natural gas from Indonesia, and export platforms for Japanese manufacturers in smaller Asian economies. To readers of a certain age, this has a familiar ring.
While it’s premature to hit the panic button, it’s sure time to sound the alarms. It’s simply wrong for the world’s leading economies to act as if they want Fortresses Asia, Europe and America. It’s truly a cause for concern that while the WTO’s Doha Round gets lip service, FTAs get done.

Whatever happens to Doha, perhaps the WTO’s biggest challenge in the coming years will be to figure out how to harmonize all the conflicting rules of origin and protectionist arrangements in the proliferating FTAs. While Mr. Abe and his counterparts from Brussels to Washington have been smiling, they should be worrying.

In Washington, D.C., the most blatant protectionist mischief is routinely cloaked in high-minded rhetoric that sounds oh-so-reasonable — the better to conceal that the government favors some politically-connected domestic businesses at the expense of others. Consider the righteous March 30 announcement by U.S. Commerce Secretary Carlos Gutierrez that the Bush administration would now deploy another weapon in the U.S. trade-law arsenal to offset “unfair” Chinese government subsidies that distort trade and threaten American jobs.

It sounds great. But a closer look shows that Mr. Gutierrez is playing a familiar smoke-and-mirrors game, the object of which is to keep the underlying protectionist politics out of sight, along with the fact that Uncle Sam is picking losers as well as winners in the American marketplace.

Commerce has imposed high anti-dumping tariffs on allegedly below-cost Chinese exports for years. Now, for the first time the U.S. government also will impose so-called “countervailing duties,” which are tariffs that are aimed at countering Chinese government subsidies such as “tax breaks, debt forgiveness and low-cost loans,” as Mr. Gutierrez explained. His ongoing test case involves tariffs of up to 20% that Commerce is considering imposing upon “unfairly” subsidized imports of Chinese “coated free sheet paper.” The paper product is quite common, showing up in everything from glossy magazine covers to slick corporate sales brochures.

What reasonable person would oppose cracking down on any government’s subsidies that result in artificially low prices that distort trade? Not Mr. Gutierrez, who declared Friday that the new policy shows the Bush administration “is demonstrating its continued commitment to leveling the playing field for American manufacturers, workers and farmers.” Not the president of the National Association of Manufacturers, John Engler, who has lobbied hard for the policy shift, which he welcomed as “great news and an important step toward balanced trade with China.”

And certainly not Leo Gerard, the international president of the United Steelworkers of America. Mr. Gerard, who also represents American paper workers, is the man who has lobbied the hardest and the longest on behalf of the new U.S. policy. “Today’s decision to apply countervailing duties against Chinese products is long overdue, and it finally makes China subject to the same rules that all other major global traders are required to follow,” Mr. Gerard asserted on Friday.

The problem is, the realities of the new policy don’t match the rhetoric the three men are using. This isn’t Mr. Engler’s balanced trade, it’s managed trade. And while it is fine for the U.S. Commerce Secretary to rail against Chinese government-sponsored tax breaks, loans and such, what about the billions of subsidized tax breaks, soft loans, etc. that the U.S. steel lobby has been living on for decades? As for Mr. Gutierrez’s suggestion that American farmers suffer because of China’s subsidies on manufactured goods, one need only consider the billions upon billions of annual U.S. farm subsidies that flood global commodity markets with below-cost American foodstuffs, to the detriment of struggling farmers in every poor corner of the world. Most importantly, the new policy that Mr. Gerard touts doesn’t, in fact, apply the same rules to China as all other global traders must comply with.

Commerce insists on treating China as a “non-market” economy in anti-dumping cases. Because this methodology allows U.S. officials to assume that all pricing in China is government controlled, the bureaucrats already have vast discretion to apply high tariffs that penalize suspected subsidies. While the coated-paper subsidy case would hit China with tariffs in the 10%-20% range, Commerce is also considering tariffs of perhaps 100% in a parallel antidumping suit that targets the same glossy paper. In the international trade bar, it’s called double counting — taxing China as a non-market economy in antidumping cases while treating China as a market economy to calculate countervailing duties.

The real unfairness is in the non-market methodology itself, and how it allows U.S. officials to use obviously distorted numbers to come up with unreasonably high antidumping tariffs on Chinese exports. In this case, U.S. bureaucrats determine what China’s prices “should” be by consulting pricing and business data derived from surrogate “market economy” countries, quite often India. Last year, Commerce officials hit Chinese manufacturers of polyester staple fiber with antidumping tariffs as high as 109% — ignoring costs of production in China and using Indian government statistics instead.

Pretending that selected economic statistics from India reflect the true costs of producing anything in China is hardly a model of intellectual honesty. But the U.S. Congress has written the trade laws to allow such obvious economic distortions.

If officials in Washington were serious about attacking the fundamental issue of Chinese government subsidies, the better way to do that would be to challenge them in the World Trade Organization — where the rigors of international law would trump politics, not the other way around.

Meanwhile, the legality of Mr. Gutierrez’s new policy back home appears dubious. For more than two decades Commerce has insisted it didn’t have the legal authority to treat China one way in antidumping cases and another way in countervailing duty litigation. Now a bipartisan group of lawmakers who are tight with the domestic steel lobby — led by Sen. Carl Levin (D., Michigan), and Rep. Phil English, a Pennsylvania Republican and vice-chairman of the steel caucus — is pressing legislation to treat China as a non-market economy in antidumping cases and as a market economy (sort of) to calculate tariffs on subsidies. Even if this legal fix would correct the violation of U.S. law, Beijing could still challenge the double counting as a violation of America’s obligations as a member of the World Trade Organization to treat all trading partners fairly.

Whether the Chinese government pursues WTO litigation or not, the new Bush administration anti-subsidy shift would still be bad economic policy, driven by parochial politics. To see the impact of those politics up close, just consider Sen. Levin’s Michigan, the home of General Motors. On January 12, 2007, GM’s top economist, Mustafa Mohatarem, wrote a two-page letter to Commerce officials to protest that a shift of U.S. anti-subsidy policy on China would drive up the costs of production for the U.S. auto industry. Such a shift, Mr. Mohatarem wrote, could “distort trade flows and hurt the competitiveness of industries that consume foreign goods and materials.” Pointedly, he added that “the imposition of punitive duties on imports can lead to higher prices and reduced availability of critical parts and materials.”

It never was true, as Dwight Eisenhower’s defense secretary, “Engine Charlie” Wilson, famously asserted in 1953, that what is good for General Motors is always good for the country. But today, it is surely true that when the U.S. government deliberately moves to help domestic steel and paper producers, at the risk of driving up costs for companies like General Motors, for essentially political reasons, such managed trade is always a bad thing.

A proposed shift in the World Bank’s procurement policy is expected to have major ramifications in Asia and is causing concern in Washington. When incoming World Bank President Paul Wolfowitz reported for duty on June 1, waiting in his inbox was a strong letter from Richard Lugar, the Indiana Republican who chairs the powerful Foreign Relations Committee of the U.S. Senate. In his letter, the senator asked Mr. Wolfowitz to investigate — and report back — concerns that the bank’s staff is considering a major change to its currently stringent procurement policies that, critics assert, could open its contract awards to corruption. “My sincere hope is that any future World Bank policies strengthen, not undermine, the World Bank’s effort to thwart corruption related to its funding,” Mr. Lugar declared.

The bank is considering financing 10 pilot projects without insisting on the usual strict audit and management-supervision requirements being enforced by its in-house procurement officials. Instead, the idea is that local officials would be trusted to award these contracts in an effort to push recipient countries into bringing their own procurement systems in line with the bank’s rigorous standards of transparency.

While officials say they haven’t yet identified which countries’ procurement regimes might be clean enough to qualify, names that are being bandied about within the bank include Poland, Turkey, Brazil, Chile and China. In Asia, India and China — or at least selected “world class” Indian and Chinese procurement agencies — are likely to come under serious initial consideration. Even selected procurement agencies in Asian countries like the Philippines that are hardly paragons of good governance would be considered, if they can convince bank officials that they can be trusted not to take the money and run.

This proposed shift in procurement policy at the World Bank is a big deal. Each year, the bank finances some $6-7 billion worth of investment projects world-wide that are open to international bidding. In Asia, it has particularly wide ramifications since the Manila-based Asian Development Bank last month announced that it would follow the World Bank’s lead and consider a similar change in its procurement policy. The ADB puts out an estimated $1.25 billion in annual contracts for international bidding.

“Our policy is that if a country’s policies are equal to ours, okay; otherwise, we won’t do it,” says Armando Araujo, the World Bank’s director of procurement policy, explaining the new approach. “If a country does not carry out its promises, it will be caught in the audit to follow.” Such audits would be expected to be conducted within two or three years of the initial contract awards.

That’s too little, too late, complain critics who range from anti-corruption watchdogs at Transparency International to influential U.S. business organizations like the National Foreign Trade Council, which has also written a strong letter to Mr. Wolfowitz. The NFTC’s members include major exporters like General Electric and Oracle, as well as many smaller enterprises. The corporate types worry that they would be cut out of lucrative contracts by local officials who would not have to worry about the advance close scrutiny by World Bank procurement officials, who currently hover over recipient countries (who in turn chafe at the conditions imposed by the “Nanny Bank”). “We believe the proposal is counter to current anti-corruption efforts, and will open the door to less transparency, less competition, and increasing costs of bidding for contracts,” explains Mary Irace, the NFTC’s vice president for trade and export finance.

American corporate consultant Diane Willkens represents clients world-wide who bid on projects that are funded by the World Bank and its sister lending institutions. An important part of Ms. Willkens’ job description is to work with the international civil servants to scrutinize the often-devilish details buried deep in local contracts — looking for evidence of bid-rigging, bribery, and so-called “lock-out” specifications that are written to benefit only one company in the world. “Currently, if a bidder sees that another bidder doesn’t have the equipment, it can go to World Bank or ADB officials and get the offender disqualified,” Ms. Willkens explains. “But if local country procurement systems are used, the banks will only come in later and evaluate what happened.”

In Manila, ADB officials decline to be drawn into a discussion of which Asian countries they consider clean enough to qualify. No wonder. A cursory review of Transparency International’s rankings of the most corrupt countries in the world — China, India, Thailand, Vietnam, Bangladesh, the Philippines — suggests ample reasons for apprehension. Even the relatively clean Malaysia (by regional standards, at least) has refused to sign onto the World Trade Organization’s Government Procurement Agreement, whereby signatories pledge to increase transparency in contract awards.

Mr. Araujo says that he understands the concerns, but insists that the proposal is misunderstood. Responding to my hypothetical about the worries of turning over control of multi-million dollar contracts to officials in such notoriously corruption-ridden countries like the Philippines, he said that the World Bank is ready to help if officials in such countries can show they have really cleaned up their act. Mr. Araujo praised the Philippines for “accepting our criticisms” and recently enacting anti-corruption legislation. “If we can provide incentives this may be one way, with caution, with a restrictive framework, to encourage moves in the right direction.” Mr. Araujo stated.

So how should Mr. Wolfowitz respond to Sen. Lugar and the critics? One idea comes from business consultant Diane Willkens. If the World Bank wants to provide incentives to Third World countries that want to showcase their world-class procurement agencies, why not first publicize any demonstrable examples of procurement successes? She asks. “Find any place where it has gone well, and give out a gold star, perhaps a President of the World Bank award.” Until the World Bank and its sister development institutions can identify in public the specific countries that have contracting agencies that can pass the good governance test, why take the risks of loosening the present stringent procurement controls?