4/8/02
The Asian Wall Street Journal

By Greg Rushford

U.S. Trade Representative Robert Zoellick wound up a four-day swing through Southeast Asia yesterday that included a visit to Singapore and the nearby Indonesian islands of Batam and Bintan. There, the USTR announced an agreement that he declared would be a model for future "free trade" accords. The two Indonesian islands' high-tech and electronics sectors, Mr. Zoellick said, would be included in a Free Trade Agreement that the US is soon to conclude with Singapore. And in Bangkok last week, the top US trade negotiator announced that he was in preliminary discussions to negotiate an FTA with Thailand as well.

All of this sounds like great news for the economies concerned, because free trade agreements must mean freer trade, right? Unfortunately not.

When you look closely, these FTAs do not deserve the appellation "free trade." Unlike multilateral trade accords where all members of the World Trade Organization are treated equally, bilateral and regional "free trade" deals create inequities by granting preferential treatment to some countries at the expense of others. This is why economists call FTAs by another name, preferential trade agreements.

The effect of such agreements is that production of goods shifts from countries that have a comparative advantage to countries that are less efficient producers but have been given a competitive advantage through lowered tariffs. Whatever appellation, these deals often dress up old-fashioned protectionism in new clothes. And clothes -- as well as tuna sandwiches, and cars and anything else in our daily lives that contains steel -- explain for us ordinary folks what's really going on.

Take tuna. Even though American canneries have moved offshore, the US still maintains protectionist tariffs for canned tuna that range from 12.5% (packed in water) to a Smoot-Hawley level 35% (in vegetable oil). But in the North American "Free Trade" Agreement, Uncle Sam agreed to give Mexico duty-free status for processed tuna by 2008.

Naturally, Caribbean countries then complained to Washington, what about us? Why would the US put its own tuna producers with investments in the Caribbean at a disadvantage competing with the Mexicans? So the US agreed in the Caribbean Basin Initiative to give CBI countries preferential tariff treatment for tuna, too. Trinidad and Tobago was the big winner there.

Other Latin countries saw what was going on, and understandably sought preferential treatment for themselves. Presently, the US Congress is considering giving the Andean countries -- Colombia, Bolivia, Peru and Ecuador -- duty-free treatment for tuna in the Andean Trade Preference Expansion Act. Ecuador is the big tuna producer in that region.

Enter politics, as companies jockey for advantage. Bumble Bee Seafoods has figured out how to get around high US tariffs that currently affect Ecuador. Bumble Bee and its 2,000-some tuna workers in Ecuador don't package the tuna there; they just clean, cook and turn the fish into fillets -- which are then exported to the United States for final processing (mainly by machines), at only about a 1.5% tariff.

But rival Starkist packages tuna in Ecuador for sale to the United States, and has to pay the high tariffs. This explains why Bumble Bee's Washington lobbyists are working to get the US Congress to keep tuna tariffs on Ecuador as high as possible. Starkist's famous Charlie the Tuna is in hot political water.

Ecuador, of course, is less than delighted with this wrangling. Foreign Minister Heinz Moeller observes that the Andean trade pact is meant to give countries like his economic incentives to turn away from the narcotics trade. "This is not only a matter of economics," Mr. Moeller declares. "This is vital to our national security."

Meanwhile, major tuna powers in the Pacific like Thailand, Indonesia and the Philippines are watching nervously. They already are being discriminated against by the European Union, which slaps 24% tariffs on Asian tuna while giving Caribbean former colonies duty-free treatment. Now the US Congress -- in its understandable enthusiasm to cut tuna tariffs for a major tuna producer like Ecuador -- is about to add to the Asians' competitive disadvantage.

Thailand may be hurt the least. Thai-owned Chicken of the Sea operates in American Samoa, a US territory that enjoys duty-free access to US markets. The Samoans are lobbying to keep tariffs high on everyone else.

But Manila officials, like their counterparts in Ecuador, are raising national security concerns. Roughly 17,000 tuna workers in southern Mindanao, mostly Muslims, already have enough to worry about, with poverty and the war against terrorism. The officials are perplexed that their ally in that war would deliberately imperil Muslim jobs by placing them at a tariff disadvantage.

This is "unjust, unreasonable and counterproductive" for the United States to do, says Philippine Ambassador to Washington Albert del Rosario. This is how Washington thanks Philippine President Gloria Macapagal Arroyo for her cooperation in the war against terrorism?

Apparently it is. Unsympathetic US officials are taking a hard-nosed position. The new American Ambassador to Manila, Francis Ricciardone, isn't talking about the plight of Muslim tuna workers. Neither is USTR Zoellick. It seems that the Philippines is being punished because Manila, alas, has recently been something of a foot-dragger on other trade liberalization issues.

Since February, I have sent Mr. Zoellick perhaps a dozen e-mails asking if he cares to offer an economic rationale for refusing to give Asian tuna producers, Muslims or otherwise, the same duty-free status as he advocates for Latin countries. No comment. This is a hard man to embarrass.

Mention free-trade embarrassments for US officials, of course, and the subject quickly turns to steel. Last month, the USTR pointedly reminded Brazil that there are benefits for countries that cut special "free trade" deals with Washington. Public opinion in Brazil is presently outraged over the Bush administration's announced 30% tariffs on steel. The US trade negotiator has told the Brazilians, you should look at our Nafta "free trade" partners Mexico and Canada; we exempted them from steel tariffs.

But this is hardly a free-trade model, either. Yes, Nafta partner Canada is exempt from US steel tariffs. But Ottawa has also put out the word that it, too, will throw up copycat trade barriers if too much foreign steel that is diverted from the United States ends up north of the border. I asked Mr. Zoellick, is this how FTAs advance free trade? Again, no comment.

When he met with Singaporean and Indonesian trade officials on Bintan Island this past weekend, Mr. Zoellick touted his "model" free trade deal for those countries' electronics sectors. The idea is to give a competitive advantage to Singapore's high-tech sector and its assembly operations in Indonesia. As Singaporean Trade Minister George Yeo explained to the Associated Press, the arrangement will help the Southeast Asian countries compete with China.

Some model. The United States spends 15 years working to bring China into the multilateral WTO, lecturing China on the wisdom of treating all trading partners equally, and then gets busy cutting special deals intended to work to China's disadvantage.

That's not even the worst. Here's where clothes come into the picture in Singapore's FTA. Mr. Zoellick is also pressing Singapore to agree to a protectionist rule of origin that is favored by the US textile lobby. The USTR wants Singapore to agree to make any garments for export to America from US yarn and fabric -- an idea that obviously makes no economic sense. But it makes political sense for an administration looking for support from the textile mills in places like North Carolina. With such "models," doubts about the Bush administration's commitment to free trade can only grow.

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