December 11, 2001

International Commentary

Hand in the Cookie Jar

By David H. Feldman, a professor of economics at the College of William & Mary.

The past two months have been hard on Pakistan's economy. The textile sector, which employs 60% of Pakistan's industrial work force, is reeling as U.S. brands cut imports or fail to renew orders. The war in Afghanistan has increased the risks to personnel, suppliers and shipments, driving U.S. importers to seek business elsewhere.

Along with direct aid, the administration of U.S. President George W. Bush has proposed lowering U.S. tariffs on Pakistani textiles in a bid to help its ally. How could a free trader like me possibly oppose such an obvious plan to bolster U.S. foreign policy? Let me explain.

Imagine a large cookie jar on the middle of the kitchen table in a house full of impulsive and selfish children. If no adults are around, that jar had better have a tight lid. This is a strikingly apt metaphor for the world's trading system. All governments face an almost irresistible temptation to use trade perks to reward friends and punish adversaries, both domestic and foreign. Short election cycles and current events make instant political gratification almost an imperative.

Every nation also understands the benefits of a stable world-trading system governed by simple rules that apply to all. Yet without some assurance that others will abide by the rules, no nation has much incentive to resist the urge to politicize trade policy. There goes the system.

The adult in the room is the World Trade Organization with its clear rules for global trade and an accepted enforcement mechanism. Yet contrary to what most people assume, the guiding principle of the WTO is nondiscrimination, not free trade.

Simply put, this trade commandment requires countries to treat goods equally regardless of their country of origin. If the U.S. has a 10% tax on imports of shoes, that tax must apply to the shoe imports of all other nations in the WTO. Nondiscrimination therefore is a clear and simple rule that helps depoliticize trade. Under WTO rules, one permissible exception is for free-trade areas because they cover all trade between two nations.

American textile producers will almost certainly oppose exempting Pakistan from U.S. textile tariffs, although such an action would have almost no impact on them since America's existing tariff wall would keep domestic prices from falling. Giving the Pakistanis a break is therefore more likely to raise the loudest cries of indignation from nations like the Philippines, for any new imports from Pakistan would displace imports from Manila, not output from North Carolina.

This is precisely why the WTO frowns on discriminatory practices. New WTO members like Taiwan and China are also likely to complain and the Bush administration could be sure of an unfavorable legal decision by the WTO.

Unlike small nations, the U.S. could throw its weight around but at a cost of further delegitimizing the nondiscrimination rule that benefits all of us. Continuing my impulsive child metaphor, the U.S. would be a rebellious adolescent with a taste for talking back. The household becomes an unpleasant place to live.

Alternatively, the U.S. could reduce its textile tariffs on everyone! Unfortunately for Pakistan, its share of the U.S. market is around 6%, so the benefit to it would be quite small. And the chorus of complaints from domestic producers would rise a few decibels as well.

The Bush administration is right to offer material aid to the Pakistani economy, as long as it comes with reasonable strings attached. These include a credible commitment to democratic political processes and support for the institutions of civil society, without which tolerance and pluralism cannot take root. But discriminatory access to the U.S. textile market should not be a part of that aid package.

Eliminating the U.S. tariff on Pakistani textiles isn't even an efficient way to boost the industry or keep down the number of unemployed workers in Pakistan's volatile cities. Because risk is the problem, not price, cutting the tariff merely transfers U.S.-government revenue to Pakistani industrialists. A tariff cut is unlikely to spur much new or renewed business until the risk exacerbating Pakistan's problems diminishes, but once the risk ebbs the tariff cut is no longer necessary.

If the administration really wants to keep American firms buying from Pakistani suppliers it could use those same tariff revenues to offer U.S. importers a sufficiently generous but temporary government-backed insurance policy against any supply disruption that might occur. In doing so, the U.S. would achieve its objective directly and without needlessly complicating its trade relations with other nations. Economists have long known the virtues of this sort of direct remedy, but try selling it to the U.S. Congress.

Nondiscrimination -- that strong lid on the cookie jar -- is not meant to prevent the U.S. from pursuing a legitimate national interest. Instead, it helps every nation resist the temptation to politicize trade in ways that are corrosive to the whole system. It is there to remind us that for almost any goal we have, changing tariffs or quotas on imports is unlikely to be the best way to accomplish it.

-- From The Asian Wall Street Journal

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