Free Trade Hits Turbulence


Advocates for open markets are contending with a strong backlash against globalization. For now, call it worldwide stalemate

Negotiating for freer trade among nations is like riding a bicycle into a strong headwind. You're O.K. as long as you keep moving forward, but if you slow down too much you're in danger of tipping over. Right now the world's free-trade bicycle looks wobbly.

The latest bad news for free-trade advocates was the U.S. announcement on Mar. 30 of tariffs on coated-paper imports from China and the signal that more tariffs could be in the offing. China said it "strongly urges the U.S. side to reconsider the decision and reverse it as soon as possible."

Two Powerful Forces

The Doha Round of global trade talks, launched in 2001, was suspended last July, and there's no timetable for a relaunch. Even the heralded free-trade agreement with South Korea, reached on Apr. 1, is a compromise that opens sales of American cars and TV shows but still shields Korean farmers from American rice and beef.

U.S. pickup trucks are protected, too. If it's rejected by lawmakers in either country—a real possibility—the attempt at a deal could actually worsen U.S.-Korea trade relations.

Think of this as a contest between two powerful forces: globalization vs. the backlash against it. Openness to imports and exports helps consumers by lowering prices, stimulating innovation, and increasing the variety of goods and services for sale.

But it also wipes out some jobs, and that visible downside has been getting most of the attention lately, even though the U.S. trade deficit excluding petroleum has been shrinking lately as a share of the economy. "It's a critical juncture," says Philip I. Levy, a resident scholar at the pro-free-trade American Enterprise Institute.

Not a Cure for Imbalance

Progress is still possible. President George W. Bush would love to bring the Doha Round to a successful conclusion before leaving office. And some key senior Democrats, including House Ways & Means Committee Chairman Charles B. Rangel (D-N.Y.), are genuinely committed to the cause of free trade and may be able to bring along some of the doubters.

If the U.S. manages to ink free-trade agreements with Korea as well as Colombia, Panama, and Peru, it could get some momentum going that might carry over to a restart of the stalled Doha Round. New energy from the U.S. might put pressure on other parties whose recalcitrance has contributed to the global stalemate, from French dairy farmers to Brazilian automakers.

Trouble is, Bush is fighting an unpopular war in Iraq and facing a Democratic Congress at the start of a Presidential campaign. And even an ambitious trade agreement would have no impact on the most important factors behind the huge global trade imbalances—namely, excessive saving in China and undersaving in the U.S. No wonder that bike is wobbling.

Coy is BusinessWeek's Economics editor.

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