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01/26/94

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U.S. on dangerous protection path in trade policy, economist says

STANFORD -- America's trade policy would shock Americans if it were possible for them to understand it, Stanford University economist Anne O. Krueger told a Stanford audience on Friday, Jan. 21.

The recent North American Free Trade Agreement is 2,000 pages long. When it is combined with other agreements, administrative rules and regulations, the country's trade policy is "almost inherently unknowable in its aggregate," said the economist who joined the Stanford faculty last June.

Krueger, formerly the chief research economist for the World Bank and most recently a Duke University professor, also said the United States is headed for economic, and possibly political, trouble if it continues to add regional trade agreements that are inconsistent with one another and with worldwide free trade.

Since NAFTA was passed by Congress in late 1993, Krueger said, every action or speech [made by U.S. policymakers] has been bilateral or regional," rather than supportive of multilateral, international free trade.

"We advocated a new international trade organization in the GATT talks," she said. "We fought for it, but there has been no support for it since."

Krueger made her remarks at the annual dinner meeting of the advisory board, steering committee and associates of the Stanford Center for Economic Policy Research.

She said she supports regional trade agreements if they are consistent with multilateral free trade. Regional agreements are not inconsistent if they provide for more economic integration of national economies, she said.

"But we are now on the path of forming separate or side agreements with Chile, Canada and Mexico, and that becomes dangerous," she said.

"We now have a U.S.-Canada commission [to settle trade disputes] and we are going to have a U.S.-Mexico commission," she said. "What happens when they come to different decisions?"

If the U.S. proceeds to a third agreement with Chile, she said, "we will very quickly have [expanded] what is already an incredibly litigious system."

Litigation causes administrative delays that hamper industry, she said.

The U.S. also claims to support international adjudication of trade disputes but insists on bilateral resolution of its disputes with the Japanese.

The countries that the United States has prodded into supporting free trade since World War II are starting to recognize the growing gap between U.S. actions and words, she said. At least four nations are considering anti-dumping laws modeled after the U.S. law, which, she said, is manipulated by U.S. industries to gain a market advantage at the expense of more efficient competitors.

"There is the threat of a trade war," she said. "So far, things have worked out," but other countries are "losing patience when we keep calling the rest of the world unfair."

Krueger predicted American leaders will change their tune after the United States gradually loses relative living standard as a result of its protectionist policies. New Zealand and Australia, she said, learned this lesson the hard way, and now are liberalizing trade.

But currently, she said, protectionism is winning in the United States as trade policy becomes a domestic political issue rather than a matter of foreign policy.

"The United States seems to have forgotten that it is the largest trading nation still and that it has a leadership role," Krueger said.

She attributed the switch in Washington's political winds to four factors:

  • "The tremendous roller coaster that the U.S. real exchange rates was on in the 1980s." This put abnormal pressure on U.S. industries, she said.
  • "The diminished giant syndrome." The U.S. share of total world trade has dropped, arguably, she said, from about 40 percent in the 1940s and 1950s to about 20 percent.
  • Falling natural protection. As transportation, communication and other technologies have made the world smaller, a nation's industries are less insulated from what's happening in the rest of the world.
  • Developments in trade theory that say, under certain monopolistic circumstances, the wealthier of two nations might benefit from trade restrictions.

The latter is still a "drawing-board theory." No economists are willing to say the theory is sound enough to be the basis of policy, she said, but "the fact that economists are no longer quite able to say that under all circumstances free trade is the best policy," she said, means that those seeking protection find it easier to win political support.

"As a result of all these things, there is no doubt that U.S. trade policy is more protectionist than it was," Krueger said.

Much of the protectionism in the law is buried in administrative procedures, she said.

"We have a lot of administrative protection, and it's absolutely bizarre in its details," she said.

Because there is a higher tariff on men's jackets than on vests, for example, "we have caught people doing the following evil thing: they ship in things without sleeves and they ship the sleeves in separately, and that of course is something that should shock every American."

The U.S. protected sugar prices to help pre-Castro Cuba. Now that protection is kept in place by corn syrup manufacturers, she said.

The Washington Post recently reported that the Clinton administration is negotiating with two corn syrup producers in the Everglades to reduce the environmental damage there, she said.

"There's a very easy way to protect the Everglades," she said, "and that would be to stop protection of sugar."

The administrators who must adjudicate disputes on an "item by item" basis are used by companies who know they will lose the case but win a time advantage, Krueger said. And by law, the adjudicators "can't even consider what the impact of their decisions are either on the consumer or American industry as a whole."

The only conclusion she can draw, Krueger said, is that "we are confused about what our policy is."

In the long run, Krueger said she is optimistic that we will reverse our protectionist direction, but "in the short run, I'm somewhat less optimistic."

-kpo-

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