GATT: Wolf in Sheep’s Clothing/Questions for Greenspan Jude Wanniski & David Gitlitz July 14, 1994

GATT: WOLF IN SHEEP'S CLOTHING?

Speedy implementation of the Uruguay Round world trade agreement is taking on priority status for a White House and Democratic congressional leadership desperate for a victory -- any kind of victory -- heading into the November mid-term elections. Obviously, free traders from both parties should welcome a pact that opens markets, expands trade and raises living standards worldwide. Unhappily, though, this GATT is becoming a protectionist wolf in free-traders' clothing, as a commonality of Big Business and Big Labor interests seize on the implementing legislation to transform the agreement into a shield against import competition. Smaller and more dynamic entrepreneurial enterprises that stand to benefit most from expanded world trade -- and would lose the most when other countries quite rationally match the U.S. protectionist impulse item by -- are being left without a voice in the process. One idea that could still be a saving grace for entrepreneurial capitalism -- Sen. Bob Dole's suggestion to pay for the "loss" of tariff revenue with a capital gains tax cut -- is being rejected out of hand by the administration. This is shaping up as a deal with benefits far outweighed by potential costs. Unless the protectionist thrust can be repelled now, the world economy would be better off if implementation of the Uruguay Round is postponed until next year. 

In fact, we observed upon conclusion of the interminable, seven-year-long Uruguay Round negotiations late last year that the package was a lifeless compromise that failed to deliver on the promise of wholesale elimination of trade barriers ("A Pitiful GATT," December 15, 1993). But as lackluster as the agreement first seemed, it now looks like a free trader's dream. The Clinton Administration is acting as a willing accomplice in the sabotage of its own hard-won efforts. As with the health care issue, the Democratic Party is pulled by political imperatives toward support of Big Business and Big Labor at the expense of small enterprise. Engineering the subversion of the letter and spirit of the GATT agreement are a number of inefficient, declining, corporate behemoths, spearheaded by several old-line steel industry dinosaurs, including Bethlehem Steel, Inland Steel and LTV. 

The crux of the matter involves "anti-dumping" rules. After heavy lobbying by Big Steel and their friends in Congress, the administration has outlined implementing legislation that expands the scope for dumping complaints and multiplies the potential penalties. To support dumping claims, U.S. companies essentially would be permitted to augment some of their own input costs, while foreign firms would be prevented from claiming certain production costs in defense. This would arbitrarily widen the "dumping margin" against which offsetting duties are calculated, and is but one example of the ramifications of an extremely complex series of amendments that the administration has outlined before the House Ways and Means Committee. 

The highly technical nature of the dumping rules is helping the protectionists keep the exercise from broad public view and, they hope, greasing the skids for passage. Actually, there has been a government-behind-closed-doors atmosphere surrounding the whole affair. The administration claims that it is going along with the steel interests because it hasn't heard much opposition. Nonsense, says the other side, including exporters who fear for their shrunken markets when foreign governments respond in kind. "It's so typical of this administration that they're going along with whoever is putting on the most pressure at the time," says one lobbyist fighting the strengthened dumping rules. The chances for a public airing probably won't be enhanced when Ways&Means formally considers the matter next week, most likely in closed session. Majority support in committee is pretty much a foregone conclusion since the final language is being worked out hand-in-hand by the administration and the panel's key Democrats.

In allowing a free trade pact to be transformed into a tool for protectionism, the administration is betting that the "tougher" dumping rules will bring home many of the pro-labor Democrats who bolted on NAFTA last year. The issue, they figure, is probably too obscure to keep most free-traders in either party from voting against implementation. The White House, however, may be badly miscalculating. The House Republican leadership warned in a letter to trade representative Mickey Kantor last month that the anti-dumping rules "should be structured and implemented as necessary to eliminate injurious dumping, not as a protectionist measure designed to shield firms from legitimate import competition or to redress unrelated trade practices perceived as unfair or burdensome." They emphasized the importance of the dumping rules to "our overall support of the Uruguay Round implementing legislation as well as future negotiating authority."

Moreover, Republican leaders like Rep. Newt Gingrich are already deeply suspicious that Democrats will try to use the implementing language to tie future trade deals to multilateral labor and environmental standards. Many in the GOP will also turn thumbs down if Clinton attempts to make up the bogus $10 billion revenue "shortfall" of reduced tariffs with any hint of new taxes. The idea of using a dynamic revenue estimate with a revenue-raising capital gains tax cut is anathema to the administration and many congressional Democrats, but it may end up becoming the only way Clinton can save this flawed agreement before the congressional elections and avoid another major foreign policy embarrassment.

David Gitlitz

QUESTIONS FOR GREENSPAN

Fed Chairman Alan Greenspan appears before both the Senate and House Banking Committees next week in one of the most crucial rounds of Humphrey/Hawkins hearings in many years. On Wednesday, July 20, he will face the full Senate Banking Committee for the first time this year. Democrats will blame Greenspan for higher interest rates and Republicans will blame President Clinton for the weak dollar, all of which is a waste of time. A more profitable line of questioning, which Greenspan might actually welcome, would get into the subtleties of current Fed policy -- in a way that could shake the financial markets out of their summer doldrums. Specifically, Greenspan should again address his comments of earlier this year that he regards the gold price as a "very good indicator" of inflation expectations. Inasmuch as gold at $385 per ounce is where it was when the Fed began "tightening" in early February in order to remove inflation expectations from the credit markets, does Greenspan believe gold is not the very good indicator he thought it was? If not, why not? Did he think the four rounds of interest rate increases would bring down the gold price and is he disappointed it did not? 

Former Fed Governor Wayne Angell, who says the gold price should be closer to $300 than $400 to satisfy the bond market, says Greenspan should have raised interest rates faster and farther, and that he should lift them sharply in August. Jack Kemp of Empower America argues against further interest rate increases and says Greenspan should directly target a lower gold price. Greenspan would shy from commenting on this divergence of opinion. Raising these differences, though, could lead into a question whose answer would throw some light on Greenspan's thinking: Does he perceive any technical problems with the funds-rate targeting procedure, in that it has forced the Fed to continue providing ever-increasing levels of liquidity to the system even at higher rates? Might the Fed, as Kemp suggests, be more successful in bringing down inflation expectations by directly targeting gold, instead of reducing bank lending by raising interest rates? Are there any legal or institutional constraints hindering the Fed from pursuing a gold-targeting mechanism? With a gold-targeting procedure, how would open market operations and the implementation of policy differ from interest rate pegging? Would he prefer the Humphrey-Hawkins legislation be amended to recommend gold/commodity targeting instead of money-supply targets?

It has been observed that the bond markets have appeared happier with gold around $350, and that with gold at $385, dollar creditors would have to expect a 10% devaluation of all dollar paper assets, which would amount to losses exceeding $1 trillion. Would Greenspan be prepared to live with the 10% inflation that we should expect to eventually follow this rise in the gold price? Would it not also leave dollar creditors with the sense that if he is prepared to allow a 10% inflation, he might be prepared to accept a 20% or 30% inflation -- thereby leading to ever higher interest rates? 

Finally, Greenspan should be asked if he thinks that the targeting of gold at an appropriate price, say $350, could serve to calm the fears of dollar creditors, and bring interest rates down sharply. And if so, would it not be advisable to publicly debate this issue, especially inasmuch as the refinancing of the $4.5 trillion national debt at low interest rates would save taxpayers a lot of money? We could think of many more questions that would explore these kinds of possibilities. These, though, would be a fine start.

Jude Wanniski