Trade ministers from nearly 100 countries gather Monday in Punta del Este, Uruguay, to choose between trade talks and trade wars.
The dilemma is straightforward. The global economy can only be managed on a cooperative, international basis. But countries and their politicians are under growing pressure to promote narrow, short-term national interests.
After intense negotiations, the trade ministers can choose to launch a new round of multilateral trade negotiations in an attempt to begin to reform and revitalize the trading system.
Or they can follow the path of least resistance and trust that the world trading system will continue to muddle through without a full-scale trade war erupting.
When the trade ministers last met in November, 1982, at the height of the Third World debt crisis and near the trough of the world economic recession, they barely held the trading system together.
The trading system is much sicker now. In the past four years, the U.S. trade deficit has skyrocketed, protectionism has increased, the number of trade disputes has proliferated, and trade has become a key partisan political issue with politicians' careers at stake. We are closer to a trade war than at any time in the last 50 years.
Launching and sustaining multilateral trade talks is getting more difficult for several reasons:
First, there is the numbers problem. Agreement was easier to reach when the United States could still unilaterally dictate outcomes. This time, agreement will be impossible unless Europe, Japan, Canada and a few other countries also take a leadership role.
But without a dominant leader, getting more than 90 countries to agree to anything requires patience, luck and political courage.
Second, it is good politics for negotiators to attend to the needs of their own people and not to worry about what's good for the world economy. Indeed, many countries regularly block progress until others "pay" to buy their cooperation. If everyone acts this way, however, nothing gets done.
Third, all the easy things were done in earlier negotiations. Cutting tariffs on manufactured goods was much easier than deciding which country's farmers will produce which goods or eliminating subsidies and other non-tariff barriers.
In addition, new trade talks are likely to tackle new and conceptually difficult issues such as trade in services. Countries cannot even agree on how to define and measure trade in services. How should negotiations on telecommunications, banking or other services be organized?
Fourth, everything is connected, so it is hard to know what to do. Trade, investment and monetary developments are linked ever more closely together. Economic policies of major countries affect one another whether they are meant to or not.
But as integration proceeds, some national autonomy is lost. Because there are no international institutions that have jurisdiction over all these matters, many countries are tempted to retreat from interdependence and try to promote national objectives.
Given these conflicting pressures, it is not surprising that it has taken so long to convince most countries that a new round of negotiations is necessary.
Most governments now believe that the dangers of protectionism and trade wars outweigh the domestic political costs associated with trade liberalization.
To protect against fragmentation of the trading system, the trade ministers have the chance to act boldly and to launch a new round of trade negotiations.
But damage control should not be the primary objective. Opportunities also abound, if only politicians have the vision and leadership to act boldly.
If trade rules are strengthened, firms operating in global markets will face less uncertainty and will invest and trade to take advantage of economies of large scale.
Furthermore, if the developing countries are integrated more fully into the trading system, world economic growth would be stimulated.
To seize these opportunities, domestic trade conflicts will have to be resolved in all countries, but most especially in the United States.
The Reagan Administration in consultation with Congress and the private sector will now have to set its agenda and tactics while building and maintaining a national consensus in the country on trade policy. This process is not far advanced.
Two steps in Congress will be needed to complete negotiations--one delegating authority to the President to negotiate, and another ratifying the final agreement.
The House has already passed a bill delegating authority to negotiate, and the Senate is about to take one up. But these bills are wrong-headed. They tie the President's hands by mandating retaliation under certain circumstances while unilaterally expanding the definition of "unfair" trading practices. Passing such legislation would start the negotiations off on the wrong foot.
If the United States rushes mindlessly into an aggressive tit-for-tat posture on trade, the trading system could end up fragmented.