Why President Bush needs a lesson from Ronald Reagan

Written by Chris Huhne MEP and published in the Evening Standard on Thu 7th Mar 2002

For thirty years, the trade relationship between the EU and the United States has been buffeted by headline-grabbing rows. Bananas, beef hormones, films, hidden export subsidies and now special tariffs of up to 30 per cent on steel all keep the EU's trade commissioner and his US counterpart buzzing across the Atlantic.

The cynical might therefore be forgiven for dismissing the talk of 'trade war looms' as just another tiff. Somehow, the US and the EU always manage to patch up their differences. The trans-atlantic trade regime has become steadily more liberal. These days the average EU external tariff on imports is just 3.87 per cent, against 3.43 per cent for the average US tariff. That is a fraction of the tariffs and other barriers in the fifties.

Nevertheless, two of the current disputes raise questions about whether the trade consensus can hold. The US decision this week to impose steel tariffs flagrantly contravenes the World Trade Organisation (WTO) rules. These allow such measures only if there is a surge of imports, but US steel imports dropped by 23 per cent last year. By diverting cheap Korean and other steel from the US to the EU market, the US may even force similar measures in the EU.

The problem is politics. For every existing US steel worker, there are three retirees drawing company pensions plus their family members. That is a lot of votes mainly in three states - Pennsylvania, Ohio and West Virginia - where the Republicans have hopes of gains in the Congressional mid-term elections. What is disappointing, though, is that the apparently free trading President Bush has succumbed to such low politics when the Democrats, with closer trade union ties, managed to resist.

The second big trade dispute concerns the US system of Foreign Sales Corporations, a covert way of subsidising exporters by cutting their profits tax. The ruling against the US in the WTO was upheld by the appeals body, allowing the EU to apply penalties against US exports of maybe $4 billion. Together with steel, the FSC case could light a blue touch paper under the Doha trade round. After all, the US Congressional vote in favour of giving the administration fast-track negotiating authority was won by just 215 to 214 votes on 6 December.

These trade tensions historically tend to go in a cycle with the dollar. When the US currency is over-valued, as it is today, US producers face low prices and super-competitive imports. They desperately try to find other means of competing. When the dollar is low or reasonably valued, the trade tensions subside. Instead of jettisoning his free trade principles, it might be more sensible of President Bush to intervene to bring the dollar down, as his equally free-market minded predecessor Ronald Reagan did in 1985.

Faced with a choice of violating the free market injunctions against currency intervention or trade protectionism, free marketeers should intervene in the currency markets every time as no lasting damage need be done. The free trade system is more fragile than it looks, and the inter-war experience of the US Smoot-Hawley tariff, a major contributor to the thirties depression, shows that it is hard to put together again if it breaks.