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Competitive Liberalization: a Policy to Leave in the Past

Competitive Liberalization: a Policy to Leave in the Past

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4342_us-china-trade-image
4342_us-china-trade-image

Acronyms are found throughout today's foreign policy. Names such as NAFTA and OPEC sum up complex institutions with simple titles. Recently, acronyms like TPP, AIIB, and ASEAN have spelled political tumult for President Obama as he attempts to rebalance towards Asia. The Trans-Pacific Partnership (TPP), for instance, commanded public attention due to both its secrecy and its size. But among all these acronyms, one aspect of American trade (with a much less concise name) often goes unnoticed. This Bush-era trade policy still drives the way the United States trades today: competitive liberalization. This is a strategy in which a state receives favorable trading conditions, such as low tariffs or standardized rules of business, by pressuring others to compete for its trade. Trade Representative Robert Zoellick pioneered the policy under George W. Bush, using it most commonly in the Middle East during the Iraq War.

While competitive liberalization helped to open up trade in the past, in 2009, trade attorney Scott Lincicome predicted that, within a few years, “America will have become the target of competitive liberalization, rather than its champion.”

Changes in US-China relations have contributed to a stunning reversal of competitive liberalization. Instead of using this policy to set the stage for American growth, the US is undermining its own interests by continuing to pursue competitive liberalization without acknowledging how the economic landscape has shifted.

Understanding how competitive liberalization has impacted current trade policy requires understanding the logic behind it. Policymakers begin by passing preferential free trade agreements with various allies; these agreements lower tariffs, sometimes only for specific industries, on goods traded with those allies.

These agreements ideally give American consumers and businesses the best deals possible and, from there, push regional neighbors of trade partners to offer better deals — or else risk being left out in the cold. Countries must compete to free up, or “liberalize”, trade with American partners, lending us the term “competitive liberalization.”

Competitive liberalization was arguably most useful in the years leading up to and following the invasion of Iraq. The Bush administration sought to secure strong American footholds in the region by strengthening economic relations. In addition to developing closer trading ties, the United States was looking to expand its military allies, especially among the Gulf States.

Perhaps the best single example of such a policy is found in relation to Bahrain. The small, Persian Gulf nation was one of the first in the Middle East to begin to liberalize trade with the United States: they signed a bilateral investment treaty and a framework deal before eventually agreeing to a free trade agreement (FTA) in 2004.

At the signing ceremony in Washington, then-Trade Representative Zoellick referenced the competitive nature of trading with the United States: “This US-Bahrain FTA is a model that can soon be shared by Bahrain’s neighbors in the Gulf and I am confident that it will be.”

He continued, saying that free trade agreements “in Jordan, Morocco, and now Bahrain have spurred a new interest in trade across the region.” Indeed they had; that same year, six other states in the region signed a flurry of framework agreements with the United States.

Given the seemingly high demand for exclusive trading privileges, it is no surprise that less than two years later Bahrain’s Persian Gulf neighbor Oman signed a free trade agreement with the United States. The final treaty completely eliminated all American and Omani tariffs on “consumer goods” — a boon for Oman’s large textile industry.

The logic of competitive liberalization would lead one to believe that other Persian Gulf countries with fragile textile industries would also try to liberalize their trade with the United States, to avoid being shut out of the market. After all, the competition for the best trade conditions seemed to persuade Oman’s government.

Overall, President Bush’s administration sought to use competitive liberalization to realize the goal of a Middle East Free Trade Area (MEFTA), which would decisively establish the United States as the dominant trade partner in the region. MEFTA, however, never came to be. Most of the regional powers have signed framework deals, but very few have followed through with full FTAs. American pressure was able to persuade some, but not all, of its trading partners.

usa x china
usa x china

The policy is a privileged power, in that it is available to states in a position of economic strength; competitive liberalization is most effective when the nation that uses it wields enough economic influence to pressure other nations to agree to trade conditions that are heavily skewed to benefit one partner over the others. The United States meets this condition almost all of the time, the exception being when Chinese trade is also involved. Indeed, President Obama’s policy shift towards Asia shadows the Bush policy in many ways.

The Trans-Pacific Partnership, or TPP, is a signed, but not yet enforced agreement between twelve Pacific Rim countries that is poised to eliminate tariffs and other barriers on trade between the member states. It reflects the realities of the larger narrative regarding China’s economic rise and growing influence. President Obama’s endorsement of the TPP usually comes with a caveat: the United States must lead in trade, or risk losing the opportunity to “writ[e] the rules for the world economy.”

His fear may be warranted, as American economic leverage has been weakening in recent years in the face of rapid Chinese growth. The most significant example of recent memory was the creation of the Asian Infrastructure Investment Bank (AIIB).

The AIIB is a Chinese-led institution that will provide long-term loans to member countries with the purpose of developing infrastructure such as water ports, bridges, highways, and railways across Asia. The AIIB’s purpose and function is very similar to that of the US-led World Bank, stoking fears among leaders in Washington that the AIIB would rival the World Bank and undermine US influence.

The United States has taken a stand and has refused to get on board with the AIIB. American diplomats have urged others not to join the AIIB, ostensibly due to weaknesses in standards of governance and environmental protections. Despite diplomatic pressure, key American allies such as South Korea and Britain have signed on, along with over fifty other major economies. The United States has been hung out to dry.

Another source of trade competition between the United States and China is the Association of Southeast Asian Nations (ASEAN). ASEAN is an organization that seeks to strengthen the economic and political ties of its ten member states, including countries such as the Philippines and Malaysia.

In the latter half of the 2000s, China enacted free trade agreements with ASEAN member states Thailand and Singapore. The fear among other ASEAN members was that Thailand and Singapore had gained a competitive edge on trade with China, contributing to the institution of a joint China-ASEAN free trade area in 2010.

Unsurprisingly, the TPP seeks to liberalize trade with a few ASEAN members; Malaysia, Singapore, Brunei, and Vietnam are all parties in the TPP and together make up nearly a third of the nominal GDP of the entire ASEAN group. The United States pursued an ambitious group of countries in the TPP, but the real question remains: could the TPP help to create a joint US-ASEAN trade agreement?

In the case of the AIIB, the strategy of competitive liberalization hurt American interests more than it helped; in the case of ASEAN, it has been less effective than it would have been in Zoellick’s time. ASEAN economies, especially the poorest few, already depend on Chinese trade far more than American trade. The TPP or any other agreements may be too little too late.

Negotiators of the TPP attempted to make up for the its late arrival on the scene by establishing favorable frameworks for business. One complaint against China’s approach is that it doesn’t protect American businesses enough. As of this writing, the website for the office of the U.S. Trade Representative includes the following passage on the TPP:

“The rules of the road are up for grabs in Asia. If we don’t pass this agreement and write those rules, competitors will set weak rules of the road, threatening American jobs and workers while undermining U.S. leadership in Asia.”

What is motivating statements like these is what pushed many of America’s closest allies to get on board with the AIIB in the first place: the fear of being excluded from decision-making and economic activity. As America’s position on the international stage has changed, so too has its relationship with competitive liberalization.

As the world’s largest economy, the United States has historically had the leverage to coerce smaller states into trade conditions favorable for American consumers and businesses. However, as policymakers look to stave off China’s ascension, it is becoming clear that this position of supreme strength has been compromised.

China has taken the lead in Asia. In response, American free trade initiatives like the TPP have attempted to consolidate the United States’ slipping position as the center of the world’s economic gravity. And, amid all of this, the United States is moving into election season, and many candidates will try to capitalize on the desire to cling to American economic superiority.

However, stubborn refusal to acknowledge how the United States' relationship with competitive liberalization (or for that matter, with China) has changed will lead to more situations like the creation of the AIIB. Failure to be realistic about US economic influence relative to China could lead American politicians to issue more ultimatums and cooperate less.

“You’re with us or against us” statements will not convince others to stand with the United States but will instead leave the United States out of other institutions like the AIIB or ASEAN. It is time that American leaders acknowledge the reality of US-China relations and, going forward, focus on collaboration rather than competition.

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