No. 8 — March 1, 1996

Weekly Review

ELECTION YEAR POLITICS MAY BRING HARDER WHITE HOUSE LINE ON TRADE DISPUTES
--- by Christopher B. Johnstone

The politics of the presidential campaign invariably affect the actions of an incumbent president seeking reelection, and observers overseas are struggling to predict the impact of the 1996 race on President Clinton's foreign policies this year. In part because of the fiery rhetoric of Republican presidential candidate Patrick Buchanan trade has attracted a surprising amount of attention in the early campaigning (see JEI Report No. 7B, February 23, 1996). Whether or not Mr. Buchanan proves successful in his drive to become the GOP presidential nominee, his use of attacks on the trade policies of President Clinton and his Republican predecessors may be adopted by whoever becomes the GOP presidential nominee; that, in turn, would force the Clinton administration to defend its trade record in the fall campaign. Given America's rapid export growth in recent years and the drop in the 1995 U.S. trade deficit with Japan, the White House appears well-positioned to ward off any such attacks — although some economists suggest that Mr. Clinton's policies have had little impact on either trend. Nevertheless, the specter of harsh criticism from his GOP opponent may prompt Mr. Clinton to adopt a tough stance on trade — particularly toward the People's Republic of China and Japan — on a number of contentious issues this year.

Over the next few months several serious bilateral trade disputes are coming to a head and very likely could reinforce the surprising prominence of trade in the current presidential campaign; the GOP campaign rhetoric itself may color the White House's approach to these negotiations. Of perhaps most concern are trade-related disputes with China. The White House has been particularly critical of Beijing's seemingly lax enforcement of an intellectual property rights agreement signed last year. In the face of Washington's early 1995 threat to impose 100 percent tariffs on $1 billion worth of Chinese goods Beijing agreed in February that year to prosecute copyright abuses vigorously, beef up customs procedures and expand market access for American record producers. More than a year after the signing of the accord, however, Washington asserts that Beijing has not lived up to its commitments; the International Intellectual Property Alliance — which represents movie, music, software and book publishers — estimates that the industry lost nearly $2 billion to Chinese piracy in 1995. The White House has indicated that it may impose sanctions on China in the next few weeks if Beijing does not take significant steps to meet its agreement obligations.

Other disputes with China fester as well. Concerns surrounding Beijing's arms sales continue to grow, particularly following recent allegations that Beijing in 1995 exported to Pakistan equipment that could be used to enrich weapons-grade uranium. The sale prompted congressional accusations that China had violated both U.S. and international nuclear nonproliferation laws; many legislators have called on Mr. Clinton to impose severe economic sanctions on Beijing. The escalating tensions between China and Taiwan are also a source of worry, with many observers predicting that this year's debate over the renewal of China's most-favored-nation trade status could be the most contentious in recent memory (see JEI Report No. 6A, February 16, 1996).

Mr. Clinton's handling of these disputes no doubt will be scrutinized closely by the GOP presidential hopefuls. Mr. Buchanan in particular has proposed imposing tariffs as high as 40 percent on Chinese imports as a means of combating China's large and growing trade surplus with the United States. The GOP candidate likely will use any perceived White House misstep as an excuse to attack Mr. Clinton's trade and foreign policies toward the Asian giant.

White House management of U.S. trade problems with Japan also will attract close attention. Two disputes in particular may come to a head this summer, just as the presidential race begins to gather steam. The 1991 semiconductor trade agreement expires in July, and U.S. efforts to negotiate an extension thus far have met with firm Japanese resistance (see JEI Report No. 47B, December 22, 1995). Should Tokyo's position remain unaltered, Washington's response is not likely to be low key — particularly given the presidential campaign themes. Also in July the U.S. Trade Representative is scheduled to complete an investigation of Eastman Kodak Co.'s charges — filed under Section 301 of the 1974 Trade Act — that the anticompetitive business practices of rival Fuji Photo Film Co., Ltd. in Japan's consumer photographic film and paper markets block access by the world industry leader. A finding in favor of Kodak would open the door to sanctions (see JEI Report No. 29A, August 4, 1995, and No. 40B, October 27, 1995). Other potentially contentious bilateral disagreements include American access to Japanese insurance markets and the renegotiation of a bilateral aviation accord (see JEI Report No. 47B, December 22, 1995).

Against the backdrop of these disputes are Mr. Buchanan's advocacy of 10 percent duties on U.S. imports of made-in-Japan products and his suggestion that Tokyo would be more "scared" of him as president than it is of Mr. Clinton. The GOP candidate also has asserted that as president he would "unilaterally" eliminate the bilateral trade imbalance if Tokyo fails to do so on its own. For his part Senate Majority Leader Robert Dole (Kan.) — who until his second-place finish in the February 20 New Hampshire primary was viewed as the GOP presidential front-runner — asserted in a speech shortly before the New Hampshire primary: "President Clinton threatened a trade war with Japan, then raised the white flag. ... Increasingly belligerent trading partners realize that the Clinton administration will not use against them the market-opening tools Congress created." As a way of differentiating himself from his primary opponent, Mr. Buchanan, the Kansas senator also noted, "Protectionism and isolation are not the answer to competing against other thriving economies." If he were president, Mr. Dole said, "Our trading partners would be put on notice: no more trade deals that are never lived up to. No more toleration of unfair trade barriers."

In one well-timed response to these Republican candidates' rhetoric on trade Mr. Clinton offered a defense of his administration's policy in a February 23 speech in Long Beach, California, shortly before he was to meet with Prime Minister Ryutaro Hashimoto (see previous article). Without mentioning his GOP rivals by name, Mr. Clinton asserted, "We have to break down walls, not build them up. ... In California, more than a quarter of a million jobs depend on trade with Japan. For the first time in history, rice farmers in California can sell rice in Japan." In outlining his philosophical approach to trade the president added, "If you want your country to lead for peace and freedom and prosperity, the answer is neither to be uncritically in favor of free trade, nor to be pulling up the rug and closing our borders. The answer is to be for trade that is free and fair so everybody has a fair chance to grow in the global economy."

Whether trade policy will become a significant or even lasting issue during the election campaign remains to be seen. Ironically, the Clinton administration might find the current GOP rhetoric on trade to be a useful negotiating tool. For example, fear that inflexibility on trade disputes could bring a backlash from Washington — and might even strengthen Mr. Buchanan's candidacy — could encourage China and Japan to come more quickly to an accommodation on outstanding issues. If Mr. Buchanan becomes the GOP candidate, however, or if his antitrade rhetoric is taken up by the eventual Republican nominee, the Clinton administration will find its trade policy subject to intense scrutiny. The White House even could decide to take harsher actions than it otherwise might deem necessary or appropriate to ward off GOP charges that it has not been tough enough on unfair foreign trade practices. As the presidential campaign heats up, the Clinton administration may feel its negotiating room shrink as it seeks to strike a difficult balance between pursuing policies that serve to expand market access for U.S. firms abroad and avoiding actions that could inflict excessive damage to overall ties with America's major trading partners — while at the same time fending off GOP attacks on the White House trade record.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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