Mercantilism Today
When politics trumps free trade, consumers lose.


The U.S. and Australia, after intense negotiations over the past two weeks, announced on February 8 that they had reached an historic trade agreement. Australian Trade Minister Mark Vaile, putting a good face on the pact at a joint press conference with U.S. Trade Representative Robert Zoellick, limped back to Canberra. Ambassador Zoellick jetted off to Asia to preach the benefits of open trade and the need to pursue the World Trade Organization’s Doha agenda for trade liberalization.

Election-year jitters and intense special-interest lobbying undermined negotiators’ ability to reach a real free-trade deal. With both Australia’s Prime Minister John Howard and President George W. Bush facing elections later this year, trade officials tiptoed warily around entrenched agricultural interests.

U.S. negotiators were hamstrung at the beginning. A commodity important to the Aussies–sugar–was off the negotiating table. No way was Australia to gain greater market access to the U.S. markets for sugar, U.S. officials said publicly. Why, that would tick off the sugar barons in key electoral states, particularly in Florida. The sugar-beet lobbyists cried that jobs would be lost in key agricultural states. Of course, they didn’t mention all the jobs lost because some U.S. food and confectionary producers can’t be competitive when they have to pay two to three times the market price for sugar. Or the fact that those protectionist policies eat heavily into consumers’ pocketbooks.

The beef and dairy industries also were making ugly noises–they too wanted their products kept safe from competition. If sugar could get carved out, why not beef and dairy too? After all, they reasoned in true mercantilist fashion, that’s what a trade agreement is all about–protecting special interests from foreign competition. In a letter to President George W. Bush, Senate Democratic leader Tom Daschle threatened to vote against a pact unless U.S. beef- and cattle-import barriers were left in place.

Bowing to those other “sensitive” sectors, officials agreed to raise only slightly the quota for Australian beef imports to amount to about 0.17 percent of U.S. beef production. The quota increases will take effect when U.S. beef exports return to their 2003 (pre-BSE) levels, or three years after effective date of the agreement, whichever comes first. To give enough time for U.S. beef producers to transition, duties on Australian beef imports above that quota will be phased out over 18 years–that’s equivalent to nine congressional terms! And if that’s not enough time, the agreement also has a permanent safeguard measure that kicks in to protect U.S. producers.

The influential and vocal dairy industry sensed their own power, sharing the platform with Presidential primaries taking place in dairy states. They argued for keeping the tariffs on dairy imports above the quota, which they easily got. As with beef, the quota was raised to amount to a measly 0.17 percent of the annual value of dairy production.

While the full text won’t be available for about a month, the broad terms of the pact show how free trade can be held hostage during election cycles. The agreement also shows that mercantilism is alive and well in trade negotiations. Rather than viewing trade as mutually beneficial, the U.S. took a defensive posture that increased agricultural imports from Australia would have a negative impact. Completely overlooked by both sides were the increased consumer benefits–greater choices and lower prices–for both Americans and Australians that more open trade can bring.

In the current election-year protectionist climate, there has been at least one voice that has pointed to the benefits of open trade and the perils of protectionism. Federal Reserve Board Chairman Alan Greenspan, in a mid-December speech before the World Affairs Council of Greater Dallas, said:

“For the most part, we as a nation have not engaged in significant and widespread protectionism for more than five decades. The consequences of moving in that direction in today’s far more globalized financial world could be unexpectedly destabilizing. A likely fall in wage incomes and profits could lead, ironically, to a fall in jobs and job security in the shorter term. So, yes, we can shut out part or all foreign competition, but we would pay a price for doing so–perhaps a rather large price.”

Politicos and special interests should take this caution to heart, even in an election year.

Frances B. Smith is executive director of Consumer Alert.