The global free-trading system we have known since the end of World War II is dead, but there is nothing to take its place. And there is no globally dominant power that can force everyone to agree to the rules of trade, as the United States could in 1944.
Since economies abhor a vacuum no less than nature, a new system of trade is being constructed informally. As the Europeans negotiate rules for their internal common market and decide how outsiders relate to that market, they are effectively writing the rules for world trade in the next century. Everyone else will adopt their rules as the world's de facto operating system.The new system being built will be neither the global free-trade regime of recent decades, nor the kind of trading blocs of the 1930s, where trade was reduced or eliminated altogether between blocs, ultimately leading to war.
Rather, I am convinced, we will see in the 1990s a system of "quasi-trading blocs." These blocs will attempt to manage trade in certain areas, through agreements like that between the United States and Japan which establish market share for semiconductors. And they will provide special trading privileges to neighbors within the bloc that are not available to those outside of it, such as in the proposed North American Free Trade Agreement involving the United States, Canada and Mexico.
The end of Cold War divisions in Europe has provided impetus for the new trading system. For the first time since the Roman Empire, there is a chance now to build the House of Europe. But to build that house, eastern Europe and the former Soviet Union eventually have to be brought into a common market.
Yet, for countries like Poland and Czechoslovakia to raise their standard of living to a level approaching their European counterparts, they must produce and export the same kinds of products as those exported by Taiwan, Singapore, South Korea or Hong Kong - trading states with which the post-communist economies cannot possibly compete in a free world market for decades to come.
So within Europe, eastern European countries will inevitably be granted special privileges and access to markets from which Taiwan or South Korea will be shut out. That creates a trade bloc.
African migration pressures on Europe also are forcing the European Community to grant special market access privileges for low-wage manufactured goods, unavailable to India for example, or to Algeria and others in the region.
That too, consolidates a trade bloc, as does the U.S. agreement with Canada and the one now being negotiated with Mexico, an agreement technically illegal under GATT (General Agreement on Trade and Tariffs), since there is no intent of ultimate political union.
The other factor pushing the world toward blocs that manage trade is the inability of Europe or America to balance trade through head-to-head competition with the globally ascendant competitive power of Japan - competition that has grown far more intense as world growth has slowed from 4.9 percent in the 1960s to 2.9 percent in the 1980s.
As a consequence, both Europe and America are making their own deals with Japan. The Europeans have negotiated an agreement with the Japanese concerning access to each other's automobile markets. The United States is not part of this agreement. And the United States and Japan have agreed that Japan will guarantee America more than 20 percent of their semiconductor market, but no provision is made for the Europeans.
The trading bloc mentality is perhaps clearest in the battle over control of high-definition television, or HDTV. Europe, Japan and the United States are all deliberately setting different technical standards for HDTV to ensure that producers from the other regions cannot dominate their market.
The spirit of GATT calls for common standards to set a level playing field. But no one today seems to want a level playing field. Everyone wants an edge.
The quasi-trading bloc system will put Japan at a disadvantage, which is perhaps why it appeals so much to the rest of the world.
Unlike North America or Europe, there is no major importing country in Asia. For this reason, countries like South Korea or Taiwan, which sell far more to America than Japan, are more likely to want to join the North American bloc, upon which their prosperity depends.
Like all systems, the emergent trading system needs a manager. But, like Britain after World War I, the United States has abdicated its responsibility. Germany, the European economic power, is too consumed with reunification to play a major role.
The role of a global manager is especially important today, since the world seems to have forgotten the lesson of the 1920s that bilateral negotiations cannot lead to a stable trading system. A global downturn in such circumstances could once again prove disastrous.
If the 1991 Anglo-Saxon recession were to spread to the world, the United States could not rescue everyone else from an economic downturn, as it did back in 1982.
Since no singular economic power is capable of macro-management of the world economy, the only alternative is for the United States, together with Germany and Japan - the G-3 instead of the G-7 - to do so jointly.
The need for an institution - such as the International Trade Organization - that can objectively judge trade disputes and enforce decisions has become more obvious. To make the world economy work, everyone must feel that they have an equal chance to win.
Unless an institution such as the ITO is invested with real authority, multilateral trade will cease to have any real meaning.
1991 New Perspectives Quarterly
Distributed by L.A. Times Syndicate