Despite news reports about Secretary of State John Kerry’s visit to Brazil, few Americans are paying much attention to the current bobble in our relations with that giant country. Nevertheless, the event illustrates the degree of ongoing dysfunction in our nation’s political system and its inability to resolve even minor economic policy problems.
The core issue is that we are not going to pay Brazil the $147.3 million we contractually promised it when a trade rule dispute the country filed against us with the World Trade Organization, or WTO, was decided in its favor four years ago. The WTO ruled that certain aspects of how we subsidize cotton production and export broke WTO rules. If we did not change these subsidies, Brazil got the green light to retaliate by restricting imports of U.S. products.
A solution was administratively and economically simple: All Congress had to do was pass a bill abolishing the prohibited subsidies. This would have reduced the budget deficit and made the U.S. economy more efficient. But few as cotton growers are, they have great political power. They convinced the federal government to negotiate an alternative plan — that of simply making annual payments to Brazil to indemnify the country for losses to its cotton producers resulting from U.S. policies.
We have been making those payments for three years. But lacking a new farm bill and any resolution of the budget impasse that is manifest in sequestration, the U.S. government has to stop these payments as of October.
The Brazilians correctly say they have been patient. If the agreed-on payments stop, they will implement restrictions on imports from the United States already approved by the WTO. Additionally, the dispute may tip the scales away from purchasing some $4 billion in Boeing-made jet fighters as part of a long-delayed upgrade of the Brazilian air force.
The issue is simple: Will our country honor contractual commitments to other countries or not? If we refuse for domestic political reasons, how will that affect foreign relations with all other countries, and how will it affect our economy?
Leave aside the question of whether international trade is good or bad and whether U.S. participation in a multilateral organization like the WTO is good policy. The point is that 12 successive presidents from both parties over seven decades have deemed such participation in the best interests of our country.
Congress has repeatedly ratified trade agreements reached by these administrations under the aegis of the General Agreement on Tariffs and Trade and its successor, the WTO.
Moreover, it was our country that, in the course of the 1986-1994 Uruguay Round of negotiations, pressed hard for agricultural trade to be included in this multilateral regime and for the new WTO to have much stronger powers to adjudicate trade disputes than the weak GATT. So we are hoist on our own petard.
We agreed to the trade rules that we broke, and we agreed to the dispute resolution procedures that have found us at fault.
Treaties signed by presidents and ratified by the Senate have the status of law. So are we a nation of laws or not?
Of course, for many nations, adherence to the law is more flexible in international relations than it is domestically, and our nation is no exception. People often opine that our trading partners flout trade rules while we are some sort of nave patsy that observes them scrupulously.
This reveals a profound ignorance of the facts: We often violate agreements we have made, perhaps less than some countries and certainly more than others.
We are particularly notorious for having a Congress that blithely passes laws that clearly contravene rules to which we have signed on, such as the Section 301 provisions of the 1970s and 1980s. And often we drag our heels for years in complying with rulings, as we did in the softwood dispute with Canada, simply because we are a large, powerful country and we can get away with it.
If you want to take a cold-blooded, realpolitik point of view, what do we lose by stiffing the Brazilians, or the Canadians, for that matter? We are as close to an economically hegemonic nation as there is today.
Perhaps we lose little in the immediate term, although in the case of Brazil, the cotton dispute compounds the damage done by revelations that our National Security Agency was spying on domestic Brazilian telephone and internet traffic. That makes Boeing’s big deal much more tenuous.
In the longer term, each time we refuse to comply with a contractual trade agreement we have made, it undercuts our credibility, not only in specific future trade negotiations but in our foreign policy more broadly. “Do as I say, not as I do” inevitably takes a toll on how others perceive our reliability as a political and military ally as well as a trade partner.
The post-World War II multilateral trading system has greatly benefited our country even if participation by large, poor counties like China has imposed significant adjustment costs on many U.S. workers in the past two decades.
And in the long term, a global economy with significant trade works to our political and economic advantage. There is no reason to undermine that because of petty domestic political dysfunction.