GENEVA -- The compact that polices world trade is suffering a midlife crisis as it tries to deal with growing threats to the international trading system posed by new forms of protectionism.
"The beggar-thy-neighbor approach is making a comeback," said U.S. Trade Representative Clayton K. Yeutter.
The issue is important for the United States, which is trying to come out from under five years of record trade deficits that have permanently changed the U.S. economic picture by forcing millions of factory workers off their jobs and closing thousands of plants and businesses.
It is also important both for industrialized and developing nations, since a liberalized trade environment in the post-World War II era generally is credited with contributing to unprecedented economic growth.
As it prepares to celebrate its 40th birthday Monday, the compact known as the General Agreement on Tariffs and Trade, or GATT, is looking to a new round of trade talks to provide the added authority it needs to cope with new trade barriers. These take the form of export subsidies and new barriers to replace tariffs, which have been reduced substantially over the past 40 years.
As part of the celebration, ministers from leading trading nations will meet Sunday over a dinner given by the Swiss government in Lausanne to take stock of progress made in the first year of negotiations for the new round.
This new round, the eighth since GATT was born out of the chaos of the post-World War II period to act as a traffic cop for international trade, is crucial to the compact's future.
"Failure will be seen as yet one further indication of a range of differences among major countries" and is likely "to make financial markets jittery," said Robert D. Hormats, vice president for international finance for Goldman Sachs & Co. and an assistant secretary of State in the Carter administration.
"New negotiations could increase world economic growth and restore confidence in the trading system, or they could contribute further to the disintegration of the system," added C. Michael Aho, senior fellow for economics at the Council for Foreign Relations in New York.
But Aho said the talks, which are called the "Uruguay Round" for the site of the meeting that authorized them, are occurring at a time when the world trading system is "in disarray" and the United States is unable to push the rest of the world toward greater trade liberalization.
"International cooperation is at its lowest point since World War II," he said. "With discipline lacking, a full-scale trade war is a distinct possibility. Pressures for trade restrictions abound because of current unemployment problems and will increase because of the labor adjustment problems inherent in heightened international competition and in the transition from old to new technologies. The record trade deficit also increases the pressure for protection in the United States."
Nonetheless, the Reagan administration has been pushing for the new round of trade talks since 1982 against the opposition of two of its leading trading partners -- Japan and the 12-nation European Community -- as well as some less developed nations such as Brazil and India.
But the talks are taking place at a time when the United States -- which took the leadership in founding GATT and in pushing through all previous trade rounds -- is economically and politically weakened by its trade deficits and its status as the world's largest debtor nation, which makes it dependent on foreign investment.
"It now takes joint leadership to move ahead, which is harder and balkier," said Aho.
"The United States can't lead alone anymore. Without the three pillars" of the United States, Japan and the EC, "there is no progress," Aho said.
Deputy U.S. Trade Representative Michael B. Smith said it remains unclear whether the 95 signatories to GATT have the political will to push for greater trade liberalization that has long-term benefits but could hurt politically sensitive sectors in the short run.
Yeutter called the trend toward increased protectionism "alarming" because it could spawn a trade war worse than the one blamed for deepening the Great Depression.
"Today, in an ever more interdependent world, a comparable trade war would be even more disastrous," he said. "The tremors that have rocked the financial markets are a sobering reminder of the fragile nature of the international economic system."
In the 1930s, most barriers were in the form of high tariffs, and during its 40 years of existence GATT has helped bring the average tariffs of industrialized nations down to 5 percent from about 40 percent.
Recently, however, a growing proportion of the world's $2 trillion in international trade has been done outside GATT rules. Services such as banking, insurance and advertising, which now amount to about one-third of all trade, are not covered by GATT. Neither is agriculture, where the United States, the EC and Japan together spend at least $63 billion to subsidize their farmers.
Furthermore, GATT officials estimate that as much as half the world's trade takes place as part of market-sharing deals outside of GATT rules, such as the "voluntary restraint agreement" that Japan practices in its auto sales to the United States.
"Unfortunately, many countries seem to be succumbing to the temptations of mercantilism and managed economies," said Yeutter.
The United States is one of them, although its markets remain among the most open in the world and far freer than any of its major trading partners. Aho noted that "the United States is now starting to act like the rest of the world instead of trying to exercise leadership."
Sylvia Ostry, Canada's ambassador for multilateral trade negotiations, calls this "the new protectionism" that GATT is unable to deal with under the present rules.
But a new spirit of optimism permeates GATT, which is housed here in a somber stone building on the shores of Lake Geneva.
Arthur Dunkel, GATT's director general, said negotiators are coming up with new ideas for ways to bring such new trade areas as services, protection of intellectual property and a freer flow of investment capital into the GATT. He said that countries such as India and Brazil, which initially had opposed bringing trade in services into GATT, are now fully engaged in the process.
Furthermore, GATT's cumbersome dispute settlement procedures, which have been under attack by the United States and other countries for the length of time it takes to resolve trade complaints, have improved to the point where panel rulings now come out in six months instead of more than four years.
In recent months GATT panels have issued four major rulings of great importance to the United States, and officials here said one positive result of the trade round is that countries appear less likely to try to block them. Japan, for instance, last week accepted a ruling against its practice of taxing imported liquor at a higher rate than the domestic product, and Canada is expected to accept another decision that went against protectionism by its provinces of Canadian-made wine and beer.
Yeutter has made a faster, more decisive system of dispute resolution a key element of U.S. strategy in the new round.
"GATT is in a fortunate position in that it has the chance to reforge its own future," Dunkel said.
If the trade negotiations, which could last into the 1990s, fall far short of their aim to strengthen and revitalize GATT, Yeutter and others predict that the compact will grow increasingly irrelevant. "It must change with the times or run the risk of becoming obsolete," said Yeutter.
"Clearly the United States has alternatives to GATT," said Smith, with the prime one being more free trade arrangements such as the one recently concluded with Canada.
These could lead to the formation of a "GATT of like-minded nations" or a "super GATT" -- countries that will follow certain rules of trade and gain enhanced economic benefits from them.
But in a pointed warning to less developed nations, Smith added that while that might be all right for the United States, "smaller countries don't have the luxury of being able to have it both ways.