Not as Free As You Think.(free trade negotiations between U.S. and Europe)(trade relations between developing countries and industrialized countries)

Headlines tell us that world trade is threatened by the struggle between rich and poor nations that erupted at the last big summit in Cancun. The leaders of the two camps, Washington and Beijing, are now trading tariff threats and counterthreats. After Cancun, follow-up talks in Geneva folded early as well. Last week EU Trade Commissioner Pascal Lamy called on Europe and the United States to design trade deals so that poor countries could sign on later. "After the failure in Cancun," said Lamy, "it's clear that business as usual is not an option."

But look more closely. The specter of North-South trade wars tends to obscure the fact that commerce is a rich nation's game. The flow of exports and imports between developed nations accounts for 80 percent of world trade. Last week both the United States and the European Union sent out peace signals in their own steel trade dispute before Lamy made his gesture of welcome to the developing world. What that message amounts to is this: if we can't get 148 nations to agree to something, we'll start cutting bilateral deals with our most important partners.

The more threatened trade becomes, the more important it is for Washington and Brussels to cement their most critical alliances first. Trade reps on both sides of the Atlantic are openly challenging the widespread perception that trade among rich nations is already free, and that all the easy cuts in trade barriers have been made. Two weeks ago at the Confederation of British Industry (CBI) annual conference in Birmingham, England, Chancellor of the Exchequer Gordon Brown said that further cuts could boost Europe's wealth by 100 billion euro per year and create 1 million new jobs. The study from which he took these figures, done by academics from the Centre for Economic Policy Research, says the United States stands to gain nearly as much. Sharing a platform with U.S. Treasury Secretary John Snow, Brown said, "It's time for us to make the effort to move beyond damaging trade and regulatory disputes."

That's beginning to happen. Trade negotiators on both sides emphasize that disputes--the key ones being taxes on U.S. foreign subsidiaries and steel--are only about 2 percent of the $500 billion in annual transatlantic trade. The issue of how to tax U.S. foreign subsidiaries remains a sticking point, for reasons we'll return to below. But in response to U.S. hints last week that it would withdraw new tariffs on European steel, the EU said it would delay imposing $2.2 billion in retaliatory tariffs on everything from American orange juice to pajamas. At the same time America and the EU announced new agreements on common accounting standards, which settles no current trade dispute but should nonetheless give a boost to transatlantic commerce. In Birmingham, Brown and Snow pledged further university links like the extremely successful MIT-Cambridge alliance, a joint forum on productivity challenges and a technology transfer fund to share ideas across the Atlantic.

Progress toward free trade among rich nations is often exaggerated because tariffs, the simplest form of ...