Inside the free-trade breakthrough

How the warring parties in Washington crafted a surprising deal on trade - and what it means for business. Fortune's Nina Easton reports.

By Nina Easton, Fortune Washington Bureau Chief

(WASHINGTON) Fortune -- As the capital's attention fixed on congressional maneuvering over Iraq war spending, a different drama was playing out in the offices of leading House members - one that would determine the nation's free trade path at a critical juncture.

The question: Would Democrats - much of their party wary of free trade agreements and, more generally, the costs of globalization - sign off on a deal with Republicans that would pave the way for key free trade pacts to move forward?

After a months-long dance, the answer emerged as "yes" Thursday night, thanks to a handful of men, and one woman, determined to move past the poisonous atmosphere that still stews between the two parties.

Quietly meeting in each other's offices, U.S. Trade Ambassador Susan Schwab, Ways and Means Committee Chairman Charlie Rangel, and Republican counterpart, Rep. Jim McCrery, hashed out an agreement that would include the international labor standards and environmental protections Democrats had long sought - and yet still be acceptable to the business community.

In seeking a deal across the aisle, Schwab and McCrery stepped into the landmine-filled territory of the Democratic Party, which regained control of Congress in November, bringing along a renewed protectionist streak. "After the November election, I thought trade was in desperate straits," McCrery says.

While a couple dozen Democratic House members are free-trade advocates, the majority are far more skeptical - a sentiment fed by labor leaders closely aligned with the party. Last year's congressional races showcased growing public concern about the costs of globalization, and Americans increasingly equate open trading borders with U.S. job losses.

Even for Rangel, who stood ready to make a deal, the negotiations with his party colleagues proved delicate - with labor leaders objecting at key moments. Rangel now predicts he can pull "more than 100" Democratic votes to his side, more than enough when combined with Republican votes to move important trade accords forward.

Republicans thought the deal was settled more than once over the past months, only to watch the agreement slip away. So on Thursday afternoon, as they closed in again, everyone was crossing their fingers. Inside Rangel's office, an aide was calling Michigan Rep. Sander Levin - who, as a labor champion and chair of the trade subcommittee, posed a veto threat to any deal - to sign off on a letter to Schwab.

"We're very close," the 76-year-old Rangel told me as he made his way to the House floor to cast a vote on Iraq, all the while cracking jokes in his craggy New York accent.

Earlier that day, from a House office building up the street, McCrery, a soft-spoken 57-year-old Louisiana lawmaker, took off his wire-rim glass, rubbed his blue eyes, and looked at the clock in his office. His job was to run the final agreement through key Senate Republicans and the business community, convincing them to sign off.

McCrery was hopeful, but he'd also been here before. "We've been very close a couple times," he told Fortune. "Two weeks ago, we really thought we had a deal, and it turned out we didn't. It's been exasperating."

And from her office across town, the 52-year-old Schwab, a veteran international negotiator, sensed that everyone was "ready to close."

The only question was the reaction of the two parties' "constituencies" - business for Republicans, labor for Democrats - and "what was the balance of happy and unhappy campers." In the end, there were enough happy campers to announce a deal from Speaker Nancy Pelosi's office.

Schwab and her Republican allies didn't get everything they wanted - most notably a guarantee that fast-track authority would be renewed.

Fast-track, formally called trade promotion authority, enables a president to negotiate deals with other countries that Congress must then pass or reject in full, without amendment. Without it, the United States lacks negotiating leverage with other countries. Fast-track authority expires at the end of June and its renewal is considered vital to the completion of the Doha round of the World Trade Organization negotiations.

But fast-track is also a political hot potato, and yesterday the Republicans opted to leave well enough alone and close the deal they could get - after assurances from Rangel and others that this would lay a foundation for renewal.

"You have to set aside things you had hoped to get, and just say, 'this is a really good deal for America,'" said Schwab. "The real key is that we have created the path to move ahead and get fast track."

In the near future, yesterday's accord is expected to clear the way for trade agreements with Peru and Panama; two other pending deals - Colombia and South Korea - will face additional obstacles from Congress.

Just as importantly, though, the deal provides a bipartisan template for future agreements. It was a historic - and in some ways surprising - breakthrough, given the political climate surrounding trade. "Getting this deal was critical for U.S. trade policy," Schwab says. "We had been drifting in the wrong direction.

But Rangel couldn't help but find some humor in the fact that Republicans, who for years had refused to include labor or environmental standards, were now so eager for a deal.

"They've ignored us. Now everyone in the administration is nice to me, because I'm chairman!" At that, he burst into a hearty New York chuckle. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.