(What’s Left of) Our Economy: Progress from Progressives on Trade

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America First, developed countries, developing countries, environmental standards, Financial Crisis, GATT, General Agreement on Tariffs and Trade, George W. Bush, Global Imbalances, Global Trade Watch, globalization, Hillary Clinton, Jared Bernstein, labor standards, Lori Wallach, multinational companies, NAFTA, national treatment, non-discrimination, North American Free Trade Agreement, offshoring, progressives, Public Citizen, The American Prospect, TPP, Trade, Trans-Pacific Partnership, World Trade Organization, WTO, {What's Left of) Our Economy

Ever since the debate over NAFTA (the North American Free Trade Agreement) more than twenty years ago turned trade policy into a nationally contentious issue, the American left has provided the overwhelming share of the political money and muscle aimed at creating urgently needed course corrections. So it’s great to see important signs that progressives have finally started touting two ideas that realistically could make a significant difference.

The evidence can be found in an article coming up in The American Prospect by Jared Bernstein, former top economist to Vice President Biden, and Lori Wallach of Public Citizen’s Global Trade Watch. To be sure, the article does dwell overlong on proposals that left-of-center figures have been making for decades, and that hold little, if any, promise of turning trade agreements and related policy decisions into engines of domestic growth.

For example, there’s the usual call for truly enforceable labor and environmental standards in trade deals – even though adequately inspecting enormous third world national manufacturing complexes is a logistically impossible task. Worse, the offshoring lobby and its minions in Congress and the Executive Branch have already twice used the tactic of making cosmetic changes along these lines in trade agreements to call progressives’ bluff: during the George W. Bush administration in deals with agreements with Panama and Peru; and in President Obama’s Trans-Pacific Partnership (TPP).

Don’t think Democratic presidential candidate Hillary Clinton doesn’t recognize how successful this ploy has been in persuading fence-sitting Congressional Democrats to fall in line behind new trade deals.

Judging from the Bernstein-Wallach piece, moreover, the American left still believes that no hard choices need be made in trade and broader globalization strategy, and that with their proposed reforms, growing international commerce can become a win-win for first and third world workers alike around the world. As I’ve recently written, positive sum outcomes for developed and developing country workforces are possible – if, for instance, NAFTA was turned into a genuine western hemisphere trade bloc, as its leading founders once suggested they intended.

On a global basis, though, the surplus of developing country workers earning pauper wages (both in absolute terms and in relative terms in sectors like advanced manufacturing and high tech services) ensures that for decades the third world will remain much more important as a low-wage and low-regulation production site than as a source of new consumer demand. And as long as that situation holds, astronomical growth-, job-, and wage-killing trade deficits in the United States will be inevitable. Also inevitable will be the buildup of enormous international economic imbalances like those that set the stage for the last financial crisis.

But the most encouraging aspect of the Bernstein-Wallach article was indeed encouraging: The authors argued that not all prospective U.S. trade partners should be treated equally – because they differ in crucial respects. Ever since the current global trading system began taking shape in the immediate aftermath of World War II, one of its biggest weaknesses – and one posing special problems for a relatively open economy like America’s – has been its insistence (largely at Washington’s behest, to be sure) on the principles of non-discrimination and national treatment.

In other words, regardless of how open or closed they are, or how wealthy or impoverished, the United States needed to deal equally with all countries belonging to the old General Agreement on Tariffs and Trade (GATT) and to the newer World Trade Organization (WTO). During the early post-war decades, these requirements legally forced American leaders to open their markets as much, say, to relatively open Britain as to hermetically sealed Japan, and to treat identically in the American market businesses from wildly varying countries.

When the end of the Cold War encouraged third world population giants like China and Mexico to introduce selected free market reforms and join the global economy, the option of mass production offshoring was created for multinational companies. As a result, these GATT and then WTO principles prompted the U.S. leaders influenced by these companies to expand trade whether or not the target countries could become significant net consumers, and thus create reasonably balanced trade flows and their economic benefits.

Bernstein and Wallach don’t favor discrimination on grounds like these. (That’s not surprising, since this practice would undercut their positive-sum first-third world trade optimism.) But they do urge selecting

“trade partners based on their countries’ records of compliance with the terms of past trade agreements, international labor and environmental standards, and human rights and other criteria. [The article makes clear that records of currency manipulation would be among them.] While no country has a perfect track record, there is a well-understood continuum of compliance, and known bad actors should be barred from the negotiating table until they’ve made proven, effective efforts to begin cleaning up their acts.”

That’s a start – and a potential wedge.

It’s also heartening to see Bernstein and Wallach emphasize “rewarding those who play by the rules” by creating and enforcing meaningful rules of origin in trade deals. As they rightly note, without such provisions, countries that have not signed various trade deals can still benefit from them because multinationals and other companies will be free to import into member countries goods largely made outside the new trade zone. That’s great of course for businesses seeking the great possible sourcing flexibility. But these practices inevitably render meaningless most of the rest of the given agreement.

And most encouraging of all – although the authors don’t mention this – an American trade policy (robustly) incorporating these features would be in violation of WTO rules. Free of a straitjacket that mandates policy uniformity in a highly diverse world, Washington would be free to choose another globalization lodestar – one that makes far more sense for a country with incomparable market power, potential for self-sufficiency, and thus unilateral leverage. A lodestar like “America First.”

(What’s Left of) Our Economy: The IMF (Unwittingly) Trashes the Case for Obama’s Pacific Trade Deal

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Christine LaGarde, developed countries, developing countries, emerging markets, free trade agreements, IMF, International Labor Organization, International Monetary Fund, Obama, Stolper-Samuelson theory, third world, TPP, Trade, Trans-Pacific Partnership, World Bank, {What's Left of) Our Economy

Whatever reputation the French have had for being master logicians has just been shredded by International Monetary Fund (IMF) chief Christine LaGarde.  Her take on emerging markets’ emerging role in the world economy is completely incoherent, and its fatal flaws have big implications for President Obama’s Trans-Pacific Partnership (TPP) and U.S. trade policy as a whole.

For decades, Washington has told Americans that the U.S. economy urgently needs new trade deals mainly because without them, the nation and its workers would be shut out of all the huge, rapidly expanding third world economies that would surely be the globe’s most powerful growth engine for the indefinite future. Moreover, both Democratic and Republican presidents and Congresses have followed through, as new U.S. trade deals since Mexico’s addition to the North American Free Trade Agreement (NAFTA) have focused tightly on developing countries.

Mr. Obama and other TPP supporters have used the same justification for the Pacific Rim trade agreement, repeating over and over again the mantra that “more than 95 percent of our potential customers live outside our borders….” Obviously, they haven’t been thinking mainly of developed markets like Europe and Japan.

On the level of both individuals and national economies, these claims have always been bogus. As I’ve shown, according to major international organizations like the World Bank and the International Labor Organization, the vast majority of third world populations still earn far too little to buy goods made in wealthier countries like the United States on anything close to a regular basis. Moreover, as my book The Race to the Bottom documented exhaustively, most major developing countries – ranging from Mexico to China and its low-income Asian neighbors – have achieved most of their growth by selling to America and the high-income world. Even the commodity producers that have profited by supplying China have remained dependent on U.S. and other developed markets indirectly, since they have been such important final customers for China’s output.

In a Tuesday speech in Paris, LaGarde echoed recent observations that developing countries are in the process of turning into global growth laggards from global growth leaders. As made clear above, their claim to that former status was dubious at best, but LaGarde’s outlook was also noteworthy for its profound pessimism. She not only warned that emerging economies that borrowed heavily in dollars were vulnerable to monetary tightening moves from the Federal Reserve. She also declared that “emerging and developing countries are now confronted with a new reality. Growth rates are down, and cyclical and structural forces have undermined the traditional growth paradigm.”

Indeed, LaGarde pointed to IMF research projecting that “the emerging world will converge to advanced economy income levels at less than two-thirds the pace we had predicted just a decade ago. This is cause for concern.” (What she failed to mention is that this convergence could also result in part from incomes in the developed world sinking closer to third world standards, as the Stolper-Samuelson theory of international trade’s impact first stipulated.) For good measure, LaGarde reminded her audience that “Clearly, emerging markets are benefiting from the fact that many central banks in many advanced economies still have a very easy policy stance.” In other words, historically easy credit in the wealthier countries had kept third world exports and growth much greater than they would have been otherwise.

Yet even though she made the case that emerging market economies’ prospects were deteriorating and had relied critically on the developed countries even after the financial crisis, LaGarde also mysteriously contended that the emerging world “contributed more than 80 percent of global growth since” the global economy seemed on the verge of collapse and that, consequently, “The economic health of the emerging world is of first-order importance for the advanced economies.”

And in the strangest statement of all, she proceeded to insist that the wealthy countries now need to deal with this situation by propping up emerging market performance with “a stronger global financial safety net” for these economies that expands their access to the swap lines of the richer countries’ central banks.

A respectable case can be made that emerging markets have always been the keys to future global growth. Equally respectable cases can be made for the propositions that they have been the main global growth drivers since the financial crisis; that they have never been the keys to global growth; that they will remain central to the wealthier countries’ well-being; that they are headed to a much gloomier “new normal;” and that they need new aid from the developed countries to avoid major future woes. But no case can be made for all these contentions at the same time – unless reason and logic are abandoned entirely.

Moreover, since the claim behind which LaGarde is putting her money is the one that’s downgrading the third world’s economic importance substantially, and the one conforming with past and future realities, it should be clear that the term “emerging markets” is likeliest to be an oxymoron going forward. As a result, although the United States and other wealthier countries could legitimately decide to lend them a hand for moral and humanitarian reasons, the argument from self-interest is looking ever more far-fetched. And tying America’s fortunes even more tightly to global economic losers via new trade deals like the TPP? That looks downright masochistic.

(What’s Left of) Our Economy: Why the Latest World Trade Failure Should be Celebrated

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agriculture, Alan Greenspan, bubbles, China, Congress, developed countries, developing countries, Doha Round, Federal Reserve, Financial Crisis, George W. Bush, Global Imbalances, Information Technology Agreement, ITA, Obama, offshoring, poverty, Robert Zoellick, September 11, terrorism, TPP, Trade, trade law, Trans-Pacific Partnership, World Trade Organization, WTO, {What's Left of) Our Economy

Trade policymakers have just uncharacteristically – and perhaps unwittingly – given the world economy an important holiday gift: a virtual decision to kill the so-called Doha Development Round of world trade liberalization talks.

This outcome of the latest meeting of the World Trade Organization (WTO) in Nairobi won’t make an active contribution to solving global economic problems. But it greatly reduces the odds that additional multilateral trade expansion will keep worsening the kinds of international economic imbalances that helped trigger the last financial crisis and keep threatening to set the stage for a new meltdown.

The Doha round (named after the capitol of Qatar, where it was launched) was a product of the September 11 terror attacks, but was whoppingly misconceived both strategically and economically. Though intended to spur the prosperity needed in developing countries ostensibly needed to reduce terrorism’s appeal, its founders – notably President George W. Bush’s administration trade chief Robert Zoellick – seemed unaware that dangerous extremism had never taken hold in most world regions where poverty was most desperate, e.g., rural India and rural China. Moreover, the round’s explicit aim of channeling most of its trade liberalization benefits to developing countries completely violated the core principles of genuinely free trade.

But those mistakes and their impact paled next to the damage likely from a treaty reflecting the Doha goals – ever greater global financial instability stemming from trade flows that fostered the offshoring of production, and therefore income-earning opportunities, to countries that would still long remain too poor to consume adequately, and away from the rich-country populations (especially America’s) whose purchasing power was still crucial for adequate global growth.

By the time the Doha talks were inaugurated, in 2001, years of NAFTA-style, offshoring-centric U.S. trade liberalization decisions capped by China’s admission into the WTO had already recklessly placed the U.S. and world economies on a completely unstable course. The Bush administration and the Federal Reserve under Alan Greenspan further greased the skids for crisis with two decisive moves. The former filled the resulting American income and growth shortfall with renewed, and record, federal budget deficits. The latter even more powerfully fueled consumption with prolonged (then) record low peacetime interest rates. For half a decade, the United States experienced an unprecedented burst of debt-led, bubble-ized growth. And then the entire global economy nearly collapsed.

Success at Doha was always bound to magnify world trade imbalances further and ensure even more badly lopsided growth by requiring the United States and other developed countries to open their markets much wider and faster than low-income countries. Particularly important were measures practically certain to gut the U.S. trade laws that shielded America’s domestic economy from foreign predatory trade practices like export subsidization and dumping. In fact, the inequities were so egregious that even America’s staunchly pro-trade liberalization agricultural sector, which has long wielded outsized influence in Congress, balked; its reservations began the Doha hold-up that eventually brought its demise.

Unfortunately, another recent international trade policy decision is likely to add to dangerously distorted global growth – the new Information Technology Agreement reached under WTO auspices, which eliminates tariffs on many tech products but does nothing about the non-tariff barriers and predatory commercial practices used so heavily by so many U.S. trade rivals. New financial pressures may also be fueled if Congress passes the Trans-Pacific Partnership (TPP) trade deal pursued so avidly by President Obama. As I’ve often explained, this agreement’s text does target non-tariff barriers, but creates no mechanisms even remotely capable of actually curbing their use. Therefore, it’s all but certain to create the trade deficit-boosting, finance destabilizing effects of the previous American trade agreements on which it’s modeled.

All the same, TPP ratification this year looks doubtful, given election-year opposition by major Republicans in Congress. Doha’s death would represent a second “do no harm” decision in a single year – certainly not enough progress on the trade policy front, but considerably better than nothing.

(What’s Left of) Our Economy: Open Borders, the Goose, and the Golden Eggs

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Bernie Sanders, bubbles, central banks, developed countries, developing countries, Ezra Klein, Financial Crisis, free trade deals, Great Recession, Immigration, imports, incomes, investment, Jobs, New Economy, Open Borders, recovery, Sharing Economy, third world, Trade, Trans-Pacific Partnership, Vox.com, wages, {What's Left of) Our Economy

Since Ezra Klein is still young, he has time to learn what a bad idea it is to try being clever on unfamiliar subjects. Nonetheless, as made painfully clear in a new interview with Democratic presidential hopeful Bernie Sanders, the media wunderkind and Vox.com founder would be well advised to learn this lesson sooner rather than later, at least when it comes to how the global economy works.

Evidently trying to be clever, Klein tried to trip up the Vermont Senator by asking him how he could reconcile his avowed democratic socialism – and its presumed concern about global poverty – with his opposition to “sharply raising the level of immigration we permit, even up to a level of open borders….” Added Klein, “It would make a lot of the global poor richer, wouldn’t it?”

Sanders’ response was good. But he could have really humiliated Klein by reminding him that unlimited immigration would not only slash American living standards, but that it would ultimately backfire on developing countries as well. The reason is the same as that which argues, from a global perspective, against dropping all barriers to imports from the third world, and it springs from a reality as unmistakable as it is apparently unknown to Klein: American consumption is the goose that lays the developing countries’ golden eggs. To paraphrase that immortal adage, it’s “where the money is.”

Yet just as the United States ultimately can’t responsibly finance the consumption of enough third world imports to spur developing country progress unless its own economy remains truly healthy, it can’t ultimately provide opportunity for third world immigrants without maintaining genuine prosperity. And as Klein and other chattering class advocates of much freer immigration and trade policies should understand – but clearly don’t – the financial crisis demonstrated the heavy costs for everyone of forgetting this truth.

As I’ve written, thanks in large measure to more than a decade of U.S. job- and wage-killing trade deals focused tightly on developing countries, a critical mass of American workers lost the incomes they needed to support acceptable living standards by living within their means. Rather than change course on trade policy, the bipartisan Washington powers-that-be decided to enable the working and middle classes to at least run in place economically by borrowing, instead of earning. The economic meltdown and Great Recession that inevitably ensued inflicted damage worldwide.

Just as important, the historically feeble recovery that’s followed has claimed its share of third world victims, too. Slower American growth has helped crimp imports from China and the rest of Asia, thus sapping the vigor of these export-dependent countries. (Although, as this recent post shows, this phenomenon is easily exaggerated.)  The continuing U.S. malaise has also undermined employment opportunities for current and prospective immigrants from Mexico and the rest of Latin America. Meanwhile, because many global investors have become more risk averse since the last decade’s bubbles burst, and because Wall Street regulations have (necessarily) tightened up some, much international capital has forsaken developing country market and fled to the safety of the United States.

Do Klein and his ilk really believe that admitting a flood of overwhelmingly low-wage, low-skill immigrants will turn this situation around and help anyone, at least for any serious length of time? The only possible justification is a belief, contrary to the evidence and common sense, that the newcomers could rise up the U.S. income ladder as quickly as previous immigrant cohorts. The same question applies to boosting American imports from developing countries – which other supposed experts have touted as a prime reason for supporting President Obama’s Pacific Rim trade deal. Moreover, as I’ve just reported, import- and offshoring-friendly American trade policies could also start victimizing recent immigrants – and choking off opportunities for their successors.

In a perfect world, of course, inhabitants from poor countries could move to wealthier countries any time they wished, and they and the native-born populations would all live happily ever after. Alternatively, in a perfect world, third world populations could supercharge their incomes by providing their first world counterparts with an indefinitely growing supply of increasingly advanced products. Americans (and in principle, Europeans and Japanese) would all support themselves by finding themselves jobs in the New Economy, or the Newer Economy, or the Sharing Economy, or whatever fantasy economic utopians conjure up. Or maybe central banks could keep trying to shatter ever-soaring records for money-printing,

In that perfect world, however, we wouldn’t need economics, or economics. And we certainly wouldn’t need economic journalists like Ezra Klein.