(What’s Left of) Our Economy: Why Trump’s Budget Proposal is a Win for Trade Policy Realism

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border adjustment, budget, Commerce Department, enforcement, exports, imports, Robert Lighthizer, tax reform, Trade, trade law, Trump, U.S. Trade Representative, Wilbur Ross, {What's Left of) Our Economy

Certainly since Donald Trump has been elected president, there’s been a tension even among his most supposedly hawkish trade policy advisers over basic objectives: Should the United States seek to solve its major trade-related problems mainly by promoting exports, or mainly by curbing imports? Of course, the two goals aren’t mutually exclusive. But the first suggests that the nation’s approach to trade will essentially be more of the same (albeit executed more competently), while the latter suggests a significant shift and is vigorously put into effect.

That’s one trade-related reason why Mr. Trump’s new budget proposal is so interesting and potentially important. If you believe that “money talks,” or “deeds count more than words” or any homilies to that effect, then it looks like that the tension has been resolved in favor of import limits – which would be good news indeed if it remains intact.

The reasons, as I’ve long written, are pretty simple, and should be much more obvious than they’ve been. First, for all its problems, the U.S. economy has been growing faster recently than most major world economies. And unlike the faster growers (mainly in the developing world), America’s growth isn’t export-led or -heavy. For that reason alone, its domestic market continues to be the world’s paramount emerging market.

Second, that relatively fast growth, combined with the ongoing export-heavy nature of most foreign economies means, and the huge and chronic American trade deficit, means that the size of the U.S. domestic market into which domestic producers can sell is enormous in absolute terms and indeed much bigger relative to foreign markets than widely realized. After all, this American market includes not only whatever growth the United States can generate going forward, but the large chunks of its market currently controlled by foreign competition.

Third, however much leverage the United States enjoys in global trade, and over foreign countries, its influence over its own market will always be much greater. And that goes double for countries with long records of sweeping protectionism.

Fourth, the domestic market is the market that domestic American producers should know best. Therefore, despite its undeniably impressive dynamism, these domestic producers have less to learn about customer preferences than is the case with foreign market.

For examples of the administration’s apparent ambivalence, simply check out statements made in the confirmation hearings of Commerce Secretary Wilbur Ross and U.S. Trade Representative-designate Robert Lighthizer. Indeed, it’s easy to conclude that their stated bottom line endorses the export-focused approach.

But the new Trump budget document is sending the opposite message – and its declared spending priorities arguably matter more than even sworn testimony. Specifically, according to the Commerce Department section, the final budget

“Strengthens the International Trade Administration’s trade enforcement and compliance functions, including the anti-dumping and countervailing duty investigations, while rescaling the agency’s export promotion and trade analysis activities.”

Not that this text is the end of the story, or even close. As widely recognized, the new budget statement is the first step in a lengthy process in which Congress will be heavily involved. Moreover, because so much of it is so controversial, and because the nation is so far from a consensus on official spending priorities, it’s entirely likely that the current budget priorities will simply wind up being carried over for the time being.

And as for trade policy specifically, Commerce Department funding will be far from the only determinant as to where the administration will put most of its energies. Just one example: the structure of whatever new or revised trade agreements it seeks will matter greatly as well. So will the fate of the border adjustability feature of the House Republican leadership’s tax reform proposals – which would both in effect penalize imports and subsidize exports. Moreover, because the U.S. trade law system is so (inevitably) slow-moving, episodic and reactive, relying exclusively or even mainly on this traditional trade enforcement tool will become a recipe for trade policy failure.    

But the Commerce budget priorities appear to be a straw in the wind that’s unmistakable – and because realistic, unmistakably welcome.

Making News: New Op-Ed Says U.S. Trade Strategy Flawed from the Get-Go

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enforcement, environmental standards, free trade deals, labor standards, Lifezette.com, Making News, non-tariff barriers, tariffs, TPP, Trade, Trans-Pacific Partnership, unilateralism

I’m pleased to report that my latest op-ed article has just been posted this morning on Lifezette.com – which analyzes a new U.S. government report on the likely economic impact of President Obama’s Pacific Rim trade deal. The piece explains that this study makes clear not only the dangers posed by this Trans-Pacific Partnership (TPP) to America’s growth and employment performance, but why the nation’s standard goal of negotiating terms of trade with more protectionist economic powers is completely misguided.

I hope that this piece spurs major debate both on the TPP and on the potential – and indeed the superiority – of unilateralism as a new basis for America’s global trade strategy. What do you folks think?

(What’s Left of) Our Economy: The Text Showcases TPP’s Real Flaws

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China, currency manipulation, dispute resolution, enforcement, environmental standards, exports, imports, labor standards, Obama, protectionism, rules of origin, state-owned enterprises, TPP, Trade, Trade Deficits, trade surpluses, Trans-Pacific Partnership, Treasury Department, World Trade Organization, WTO, {What's Left of) Our Economy

The release this morning of the Trans-Pacific Partnership trade deal (TPP) text means that the Obama administration has kept at least one of its promises in connection with the Pacific Rim agreement: The public has gained the ability to review every single provision in detail within a month of the deal’s signing in Atlanta, Georgia.

Nonetheless, when it comes to evaluating the TPP, the devil is not in the details, and never has been – for all the sweat expended by government officials and industry lobbyists from the 12 signatory countries on even the most arcane aspects of rules of origin, tariff rates and elimination schedules, copyright protections, labor and environmental standards, and the like. All the while, there have been only been two remotely possible exceptions – the agreement’s provisions for dispute resolution, and for determining which goods will actually be eligible for the agreement’s trade breaks.

Re dispute resolution, which is obviously crucial to any agreement’s effectiveness but which has been generally ignored in the TPP debate, the text’s release simply confirms what has always been utterly predictable: This system mirrors the kangaroo court arrangements of the World Trade Organization (WTO) – whose creation has done virtually nothing to prevent the U.S. economy’s victimization from predatory foreign trade practices. As a result, the claim of President Obama and other supporters that the agreement will create a huge, increasingly integrated market governed by U.S.-friendly, free-market-oriented rules should be recognized as the most naive imaginable fantasy.

Re rules of origin, the text confirms numerous press reports that the TPP’s benefits will extend to many products whose content comes from outside the new trade zone – which makes a mockery of the notions that currently excluded countries like China need to join in order to enjoy TPP’s benefits, and that the agreement’s conclusion therefore creates powerful incentives for such non-signatories to adopt the TPP’s high standards,

The TPP dispute-resolution process unveiled in the text demonstrates that the vast majority of member states, whose prosperity depends heavily on maximizing net exports and thus racking up trade surpluses, will gain major new guarantees of unfettered access to America’s much more open market. As with the WTO, a crucial effect of the TPP – and raison d’etre – is to narrow greatly the United States’ internationally accepted legal authority to respond unilaterally to the types of mercantilism in which most TPP countries, notably gigantic Japan, specialize.

Moreover, as with the WTO, despite the paramount importance of the U.S. market, the TPP’s dispute-resolution and rule-making systems grant no special role for America. Even though its economy represents nearly two-thirds of the new total TPP market, its influence under the agreement is simply equal to that of much smaller, and indeed tiny, economies.

Worse, just as with the WTO, the TPP’s one-country/one-vote arrangement will enable the majority of the signatories to game the system and work cooperatively to further their joint goal of ensuring that the U.S. market remains much wider open to their goods and services than the reverse. In other words, like the WTO, and all other international organizations, the TPP will be fundamentally a political organization, not a legal-juridical arrangement, and America’s negotiating strategy has in effect defined its inevitable politics out of existence.

Consequently, whatever market-opening and playing-field language the TPP text contains, turning these words into significantly new, more equitable trade realities is a chimera. For the vast majority of TPP members will be determined – and empowered through their ability to interpret rules and influence verdicts – to ensure the opposite. These countries will be working overtime, and successfully, to prevent TPP dispute-resolution panels from handing down decisions against one that could serve as precedents against all of the others, and the larger organization from writing rules, that could be used to undermine their mercantile national economic structures and strategies.

Understanding the TPP’s protectionist-friendly structure in particular debunks U.S. claims that it will foster meaningful progress toward ending or even disciplining currency manipulation. According to the U.S. Treasury Department, an agreement on this practice among the twelve signatories – which, revealingly, isn’t even in the actual TPP text – “sets a new high standard on exchange rate policies and unfair currency practices for trade agreements.”

But believing this proposition amounts to believing that countries with long protectionist histories, like Japan and Malaysia, are OK with launching efforts that eventually will forever prevent them from using a device for creating decisive price advantages for all the goods they trade in markets around the world. What is it that is known about such economies that convinces anyone that such changes of heart have taken place?

In addition, the rules of origin laid out in the final text make clear that nothing could be easier for non-signatories, like China, to enjoy many crucial advantages of TPP membership. After all, thousands of manufactured goods will be eligible for duty-free or duty-lighter treatment in TPP markets even if most of their content comes from non-TPP members. Given the pervasive global reality of industrial supply chains passing through many countries both in the TPP and outside, this is a Pacific-sized loophole.

The text’s release also should remind Congress, the public, and the media that even if the TPP’s deck wasn’t organizationally stacked against the United States, its measures to prevent abuses of workers and the environment, and the operations of state-owned enterprises, from being used for competitive advantage, are utterly unenforceable from a simple logistical and administrative standpoint.

As I have repeatedly pointed out, the factory complexes of even relatively small TPP economies dwarf the capacity of the U.S. government to monitor their labor and environmental practices systematically. And in many TPP economies, the lines between public and private sector are blurry enough, and bureaucracies opaque and skilled enough at concealing information, to render wishful thinking any confidence that these systems can be transformed.

It’s equally fanciful to suppose that even the TPP’s minimalist origin rules can be effectively enforced, either. How many million American bureaucrats would be required to open how many containers of goods coming into U.S. ports to ensure compliance? And how many more would be needed to find out whether boxes of Chinese-produced goods marked “Made in Malaysia” or “Made in Japan” really are?

All along, the effort to negotiate the TPP, and the debate generated by the deal, have reflected the American delusion that signatures on a piece of paper prove that economies that have been largely closed and centrally commanded for decades have genuinely decided to mend their ways. It’s been a delusion shared by both agreement supporters (who contend that they’ve accomplished this aim) and opponents (who insist that this goal can be achieved with better language).

As a result, even the TPP’s defeat in Congress may not guarantee that American trade policy will get off its failed, export- and negotiations-obsessed track, and focus on what the United States has much more control over – access to its own one-of-a-kind market and the leverage it creates to establish more equitable and sustainable terms of trade unilaterally. But the right kind of TPP debate could still provide an invaluable learning opportunity – and start the process of turning America’s approach to trade into an engine of domestic growth and job creation, rather than of offshoring, higher trade deficits, and (even) slower recovery.      

(What’s Left of) Our Economy: TPP Debate is Perpetuating Longstanding Trade Delusions on Both Sides

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currency manipulation, David Autor, enforcement, labor standards, Lawrence Summers, level playing field, non-tariff barriers, offshoring, Paul Krugman, Sander Levin, Simon Johnson, tariffs, TPP, Trade, Trans-Pacific Partnership, {What's Left of) Our Economy

Some of the biggest names in the economics world have weighed in recently on President Obama’s proposed Pacific Rim trade deal and the negotiating authority that would help secure its approval by Congress, and their analyses once again underscore how thoroughly misunderstood American trade diplomacy, its impact, and its possibilities remain. Their main points – that agreements like the Trans-Pacific Partnership (TPP) have little economic impact, and that carefully crafted provisions can produce equitable terms of competition for America – could not be more at odds with the record, and with simple common sense.

The main rationales for slighting the economic effects of the TPP – and indeed trade agreements in general – have been made by New York Times columnist and Nobel economics winner Paul Krugman, and former Treasury Secretary and top economic adviser to President Obama Lawrence Summers. The former emphasizes that “once trade is already fairly open, the gains from opening it further are small.” The latter writes that “increases in the extent of U.S. trade are driven largely by technology and by the increased sophistication of developing economies, not by trade agreements.” (Krugman also expresses agreement with this point.)

But although trade liberalization unquestionably has made major strides in the post-World War II period, the barriers that remain shouldn’t be underestimated. For the vast bulk of the obstacles to trade that have been dismantled have been visible barriers like tariffs and quotas. By contrast, non-tariff barriers (NTBs) like subsidies – which are often excruciatingly difficult even to identify, much less document and combat through trade law actions – have become especially important to America’s trading fortunes for two main reasons.

First, most of them are found overseas, which means that their persistence and growth damages U.S. producers who face foreign competition disproportionately. Second, they are particularly popular among the developing countries whose massive surge into the global trading system starting roughly when the Cold War ended has transformed international commerce. Because trade with countries like China increasingly dominates America’s trade flows, their pervasive use of NTBs – greatly aided by the secrecy with which their governments tend to operate – imposes outsized costs on their U.S. rivals, too.

What Summers overlooks is just as important. The main reason that these developing countries’ sophistication has fueled so much trade growth is that trade agreements have enabled capital from the United States and other high income countries to access not only their markets but their productive capacities and potential. In fact, by providing important guarantees to prospective investors about their treatment in host countries, these trade agreements have boosted and indeed created most of that developing country sophistication to begin with – through the transfer of management and technological knowhow that these economies never would have developed so quickly on their own.

Ironically, Summers concedes the point when he writes that trade agreements “reduce pressure for outsourcing because when barriers fall the incentive to invest abroad in order to avoid paying tariffs is attenuated.” Unfortunately, he misses the continuing importance of NTBs in sending American production and jobs to trade deal partners, especially requirements that foreign investors transfer technology, and produce and source locally.

Krugman and Summers also ignore the crucial role played by recent U.S. trade agreements, and the global imbalances they inevitably generated, in triggering the last financial crisis and ensuing Great Recession. Chiefly, the third world focus of America’s trade diplomacy starting with NAFTA intensified U.S. economic ties with countries whose willingness and potential to produce vastly exceeded their willingness and potential to consume. So not only did soaring U.S. trade deficits become inevitable. So did a deterioration of income-earning opportunities in the United States that Washington decided to offset with recklessly easy money policies. These in were turn enabled largely by the trade profits of its partners that were recycled back into the U.S. economy to create oceans of cheap credit. If you don’t believe this, your quarrel isn’t only with me. It’s with guys named Obstfeld and Rogoff, among others.

Completely unjustified faith in the ability of trade agreements to deal effectively with trade barriers – especially NTBs – is the second fundamental misunderstanding surrounding U.S. trade policies. It’s expressed prominently on both sides of the TPP debate both by Members of Congress and leading scholars, notably Summers as well as David Autor, David Dorn, and Gordon H. Hanson in the Washington Post; and Simon Johnson (along with Rep. Sander Levin, Democrat from Michigan) in Politico.

TPP supporters (based on what is known of the agreement) claim that the deal will significantly strengthen the American economy and even improve the lot of hard-pressed U.S. workers facing foreign competition by creating significant protections for intellectual property; and by protecting “U.S. firms against predatory regulatory interventions by member governments” (as Autor, Dorn, and Hanson insist). Critics, like Johnson, Levin, and Summers believe that the deal could be made acceptable to the United States if it banned currency manipulation and included strong safeguards for the environment and worker rights.

Based on America’s experience, though, confidence in trade rule-writing is a total mystery. One big and in practical terms insuperable problem is enforcement. As I’ve noted, many of the countries currently negotiating the TPP have enormous manufacturing complexes (even relatively small economies like Vietnam). As Johnson and Levin recognize, the labor provisions of NAFTA have been a major flop in Mexico. But even if a much stronger regime had been in place, how many American officials would have been needed to be constantly inspecting how many Mexican factories to ensure consistent, widespread compliance? And now they propose to add Vietnam to Washington’s enforcement burden? And, down the road, possibly China?

The second equally big and insuperable problem stems from the structure of the dispute-resolution systems in U.S. trade agreements. Typically, they give each signatory country an equal say, even though the American economy is invariably the biggest by far in the group – and therefore the greatest prize. As a result, even if so-called strong and enforceable disciplines on currency manipulation, for example, were included in the core texts of TPP and other trade deals, what reason is there to suppose that the majority of partner countries would ever see eye-to-eye with Washington on actually using any existing standard to punish the practice?

After all, Japan has already been accused by the U.S. Treasury Department of devaluing the yen for trade advantage. Why would Tokyo agree to deprive itself of the option in the future? The same goes for follow-on countries like Korea and China. In fact, since all of current and likely TPP members have a strong interest in growing by amassing trade surpluses with the United States, why would any of them ever agree to remove this weapon from their policy arsenals in any and all future circumstances?

The real lesson taught by America’s experience with trade deals is that it’s not remotely possible to level the proverbial global playing field with provisions proscribing or limiting various ostensibly objectionable foreign practices and policies. Washington’s enforcement capacity is sorely inadequate to the task, and the necessary consensus among our trade partners on acceptable and unacceptable behavior simply doesn’t exist, and shows no likelihood of emerging no matter how many pieces of paper these countries sign and how many rules they endorse.

The United States can, however, reasonably hope to secure equitable terms of trade for its domestic producers by relying on what it can hope to control – access to its own supremely important market. In other words, to serve the interests of the U.S. domestic economy, America’s trade agreements must stipulate that other countries will receive the privilege and immense advantages of doing business in the United States only on terms acceptable to the U.S. government and subject to the Congress’ unfettered ability to amend any deal it considers. Moreover, Washington will unilaterally administer all agreements and serve as judge, jury, and court of appeals for all disputes.

Even better, since the U.S. economy remains the world economy’s biggest golden goose, such tough trade policy love will bring major worldwide benefits as well – by preventing the reemergence of unsustainable international economic imbalances and the destructive financial instability and global crises to which they can lead.