(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: Currency Manipulation is Far from the TPP’s Only Danger to the U.S.

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China, currency manipulation, Japan, Jared Bernstein, multinational corporations, offshoring, subsidies, TPP, Trade, Trade Deficits, Trans-Pacific Partnership, {What's Left of) Our Economy

On the one hand, I’m thrilled to see Jared Bernstein’s op-ed in The New York Times this morning urging that President Obama’s proposed Trans-Pacific Partnership (TPP) trade deal include provisions that would severely restrict currency manipulation.

When governments artificially undervalue their currencies, they create for all goods and services they produce price advantages over foreign competition that have nothing to do with free market, much less free trade, principles. The world’s most important currency manipulator, China, foreign is not (yet) a TPP member. But as Bernstein — former chief economist for Vice President Biden — points out, three of the countries that are signatories, including Japan, are regular practitioners.

In addition, Bernstein’s piece performs the valuable service of providing a dispositive counter-argument to claims that the Federal Reserve’s easy money policies are America’s form of currency manipulation. The Fed, as the author notes, buys almost no foreign currency, so its policies do not directly affect exchange rates.  This insight should also be vitally important in clarifying the still-too-muddled debate over legislation to authorize unilateral U.S. sanctions against currency manipulation. 

Bernstein should be commended as well for reminding readers that it’s easy to devise a perfectly reasonable definition of currency manipulation – which is a prerequisite for rule-writing and meaningful enforcement. Amassing enough foreign currency to cover up to a year’s worth of foreign liabilities would be permitted. In particular, that would enable low-income TPP members, which typically need to access foreign capital markets to finance much growth, protect themselves against big monetary policy or bond market shocks that aren’t their fault. Amassing more foreign currency than that one-year supply would qualify as currency manipulation, and would entitle other TPP countries to retaliate.

I can’t speak for Bernstein personally, but certainly many TPP opponents are spotlighting the currency issue not in order to show how a TPP could actually benefit the entire U.S. economy, rather than simply offshoring multinational companies and their Wall Street financiers. Instead, these critics believe that bans on currency manipulation would be deal-killers both for Asian protectionists and for the American offshoring lobby, since the practice is so crucial for their massive earnings from trade.

Yet however important, currency manipulation isn’t the only threat to U.S. interests posed by the TPP. For example, too many of the major signatory countries pervasively employ subsidies that can affect the prices and competitiveness of traded goods and services just as significantly as currency manipulation. And because subsidizing governments tend to be so secretive, even identifying a subsidy can be next-to-impossible, much less combating it. Similarly, in many of these countries, and notably Japan, the line between public and private sectors isn’t nearly as bright as in the United States. The result is yet another obstacle to countering subsidies and other forms of economic predation effectively.

So even a TPP with currency manipulation curbs could balloon U.S. trade deficits and thus backfire on the American economy unless it genuinely negates the entire range of foreign protectionist measures. History and common sense teach that that’s an impossible challenge to meet (for some other obstacles, see this recent post). That’s why, on the other hand, I wasn’t entirely satisfied with Bernstein’s article, and hope that he and other critics will start dealing with the bigger TPP picture – soon.