(What’s Left of) Our Economy: (Inadequate) Establishment Progress on China Trade

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China, decoupling, dual-use technologies, national security, reciprocity, Trade, Trade Deficits, trade war, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

Normally, it’s bad news for anyone seeking a realistic, sustainable U.S.-China trade policy when a group like private “The U.S.-China Trade Policy Working Group” issues a statement outlining “a new framework for trade negotiations” out of concern that bilateral economic relations “have taken a very concerning turn.”

Such phrases usually signal that the group of supposed experts in question is going to “Blame America First” for the current trade war (albeit with token acknowledgments of problematic Chinese policies) and urge a return to a cosmetically altered pre-Trump status quo. A quintessential example is this July letter to the President and Members of Congress from “members of the scholarly, foreign policy, military and business communities, overwhelmingly from the United States, including many who have focused on Asia throughout our professional careers.” Pessimism seemed especially appropriate given that this latest Working Group is comprised of “economists and legal scholars from China and the United States,” since members from the PRC can be accurately seen only as mouthpieces for the dictators in Beijing.

So I’m as pleased as I am surprised to report that the Group’s October 18 statement reinforces the case for a Trump-ian turn in China policies in two important ways. First, it made clear that, contrary to the economic conventional wisdom, lopsided U.S.-China trade flows (i.e., U.S. trade deficits) are an important, legitimate concern for Americans and their leaders. Second, it echoed increasingly common criticisms that the World Trade Organization (WTO) is a sorely inadequate forum for dealing adequately with these as well as the grave threats to U.S. security created by China’s rapid progress toward superpower status.

Not that the Working Group’s endorsement of a concentration on economic imbalances was emphatic, or even explicit. In fact, it was disappointingly implicit, and justified partly for political, not economic reasons. But nonetheless, endorsement it was, and it came twice, in the following passages:

>”In today’s interdependent global economy, a broad assortment of divergent domestic policies (including policies that have not historically been regulated through WTO rules) can trigger calls to ‘rebalance’ the structure of cross-border market access and trade barriers between countries.”

>”One advantage of [the Group’s proposed new framework for world trade] is that it offers a structure whereby the US and China can, together, make choices about how to rebalance their trading relationship in the future.”

At the same time, some individual Group members have accorded considerably more importance to the bilateral imbalances, both in economic and political terms. For example, University of Cambridge (United Kingdom) economist Meredith A. Crowley wrote in a concurring statement:

“Economic research has documented that the US’s trade policy commitments at the WTO have resulted in a higher level of penetration of the US market by producers based in China than China’s trade policy commitments have generated for producers based in the US. This asymmetry in border policy commitments, in conjunction with changes in technology, domestic and regulatory policies, and the wider economy have resulted in an asymmetry in the real and perceived benefits of the US-China economic relationship between these countries and across groups within the United States.”

And according to Dartmouth College economist Robert W. Staiger:

“US expectations of reciprocal market access expansion into the Chinese market arising from China’s 2001 entry into the WTO have not been met. This requires a rebalancing of the existing WTO market access commitments between the US and China to achieve the degree of reciprocity in these commitments that was intended to arise from their 2001 negotiations.”

Indeed, Staiger both went on to note that the same criticism could be made of the 1994 Uruguay Round global trade agreement that produced some trade barrier cuts along with creating the WTO:

“US expectations of the balance between the internal benefits and costs of its own tariff commitments agreed to at the…Uruguay Round have not materialized. This may require a rethinking and possible renegotiation of some of the Uruguay Round tariff commitments made by the US, subject to the preservation of reciprocity (once achieved) with China and with other US trading partners who would be impacted by this renegotiation.”

His mention of reciprocity as a trade diplomacy goal is noteworthy as well, for although this objective has been sought by the Trump administration and long supported by trade policy critics, it was never a goal enshrined by the WTO (or its predecessor, the General Agreement on Tariffs and Trade) and is roundly rejected by most economists.  (See, e.g., here.)

As for the WTO itself, the Group as a whole made two key observations:

“It has been almost 18 years since China joined the WTO, the system of trade rules and dispute resolution mechanisms that, at that time, defined the state of the art. During the intervening years, the global economy and the technologies that sustain it have changed dramatically, in ways that very few people anticipated at the time”; and

“[T]hese changes have had significant impacts on the international trade ecosystem, and the political leaders of many WTO members have voiced concerns that globalization pursuant to the WTO system is no longer attuned to their countries’ needs.”

As a result, the Group declared its intent to offer an “intellectual framework” that would represent an “alternative” to that which “undergirded the global economy at the time of China’s 2001 Protocol of Accession to the WTO.” (In fairness, the Group has also described its recommendations as an alternative to more recent ideas, emphasizing geopolitical competition, that underlie more recent calls for U.S.-China economic decoupling.)

Most strikingly of all, although Group members clearly would like to preserve as much of the WTO’s multilateral dispute-resolution system as possible (in order to preserve to the great possible extent what they remain confident are the mutual gains resulting from maximum free trade), all are now on record as backing both the United States and China dealing with certain high priority issues “bilaterally outside the WTO framework initially, with subsequent WTO-compliance then achieved through the application of various WTO ‘flexibilities,’ or, in the case of new areas such as digital trade, through the development of new WTO norms.”

And despite the above qualifications to outside-the-WTO bilateralism, the references to “WTO ‘flexibilities’” and to “developing new WTO norms,” can only shrink the trade body’s role and legally accepted authority over the trade policies of both countries.

Unfortunately, the new Working Group report isn’t entirely a good news story for critics of pre-Trump China trade policies – mainly because it says so little about operational details, and what little is said is so unconvincing. For example, it uses a “buckets of policies” methodology to identify practices that the two countries (and the world trade system as a whole) should agree to prohibit or forswear, and practices that all parties concerned should be permitted in the name of sovereignty in general and economic development objectives more specifically.

But even keeping in mind the Group’s recognition that it work is only a start down this road, the suggested standards they propose for classifying practices as permissable and not seem hopelessly subjective. Even regarding rules they consider relatively uncontroversial, what will be the real world difference between “policies [that] cause harm to [another] country…without necessarily taking on a beggar-thy-neighbor character or entailing global economic losses” on the one hand, and on the other, policies that cause harm to another country that do take on a beggar-thy-neighbor character?

Similarly, in terms of the more controversial situations they explore, what’s the real world difference between “cases where Country A’s policies have adverse implications for Country B, but the harm is the incidental consequence of, and not the primary motivation for, those policies” and cases where the harm isn’t incidental and/or the primary motive?

And within these areas, huge definitional questions loom just as large. Like what kinds of compensation for various trade-related offenses will be deemed “adequate” and what kinds of responses considered “well-calibrated”?

The calibration point also brings up another problem never squarely faced by the Group to begin with: What’s the verification mechanism? That’s an especially important omission given China’s long record of violating official commitments. To date, if anyone’s thought of an answer that can adequately safeguard legitimate American interests other than reserving that authority unilaterally to Washington, they’ve very effectively kept it secret.

Moreover, the Group’s approach can be faulted for failing to recognize the systemic nature of China’s assault both on even minimally free market-oriented norms. “Well-calibrated domestic policy adjustments” and “proportionate and well-targeted” remedies sound great until the ease with which China’s vast and secretive bureaucracy can reorganize and rename offending entities is considered.

In fact, the Group seems to try to define the systemic nature of the China threat out of existence, touting the “advantage” created by its framework of “encouraging each country to refrain from aggregating the other’s extraterritorially injurious policies into a single grievance and to refrain from amalgamating extraterritorially injurious policies with other, non-economic concerns.”

Such aggregation is precisely what’s needed to deal with the China challenge satisfactorily from a U.S. standpoint, and avoid being drawn into the mug’s game of responding to offending Chinese behavior episodically.

Moreover, for all the potential benefits of delinking lower from higher hanging fruit, delinking economic concerns and strategic concerns created by Chinese transgressions clashes with the Group’s own recognition of the emergence and multiplication of “dual use” technologies with civilian and crucial military applications.

This U.S.-China Trade Policy Working Group deserves credit for breaking out of some dangerously outdated academic and policy molds. But compared with the growth of the Chinese threat, and the extent to which the economic decoupling it seeks in part to avoid is already proceeding, its work is way behind the times.

(What’s Left of) Our Economy: Trump’s NAFTA Rewrite Blueprint is an Encouraging Start

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bubbles, Buy American, Canada, dispute resolution, environmental standards, GATT, General Agreement on Tariffs and Trade, government procurement, labor standards, manufacturing, Mexico, NAFTA, national treatment, non-discrimination, North American Free Trade Agreement, reciprocity, rules of origin, tariffs, TPP, Trade, trade deficit, trade enforcement, trade laws, Trans-Pacific Partnership, Trump, value-added taxes, VATs, World Trade Organization, WTO, {What's Left of) Our Economy

The Trump administration is out with its detailed statement of renegotiation objectives for the North American Free Trade Agreement (NAFTA), and if you’ve favored turning U.S. trade policy from an engine of debt-creation and offshoring into one of production-fueled growth and domestic job creation, you should be pretty pleased.

As critics have noted, yesterday’s statement does lack numerous important details about how the administration intends to achieve its goals, and some of these omissions (as will be explained) raise legitimate questions about the depth of the president’s commitment to these changes. But the statute requiring the release of such statements doesn’t mandate disclosure of every – or any – specific strategy for reaching these goals. Moreover, the talks haven’t even started, and these tactics naturally tend to change with circumstances. So those accusing the administration of excessive vagueness should start holding their fire.

As indicated in yesterday’s post, the most important change needed in NAFTA is the addition of teeth to the agreement’s existing rules of origin – the requirements that goods sold within the NAFTA free trade zone comprised of the United States, Mexico, and Canada be made overwhelmingly of parts, components, and materials made inside the zone.

After all, manufacturing dominates trade not only inside NAFTA, but between the NAFTA countries and the rest of the world. Without imposing teeth, non-NAFTA countries will have no meaningful incentive to invest in new NAFTA-area facilities to produce the intermediate goods that comprise the content of final products, like automobiles. And the economies, businesses, and workers in the three countries will be denied immense opportunities to boost production and employment. Indeed, this is precisely this opportunity that’s been missed under the current NAFTA.

It’s difficult to imagine these teeth taking a form other than steep tariffs on goods imports from outside NAFTA, and the Trump blueprint never mentions that “t” word. But it does contain a call to “Update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.” And it specifies that these improved origin rules must “incentivize the sourcing of goods and materials from the United States and North America.” How could anyone supporting more U.S. manufacturing production and employment not be heartened?

Also impressive – as widely reported, the administration has prioritized preserving America’s ability to “enforce rigorously its trade laws, including the antidumping, countervailing duty, and safeguard laws” chiefly by eliminating the NAFTA provisions that established international tribunals as the last word in resolving trade complaints among the signatories, rather than the U.S. trade law system. The Trump administration is also seeking to reestablish America’s unfettered authority to impose “safeguard” tariffs on imports from Mexico and Canada when they begin to surge into the United States. So if you’re worried that NAFTA and other recent U.S. trade agreements have needlessly undermined American sovereignty, this blueprint is for you.

Similarly, critics have long complained about NAFTA’s overriding of the Buy America provisions of U.S. public procurement regulations aimed at maximizing the American taxpayer dollars used to purchase goods and services for government agencies. The Trump strategy laid out in the blueprint seeks to preserve these and other key domestic preference programs.

It’s true, as is being contended, that in areas ranging from promoting high labor rights and environmental standards, to dealing more effectively with the trade distortions created by state-owned enterprises (SOEs), the Trump NAFTA blueprint looks a lot like the Trans-Pacific Partnership (TPP) trade deal that the president condemned as a candidate and withdrew from on his first day in office.

It’s just as true, however, that formidable obstacles were bound to prevent effective enforcement of those proposed TPP rules. These loom as large as ever – notably, the huge numbers of U.S. government officials that would be needed to monitor the even huge-er Mexican manufacturing sector on anything close to an ongoing basis. But the final TPP text demonstrated beyond reasonable doubt that the Obama administration failed to address these concerns adequately. Maybe the Trump administration will come up with viable answers.

Finally, the Trump NAFTA blueprint contains two conceptual objectives that have never been prioritized since the current world trading system was created shortly after World War II, and that trade policy critics should be applauding vigorously. The first is the endorsement of reciprocity as a lodestar of American trade strategy. The second is an emphasis on reducing America’s mammoth trade deficits.

Although reciprocity (i.e., America opens its markets to certain trade partners only to the extent that their markets are open to U.S.-origin goods and services) seems like an uncontroversial trade goal for Washington to seek, and is often presumed to be the goal, nothing until now could be further from the truth. In particular, the foundational principles of the world trade system under the General Agreement on Tariffs and Trade (GATT), and the World Trade Organization (WTO) are national treatment and non-discrimination.

National treatment simply insists that countries deal with foreign enterprises the same way they deal with their own domestic enterprises. Non-discrimination simply mandates that countries treat imports from all trade partners’ identically. The big problems? They enable closed economies to maintain way too many trade barriers. For instance, countries that favor certain companies over others for either political reasons (as with China’s state-owned sector) or reasons of national economic strategy (as with Japan’s efforts to limit entrants into certain industries to prevent excessive domestic competition) can continue discriminating in similar ways against foreign competitors. And countries can maintain high trade barriers as long as they apply equally to all imports.

As for trade deficit reduction, it’s a great way to promote healthy, production-led American growth, rather than the kind of debt-led, bubble-ized growth that’s been engineered arguably going back to the 1990s. But here’s where the Trump blueprint can be faulted. Especially if the new NAFTA contains better rules of origin, it’s likeliest to reduce the U.S. trade deficit with non-NAFTA countries, not with the treaty signatories that the blueprint targets. And nothing would be wrong with that result at all.

Two other aspects of the NAFTA objectives deserve comment – and merit genuine concern. First, although it’s good that the administration has included on the list currency manipulation, critics are right to note that specifics are urgently needed. Their development, moreover, is important not mainly because Canada and Mexico have been important culprits (they haven’t been) but because this is a challenge that President Trump needs to meet in connection with countries that clearly have manipulated in the past and could well do so again.

Second, the Trump blueprint makes no mention of value-added taxes (VATS). Mexico’s is 16 percent, Canada’s is five percent at the federal level and eight percent at the provincial level. As with all other VATs, these levies act as barriers to imports and subsidies for exports. Candidate Trump rightly called for American countermeasures in order to level the trade playing field inside NAFTA. President Trump should take heed.   

(What’s Left of) Our Economy: On Trade, Now What?

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currency manipulation, dispute resolution, environmental standards, fast track, Financial Crisis, free trade agreements, gross domestic product, labor standards, Obama, offshoring lobby, reciprocity, recovery, rule of law, Senate, Trade, trade enforcement, Trans-Pacific Partnership, transparency, U.S. Trade Representative, unilateralism, {What's Left of) Our Economy

Although yesterday’s Senate vote doesn’t mean that President Obama’s hopes for winning fast track trade negotiating are dead, this historically trade- (and offshoring-) friendly body’s decision to delay debate with a new presidential election cycle already heating up certainly dims the odds. Just as important, their Senate victory starts putting the onus on critics to propose a new U.S. trade strategy. Here are some of my ideas.

First, about the only true statement Mr. Obama has made during the debate over a measure that would prevent Congress from amending newly signed trade agreements is that the status quo on this policy front is unacceptable. To me, the most damning indictment of the current trade landscape is my finding that the portion of U.S. trade flows most influenced by trade deals and related policies has worsened greatly during this feeble economic recovery – and slowed real growth since the last recession.  Since that article was published, that growth toll has risen to nearly 20 percent.

The answer, however, isn’t doubling down on the kinds of treaties that have produced this policy disaster. Nor is it dressing up the current framework with Congressional directives to enforce higher labor and environmental standards at foreign factories. Too many well-intentioned trade critics in particular ignore the immense difficulties Washington has had adequately regulating in the United States. As I’ve repeatedly written, the notion that huge foreign factory complexes can be monitored more effectively doesn’t stand to reason.

I’m much more sympathetic to adding what are called strong, enforceable curbs on foreign currency manipulation to the list of Congress’ mandatory trade negotiating instructions to presidents, but even this idea faces a huge problem. Many of America’s prospective trade deal partners are determined to retain the right to undervalue their currencies to undersell U.S.-origin goods and services for reasons totally unrelated to free markets or underlying competitiveness. Therefore, unless the United States wins unprecedented voting power in the dispute-resolution systems created by new trade agreements, other parties to the deal will easily be able to reject even the best-founded American complaints.

These very weaknesses in the current trade policy models supported by both supporters of current deals (and to a fascinating extent by the critics) start pointing the way to a fundamentally new approach. So do the unmistakable realities that the U.S. market is by far the biggest prize of any trade negotiations; that it enjoys a matchless potential for economic self-sufficiency; and that even though rebounding trade deficits (especially those shaped by policy) are dragging on America’s weak-enough recovery, the U.S. economy has been a global out-performer lately. (Interestingly, preliminary figures have just revealed that the chronically troubled Eurozone expanded faster than America in the first quarter of this year, but the main reasons are improving European trade balances and worsening American deficits.)

As a result, Washington should scrap its commitment to traditional negotiations and the quest for new international deals as the basis for its trade policy. Since access to the American market is so uniquely valuable to most foreign economies, and since Washington has so much more capacity to enforce laws and regulations within the U.S. economy than without, U.S. leaders should focus instead on establishing the terms of doing business in America unilaterally. Foreign governments could certainly retaliate, although the chronically lopsided pattern of global trade can leave no doubt that they’d come out the worse in any resulting “trade war.” It’s far likelier that America’s competitors would, in essence, pay to play.

And here’s another reason that any overseas protests would be short-lived: Because the United States takes seriously values like the rule of law and transparency, an exclusively American-run system for enforcing domestic trade justice would give them a much fairer shake than their own governments often give their own companies and workers in their own economies.

This new approach need not destroy all employment opportunities at America’s trade negotiating agencies. Officials at the U.S. Trade Representative’s office could still find useful work devising deals based on genuine reciprocity. But because the main foreign trade barriers nowadays consist of practices developed and carried out by highly secretive foreign bureaucracies, making evidence painfully difficult to find, determining whether such reciprocity has been achieved would be up to Washington exclusively.

Ironically, many American trade policy critics can be expected to charge that this unilateralism would trample the sovereignty of countries all around the world. But nothing could be further from the truth. Any foreign governments finding the new policy unacceptable would be perfectly free to seek growth and employment and prosperity without utilizing American demand. Of course, the offshoring lobby and various avowed free market champions will angrily condemn the new approach as neanderthal protectionism. But it’s truer to private sector norms in one crucial respect. Rather than giving away for free an enormously valuable asset like the American market, this strategy would charge a price.

Since the new strategy would represent such a dramatic and disruptive policy revolution, it’s best to phase it in – the way current trade agreements phase in agreed-on reductions or elimination of many trade barriers. Economic actors certainly deserve time to adjust. In fact, here’s a possible compromise for the squeamish: Washington could continue seeking trade deals that establish various new rules and standards for U.S. and foreign economies. But America’s role in any dispute-resolution system should be proportionate to the size of its economy in any new free trade zone. So for President Obama’s proposed Pacific Rim trade deal (the Trans-Pacific Partnership), the United States would hold nearly two-thirds of the votes, because America’s gross domestic product equals that percentage of the prospective free trade zone’s economic output. Surely that’s more equitable than the standard one-country-one-vote approach.

These ideas are strong medicine, to be sure. But critics should keep in mind that the historic imbalances produced by America’s current trade strategy helped set the stage for last decade’s financial crisis and its dispiriting aftermath, and that even despite the slow U.S. and global recoveries, trade flows are becoming similarly lopsided again. I’m perfectly willing to acknowledge that superior approaches might be developed. But what have their creators been waiting for?