(What’s Left of) Our Economy: It’s “Big Week” on Trade

Tags

100-day China plan, Canada, China, environmental standards, G20, Gary Cohn, H.R. McMaster, James Mathis, labor standards, Mar-a-Lago summit, Mexico, NAFTA, North American Free Trade Agreement, North Korea, Robert Lighthizer, rules of origin, steel, Steve Mnuchin, tairffs, Trade, Trump, Wilbur Ross, Xi JInPing, {What's Left of) Our Economy

During World War II, the United States and the United Kingdom launched a massive multi-day strategic bombing campaign against Nazi Germany called “Big Week.” The stakes are considerably less apocalyptic, but yesterday began a period for U.S. trade policy that qualifies as a big week, too. Here’s why, and what to look for.

First, yesterday marked the deadline for the 100-day plan announced at the summit between President Trump and his Chinese counterpart Xi Jinping to start bringing down America’s immense trade deficit with the People’s Republic. Some near-term deals were announced in May, and the Chinese seem to be playing along, to at least some extent. But even the American offshoring lobby, which has greatly soured on China since its full-court-press lobbying campaign convinced Washington to expand U.S.-China trade exponentially, has been complaining that agreements of this scope are way too small to solve their own problems with Beijing in the Chinese market. These deals have even less potential to stop most of the damage still being inflicted on the American domestic economy from wide-ranging predatory Chinese economic practices.

The results are due to be announced this week – and may be delayed to take into account whatever can be accomplished by a new high-level economics dialogue that will hold its first session in Washington this week. Will they produce some big wins for the administration and the domestic economy? As I see it, reasons for pessimism outweigh reasons for optimism.

The former include the president’s continuing statements about the threat posed by China’s imports (in this case, of steel), and the awareness demonstrated by his campaign of how varied and unconventional (meaning they went far beyond tariffs and quotas) China’s trade and trade-related transgressions have been. Among the reasons for pessimism, though, are intra-administration divisions that entail both economic issues (with the administration’s economic populists arrayed against what’s been called the pro-free trade “Goldman Sachs” gang comprised of top economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin) and security issues (pitting the populists against traditional foreign policy thinkers like national security adviser H.R. McMaster and Defense Secretary James Mattis, who would sympathize with notions like the claim that China should be courted to enlist its help in sitting on North Korea). In addition, the kinds of staffing woes still dogging the administration typically make sharp departures from a policy status quo difficult to engineer.

In fairness, Commerce Secretary Wilbur Ross, who has forthrightly described the China economic challenge, acknowledged when announcing the 100-day trade plan’s first results that three months worth of talks couldn’t possibly be a game-changer precisely because China’s mercantilism was so pervasive. But in so doing, he unintentionally made the argument – which I support for U.S. trade policy generally – for dispensing with talks altogether and capitalizing on China’s urgent need to export to the United States by addressing this issue unilaterally.

Certainly, this kind of course change would be much more consistent with the president’s numerous campaign statements emphasizing the destructive effect of Chinese predation on America’s economy and working class. It’s also the kind of strategy you’d expect from a chief executive whose non-trade agenda is almost completely stalled in Congress, who’s under intense political pressure, and who could badly use a big economic win in order to prevent major Congressional losses in the next off-year elections – whose campaign cycle will be here before he knows it.

Another big (self-imposed) administration deadline falls today. It marks the date by which the White House said it would submit its detailed plan to renegotiate NAFTA – the North American Free Trade Agreement. In May, U.S. Trade Representative Robert Lighthizer sent Congressional leaders a brief letter alluding generally to some objectives, but by tomorrow he needs to fill in critical details. Many might have been contained in a draft letter released March 30, and that plan looked pretty impressive. The big question of course is which ones will wind up surviving – and whether the administration is open to other ideas.

As I’ve written, the most important issue concerns the treatment of “rules of origin” – the provisions of NAFTA aimed at ensuring that any goods sold in the three signatory countries (the United States, Canada, and Mexico) are overwhelmingly made in some combination of those countries. The deal that’s currently in place specifies North American content levels that need to be met to qualify for duty-free treatment inside the free trade zone. But the tariff penalties for goods not meeting these standards aren’t nearly high enough to achieve the goal of increasing the entire region’s competitiveness.

The March 30 letter suggested that the administration would seek origin rules that promote U.S. production and jobs more effectively, but it didn’t say how. If much higher external tariffs aren’t proposed in the plan due today, it’s doubtful that any reforms will result in non-NAFTA countries to make more of their products in any of the countries inside the NAFTA zone. Moreover, it’s of course going to be easier for Washington to persuade Canada and Mexico to go along if it re-emphasizes what President Trump has been saying since his meeting last summer, before the election, with his Mexican counterpart: NAFTA should aim to boost the competitiveness of all three countries.

The brief May 18 Lighthizer letter also suggested obliquely the need to change NAFTA’s dispute-resolution procedures, and the March 30 draft discussed the issue at greater length. But even its recommendations to strengthen America’s authority both to respond to import surges from its NAFTA partners (called “safeguards”) and to apply its own Buy American government procurement rules to intra-NAFTA trade may not go far enough.

As I’ve explained, the fundamental problem is that the current dispute-resolution process treats the three NAFTA countries as legal equals, even though the U.S. market is nearly 90 percent of the total NAFTA market, and clearly remains the most valuable prize for all three signatories. Without closing or somehow changing acceptably, the yawning gap between the NAFTA legal regime and the economic facts on the ground, it’s hard to imagine the system serving U.S. interest on net.

At this point, you might be wondering why I haven’t mentioned NAFTA’s labor and environmental provisions. The reason? Although they’ve been major objectives of Democratic party and other left-of-center NAFTA and broader trade policy critics, as with their counterparts in the Trans-Pacific Partnership (TPP) deal, they’re largely unenforceable. As I’ve asked before, how many American bureaucrats will be needed to run around how many factories in a signatory country (in this case, Mexico) to ensure that companies aren’t abusing workers or dumping sewage into nearby streams? With more effective rules of origin, however, producers in Mexico will feel less pressure to remain competitive versus rivals in China and elsewhere in Asia by offering the worst possible working conditions and ignoring environmental considerations completely.

Finally, there’s the steel tariff issue. The administration has delayed announcing its decision to impose national security-related tariffs on U.S. steel imports, but is expected to reveal its intentions this week. For what it’s worth, the president sounds determined to approve some levies on some countries’ steel. The main question is who the main targets will be. It will also be crucial to see whether and how prominently the announcement emphasizes the need to deal decisively with the underlying problem – the ocean of subsidized steel from China that has flooded and distorted world markets in recent years.

At the same time, there’s a reason for Mr. Trump to punt – or to punt for the most part: At their summit earlier this month in Hamburg, Germany, the leaders of the world’s twenty largest economies (the “G20”) agreed to require an international commission on the subject to deliver a report by November containing “concrete policy solutions that reduce excess steel capacity.” Postponing unilateral action until this mandate is fulfilled could prove a tempting option for a president who doesn’t exactly need to come under fire from new fronts.

Moreover, if the commission’s ideas don’t pass U.S. muster, Mr. Trump would be in a much stronger position to slap the tariffs on everyone, and vow to maintain or even increase them until meaningful, concrete agreements are reached.

President Trump has been sending surprisingly (at least to me) mixed signals on trade since his Inauguration Day two-step – killing the TPP but refraining from labeling China a currency manipulator. Big Week in trade isn’t likely to clarify the picture fully, but we’re bound to know more at its end than we do here at the beginning.

(What’s Left of) Our Economy: Which Democrats are Serious and Un-Serious About Trade Overhaul?

Tags

AFL-CIO, Bernie Sanders, Canada, Charles Schumer, currency manipulation, Debbie Dingell, Democrats, dispute resolution, Elizabeth Warren, environmental standards, labor standards, Mexico, NAFTA, North American Free Trade Agreement, Politico, Richard Neal, Robert Lighthizer, Rosa deLauro, rules of origin, Thea Lee, Trade, Trump, U.S. Trade Representative, unions, Wilbur Ross, William Pascrell, {What's Left of) Our Economy

Usually, paying attention to instances of politicians and other public figures getting up on their soapboxes is a waste of time. Yesterday served up an exception: a press conference held by House Democrats in reaction to President Trump’s official decision to open talks to renegotiate the North American Free Trade Agreement (NAFTA). The statements recorded in this Politico account offer some evidence as to which leaders on America’s Left are willing to work with the administration on trade policies that can help the working class voters Democrats still profess to champion, and those who will remain content to sit on the sidelines and take partisan potshots.

Reportedly, all of the House members who spoke at the event “said…they feared Trump would make only modest changes to NAFTA after blasting it as an economic disaster throughout last year’s presidential campaign.” The basis for these worries? The letter sent yesterday by new U.S. Trade Representative Robert Lighthizer to Congressional leaders announcing the administration’s intention to open NAFTA talks with the two other signatories, Canada and Mexico. According to these House Democrats and some other trade critics, the document apparently was “short on details,” which many claimed indicated Trump’s intention simply to “tweak” rather than comprehensively overhaul the agreement.

All else equal, wondering about the president’s real intentions is anything but unreasonable. His personality, after all, is mercurial, and one of his major trade initiatives to date – the negotiations begun with Beijing following February’s summit with Chinese leader XiJinping – has legitimately disappointed advocates of the major course change he pledged during the campaign. (The other major trade initiative, scrapping the Trans-Pacific Partnership trade agreement, kept a leading campaign promise to the letter.) Moreover, the Lighthizer letter is indeed short on specifics.

But none of the participants in the press conference seems to have noticed that in previous statements –including reportedly to leading Democratic lawmakers, top Trump officials have emphasized the need for dramatic NAFTA changes.

For example, Commerce Secretary Wilbur Ross has described as high NAFTA-related priorities greatly tightening the pact’s rules of origin in order to incentivize more non-NAFTA manufacturing investment inside the free trade zone, and restructuring a dispute-resolution system that gives each signatory an equal vote even though the United States represents more than 85 percent of North America’s total economic output. Reinforcing this point was the Lighthizer letter’s contention that “establishing effective implementation and aggressive enforcement of the commitments made by our trading partners under our trade agreements is vital to the success of these agreements and should be improved in the context of NAFTA.”

Meanwhile, Lighthizer reportedly has told Senators that the administration is thinking of adding to NAFTA rules that would prohibit currency manipulation – a move that would set a valuable precedent for future trade deals. In addition, his letter mentioned the need to improve NAFTA’s labor and environmental protections. In my view, they’re largely unenforceable. But they’ve been a prime focus of Democratic Party trade policy positions for decades.

So given that background, it seems fair at this point to finger Connecticut’s Rosa deLauro, New Jersey’s Bill Pascrell, and Massachusetts’ Richard Neal as grandstanders. The former stressed the “tweaking” allegation. The latter two charged that “It was clear from the start that the administration was only interested in working with the Congressional Republican leadership in drafting this notice [the Lighthizer letter].”

I’d also include in this group several key Senate Democrats, including Leader Charles Schumer of New York, former presidential candidate Bernie Sanders of New York, and Elizabeth Warren of Massachusetts. They voted against Lighthizer’s confirmation despite his decades-long record of fighting predatory foreign trade practices both as Deputy U.S. Trade Representative during the Reagan administration, and as a trade lawyer representing domestic American producers.

More temperate in their judgments were Michigan’s Debbie Dingell, and the AFL-CIO’s Thea Lee. The former stated that she was “investing the time to understand where the consensus is.” The latter said, “We enter every negotiation in a good faith state of mind and we expect a lot from our government. Certainly candidate Trump made a lot of promises about fixing flawed trade agreements and looking out for American workers and good jobs, so we will hold him and his administration to that promise.”

I can’t think of a more reasonable position for politicians and other supporters of a movement that still styles itself as the “party of the common man [and woman].”

(What’s Left of) Our Economy: How Trump Can Get His Trade Chops Back

Tags

bilateral trade agreements, China, dispute resolution, free trade agreements, Government Accountability Office, Japan, managed trade, Mike Pence, multilateral trade agreements, North Korea, Robert Lighthizer, semiconductors, South Korea, tariffs, Trade, Trump, U.S. Trade Representative, U.S.-Japan semiconductor agreement, {What's Left of) Our Economy

Comments made by Vice President Pence on his Asia trip concerning America’s trade relations with Japan and South Korea show both the promise and peril of the Trump administration’s approach to international commerce and globalization. Major gains for the economy are possible from negotiating a bilateral trade agreement with Japan and revamping what Mr. Pence described as a failed deal with South Korea. But first, the president and his aides must show more awareness than to date of why accords with countries like these keep failing.

According to candidate Trump, and President Trump, the main problems with such measures have been, variously, incompetent U.S. negotiators, dominance of the policy process by offshoring and similar interests, and a mistaken preference for multilateral arrangements over bilateral deals where America’s leverage is less likely to be watered down.

The second reason for failure cited above has certainly shaped U.S. trade agreements with super low-cost countries that have been tempting locations for production and job offshoring, and that have revealingly comprised the vast majority of trade deals initiated and signed by Washington since the early 1990s. But footloose multinationals have played a much smaller role when it comes to higher income countries like Japan and South Korea. There, achieving better results for the American domestic economy has faced two leading obstacles.

The first has been widely noted: the longstanding tendency of the U.S. leaders to elevate geopolitical aims like strengthening security alliances over economic aims like removing distortions to trade flows. Here, strangely, the administration has been giving off mixed signals lately. The president is now clearly treating the security-related objective of gaining more Chinese cooperation in resolving the North Korea nuclear weapons crisis as a higher priority than combating the numerous predatory Chinese trade policies that have hurt domestic employers and their workers. But he blasted such priorities as recently as last month. And the Pence statements indicate that trade and security issues will be handled on separate tracks for Japan and South Korea.

The second obstacle has been less widely noted – although it’s been a major theme of mine: Opening markets in highly protectionist countries like those Asian powers is fiendishly difficult, at best. As I’ve written, these economies are most accurately seen as nation-wide systems of protection and mercantilism. The particular form taken by any of their trade barriers or subsidies at any given moment matters much less than the underlying intent to manage trade flows to their advantage. In addition, these protectionist systems are run by powerful bureaucracies whose secretiveness and agility makes even identifying problematic practices – much less combating them – excruciatingly difficult.

The bottom line is that trade agreements with such countries are virtually impossible to monitor and enforce effectively, and because their governments know this, the provisions are violated routinely.

By contrast, because the U.S. government is so transparent, almost of America’s trade barriers and subsidies are easy to identify and attack, and American compliance with trade agreements is easy to measure. So it’s easy to see how these agreements strongly tend to create more (and more strongly guaranteed) access to the U.S. market than vice versa. This new report from the U.S. Government Accountability Office shows how these damaging results can stem from multilateral agreements, but the Korea deal spotlighted by Spence and a long string of agreements with Japan show the similarly dismal record of bilateral arrangements.

That’s not to say that worthwhile trade deals with Japan and South Korea are impossible. But they’ll require thinking that’s much further outside the box than the administration seems to be engaged in. The best possibility would be going the managed trade route. That is, rather than accept unverifiable promises to dismantle trade barriers or end subsidies, America’s interlocutors would commit to allot specific shares of their domestic markets to specific U.S.-origin goods and services. There’s even a precedent for this practice – the 1986 semiconductor trade agreement reached between Washington and Tokyo.

Managed trade of course isn’t free trade. But little about Japanese and South Korean policies fits the definition, either. And the history of the semiconductor deal is well known by President Trump’s choice to head the U.S. Trade Representative’s office, Robert Lighthizer, because he was personally and deeply involved.

Another possibility would be to expand one of the few modestly worthwhile leafs from former President Obama’s 2012 trade agreement with South Korea. Precisely because Seoul’s predatory practices in the automobile sector specifically were so difficult to combat via the standard, legalistic procedures used in the dispute-resolution systems in most American free trade agreements (and the international counterpart run by the World Trade Organization), Mr. Obama secured South Korean acceptance of provisions that are especially appropriate in dealings with opaque bureaucracies that prevent significant evidence gathering.

Specifically, if a dispute-resolution panel convened under the agreement decides that Seoul is violating the auto provisions, and the United States restores pre-agreement tariffs on Korean products, it’s up to the Koreans to prove that they’re back in compliance with the treaty before the new tariffs are removed. Even better, however, would be to impose the burden of proof on South Korea, Japan, and similar countries as soon as a complaint is filed.

Yet there’s a strong argument that the very structure of dispute-resolution mechanisms is fatally flawed. Whether the trade agreement in question is bilateral or multilateral, these arrangements treat the United States as an equal party. But given the huge size of the U.S. economy relative to any other trade agreement signatories, and therefore given its status as the paramount prize in any such agreement, this “one country-one vote” set-up is as absurd as it is detrimental to American interests.

Rather than agree to such standard dispute-resolution systems – which invariably result in deadlocks that penalize open economies like America’s – Washington should insist that dispute-resolution votes be allotted more realistically. Basing them on the sizes of the various signatory economies is one obvious formula.

And don’t forget the ultimate America-First trade policy: Dispense with negotiations altogether, or for the most part, and start imposing tariffs on the imports of predatory trading powers, or on all imports (in order to prevent offshore exporters from switching production sites). Of course, that universalism is a big virtue of the border adjustment tax proposed by the House’s Republican leaders. In return, Mr. Trump could offer greater U.S. market access to those countries that prove (after years of good behavior according to exclusively American judgments) that they’re giving American exports a fair shake. This form of unilateralism should have special political appeal for an administration that’s increasingly in need of some big early economic wins.

President Trump (at least the pre-China currency version) has been termed a trade policy disrupter. If he wants to re-earn that label, getting the nation’s Japan and South Korea trade right after decades of frightful losses would be a great place to start.

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

Tags

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: Thom Hartmann Interview on Trump and Trade Now On-Line

Tags

China, Commerce Department, Making News, NAFTA, National Trade Council, North American Free Trade Agreement, Peter Navarro, Robert Lighthizer, RT America, The Big Picture with Thom Hartmann, Thom Hartmann, Trade, U.S. Trade Representative, Wilbur Ross

I’m pleased to announce that the video of my appearance last night on RT America’s The Big Picture with Thom Hartmann is on-line!  Click on this link to hear in full a great discussion of President-elect Trump’s plans for U.S. trade policy and how they promise to shake up American politics.  The segment starts at about the 15:30 mark.

And keep checking back in with RealityChek for news of upcoming media appearances and other developments.