(What’s Left of) Our Economy: U.S. Trade Policy Deserves Blame for the Caravans

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apparel, asylum seekers, Bangladesh, CAFTA, caravan, Caribbean Basin Initiative, Central America, Central America Free Trade Agreement, China, economic development, El Salvador, globalization, Guatemala, Honduras, immigrants, Immigration, manufacturing, migrants, Multi-Fibre Arrangement, NAFTA, North American Free Trade Agreement, Northern Triangle, Trade, Uruguay Round, Vietnam, World Trade Organization, WTO, {What's Left of) Our Economy

Hot on the heels of the current caravan of Central Americans heading through Mexico to the U.S. border, another such procession is gathering in Guatemala. And these two have followed the flood of unaccompanied migrant children from the area that reached the United States in 2014.

I wish I could tell you that there’s a silver bullet for solving the problem – though nothing could be clearer than that these human tides will keep organizing in even greater numbers if Washington follows the general advice of the Open Borders lobby to view all of the caravan-ers as legitimate asylum-seekers entitled to full due process once they reach the border and request this status. Upon which time current procedures call for recording their claims and then releasing them based on the ludicrous assumption that they’ll report back to immigration court on the appointed date and risk being rejected and thus deported.

What I can tell you is that this crisis has been greatly aggravated by an unforgivably short-sighted U.S. trade policy strategy that emerged in the 1990s. It consisted of indiscriminately liberalizing trade with developing countries, and thereby ignoring the case for targeting trade diplomacy to ensure that countries and regions of greatest importance to the United States receive the lion’s share of the benefits. And the prime victims of this strategic failure – which mainly reflected the determination of offshoring multinational manufacturers and Big Box retailers to gain maximum flexibility to source imported inputs and final products – were the poorer countries of the Western Hemisphere. That group of course includes Mexico and the Central American countries that have sent so many migrants northward.

Interestingly, Central America and the Caribbean countries were placed prominently in line to receive significant shares of the vast U.S. market by a Reagan-era initiative aimed mainly at stemming the spread of left-wing revolutionary forces in the region. But scant years later, any hopes generated by this strategy for fostering more prosperity in these impoverished regions and strengthening the appeal of pro-Western leaders were kneecapped by two big decisions.

The first was the negotiation of the North American Free Trade Agreement (NAFTA) in 1993. The second was the phase out of U.S. and other developed countries’ quotas on apparel imports that was approved the following year as part of the Uruguay Round global agreement that reduced various trade barriers worldwide and created the World Trade Organization (WTO). And the third was the Clinton administration’s subsequent rush to liberalize trade with a host of low-income countries outside the Western Hemisphere.

In principle NAFTA’s tight focus on Mexico was justifiable given Mexico’s size, position as a U.S. neighbor, and history of political, economic, and social policy failure that seemed to be reaching a crisis point. But economic growth and employment could still have been greatly lifted in Mexico and Central American (along with the Caribbean countries) had American trade liberalization stopped or at least paused there.

Yet the quota phaseout forbade Washington from incorporating any strategic or non-economic considerations into apparel trade policy, whether conditions urgently required them or not.  As a result, it ensured that the benefits of freer trade would be greatly watered down (and many garnered by China and the rest of developing Asia in particular), and insult was added to injury by new liberalization deals reached or renewed, or decisions made, regarding Vietnam, sub-Saharan Africa, Jordan, most of developing Asia (in the form of a deal on information technology products, including labor-intensive consumer electronics), and China. Largely as a result, the poorer countries of the Western Hemisphere were left in the dust in the business models of the multinationals and the big retailers.

Nowhere does the opportunity lost by Mexico and Central America come through more clearly than in the apparel trade figures. This sector is almost always the first utilized by developing countries to begin their industrialization and modernization drives mainly because its own labor intensivity means that capital and technology requirements are pretty modest, the relevant skills can be taught fairly easily, and its job-creation promise is substantial.

Here are the figures for apparel imports from Mexico, the three “Northern Triangle” Central American countries, China, and two other current Asian textile giants (Bangladesh and Vietnam) for four key years. Next to them will be the figure for the share of American apparel consumption (market share) won at that point by each. We start with 1997 because that’s the year when the U.S. government began adopting its current dominant system for slicing and dicing trade and manufacturing data – which enables us to see statistics that are apples-to-apples. The second year is 2001 – the year China’s was admitted into the WTO – and thus gained substantial immunity from American laws aimed at curbing predatory trade practices. The third year is 2006 – when Congress approved a Central America Free Trade Agreement (CAFTA) negotiate by George W. Bush’s administration. And the fourth year is last year – the latest for which we have full-year numbers.

1997

Mexico:                       $5.317b                    11.29 percent 

El Salvador:                 $1.052b                     2.18 percent

Guatemala:                  $0.973b                     2.07 percent

Honduras:                    $1.689b                     3.59 percent

China:                          $7.279b                   15.46 percent

Bangladesh:                 $1.442b                      3.06 percent

Vietnam:                      $0.026b                      0.06 percent

2001:

Mexico:                       $8.112b                     12.99 percent 

El Salvador:                 $1.634b                      2.62 percent

Guatemala:                  $1.630b                       2.61 percent

Honduras:                    $2.438b                       3.91 percent

China:                          $8.597b                     13.47 percent

Bangladesh:                 $2.101b                      3.37 percent

Vietnam:                      $0.048b                       0.08 percent

2006:

Mexico:                       $5.514b                       7.16 percent 

El Salvador:                 $1.408b                      1.83 percent

Guatemala:                  $1.685b                      2.19 percent

Honduras:                    $2.519b                      3.27 percent

China:                        $22.405b                    22.09 percent

Bangladesh:                 $2.915b                       3.79 percent

Vietnam:                      $3.226b                       4.19 percent

2017:

Mexico:                       $3.806b                       4.52 percent 

El Salvador:                 $1.920b                       2.28 percent

Guatemala:                  $1.371b                       1.63 percent

Honduras:                    $2.522b                       3.00 percent

China:                        $29.322b                     34.85 percent

Bangladesh:                $5.046b                       6.00 percent

Vietnam:                    $11.613b                     13.80 percent

The big takeaway? Even during the decade after the Central America free trade deal was signed, the three Northern Triangle countries actually saw their share of the U.S. apparel market stagnate or actually shrink. Mexico’s share has been cut by about almost 60 percent. And the business won by China, Bangladesh, and Vietnam has exploded – since 2001 for China, and since 2006 for the two other Asians. Again, the year that the free trade deal that was supposed to benefit El Salvador, Guatemala, and Honduras was inked.

With Mexico, there are of course mitigating factors. Chiefly, although its apparel competitiveness in the U.S. market is way down, its competitiveness in higher value automotive manufacturing in particular is way up. But millions of poor Mexicans still could have benefited from apparel employment, and no such progress has been made in Central America – which is partly understandable since incomes are even lower, and governments and other institutions needed for economic development are so much weaker.

Apparel should have been the great hope for these populations, but that sector’s potential for expanding production (which of course needs to be export-oriented since these countries’ domestic markets are tiny) and employment has been virtually choked off. Just as important, the prospect that apparel wages in the Northern Triangle might rise adequately has been limited, too – since pay throughout developing East and South Asia (even in China, according to the chart below) remains so much lower.

American trade policy could have lent a big helping hand to Central America had it adopted a strategically sensible set of priorities. But it failed to learn a fundamental lesson of strategy: When everything is a priority, then nothing is a priority. You can see the victims of this failure in the flow of human misery heading up from the Northern Triangle.

Im-Politic: Biden’s Trade Views are Big Nomination Obstacles

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2016 elections, Bernie Sanders, China, Congress, Democrats, fast track, Hillary Clinton, House of Representatives, Im-Politic, Joe Biden, MFN, Most Favored Nation, NAFTA, Obama, Permanent Normal Trade Relations, PNTR, polls, Senate, TPP, Trade, Trans-Pacific Partnership, Uruguay Round, World Trade Organization, WTO

When, as now expected, Vice President Joe Biden finally enters the presidential race, one of his top challenges will be winning the lion’s share of endorsements from organized labor over main Democratic nomination rivals – former Secretary of State Hillary Clinton and Vermont Senator Bernie Sanders. And if, as expected, trade policy records are a big part of most unions’ litmus tests, he’ll have a hard time convincing labor that he’s dedicated to making trade agreements and related decisions more worker-friendly.

The unions’ role in Democratic politics is hardly limited to campaign contributions, though money of course matters. But labor also is the dominant player in the party’s ground game, being the only constituency that can mobilize armies of campaign workers to knock on doors and get out the vote. Don’t, moreover, forget the enthusiasm factor. If union members and their families are excited about Democratic candidates, they’ll help the party win the turnout war. If they’re discouraged about the nominee and too many stay home in November, the Democrats’ chances of victory plummet. Moreover, union apathy and its costs can trickle down to state and local-level elections as well – where the Democrat’s recent performance has been abysmal.

The Vice President’s real views on trade policy are hard to discern for several reasons. First, he’s been anything but a model of consistency, supporting some deals and opposing others seemingly with no rhyme of reason. Moreover, there’s often much less to trade votes in the Senate – where he served in Congress – than meets the eye. For decades, after all, large bipartisan Senate majorities have strongly supported the main thrust of American trade policy; the only real opportunities for mandating course changes have been in the House. As a result, Senators who favor politically unpopular trade deals but who fear antagonizing wealthy donors can often have their cake and eat it, too. They can cast No votes and assure their offshoring lobby backers that their favored policies will be approved anyway.

Nonetheless, two clear patterns emerge from reviewing Biden’s trade record since Delaware voters first elected him to the Senate in 1972. (My source is the Cato Institute’s indispensable Congress trade votes database.) He’s been much likelier to oppose the trade policy status quo when Republicans have occupied the White House than under Democratic presidents. And second, not only has he never been a leader in this area. He’s expressed almost no interest in it whatever. That tells me that nothing has been easier for him than to accept the bipartisan inside-the-Beltway consensus that the longer America stays the current, offshoring-friendly trade policy course, the better.

Biden did oppose some high profile trade agreements as a Senator – notably the Central America-Dominican Republic deal of 2005. He also joined most of his colleagues that year in backing unilateral sanctions on China to fight its currency manipulation. In 2007, he supported continuing to ban trucks from Mexico from driving on American highways. And in 2003, over the objections of key American trade partners, he voted to strengthen U.S. requirements that labels on certain food products reveal the country in which they were grown and raised.

But all of those votes took place when George W. Bush was president. And many fell into that aforementioned category of “free votes.” Under his Democratic predecessor, Bill Clinton, Biden’s positions seemed very different. He twice voted to approved extension of Most Favored Nation trade status for China, and in 2000 favored making normal trade treatment for China permanent – which paved the way for Beijing to join the World Trade Organization and triggered a flood of job-, wage-, and growth-destroying Chinese exports (many illegally subsidized) into the U.S. market. Biden also backed the North American Free Trade Agreement (NAFTA) in 1993, the Uruguay Round multilateral trade agreement of 1994 that created the World Trade Organization, and fast track negotiating authority for Clinton in 1998.

Biden and his camp could argue that the Vice President has learned and evolved. But the trade policy decisions he endorsed in the 1990s were much more important than those he opposed in the following decade. Moreover, this past spring, he helped the president he serves secure Congressional passage of fast track negotiating authority. That’s bound to boost the odds of TPP’s approval on Capitol Hill.  And he remains a strong supporter of the actual deal even though it suffers most of the main weaknesses of its predecessors. 

Interestingly, Biden’s trade positions might not be a total loser in Democratic primaries, or in the general election if he makes it that far. Several recent polls indicate that Democratic voters have become stronger supporters of current trade policies than the Republican electorate. But Clinton and Sanders aren’t working overtime for union support – and in the former’s case, flip-flopping on the TPP – for nothing. If Biden’s loyalty to President Obama and his own beliefs lead him to champion TPP on the hustings, his best chance for the nomination could boil down to Clinton’s vulnerability to any legal charges stemming from her questionable handling of sensitive national security material on her private email system.

 

 

 

(What’s Left of) Our Economy: Washington’s Africa Sloppiness Shows Dangers of Fast Tracking Trade

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Africa, African Growth and Opportunity Act, AGOA, Congress, economic development, fast track, garments, manufacturing, MFA, Multifibre Arrangement, TPA, TPP, Trade, Trade Promotion Authority, Trans-Pacific Partnership, Uruguay Round, World Trade Organization, WTO, {What's Left of) Our Economy

Renewal of America’s trade agreement with sub-Saharan Africa isn’t the single biggest determinant of the fate of fast track authority in Congress this week, but it’s certainly in the mix. And the enormous popularity it’s enjoyed even among lawmakers generally opposed to current trade policies speaks volumes about how sloppily Washington as a whole develops trade agreements, and how the results can fail even intended foreign beneficiaries.

The Africa trade deal – created by the African Growth and Opportunity Act (AGOA) – is intended to promote economic progress on the continent by opening the U.S. market wide to its exports. Even though African countries aren’t required to reciprocate, the measure seems worthwhile, as the continent’s own purchasing power is meager at best, and its non-oil sales to the United States are miniscule as well.

But since AGOA went into effect in 2001, even supporters in academe, like Harvard University economist Robert Z. Lawrence have called its growth-inducing effects in Africa “quite disappointing.” And the reasons stem from two major and related U.S. trade policy mistakes that could be easily corrected, but that remain in effect mainly because Washington has cared much more about pretending to help the continent rather than seriously addressing its problems.

The first fatal flaw has to do with AGOA’s “rule of origin” provisions, which principally affect the African apparel production and shipments. Developing strong apparel industries is crucial to the development hopes of the AGOA countries, because as a labor-intensive manufacturing sector, clothing historically has served as a “starter” industry for developing nations seeking both higher growth and higher incomes. And the hope clearly was that, once competitive local garment manufacturing had been established, sub-Saharan Africa would be able to attract the kind of investment needed to move to from relatively simple assembly to the next stage up the industrialization ladder – fabric and other input production.

Indeed, the current lack of meaningful fabric or yarn manufacturing in most of the AGOA countries to begin with led Washington to permit them to export on a duty-free basis to the United States garments made largely of foreign-produced fabric – both from the United States and from third countries. In its first few years, AGOA did stimulate strongly growing African apparel shipments to the United States. But progress came to an abrupt halt in the middle of the last decade, The quality failed to improve – in particular, AGOA fostered almost no fabric production – because most of the non-U.S. providers of fabric for African-assembled garments showed almost no interest in its encouragement. So AGOA apparel sales to Americans still largely consist of fabric produced outside Africa, generally in Asia – including China. Consequently, Africans have remained stuck in knitting and sewing work, which adds relatively little value to their economies.

But even the growth of shipments from Africa to the United States has slowed, and that owes to Washington’s second major trade policy mistake – its insistence that a global system of quotas for third world apparel exports be abolished as part of the Uruguay Round world trade liberalization agreement. As I wrote in this 2013 article, this Multifibre Arrangement (MFA) was widely criticized as selfish protectionism on the part of the high income countries that used it to regulate foreign market access for textiles and clothing. But it also gave invaluable opportunities to the world’s least developed countries to establish niches – and indeed growing niches – in this business, mainly by limiting imports from more advanced developing countries, like Taiwan, Korea, China, and even India.

And since AGOA’s provisions remain largely unchanged, most of its economic development benefits will continue flowing to countries that need them much less. And in a final, especially cruel, irony, avowed friends of Africa who vote for President Obama’s proposed Pacific Rim trade deal will only wind up putting added pressure on the continent. For one of the biggest expected results of this Trans-Pacific Partnership (TPP) will be to supercharge U.S. apparel imports from hyper-competitive – and super low-wage and anti-union – Vietnam.

So if Congress – and the Obama administration – really wanted to help sub-Saharan Africa, they would push the World Trade Organization to restore the MFA or at least reestablish a quota system of its own, and they would rethink the TPP. That neither proposal is on the table in Washington strongly indicates that, when it comes to using U.S. trade policy to aiding developing countries, American leaders are much more interested in feeling good than in doing good. And can the same president and legislators who have so thoroughly neglected crucial AGOA-related details really be reasonably expected to produce a TPP that benefits America?

(What’s Left of) Our Economy: The Washington Post’s Embarrasingly Bad Pro-TPP Editorials Just Keep Coming

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Asia, China, escalation dominance, exports, Japan, Jobs, North Korea, pivot, rules-based trade, TPP, Trade, Trans-Pacific Partnership, Uruguay Round, Washington Post, World Trade Organization, WTO, {What's Left of) Our Economy

It’s a good thing for the offshoring lobby and other mindless American trade cheerleaders that the fate of President Obama’s Trans-Pacific Partnership (TPP) and other new trade deals won’t depend significantly on Washington Post editorials. If it did, the proposed Pacific rim agreement and the new negotiating authority also being sought by the president would be DOA in Congress.

The Post‘s latest missive on behalf of the TPP stumbled practically out of the gate. According to Post editorialists, the president’s claims that the Pacific deal and a roughly similar pact with Europe would boost American exports and create high wage domestic jobs were a welcome breath of fresh air. Huh?

The editorial then proceeded to careen ever faster downhill. According to the Post, listeners shouldn’t take literally Mr. Obama’s contention that “as we speak, China wants to write the rules for world’s fastest growing region. That would put our workers and our businesses at a disadvantage.” According to the Post, taking the president’s words at face value would amount to believing a “conspiratorial” charge that “Beijing’s bureaucrats are plotting to impose a whole new set of laws and regulations on East Asia’s economy.”

What Post writers evidently have forgotten is that turning the world trading system into one that’s governed by the rule of law instead of the law of the jungle has long been a central aim of U.S. policy. We know this, and we know that the TPP is Washington’s latest effort to achieve this goal, in large part because not only do Presidents keep highlighting its importance. So do major newspaper editorials – like this very same Post offering, which insists that the deal would “organize trade in the Pacific Rim according to U.S. free-trade principles rather than China’s mercantilist goals.”

Nor is this a standalone Post position. Last April, its editorial board wrote that TPP would:

“ensure that this huge area, including giants such as Japan, Canada, Mexico and Australia, conducts business according to U.S.-style rules on tariffs, regulation and intellectual property. China would be left on the sidelines, along with its mercantilist model of international commerce — unless and until it modifies that approach.”

What the Post – and the president – need to understand is that this quest for rules-based trade, as I’ve argued before, is actually counter-productive for Americans because so many of its trade competitors, especially in Asia, reject the idea of rules-based governance in their own countries. Believing that their governments will apply it to Americans (and other foreigners) when they deny this benefit to their own people is simply daffy.

At the same time, because American political culture is based on the rule of law, while U.S. competitors merrily keep ignoring new trade rules, the United States will keep respecting them – which has been a sure-fire recipe for super-charged trade deficits, slower growth, mounting job loss, lower wages, and astronomical national debt. Doubters should consider that these have been the unmistakable results of Washington pushing and signing the Uruguay Round agreement, which created a new organization – the World Trade Organization – aimed at writing and enforcing strong global trade rules, as well as bilateral deals like the free trade agreement with Korea, which is Mr. Obama’s so-called “high standards” model for the TPP.

But the Post‘s exercise in incoherence doesn’t stop there. Readers are told that the president’s reference to trade rules is really an allusion to:

“the wider strategic rationale for the Trans-Pacific Partnership, which would link North and South America, Australia and New Zealand more closely, and on more equitable terms, with Japan and other key Asian nations. By and large, these Asian countries seek to maintain a strong U.S. presence in their region as a counterweight to Chinese influence.”

TPP success “is therefore a vital interest for them — and for the United States. Both economically and geopolitically, the ­Trans-Pacific Partnership would perpetuate the United States’ stabilizing role in Asia….”

What these passages reveal is that the Post‘s editorialists don’t know the first thing about power politics, leverage, and bargaining chips – or even about the strategic situation in the East Asia/Pacific region. The United States has maintained a “strong presence” there since 1945 in the form of the Seventh Fleet and other military forces. It’s not going anywhere, and in fact, the administration’s military “pivot” away from the Middle East and toward Asia signals the aim to reinforce these units (even though little progress has been made so far on this front – at best).  

Not that big threats to America’s grand strategy in the Pacific region aren’t easy to identify apart from actual U.S. force levels.  As I’ve argued, the nation’s seemingly impending loss of nuclear escalation dominance against both North Korea and China is a far bigger worry.  TPP is completely irrelevant to solving this problem. 

And however important this region’s security and independence is to America strategically and economically, it’s obviously more important to local countries. Which means that they have a much greater need to demonstrate their usefulness to the United States than vice versa. That so many of these countries, especially Japan, have balked for so long at American proposals to open their markets wider says loud and clear that the Obama negotiating team has ignored these realities, and that anyone linked to this strategy should be fired for sheer incompetence. Editorial writers who parrot this nonsense of course can do no such damage to U.S. interests. But shouldn’t they be shown the door too?