With the Trans-Pacific Partnership negotiations allegedly near completion, the transatlantic talks kicking into higher gear, and debate in Congress over U.S. trade policy objectives about to intensify, 2014 is shaping up to be the most consequential year for the trade agenda in a long time. Whether real free traders should rejoice over these developments depends on the emerging details, as well as the ability to avoid making the perfect the enemy of the good.
Real free traders abhor domestic trade barriers and want them removed regardless of whether other governments remove their own barriers. The benefits of trade are the imports we obtain, not the exports we give up. The immediate benefits are measured by the value of imports that can be purchased for a given unit of exports – the more, the better – and domestic barriers reduce those terms of trade. Of course, there are also the secondary benefits of imports, which include greater variety, lower prices, more competition, better quality, and the innovation spawned by those and other factors.
The process of U.S. trade policy formulation has never been particularly accommodating of free traders’ perspectives. Free trade views have been marginalized by their being subsumed within a broader category of views labelled “pro-trade,” which is dominated by business lobbies and other “pro-export” mercantilists. As the definition of free trade has been expanded to mean pro-trade, the definition of protectionism has been narrowed to exclude views, such as: “I’m not a protectionist; I just want a level playing field,” or; “I’m for free trade, as long as it’s fair trade.” Those are the clichés of protectionists, who are now popularly grouped under the pro-trade umbrella.
So, today’s trade debate (framed as it is by media, lobbyists, and politicians) does not feature free-traders on one side and protectionists on the other. Instead, one is either pro-trade or anti-trade, supports corporations or their workers, and believes free trade agreements are either good or evil. In a world with these binary choices, nuance gets squeezed out. Where do you fit if you support the tariff reductions in a trade agreement, but are unhappy with the corporate welfare it bestows on particular industries? What if you know that trade liberalization is good for both corporations and their workers alike? What if you’re pro-market, but not pro-business?
Given these and other ambiguities, should free traders support free trade agreements? Let me lay down a marker for free trade – “real” free trade, that is.
Free markets are essential to our prosperity, and free trade is the extension of free markets across political borders. Making markets freer and expanding them to integrate more buyers, sellers, investors, and workers deepens and broadens that prosperity. When goods, services, capital, and labor flow freely across borders, Americans can take full advantage of the opportunities of the international marketplace. Free trade provides benefits to consumers and taxpayers in the form of lower prices, greater variety, and better quality. And, it enables businesses and workers to reap the benefits of innovation, specialization, and economies of scale that larger markets afford. Countless studies have shown that economies that are more open grow faster and achieve higher incomes than those that are relatively closed.
A Washington Post editorial today pushes back against the argument that a Trans-Pacific Partnership agreement would exacerbate income inequality. Amen, I suppose. But in making its case, the editorial burns the village to save it by conceding as fact certain destructive myths that undergird broad skepticism about trade and unify its opponents.
“All else being equal,” the editorial reads, “firms move where labor is cheapest.” Presumably, by “all else being equal,” the editorial board means: if the quality of the factors of production were the same; if skill sets were identical; if workers were endowed with the same capital; if all production locations had equal access to ports and rail; if the proximity of large markets and other nodes in the supply chain were the same; if institutions supporting the rule of law were comparably rigorous or lax; if the risks of asset expropriation were the same; if regulations and taxes were identical; and so on, the final determinant in the production location decision would be the cost of labor. Fair enough. That untestable premise may be correct.
But back in reality, none of those conditions is equal. And what do we see? We see investment flowing (sometimes in the form of “firms mov[ing],” but more often in the form of firms supplementing domestic activities) to rich countries, not poor. In this recent study, I reported statistics from the Bureau of Economic Analysis revealing that:
Nearly three quarters of the $5.2 trillion stock of U.S.-owned direct investment abroad is concentrated in Europe, Canada, Japan, Australia, and Singapore. Contrary to persistent rumors, only 1.3 percent of the value of U.S.-outward FDI [foreign direct investment] was in China at the end of 2011.
Last week, the big news in the trade agreement arena was the leak of a draft text on intellectual property (IP) in the Trans Pacific Partnership (TPP) talks. Tim Lee of the Washington Post (and formerly a Cato adjunct scholar) explains what’s in it:
The leaked draft is 95 pages long, and includes provisions on everything from copyright damages to rules for marketing pharmaceuticals. Several proposed items are drawn from Hollywood’s wish list. The United States wants all signatories to extend their copyright terms to the life of the author plus 70 years for individual authors, and 95 years for corporate-owned works. The treaty includes a long section, proposed by the United States, requiring the creation of legal penalties for circumventing copy-protection schemes such as those that prevent copying of DVDs and Kindle books.
The United States has also pushed for a wide variety of provisions that would benefit the U.S. pharmaceutical and medical device industries. The Obama administration wants to require the extension of patent protection to plants, animals, and medical procedures. It wants to require countries to offer longer terms of patent protection to compensate for delays in the patent application process. The United States also wants to bar the manufacturers of generic drugs from relying on safety and efficacy information that was previously submitted by a brand-name drug maker — a step that would make it harder for generic manufacturers to enter the pharmaceutical market and could raise drug prices.
While the critics pounced, defenders defended. Here’s the MPAA:
What the text does show … is that despite much hyperbole from free trade opponents, the U.S. has put forth no proposals that are inconsistent with U.S. law.
In response to this statement, it is worth noting two things. First, many of the critics of this IP text are not “free trade opponents.” They simply oppose overly strong IP protections. Many of them are actually for free trade, or at least not actively against it. Second, while these proposals may not be inconsistent with U.S. law, that doesn’t make them good policy.
I have a feeling that the IP aspect of the TPP talks is going to be very important for the future of IP in trade agreements. IP was kind of slipped into trade agreements quietly back in the early 1990s. But the recent backlash has been strong. How the TPP fares politically here in the U.S. – if and when negotiations are completed – could tell us a lot about what the future holds for IP in trade agreements.
Harold Meyerson, with whom I’ve rarely found occasion to agree, makes one point in today’s column (“Go Slower on Free Trade”) that didn’t cause my eyes to roll: that the Obama administration has been relentlessly secretive about the goings-on in the Trans-Pacific Partnership trade negotiations.
I cannot corroborate Meyerson’s claim that the administration has granted access to the negotiators and the negotiating text to “roughly 600 trade ‘advisers’ from big businesses,” but has excluded everyone else, including Congress. It may be true, but then again… Certainly, Congress (by which I mean Congress, and not just a few Senate Democrats) is very much in the dark about the details of these negotiations, and that presents an enormous logistical problem.
Article I, Section 8 of the Constitution vests power in the Congress “To regulate Commerce with foreign Nations,” which covers trade agreements. Traditionally, Congress has temporarily extended that authority to the executive branch, given the impracticability of having 535 trade representatives with 535 different agendas negotiating with foreign governments. That temporary grant of “fast track” or “trade promotion” authority is not a blank check. It comes with a list of congressional demands – items that can, cannot, must, and must not be included in the agreement. It is like doing the legislative process in reverse in the sense that amendments are articulated as conditions BEFORE the agreement is reached. Ideally, those congressional demands would be formalized before the negotiations BEGIN so that there are no false starts.
But with the administration still aiming to conclude negotiations in October, no fast track legislation in sight, and anti-trade legislation metastasizing in a Congress that has largely been excluded from shaping the deal’s terms, there are long battles ahead. Meyerson’s counsel that we “go slower on free trade” is probably already a done deal.
As to the rest of Meyerson’s claims that trade is a boon for big business, which comes at the expense of workers and consumers, we have harvested countless forests here at Cato explaining why that is just false. The most persistent U.S. trade barriers are imposed on food (tariffs and tariff-rate quotas), clothing (tariffs), and shelter (trade remedies restrictions on lumber, steel, cement, paint, nails, appliances, flooring, furniture, etc.), making them the most regressive taxes in the U.S. system. Lower-income Americans (those for whom Meyerson claims to speak) devote larger shares of their budgets to these basic necessities than do white-collar fat cats.
I’ll leave you with these three charts, which demonstrate positive relationships between import and jobs, price decreases over time for heavily traded items, and price increases over time for less frequently traded services, all exposing the errors of Meyerson’s claims.
There has been more buzz about the prospects for trade liberalization this year than at any time since the first term of the second president Bush. It appears that some may be mistaking the chatter for actual accomplishment.
For example, trade policy made the front page of Saturday’s Washington Post in a story that is much less about the substantive issues, or the obstacle-strewn path to meaningful liberalization, or the political leadership that will be required to surmount those obstacles than it is a paean to President Obama’s alleged metamorphosis into a champion of free trade.
But before anyone awards the president the Nobel Trade Prize for a job yet done, consider this: in four-plus years, this administration has concluded zero trade agreements, while launching 13 WTO cases against various trade partners. For 50 months, enforcement and domestic protectionism—not liberalization—have dominated the trade agenda.
Yet, the absence of evidence that this administration can deliver meaningful new trade agreements doesn’t seem to curb the enthusiasm of Bruce Stokes, a long-time trade policy observer, whose comment serves as the emphatic final sentence of the Washington Post tribute: “They appear to have moved from a risk-averse first term to creating a legacy in international economic and trade policy.” A legacy? Really? Shouldn’t the bar be raised just a smidge before we coronate President Obama this generation’s Cordell Hull?
For starters, wouldn’t the president have delegated someone capable and experienced to take ownership of the trade agenda if he were really committed to leaving a trade policy legacy? U.S. trade representative Ron Kirk announced more than one year ago that he would be leaving his post early in a second Obama administration. Yet there is nobody vetted and ready to take the reins of trade policy. Kirk’s official resignation came at the end of last month—though he has been hanging around to help out on account of … “sequestration.”
The most prominent name floated for U.S. Trade Representative has been the OMB’s Jeff Zients, the person most closely associated with President Obama’s proposal to subsume the USTR under the enforcement-centric Commerce Department—again, not exactly the substance of trade legacy-building. Members from both parties in Congress have demanded a better candidate if the president expects his trade agenda to be taken seriously.
Accomplishments, not rhetorical intentions, should serve as the basis for our judgments. Anyone can announce initiatives. President Obama is quite proficient at reciting litanies of initiatives. But it remains to be seen how he handles the situation when the deals require his confronting allied interests and dismantling their protectionist perches. In fairness, the administration’s trade negotiators have been working hard toward a Trans-Pacific Partnership agreement with 10 Pacific-rim nations. But let’s see where this goes before we start writing history. There’s still a lot of ham left on that bone.
The administration has verbally committed to completing the TPP negotiations by the end of this year and the just-announced Transatlantic Trade and Investment Partnership negotiations with Europe by the end of next year—both virtual impossibilities given where things stand in those negotiations and between the White House and Congress. So we already have a credibility problem.
If you harbor any doubts that the parameters of U.S. trade policy are defined by a few politically-important domestic industries, take a look at the debate over whether Japan should be allowed to join the Trans-Pacific Partnership trade negotiations.
Did you miss it? That’s because there really hasn’t been much debate; there has been near-unanimous support for the idea in the United States.
In December 2011, the Office of the U.S. Trade Representative requested comments from the public about Japan’s expression of interest in joining the TPP talks. In response, 115 submissions were filed on behalf of various U.S. interests (small to large companies, trade associations, unions, and other NGOs). Five of the responses flat out rejected the idea of Japan’s participation; five expressed a willingness to support Japan’s participation with conditions, and 105 expressed no-strings-attached support for Japan joining the talks. In other words, 91 percent of the respondents were unequivocally in favor of Japan’s participation in the negotiations.
Yet, four months after reviewing those comments, the Obama administration is equivocal about the matter.
With 91 percent in favor, the only formula that could produce executive equivocation is one that weights extremely heavily the views of those expressing opposition to Japan’s participation. Which of these five dissenters’ views are likely to be getting extra special consideration from the administration on this matter: Humane Society International, the National Marine Manufacturers Association, the Maine Citizen Trade Policy Commission, the Central Union of Agricultural Cooperatives, or the American Automotive Policy Council (hint: the lobbying arm of the “Detroit 3” – Ford, GM, and Chrysler)?
Yes, the same GM that American taxpayers bailed out and are still involuntarily vested in to the tune of $27 billion has interest in seeing those same taxpayers denied the enormous benefits of liberalizing trade with the world’s third largest economy. And yes, this is the same Chrysler that masquerades as an American company (remember the Clint Eastwood Super Bowl ad), but is owned by the Italian automaker Fiat. Add that little detail to the fact that GM produces more cars in China than it does in the United States and one has to question how, exactly, the process of U.S. trade policy formulation is reality-based.
There is nothing wrong with companies investing across borders and producing wherever they can to serve demand across the globe. Indeed, freedom of capital, trade, and labor should be the rule, not the exception that it is today. Likewise, it is to be expected that companies will respond to incentives and if policy is perceived as malleable, the incentive to influence favorable outcomes will motivate companies to lobby. And as entities beholden to the fiduciary duty to maximize profits for shareholders, these companies try to influence the rules to their own advantages. But who’s watching over the hen-house here? Policymakers have a responsibility to the public interest, not to specific industries or companies.
What is proper, democratic, or civic-minded about U.S. policy formulated with the views of a few politically-favored companies – companies that are lobbying foreign governments on some of the very same issues – trumping the opinions of a diverse 91 percent of respondent interests? If the goal of trade policy is to deliver the benefits of trade liberalization to a broad cross-section of Americans, then why is there this egregious imbalance of influence on the process? What is the point of collecting comments from the public on such matters, if not just to create the illusions of policy accessibility and transparency? The whole exercise renders trade policy indistinguishable from corporate welfare and gives trade a bad name.
Consider the realpolitik of the matter. The Chinese government sees the TPP negotiations as a U.S.-led effort to counter China’s growing influence, a perception the administration has not been shy about helping to cultivate. Presumably, the Chinese government would like to see those efforts fail, and one way to undermine the TPP is to ensure that Japan stays out. How might China accomplish that? GM and Ford have big and growing stakes in a Chinese auto market that has been subject to various regulations to control rapid demand growth and stifling traffic congestion. Might GM’s and Ford’s adamant opposition to Japan’s joining the TPP negotiations be animated by these considerations? The argument put forward by the American Automotive Policy Council that Japan should be excluded from even negotiating because it has allegedly impermeable non-tariff barriers seems to miss the whole point that negotiations are where those barriers are discussed and, ultimately, dismantled. It’s like disqualifying someone for a haircut because he wears his hair too long. To my mind (and I neither offer nor have any proof), the adamancy of AAPC’s opposition whiffs of their trying to uphold their end of a bargain with Beijing.
Another explanation put forth for official U.S. equivocation over Japan is that the administration wants to proceed quickly, but the Japanese government itself has not decided whether it even wants to join the negotiations. Even if Japan were entirely committed to the negotiations and had no domestic opposition to overcome, the process would be slower. But there is domestic opposition in Japan, so, in fairness, the Obama administration’s concern for Detroit’s feelings doesn’t present the only obstacle.
Getting the deal done quickly is a valid reason to oppose Japan’s participation if the administration sees the TPP only as a means to a political end: having a deal – a relatively minor one, no doubt – to tout before November. But this isn’t going to be done before November 2013, let alone November 2012. And the economics of a Japan-less deal are, frankly, underwhelming.
Japan is the world’s third largest economy and the fourth largest trading partner of the United States. The $6 trillion Japanese economy is more than double the size of the economies of the eight current U.S. negotiating partners combined. The $200 billion in two-way trade between the United States and Japan equals that of trade between the United States and all of the eight current negotiating partners combined – and the United States already has free trade agreements with four of them. If there are good reasons for pursuing a trade agreement with the eight, the reasons are much stronger if Japan is included.
Just a few short weeks ago, U.S. Trade Representative Ron Kirk waxed in the Wall Street Journal about the importance of the U.S. services sector industries. In a piece titled “Rethinking ‘Made in America’,” Ambassador Kirk made the point that the United States is a services-exporting powerhouse and that industries in those sectors would drive growth and job creation in the 21st century. He wrote:
A commitment to services exports is why services and investment are a [sic] cornerstone of the current nine-country Trans-Pacific Partnership negotiations, in which the U.S. is seeking broad, nondiscriminatory market access for a wide range of services.
There isn’t a bigger ready-market for U.S. services in the world than Japan’s, but as of this moment an icon of the 20th century’s manufacturing economy is in the driver’s seat of this 21st century agreement.
Those who claim to want to move fast assert that Japan can always accede to the agreement at a later date – when it is good and certain that it wants to join. But there are no guarantees that Japan would want to get into the club on terms undoubtedly less favorable than those it could secure as a charter member. Rather than view the TPP as a model for the region, Japan, Korea, Indonesia, Canada, Mexico, China and even Europe might create their own alternative. If the TPP is to have guaranteed drawing power, it needs the anchor of a large Asian economy. And adding Canada and Mexico makes the endeavor all the more worthwhile.
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