Tag: trade agreements

Should Free Traders Support Free Trade Agreements?

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.

New Cato Policy Analysis on Regulatory Protectionism

Just in time for today’s release of my and Bill Watson’s new PA, “Regulatory Protectionism: A Hidden Threat to Free Trade” comes a feature article [$] in the specialist trade (in both senses of the word) publication, Inside U.S. Trade on the likely obstacles to a U.S-EU preferential trade agreement (a recent Cato event also hosted a discussion on this topic). And, in an inadvertent PR coup for us, it focusses almost entirely on how regulations and other non-tariff barriers (NTBs) in each economy might inhibit a successful result to negotiations:  

The shifting nature of domestic policies and agricultural trade between the United States and the European Union over the last several decades means that while some traditional trade irritants are no longer present, others have been introduced that will likely prove difficult to unravel in the context of trans-Atlantic bilateral negotiations. Whereas bilateral trade irritants previously centered on export subsidies and competition in third markets for commodities like wheat, now the disagreements primarily relate to non-tariff barriers (NTBs), including divergent scientific standards, food safety regulations and other issues that are hindrances to bilateral trade… But the difficulty in negotiating these issues is that, because they ostensibly relate to consumer health and safety, governments cannot easily make “trade-offs,” as they can with tariffs. Observers believe that this is the chief reason that the talks over agriculture promise to be so difficult.

Indeed. As we discuss in our paper, tariffs and other conventional trade barriers have fallen over the years, so the barriers that remain are more regulatory in nature, and more sensitive to negotiate. What we’re essentially left with is the difficult issues. They get to the heart of national sovereignty and, on a practical level, require the participation of regulatory administrators who may have very little or no trade negotiation knowledge or experience. They also have little incentive to concede their power. Whereas trade negotiators are paid to, well, negotiate, regulators are paid to inhibit commerce. They face asymmetric rewards: a huge fuss if something goes wrong, not many kudos if they remove the reins and let commerce thrive. Under those conditions, it should be no surprise that they are risk-averse. So this trade agreement will not be easy to complete. In the meantime, though, there is much the United States can do to limit the ability of regulators to shackle the economy with burdensome—and potentially illegal—requirements that limit choice and expose American businesses to retaliatory sanctions. For example, ensure WTO obligations are taken seriously and adhered to. From our paper:  

Prior to implementing a new regulation, federal agencies should be required to evaluate the possibility that less trade-restrictive alternatives could meet regulatory goals as effectively as their preferred proposal. Also, the U.S. government should not dilute or bypass the multilateral rules of the WTO through bilateral or regional negotiations that accept managed protectionism. This paper uses a number of recent examples of protectionist regulations to show that the enemies of regulatory protectionism are transparency and vigilance. Policymakers should be skeptical of regulatory proposals backed by the target domestic industry and of proposals that lack a plausible theory of market failure.

Read the whole thing here. And if you are in D.C. or near a computer next Thursday, watch our event to launch the paper.

The Trade Negotiation Proliferation

It’s getting hard to keep track of all the various trade negotiations going on right now.

As this blog’s readers may recall, in his State of the Union speech, President Obama announced that the United States would begin trade negotiations with the EU. And no doubt you know that the United States, Canada, and Mexico are part of NAFTA.

But less prominently, the United States, Canada, and Mexico are also part of trade talks among various nations in the Pacific region, called the Trans Pacific Partnership (TPP). And now Japan has announced that it would like to join these talks.

In addition, Canada and the EU have been negotiating their own trade agreement for several years now.

And just the other day, Japan and the EU started trade talks.

Oh, and Mexico has suggested a broader NAFTA-EU trade deal.

Got all that? It’s OK if you don’t—I’m not sure I do either.

There are some good reasons to use international trade agreements to promote free trade. The world trading system has been very successful in bringing down tariffs and other protectionist barriers over the past few decades. But the recent proliferation of agreements, with sometimes conflicting rules (going beyond just protectionism), may be steering us away from real free trade. Real free trade would lower trade barriers for all countries, not just for some. Hopefully some day trade negotiations can get back to that principle.

Trade Agreements Promote U.S. Manufacturing Exports

Do trade agreements promote trade? The answer appears to be yes. In a new Cato Free Trade Bulletin released today, I examine the record of trade agreements the United States has signed with 14 other nations during the past decade.

The impact of those agreements on U.S. trade is a timely subject because Congress may soon consider pending free-trade agreements (FTAs) with South Korea, Colombia, and Panama. Opponents of such deals often argue that they open the U.S. economy to unfair competition from low-wage countries, displacing U.S. manufacturing. Advocates argue the agreements do open the U.S. market further to imports, but they open markets abroad even wider for U.S. exports.

Based on actual post-agreement trade flows, I found that both total imports and exports with the 14 countries grew faster than overall U.S. trade since each agreement went into effect. For politicians obsessed with manufacturing exports, the study should be especially encouraging. Here is a key finding:

Politically sensitive manufacturing trade with the 14 FTA partners has expanded more rapidly than overall U.S. manufacturing trade, especially on the export side. U.S. manufacturing exports to the recent FTA partners were 10.5 percent higher in 2010 compared to our overall export growth since each agreement was signed. That represents an additional $8 billion in manufacturing exports.

I’ll be discussing the three pending trade agreements alongside William Lane of Caterpillar Inc. at a Cato Hill Briefing on Wednesday of this week. Along with the new study on the past FTAs, I’ll be talking about our recent studies on the Columbia and Korea agreements.

TAA Reversal on Grand Bargain

On Monday, a group of 41 Senate Democrats, led by Sen. Debbie Stabenow (MI) sent a letter to President Obama, praising his administration’s recent decision to abandon its erstwhile promotion of the three pending trade deals as “job creators” and instead warn Congress it won’t submit the pacts for a vote unless they can be assured that a stimulus-enhanced version of trade adjustment assistance will be renewed.

The letter contains much about the benefits of the program, with little mention of its costs to taxpayers and even less concern shown for the innocent consumers whose pockets have been picked for decades to maintain the jobs lost when trade is allowed to flow more freely. That’s pretty standard fare for protectionists, who rely on the hidden and dispersed nature of the costs to get support for their policies. What’s new about this situation is the ratchet effect – the base TAA program is still in place, so what they are asking for is a renewal of part of the stimulus as a pre-condition for supporting trade liberalization. Note that the stimulus changes included a removal of the requirement that job losses be linked to a trade agreement (a feature, not a bug of the program, according to the Senators).

Wait, did I say a renewal of TAA-plus would be a pre-condition for supporting trade agreements? Not necessarily. Note this telling paragraph of the letter:

While we the undersigned may have differing views on elements of the trade agenda - with some of us looking forward to supporting the pending trade agreements with South Korea, Colombia, and Panama, and others skeptical of the impact of the agreements -we are unified in our belief that the first order of business, before we should consider any FTA, is securing a long-term TAA extension.  [emphasis added]

As I’ve said repeatedly, I understand (even if I don’t support) the political calculation that TAA is necessary – and worth it– if it secures votes for trade liberalization. But reading between the lines, some of the letter signers have no intention voting for the trade agreements, even if the mega-TAA is approved.  What we have here is a reversal of the grand bargain on trade liberalization, that gave extra welfare to workers who lost their job because of freer trade in exchange for support for trade agreements that lowered trade barriers. That ‘grand bargain’ has been tenuous for years now, of course – witness the complete lack of movement on the trade agreements even after the 2009 enhancement of TAA, at least until recent months. But now, rather than using TAA to buy votes for trade liberalization, the administration and their allies appear to using pretty-much-assured votes for trade liberalization to buy TAA. As a Wall Street Journal editorial said on Friday, it’s extortion.

President Obama’s Cognitive Dissonance on Trade with Latin America

As President Obama flies from Brazil to Chile today and then on to El Salvador later this week, trade and jobs have been a major theme of his trip. So far the tour has been a public relations success, but it also highlights the contradictions in the president’s trade policy toward our Latin American neighbors.

One contradiction is that the president says nice things about trade agreements in the abstract, but he has so far refused to show leadership when it really matters. In an op-ed in USAToday on Friday, as he was about to depart for Brazil, the president wrote:

Thanks in part to our trade agreements across the region, we now export three times as much to Latin America as we do to China, and our exports to the region — which are growing faster than our exports to the rest of the world — will soon support more than 2 million jobs here in the United States.

Yet nowhere in the 900-word article did the president even mention “Colombia” and “Panama,” two countries that have already signed trade agreements with the United States but are waiting for the president to ask Congress to actually vote on them. The Colombia agreement alone would stimulate an extra $1 billion a year in U.S. exports. (See our recent Cato study.)

Yet because his labor-union allies oppose both agreements, President Obama could not bring himself to even mention them in a major article on Latin American trade, exports, and jobs. More than passing strange.

A second contradiction is that the president talks a lot about reducing barriers to trade in other countries, but hardly ever acknowledges remaining trade barriers in the United States. No other country would like to hear that acknowledgment more than Brazil, whose producers face high U.S. barriers to some of their most important exports.

In a speech yesterday in Rio de Janeiro, the president told his hosts:

In a global economy, the United States and Brazil should expand trade, expand investment, so that we create new jobs and new opportunities in both of our nations. And that’s why we’re working to break down barriers to doing business. That’s why we’re building closer relationships between our workers and our entrepreneurs.

Our commercial relations with Brazil could be even closer if the United States did not maintain high trade barriers against such major Brazilian exports as sugar, ethanol, steel, and orange juice. Brazil would also export more cotton and soybeans if the U.S. government did not so heavily subsidize our own production.

If President Obama has been working to break down those U.S.-imposed barriers to U.S.-Brazilian trade, I somehow missed the news.

President Obama Fails to Understand Trade

At the beginning of the Obama administration, I had the audacity to hope that the new president would defy conventional wisdom and become a proponent of trade and a good spokesman for its benefits. Scott Lincicome and I even wrote a 20,000-plus word Cato analysis explaining why the economic, geopolitical, and domestic political environment offered the president a unique opportunity to steer his party back to its pro-trade roots.

The thrust of our analysis was that, despite the campaign rhetoric, the president understood the economic benefits of trade and that he would see it as an escape route from recession and a path to political success; that the president’s visibility and new cache with his trade-skeptical political party—and the fact that he wasn’t George W. Bush—made him well-suited to the task of challenging and extinguishing lingering myths about the alleged ravages of trade, while explaining its many benefits; and, that the president would recognize that pro-trade policies should be part of the current Democratic Party platform, if for no other reason than the fact that restrictions governments place on trade harm lower-income Americans and the world’s poor more than they hurt anyone else. (Protectionism is regressive taxation, which is presumably anathema to Democratic Party creed.)

Alas, our study, “Audaciously Hopeful: How President Obama Can Restore the Pro-Trade Consensus,” was just a little too. It fell on deaf ears. It was ignored. In fact, it’s almost as if the past two years of trade policy were conducted to spite the recommendations in that paper.

From this administration, we’ve seen completed bilateral trade agreements sent to an off-site storage warehouse; the imposition of taxes on imported tires; “Buy American” provisions; prohibitions on Mexican trucks; demonization by the president of companies that outsource; defiance of multilateral rules governing use of the antidumping law; and, a “Boardwalk Empire”-style deal to prospectively compensate Brazilian farmers for the lower revenues they should expect on account of the lavish subsidies bestowed by U.S. taxpayers on U.S. cotton producers in lieu of reducing—or better still, halting—cotton subsidies altogether. Yes, the hallmark accomplishment of this administration’s trade policy so far is a deal that requires American taxpayers to subsidize Brazilian cotton producers for the right to continue subsidizing U.S. cotton producers.

Despite all that, I remained audacious (or gullible) enough to hold a glimmer of hope that the president would finally see the wisdom in our advice—given the new political landscape.  That glimmer was snuffed out with publication of an oped in the New York Times this past Saturday, in which President Obama betrays profound misunderstanding of trade and its purpose.  The president portrays trade as an enterprise that is won or lost at the negotiating table, where only the most savvy or most committed negotiators can succeed in bringing home the spoils.  The president promises to fight hard to get Americans their fair shake from this dog-eat-dog process, while actual producers, consumers, workers, and investors are relegated to tertiary roles.

The central dysfunction between Americans and trade is the assumption—reinforced in the president’s op-ed—that exports are good, imports are bad, the trade account is the scoreboard, and our trade deficit means that we are losing at trade. That dysfunction resides comfortably within a zero-sum worldview, which the president touts in a purposeful cadence throughout the oped. In the penultimate sentence, the president writes:

Finally, at the Asia-Pacific Economic Cooperation meeting in Japan, I will continue seeking new markets in Asia for American exports. We want to expand our trade relationships in the region, including through the Trans-Pacific Partnership, to make sure that we’re not ceding markets, exports and the jobs they support to other nations.

By opining about trade without understanding that its real benefits are manifest in imports (here’s Don Boudreax’s elaboration of that process), the president is simply reinforcing myths that will continue to confuse and divide American.  As long as politicians insist that our trade account is a scoreboard and that a surplus is a trade policy success metric, Americans will continue to be skeptical about trade.