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.
The future of multilateral trade has presented some vexing questions for policy watchers over the past few years. With the Doha Round of multilateral trade negotiations hopelessly stalled and the proliferation of regional and bilateral agreements in its stead, contemplation and debate about the fate of the World Trade Organization, its successful adjudicatory body, international trade governance, and globalization have been all the rage.
The significance of the Bali deal depends on whom you ask. Those heavily vested in the current architecture of the multilateral system tend to hail Bali as proof that multilateral negotiations are back in business and that there is renewed promise for completing the long-stalled Doha Round. Frankly, taking 12 years to forge an agreement on trade facilitation (basically, reform of customs procedures, which constitutes a tiny fraction of the Doha Round’s objectives) plus some concessions to permit more subsidization of agriculture in the name of food security is not exactly convincing evidence that Doha Round negotiators have demonstrated their cost effectiveness or the utility of this approach.
To the extent that trade agreements result in Americans being “freer” to transact how and with whom they please, I support them. But one of my biggest misgivings about these agreements, and the negotiations that precede them, is that they reinforce the fallacy that trade is an “Us-versus-Them” contest where the objective is to secure market openings abroad, while preventing such liberalization at home. Liberalization at home – opening the domestic market to competition – is what free trade is about. Thus, the objective of free trade negotiations is not free trade. Follow?
In response to a question from House Ways and Means Trade Subcommittee Chairman Devin Nunes about what was being done to ensure that liberalization of trade in film and television services isn’t excluded from the TTIP negotiations, U.S. Trade Representative Michael Froman assured: “The United States has made clear to the EU that we strongly support a comprehensive agreement without exclusions (my emphasis).”
Then there was this question from Rep. Charles Boustany (R-LA): “Can you assure me that the Jones Act will not be diluted in any trade agreements that are negotiated during your tenure?”
Among other favors it bestows upon domestic shipbuilders, the Jones Act forbids foreign-flagged vessels from operating between U.S. ports, ensuring that U.S. maritime shipping (as crucial as it is to U.S. supply chains and U.S. production costs) is an industry that operates without any foreign competition. None.
How much more economically self-destructive can policy be than a federal law that consigns U.S. businesses to inefficient production and transportation options, deters investment in U.S. manufacturing and distribution operations, and gives carte blanche to shipbuilders to be as unresponsive to customer needs as they and their unions desire?
Ambassador Froman’s answer:
We recognize the importance that the Jones Act has for the state of Louisiana. This Administratrion has continuously ensured that the application of the Jones Act is permitted under each of our trade agreements. As we continue to participate in discussions where this issue may arise, including trade agreement negotiations, we will continue to take this position.
About being clear to the EU that we strongly support a comprehensive agreement without exclusions…not so much.
This morning, Cato published a new study of mine titled, “Reversing Worrisome Trends: How to Attract and Retain Investment in a Competitive Global Economy.” The thrust of the paper is that, despite still being the world’s premiere destination for foreign direct investment, the U.S. share of the global stock of direct investment fell from 39% in 1999 to 17% today.
This downward trend is attributable to two broad factors. First, developing economies – many of which have achieved greater political stability, sustained economic growth, improved infrastructure and higher-quality worker skill sets – are now viable options for pulling in the kinds of FDI that was once untenable in those locales. Second, a deteriorating business and investment climate in the United States – owing to burgeoning, burdensome, and uncertain regulations; an antiquated, punitive corporate tax system; incoherent immigration, energy, and trade policies; a wayward tort system; cronyism and perceptions thereof; and other perverse incentives and disincentives of policy have pushed investment away.
The first trend should be welcomed and embraced; the second must be reversed. From the study:
Unlike ever before, the world’s producers have a wealth of options when it comes to where and how they organize product development, production, assembly, distribution, and other functions on the continuum from product conception to consumption. As businesses look to the most productive combinations of labor and capital, to the most efficient production processes, and to the best ways of getting products and services to market, perceptions about the business environment can be determinative. In a global economy, “offshoring” is an inevitable consequence of competition. And policy improvement should be the broad, beneficial result.
The capacity of the United States to continue to be a magnet for both foreign and domestic investment is largely a function of its advantages, many of which are shaped by public policy. Considerations of taxes, regulations, trade openness, access to skilled workers, infrastructure, energy policy, and dozens of other policy matters factor into decisions about whether, where, and how much to invest. It should be of major concern that inward FDI has been erratic and relatively downward trending in recent years, but why that is the case should not be a mystery. U.S. scores on a variety of renowned business surveys and investment indices measuring policy and perceptions of policy suggest that the U.S. business environment is becoming increasingly less hospitable.
Although some policymakers recognize the need for reform, others seem to be impervious to the investment-repelling effects of some of the laws and regulations they create. Some see the shale gas and oil booms as more than sufficient for overcoming policy shortcomings and attracting the necessary investment. The most naive consider “American” companies to be tethered to the U.S. economy and obligated to invest and hire in the United States, regardless of the quality of the business and policy environments. They fail to appreciate that increasingly transnational U.S.-based businesses are not obligated to invest, produce, or hire in the United States.
It is the responsibility of policymakers, however, to create an environment that is more attractive to prospective investors. Current laws, regulations, and other conditions affecting the U.S. business environment are conspiring to deter inward investment and to encourage companies to offshore operations that could otherwise be performed competitively in the United States.
A proper accounting of these policies, followed by implementation of reforms to remedy shortcomings, will be necessary if the United States is going to compete effectively for the investment required to fuel economic growth and higher living standards.
Details, charts, and analysis, and citations are all included here.
Today marks the official commencement of the much anticipated Transatlantic Trade and Investment Partnership negotiations in Washington. An eventual agreement could eliminate tariffs and curb superfluous rules and regulations that impede commerce and raise costs for businesses and consumers in the world’s largest economies. Those prospects make the effort worthy of our attention and, possibly, our support, but one thing should be clear from the outset: the negotiations are less about free trade than they are the latest rejection of its virtue.
Among economists, businesspeople, and policy scholars, there is near unanimity that international trade is a good thing. Many even call themselves “free traders.” But self-identifying as a free trader in Washington usually means that one supports free trade over there (in other countries), and not necessarily over here, in the United States. What passes for free trade advocacy these days is endorsing the USTR’s official negotiating objectives, which condition liberalization at home on the foreign market access gains obtained for U.S exporters. And that ain’t free trade.
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