Commentary

Dark Days Ahead?

The era of trade liberalization is dead. Yet it could get worse still. Not only have prospects for liberalization over the next few years been dashed, but Congress is considering legislation that could precipitate a retreat from the trade policies and institutions that have served U.S. interests for 60 years.

These are indeed dark days for trade. The Democratic Party, which has grown increasingly hostile to trade over the past decade, controls the legislature. The president’s authority to negotiate trade agreements and present them to Congress for an up-or-down vote has expired, and will not be renewed. The bilateral trade agreements completed with South Korea, Colombia, Peru and Panama will likely rot on the vine, as Congress shunts them aside to consider instead trade legislation that is either antagonistic or protectionist. And for the first time in post-World War II history, a multilateral trade negotiating round has ended in failure. The era of negotiation and accommodation may yield to one of confrontation and litigation.

One thing that has become clear this year is that Democratic Party opposition to trade runs much deeper than the leadership has been willing to admit. When the Democrats assumed control of Congress in January, the party’s leadership whispered assurances that, notwithstanding the strident anti-trade rhetoric adopted by its rank and file, they understood the importance of continuity in U.S. trade policy. With some modifications to the U.S. trade agreement template to reflect Democratic priorities on labor and environmental issues, the Congressional leadership would be able to help the administration move the agenda forward.

A grand bargain was struck in the spring, which was nothing more than a wholesale capitulation by the administration to Congressional demands for strict, enforceable labor and environmental provisions in prospective trade agreements, including the four pending congressional consideration. But as the ink was drying, the Democrats moved the goalposts.

The South Korea agreement was deemed unsupportable by House Ways and Means Chairman Charles Rangel (DNY) and Ways and Means Trade Subcommittee Chairman Sander Levin (D-MI) because its terms do not condition Korean automobile access to the U.S. market on the performance of U.S. automobile exporters in the Korean market. Of course, such a provision, which was put forward by Rangel and Levin in the waning days of the negotiations, would leave the U.S. auto producers in a position to decide just how much competition it wanted from Korean producers. Accordingly, that provision was a nonstarter.

The Colombia agreement was deemed unsupportable because the Uribe government allegedly has done an inadequate job of finding and prosecuting thugs who have terrorized and killed Colombian unionists over the years. Thus, Democratic disdain for a right-ofcenter Latin American government, which also happens to be one of the few regional governments not openly hostile to U.S. policy, suffices for justification to deprive Colombian citizens of the opportunity to improve their lots through better trade terms with the United States.

Consideration of the Peru agreement was sidelined until Chairman Rangel and others have a chance to visit Peru, see first hand how its factories are run, and possibly change the agreement’s terms, again. Democrats have used the labor conditions excuse to camouflage Big Labor’s real motive, which is to kill trade deals at all costs. At least that truth now has been exposed. But regrettably, the anti-trade objectives of organized labor and importcompeting interests have dovetailed conveniently with proliferating misconceptions and myths about imports, jobs, and manufacturing to produce a phony sense of crisis.

Most of the anti-trade legislation introduced this Congress is premised on the myth of U.S. manufacturing decline at the hands of rising imports, mostly from China. But U.S. manufacturing is thriving. In 2006 the manufacturing sector achieved record output, record sales, record profits, record profit rates, and record return on investment.

Imports are not a bane for U.S. producers. In fact, there is a strong correlation between manufactured imports and manufacturing output, as U.S. producers account for more than half of the value of all U.S. imports. When imports rise, output rises. When imports fall, output falls. In the past quarter century, imports have increased six-fold, while real GDP has grown by more than 130 percent, creating an average of 1.8 million net new jobs each year.

But policymakers fail to acknowledge this crucial relationship. Instead, too many in Congress view exports as good, imports as bad, and the trade account as the scoreboard. Given the large and growing U.S. trade deficit, policymakers conclude that we are losing at trade. And we are losing at trade because our trade partners are cheating.

In China’s case the alleged cheating involves currency manipulation, subsidization of industry, unfair labor practices, hidden market barriers, dumping, and other transgressions. Some of these allegations may carry a degree of truth, but by and large the trade relationship has been conducted within the rules and consensually, yielding huge benefits for Americans.

In any event, the proper course for redress for complaints is through the dispute settlement system of the World Trade Organization. The Bush administration lodged three formal complaints earlier this year, which are working their way through the process. Congress should allow that process to continue and restrain its urge to be seen doing something. There is a distinct risk that unilateral, punitive actions on trade could severely damage the trade relationship and lead to a contagious deterioration of respect for the WTO and its decisions. That, ultimately, would take us back to the days when tit-for-tat trade wars were common, and uncertainty in trade prevailed.

Plenty of blame for the current state of affairs rests with the Congressional Democratic leadership, which has reckoned there is very little political downside to receding on trade, economic consequences be damned. That position has the blessing of Big Labor, and opposing the initiatives of an unpopular president might prove to be good politics.

But Republicans are on the hook too. The strong pro-trade consensus among Republicans that was so evident in the 1990s began breaking down in the early part of this decade, as China’s economic emergence was becoming evident. Steel- and textile state Republicans have presented some of the greatest obstacles to the Bush administration’s trade policy agenda.

And by failing to make a comprehensive case for trade liberalization, the Bush administration itself bears some responsibility for the current state of affairs. Rather than talk about the benefits of imports, which keep prices in check for consumers and input costs competitive for producers, the administration has focused almost exclusively on the potential export gains from trade agreements, affirming the mercantilist world view of Congress. The U.S. Trade Representative’s office is fond of pitching further trade liberalization by pointing to the U.S. trade surplus with countries with which this administration has negotiated bilateral trade agreements. But by treating a trade surplus as a success metric, it’s only a small step to the conclusion that our overall trade policy is failing, given our nearly $1 trillion deficit.

The Bush administration’s quest for further trade liberalization came to a grinding halt when the 110th Congress convened. But in many ways the President’s trade policy legacy might be forged during its final 18 months. By holding the line against bad trade legislation from an increasingly confrontational Congress, the administration can make the task less arduous for a subsequent administration to rebuild the consensus for trade when the political climate improves.

Daniel Ikenson is associate director of the Cato Institute’s Center for Trade Policy Studies.