A Divide and Conquer Trade Policy

California Rep. Devin Nunes has proposed what seems like a neo-con approach to trade policy:  Trade with our allies, not with our perceived enemies.  His goal is to make trade policy part of our general foreign policy, which, in his view, should focus on making alliances with our friends and isolating our enemies.

This is a bad idea, for many reasons.  I'll explain the details of his plan a bit more, then I'll go over all of the problems I see with it.

As he explains over at NRO, Rep. Nunes would like to create "an alliance of free-trading nations." He supports the Trans Pacific Partnerhship (TPP) negotiations, and would also like to see U.S.-EU and U.S.-Brazil free trade agreements. He then talks about "distinguishing friend from foe," and singles out Venezuela, the Gaza Strip, Russia and Egypt as countries who are "hostile" to the United States.

In support of his approach to trade/foreign policy, he has introduced in Congress the Economic Freedom Alliance Act, which is made up of several specific pieces of legislation to accomplish the various elements of his plan.

It would be easy to ignore this proposal.  It's just some legislation introduced by one Congressman.  However, note the similarities with part of Mitt Romney's economic plan:

... there is an opportunity to pursue a game-changing multilateral agreement among like-minded nations genuinely committed to the principles of open markets. As president, Mitt Romney will pursue the formation of a "Reagan Economic Zone." ...

Such a partnership would be extraordinarily attractive to most developed nations, and to those developing nations that have embraced free enterprise and open markets. With membership open to any nation willing to abide by the rules, two primary U.S. objectives would be fulfilled. First, as the most open and innovative economies came together, the dynamism of the resulting economic zone would serve as a powerful magnet, drawing in an expanding circle of countries willing to abide by the rules in exchange for greater access to one another’s markets. At the same time, it would also serve as a mechanism for confronting nations that violated trade rules while free-riding on the international system. Creating a large open market, and excluding countries that failed to respect the rule of law, would prevent cheaters from prospering and provide a major incentive for them to reform.

I think the trade part of this approach can be summed as follows:  "We" are more open and free than "they" are, and so we should set up a system that is just for "us," and if "they" change to be more like "us," "they" can be part of "our" system.  Romney focuses on trade more than Nunes does; Nunes goes further in tying this plan to foreign policy.

As I said, I think this is a bad approach.  Here are all the things that are wrong with it.

At the outset, if we're being honest, an "alliance of free-trading nations" would not have many members.  Certainly the U.S. wouldn't be part of it.  With our tariffs in traditionally protected industries, excessive use of trade remedies, massive subsidies, and discriminatory government procurement, we are hardly a model of free trade virtue.

But just for the sake of argument, I'll stipulate to the assumption Rep. Nunes makes, that we are relatively more free trade oriented than many countries.  Even under this assumption, this proposal is still a bad idea.

First, it builds discrimination into the world trading system.  The idea is to strengthen "alliances."  But the converse of making an ally is making an enemy out of those not in the alliance.  Singling countries out as not part of your alliance is likely to generate a good deal of antipathy.  Nunes mentions Russia, and presumably he has China in mind to some extent.  But will putting them formally outside of our "free trade alliance" cause them to want to be more like us?  That seems unlikely.  As Exhibit A on this issue, look at Cuba.  I'm not sure we even need an Exhibit B, but let me also mention China.  There is a lot of hand-wringing about China these days.  But compare China today with China in 1990.  Isn't it pretty clear that the world economy is better off with China having opened itself to international trade and investment to a great degree, and bound itself to WTO rules?  Despite what you often hear in the media, we sell a lot of stuff to China.  Also despite what you may hear, all that stuff we buy from China is actually a benefit to us.

Second, the specific proposed free trade agreements he mentions have fairly dim prospects. The TPP has progressed a bit already, but with more countries being added, and lots of contentious issues, it would come as no surprise if the negotiations dragged on and on, and never concluded.  As for a U.S.-EU free trade agreement, if the two of them can work out a way to cut their massive farm subsidies, I will be greatly pleased.  But I'm not holding my breath.  And the U.S. and Brazil are currently arguing about Brazil's proposed tariff increases and U.S. monetary policy.

So what should we do instead?  Let me offer the following suggestions.

The first thing we should do is commit ourselves to pushing for free trade in our domestic policy.  Many Americans are under the impression that we are the free traders, and Rep. Nunes seems to have assumed this.  But the rest of the word doesn't see things that way, for good reason.  Let's take Brazil, one of Rep. Nunes' potential free trade partners, as an example.  A few years ago, Brazil brought a WTO complaint challenging U.S. subsidies to cotton producers.  The WTO found the U.S. to be in violation of free trade rules.  Did the U.S. respond by removing the subsidies, which would have been the obvious free trade position to take?  No.  Instead, the U.S. bought off Brazil by offering additional subsidies to Brazilian cotton producers, so that it could maintain the subsidies to U.S. producers.   Does anyone think Brazil sees U.S. policy as one based on free trade?

The second thing we should do is keep trade policy about economics.  Underlying the Nunes plan is that it is not really about trade policy.  It is about foreign policy.  He says:  "America’s foreign policy is incoherent and adrift, lacking clear criteria even for distinguishing friend from foe."  Maybe, maybe not.  But even if true, this is not a trade policy issue.  He is using trade policy to pursue foreign policy goals.  This is not likely to lead to an economically sensible trade policy.

And finally, one of the biggest problems I see with current U.S. trade policy is that it often gets distracted from core trade issues.  Intellectual property, labor, and environmental rules in trade agreements are some good examples.  But Rep. Nunes provides another.  In a blog post related to his proposal, he refers to the Agriculture Trade Facilitation Act as one part of his proposal.  An older version of this bill set out one of its negotiating objectives for food safety and health measures as follows:  "To strengthen the requirement that the application of measures is based on scientific evidence by requiring parties to the agreement to make available their risk assessments and provide a science-based justification for regulations, in particular in cases in which measures are more restrictive than international standards."  Now, I'm all for science-based regulation.  If we are going to regulate on health issues, science should guide the process.  But making science-based regulation a binding international law rule is another matter.  (To be clear, it already is part of WTO rules; Rep. Nunes wants to make the international rules tougher.)  To me, this is one of the issues that is distracting us from core free-trade principles.

So, to sum up:  Free trade only with our allies is bad foreign policy and it distracts from good trade policy.  U.S. foreign policy already has enough problems with creating new enemies.  Let's not bring trade into the mix, making both foreign policy and trade policy worse as a result.