A Beacon for US Trade Policy

July 18, 2011 • Commentary
This article appeared in The Australian Financial Review on July 18, 2011.

With the Doha Round dead and the United States no longer capable of global trade leadership, Australia should be exporting a commodity it produces and other countries lack: enlightened trade policy thinking. While a paucity of understanding about trade and its benefits afflicts policy in most countries, some fundamentally sound, intellectually coherent ideas have gained traction in Australia. Sixteenth‐​century mercantilist dogma may still dominate trade policymaking in Washington, but in Canberra the government has set a 21st‐​century course by espousing and embracing the real benefits of trade. Of course, it helps that Australia’s Trade Minister is an economist with a PhD in international trade (and not a back‐​slapping former mayor who favours the path of least resistance).

The Gillard government published a paper in April conveying its view of trade policy as a tool to increase national prosperity. The document is striking in its contrast to the zero‐​sum world view permeating the Obama administration’s plan to double US exports by 2014 and “win the future”. In rejecting the “exports good, imports bad” mantra, the document is a refreshingly novel exposition of the manifestation of trade’s benefits.

Indeed, the ideas embodied in three of the document’s guiding principles — unilateralism, transparency and the indivisibility of trade policy from broader economic policy — are as close to universal truths as one will find outside the realm of the physical sciences. But those truths contradict the favoured sports metaphors and the “us versus them” characterisations of trade to which policymakers and much of the public have grown accustomed.

Unilateralism means that domestic economic reform is beneficial in its own right and should be undertaken without regard to what other countries do. It eschews demands for reciprocity. To quote the document: “Using domestic reform as a bargaining chip in [trade] negotiations is akin to an athlete refusing to get fit for an event unless and until other competitors also agree to get fit.”

Transparency is about keeping the public truthfully informed about the real costs and benefits of economic reform, rather than leaving that process to interest groups with inordinate stakes in the outcome. Asymmetries in the stakes between the concentrated interests who benefit from the status quo and the many more but dispersed beneficiaries of reform produce asymmetries in motivations to influence outcomes, which often leads to the public hearing only one side of the story. Transparency is about ensuring that those asymmetries are foreclosed as wellsprings of bad policy.

The concept of indivisibility reinforces the fact that domestic economic reform — rather than market liberalisation abroad — is the most effective trade policy. If governments wish their countries’ industries to be internationally competitive, the focus should be on reducing home‐​grown frictions, removing superfluous domestic regulations and encouraging more competition at home, before looking to clear bottlenecks abroad.

On this point, the primary focus of the Obama administration’s National Export Initiative has been the reduction of foreign barriers to trade — the premise being that the most significant obstacles to US export success are foreign‐​made. But that’s wrong. US exporters, like Australian exporters, are not born as exporters. They are first manufacturers, service providers, employers, importers, taxpayers and emitters of carbon, compelled in those capacities to comply with a growing web of mandates, regulations and restrictions that are often redundant or at cross purposes, impeding competitiveness at home and abroad. That is where the reform focus should be.

Earlier this month, a World Trade Organisation dispute settlement panel sided with the US government in its challenge of restraints imposed by the Chinese government on China’s exports of nine crucial raw materials. US Trade Representative Ron Kirk was right to characterise the export restraints as harmful to downstream US industries that rely on those industrial inputs to compete effectively. But he failed to mention that the US government itself imposes import restrictions under the anti‐​dumping law on some of those raw materials, devastating firms in the same industries. This economic self‐​flagellation stems from a failure of policymakers to absorb the point that domestic reform and trade policy are inseparable.

But as rare and refreshing as that statement is, some of Australia’s staunchest advocates of trade liberalisation question the government’s commitment to implementation. The Tasman Transparency Group, a venerable collection of policy scholars, trade academics, former government officials and businessmen from Australia and New Zealand, presented a compelling paper last week at the Conference of Economists in Canberra which applauds the government’s statement but worries, in particular, about the lack of specifics on the transparency component.

Indeed, the lack of transparency about the true costs and benefits of trade explains America’s increasingly unenlightened policy. But for an American whose government peddles the fallacy that increased exports are the benefits and increased imports the costs of trade liberalisation, developments in Australia offer a beacon that could guide US policy away from the rocky shores.

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