By: Mark Glennon*
It’s a lesson I first learned over thirty years ago as a law clerk one summer in the State Department’s Office of Trade, and it’s been reinforced ever since: If you intend to get seriously educated on foreign trade agreements, beware, because you probably won’t succeed on your own. Few topics are this complex and few are so endlessly subject to deceitful arguments — straw man simplifications, ivory tower theory, cherry-picked numbers and self-interested distortions. All sides are often guilty — corporations, labor, our trade negotiators and free trade supporters (of which I am one).
Trade is particularly important for Illinois. We export about $63 billion in goods supporting almost 300,000 jobs spread among some 23,000 companies. You can expect to see plenty written about trade in light of two hugely important, pending trade agreements — the TTP (Trans-Pacific Partnership agreement and the TTIP (Transatlantic Trade and Investment Partnership).
Today, the most abused straw man argument is perpetually made by trade supporters against “fair trade” objections. Question the fairness in any trade relationship and the cries are entirely predictable: “Protectionism. Smoot-Hawley. You don’t understand basic principles of comparative advantage and trade.”
No, it’s perfectly right to raise questions about fair trade without contradicting free trade principles. Weren’t U.S. auto makers, for example, right to object to the historical inequity of tariffs with Korea (2.5% on Korean cars sold here and 8% on U.S cars sold there), which allowed Korea to establish itself firmly in our market? They fought for and won elimination of that disparity in 2012, but it’s only being fully implemented this year. It still will take years for American makers to catch up in market share there to what Korea has here.
Then there’s the case that trade deficits don’t matter. The Chicago Tribune’s Steve Chapman recently made this common argument, which goes like this: Trade deficits, which are part of the current account, are automatically offset by increases in the capital account, which is the flow of investments back and forth. Buy a Chinese import, for example, and that money inevitably returns to the U.S. with a Chinese purchase of a treasury bond, the Chicago Stock Exchange, an American hotel or whatever. That’s true, but it misses the point, which is that wealth is transferred abroad — they end up owning our assets. Sure, there’s good in making them have a stake in our economy and lowering consumer prices, but shouldn’t that be weighted against the importance of the wealth transfer?
On that subject, Abraham Lincoln recognized a plain truth about trade. He said, “If I buy a coat from an American, I get the coat and an American gets the money. If I buy it from a foreigner, I get the coat and a foreigner gets the money.” Economists sometimes ridicule that that story because it ignores other issues, like how much you might have saved by buying an import — a major benefit of free trade. It’s indeed more complicated than Lincoln had it, but it’s still important to recognize the lost wealth represented by trade deficits, along with huge social value of keeping domestic employment up.
Plenty of free marketeers go so far as to say we should unilaterally eliminate all trade barriers and ignore what other countries do. Sorry, but that’s nuts. With no leverage to gain access to foreign markets our trade deficit would skyrocket along with the capital account and the drain of wealth out of America would be catastrophic.
If that sounds protectionist so far, it’s not. Free trade is good for all sides in the aggregate (though there are winners and losers with each nation, with particular workers often bearing the heaviest loss). Instead, the simple point is that it’s always right to ask whether we are trading on a level playing field. On that point, keep in mind that the primary influencers on our trade negotiators are large corporations and that over half of the earnings from S&P 500 companies come from abroad. They are truly citizens of the world, having duties to employees, suppliers, shareholders and customers worldwide. Don’t count on them to make America or its workers their primary concern.
And it’s entirely correct to say we’ve done a poor job negotiating so far. If you don’t think so, look no further than the case being made by USTR, our trade negotiators, for the TPA. It says,
The United States already has one of the most open markets on the planet… The average world tariff is over twice as high as ours…. American manufactured goods face tariffs of up to 100% on certain goods in TPP markets, and American agriculture exports face tariffs over 700% on some products…. American workers and businesses are facing an unfair status quo.
In other words, we’ve been getting schlonged (as Donald Trump would say; no endorsement of him or his views on trade implied). That’s another lesson I learned that summer long ago in the Office of Trade. Then, the central focus of trade terms was supposed to be “reciprocity” under a framework called the General Agreement on Tariffs and Trade. Reciprocity was a sort of do-unto-others Golden Rule — parity on reductions in tariffs and other trade barriers. But on product after product, reciprocity rarely existed. It wasn’t a topic you wanted to bring up with the boss. Disparity was just too embarrassing and rampant, and the U.S. usually was on the short end, though not always. That’s part of why the GATT faded into obscurity — the Golden Rule of reciprocity has never really prevailed.
That’s typically been the rationale made by U.S. negotiators in favor of trade agreements — that they help eliminate disparities in how U.S. goods are treated. It was the U.S.-Korea Fee Trade Agreement that addressed that unfairness in auto tariffs. If you looked closely at the arguments behind NAFTA, it was much the same — it supposedly made the terms of trade fairer for America. NAFTA, I thought at the time, could have been more appropriately named, “The Less Unfair Trade Agreement.”
It’s the same argument being made today by USTR in favor of the TPP. USTR claims, of course, that TPP succeeds in leveling the playing field, and that’s the issue on which the complexity becomes truly mind boggling. It covers some 18,000 taxes and trade barriers among 12 nations. Questions of parity or fairness are product-specific and nation-specific. Whether the deal is a good one, or the best we could do, is impossible for most of us to assess on our own.
And TPP gets still more complicated because it addresses many other issues beyond tariffs and traditional barriers. They include intellectual property rights, cross-border investment and dispute resolution, labor and environmental protection, and more. It’s over 5,500 pages long and extremely technical.
The TTIP, between the United States and the European Union, is similarly complex.
Finally, overarching issues often further complicate the fairness and value of trade agreements. A few examples: Many nations rebate their VAT taxes on exports, effectively subsidizing them, as we do with our Export-Import Bank. Part of the rationale for the TPP is a broad, strategic one — to counterbalance China’s influence in the Pacific region. Currency manipulation is alleged to be common, but is sometimes just the result of easy monetary policy. (Quantitative easing depreciated the dollar, helping our exports, but probably shouldn’t be considered to have been currency manipulation.)
The bottom line is that if you intend to pass judgement on trade agreements you better be willing to either (a) make a career of it, or (b) defer to a genuinely unbiased, expert person or group that shares your basic values and principles.
Personally, I’m taking the second option, but still looking for the right authority.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.