The last thing America needs to negotiate is more trade deals
President Trump is expected to outline plans for trade policy development in his speech to a joint session of Congress.
He outlined some of those plans in remarks to the Conservative Political Action Conference, where he said “We’re going to make trade deals, but we’re going to do one-on-one, one-on-one, and if they misbehave, we terminate the deal.”
The United States had a global current account deficit (the broadest measure of all trade in goods, services and income) of $470 billion (2.5 percent of GDP) and a goods trade deficit of $750 billion (4 percent of GDP) in 2016.
Meanwhile, a handful of countries have developed large, structural trade surpluses that reached $1.2 trillion, which have effectively transferred millions of manufacturing jobs from the United States and other countries to these surplus countries—have hampered economic recovery in much of the globe—and now threaten to destabilize the global economy again in coming years if not reduced.
Trump was elected, in part, on a promise to “make American manufacturing great again.” Eliminating U.S. trade deficits and rebalancing global trade are the keys to rebuilding U.S. manufacturing, along with a robust plan for massive infrastructure investments, which would also stimulate manufacturing investment and job creation. Achieving these goals will require a laser-like efforts to eliminate the cause of U.S. trade deficits. In doing so, we must avoid doing harm to the U.S. economy and to our international competitiveness, and clearly identify key priorities for developing effective trade and manufacturing strategies. In doing so:
The last thing we need is to negotiate more trade and investment deals. And we should avoid raising tariffs on Mexico that will just hurt workers in both the United States and Mexico.
We do need to address the root causes of the $1.2 trillion global trade surplus that has been engineered by countries in Europe and East Asia, led by China, Germany, Japan and Korea. These problems include unfair trade policies, massive excess production capacity in a range of industries and, most importantly, significantly undervalued currencies.
Global trade surpluses are also generating massive capital inflows that are fueling real estate and asset bubbles that could lead to another round of global financial crises. This is the hidden underbelly of a growing potential Trump-bubble in financial markets that must be addressed before it gets out of control.
Thus, it is doubly important to reduce global trade imbalances in order to rebuild U.S. manufacturing, restore order to the global economy, and eliminate the threat of yet another Great Recession.
U.S. President Donald Trump takes his seat for a “strategic initiatives” lunch at the White House in Washington, U.S., February 22, 2017. Reuters/Kevin Lamarque
The last thing we need is to negotiate more trade deals
Trump has claimed that he can force other countries to give us better terms on trade deals because he is a tough negotiator. During the campaign he said, “I intend to immediately renegotiate … the NAFTA [North American Free Trade] agreement.” If he doesn’t get what he wants, he will withdraw from the deal, he says.
He clearly has a point that our trade deals have been bad for American workers. And these deals have little to nothing to do with “free trade.” Instead, NAFTA and other recent trade and investment deals such as the U.S.-Korea Free Trade Agreement and the proposed Trans-Pacific Partnership (TPP) were designed to create a separate, global set of rules to protect foreign investors and encourage the outsourcing of production from the United States to other countries.
These deals contain 30 or more chapters providing special protections for foreign investors; extending patents and copyrights (enriching the wealthy); privatizing markets for public services such as education, health, and public utilities; and “harmonizing” regulations in ways that limit or prevent governments from protecting the public health or environment.
These rules are all enforced by special “investor state dispute settlement (ISDS) panels,” private arbitrators that transfer sovereignty from domestic courts to “independent” international lawyers (who work for multinational corporations [MNCs] one day and decide cases the next—so much for “unbiased” law). These deals do much more than cut tariffs or promote trade.
They promote outsourcing and shift the balance of power from workers to investors based in the United States and other countries.
Trump is also correct that the system for creating such deals is fundamentally corrupt. Government negotiators (trade lawyers who often have their own deregulatory agendas) are, by law, advised by committees composed of hundreds of representatives of multinational corporations who, in essence, dictate the terms of these agreements.
The process is fundamentally flawed. And, many of the negotiators, and leading policy makers, are part of the revolving door conspiracy where they negotiate provisions for their former employers who they often rejoin right after negotiating the sweetheart deals.
But we can’t just wave a wand and undo NAFTA because the United States, Mexico and Canada have 20 years of involvement in the deal and cancelling it would create havoc. NAFTA must be improved by raising labor standards. Mexico has some of the weakest labor laws in the world and labor rights are under attack across the United States, so workers throughout the hemisphere would be helped by a joint agreement to raise labor standards to Canadian levels. In addition, both countries could gain from measures to dramatically increase the required North American content of goods deemed to originate in the region, and by eliminating the investor-state dispute settlement system from the agreement. However, Donald Trump and his billionaires’ cabinet are unlikely to make these kinds of changes to the NAFTA.
Worse yet, slapping tariffs on Mexican imports to pay for Trump’s proposed border wall will not solve any problems for American workers.
Our economy is tightly integrated with that of Mexico and Canada. Any job-creating forced from increased domestic production following the imposition of tariffs on Mexican imports would be strongly muffled by job-displacing effects of higher-priced U.S. goods—including parts used to produce other U.S. goods for export (thereby hurting U.S. exports). Imposing high tariffs suddenly would also harm workers in Mexico, and likely result in a trade war that would only escalate these costs further.
The Republican Party and the business interests it represents have been the chief proponents in the passage of these destructive trade deals. Two-thirds of the votes needed to pass NAFTA in 1993 were provided by Republicans. In fact, NAFTA was Ronald Reagan’s idea, and was first introduced and negotiated by President George H. W. Bush. More recently, 85 percent of Democrats in the House and 70 percent in the Senate opposed giving the president Fast Track authority for the TPP and other trade deals, while 87 percent of Senate Republicans gave final approval to the Fast Track bill.
Alex Wong/Getty Images
It was Republicans in Congress who helped these trade deals go forward. And it was Republican leaders who blocked legislation that would have given the Commerce Department tools to tackle the currency manipulation that is behind the loss of jobs to exporting nations that break the rules.
This history makes us suspicious that radical improvements in U.S. trade policy that would benefit working-class Americans will occur under joint Republican control of the Presidency and Congress.
The solutions Trump himself has put forward reflect little understanding of what a smart trade regime would look like. Instead of relying on Wilbur Rossto save us from a corrupt system of trade agreements from which he personally benefitted, we should instead call a halt to the negotiation of all new international trade and investment deals. Meanwhile, instead of vague promises about “better” trade deals, we need a trade policy that forthrightly addresses the fundamental causes of growing trade deficits—deficits that are causing our trade-related job losses and depressing the wages of most working Americans.
Daniel Berehulak/Getty Images
We do need to address the root causes of the $1.2 trillion global trade surplus
Countries that engage in unfair trade practices tend to develop sustained, structural trade surpluses with the world as a whole.
China, which has the largest, most persistent goods-trade surpluses in the world, is the leading example. China both subsidizes and dumps (selling below costs) massive quantities of exports.
In addition, it blocks imports, pirates software and technology from foreign producers, invests in massive amounts of excess production capacity in a range of basic industries (investments that lead to dumping), often through state owned enterprises (SOEs), and operates as a refuse lot for carbon and other industrial pollutants.
China has also engaged in extensive and sustained currency manipulation over the past two decades, resulting in persistent currency misalignments.
Roughly twenty countries, most in Asia, have engaged in persistent, sustained currency manipulation, by buying up massive quantities of Treasury bills and other dollar denominated assets (currency intervention), driving up the value of the dollar and driving down the yuan and other currencies.
Currency manipulation acts like a subsidy to the exports of all those countries, and a tax on U.S. exports to the world. Although China has not intervened against the dollar in the past two years, the yuan remains massively undervalued, and misaligned, vis-à-vis the U.S. dollar, as do the currencies of a number of other unfair traders.
Before turning to remedies for unfair trade and currency misalignment it is important to consider how the United States should go about setting trade priorities. The Trump administration has complained frequently about NAFTA and the U.S. trade deficit with Mexico, which reached $63.2 billion in 2016.
While NAFTA is seriously flawed, for reasons noted above, Mexico does not engage in widespread unfair trade practices, as do the other countries noted above. One strong indicator of this is the fact that Mexico had a significant, sustained trade deficit (current account balance) with the world which reached $32.7 billion in 2015 (latest data available), as shown in Figure A, below.
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