Trading Up or Trading Down?

Stephen DeAngelis

March 19, 2009

The current financial recession (which is quickly becoming the Great Recession) has exposed people to topics that would not have been the subjects of casual conversation in previous decades. One of those topics is trade policy. Most economic historians believe that protectionism is what made the Great Depression great. To date, countries have promised to avoid protectionism, but many of those who took the pledge have already broken it [“Trade Barriers Could Threaten Global Economy,” by Anthony Faiola, Washington Post, 19 March 2009]. Faiola reports that “at least 17 of the 20 major nations that vowed at a November summit to avoid protectionist steps that could spark a global trade war have violated that promise.”

 

The temptation to increase protectionist measures is never far from the surface. For example, Congress successfully inserted “buy American” restrictions in its economic stimulus package; but at the same time members of Congress hoped other countries would welcome America products. In another article, Faiola reports, “The Obama administration is aggressively reworking U.S. trade policy to more strongly emphasize domestic and social issues, from the displacement of American workers to climate change” [“U.S. to Toughen Its Stance On Trade,” Washington Post, 10 March 2009].

 

Frankly, the Obama administration is a bit at sea when it comes to trade policy. The President campaigned against “free trade agreements” such as NAFTA, but has since met with the Canadian prime minister to convince him that America wants strong trade ties with Canada. Ron Kirk, President Obama’s U.S. trade representative nominee, testified in nomination hearings, “I believe in trade and will work to expand it, but I also know that not all Americans are winning from it and that our trading partners are not always playing by the rules.” As Faiola reports, Obama is not the only political leader wrestling with protectionist challenges:

“World leaders [are moving] to protect their domestic industries from the ravages of the financial crisis, embracing new trade barriers aimed at imported goods and other measures meant to restrict the flow of capital outside their borders.”

A recent World Bank report, which is the focus of the first Faiola article mentioned above, states “that, since last November, a host of nations has imposed a total of 47 measures that restrict trade at the expense of other countries.” Faiola goes on to detail some of those measures.

“The most obvious trade restrictions — raising tariffs, or taxes on imports — represent only about a third of all measures taken. Some countries are taking a direct approach. Ecuador, for instance, has raised tariffs on more than 600 items. But most are taking more creative steps that fall into the gray area of what is considered legal under international trade law. Argentina, for example, has put new licensing requirements on auto parts, textiles, televisions, toys, shoes and leather goods that create a new layer of bureaucracy for overseas exporters. The European Union announced new export subsidies on butter, cheese and milk powder. China and India have increased the tax rebates for domestic exporters, seen by critics as providing a stealth subsidy that makes their products unfairly cheaper abroad. Some measures, the report concludes, may distort global production for products like cars and trucks. National bailouts and subsidies proposed worldwide for the auto industry, the World Bank said, now total some $48 billion globally, with aid pouring out from governments including the United States, France, Canada, Germany, Britain, China, Argentina and Brazil. That could prevent the natural readjustment of the industry, which many experts say is greatly overcapacity, allowing automakers to continue to produce more cars than consumers need. The report noted that current trade laws, however, make it tougher for nations to take the more sweeping measures that triggered the trade wars of the 1930s. The era of globalization has made countries more interdependent than ever before, with supply chains for a single car made in China or a plane made in the United States now often relying on components manufactured in many other nations. That has led to a new measure of caution when putting up trade barriers. Additionally, global treaties have made it more difficult to enact draconian barriers. Yet that does not mean nations are not finding ways to engage in what critics call protectionist policies.”

Charlene Barshefsky, the U.S. trade representative from 1997 to 2001, argues that “President Obama faces two immediate challenges: restoring economic growth and renewing global faith in America’s judgment. A robust trade policy is essential to both [“Trading Up To Global Recovery,” Washington Post, 9 March 2009]. Barshefsky argues that Americans shouldn’t be ambivalent about trade because the facts clearly demonstrate its importance to America’s prosperity.

“Over the past 40 years, the share of trade in the U.S. economy has tripled, to 30 percent of gross domestic product. The benefits are clear in significant income gains, record pre-crisis manufacturing output and exports, and robust services and farm trade. Exports, which support 20 percent of U.S. manufacturing jobs, are now our only significant source of private-sector growth. … Trade spurs development, building alliances and security as economic integration creates shared interests.”

There’s a bit of Norman Angell in her arguments, but she believes history is on her side. Not everyone agrees. Robert Cassidy, who was the chief U.S. negotiator on China’s 1999 market access agreement with the United States, has openly questioned whether trade has been good for America. “‘I couldn’t prove it,’ he says. ‘Did it benefit U.S. multinational corporations? Yes. But I cannot prove that it benefits the economy'” [“Second Thoughts on Trade,” by Harold Meyerson, Washington Post, 28 January 2009].

 

Barshefsky offers a three-pronged program for going forward: Do what counts; Support development and security; and Foster common action. Here are some highlights of her plan:

— Do what counts. Economic expansion is key. Instead of small agreements with small countries, and rounding-error results for our economy, finish the Doha round of global trade talks on acceptable terms, then pivot to the big partners and fastest-growing industries. A model free-trade agreement among the United States, Europe and Japan covering the largest, newest sectors of our economies — services trade, emerging technologies such as “green” infrastructure, energy and medical services — could be negotiated under the auspices of the World Trade Organization and opened to all countries wishing to join.

 

— Support development and security. We can do more for the world’s poor and our national security by reforming our own trade regime. For example, the highest U.S. manufacturing tariff is the 48 percent tax on cheap sneakers. The United States makes no cheap sneakers; they are produced in very poor countries such as Cambodia and in large Muslim states such as Pakistan. The same goes for many cheap clothes and household goods. Why tax these countries’ meager profitability and the American pocketbook? It is similarly sensible to make permanent our programs offering duty-free access for the least-developed countries. U.S. security concerns center on the Middle East, from the Maghreb to Central Asia. That area includes some of the world’s poorest regions, with high unemployment rates that further radicalize young populations. Attempts to solve its political problems without addressing economic stagnation have not worked. A better option, modeled on the duty-free program for Africa, would be to waive tariffs for reforming Muslim countries that cooperate with U.S. efforts to fight terrorism.

 

— Foster common action. The global system serves America’s interests and aspirations. The more we adjust to new economic realities and demand constructive engagement from the developing world — India, China and others — on international economic governance, the more stable that system will become. These countries should have enhanced voting rights in the International Monetary Fund, the World Bank and other organizations, but they must accept more responsibility for stewardship of the global order from which they benefit. In combating today’s economic crisis, that includes providing additional liquidity, coordinated stimulus and assistance to the poorest countries as well as cooperation toward a global system of regulation.

 

In my discussions about Development-in-a-Box™, I have consistently argued that connectivity to the global economy is important for developing countries if they are going experience economic growth. I have also argued that the developed world’s prosperity rests in large measure on its ability to help develop emerging markets. The global economy relies on trade. As Barshefsky concludes, “Trade policy is challenging. Some may be tempted to view it as too politically taxing given an already crowded agenda. It is imperative for growth and American leadership, however, that Obama and Congress confound the skeptics and move forward on a robust trade agenda.” That won’t be easy. On this point, Ron Kirk’s testimony before Congress is telling. He said, “It is true that cheaper foreign products helped squeezed American families stretch their dollars, and the sale of our goods and services abroad support American families. But it is also true that the overarching benefits of trade are difficult to appreciate when a plant closes in a small community because of increased foreign competition.”

 

As Faiola reported in an earlier article, current trade regulations are stricter on rich countries than on poor ones. Undoubtedly, this doesn’t go down well in the xenophobic parts of America, especially since many developed nations are exercising their rights to raise tariffs with gusto [“Out of Gaps In Treaties, First Salvos Of Trade War,” Washington Post, 1 February 2009]. In an editorial about trade, The New York Times encouraged President Obama and Congress to demonstrate moral courage and leadership in promoting international trade [“Mr. Obama’s Trade Agenda,” 10 March 2009]. The editors wrote:

“If ever there was a need for collective action — on fiscal stimuli, monetary policy, aid to the developing world, fighting protectionism — it is now. A place to start the rethinking is China and how to encourage increased domestic consumption and investment in China and other cash-rich Asian countries so they can start pulling the world out of recession. China’s leaders, in particular, need to understand that export-led growth no longer works for them or for the world. The United States will have more influence if it stops beating on Beijing for its foreign-exchange policy and engages China’s leaders as partners, not rivals. Vigorous trade will help the world recover.”

Hopefully, economics and reason — rather than emotion and misguided self-interest — will rule the day. Barshefsky got it right — we need to trade up to economic recovery. This doesn’t mean that the U.S. needs to fall back into a pattern of conspicuous consumption; rather it means that sound trade policy will help foster global economic growth.