Trade Policy in the ICU

After World War II, the United States spearheaded a historic era of global trade liberalization. Successive U.S. administrations, Republican and Democratic alike, rejected protectionism to forge multilateral agreement to improve market access for trade and investment. The results were impressive. By the end of the twentieth century, the world enjoyed unprecedented prosperity, poverty had declined dramatically, and international trade had dampened political tensions across the globe. Thanks to rising living standards, the U.S. public and Congress strongly supported globalization.

Those days, alas, are over.

Dramatic economic reversals have affected the United States in the past decade. As wages decline or stagnate, and unemployment climbs, more Americans blame their misfortunes—rightly or wrongly—on international competition. In Congress, there is little faith that further trade liberalization will restore high-paying jobs. Meanwhile the Obama administration—despite the President’s early 2010 pledge  to double U.S. exports over five years—has been MIA . It has even failed to win legislative approval for modest bilateral accords with Korea, Colombia, and Panama.

This crisis of confidence comes at a crucial moment. Trade remains a powerful engine for U.S. growth.  Booming emerging economies present tremendous opportunities, provided the United States adopts—and successfully implements—an ambitious vision. “If the United States is to prosper in today’s global economy, it must enhance its ability to attract the investment and jobs linked to producing goods and services for these large and prospering markets. In short, the United States must become a great trading nation.” This is the central message of a timely CFR Task Force Report, U.S. Trade and Investment Policy  a bipartisan undertaking co-chaired by former Bush White House chief of staff Andrew Card and former Senate majority leader Tom Daschle.

The report faces a tough sell to an ambivalent U.S. public. Trade has provided tangible benefits such as rising productivity and more inexpensive and high-quality imports. Yet,  Americans are more focused on the downside—notably stagnant wages, rising income inequality, and higher levels and longer periods of unemployment. The Great Recession has destroyed millions of jobs, many of which will not return. Wage anxiety has led much of the U.S. public—and many legislators—to view trade as a threat. While the relative role of international competition in putting downward pressure on U.S. income remains uncertain, the task force itself acknowledges, “it seems reasonable to think that trade has played some role in the post-2000 wage stagnation in America.”

And yet trade is critical for U.S. long-term growth. Nobel Laureate (and CFR Senior Fellow) Michael Spence observes that nearly all U.S. job growth in the past two decades has occurred in the nontradable sectors, mainly government and health care. Fiscal difficulties, however, and health care reform will constrain both in years ahead. Growth will thus depend on the U.S. capacity to generate new, high-paying export-related jobs. The political challenge is to persuade an increasingly skeptical U.S. public and Congress that this is something that trade and globalization can deliver.

The CFR task force report, drafted by CFR Senior Fellows Edward Alden and Matthew Slaughter, identifies seven sensible priorities for the United States to pursue:

• Adopt a vigorous trade negotiation strategy: The United States should refocus its trade liberalization on sectors (like services) and countries (particularly major emerging markets) where potential gains are greatest. It must transcend today’s Doha impasse, using the World Trade Organization as a vehicle for narrow negotiations rather than a comprehensive deal. These should focus on discrete but promising issues and sectors, from government procurement to product safety and even agriculture. It should also proceed with tariff-cutting bilateral arrangements with big countries like India and Brazil. Simultaneously, it should push broader regional agreements—beginning with the Trans-Pacific Partnership, that President Obama can prioritize as the centerpiece of the November APEC Summit in Hawaii.
• Launch a National Investment Initiative: The United States can no longer take for granted that it is an attractive destination for foreign direct investment (FDI)  and must launch a National Investment Initiative. This government-wide effort to attract FDI would ideally include new government investments in infrastructure, research and development, and education, as well encourage high-skilled immigration, reform corporate tax rates, and soberly review national security restrictions on foreign investment.
•  Enforce Existing International Trade Laws: Nothing discredits U.S. public support for international trade like widespread perceptions that other countries are not playing by the rules—by subsidizing their own enterprises, adopting restrictive public procurement policies, tolerating rampant intellectual property rights (IPR) violations, or manipulating their currencies. U.S. officials must take a more aggressive line within the WTO’s dispute resolution mechanism, implement its own anti-dumping/countervailing duty laws, and push for new global standards to restrict distorting state intervention and IPR piracy by trading partners.
• Promote Trade Aggressively: The United States lags behind many of its competitors, including Germany and Japan, in aggressively promoting its exports. One of the first steps should be for the United States to expand trade financing by the Export-Import Bank. The U.S. government should also consider targeted assistance to pivotal industries. While the notion of “picking winners” raises ideological hackles in some quarters, the CFR Task Force comes down squarely on the side of governmental activism, reasoning, “some industries are particularly important for U.S. national strategy and trade competitors.”  (A case in point is the U.S. semiconductor industry, which the U.S. government helped rescue from unfair competition in the 1980s. The Task Force suggests that clean energy initiatives might be suitable candidates for similar U.S. support today).
• Use Trade to Promote Development: Thanks in large part to expanding global trade, the past two decades have seen the greatest reduction of poverty in human history. The United States has the opportunity to consolidate and build on these gains—while enriching itself in the process. The first step should be to reinstate recently lapsed trade preferences—including the Generalized System of Preferences and the Andean Trade Partnership Act. Beyond this step, the United States should extend permanent duty-free and quota-free access to the imports of the world’s poorest countries, as a tangible step towards realizing the Millennium Development Goals (MDGs).
• Expand the U.S. Safety Net and Labor Force Training: Trade liberalization will create losers, as well as winners, in the U.S. labor market. The U.S. government must revamp outdated labor market programs such as traditional unemployment insurance and Trade Adjustment Assistance. These policies would help to offset globalization’s negative consequences by retraining workers for new industries, connecting companies with prospective employees, and providing continuity of benefits, such as health care.
• Restore the President’s Trade Negotiating Authority: America’s leadership role in global trade liberalization dates to 1934, when Congress approved the Reciprocal Trade Agreements Act (RTAA). The RTAA gave the President authority to negotiate comprehensive trade agreements without micromanaging by legislators. In the Trade Act of 1974, Congress extended this authority and agreed to expedite consideration of trade agreement without proposing amendments. This so-called “fast track” procedure, later renamed Trade Promotion Authority (TPA), has always been fragile, however, and has been repeatedly allowed to lapse. The question of reauthorization has become a perennial political football,  undercutting the perceived U.S. commitment to trade liberalization.

Given the current fiscal environment, many of these recommendations will face stiff headwinds (especially expanding services to the unemployed), but the world’s economy is shifting. Restoring the vigor and credibility of U.S. global trade leadership will require bipartisan congressional cooperation to restore TPA, compete with Germany, Japan and other aggressive export promoters, and attract FDI. Otherwise, the United States may risk its prized economic standing.