Free trade gets a bad rap

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The business community and the majority of economists have traditionally supported trade agreements to lower tariffs and other barriers to international trade, but the general public has grown increasingly skeptical. According to one economist (The Myth of the Rational Voter, Bryan Caplan, 2008), this reflects a popular bias against policies that might benefit foreign interests. Getting through to “irrational” people, 9/17/07.

The popular bias is not entirely irrational, however, as the lowering of trade barriers can and does facilitate outsourcing of US manufacturing operations to other countries. And while there may also be a boost for US export businesses, the net effect on US employment is likely to be negative.

Consider the North American Free Trade Agreement (NAFTA), which was famously attacked as a job destroyer by businessman-turned-politician Ross Perot during the 1992 presidential campaign. Giant sucking sound, 1992 presidential debate (President George Bush, Arkansas Governor Bill Clinton, and Perot), you-tube.com (video 2:34).



The Clinton administration implemented this massive trade agreement with Canada and Mexico after the election, but the economic debate has continued. NAFTA critics claim that resultant trade deficits with Mexico have eliminated hundreds of thousands of US jobs, mainly in manufacturing. Others argue that these jobs would have been lost in any case, albeit perhaps going to China rather than Mexico, and that the agreement created US jobs by boosting exports. NAFTA, 20 years later: Do the benefits outweigh the costs? Wharton School, 2/19/14.

If anything, there is more anti-foreign bias today than there was in 1992 – and it’s exhibited at both ends of the political spectrum. If trade agreements were classed as treaties, 2/3 approval of the Senate would be well nigh impossible to obtain.

The traditional workaround has been for Congress to authorize the executive branch to negotiate trade agreements that can be presented to Congress for “fast track” approval (no amendments, no filibusters, majority vote in both houses). Trade Promotion Authority (TPA) was renewed in 2015 (extending until at least 2018), after having lapsed for several years, but it wasn’t easy and the legislation required strong Republican support.

A 12-nation international trade agreement that had been in the works for several years – the Trans-Pacific Partnership – was subsequently finalized and presented for approval. It is a lengthy, complex document, which will take months to systematically review. Trans-Pacific Partnership – yes, no or maybe?
11/16/15.

Two other major trade agreements are being negotiated, one dealing with transatlantic trade and the other with international services; neither has been presented for approval to date so all the talk has been about the TPP.

Democratic members of Congress are generally against the TPP, and strong Republican support is uncertain. It may be voted on during the “lame duck session” after the elections, but probably will be carried over (like many other things) to 2017. Voters in no mood for lame duck repeat of history, Dustin Howard, netrightdaily.com,
3/14/16.

Americans are hurting, angry, and reject these double-dealings. The surest way to keep them that way is to have another lame duck trade deal that Americans just rejected at the ballot box. Congress makes this sausage at [its] own peril.

As for what the next administration is likely to do, both Democratic presidential candidates (Hillary Clinton & Bernie Sanders) have come out against the TPP. The Republican frontrunner (Donald Trump) has been scathing in his comments about how this country always makes “terrible trade deals,” and Ted Cruz says he has “always opposed” the TPP. Only John Kasich has been supportive of the TPP, and even he vows to get tough with trade agreement cheaters.

One interpretation is that the candidates are just playing to the audience and don’t really mean what they are saying. Why candidates prefer bashing trade to kissing babies, Daniel Ikenson, forbes.com,
2/19/16.

In 2008, Senators Obama, Clinton and Edwards tripped over one other to be cast as the trade-rules enforcer and playing-field leveler, each pledging to force U.S. trade partners back to the negotiating table to revise NAFTA and the various World Trade Organization agreements so that the rules would be “more fair” to American workers. However, within days of taking the oath of office, President Obama phoned Canadian Prime Minister Stephen Harper and Mexican President Felipe Calderon to let them know that his words were merely campaign rhetoric. Concurrently, a few blocks away and shortly after being confirmed as President Obama’s Secretary of State, Mrs. Clinton trumpeted the U.S. “pivot to Asia,” featuring the Trans-Pacific Partnership as its economic centerpiece.

There could be a substantial opportunity cost from rejecting the TPP (assuming the terms are deemed acceptable) and the other trade agreements being negotiated (ditto); more damage could result from an attempt to renegotiate existing trade arrangements. Accordingly, it may be prudent to take the anti-trade campaign rhetoric seriously, as we will do in the following candidate-by-candidate recap.

BERNIE SANDERS blames trade agreements for (a) US manufacturing jobs going overseas to take advantage of lower labor rates, and (b) stagnant pay levels here in the US. Moreover, he boasts of opposing the NAFTA and other trade agreements, while Hillary Clinton supported them until her recent renunciation of the TPP. Democratic presidential candidates debate, Flint, Michigan, 3/6/16.

•Do you know that in 1960 Detroit Michigan was one of the wealthiest cities in America? Flint, Michigan was a prosperous city, but then what happened is corporate America said why do I want to pay somebody in Michigan a living wage when I can pay slave wages in Mexico or China? We're going to shut down, we're going to move abroad, we're going to bring those products back into this country. Those trade policies, as much as any other set of policies, has resulted in the shrinking of the American middle class. And, I'll tell you what else it did. It's not only job loss by the millions, it is the race to the bottom so that new jobs in manufacturing, in some cases today, pay 50 percent less than they did 20 years ago. How stupid is that trade policy?

•Secretary Clinton supported virtually every one of the disastrous trade agreements written by corporate America. NAFTA, supported by the Secretary cost, us 800,000 jobs nationwide, tens of thousands of jobs in the Midwest. Permanent normal trade relations with China cost us millions of jobs. Look, I was on a picket line in early 1990's against NAFTA because you didn't need a PhD in economics to understand that American workers should not be forced to compete against people in Mexico making 25 cents an hour.


Sanders would block the TPP and any other trade agreements that may be proposed. He also talks about requiring US firms to keep their manufacturing operations in the US, although he hasn’t made clear how this would be accomplished.

Look, what we have got to do is tell corporate America that they cannot continue to shut down. We've lost 60,000 factories since 2001. They're going to start having to, if I'm president, invest in this country -- not in China, not in Mexico.

Many of Sanders’ economic proposals (single payer healthcare, higher minimum wage, ban oil & gas fracking, etc.) would raise the cost of doing business in the US and thereby encourage more outsourcing. His proposal for the government to “invest” a lot more money in infrastructure might seem like a plus for US-based operations, but this and many other spending programs would be paid for by hiking taxes on business firms and high earners. On the issues, Bernie
2016.

Bottom line, the Sanders economic plan seems nonsensical; if implemented, it could tank the US economy.

HILLARY CLINTON claims she didn’t vote for any trade agreements during her years in the Senate (2001-2009), but until recently she was supportive of trade liberalization efforts. Her renunciation of the TPP appears to have been a matter of political expediency. Pacify liberal critics - defuse a Sanders talking point – offer a rationale that would keep her options open. Clinton opposes Obama’s TPP trade deal, Al Weaver, Washington Examiner, 10/7/15.

. . . Clinton told host Judy Woodruff that at the moment, she is "not in favor" of the deal as currently constructed. The former secretary of state, who dragged her feet for a while on the issue, also told the host that it doesn't meet the "high bar" she set for any such agreement. "As of today, I am not in favor of what I have learned about it," Clinton said. "I don't believe it's going to meet the high bar I have set."

The “high bar” for trade agreements rhetoric also appears in an issue statement on Clinton’s campaign website, basically establishing a basis for opposing any trade agreement by requiring that no identifiable downside be involved.

Set a high bar for trade agreements, ensuring they create good American jobs, raise wages, and advance our national security.

As for how to keep manufacturing operations in the United States, Clinton has outlined a raft of measures of interest to various constituencies. Hillary Clinton’s plan to win the global competition for advanced manufacturing jobs, hillaryclinton.com,
3/17/16.

Targeted tax incentives for investments in “hard-hit areas” – enhanced tax incentives for US investment and research – prohibition of corporate inversions in which US firms wind up incorporated in other countries – government-directed efforts to prevent “downward spirals” – greater support for the Manufacturing Extension Partnership – aggressive fight against trade violations and currency manipulation – expansion of the National Network for Manufacturing Innovation – support for “the freedom of workers to unionize and engage in collective bargaining” – “Buy America” laws – various educational and training programs including “tuition-free community college.”

Aside from tilting against trade agreements, the Clinton plan would basically represent a continuation of current policies. That’s hardly a recipe for robust economic performance, in our opinion, but would seem preferable to the Sanders plan.

DONALD TRUMP employs such broad generalities in speaking about policy issues, and changes his mind so frequently, that it’s often difficult to determine what he truly believes. When it comes to international trade, however, Trump has been maintaining for years that China and many other countries are racking up trade surpluses against the US by cheating on trade deals, engaging in currency manipulation, etc. His proposed solutions include imposing punitive taxes on imports and making smarter trade deals. Time to get tough, Donald Trump, 2011 (republished in 2015 with minor changes).

Trump expounded on this subject in the most recent (and perhaps last) Republican presidential candidates debate. Transcript, Miami, Florida,
3/10/16.

. . . trade deals are absolutely killing our country. The devaluations of their currencies by China and Japan and many, many other countries, and we don't do it because we don't play the game. and the only way we're going to be able to do it is we're going to have to do taxes unless they behave. If you don't tax certain products coming into this country from certain countries that are taking advantage of the United States and laughing at our stupidity, we're going to continue to lose businesses and we're going to continue to lose jobs. And if you look at the average worker over the last 12 years, their salary and their pay have gone down, not up. It has gone down.

When it was pointed out that he had previously suggested a 45% tariff on all imports from China, Trump indicated that this should not necessarily be taken literally.

The 45 percent is a threat that if they don't behave, if they don't follow the rules and regulations so that we can have it equal on both sides, we will tax you. It doesn't have to be 45, it could be less. But it has to be something because our country and our trade and our deals and most importantly our jobs are going to hell.

Trump denied his proposed tax on imports would be passed on to American consumers through higher prices, arguing that the goods would start being made here.

. . . we will start building those factories and those plants. Instead of in China, we'll build them here. And people will buy products from here, rather than buying it through China where we're being ripped off. And we have a $505 billion trade deficit right now. So we'll build our factories here and we'll make our own products. And that's the way it should be done.

His opposition to trade deals and such is not supported by a wealth of specific information. Thus, in a previous debate, Trump apparently didn’t realize that China isn’t a party to the TPP. Donald Trump – not exactly an expert on TPP, Washington Examiner,
11/11/15.

On trade, Trump avoids specifics. When he discusses it, he starts talking about how the U.S. has trade deficits with some countries, especially China. (Trade deficits are not inherently bad, by the way, but they are often cited to make free trade sound bad to the uninformed.) He then launches into a standard spiel about currency manipulation. These are just convenient rhetorical vehicles for avoiding a serious discussion of the topic — the politician's equivalent of what you said in class when you hadn't read your assignment the night before.

Imposing punitive taxes on imports would disrupt global trade patterns, inflame already tense international relationships, and invite massive retaliation against US exports – to the detriment of all concerned. A sounder approach might be to continue supporting freer trade, but be quicker to object if and when cheating occurs. [Larry] Kudlow urges US to become “most hospitable spot for investment,” F. McGuire, Newsmax.com,
3/15/16.

“The issue with trade is not tariffs and banning trade to wreck the economy. The issue is enforce the rules, don't cave in. And the second issue is where necessary, sanction a company,” [Kudlow] said. For example, the U.S. has decided to sanction Chinese telecom giant ZTE for trade violations with Iran.

TED CRUZ has declared opposition to the TPP, reflecting among other things his mistrust of the current administration. Ben Carson backs White House’s TPP trade deal, Reid Epstein, Wall Street Journal, 11/6/15.

Sen. Ted Cruz of Texas, who had backed the “fast-track” legislation [TPA] aimed at expediting TPP approval, backed away from the [TPP] because he said Republicans couldn’t trust Mr. Obama and said approving the deal would open American companies to increased foreign competition and boost illegal immigration.

Here is how Cruz explained his position in the Miami debate. Transcript,
3/10/16.

•I oppose TPP and have always opposed TPP *** free trade, when we open up foreign markets, helps Americans. But we're getting killed in international trade right now. And we're getting killed because we have an administration that doesn't look out for American workers and jobs are going overseas. We're driving jobs overseas. And the people who are losing out are in manufacturing jobs, or the steel industry or the auto industry. But I'll tell you who else is going to be losing out, which is the services industry. This Obama administration is negotiating the Trade in Services Agreement, which is another treaty to allow services to come in [a veiled reference to immigration] and take jobs from Americans as well.

•I think the solution is several things. Number one, we need to negotiate trade deals protecting American workers first, not the corporate boardroom. Number two, we need to lift the regulations on American businesses here so we see jobs coming back. And number three, we need a tax plan like the tax plan I've introduced [a reference to the 16% business flat tax – a value added tax - Cruz has proposed to replace the corporate income tax and payroll taxes] that will not tax exports and that will tax imports, and that will bring millions of high-paying jobs back to America.

In a subsequent exchange about Donald Trump’s proposed imposition of punitive taxes on imports. Cruz argued that the burden of such taxes on consumers should not be overlooked.

If your wages have been stagnant for 20 years; if you can't pay the bills, how does it help you to have a president come and say, "I'm going to . . . put a 45 percent tax on diapers when you buy diapers, on automobiles when you buy automobiles, on clothing when you buy clothing." That hurts you. It's why we've got to get beyond rhetoric of China bad, and actually get to how do you solve the problem. Because this solution would hurt jobs and hurt hard-working taxpayers in America.

Similarly, Cruz could have suggested – but didn’t - that the TPP’s effect on US consumer prices should be considered in evaluating that pact’s economic merits. While a single-minded focus on production and employment might suggest that some countries “win” on trade agreements while others “lose,” international trade is not a zero sum exercise. It’s quite possible for all countries concerned to come out ahead.

JOHN KASICH has a track record of supporting international trade agreements. At the Miami debate, he was asked to comment on claims that “these deals are great for corporate America’s bottom line, but have cost the US at least 1 million jobs.” In other words, “how do you respond to the criticism that you’ve been catering to boardrooms at the expense of the American middle class?”

As though he was channeling Larry Kudlow, the Ohio governor stressed the importance of having “free trade, but fair trade.”

We don't want to lock the doors and pull down the blinds and leave the world. Because frankly, if we do that, prices will go up. People will buy less. Other people will be out of work. And we don't want to see that happen. Trade, though, has to be balanced and we have to make sure that when we see a violation, like some country dumping their products into this country, believe me as president, I will stand up and I will shut down those imports because they're a violation of the agreement we have and the American worker expects us to stand up.

Kasich subsequently elaborated on his determination to combat currency manipulation in responding to a general question about US/Chinese relations.

. . . I will tell you this, they can't manipulate their currency. That will not be anything that I would allow them to get away with. And if I saw them doing it, I would take immediate action and make sure that the American worker is protected.

In so doing, Kasich (like Donald Trump) engaged in demagoguery. Currency exchange rates are ultimately determined by market forces, which governments cannot readily control. It isn’t credible to blame the huge US trade deficit with China on systematic undervaluation of the Yuan (aka Renminbi). And a recent report indicated that the Yuan is
overvalued, which may force a devaluation. China’s looming currency crisis; mass capital outflows continue despite Beijing’s efforts to boost the economy, Anne Stevenson-Yang & Kevin Dougherty, Wall Street Journal, 3/16/16.

A likely depreciation of at least 15% against the U.S. dollar would take the renminbi back to where it was on the eve of the global financial crisis, before speculative capital inflows flooded into China and drove up the currency’s value. This would be a “reset event” globally. All forecasts for inflation/deflation, interest rates, currency crosses, growth and commodity prices would have to be ripped up and recalculated. It would likely lead to an emerging-markets crash. As a percentage of global gross domestic product, China today is nearly twice the size of Asia (excluding Japan) in 1997.

EVALUATION – Based on the foregoing, we would rate the positions of the candidates on trade as follows (1-good; 2-muddled; 3-“unacceptable”). Sanders and Trump are too heavily invested in their respective positions to change. Clinton and/or Cruz could make adjustments and improve their standing. Despite his score on this issue, Kasich is trailing in the GOP race and not expected to get the nomination.

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F-E-E-D-B-Å-C-K

Perhaps the only practical way to evaluate the TPP is identify what every US corporation has to say about it. Also, if there is any rubber language by which some bureaucrats can make changes without congressional involvement, then we should know about that as well.
These trade agreements always have hooks in the hay somewhere. - SAFE director

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