Please get it right this time and correct the failures of past trade deals…..all of them! President Reagan gave a speech that established the principle of “free and fair trade with free and fair traders.” More specifically, he established the 3 R’s: Rules, Reciprocity and Results.
“Rules” mean that the trade must be rules based and every nation should follow them. “Reciprocity” meant that there will be a reciprocal reduction in tariffs, quotas and other barriers rather than one-sized reduction. “Results,” the point forgotten most, meant that America must gain a net benefit from trade arrangements rather than being taken advantage of.
[Forbes post written by Daniel DiMicco–complete post shown below]
If the Trans-Pacific Partnership (TPP) trade and global governance agreement has any chance at passage, it will require the usual alliance of Wall Street Democrats and Wall Street Republicans. Disgruntled citizens voted to “throw the bums out” because they were not delivering jobs and prosperity. Yet there is a danger that President Obama and the Republican leadership did not get the message. The Obama administration may soon be enabled by some in the GOP to pass the globalists’ biggest wish: “fast-track” trade authority on the road to the massively misguided Trans-Pacific Partnership.
It has made for titillating journalism to speculate on how these strange bedfellows will overcome opposition from blue collar Republicans and Democrats, and the fractiousness of the current Congress, to collaborate on further gutting America’s productive supply chains through unilateral trade disarmament and enablement of foreign mercantilism. The kumbaya trade agreement cheerleader crowd has convinced itself that 40 years of trade deficits don’t matter, even as the shrinkage of GDP growth has rendered the U.S. a dwindling superpower teetering on the brink of second class economy status.
Misunderstanding Trade
The left-right Wall Street alliance of TPP cheerleaders relies upon a fundamental misunderstanding of trade, its role in the world and its role in economic growth. National income accounting makes it clear that gross domestic product is the sum of four factors: consumption, investment, government procurement and net trade (exports minus imports).
That’s net trade — not gross trade. In other words, net exports increase our economic size while net imports shrink it. This is not a liberal plot, or a Tea Party plot, or a protectionist plot. It is basic and uncontroversial economic math that the TPP cheerleaders either don’t understand or don’t want to.
In 2013, the U.S. economy amounted to $16.8 trillion. Consumption was about 68% of GDP. Investment was about 16%. Government procurement was about 19%. But net trade subtracted about 3% from our economy (because imports exceeded exports). This shrinkage is cumulative, compounding year after year.
America is the picture of an unbalanced economy, disproportionately relying upon unsustainable consumption. Investment is too small, and should be 4% to 6% higher. Net trade should add to our economy, or at least not subtract from it. Consumption should increase in absolute terms, but should be a smaller percentage of our economy.
Stated another way, we need to produce more of what we consume. Right now we underproduce and engage in debt-driven consumption. We live beyond our means. Investment is down below sustainable levels. We are slouching towards Gomorrah. We must produce more to employ people and grow wealth so that we can export more (on a net basis), save more and engage in income-driven consumption.
Thus, the battle is not between free traders and protectionists, as the beltway think tanks and pundits often assert. It is between misguided Gross Traders and factually accurate Net Traders. It is not about opening or closing the borders to trade, but balancing trade flows over time. The seminal economist David Ricardo envisioned balanced trade over time, as did the drafters of the General Agreement on Tariffs and Trade (GATT).
Free trade was crafted as an antidote to mercantilism, not an enabler of it.
Markets versus Mercantilism
There is a twisted ideological school that promotes unilateral American trade disarmament. The trade disarmament advocates naively convince themselves that foreign mercantilism is irrelevant and the basic trade principle of reciprocity can be ignored. Big Government market intervention by other countries is just fine even as Big Government here is bad.
President Reagan gave a speech that established the principle of “free and fair trade with free and fair traders.” More specifically, he established the 3 R’s: Rules, Reciprocity and Results.
“Rules” mean that the trade must be rules based and every nation should follow them. “Reciprocity” meant that there will be a reciprocal reduction in tariffs, quotas and other barriers rather than one-sized reduction. “Results,” the point forgotten most, meant that America must gain a net benefit from trade arrangements rather than being taken advantage of.
The Wall Street Republican and Democrat “free traders” are not pursuing free trade at all. They are practicing “mercantilism enabling” trade. They want a deal that says “free trade” on the front cover even as the actual text incentivizes and enables scores of creative mercantilist tactics.
Modern mercantilism is not tariffs or quotas. It is not Smoot-Hawley. Foreign currency manipulation, via domestic currency controls or government intervention in foreign exchange markets, is a massive problem undertaken by many countries, some of those countries are part of the TPP negotiations. While the communist government in China is the poster child for using competitive currency devaluation to gain a trade advantage, South Korea, Japan and Singapore do it as well. The WTO includes a provision prohibiting countries from “frustrating” the intent of the agreement with exchange rate actions. But that provision has been ignored to the detriment of the global trading system, the global monetary system and the US standard of living.
Tariff reductions are often replaced by increased consumption taxes, which are charged at the border, in other countries. After NAFTA, Mexico enacted a 15% value added tax which is applied to all U.S. exports there. The border tax replaced the Mexican tariff reductions. The Central American Free Trade Agreement (CAFTA) countries generally enacted a new 12% consumption tax to replace their tariff reductions. So American companies still pay similar tariff/tax amounts at their border.
State-owned enterprises are modern forms of epic industrial subsidization. Over 50% of Chinese industry is state owned. Telecommunications, steel, shipbuilding, etc. are state-owned enterprises. They receive free or low cost land, credit, energy and other inputs. Production decisions are not driven by market forces so much as by government bureaucrats. Pricing decisions are made to undercut U.S. or global competitors and gain market share rather than by supply and demand.
A basic principle of trade agreements is that countries should not engage in actions that “nullify or impair” the benefits the contracting parties bargained for. But the U.S. has not enforced those provisions, they are hard to enforce in existing agreements, and the TPP cheerleaders keep pushing new deals without addressing the modern forms of mercantilism.
Name Calling as a Substitute for Constitutional Consistency
Deprived of past economic success to base their argument upon, a recent Cato Institute article engages in grade school name calling against those on the right and the left who oppose fast-track trade authority and recycled trade deals like the TPP. The attempt at character assassination by association is an unfortunate substitute for real data.
Even as the economy suffers from over-financialization, deindustrialization, debt-driven consumption and asset bubbles, the Wall Street TPP cheerleaders advocate a solution in more flawed trade and global governance deals. Never mind that we now have the WTO and bilateral agreements with more countries than ever. Never mind that they predicted an economic nirvana that never materialized when promoting those prior agreements.
The medicine didn’t work. So the solution is to take more medicine.
The Tea Party groups that oppose fast-track trade authority do so for core constitutional reasons as well. Article I, Section 8 of the U.S. Constitution gives Congress the authority to conduct trade policy. Congress, in the past, typically passed bills designating the countries to negotiate with and mandated the goals. Congress chose the countries to negotiate with, set goals, oversaw the negotiations, and did not pre-approve the final product before it was negotiated or concluded. The checks and balances system set up by our Founding Fathers was very intentional in dividing authority among the legislative, executive and judicial branches so the mistakes or abuse of power in one branch could be checked by another.
Today’s fast-track trade authority not only suspends the “regular order” of Congress to approve an agreement, it pre-approves a trade deal before it is even negotiated. The so-called negotiating objectives in the fast-track bill are merely for show. They are mere friendly congressional suggestions that do not bind the executive branch and are often ignored. Congress never verifies that the president achieved the objectives.
A read of past fast-track legislation reveals many “negotiating objectives” that were neither attempted nor achieved by the executive branch negotiators. Yet, the president can and does sign the agreement before Congress views or votes on it.
Then, the president writes implementing legislation, which is Congress’ job. Congress cannot, under fast track, amend the implementing legislation or the agreement but instead has only 45 days for committees to consider and vote, then 15 days for a floor vote. Only 20 hours of debate are allowed on a complex international document that runs to thousands of pages.
Modern fast track goes far deeper into Congress’ constitutional authority than mere tariffs and quotas. The president becomes a super-Congress legislating through diplomacy in domestic policy areas. He can and does negotiate with other countries regarding immigration, financial services, tax, food and product safety rules, domestic procurement, labor standards and many other domestic issues. The final agreement may overturn past acts of Congress or include new standards previously considered but rejected by Congress.
If and when the deal is approved by Congress, the new rules are adjudicated by international tribunals that issue decisions which penalize the U.S. if we do not comply. Future Congresses are forever restricted from considering a wide range of policy changes to benefit our citizens, barred by global rules or the decisions of international tribunals.
The recent WTO ruling against American’s country of origin labeling for food laws is only the most recent example. Americans did not think they agreed to a treaty that prohibited them from identifying where their food comes from.
Don’t Believe the Hype
Contrary to conventional wisdom, it’s an open question as to whether a majority of economists or politicians would support modern trade and global governance deals if they actually read them. The debate becomes twisted into the low-brow rhetoric of free trade versus protectionism. Or by ideological name calling. Or by the identity politics of “this group could be working with that group, which is a very bad thing.”
America became great by becoming an economic superpower. We innovated, we built supply chains based upon that innovation, we employed and paid people well, we created wealth, we built the first durable middle class in the world. That gave us cash to not only improve our standard of living, but also to build the world’s dominant military. We thus became the sole global superpower.
Modern fast-track legislation began with the Trade Act of 1974. We have had 40 years of trade deficits shrinking our economy ever since. It has been a net detriment rather than a net benefit. It is time to focus upon true free trade with rules, reciprocity and results, while fighting the increasing scourge of global mercantilism. We must seek balanced trade flows over time rather than be condemned to serve as the global importer of last resort.
It is also time to preserve our constitutional system of checks and balances and refrain from giving more power to global institutions that displace our legislative and judicial branches.
Only then can America return to a more broadly shared prosperity.
