The Old-School Answer to Global Trade

Editor’s note: Free trade skepticism has, before Trump, been more concentrated in the Democratic Party than the Republican Party. President Trump’s trade reform agenda took the issue away from Democrats who feared agreeing with him. This is an article describing how Democrats can and should get active on trade reform once again. 

The alternative to Trumpism lies in the forgotten postwar liberal vision.

[Beth Baltzan | May 20, 2018 | Washington Monthly]

Heading into 2020, liberals are at a crossroads on trade. Most abhor Donald Trump’s “America First” rhetoric. And even as they increasingly recognize that something is amiss with the global system, many are frightened by his bull-in-a-china-shop approach. But just what is the big competing vision his opponents have to offer? 

For decades, the political and intellectual leaders of the Democratic Party marched alongside the GOP under the banner of “free trade.” Organized labor often objected to the resulting loss of manufacturing jobs as corporations moved factories offshore or simply surrendered markets to foreign rivals. So did some Democratic politicians. (After all, Dick Gephardt’s slogan in his failed bid to win the 1988 Democratic presidential nomination was “Let’s Make America First Again.”) But union grievances tended to be dismissed as the plaints of workers unwilling, or unable, to compete in a global economy. All thinking people, at least in the party’s expanding wing of college-educated professionals, knew that free trade promoted international peace and prosperity, and anything less was special-interest politics. 

This idea became particularly pervasive in the early 1990s, when President Bill Clinton embraced the North American Free Trade Agreement (NAFTA). The trade pact was originally proposed by Ronald Reagan and largely negotiated by George H. W. Bush, but Clinton adopted it with few changes. Democrats in the 1990s similarly supported the creation of the World Trade Organization (WTO), agreeing to abide by the decisions of a quasi-judicial body in Geneva on trade disputes, and welcomed China as a member. More recently, Barack Obama spent his last two years in office pursuing the Trans-Pacific Partnership (TPP), which he described as a means to box China out in favor of other Pacific Rim countries. 

But by 2016, the consensus had cracked. Bernie Sanders won more than 40 percent of the Democratic Party’s primary votes in part by renouncing the party’s position on trade. Feeling the pressure from Sanders, Hillary Clinton split with Obama by turning on the TPP, which she had praised as secretary of state. Defenders of the status quo can still point to the fact that the expansion of global trade has reduced extreme poverty in parts of the developing world. But it has become increasingly difficult to deny that a flood of imports, particularly from China, has contributed to downward mobility among working-class Americans. In 2016, a team of economists published a groundbreaking study that found that the direct and indirect effects of Chinese imports had cost more than a million Americans their jobs since 2001 and dramatically reduced their lifetime income. 

Meanwhile, the resentment created by the global trading system has helped fuel the resurgence of reactionary political movements in the U.S. and Europe, contradicting the notion that free trade promotes international stability. Adding to the intellectual wreckage, predictions that free trade would nudge China toward liberalizing have become an embarrassing reminder of just how naive the architects of our trade policies were. 

How can liberals move beyond this past while also making clear that they have a better alternative to Trump’s incoherent and jingoistic approach? In many ways, the answer lies with an idea originally proposed by New Deal types back in the Roosevelt and Truman administrations. They rejected the use of tariffs simply to protect the interests of financiers and plutocrats. Yet they also understood, as subsequent generations would forget, that there is no such thing as truly “free” trade. All trade depends on rules, and unless markets operate under the right ones, they will tend toward capitalistic excess, including dangerous degrees of industry concentration and the exploitation of workers and the environment. Which is why the architects of the postwar system got fifty-three nations to sign off on a treaty known as the Havana Charter, which included rules that guaranteed workers’ rights, provided protections against destructive foreign investor behavior, and required trading nations to abide by anti-monopoly rules. 

Alas, this part of their vision was never realized. But today it provides a blueprint for how we can build a fair and sustainable trading system in the twenty-first century. 

Getting our heads straight on trade first requires sweeping away a good deal of unfortunate conventional wisdom. As an undergraduate at Stanford in the late 1980s, I learned—like most everyone who takes introductory economics—that tariffs are bad. Any policy that restrained foreign competition was a form of “protectionism” that coddled inefficient domestic industries and raised consumer prices. Free trade might lead to some job losses, but, by letting every country specialize in what it did best, the world would grow ever more prosperous. 

Convinced that opening up global trade contributed to the public good, I gladly worked for a private law firm pushing the implementation of NAFTA and the WTO. In 2003, I was honored and thrilled to join the team of lawyers at the Office of the United States Trade Representative, an agency within the White House that leads trade negotiations. It was a busy time: the Bush administration was negotiating a raft of bilateral and regional trade agreements, along with efforts to strike a new deal at the WTO. 

This was when I began to realize that the real world of trade policy was nothing like what I’d learned in school. What I saw was not a brotherhood of men seeking to create open and efficient markets to allocate resources to their highest valued use. Instead, I saw a system beset by a tangle of special interests, heavily oriented toward maximizing returns to capital at the expense of workers and the environment. 

In 2003, I was honored and thrilled to join the team of lawyers at the Office of the U.S. Trade Representative. This was when I began to realize that the real world of trade policy was nothing like what I’d learned in school.

One of the few things Trump gets right is that the United States continually gets taken advantage of by its trading partners. In the U.S., we at least require our decisionmaking to be public and based on an evidentiary record. But many of our trading partners make decisions in black boxes, discriminating against our exports in ways that are impossible to challenge because we simply can’t get our hands on the facts. Meanwhile, WTO bureaucrats have blocked the U.S. from using a certain methodology to calculate tariffs to address unfair trade. The result is that we can’t fully protect our domestic industries when other nations cheat. 

The dynamic never changes. In the 1970s, we complained that Germany needed to export less and spend more at home. Today, we complain that Germany needs to export less and spend more at home. In the 1970s, we complained that Japan needed to export less and import more. Today, we complain that Japan needs to export less and import more. In the interim, we designed an entirely new trading system, the WTO, and yet we have precisely the same grievances. 

That’s to say nothing about China, which puts our traditional trading partners to shame when it comes to working the system. China’s theft of intellectual property draws the most attention because the Trump administration has used it to justify tariffs on Chinese imports. But the more serious threat is Chinese industrial policy, which is not only state run but is also designed to subsidize exports as a means of gaining an edge against foreign competition. After the financial crisis, China pumped several hundred billion dollars of subsidies into its steel, aluminum, and solar panel industries. In the short term, that meant lower prices for buyers of steel and aluminum products in the U.S. and elsewhere. But by propping up its unprofitable companies, China forced factories elsewhere around the world into bankruptcy, reducing global competition and concentrating production within its borders. Now China is expanding its loss-leading strategy to other industries in which Americans still have some edge, like aerospace, pharmaceuticals, and information technology. 

Nor would the TPP, which Obama sold as a way to contain China’s fast-growing influence, have helped. Trade negotiators accepted complex supply chain rules in the agreement that would have actually benefited Chinese car part producers, by increasing the percentage of a “TPP-made” car that could be imported from China. In other words, China would have been a de facto beneficiary to an agreement designed to exclude it. 

The incoherence of our trade policies isn’t just a product of ignorance. Far from it. Instead, it often derives from the outsize political power exercised by American corporations, including the concentrated pharmaceutical and agribusiness industries. American agricultural conglomerates make sure the rules essentially require U.S. farmers to buy their seeds. Many corporations have built their business models around offshoring production, so they can source cheaper components without passing those savings on to consumers. That’s why many of America’s biggest trading corporations actually support rules that let countries like China free-ride, whether it’s NAFTA, the new NAFTA, or the TPP. Big American drug companies want the U.S. to put a priority on convincing other nations to secure and extend patent monopolies. 

The name for this regime is “free trade.” The derogatory term for those who raise questions about it is “protectionist.” Somehow, some people imagine that staying on this path will one day lead to an actual open and efficient market. 

So where does this leave people looking to break from both the obvious failures of mainstream U.S. trade policy and from Trump’s xenophobic America First-ism? To answer that question, we have to get the story straight about what the original liberal, Democratic vision for international trade was, and how it was compromised. 

That story starts after World War I. Democratic President Woodrow Wilson’s “Fourteen Points” included a demand for “the removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance.” But the Senate rejected Wilson’s global vision, and Congress continued to favor tariffs. After World War II, many liberals, both here and abroad, vowed not to repeat the previous generation’s mistakes. This did not mean embracing laissez-faire. Indeed, many liberals in this era drew a direct line from the excessive power of unregulated monopoly capitalism in the 1920s and ’30s to the rise of fascism. Nor did postwar liberals have any illusions about unrestrained capitalism benefiting workers. But they understood that properly structured trade could be a great force for building peace and prosperity. So they sought a new global trading order that would slash tariffs and encourage the growth of international trade on the one hand, while minimizing the political influence of corporations and protecting the rights of workers on the other. To postwar liberals, free trade thus meant a world in which strong international institutions would set fair market rules, including fair labor standards, disciplines on foreign investors, and anti-monopoly provisions. 

The mechanism for achieving these ends was supposed to be the Havana Charter. Drawing on an idea originally floated by FDR’s favorite economist, John Maynard Keynes, it called for the creation of a body to be known as the International Trade Organization, and charged it with enforcing rules that would protect the rights of labor and put constraints on other abuses by financiers and corporations. By March 1948, fifty-three countries, including the U.S., had signed on. 

To postwar liberals, free trade meant a world in which strong international institutions would set fair market rules, including fair labor standards, disciplines on foreign investors, and anti-monopoly provisions. The mechanism was supposed to be the Havana Charter.

But although Harry Truman signed the charter, his repeated efforts to persuade Congress to ratify it fell short, and his administration at last had to give up in 1950. Business interests opposed the charter, claiming that its constraints on capitalism were inconsistent with the American free enterprise system—even though fair labor standards and antitrust rules were fully embedded in the American free enterprise system of the era.

At the same time, leaders in both parties had come to fear that war-torn nations in Europe and Asia could fall into the orbit of Soviet communism or resurgent fascism if the United States didn’t help them recover. American corporations knew they wouldn’t get to sell foreign countries the supplies they needed to rebuild unless these countries were given the means to pay. Postwar planners, therefore, used foreign aid policies like the Marshall Plan to promote an even more extreme form of industrial interdependence than the Havana Charter had imagined. There was also strong bipartisan support for making major asymmetrical trade concessions while foreign countries recovered from the devastation of the war. 

For roughly two decades, these policies generally worked. Soviet expansion was contained, and countries like Japan and Germany were set on the road to becoming prosperous, peaceful, and democratic, fully integrated industrially with the U.S. and other key allies. Meanwhile, we didn’t yet feel the absence of fair labor and anti-monopoly standards. But by the 1970s, it had become much clearer that these arrangements were beginning to harm American workers and businesses unnecessarily. In the early ’70s, Richard Nixon grew frustrated that increasingly prosperous European and Japanese trading partners continued to throw up obstacles to U.S. imports. So his administration, and Gerald Ford’s after it, sought to get better behavior out of our trading partners by expanding the U.S. commitment to a mechanism known as the General Agreement on Tariffs and Trade, which was supposed to tie everyone to a more rule-bound trade regime. But in 1979, President Carter, presented with a new GATT deal, concluded that it was better to accept a deal without fair labor standards than to have no deal at all. 

If the 1970s presented one missed opportunity to achieve a truly liberal trade policy, the 1990s presented a second. With the collapse of the Soviet Union, the U.S. might have decided that it no longer had any geopolitical need for trade concessions that threatened the well-being of its workers and communities and the resiliency of its industrial base. Instead, many Democrats embraced NAFTA and the creation of the WTO. The Clinton administration also pressed to loosen trade restrictions on autocratic China, which in hindsight was a mistake. Under these policies, more and more American manufacturing moved offshore, and foreign producers gained still more asymmetrical access to our markets—all without agreeing to abide by basic labor and environmental protections. Where the U.S. did use its chips, it was in the service of corporate profits: expanding patent protections for U.S. drug companies and giving the investor class the unique ability to sue governments, ultimately extending to challenges to regulations that impinge on investors’ profits. 

These decisions represented a further departure from the liberal principles set out by the Havana Charter. Whereas the architects of that agreement believed in constraints on capital, through fair labor standards, anti-monopoly rules, and disciplines on foreign investor interference with domestic policies, mainstream Democrats in the 1990s didn’t even contemplate that these rules might be necessary. At this point, the influence of libertarianism was near its zenith among academic economists. Their former students, including many self-styled liberals, were going out into the world while suffering from the same cognitive capture that had happened to me at Stanford. 

Today’s liberals—and anyone else trying to determine the right position on trade—can learn from the mistakes and missed opportunities of the past. To start with, we need to return to and update the trade principles in the Havana Charter. Those principles include engineering fair, competitive markets designed to limit corporate power. This is a particular problem in the context of increasing corporate concentration. As giant corporations have gained economic power they have also gained political power, which has been used to undermine health, labor, environmental, and other regulation. Blowing up the outsize influence of corporations, including the power of nominally American corporations that take advantage of lax Chinese health, labor, and environmental standards through offshoring, is a precondition for doing anything serious about inequality or climate change.

We also cannot continue to justify our trade policies on the basis of consumerism. Not only are benefits to consumers assumed, rather than proven, we also must consider the rights of working-class Americans to a fair shot at the American Dream, and on the ability of small and midsize American firms to stay in business without needing to bust unions, cut benefits, or offshore their operations. In some instances, achieving these goals will require the U.S. to cut trade with certain nations, or at least retain the ability to credibly threaten to do so. 

That means we will need to be ambitious in reconceiving the way the international trading system works. It needs to have strong labor and environmental standards. It needs to prevent bureaucrats in Geneva from making up rules. And it needs to address the fact that Chinese state capitalism, which is monopolistic in nature, is fundamentally incompatible with the free enterprise system the original architects created. The concentration of vital industrial capacities in a few nations—or only one—is dangerous for the global system. 

Trump’s abrasive attack on the WTO has shaken things up. Therein lies the opportunity. Liberals care about systemic problems like income inequality and the destruction of the environment. As we look ahead to 2020 and contemplate bold policy ideas like the Green New Deal, it should be natural for us to expect the global trading system to be part of the solution, not part of the problem. We have the chance to make the system fit our purposes in the modern era. Let’s do it.