How Trade Policy Got Hijacked And Ruined Our Economy

How Trade Policy Got Hijacked and Ruined Our Economy

By Will Wilkin

American Economic Decline is Getting Worse

Trade policy is complex and boring to busy citizens, but the issue has real-world consequences too serious to ignore any longer.  The last few decades have brought economic changes that have been very bad for our country.  The trade deficit is a quick way to gauge the problem: from 1894 through 1970 we had a virtually uninterrupted surplus in our goods foreign trade.  By contrast, since 1976 we have had growing, unsustainable trade deficits that averaged over $715 Billion annually over the last 10 years, almost 5% of our GDP!  That is over $7 trillion of US demand satisfied in a decade by imports rather than American workers and American factories.

American manufacturing employment has fallen from a 1979 peak of over 19.5 million to just over 12 million in 2014.  This same period saw our population grow by over 90 million people!  Despite all the talk of rising productivity and declining percent of manufacturing employment among the developed countries, we see rising manufacturing employment in China, store shelves flooded with cheap imports, and idle American workers and factories.  Those who still have jobs find their wages have been stagnant and employment less secure.  According to John Williams at www.shadowstats.com, if the unemployed were still counted by the methodology used until 1994, our official unemployment rate would be well over 20%.

All these trends are connected.  American trade policy during the Nixon administration began moving away from protecting our industries, and has become the Free Trade policy seen in our membership in the World Trade Organization and in our Free Trade Agreements (FTAs) on the NAFTA model.

What started as an attempt by American corporations to take advantage of growing markets in developing countries has turned into a large-scale offshoring and outsourcing of production for the American market.  Free Trade has contributed to high stock prices and high compensation for executives but has had a devastating impact on the larger national interest, eliminating many millions of American jobs and dismantling substantial portions of our manufacturing base and larger industrial ecosystem.  In his February 2014 report NAFTA’s 20-Year Legacy and the Fate of the Trans-Pacific Partnership published by Public Citizen, Ben Beachy says the USA has lost literally a million jobs due to NAFTA alone, not counting all the other jobs lost through our many other Free Trade Agreements and membership in the World Trade Organization.

What does the Obama administration propose to do about this?  Make it worse!  President Obama is asking Congress to empower the US Trade Representative (USTR) Michael Froman to negotiate two more Free Trade treaties on the NAFTA model.  The resulting TransPacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) would be the biggest 2 FTAs ever made, and President Obama even wants a "Fast Track" Trade Promotion Authority law that will eliminate the ability of Congress to propose any changes to the treaties and will impose tight limits on the number of days Congress even has to debate them.

Fast Track would also ignore the Constitution Article 2 Section 2 that requires treaties be ratified by ⅔ of the Senators present, instead allowing ratification by a simple majority in both chambers of Congress.  In fact there are a host of Constitutional problems with our trade policies, but that is for another article.

Before all the Obama-haters take this and run with it, remember that the President has more support on this from Republicans than from his own party.  This Free Trade project has been a bi-partisan project ever since  the first Bush Administration.  The vast majority of Republicans in Congress support Fast Track and have voted in favor of all our previous FTAs.  Meanwhile the Democratic party is split on Fast Track and these new impending FTAs, as they have been ever since NAFTA began the Free Trade era.  But this article is not about politics or parties, because the political problem stems from the bankrolling of both parties by globalized corporations that have zero loyalty the the USA.

Throwing Corks at a Breaking Dam

The strongest defense now being offered in Congress against the flood of imports and huge trade deficits is by Senator Sherrod Brown, who, along with Senator Jeff Sessions on June 10, 2014, sent President Obama a letter urging the President support the Currency Exchange Rate Oversight Reform Act of 2013 (S.1114).  That bill was introduced in June 2013 by Senators Brown, Sessions and 20 other co-sponsors.

http://beta.congress.gov/bill/113th-congress/senate-bill/1114

Its a good bill as far as it goes, and l'll say more about it below, but first we need to see that in the larger context this bill shows how the whole trade policy reform agenda has been reduced to focus on relatively small aspects of the problem while much larger expansions of the Free Trade disaster are still being lined up in Congress.

Senator Brown is the best the US Senate has had on trade policy in a very long time.  That is why I am dismayed that the currency issue is being articulated by him as if it is the price for passing the TPP.  For example, in a May 1st Senate Finance Committee hearing, the Senator asked USTR Michael Froman "Are you prepared to risk defeat of the TPP by not including meaningful currency provisions in this agreement?"  Perhaps this was just a rhetorical exercise by a Senator who will still vote NO on the TPP even if it does ultimately contain language on currency manipulation, but others in a Congress flooded with corporate money might find an excuse to satisfy their corporate donors with a "yes" vote and still appear to protect the national interest if the USTR gives them their currency language.

Senator Brown and his allies were much closer to a solution in 2009 when he introduced the TRADE Act, which required a review of existing trade treaties (including our membership in the WTO) and described what must and must not be included in future trade treaties:

http://beta.congress.gov/bill/111th-congress/senate-bill/2821

That bill would have required --before any new FTAs could be negotiated-- a thorough review of and renegotiation of existing trade agreements that don't conform to TRADE Act standards (currency was one of many issues listed).  Of course there is no existing FTA that would conform to the TRADE Act's standards.  The bill would also have established a new trade negotiating and approval mechanism to replace Fast Track, restoring to Congress the prerogative to hold meaningful hearings and power of amendments regarding any FTAs negotiated.  Here is a summary of that bill:

http://www.citizen.org/documents/TRADEActFactSheet2009.pdf

Virtually everything was right about that approach.  It started with a unilateral act of Congress to define the national interest in our trade policy as non-negotiable with foreign countries and even non-negotiable with the Executive.  Now, 5 years later, look at how much weaker are the trade reforms being proposed: fight "currency manipulation."  This approach can be useful as one device among many that together would comprise an effective industrial policy, but it has instead become a singular focus that is woefully inadequate to our problems.

Where is the Reform Agenda Coming From?

In their letter to President Obama, Brown and Sessions cite an Economic Policy Institute (EPI) report by Rob Scott, who echoes and cites articles published by the Peterson Institute for International Economics (PIIE).  The leadership of the labor movement and many public advocacy groups also cite these studies and echo their demands for action against currency manipulation.

At this critical and dangerous moment when the President is trying to get "Fast Track" Trade Promotion Authority to negotiate and ratify 2 huge new trade treaties on the disastrous NAFTA model, this chorus distracts from the larger need to replace our Free Trade policy with a Balanced Trade policy that limits the flow of imports that are washing away our industries.  Instead the more limited "currency manipulation" strategy has resorted to exaggerating its potential benefits in such a way that diverts criticism of the Free Trade ideology and ends up supporting it, by ascribing our problems to not enough free trade, blaming our trade deficits on "cheaters" violating the principles of Free Trade by wielding the single factor of "currency manipulation."

No doubt it is true that other countries have sophisticated industrial policy that does not adhere to the Free Trade ideology enshrined in treaties and proselytized by the PIIE and many academic economists.  Why should they?  Good government takes a pragmatic approach and puts the national interest above ideology or interests that do not have national loyalty.

The risk reformers take in insisting that new FTAs include language on currency is they might get it.  In other words, the USTR might try to buy out these objections by negotiating currency language into future FTAs, just as such language has already been included in the Camp-Baucus "Fast Track" bill that would authorize negotiation of the TPP and TTIP.  And "winning" new FTAs with language against "currency manipulation" will never end our trade deficits or rebuild American employment and manufacturing.

Effective reform of trade policy will require we pull back from negotiating what the globalized corporations want and instead have Congress assert the national interest in a way that is not negotiable or contingent on approval by other countries.

What Is Currency Manipulation and Why Is It The Focus Of Trade Reform Efforts?

Definitions of currency manipulation can get technical and complex, but they boil down to deliberate actions taken by governments to reduce the exchange value of their currency in relation to other currencies, in this case against the dollar.  When their currency is weak compared to the dollar, it makes their exports cheaper to American consumers and our exports more expensive to their consumers.

Cheap imports are seductive to consumers in any country, but when the long-term effects include dismantling of the domestic industries then the losses end up being bigger than the gains.  Certainly that is the story of American economic decline but the question before us is how much of that is attributable to currency values versus other factors.

In a December 2012 policy brief published by the Peterson Institute for International Economics (PIIE), Currency Manipulation, the US Economy and the Global Economic Order, Fred Bergsten and Joseph Gagnon argue that currency manipulation by 20 countries has resulted in a loss of 1 million to 5 million US jobs and reduced the current account balance (balance of money flowing in and out of a country) of the USA by about $200 billion to $500 billion.  That's about 28% to 69% of our goods trade deficit, which has averaged $716 billion per year over the past 10 years.

Bergsten and Gagnon go so far as to say "Half or more of excess US unemployment --the extent to which current joblessness exceeds the full employment level-- is attributable to currency manipulation by foreign governments."  Here is the Bergsten-Gagnon article:

http://piie.com/publications/pb/pb12-25.pdf

It is important to understand not just currency manipulation but also the agenda of the Peterson Institute.  It is a prestigious collection of economists, former government officials and corporate executives who share a commitment to globalization of the economy through Free Trade policies.  Before virtually every FTA was passed by Congress, Peterson Institute scholars have published studies predicting the treaty would increase American employment.

Two decades of history show those predictions have been horribly wrong, but because the interests behind the PIIE have become enormously wealthy through globalization, they remain as committed to Free Trade now as they ever were.  These are very smart people who cannot have failed to notice their policies have been a disaster to the American national interest.  And they are smart enough to realize that after two decades of Free Trade the American people are becoming increasingly conscious of the problem.  And so the PIIE has thrown out a red herring to divert the fury, saying that America's economic problems have not been caused by Free Trade but rather by foreign countries refusal to follow Free Trade, and especially by foreign countries "cheating" on trade by engaging in currency manipulation.

Never mind that good government means pursuing the national interest through all policies available, including monetary policy that affects the value of currency.  Never mind that American industry and prosperity were built behind a protective trade policy for almost 200 years before the Free Traders won control and dismantled so much of America's productive economy through offshoring and outsourcing.  Never mind that democracy and accountable government means sovereignty should remain in the hands of elected governments rather than in the unelected international tribunals of the WTO and other bodies of global governance.  The PIIE and the globalists they write for believe that the ideology of Free Trade is more important than any of that.  All those national sovereignties and the citizens whose national interests they represent are just so many obstacles to corporate interests that want to produce where wages and regulations are lowest and sell where consumers are richest and prices are highest.

Why Did Trade Policy Reformers Take the Currency Bait?

Fundamentally I think the answer to that question is that trade policy reformers have been demoralized by the decades of globalization and the building of a large body of US laws and treaty obligations that have ensconced Free Trade policies into a framework of global governance.  The resulting perception is that Free Trade policies are irreversible and thus we must pick smaller battles that can be won without running straight into the wall of "WTO-compliance."  This may seem "realistic" except that being realistic might be better defined as recognizing how inadequate are all solutions being proposed in the Congress and thus realism requires we demand much better.

And so my partner Ken Davis and I at Balanced Trade Associates have proposed a Balanced Trade Restoration Act that Congress could pass to balance our trade by limiting our imports to the same value as our exports.  (email willwilkin@balancedtrade.us for a copy of the draft legislation)  That would be an assertion of national sovereignty in the national interest and would not require negotiation with other countries or adjudication by international tribunals.  It would divert our trade deficits, averaging over $700 billion per year, towards American-made goods, creating over 8 million new US jobs and rebuilding our national manufacturing base.

But of course it would upset the cart of FTAs and WTO membership that has been carrying us down the road of economic decline.  A lot of rich and powerful people have increased their wealth and power through the globalized trade system codified in these treaties.  And so, even though virtually every trade policy reformer agrees that our goal should be balancing our trade to end the trade deficits, they have reduced their demands into smaller whac-a-mole projects like fighting currency manipulation (or passing symbolic "Buy American" laws that are ineffective because superseded by existing FTAs and WTO rules and other laws requiring waivers of Buy American requirements for the imports from approximately 121 countries).

The campaign to fight currency manipulation is a case study of those lowered expectations.  It took prominence in the reform agenda with a study published in February 2014 by the Economic Policy Institute, Stop Currency Manipulation and Create Millions of Jobs, in which author Robert Scott echoed Peterson Institute numbers and arguments, saying that ending currency manipulation by 20 countries would reduce the US trade deficit by up to $500 billion.  But EPI seems to go even further, saying that ending currency manipulation by China alone would increase US jobs between 2.3 million to 5.8 million and reduce our goods trade deficit by at least $200 Billion.  Here is that EPI report:

http://www.epi.org/publication/stop-currency-manipulation-and-create-millions-of-jobs/

Before we examine these claims, consider that Robert Scott in 2010 published through the EPI a study that of the Buffett Plan (proposed by Warren Buffett in a 2003 Fortune Magazine article) that would balance our trade by limiting our imports to the same value as our exports.  In that EPI study, Re-Balancing US Trade and Capital Accounts: An Analysis of Warren Buffett's Import Certificate Plan, Mr. Scott wrote would "If the Buffett plan is implemented, it would have substantial benefits for U.S. manufacturing industries, and it would support a substantial expansion in exports and employment in these highly productive sectors of the economy….The Buffett plan provides a way of out of our codependent net import‐ and capital‐dependent past and a way forward for the U.S. economy. It is time to seriously consider such bold solutions to our longstanding trade problems."

But apparently times have changed, a Balanced Trade policy today is no longer seen as possible, and so more "realistic" goals have been taken up.  The circle is complete now that Senators Sherrod Brown and Jeff Sessions, in their June 7 letter to President Obama, cite Robert Scott and his Peterson-derived numbers when asking the President to support their Currency Exchange Rate Oversight Act.

Would Ending Foreign Currency Manipulation Fix the American Economy?

No doubt currency values are a factor in the balance of trade because they affect the prices of imports and exports.  But can the single factor of currency exchange rates really be responsible for 30-70% of our trade deficits and half of our "excess unemployment?"  Wages in China and India, for example, are less than 10% of US wages --and Vietnam and other countries are even lower.  It is often argued that wages matter in labor-intensive industries like textiles but not so much in capital-intensive ones like computer chips.  But for capital-intensive industries, massive subsidies are given to business by Asian governments, from free or cheap land and loans to tax abatements and wage subsidies and weak regulations.

So there is a lot more going on than just low wages  and "currency manipulation," which takes us to our trade deficits with high-wage countries like Germany and Japan, both having strong systems of government-industry cooperation (industrial policy).  Japan is #3 on the Peterson Institute list of currency manipulators, but Germany is not on the list.  Our goods trade deficit with Japan in 2013 was just under $73.4 billion, over 10% of our total trade deficit.  Our $66.9 billion goods trade deficit with Germany was 9.7% of our total last year, and by extension our trade deficit with the EU was $125.4 billion last year, over 18% of our trade deficit, and none of that is being attributed o currency issues.

In fact, Bergsten and Gagnon say that "the most important non-interveners by far are the United States and the euro area."  Clyde Prestowitz has argued that Germany DOES benefit from a "soft currency manipulation" by virtue of being the strong industrial power in the EU and thus benefitting from a Euro value dragged down by countries like Portugal and Greece.  But neither the Peterson Institute scholars nor EPI mention Germany, and so long as the euro survives a functioning currency there doesn't seem to be any chance that Germany will ever be identified as a currency manipulator and targeted for countervailing duties as proposed by S.1114.

If we move away from Free Trade academics and consult a Free Trade corporate executive who also professes a desire to rebuild American manufacturing, take a look at the 2011 book Make It In America by Andrew Liveris, CEO of Dow Chemical.  In that book, Mr. Liveris he acknowledges the trade deficit is a hemorrhaging of jobs and our manufacturing base, and that if not reversed, America faces a dark future where we lose our ability to innovate, become dependent on the intellectual property of other nations, and can no longer recover our position in the world.  The USA will find itself "falling behind for good, out of a game whose rules we used to write."  He describes how our competitors are using tax breaks, wage subsides, free land, input price discounts/guarantees, low interest loans and many other non-laissez-faire strategies to beat us in trade and promotion of domestic industries.  Currency manipulation may be a factor in some of our trade losses, but not big enough a factor to merit mention by the CEO of Dow Chemical, a corporation with sales in approximately 160 countries.

Mr. Liveris proposes a list of reforms he says will bring manufacturing back to America, but ending foreign currency manipulation isn't there.  Instead he proposes 1) reform tax policy 2) create a National Economic Growth Bank to provide strategic incentives to businesses in growth industries 3) comprehensive review & reform of regulations 4) transform our manufacturing from basic to advanced 5) expand exports through MORE free trade treaties 6) establish an energy policy promoting US development & mfr of renewable energy technologies 7) close the education gap between the US and better-performing nations, especially through focus on STEM fields (science, technology, engineering & math)  8) repair and modernize our infrastructure: smart-grid electric generation and distribution, high-speed broadband telecommunications, high-speed rail corridors, automated efficient export ports, more efficient industrial water use and replacement of drinking water and wastewater infrastructure, rebuild and expand roads and bridges.  Create a National Infrastructure Bank and provide incentives for private infrastructure projects.

Although Mr. Liveris has been proven wrong on Free Trade by the growing trade deficits resulting from FTAs, we have to read him as the voice of a CEO of a globalized corporation advising the US government on how to bring manufacturing back to America in a way that suits the interests of a $69 billion corporation with 201 manufacturing sites in 36 countries.  Yet nowhere in the book does he mention fighting currency manipulation.

Consider just one other example of how other factors are much more important than currency values in determining where manufacturing will occur.  As the owner of a solar electric installation company, I read the trade journals.  In January I came across an article that illustrates just how aggressive China is in their industrial policy that lures American companies to offshore their manufacturing and, in the process, transfer technologies that were developed in the USA.  Compare this scenario to America's relatively laissez-faire approach to trade and investment:

http://www.solarindustrymag.com/e107_plugins/content/content.php?content.13641

QUOTE:

Ascent Solar Technologies Inc. has signed a definitive agreement to establish a joint venture with the municipal government of Suqian, China, to build a factory to manufacture thin-film copper indium gallium di-selenide (CIGS) photovoltaic modules.

Under the terms of the agreement, Suqian will provide approximately $32.5 million in funding, as well as five year rent-free use of approximately 331,000 square feet of factory and office space in the Suqian Economic and Industrial Development Science Park. Ascent has agreed to purchase the factory within five years at the initial construction cost, and will also hold the right to purchase Suqian's ownership interest in the joint venture at 150% of Suqian's cash investment.

Ascent will also contribute its proprietary technology and intellectual property, as well as certain equipment from its Colorado facility. By the first quarter of 2016, the joint venture is expected to be producing 25 MW of its EnerPlex CIGS modules and related consumer products per year. Within six years, Ascent expects its manufacturing operations in Suqian to have a capacity of 100 MW per year.

END QUOTE

Thus there are many reasons to doubt that currency manipulation deserves such singular focus as it is now getting.  Yet the Peterson Institute economists have succeeded in setting the agenda of the trade policy reformers, and that agenda is all about currency manipulation rather than a larger dismantling of the Free Trade policy that has brought American manufacturing into deep decline.

Is the Currency Exchange Rate Oversight Reform Act a Good Idea?

On its own terms, passing the Currency Exchange Rate Oversight Reform Act would be helpful because it sets the stage for some tariff protections of domestic manufactures.  These tariffs would be in the form of countervailing duties against imports from those countries determined to be currency manipulators, in amounts determined to neutralize the price advantage gained by their artificially low currency values.

Until we can get a Balanced Trade law, tariffs are a lot better better than nothing.  Although I doubt the high end of the claims made by those trumpeting a fight against currency manipulation, adding even 1 million new jobs would be helpful, especially since many would be in manufacturing.

But genuinely ending our trade deficits and rebuilding our industries requires a much bigger reform of trade policy than this.  Countering low values of foreign currencies is inadequate to our problems in the larger Free Trade context of WTO and FTAs that allow so many non-currency factors to operate against us, and especially so in the face of the impending TPP and TTIP trade treaties that threaten to expand the NAFTA model to a much larger portion of our trade.

The bill basically requires the Sec. of the Treasury to make biannual reports on the relationship between the dollar and the currencies of our other major trading partners, and to designate as "fundamentally misaligned" those currencies determined to be undervalued.  Of those countries with "fundamentally misaligned" currencies, if further investigation by the Treasury Department determines it is the result of certain specified deliberate policies, then that country is designated as having a "fundamentally misaligned currency for priority action."  This is their legal term for a currency manipulator, and once such a determination has been made, several Executive actions would be triggered, beginning with negotiations through the WTO but, if unsuccessful after 360 days, culminating in countervailing duties on the imports of goods from that country.

Besides the slowness of a 360 day delay before countervailing duties, the other weakness I see in the bill is that it refuses to challenge the global governance of the WTO.  Specifically, federal procurement of goods from countries identified as currency manipulators is blocked only if that country is not a member of the WTO Government Procurement Agreement (China is not yet but reportedly in the process of joining).  In other words, the WTO GPA would supersede this Act of Congress, as it does so many other American laws, including the Buy American Act and most other laws that contain "buy American" language.

The Currency Reform bill is quite complicated and extensive, so my summary above amounts to a summary of a summary.  But that is the essence of it.  A more extensive summary is linked from this article:

http://www.tradereform.org/2014/06/bipartisan-call-crack-currency-restore-5-8-million-jobs/

Conclusions

Trade policy reformers and a few American economists see we are in trouble but are afraid it is "unrealistic" to challenge the body of laws and treaty obligations that have been built around Free Trade globalization.  Thus they confine themselves to smaller goals they believe can be won without challenging the larger Free Trade policy.

The problem is that such smaller reforms are not realistic solutions to the magnitude of our economic deterioration and the diverse foreign strategies and conditions that Free Trade allows to replace domestic manufacturing with imports.  True realism would recognize that the terms of our membership in the WTO and other trade treaties are bad for America, and need to be replaced with a policy that balances our trade by limiting our imports through a unilateral and non-negotiable assertion by Congress of the national interest.

When will the economists notice THAT?

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Will Wilkin is the Deputy Director of Balanced Trade Associates and a Co-Owner-Operator of Made In USA Solar LLC.  Contact: willwilkin@balancedtrade.us