Towards a New Trade Policy

International trade deals have lost their consensus support as more workers view them as anathema to good-paying jobs, requiring the U.S. politicians to rethink these strategies, writes Andrew Spannaus.

By Andrew Spannaus

On Jan. 23, President Donald Trump signed an order directing the U.S. Trade Representative to withdraw the country from the Trans-Pacific Partnership (TPP), the trade deal that the previous administration had spent years negotiating with eleven other nations around the Pacific Rim. This executive action represents a first step towards a controversial new direction in trade policy.

The run-down PIX Theatre sign reads “Vote Trump” on Main Street in Sleepy Eye, Minnesota. July 15, 2016. (Photo by Tony Webster Flickr)

The TPP was already on life support, as the 2016 election campaign made it toxic with the majority of American voters. Bernie Sanders, Ted Cruz and Donald Trump all focused great energy on the trade pact as an example of the failed economic policies of recent decades. Even Hillary Clinton, despite her previous public support for the TPP and other trade agreements, was forced to come out against it, to fight off criticism from Sanders in the primaries, and Trump in the general election.

Trump’s broadsides against international free trade deals have provoked a response bordering on horror from much of the political and academic world. The dreaded policies of “protectionism”, which economists left and right assure are a recipe for disaster, seem to be on the march, threatening to return the world to a terrible past when governments intervened too much in economic policy.

More sophisticated commentators prefer to focus on the strategic ramifications of abandoning the TPP. Indeed it is no secret that the principal goal of the pact was geopolitical, to strengthen ties with Western allies around the world and prevent other countries from falling under China’s sphere of influence.

Former President Barack Obama often repeated that the TPP would ensure that “we write the rules of the road for trade in the 21st century.” The American population was not convinced.

This should have come as no surprise to the nation’s political institutions, but the assumption apparently was that, as has generally happened in the past, the politicians of both parties would come together to move forward the “Washington Consensus” that had dominated economic policy-making for decades.

Yet opposition was strong, from unions and progressives in particular. This forced Democratic leaders to come up with justifications for yet another deal suspected of favoring outsourcing to low-cost countries, and protecting the profits of multinational corporations at the expense of the American worker.

The Obama administration made assurances that the TPP had “the toughest labor and environmental standards that have ever been included in a trade deal.” And despite later attempts to walk back her praise, in 2012 then Secretary of State Hillary Clinton famously said, “This TPP sets the gold standard in trade agreements to open free, transparent, fair trade.”

Jobs, Trade and Technology

Few people believed this rhetoric: not progressives, not conservatives, not workers whether on the left or right. And why should they have? Total U.S. manufacturing employment has dropped by more than seven million jobs since 1980, even as total population has grown by almost 100 million individuals. In percentage terms, manufacturing employees now make up only 8 percent of the workforce, about one-third of their weight in 1970. It is well known that most of these workers now find themselves with jobs that pay less in real terms and provide less stability, if they have not fallen out of the workforce altogether.

Donald Trump speaking with supporters at a campaign rally at Fountain Park in Fountain Hills, Arizona. March 19, 2016. (Flickr Gage Skidmore)

One response to this phenomenon increasingly heard from experts is that the loss of industrial jobs is due not to trade, but technology. Automation is accelerating and promises to do so even more with the digital revolution. The trend towards producing more with fewer workers is irreversible. However, for high-technology goods in particular, this can actually favor reshoring, as cost of labor becomes less important, while worker skills and a climate of innovation represent strategic advantages.

As for more labor-intensive goods, the argument seems specious when used to justify free trade agreements. Why is it that most of the consumer products bought, both in the U.S. and Europe, are produced in countries like China, Bangladesh, Mexico or Guatemala? Technology doesn’t provide the answer; low wages and operating costs do.

A more coherent argument is that regarding prices. It is said that in many sectors labor-intensive production processes are simply too costly to remain in more advanced countries, and thus free trade keeps prices down. What would consumers at the bottom of the economic ladder say if they could not get cheap goods at Wal-Mart?

This is a real problem, which raises complex issues about how to reverse the race to the bottom based on low costs, but the perspective can be shifted quickly by taking a more long-term view: why is it that the (working) poor in the U.S. cannot afford higher-priced goods? Does it not have something to do precisely with the loss of good-paying jobs due to the search for cheap labor? A quick glance around the world shows the weakness of the argument for low costs as essential for economic well-being. The wealthiest economies are not characterized by low costs; quite the opposite.

Proponents of pro-free trade policies propose various arguments to counter the opposition to outsourced production. Again though, the population is unlikely to believe them. And again, why should they? The contradictions are all too apparent.

By way of example, consider the arguments presented by Mireya Solís in her article “The case for trade and the Trans-Pacific Partnership” published by the Brookings Institute in October 2016 as part of the “Brookings Big Ideas for America” initiative. [Solís, Mireya, The case for trade and the Trans-Pacific Partnership. Brookings Big Ideas for America, October 4, 2016.]

Solís is up front when she asserts the importance of the TPP as an instrument to counter China’s weight in Asia. When it comes to jobs though, she runs into a blatant contradiction in her attempt to claim that on the whole, the new trade deal will be good for America. After admitting that trade competition with China “is estimated by some to have cost 985,000 manufacturing jobs between 1999 and 2011,” she moves quickly to stress other factors (technology, exports, low prices) to downplay the importance of this loss. One paragraph later, though, Solís is glad to tell us that the International Trade Commission has estimated that the TPP would create 128,000 jobs in the U.S.

Not a very strong argument, at least in mathematical terms.

Difficulties Recognized

Recognition is in fact growing in the academic world of the difficulties for the optimistic view that losses due to low-cost competition are generally outweighed by positive factors in advanced countries. An example is the in-depth study, “The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade,” by Autor, Dorn and Hanson. [Autor, David H., Dorn, David, Hanson, Gordon H., The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade. Annual Review of Economics, 2016. 8:205–40.]

Former Secretary of State Hillary Clinton speaking with supporters at a campaign rally in Phoenix, Arizona, March 21, 2016. (Photo by Gage Skidmore)

The authors note that in the 1990s and early 2000s, a consensus had been reached, for example, that “Trade had not in recent decades been a major contributor to declining manufacturing employment or rising wage inequality in developed countries.” Technological change was viewed as the primary factor at work, while the fluid and flexible U.S. labor markets were expected to absorb the shocks from trade with China and produce increases in employment in other industries.

Yet new studies are showing that the anticipated adjustment is not offsetting negative effects on jobs and income; the positive gains posited by neoclassical theory “have yet to materialize”. In fact, the authors conclude, the effects produced by growth of imports may even have been underestimated. While positive employment effects are “plausible in theory”, evidence in academic literature is scarce.

In 1851, American economist Henry Carey wrote his seminal work, “The Harmony of Interests.” Carey’s ideas would form the basis for the economic program of the newly-founded Republican Party led by Abraham Lincoln, and the global expansion of what became known as the “American System”, based on protection, investment in industry, infrastructure and workers.

In his book, Carey expressed a view that is still relevant today: in the long run either the condition of the exploited laborers throughout the world would be raised and move towards that of the more developed nations, or the American worker would ultimately be brought down to the level of the laborer under the imperial system.

Carey’s central premise is that “every man is a consumer to the whole extent of his production,” meaning that if you produce something, you will have the income necessary to consume as well, which will actually increase trade. This idea would undoubtedly be considered terribly outdated by most economists today. Yet for American and European workers who have lived through the recent phase of globalization, it is all too accurate.

However, few seem able to translate their recognition of the negative effects on American workers into a new set of policies, something that can replace the free trade, globalization mindset of the past 30-plus years. Both the Left and Right have cheered campaigns against global trade pacts, but for many the word “protectionism” still seems a bridge too far.

Need for New Theory

A new approach to trade policy is needed, to begin the fundamental shift away from the low-cost, anti-production policies of recent decades. Below are some specific measures that could be taken to start the change, drawing on concepts already present in the political debate that, however, represent a move away from the current system.

First of all, let us consider tariffs. Tariffs and duties are currently used by many countries, justified in the West, for example, as measures to counteract dumping. This practice is generally defined as selling below the “normal price”, i.e. below cost or below the price in the home market.

The first order of business for countries with developed economies and social welfare systems is to define clear rules concerning social dumping – the broader definition of production practices taking advantage of cheap labor – and protections to avoid it.

President Trump and some of his advisors have suggested imposing significant tariffs on goods from other countries, starting with Mexico. The notion of a “border tax” for American companies that outsource their production and then re-import finished products makes sense, but needs to be implemented with clear standards. Here are some suggestions for how it could work.

First, the obvious target is companies that move production abroad but at the same time receive tax breaks and other incentives from the federal and local governments.

The infamous case of Carrier in Indiana is quite clear: a company that received more than $500,000 in grants from the state, and applied for more than $5 million in federal tax breaks, but then decided to move its production to take advantage of cheap labor elsewhere. Public pressure forced Carrier to claim it would not take the federal incentives, but laws could be passed to prevent companies that outsource production from benefitting from public funds.

Second, the type of standards included in previous free trade agreements, but rarely implemented, should be strengthened, adopted as national policy and enforced unilaterally where possible.

Under NAFTA, for example, the protection of labor standards is governed by the North American Agreement on Labor Cooperation (NAALC) that entered into force along with NAFTA itself. The NAALC covers areas such as the prohibition of forced labor, minimum employment standards, prevention of occupational injuries, and the elimination of employment discrimination. Yet the agreement is widely viewed as having been ineffective, due to lack of enforcement. [Bieszczat, Frank H., Labor Provisions in Trade Agreements: From the NAALC to Now. Chicago-Kent Law Review, Volume 83, June 2008.]

The end-result of petitions filed through the NAALC process, for the few that actually move forward, is the creation of a committee that in the best of cases has led to public awareness campaigns, rather than hard sanctions or policy responses.

Subsequent trade pacts have also contained labor-protection provisions, and as noted, the proponents of the TPP have spoken glowingly about its labor and environmental protections. If this is truly among the aims of free trade agreements, then there should be no opposition to such provisions becoming an integral part of U.S. trade laws, and being included in any bilateral agreements concluded in the future.

The goal is not to close borders and restrict trade, but to ensure that trade takes place without undermining the social and living standards of developed countries. Regulations need to be drawn up to certify whether companies, or entire countries, comply with certain standards. Some examples include rules on workplace safety, child labor and pollution, which can be enforced through both tariffs and in some cases outright bans.

Selective targeting of low-quality production will be complex at times, in part due to the existence of global supply chains, which exploit comparative advantages in terms of not only labor costs, but also logistics and infrastructure.

Yet the complexity of these issues is no excuse for ignoring the enforcement of provisions that are essential to protect economic well-being. Politicians and economists constantly make assurances that such standards are integral to the notion of free trade, yet on the list of priorities they seem to be squarely at the bottom.

The current political situation offers an opportunity to chart a new course, not of isolationism, but of setting clear rules for trade between countries aiming for high living standards.

The TPP is dead, as is the TTIP between the United States and Europe. However, there will likely be a move to pursue the key objectives of those pacts, such as strategic positioning towards China and protection of intellectual property rights, through bilateral agreements with a number of countries. Such agreements would be an excellent place to show that the U.S. is now ready to enforce standards consistent with the living conditions in advanced economies, while still pursuing mutually beneficial trade.

The practical effect could be that the key parameters of trade will shift from low costs, to high quality; precisely what is needed to respond to the race to the bottom that has so negatively affected the middle class in the advanced economies of the West.

Andrew Spannaus is a freelance journalist and strategic analyst based in Milan, Italy. He is the founder of Transatlantico.info, that provides news, analysis and consulting to Italian institutions and businesses. His book on the U.S. elections Perchè vince Trump (Why Trump is Winning) was published in June 2016. [This article was originally published at the Aspen Institute’s Web site, http://www.aspeninstitute.it/aspenia-online/article/tariffs-and-standards-towards-new-trade-policy]

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6 comments for “Towards a New Trade Policy

  1. Herman
    February 22, 2017 at 09:41

    The article notes:

    “More sophisticated commentators prefer to focus on the strategic ramifications of abandoning the TPP. Indeed it is no secret that the principal goal of the pact was geopolitical, to strengthen ties with Western allies around the world and prevent other countries from falling under China’s sphere of influence.”

    The fixation of our leaders to maintain full spectrum dominance is the kind of dangerous policy reflected in the TPP, to economically strangle your enemies, a form of warfare that invites dangers of escalation to military confrontation. It is akin to our predilection to use sanctions as a weapon for a similar purpose.

    What you have to wonder whether the authors of the TPP were more interested in the welfare of our citizens or isolating China. This along with its predilection to create a favorable climate for our corporations leaves the citizens of our country in the back seats of the bus.

    Free trade is sold as an antidote to protectionism, the dreaded P word, the cause many claimed of World War II. This argument that any alternative to TPP was protectionist and isolationist carried a lot of weight and frightened politicians until the arguments against free trade were increasingly supported by facts.

    The President was right in quashing TPP, but it is doubtful he will do anything to address the mindset of using trade as form of warfare , and all the dangers to peace that entails.

  2. Adrian Engler
    February 22, 2017 at 07:55

    I think the question is relatively complex. The so-called free trade agreements do much more than just promoting trade, they weaken the possibilities of states to introduce regulations and give corporations more power to fight against democratic decisions of countries (e.g. using “protection of investments” against improved social or ecological norms). The agreements also expand intellectual property rights of companies.

    Whether more trade is always in the interest of everyone is, indeed, a dogma that should be questioned. There are many indications that it can increase inequality. On the other hand, labor costs are so different that even without free trade agreements, it can hardly be prevented that labor intensive activities will, to some degree, be moved to countries with lower labor costs. The differences in labor costs are so big that it is in many cases questionable whether tariffs can do much to offset this. All developed countries had a shift from manufacturing jobs to service jobs (after a shift from agriculture jobs to manufacturing in an earlier phase). In my view, the bigger problem is that, in the US, many people accept that many kinds of service jobs are paid much worse than manufacturing jobs used to be, while in some other countries, service jobs are not paid worse than manufacturing jobs used to be, and therefore, the loss of manufacturing jobs is a less important political topic.

    While there has been a general shift from manufacturing to service jobs in developped countries, there is still the question of how far this goes. With increased automation, manufacturing in developed countries can be competitive and still offer a significant number of jobs. It is important not to treat the large US trade deficit as an inevitable consequence of globalization and the differences in labor cost. Other developed countries like Germany and Switzerland have large trade surpluses. This is hardly something that can unequivocally be called beneficial, many argue that German trade surpluses lead to inbalances and caused problems in other European countries. But both large trade surpluses and trade deficits may be problematic, and since both the US and Germany operate under similar conditions of globalization and increased international trade, it would hardly be appropriate to say that globalization and increased trade as such is responsible for the trade deficit or the trade surplus.

  3. Eddie
    February 21, 2017 at 22:37

    I agree with the above comments and would also question why ‘free trade’ is always consider the holy-of-holies? Shouldn’t a society ideally be relatively self-sufficient and make most things for itself without UNDUE competition from countries where desperate workers are exploited by ruthless managers (ie; I recall reading of the Chinese solution to worker suicides in some of their sweatshops [where workers would jump off of roofs] was to erect ‘suicide nets’ around the perimeter of the buildings. Such is the concern for worker’s rights in many of the foreign countries where we outsource our manufacturing/textiles). Also, just to add some balance to the free-trade reverence, let us not forget that we’ve gotten a number of negative things from ‘free-trade’ – – – notably invasive species like the Emerald Ash Borer which is currently killing hundreds of millions of trees (many in cities) in the US, all because some Chinese pallets came here with those insects in them. Zebra Mussels from the ballast tanks of Russian ships have clogged the intake pipes of numerous cities on the Great Lakes. The list of invasive species is long (https://en.wikipedia.org/wiki/Invasive_species_in_the_United_States) when it includes those voluntarily brought into this country before legislative prohibitions (gee… sounds kind of like ‘protectionism’ doesn’t it?) stopped most of the casually introduced species. This same link mentions estimates of costs of $120B / yr in the US alone due to these invasive species. Add the other environmental and aforementioned social costs, and it’s obvious that so-called ‘free-trade’ is NOT the unmitigated good that it’s proponents like to present it as…

  4. Joe J Tedesky
    February 21, 2017 at 14:50

    It’s all about intentions, and enforcement. The public is all to aware of the crafty words, and the lack of invoking the otherside of the treaty to provide suitable jobs anywhere. The out of work worker in Cleveland is hurting, and his replacement bed down in some dim lite sweat shop on the otherside of the world is hurting too, this treaty making isn’t a plan for lifting ‘all’ of humanity as much it is a plan for immunity from liability and a healthier bottom line profit for the corporate hierarchy.

    Every nation on this planet should be able to provide for itself. If less than one third of a nation’s population were to farm and manufacturer everything from tomatoes, pots and pans to vehicles, and then import as well, this would be a perfect thing. If a disaster hits in the supply chain why just add another shift to pick up the slack. My idea is raw I know, but more has been made with less where better minds than mine could expand upon such thoughts.

    Another thing, if you want to rein over the passenger car world, don’t just erect an assembly plant in some unused cornfield somewhere in America, start manufacturing an exporting car parts. The jobs, and long range profits are in the parts. One part may have twelve to one hundred components…just think of the employment. Do this and everybody will get pepperoni with all the toppings on their Friday night family pizza. Plus this is where the small business could excel. A Harley bike has better than three hundred small vendors attached to it…this is just one example, but think about any product you look at, and then consider the various workers who contributed to its production, and you will get dizzy when dismantling it down to it’s variety of components.

    You can’t be a healthy society when all of your numbers are being crushed into a profit and loss sheet all on Wall Street. To have a healthy economy you need to be able to put something up on the table, and say we grew this, we made this, and we trucked it to the export piers.

  5. February 21, 2017 at 14:45

    Thank you for such a insightful and sane essay on trade policy. As a proud member of Union Local 600 these ideas make sense to me. It seems simple enough. Stop subsidizing companies that out source manufacturing to countries outside the U.S. Enforce safe working conditions, fair wages and environmental laws with any company that imports goods and services to our country and vice versa. I would also add a luxury tax on any company who’s CEO exceeds a fair ratio between management salaries and labor wages.

    • Erik G
      February 22, 2017 at 09:33

      I have long suggested an international import tax to equalize foreign & domestic wholesale costs for products of comparable quality, based upon general living conditions in the supplier nation, adjusted for labor conditions of each producer. This funds foreign aid to the producer nation to raise standards of education and health care, and permits wage increases, because these will not affect the wholesale cost in the consumer nations. It also protects domestic production very nicely. You can buy the foreign product but not at a discount, and the difference funds foreign aid.

      This has the further benefit of assessing and raising product quality, which avoids cheating the consumer and wasting resources on products with health or safety problems, incompetent design, or professionally-degraded durability. That should be a high priority in itself, especially for domestic products, as it removes the reward for supplier cheating and false advertising, by catching it at the design stage and assigning a quality grade required during marketing, so consumers know whether the product will last two or twenty years.

      This can be done within the US and then generalized by the UN.

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