Deep Dive

A Bad Trade

Obama has swapped smart policy for the same-old job-crushing trade deals.

When Barack Obama was elected back in 2008, he committed to breaking with the same flawed trade policy the United States has followed for a generation. Obama promised a new page, one that focused on creating American jobs and protecting the environment. Instead, his administration has flip-flopped on these campaign promises and is now pushing free trade agreements (FTAs) that are projected to cost American jobs, undermine U.S. negotiating credibility, and could even dampen the president's electoral prospects in 2012.

For years, U.S. trade policy has ignored America's massive trade imbalance with China and focused instead on expanding the controversial North American Free Trade Agreement (NAFTA) model -- in which corporate profits are protected, but jobs are offshored -- to additional countries. Obama came into office promising to change that; he made specific commitments to alter the NAFTA model going forward, renegotiate NAFTA itself, and take action on China's overvalued currency. These reform promises were partnered with intensive trade-focused member outreach by unions, and they helped move white working-class voters into Democratic majorities in key swing Midwestern states during the 2008 campaign.

But Obama has kept none of his promises. Instead, he appointed Clinton-era officials, such as Larry Summers and Timothy Geithner, who remain staunch defenders of the trade status quo. The administration has tried to push through three FTAs left over from George W. Bush's administration, meeting resistance from Congress and the Democratic political base.

No wonder Americans are angry. Since NAFTA went into effect in 1994 and the World Trade Organization (WTO) began its operations a year later, 43,000 American manufacturing establishments have closed, more than 5 million manufacturing jobs have been lost, median real wages have stagnated, and inequality has skyrocketed to levels not seen since the robber-baron age. Brand-name goods once made in the United States are now being made offshore and imported back for sale, leading to massive, growth-dragging trade deficits. There's not even evidence that the trade agreements do the one thing they're assumed to: boost U.S. exports to foreign markets. U.S. exports to the 17 countries with which the United States has active NAFTA-style trade deals have grown at half the pace of exports to countries with which Washington has not signed deals, putting these pacts into perverse conflict with the administration's stated goal of doubling U.S. exports.

NAFTA-style deals also make it easier to offshore jobs by limiting the risks U.S. firms face when relocating to low-wage countries. Multinational corporations have long complained that foreign judicial systems provide unreliable protection for their overseas investments, not to mention the risk that governments there might introduce new labor or environmental regulations they don't like. Presumably, these concerns are an important barrier to shuttering factories in places like Peoria and Buffalo.

But now, NAFTA-style deals make it easier to offshore, removing this deterrent. They allow corporations to bypass national judicial systems and launch attacks on governments in international tribunals for interfering with their future expected profits. The judges for these cases are selected in part by the corporation, and the trade-pact rules they judge against have been tailored to corporate demands.

Often the mere threat of one of these cases can cast a chill on public-interest regulation. For instance, in August of last year, Canada paid U.S. firm AbitibiBowater $130 million to stop the company's NAFTA arbitration from going forward. The company argued that NAFTA gave it the right to resell its timber-harvesting licenses and water-use permits after having closed down a paper mill in Newfoundland. Canadian legal scholars argued that the federal government's concessions to AbitibiBowater undermined the "concept of water as a public trust" and created new property rights where Canadian law does not usually recognize any. All told, more than $350 million has been paid to date in these cases; there are nearly $9.1 billion in claims in the 14 investor-state cases outstanding under NAFTA-style deals, relating to environmental, public health, and transportation policy.

Unsurprisingly, Americans who have lived through this reality want something different. Polls by Greenberg Quinlan Rosner show that opposition to more-of-the-same trade policy is one of the few things that unite Americans of different incomes and political persuasions. The last three election cycles brought over 100 new lawmakers from both parties to Washington who campaigned and won on a platform of fair trade and opposition to more NAFTAs. Yet despite all this, Obama is still pushing three FTAs -- with Colombia, Panama, and South Korea -- that are a throwback to the 1990s.

Moreover, Obama doesn't seem to have learned anything from the Bush administration's disastrous FTA with Peru in 2007. When the 2006 election brought Democratic majorities to Congress, it became clear that no FTAs were going to move unless they were amended to address certain congressional concerns. Top Democrats made clear that they wouldn't sign on until Panama eliminated its tax-haven policies, Peru reversed the destruction of Amazonian forests, and Colombia stopped the violent murder of unionists, Afro-Colombians, and other rights defenders. Democrats also demanded changes to lopsided commercial provisions of the South Korea FTA, which the U.S. International Trade Commission projected would increase the overall U.S. trade deficit.

Of these, only Peru moved. Democratic trade leaders in Congress agreed to changes in the pacts' labor and environmental terms, including a specific commitment by Peru to make changes in how it governed its forests. Obama backed the trade deal as a presidential candidate, and Congress passed it in late 2007. But not before a bitter fight that divided the Democratic Party. A majority of House Democrats opposed the deal, arguing that the pact failed to fundamentally alter the NAFTA model.

Divisions were also worsening in Peru. While the U.S. Congress was weighing the Peru FTA, the country's president, Alan García, penned a series of op-eds (see here, here, and here) accusing Peru's indigenous groups and his political opponents of invoking environmentalism and indigenous rights as a pretext to block access to mining and timber exploitation in their ancestral lands. He deemed them as having a "manger dog" ideology, in apparent reference to an Aesop fable. Unsurprisingly, indigenous groups did not like being likened to dogs, no matter the literary provenance.

The trade pact came into effect in January 2009, just as Bush was leaving office and before Peru had implemented its labor law reforms or environmental commitments. The Bush trade team simply certified Peru as having met its labor and environmental obligations, over the protests of the Democrats who had made the 2007 deal and outlined a host of ways that Peru was not yet in compliance.

Then it got worse. After the FTA was approved, García began pushing a set of trade pact-related forestry changes that would take some steps to improve governance in the sector, but which would also relieve the government of some of its obligations to consult with indigenous groups before making changes to forestry, mining, or timber policies impacting their lands.

Indigenous groups predictably opposed these moves, calling an indefinite popular mobilization beginning in early April 2009 that led to protesters blockading roads in the town of Bagua. Police tried to forcibly remove the blockade, culminating in a bloody massacre in June in which 10 civilians and 23 police officers were killed. The New York Times reported that according to Peruvian Foreign Minister José García Belaunde, "The ultimate aim of the protesters was to prevent Peru from carrying out a trade agreement with the United States, because one of the most contentious of the decrees that were suspended on [June 11, 2009] would bring Peru's rules for investment in jungle areas into line with the trade agreement." Environmental groups called on the Obama administration to declare that none of the Peruvian government's supposed investment-opening measures were stipulated by the FTA; the administration refused. Despite the violence and the lack of a new forestry law, Peru's FTA privileges have never been suspended.

The Peru experience is full of teachable moments. First, don't trade concessions today for promises of change in the future. Congress should have required Peru to implement its labor law reforms and forestry policies first and taken the time to see whether they were working before holding a vote on the trade pact. The additional time would also have allowed stakeholders in both the United States and Peru to appreciate how truly divisive the trade pact was going to be in both countries. And it would have provided the opportunity to ensure improved Amazonian conservation could be achieved in a manner respectful of all Peruvians.

Unfortunately, the Obama administration appears to have learned none of these lessons.

On July 22, 2010, when 110 House members from both sides of the aisle wrote to Obama with a shortlist of changes -- meant to remove the most damaging NAFTA-like provisions from the South Korea pact -- the administration ignored the letter. Instead, Obama announced a narrow addition to the FTA on Dec. 3 that exempts U.S. cars from having to meet Korean auto safety and environmental standards. Perversely, this exemption may make it more difficult for Detroit to sell cars in South Korea because the high-profile supplemental deal will be seen by Korean consumers as a signal that U.S. cars don't have to meet Korean standards.

Meanwhile, on the Panama deal, Obama inked a bilateral tax agreement that will supposedly commit the country to collect and share information about tax dodgers. But the language allows Panama to refuse an information request "where the disclosure of the information requested would be contrary to the public policy" of Panama. Given Panama's long-standing public policy of encouraging tax-haven activities, this loophole is big enough to keep its offshore economy alive and kicking. We simply have no idea whether and how Panama will cooperate with its tax commitments and other long-standing congressional demands for reform.

On the Colombia deal, Obama administration officials have announced an "action plan" that ignores most of the labor and human rights improvement metrics outlined by senior Democratic Congress members, not to mention labor and human rights groups. Most importantly, the administration plan does not require a reduction in (much less an end to) unionist or Afro-Colombian murders before the deal can go into place. These abuses have worsened in recent years. In 2007, when Bush signed the Colombia deal, 39 unionists were murdered. In 2010, the number was 51.

None of these initiatives would pass the laugh test in domestic politics. But they're even less tenable in international relations, where unpredictability is the norm. Obama's advocacy of three FTAs firmly in the Bush-Clinton-Bush mold risks alienating both his core supporters and the broader set of middle-class voters whom Democrats need to win elections. Sadly, the president's "supplemental deals" to move the FTAs forward risk sending a signal to America's trading partners that creating political cover is more valuable in Washington than creating jobs, pushing American exports, or ensuring environmental conservation.

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Deep Dive

Nothing Free About It

The supposedly free trade deals miss the real barriers to global exchange.

Free trade agreements, or FTAs to the cognoscenti, are popping up like daffodils in April. The European Union and South Korea just recently inked a bilateral agreement. U.S. President Barack Obama has promised to push ratification of a U.S.-Korea deal through Congress and is also rushing to complete and submit to Congress similar deals with Colombia and Panama. Washington is also in the midst of negotiating the so-called Trans-Pacific Partnership, a proposed FTA between Australia, Brunei, Chile, Malaysia, New Zealand, Peru, The Philippines, Singapore, Vietnam, and the United States.

Free trade always sounds like a good thing, especially for Americans, for whom the word "free" has very positive connotations. In this highly globalized world, however, the truth is that "free trade" agreements are actually anything but. They are a return to the ad hoc commerce of the early 20th century. And like their predecessors, they often close as many doors as they open and avoid the real issues that are tipping the trade balance from free and open to unbalanced and opaque. While the world has grown more interconnected, our trade policies have grown ever more fractious.

As an illustration, take discussions I had recently in Singapore about various "free trade" arrangements being negotiated in the Asia-Pacific region. During our conversation, one of the Singaporean negotiators warned that the United States would find itself locked out of key Asian markets if it didn't join in all the free trade deals. The implication, of course, is that the parties to an FTA will have different and more favorable trading conditions among themselves than with outsiders. In a word, they will have a preferential trade deal. That's all that FTAs really are; we should call them preferential trade agreements, or PTAs. And they are very similar to the kinds of arrangements that prevailed prior to World War II.

Over the last half of the 20th century, the world's trade negotiators did everything they could to simplify the complicated, inefficient web of bilateral compacts that were weighing global trade down. The motivation was to get all trading countries onto the same playing field. Indeed, it was to forever avoid the evils of preferential trading that the General Agreement on Tariffs and Trade (GATT) was concluded in the wake of World War II and its successor, the World Trade Organization (WTO), was formed in 1995.

Now, however, quite the opposite is happening, and the PTAs are back in force. It is quite possible, for example, that a new FTA between players A, B, and C will nullify or impair the "free trade" results of an earlier FTA between players A,Y, and Z. Consider the Caribbean Basin Trade Partnership (CBTP) of 2000 between the United States and most of the countries around the Caribbean Sea. Part of that deal gives Caribbean countries such as Honduras lower-than-average tariffs on imports of their apparel into the U.S. market on the condition that they use U.S.-made yarn or fabric for making the clothes. Because it is conditioned on use of U.S. yarn, this deal is far from true free trade. Still, it has stimulated a huge amount of trade between the United States and the Caribbean countries and has provided jobs and a way out of poverty for hundreds of thousands of Latin Americans. The proposed Trans-Pacific Partnership (TPP) could undermine this success by extending tariff reduction on apparel to the Pacific countries as well as the Caribbean countries. But this time, producers likely wouldn't have to use U.S. yarn; they could use cheaper, locally sourced raw materials. That would likely disrupt or even destroy the Caribbean industry, which still relies on more expensive American thread.

Let's also be honest about the motive of these agreements, which is not free trade per se. The Caribbean deal was about boosting jobs in that region, so as to reduce the incentives for drug smuggling and illegal immigration. Unless it is negotiated and amended with extreme care, the emerging TPP could wholly undermine whatever effect the CBTP has had in that regard. And even if carefully negotiated, every new FTA undermines a little bit more the credibility and authority of the WTO -- which really is about free trade. Although the WTO's rules allow for FTAs -- under the condition that they don't raise tariffs or other protectionist measures above levels committed to in the WTO -- their very essence contradicts what the organization is about: that each trading country should treat every other WTO member in the same way.

But dueling FTAs is the least of the problems. Far more significant is the question of whether any of our free trade negotiations, be they in pursuit of FTAs or in pursuit of new global arrangements under the auspices of the WTO, have any relevance to the actual problems in the global economy.

Take the question of exchange rates. FTAs, as well as all the WTO negotiations, including the Doha round, focus on tariff reduction and protection of intellectual property. Yet manipulated exchange rates can have a far greater effect on imports and exports than the tariffs that are so laboriously negotiated. Brazil, China, Japan, Malaysia, South Korea, and Switzerland all intervene in international currency markets to keep their currencies undervalued as a kind of indirect subsidy for their export-led economic growth strategies. Currencies can swing by 20 to 30 percent in the course of a few months, easily wiping out tariff reductions that might be equal to 2 to 5 percent of the cost of a product. Cordoned off as the domain of banks and finance ministries, one of the single most important determinants of trade is thus left out of discussions altogether.

Investment incentives play a similarly important (and ignored) role in trade. Countries as diverse as China, France, Ireland, Israel, and Singapore aggressively use offers of free land, zero or very low taxes, capital grants, utilities at half price, and other perks to lure investment and production to their territory -- and away from locations where low operating costs would normally draw corporations to set up shop. Intel recently opened a facility in China for making advanced semiconductors, for example. A major consideration in the company's decision was the huge tax breaks and capital grants offered by China, which succeeded in luring the investment away from a U.S. location that would have had lower operating costs and better initial quality. Because the United States has a trade surplus with China in semiconductors, largely as a result of Intel's exports, the location of the new factory could well turn this surplus into another trade deficit. Yet again, these kinds of incentives are never the subject of free trade negotiations.

Even in cases where topics are nominally covered by the FTAs, the truth is that the FTAs may be largely meaningless. This is especially true for intellectual property and market opening. The proposed FTA between South Korea and the United States is a good example of both issues. It contains very strong language with regard to increasing protection of intellectual property. But the Korean legal system has demonstrated that it may rule otherwise. Over the past 15 years, for example, patents granted by the Korean patent office to FormFactor, an American company, for its probe cards (a device for testing semiconductor wafer circuits), were nullified by the Korean courts. This was not particularly surprising; Korean courts rarely rule in favor of non-Korean companies. Obviously the language of an FTA is pretty meaningless if a nationalistic legal system refuses to uphold it. In these circumstances, it does not make any difference what kind of FTA a country concludes; it will not achieve anything close to free trade.

FTAs are also meant to open markets, meaning that in any particular market, domestic and foreign producers are able to operate under the same conditions. Indeed, these deals are supposed to grant a sort of local treatment to nonlocal entrants into the market. Clearly, to sell a product in a given country, a producer must be able to get its products in front of the customer. Yet these FTAs never guarantee that. Take autos, for example: To sell them, an automaker must find dealers who will put the cars in their showrooms, service them, and market them. But in most countries, auto dealers don't sell multiple brands. So even if auto tariffs are slashed to zero, in many countries imports of foreign cars won't rise much because there are no or few dealers who will actually put the cars on their lots.

Of course, Ford, for example, may try to open dealerships in, say, South Korea. But opening a nationwide network of dealers takes a lot of time and a lot of money. Foreign companies entering the U.S. market, by contrast, don't have to spend that time and money because American auto dealers sell all manner of cars, no matter their affiliation to automakers. An FTA with South Korea would not create equal sales potential for U.S. and Korean automakers. Let me emphasize that this is not a matter of unfairness. It is a matter of trade policies needing to catch up to the real world.

FTAs and other trade deals are always presented as win-win propositions that will increase trade and jobs for everyone. They don't. And because they don't, they give rise to cynicism about the benefits of free trade and globalization and to increasing resistance to further such agreements. For the WTO to continue to succeed and for trade deals to produce real benefits for all players, we will have to recognize that the current drivers of globalization are not tariff reductions and import-export rates. We live in a world in which the real issues are anti-trust policies, investment rules, and capital flows. It's time that the negotiators caught up with the reality.

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