It’s taken four years, but President Obama is finally coming around to a pro-trade economic agenda. And it could be his greatest legacy.
The U.S. economy grew at 2.5 percent in the first quarter of this year. That's better than the 1.7 percent rate of all of 2012, but with unemployment still at a hefty 7.6 percent, it's still awfully anemic nearly four years after the recession officially ended. Help, however, may be on the way. The Obama administration is at last turning to a surefire way to increase growth: more trade with the rest of the world.
During the first three years of his first term, Barack Obama talked about boosting exports, but did little to expand trade. Unlike every president since Franklin Roosevelt, he declined to pursue trade promotion authority, necessary for any significant trade deal because it forces Congress to take an up-or-down vote, without amendments. Unlike his recent predecessors, he didn't push for multilateral agreements like the Doha Round, which focused on increasing trade links with developing countries. And he took nearly three years to get approval for the bilateral deals with Panama, Colombia, and South Korea that had been negotiated during President George W. Bush's tenure.
But in a dramatic about-face, Obama has embraced two large agreements that would open new markets to U.S. exporters. The Transatlantic Trade and Investment Partnership (TTIP) would remove tax and regulatory barriers with the European Union, while the Trans-Pacific Partnership (TPP) would increase trade with 11 Asian and Latin American countries. In February, President Obama and European leaders announced they would pursue a sweeping free-trade agreement, and on April 12, the United States approved Japan's entry into TPP negotiations, where it joins Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, and Vietnam; the deal will likely be completed by December.
These are trade openings on a grand scale. The E.U. is the largest economy in the world, the United States is second, and Japan is fourth. The dozen nations in the Trans-Pacific Partnership account for some 40 percent of global GDP. This joint-lowering of trade barriers would be the most powerful step taken to restore economic growth since the 2008 financial crisis, both for the United States and its partner countries. "Countries that liberalized their trade regimes experienced average annual growth rates that were about 1.5 percentage points higher than before liberalization," according to an often-cited study by Stanford's Romain Wacziarg and Karen Horn Welch in 2008.
More open trade lets Americans reap additional revenues from foreign sales, while profiting from the lower costs that imports provide -- both for finished consumer goods and for inputs into U.S. manufacturing. It's a lesson the Japanese have absorbed as well, as they embrace one of the greatest trade-expansion opportunities in history. In March, Prime Minister Shinzo Abe decided to boost trade, in order to re-ignite Japan's smoldering economic embers: the country's GDP has grown at an average annual rate of just 1 percent since 1990.
The Pacific deal faces opposition from Japanese farmers, as well as U.S. automakers and unions, but Obama and Abe, in hopes of sparking a new Japanese Miracle, are hanging tough.
Japan has a reputation as a closed market. In 2012, the United States exported $70 billion in merchandise to Japan, a new record but an increase of only 8 percent since 2000. Imports from Japan over the same period have been flat. Lately, however, there have been signs of progress. Exports of U.S. pork to Japan now total $2 billion, making it our highest-value foreign market, and in January, Japan loosened its controversial restrictions on U.S. beef imports. Exports of U.S. services, such as licensing fees and royalties, rose 50 percent from 2002 to 2011, while Japanese foreign direct investment in the United States, a potent form of trade, have nearly doubled.
Still, the United States is running a $76 billion merchandise trade deficit with Japan. More worryingly, Japan has fallen from the second largest recipient of U.S. exports and number-one provider of U.S. imports in 1989, to fourth in both categories. In trade, the critical metric is the total value of what is exchanged, and U.S.-Japan trade could be a great deal higher than it is today.
The problem is obvious: major barriers to trade remain on both sides. U.S. insurance companies complain that the Japanese government gives regulatory preferences to Japan Post, the government postal service, which also operates a huge insurance subsidiary. Meanwhile, the United States slaps 2.5 percent tariffs on Japanese automobiles and 25 percent on light truck imports. Although Japan has no tariffs on U.S. automobiles, it has erected other barriers to trade, including environmental standards and arduous certification procedures.
Japanese officials argue that their consumers simply do not like U.S. cars. Regardless, the non-tariff barriers also hurt sales. The United States exported just $1.5 billion in auto products into Japan, while importing $41 billion from Japan. Rep. Sander Levin (D-MI), the ranking member of the House Ways and Means Committee, which handles trade issues, points out that in 2012 American automakers sold only 13,637 cars in Japan. That's fewer than 40 a day. Japanese automakers, on the other hand, sold 5.4 million, including those produced at U.S. plants.
Zeroing in on non-tariff barriers make sense for both the Pacific and the European agreements. These barriers -- regulations, government subsidies for domestic industries, and import limitations -- increase prices of foreign goods and services, and keep them out of home markets.
For the European agreement, non-tariff barriers are equally important. Europeans have strong regulations limiting the import of genetically modified foods, and requirements that television networks "reserve for European works a majority proportion of their transmission time." In the telecom sector, "a barrier-free transatlantic market in telecommunications services has yet to emerge" despite technological and regulatory advances, according to a forthcoming study by the Foundation for Social Studies and Analysis, a Spanish think tank. With the possible exception of Vodafone, no European or U.S. telecom company has significant operations on both continents.
The truth is that tariffs throughout the world are relatively low. (The average tariff rate on foreign imports into the United States is only 3 percent.) But a study of non-tariff measures in 91 countries found that these barriers had the same impact as tariffs averaging 12 percent.
The real work of these two trade agreements will not be in bringing down tariff rates, but in harmonizing regulations. The E.U. tends to give governments more control over businesses, provides more subsidies, and operates on the risk-averse "precautionary principle," which often prohibits production distribution when a product might be hazardous, even when data is lacking.
In negotiating the Pacific and European agreements, the United States has the opportunity to shape global regulatory policy, and determine whether the world will go down a path that emphasizes state economic control, or free-market dynamism. Abe of Japan looks like a brave partner in that endeavor.
These two agreements could give the American economy the boost it needs to get to 4 percent growth -- the level that will reduce the deficit, cut unemployment, and extend prosperity and opportunity. The deals may help Japan end its own reign of stagnation. And they are also an opportunity for the United States to show global leadership. If negotiations succeed, freer trade could become the most important achievement of the Obama administration.
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