The Magazine

Don’t Give Him What He Wants

Beware Obama’s trade deals.

Jan 27, 2014, Vol. 19, No. 19 • By IRWIN M. STELZER
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Republicans are being urged to support President Obama’s request for TPA so that he can complete negotiations on TPP and TTIP while pursuing other deals at the WTO. For those who do not often feast on this alphabet soup: Obama wants what we used to call fast-track authority to make a trade deal.

Obama

Can he be trusted?

In today’s lingo, the president seeks Trade Promotion Authority (TPA) so that he can put any deal he negotiates before Congress on a take-it-or-leave-it basis, no amendments allowed. The two deals he wants to consummate are a 12-country Trans-Pacific Partnership (TPP) with Canada, Mexico, Chile, Brunei, and several other parties, and a Transatlantic Trade and Investment Partnership (TTIP) with the 28-nation European Union. The administration also hopes to work out a freer trade agreement with the 159-member World Trade Organization (WTO), but the chances of doing that are somewhere between remote and nil, which is one reason the administration is pressing for regional trade deals.

The president has a problem. The same group of Democrats that shot down Larry Summers, his first choice to replace Ben Bernanke at the Federal Reserve, are threatening to deny him TPA authority: His overseas negotiating partners are reluctant to offer any quid pro quo in return for some U.S. concession if Congress can later vote to pocket the other parties’ concessions while canceling the president’s. Gary Hufbauer, senior trade expert at the Peterson Institute for International Economics, reckons that at least half of congressional Democrats will vote against giving the president the authority he seeks, some because history teaches he won’t bother consulting with them, some because they fear he will make concessions that damage their constituents. Hufbauer concludes that Obama needs “three-quarters of the Republicans” to get a trade deal passed.

Republicans’ business backers are engaged in an all-out effort to round up those votes. Former U.S. trade representative and head of the World Bank Robert Zoellick, a victor in trade wars past, has returned to the fray to urge Republicans to “lead in opening markets .  .  . and make 2014 the year the U.S. reclaimed global leadership on trade.” With all due respect to the estimable Mr. Zoellick, and to House speaker John Boehner, a reflexive free-trader, congressional Republicans should just say no.

Theoretically, free trade allows every nation to specialize in what it does best, and trade that output for the stuff other nations produce more efficiently than it can. Result: Every nation’s resources—labor, capital, land—are put to their best possible use, capital flows around the globe to wherever it is most productive, consumers get goods and services at the lowest possible prices, and all is for the best in this best of all possible free-trading worlds. Except that it isn’t.

TPA might under some circumstances be a good idea—but only if it empowers a president who respects the legislation passed by Congress, and if the trade agreements it facilitates are also a good idea. Neither criterion is met these days.

Start with the particular president who is requesting this authority. He is no George W. Bush, to whom Congress granted such authority. President Obama has made it clear that he will enforce those parts of any legislation or treaty that suit him, de facto amend legislation without seeking congressional approval, and write regulations that order nonenforcement of laws he does not like. Congress refused to pass his Dream Act, so he ordered the authorities to treat illegal aliens as if it had; enforcement of Obamacare’s employer mandate at the date specified in the law became inconvenient, so he unilaterally postponed it; he has decided not to enforce the federal law against the sale of marijuana. There’s more, but you get the idea.

It is therefore not unreasonable to suppose that a provision in one of these trade pacts that benefits some industry or company that later fails to toe the presidential line or pay financial obeisance to Democratic campaign committees will disappear in a haze of bureaucratic rulings. In short, whatever the theoretical benefits of free trade, they must be weighed against increasing this president’s ability to exercise even more extralegal power over American businesses. One example: The Asia deal might include a concession from Japan to ease imports of made-in-America vehicles. It is not beyond imagining that the president will interpret that to apply only to the green vehicles of which he is so fond.

That is the lesser of the objections to a new set of deals. The larger problem is that the international exchange of goods and services—world trade—is occurring in markets so distorted by the world’s major exporter that it is impossible to predict the consequence of any agreement. China is not included in the proposed Trans-Pacific Partnership, but as the world’s biggest trader in goods—it overtook the United States last year in what the Financial Times calls “a shift in power away from the U.S.”—it affects the trade patterns of all the parties to the potential agreements. For example, German machinery manufacturers who want access to China’s market must turn over their intellectual property to Chinese state-owned enterprises, which after an initial period reach a scale that enables them to compete not only with German, but with American manufacturers.

In effect, if these deals are struck, American manufacturers will find themselves competing even more fiercely with exporters whose terms of trade are set in a market dominated by a currency manipulator that subsidizes its inefficient state-owned enterprises, protects key markets from American competition, and—how to put this—steals intellectual property. Despite recent increases in the value of the yuan, it remains undervalued, distorting world trade flows, and forcing Korea and Japan to follow suit, to howls of pain from Detroit automakers who believe such manipulation is artificially constraining sales of made-in-America autos. Yet the president is fiercely opposed to any move by Congress to make an end to currency manipulation “a principal negotiating objective” of our trade negotiators.

There is worse. Even in the absence of the distorting effect of China’s key role in shaping international markets, even if freer trade would increase the size of the global economic pie as its advocates confidently contend, it would have a malign effect on the distribution of income in the United States. Both parties have made their sympathy for “the hardpressed middle class” clear. Democrats are -translating that into an attack on increasing inequality of income, never mind that data relating to consumption, which reflects progressive taxation of “the rich” and benefits paid to lower earners, rather than pretax incomes, call such rising inequality into question. Multimillion-dollar bonuses for failed bankers combined with high unemployment and static pay checks for middle-income workers are undermining faith in market capitalism, and promoting the notion that the macroeconomic cards are stacked against the struggling residents of the middle class and, worse, sawing off the rungs on the income ladder that provided upward mobility for future generations. 

The two culprits are monetary policy—tipped in favor of those holding the shares, property, and other assets the value of which Fed zero-interest monetary policy aims to increase at the expense of savers—and trade policy. America is the largest market in the world, by far. Closing it to Chinese goods might raise prices in Walmart a bit, but would surely lower China’s economic growth rate to regime-threatening levels. Yet we consistently allow China to undervalue its currency so that equally efficient American firms, makers of textiles, shoes, and electronics, among other goods, cannot compete. Yes, we sell things to China, but far fewer than they sell here: China recently announced that its 2013 trade surplus was up 12.8 percent over 2012, and was the largest in dollar terms since 2008, with sales here the principal driver. Meanwhile, China maintains restrictions estimated by the Council on Foreign Relations to be equivalent to a 66 percent tariff on U.S. exports of business services. 

The goods we sell to China are mostly high-value items made by higher-paid, skilled American workers. And even those U.S. exporters are living on borrowed time, as China will allow their goods into its country only if accompanied by technology transfers that will soon permit China to become self-sufficient in and major exporters of those products, a process accelerated by the regime’s insistence that its state-owned enterprises purchase enough homemade products to enable China to achieve economies of scale.

Meanwhile, the stuff we buy from China was once made by lower-paid workers here, working hard so that they or their children might join the ranks of the middle class rather than the jobs queue on which they find themselves. Many workers hurt by imports have played the game the way we have asked them to—worked hard, devoted decades to their employers, paid their taxes. Suddenly, the world changes, and through no fault of their own they find themselves unable to compete with the more than one billion low-paid workers that globalization introduced into the world’s labor markets.

None of this is to say that America is a pure-as-the-driven-snow free trader. Fed policy of running the printing presses overtime has kept the dollar lower than it might otherwise be, and our trading partners are not wrong to call this a form of currency manipulation. Australia, Vietnam, Malaysia, and New Zealand, partners in the TPP, are not wrong when they complain about our restrictions on imports of sugar, dairy products, textiles, apparel, and footwear.

Nor is support for freer trade inappropriate at all times. But it might not be the optimal time to sign on to comprehensive changes in the way the world does business when (1) any deals we sign now confer enormous additional powers on a president not bound by the Founders’ notion of checks and balances; (2) these deals are negotiated in a world in which the leading trading nation is distorting the flow of trade; (3) the deals might well contribute to income inequality and the consequent further loss of faith in market capitalism; and (4) we do not have in place effective programs to relieve the plight of the innocent bystanders who constitute the collateral damage of globalization. 

It might, instead, be a time for Republicans who historically bow to the wishes of corporate America to ask if what is good for American corporations is always good for Americans, and if freer trade at this particular moment serves the conservative objective of sustaining support for market capitalism.

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of -economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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