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Thoughts From Across the Atlantic

The U.S. Faces an Unusual Opportunity to Expand Trade

The United States faces an opportunity to improve its own prosperity and that of major European and Asian partners. The U.S. is currently negotiating separate trade agreement with the European Union and with Trans-Pacific partner countries from a rapidly growing region of the world. Both sets of negotiations have proceeded in spite of protectionist pressures brought on by the damaging Great Recession.

WIN-WIN VS. REDISTRIBUTION

Relaxing trade barriers is one of the few ways to raise incomes of both trading partners and increase their economic growth. Total gains for US-EU trade expansion have been estimated as $100 billion per year. (Reuters) Win-win policies that reduce costly trade barriers contrast with redistributional policies, such as raising the minimum wage, that increase  the incomes of some people while at the same time decreasing employment and incomes  of other people.

EU TRADE IN GOODS AND SERVICES

The EU has offered to eliminate tariffs on 96% of merchandise trade with the US and to negotiate on liberalizing trade in a wide range of services. For example, U.S. airlines are allowed to fly from US cities to European cities but they are not allowed to fly from one European city to another. Similarly, European airlines are not allowed to fly from one US city to another. Removing these restrictions would increase competition and provide greater service to American and European passengers at a lower cost.

PACIFIC NATIONS OF LATIN AMERICA

Discussion of increasing Pacific trade comes at a fortunate time for Pacific countries of Latin America, such as Mexico, Peru, and Chile, which all have current governments that are amenable  to more open economies. They offer a sharp contrast in Latin America  to the more statist economies on the Atlantic, such as Venezuela and Argentina. Economic failure has led to violent demonstrations against the Venezuelan government . Argentina continued its long term relative decline by falling behind Columbia in GDP last year.

PROTECTIONISM IN CONGRESS

The US is a large potential gainer, but there is protectionist pressure in both political parties. Recovery from the Great Recession remains slow, the unemployment rate has fallen considerably, but broader measures of unemployment that include discouraged or part-time workers have improved less and long-term unemployment remains elevated. Both parties are concerned about the loss of jobs in the manufacturing sector. Imports are often blamed for job losses in manufacturing even though technical change is a more important source. The value of manufactured production has been stable at around 12% of GDP since 1960, but, but employment in manufacturing has dropped from 25% of the labor force in 1960 to around 8% today. The difference between the production and employment shares is a result of a substantial increase in production per worker, largely due to technical change. Since members of Congress represent districts, they must provide some support for their districts even if what is best for the district is not best for the country as a whole. Conversely, the President is elected by all the people, and he is responsible for promoting policies that are best for the nation as a whole, even if they are harmful to certain districts. Presidential leadership is important in promoting open trade policy.

PRESIDENTIAL LEADERSHIP

Until now, President Obama has been less than a forceful leader for freer trade. He opposed NAFTA in the past, and he did not request. Fast Track Authority in his first Presidential term. The President rarely mentions Fast Track in public statements, and public support for freer trade within the Obama Administration comes mainly from the Trade Representative, Michael Froman. The President needs to assemble a coalition of Democrats and Republicans, but he has not received much support from his own party, especially the Congressional leaders, Harry Reid and Nancy Pelosi. Both Reid and Pelosi have openly opposed Fast Track Authority and other attempts to liberalize trade. However if Presidents are committed to a policy and willing to take the lead, they can influence a reluctant Congress. William Galston, a Whjte House advisor in the Clinton administration has pointed out that President Clinton supported NAFTA and refused to run as a protectionist, in spite of protectionist sentiment among influential Democrats. Most House Democrats (156) voted against NAFTA in 2003, but with the urging of the President, enough House Democrats (102) voted in favor to provide an overall 234-200 vote in favor of NAFTA. How serious is President Obama about more open trade? In the words of Galston, this is “Obama’s Moment of Truth on Trade”.

TIMING AND FAST TRACK

US trade agreements with Europe and the Pacific have the potential to raise world income, but the timing and sequence of the negotiations has been awkward. Every President since Gerald Ford has requested and received Fast Track Authority before beginning negotiations. Fast Track facilitates negotiation by obliging Congress to vote yes or no on the original trade agreement without adding amendments. The Obama policy has differed from those of predecessors by beginning complex negotiations with two sets of countries without first receiving Fast Track authorization from Congress. At this point, foreign negotiators cannot know if an agreement they sign will be the same one Congress votes on, or whether amendments change the document in ways that make it no longer acceptable to the partner. This uncertainty can only hinder the possibility of an agreement being reached.

CONCLUSION

The United States faces an unusual opportunity to cooperate with European and Asian partners  to raise world income by providing a more open world economy.   European Union and Asian partners have demonstrated their seriousness in ongoing negotiations. The government of Mexico has demonstrated its commitment to reform by opening up the energy sector to private participation and by attacking the power of incumbent monopolists. The governments of the Pacific nations of South America, have demonstrated their outward orientation in contrast to their Atlantic neighbors, Venezuela and Argentina. However, timing is crucial, and the “window of opportunity” could close quickly. There are powerful protectionist forces in the Congress, especially in the Democratic party, but history has shown that Presidents with a strong commitment to a policy and a willingness to lead can have an important influence on the Congress. President “Obama’s Moment of Truth on Trade” has arrived.

REFERENCES

Galston, William A. “Obama’s Moment of Truth on Trade” Wall Street Journal, February 5, 2014

Exclusive: EU Ready to Lift Duties on Most U.S. Goods for Trade Pact” Reuters, February 6, 2014

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5 Responses to “The U.S. Faces an Unusual Opportunity to Expand Trade”

DonMarch 18th, 2014 at 1:52 pm

Such misinformation. We been lied to like this before. The globalization has caused a massive loss of jobs in the US as manufacturers moved to places with little cost for worker’s health care, safety nets, and no cost for complying with OSHA or EPA regulations. We’ve also lost sovereign control over food and safety regulations arising from imports.

TimMarch 18th, 2014 at 11:44 pm

TPP is not about lifting barriers to trade. It is about weakening labor and environmental laws for multinational companies. It is about strengthening patent protection that will raise prices. No labor or environmental input has been taken, while lobbiests for big business are assigned to be trade envoys and negotiate the terms. This is a deal for the 1% and should be abandoned.

ThomasGrennesMarch 19th, 2014 at 7:41 pm

Total employment in manufacturing has declined in the U.S., in all high income countries, and (based on limited data) in China. The main source of job loss in the sector is technical change that has increased worker productivity, that allows production to increase at the same time manufacturing employment declines. Even if countries closed their borders to trade, technical change would continue to destroy jobs in particular sectors. Historically, even more jobs (8 million) were lost in agriculture, even though agricultural production continues to rise. The good news is that the added production has increased the standard of living for the average person.

ThomasGrennesMarch 19th, 2014 at 7:54 pm

The fact that the Obama administration has been remarkably silent about the two sets of
negotiations leaves the impression that negotiators are doing something improper. However, if the administration ever reaches agreements with partner countries, they will have to submit the agreement to Congress for its approval. They cannot hide it forever. This failure to obtain fast track approval before negotiating makes it less likely that an agreement will be reached. Without knowledge of an agreement, how can we know who will gain? A general principle is that countries gain from differences in economic conditions not similarities. If countries had the same wages, climate, labor laws, etc., costs would be the same, and there would be not gains from trade.

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