– U.S. trade policy – time to start over

Economy of Ukraine (Ukrainian) - - News - Report By Jeff Faux November 30, 2016.

Anger over the impact of international trade on jobs, wages, and opportunities was a major cause of Donald Trump’s election. As the Democratic Party’s politicians and pundits search through the rubble of Hillary Clinton’s candidacy for clues to her stunning loss, they need to take an honest look at their own contribution.

Since the signing of the 1994 North American Free Trade Agreement (NAFTA) (conceived by Ronald Reagan, negotiated by George H. W. Bush, and sold to the Congress by Bill Clinton) the Washington policy class has relentlessly pursued ever more so called free trade agreements. As the Economic Policy Institute has been reporting for decades, these deals have devastated our country’s industrial base and the economic security of millions of Americans. Under pressure from multinational corporations, Republican and Democratic leaders have systematically traded away the income and job security of American workers in exchange for promoting the interests of American international investors.

It was only a matter of time before voters in the most affected states rebelled against the elites of both parties. There were enough of them in Michigan, Ohio, Pennsylvania, Wisconsin, and Iowa – many of whom had voted for Obama in the previous election – to carry Trump to the White House.

But the issue remains. Trump has declared the twelve nation Trans Pacific Partnership (TPP) dead. Instead, he promises to negotiate “fair bilateral trade deals that bring jobs and industry back onto American shores.” We have heard that before. Barack Obama predicted 70,000 new jobs from the bilateral U.S. – Korea Free Trade Agreement he signed in 2011. Four years later we had already lost 95,000.1

Trump may be, as he boasts, a better negotiator than Barack Obama. He was certainly right in criticizing Obama’s deals. But the root cause of the loss of jobs and industry to globalization goes deeper than the trade pacts’ details. It is inherent in economic policies that relentlessly open up American workers and their communities to brutal global competition for which they have not been prepared. The result is that the costs to American workers of each cycle of expanded trade relentlessly exceed the benefits. This fundamental problem will not be resolved by better negotiations.

The trade policy of the last quarter century is now bankrupt, economically and politically. This is the moment for America to go back to the drawing board and rethink strategies for competing in the global economy in ways that raise living standards for all.

The first step is to declare a freeze on all trade negotiations – bilateral as well as multilateral – until we have such strategies in place.

Bad economics = losing politics

Donald Trump hammered away at those trade deals and the arrogance of an establishment that cared more about its relationship with Wall Street and foreigners than with Americans whose lives were being wrecked by globalization. He attacked leaders of both parties. But Democratic presidents Bill Clinton and Barack Obama were the most prominent champions of corporate globalization. And because the Democratic Party has traditionally claimed to be the champion of the working class, it was the most vulnerable to feelings of betrayal.

Workers’ fear and anger that they were rapidly losing the American Dream were channeled by rightwing propaganda into resentment against immigrants and minorities, and upwardly mobile college educated women. Many voters became convinced, however incorrectly, that Democrats were increasing benefits and protections to these groups, while pulling the rug out from under industrial workers and their communities, which contain Americans of all races, genders, and social identities.

This impression was reinforced by political consultants and pundits who argued that the party no longer needed that traditional base but could win an electoral college majority on the basis of larger turnouts from a coalition of minorities, immigrants, women, and white male college men. They lost the bet. Hillary Clinton underperformed relative to Obama in 2012 with African Americans, Latinos, and white women. Donald Trump, for all of his insulting diatribes against immigrants from south of the border actually did better among Latino voters than Mitt Romney in 2012. And when he attacked the Carrier Company for planning to move its factory to Mexico, he was talking about a plant where 50 percent of the workforce is African American. Women make up half the workforce on the assembly lines. The facility also employs dozens of recent Burmese immigrants.2

It was only after being pushed by Vermont senator Bernie Sanders in the primaries that Clinton backtracked on her support for the TPP, which she had once called the “gold standard” for trade agreements.3 And it was only after he was offered the nomination for vice president that Virginia senator Tim Kaine reversed himself on the TPP. But many voters in the Midwest were understandably skeptical. In the primaries of 2008, both Clinton and Barack Obama promised voters in the Midwest that they would renegotiate NAFTA, and quickly broke that pledge after Obama became president and Clinton secretary of state.

As the working class grew angrier, their concerns – and those who tried to defend them, from industrial union leaders to members of Congress such as Bernie Sanders, Ohio representative Marcy Kaptur, and Ohio senator Sherrod Brown – were consistently ridiculed by columnists, economists, and editorial writers. The conventional economic wisdom was that workers should be grateful to have traded away good jobs and wages, stable communities, and a future for their children in exchange for cheap underwear and cell phones.

U.S. trade policies have clearly turned out to be bad politics. But they are bad politics because they are bad economics.

If the American political establishment is to learn anything from this election, it has to start by ending its 20 years of deception, denial, and anti democratic arrogance over trade policies. It can respond to Trump by digging in its heels to protect corporate globalization or can use this as a wake up call to rethink new strategies that return American workers to the center of America’s economic policies.

The first step is to recognize how U.S. elites have deluded themselves and the country on trade.

Trade myths

Promoters of trade agreements from NAFTA to the TPP have not honestly dealt with their critics. Instead of acknowledging the obvious failures, they have stubbornly defended themselves by attacking opponents with irrelevant denunciations of “protectionism.”

Says Barack Obama in defending trade, “We cannot seal ourselves off from the rest of the world.”4 Brookings Institution economist Gary Burtless adds: “Do we really think it would be a good idea for the U.S. not to have been able to trade in 1916 or 1886?”5

The accusation is false and the argument irrelevant. Trade as a share of our economy was increasing way before NAFTA and will continue at a high level after TPP is officially rejected.6

Despite the labeling, NAFTA and the NAFTA like deals that have followed agreements are not “free trade” agreements. Only six of 30 chapters of the TPP directly address questions of trade. The rest lay down rules that protect the interests of multinational investors above those of workers, the environment, and human rights. It is rife with restrictions on domestic policies – including restrictions on government policies to favor local procurement – that protect multinational corporate rights to future profits. To enforce those rights, the TPP would establish an Investor State Dispute Settlement system by which corporate affiliated judges can override the decisions of democratic governments.7

These are not the rules that existed in 1886 or 1916 — or any time before 1994.

The United States has always been a trading nation, but not a “free trading” nation. Until a quarter century ago trade policy – primarily the raising and lowering of tariffs – was an instrument of domestic economic development. As the U.S. economy grew, so did its trade with the rest of the world. For the hundred years of America’s post Civil War industrialization, America’s trade was in balance or in modest surplus, i.e., we paid for our imports with exports.8

Balanced trade reinforced virtuous cycles of internal economic growth. When a company replaced workers with machines, the increased profits were reinvested in other domestic industries, creating new jobs. Balanced trade helped assure that the benefits of rising productivity and technological change were widely shared by American workers as well as investors.

After World War II, American producers emerged with a unique and temporary comparative advantage over foreign competitors. The U.S. government therefore

became a champion of lower tariffs. The new policy was also a weapon in the Cold War; providing access to the huge U.S. market dwarfed whatever the Soviet Union could offer to countries for whose loyalties we were competing.

Inevitably, Europe and Japan recovered, taking back their own markets – and reaching into ours. In the late 1970s the United States began to run chronic trade deficits, a market signal that it was losing competitiveness. By 1979, real wages of U.S. workers began to stagnate, and then fall. With the collapse of the Soviet Union in the next decade, the geopolitical rationale for Cold War trade policies also disappeared.

At this point in history, American leaders should have adjusted the country’s policies to help its people cope with changing international conditions. But in the 1980s, business and financial institutions with global operations grew more dominant in Washington. Instead of helping working Americans regain the long term trend of rising wages, pro corporate domestic economic policies further weakened the bargaining power of labor vis а vis capital.

As did pro corporate international economic policies. Beginning with NAFTA, U.S. trade policy made a radical and reactionary break with the past. In effect, it responded to the changing circumstances by allowing U.S. corporations to shed the economic and social responsibilities of being “American.”

Specifically, NAFTA freed U.S. corporations to produce in Mexico – where labor was cheap, regulations lax, and government officials more than happy to serve the interests of foreign investors – and to sell those products back in the United States. And as Jorge Castaсeda, who later became Mexico’s foreign minister, put it, NAFTA was “an agreement for the rich and powerful in the United States, Mexico, and Canada, an agreement effectively excluding ordinary people in all three societies.”9

NAFTA became the template for the neoliberal trade agreements that followed: the World Trade Organization in 1995, the PNTR (permanent normal trade relations) agreement with China in 2000, the CAFTA (the Central America Free Trade Agreement) in 2005, and the U.S. – Korea Free Trade Agreement in 2012.

NAFTA was the model for the TPP.

A trail of broken promises

The central argument to Congress made by the promoters of NAFTA and the trade deals that followed was:

1. Because other countries had higher tariffs than the United States, reducing trade barriers would cause U.S. exports to rise faster than imports. 2. The annual trade deficits would therefore disappear. 3. As exports rose to equal if not exceed imports, U.S. jobs and wages would increase.

When NAFTA was passed, the United States was running a trade surplus with Mexico. President Bill Clinton promised that NAFTA would increase the surplus, creating 200,000 new American jobs in its first two years and a million jobs in five years. By 2010, deficits with Mexico had cost the United States 700,000 jobs.10

making a series of optimistic assumptions and claims about the economy farther into the future than anyone could possibly see, predicted that the TPP would increase annual U.S. GDP by the equivalent of one month’s growth – by 2047!18 That the U.S. government would further risk the future of a majority of American workers for the promise of such a tiny reward reveals the bankruptcy of the economic case.

National security: An argument of last resort

With the economic case in tatters, it was no surprise that TPP promoters then reached for other arguments, which had even less credibility. They shifted from the claim that the TPP would make Americans prosperous to the claim that it would make us safer, i.e., by containing China’s influence in Southeast Asia.

Defense Secretary Ashton Carter said “passing TPP is as important to me as another aircraft carrier.”19 Eight former defense secretaries assured congressional leaders that approving the TPP would “contribute to a safer world for us, our children and our grandchildren.”20 Obama’s former chief economist Alan Krueger told us that “trade agreements are primarily about foreign relations.”21

But we have been hearing that trade deals were needed to make America safer for the last 20 years. And for 20 years the predictions of national security experts have not fared any better than the predictions of their economic counterparts.

For example, NAFTA was supposed to secure the southern border of the United States, reducing illegal immigration and creating a stable rule of law democracy south of the border. Instead, the destruction of much of Mexico’s farm and small business sector vastly increased the flow of undocumented workers, creating a major political and social crisis in the United States. And, partly because NAFTA made it easier to bring drugs into the United States from both Mexico and Latin America, lawlessness and social instability associated with the drug trade have become widespread.

The State Department now warns Americans against traveling to Mexican border states.22 As for border security, we have reinforced our southern frontier with drones, dogs, a 700 mile fence, some 6,000 guards and even bands of extralegal vigilantes. NAFTA clearly made us less secure.

A few years after being sold on NAFTA, Americans were told that opening up our markets to China with a special deal that brought it into the World Trade Organization was a clever geopolitical strategy to “pull China in the right direction.”23

After 16 years of continuous job loss and a relentless trade deficit that has transferred trillions of dollars from the United States to China,24 we are now told that China moved in the wrong direction. Instead of becoming a free market Western style democracy content to be America’s junior partner in Asia, China has developed its own authoritarian capitalist model and is a rival for U.S. influence in the region.

In response, the United States is building up its network of military bases in Asia and supplying more weapons and training to China’s neighbors – all of which are, ironically, following China’s “wrong” model of authoritarian capitalism.

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