Last year, I commented on a speech by U.S. Trade Representative Michael Froman on the "values" driving U.S. trade policy. With that post, I probably got myself taken off Froman's holiday card list, so I figure I can't make it any worse by critiquing an article he recently wrote. The article has similar themes, but it seems to be more focused on promoting particular goals, such as the TPP.
I'll begin with two points of his that I really liked, to get things off to a friendly start.
Tariffs are bad economic policy
Froman writes:
Historically, few policies have helped American households as much as expanding trade. We tend not to focus on the consumer benefits of trade, but since World War II, trade liberalization has added nearly $13,000, on average, to each American family’s annual income. These gains have disproportionately benefited lower-income Americans, who spend a greater portion of their incomes on highly traded staples like food, shoes, and clothing. According to one recent study, American consumers in the lowest decile of income distribution owe more than half of their purchasing power to international trade. By contrast, Americans in the top decile gain only 3 percent in purchasing power through the benefits of trade.
Remaining barriers also disproportionately harm America’s poorest. For example, tariffs on luxury leather shoes are 8.5 percent, while tariffs on basic sneakers can reach 48 percent. Likewise, tariffs on acrylic sweaters are twice as high as those on wool sweaters and eight times the tariff on cashmere sweaters. Eliminating tariffs like these helps all consumers, but helps low-income consumers the most.
Now, I would have been even happier if he made it explicit that he was talking about import tariffs. There's lots of talk about tariff cutting in the piece, but no mention of the word "imports" as far as I could see. But regardless, even the implicit acknowledgement that imports are good for American consumers is a great thing to hear from a government. And I wish the point about tariffs disproportionately hurting the poor would be publicized more.
Later on, he says more on this issue:
Sound trade policies also bolster food security. By lowering tariffs on agricultural goods, ensuring that non-tariff measures are science-based, and disciplining export bans that lead to food shortages, TPP will increase access to affordable, safe, and nutritious food. ...
A number of additional features in TPP will contribute to global health. For example, TPP will eliminate duties on medicines and medical devices, thereby decreasing costs for health-care systems, hospitals, clinics, aid organizations, and consumers. Take Vietnam, where TPP will eliminate tariffs of up to 5 percent on a range of medicines, including antibiotics, corticosteroids, and anti-malarial medications, as well as tariffs of up to 7 percent on essential medical supplies like gauze and bandages. ...
Online services is a new growth area
Froman writes:
... we’ve only scratched the surface of the digital economy’s growth potential. ... Advances in technology could also create new exporters in the telemedicine, research and development, and distance education fields, among others.
These are great points, and unless I hear something to the contrary, I'm taking this as evidence that someone at USTR has been reading my work.
All this talk of the benefits of lower tariffs, and of new online trade in services, is wonderful! But as indicated above, I also have some concerns with the piece. Here they are.
China's free trade agreements are not a mercantilist threat
Froman writes:
Increasingly, the rules-based trading system that the United States has led since World War II is being challenged by alternative models that do not reflect our interests and our values. In the vast majority of China’s trade agreements, for example, there are no labor or environmental protections. Meanwhile, these agreements allow state-owned enterprises to benefit from generous subsidies and other advantages that undercut the competitiveness of other countries’ workers and businesses, including our own. They allow countries to force companies to relocate their operations or to transfer their technology and intellectual property in order to serve new markets. In these mercantilist models, the state is often absent where it should be present and dominant where it should be invisible
I have several issues here.
First, if you look at the content of China's FTAs, they are about trade liberalization, including lower tariffs, opening up services markets, and the like. They may not go as far as I would go with liberalization, but China's trading partners seem happy with the results.
Now, it may be that China's economy is relatively more mercantilist than others, but when it engages in trade liberalization, that should be celebrated. Calling its trade agreements "mercantilist" doesn't match the reality.
Along the same lines, the fact that these agreements do not have labor/environmental protections doesn't undermine their liberalization. Whether labor and environment protections should be in FTAs, and whether the U.S. is a leader in either of these areas, is up for debate, it seems to me. (My Canadian and European friends sneer at the U.S. in the area of labor protections. And I'm not really an expert on environmental protection, but when I looked into this a while back, it didn't seem like the U.S. did all that well. But I don't really have strong opinions on the issue of who is "better" here).
And the fact that China's FTAs do not address SOEs also does not change this assessment. U.S. FTAs do not generally address farm subsidies, but that doesn't mean they are not liberalizing. I would rather that trade agreements addressed both, but I understand the political reality that each side wants to avoid taking on certain favored domestic constituencies.
Finally, Froman starts the article with praise for U.S. trade agreements from the 1930s and the GATT era. I agree with his praise, but note that those agreements did not have labor/environment rules either, so criticizing China for taking an approach that we used to take, but then praising us and criticizing China, seems inconsistent. I understand that many people think the current U.S. FTA model, with all of its various non-trade issues, is the right one, and everyone should get on board and follow it. I'm less convinced, but we'll see what happens with the TPP.
The problem of non-tariff barriers
Froman writes:
As tariffs have declined globally, other barriers to trade have taken on greater importance. These “non-tariff barriers” have the same export-limiting impact as traditional tariffs. In Japan, for example, there have been instances when regulations have slowed down the introduction of American autos with cutting-edge technology, including green technology. In addition to the environmental impacts, costs like these are borne by everyone in the supply chain, from large American auto companies and their employees to the thousands of small businesses that sell parts, advertising, logistics, and other related products and services. TPP will address a number of these barriers and take steps to prevent the emergence of future obstacles to U.S. exports.
It's true that "non-tariff barriers" are a problem, but it's not clear to me why the TPP is the solution. Doesn't the WTO already address a lot of these issues? Also worth noting is that if you look at the recent WTO case law, there are several high profile cases against the U.S.
The minimum wage
Froman writes:
TPP is the first trade agreement that will include requirements for countries to adopt laws on minimum wages ...
There has been some talk from the administration about how the TPP will do something new and significant on the minimum wage. However, I have been told by lots of people who seem to know these things that there is absolutely no way the TPP will require countries to adopt a minimum wage, and that Republicans in Congress would rebel if it did. I'm not sure what Froman has in mind in the sentence quoted above, but the administration is walking a fine line here, trying to get progressives excited about the TPP, without aggravating conservatives.
Environmental conservation issues
Froman writes:
An opportunity of similar scale exists to tackle illegal logging and wildlife trafficking. Trade in illegal timber can run as high as $100 billion annually, and the Asia-Pacific region exports nearly one-quarter of the value of global timber and wood products. TPP partners are also major source, transit, and destination countries for legal and illegal wildlife products, contributing to what is estimated to be up to $200 billion in annual transnational environmental crime—including wildlife trafficking. The victims of these crimes include familiar targets such as the elephant and rhinoceros, as well as relatively unknown, highly endangered species such as the pangolin, a scaly, ant-eating mammal that is the world’s most trafficked animal.
I can understand why people are concerned with conservation, even for "scaly, ant-eating mammals," but why is any of this in trade agreements? It's true that a country with economic power can use it to coerce trading partners to do things it wants, as part of a trade negotiation. But it seems to me there must be more cooperative ways to promote international efforts on problems like this one.
Are there alternatives?
Froman writes:
Ultimately, the question is not whether TPP is perfect, but whether it substantially furthers our interests and our values and whether we are better off with it or under the alternative scenario. In today’s fast-changing world, the status quo will not hold. In Asia alone, hundreds of agreements have been struck in recent years, the vast majority of which do not share our commitment to ensuring that growth is equitable, sustainable, and inclusive. ...
In terms of practical alternatives, TPP is the trade initiative on the table, so in the near term we all have to decide yes or no on the TPP. (I don't feel particularly threatened by, say, a China - New Zealand FTA, but I guess it does provide us some motivation to do some of our own liberalizing.)
More generally, though, I can imagine alternatives that reduce tariffs multilaterally, limit farm subsidies, extend the existing liberalization in services and government procurement, and rein in trade remedies. For me, those alternatives would be pretty attractive. But I recognize that for any of that to happen, governments would have to be willing to take on some powerful domestic constituencies.
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Just to add two minor points, his statements playing up the importance of the IP provisions won't convince any critics, but I'm sure he knows that; and the "free flow of information" part would be more convincing if we let online gambling information flow freely.
Overall, this piece, with its emphasis on FDR and labor/environment/development issues, seems to be about convincing progressives to support TPP. Will it work? Maybe we'll find out soon, but of course we need a finished TPP first.
