Sunday, January 31, 2010

POTUS' Trade Pitch Misses the Plate

Speaking to House Republicans during their annual retreat (in sunny Baltimore!), President Obama spoke publicly and off-script about his plans for the future of US trade policy (starts at about 4:20):

At this point, it's utterly unsurprising that Obama's remarks evince a wholly mercantilist outlook - exports are what's good about trade, and imports are the bad thing that we must reluctantly accept in order to secure new markets for US goods and services.  Of course, as readers of this blog (and anyone who's taken a basic macro-econ class in the last, say, 75 years) know, mercantilist trade policy is nonsense.  Indeed, I think Adam Smith settled this debate a few hundred years ago, but even if he didn't, Japan's years of economic stagnation and ever-present trade surpluses should do the trick.

There are plenty of smart people in the White House who of course know these facts, but it's clear that they have ceded their knowledge of rudimentary economics to the in-house politicos who think that the only way to "sell trade" is to (i) focus on exports; (ii) explain how the rest of the world is illegally blocking those exports; and (iii) never, ever mention imports.  And the President - not really versed in any of this econ stuff and most definitely not a reader of this blog - is dutifully carrying out that messaging strategy.

But is Obama's sales pitch effective?  Can he really "sell trade" by focusing on the things he laid out in his talk with the House GOP?  Let's review a few of his comments to find out, shall we?

Obama states that "the suspicion about trade agreements is that they're all one way."  Ok, that's true, but what's feeding that suspicion is not the FTAs themselves, or most Americans' real-world experiences with imports and free trade, but rather political demagoguery and media misreporting on imports, the trade deficit  and the state of US manufacturing. (See discussion here.)  Until these myths are corrected - until the American people understand that imports are good for US businesses and consumers, that US manufacturing output is still the world's largest, and that the US trade balance is not some "free trade scorecard" - any attempt to sell free trade through an exports-only focus will actually enhance Americans' suspicions, rather than alleviate them.  Americans simply will look at the trade deficit (which the US has held since the 1960s, so it's not like it's going away anytime soon) and think that we're "losing" at trade, and that our supposedly "reciprocal" FTAs stink.  Why?  Because the President told them that exports are the only thing that matter, and that the only reason that American companies aren't exporting more is because our trading partners are cheating by illegally denying US companies access to their markets (more on that below).

This is also the problem inherent in the President's attempts to build confidence that "trade is going to be reciprocal, that it's not just going to be a one-way street."  "Reciprocity" in a trade agreement implies that FTAs are "win-lose" endeavors.  We "win" by getting new export markets and "lose" by opening up our own.  And we need a balance between winning and losing for the FTA to be "fair."  Of course, nothing could be further from the truth - domestic liberalization is as big a "win" for the US economy, as is foreign market access for US exports.  And in a world of global supply chains, internet sales and lightning fast logistics, bilateral trade balances are increasingly meaningless (more on that here).  Yet through a demand for "reciprocity" and "balance" with our trading partners, bilateral trade balances ridiculously become "free trade report cards" - if, for example, a trade balance with an FTA partner doesn't result in total parity or a US trade surplus, then the American people will think that the FTA caused us to "lose" more than we "won."  And not only is that wrong, but it also guarantees that US support for free trade continues to stink.

Finally, the President's focus on increased enforcement reinforces two huge myths about global trade policy: (i) it's currently the Wild West out there, and (ii) our trading partners are cheating with impunity.  In closing his remarks, President Obama says that he supports trade, but that "it's gonna have to be trade that combines with an enforcement mechanism as well as just opening up our markets."  This is wrong in two key ways.  First, it clearly implies that there are no "enforcement mechanisms" in place right now, despite the fact that we have domestic "unfair trade" laws (antidumping, countervailing duty, safeguards, etc.), WTO dispute settlement procedures, and even bilateral dispute mechanisms in all of our FTAs.  Second, it implies that we're currently not enforcing the rules that are in place, when in reality there are literally hundreds of duties in force against "unfairly traded" foreign imports as a result of our domestic trade laws, and the US has successfully litigated or otherwise resolved dozens of cases at the WTO.

The President's statement also implies that our trading partners are cheaters, and that the only reason we're not exporting more is because they're illegally denying US exports access to their markets.  Yet while it's undeniable that some countries are engaging in illegal behavior, the reality is that such chicanery affects a tiny fraction of overall global tradeflows.  In our 2009 paper, Dan Ikenson and I calculated that the combined trade volumes affected by the current US anti-subsidy cases against China represented less than one percent of the entire US-China trade deficit.  So while "China cheats" made for a great soundbite, it certainly wasn't the driving force behind the bilateral trade relationship.  The same holds true for other markets - cheating simply doesn't define or drive global trade.

Because of this reality, relying on "enforcement" to sell free trade to the American people is a very, very bad idea.  Beyond the distressing fact that increased enforcement actions will antagonize trading partners (we're no market access angels, you know) and likely close markets rather than open them (retaliatory sanctions are often the end-result of unfair trade cases or WTO disputes), more cases and more "mechanisms" simply can't have a big effect on global trade balances.  So even if our trade deficits shrink a little because of heightened enforcement (unlikely), Americans will believe that our trading partners are still cheating (and that the United States stinks at enforcement) because the deficits won't have disappeared entirely, and because they've been told that cheating is the root cause of those deficits (and, of course, that those deficits are bad).

So we'll have increased trade tensions, decreased tradeflows, and maintained or even emboldened a still-suspicious electorate. A protectionist trifecta!

So where does this all leave us?  Well, I'm not going to indulge in any silly conspiracy theories implying that all of these missteps are the President's sneaky intent - I simply don't believe that the White House has developed a "free trade strategy" for the secret purpose of actually undermining free trade.  However, I think the above analysis makes it abundantly clear that the White House's politically-driven decision to sell trade through a focus on exports and enforcement is doomed to fail because it reinforces, rather than resolves, Americans' misconceptions about free trade and FTAs.

Unfortunately, I don't think that this strategy is going to change anytime soon.

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