Why Free Traders (and Policy Fans) of All Political Stripes Should Root for Paul Ryan

A few days ago, I examined Republican Vice Presidential candidate Paul Ryan's congressional votes on subsidies and international trade, and concluded that he had a pretty good, but not great, record.  But that unfortunate fact doesn't mean that I'm not rooting for the guy - I definitely am, and if you support better US trade policies or simply wish for political campaigns to focus more on real policy issues rather than stupid trivia, then you should too.

Regardless of your political affiliation.

In today's Wall Street Journal, the Hoover Institute's Robert Barro begins to explain what I mean by the bold statement above.  He first notes that "The level of economic commentary during the presidential campaign has not been high" - a disturbing fact that I've repeatedly lamented here.  Then, after quickly explaining the basic - and almost universally-accepted - economic truths about the overwhelming benefits of free trade (including outsourcing) and the undeniable harms of "socialistic" business subsidies, Barro discusses why Mitt Romney's selection of Ryan - most definitely not a vocal free trade zealot - matters for these issues:

With the addition of conservative thinker and budget expert Rep. Paul Ryan to the Republican presidential ticket, we can hope that the economic dialogue will become more serious. And perhaps this added substance will extend beyond the important issue of long-term fiscal reform to encompass the enduring but still crucial debate about socialism versus capitalism.

The post-Ryan political conversation thus far appears to be fulfilling Barro's hopes.  For example, earlier this week, the WSJ reported that Ryan's selection has set off a debate about the proper scope of government:

Amid growing complaints about the pettiness of American politics, the 2012 presidential campaign is turning into a far-reaching, big-picture debate over the size and scope of government.

Mitt Romney's choice of Rep. Paul Ryan of Wisconsin, an uncommonly assertive spokesman for free markets and small government, to be his running mate on the Republican ticket has highlighted the differences between them and President Barack Obama...

Until now, in a 2012 campaign bristling with negative attacks and accusations about the character of the two candidates, big policy choices have been eclipsed.

That changes with the selection of Mr. Ryan, author of detailed conservative budget plans that call for major changes to many social programs, offering voters a choice: Are welfare services a safety net, or can they breed dependency? Is Medicare a social contract with the elderly, or unsustainable and in need of repair? And will cuts in government spending hurt economic growth, or foster a more robust private sector?

Myriad stories along the same lines have emerged over the last few days, and it seems that almost everyone with a Twitter or Facebook account has seen or posted something about the Ryan plan, the budget, Medicare cuts or some other serious policy issue.  Contrast this with the last several months of soul-crushing, superficial "debates" about tax returns, Olympic uniforms, who ran Bain Capital and when, fast food chicken, dogs (on car roofs or dinner plates), and... well, you get the idea.  The level of election-related discourse has undeniably improved in the last week.

Now, I have no idea whether this improvement will last through November.  I actually think it will because both sides seem to think that the other's fiscal position is political kryptonite, but, frankly, it's not just the public budget and economics debate that has me rooting for Paul Ryan - it's what a Romney/Ryan victory would mean for the longstanding behind-the-scenes fight between policy advisers and political hacks, especially during campaign season.  As I've repeatedly mentioned here in the context of trade, that fight - one that I've unfortunately experienced firsthand - tends to go something like this:

Adviser: There is ample historical and empirical evidence showing that policy [X] is the superior  position from an economic and moral perspective.

Hack (briefly looking up from his blackberry): Umm, yeah, that's great, dude, but policy [X] polls poorly, and we're just not gonna take the risk in an important election year. On the other hand, the public just loves policy [Y], so we're gonna stick with that, even though we all know it's an inferior position.  Now if you'll excuse me, I gotta jet - need to meet [politician] at Morton's for a fundraiser.

Adviser (mumbling under his breath): I hope you get hit by a taxi.

I The adviser may or may not have said that last thing, but you couldn't really blame him if he did.  This debate plays out over and over in political offices and on related conference calls across the country: principled wonks want a political debate about important policy issues, but political consultants, armed with polls and focus group testing, are scared to death of "real" debates' repercussions and thus seek to avoid them like the plague.  So we're stuck with month-long political fights about whether Harry Reid's friend's cousin's dogsitter saw Mitt Romney's 1997 1040EZ - fights that, by displacing real policy discussions, prevent better public understanding of important issues and thus doom the political discourse to repeat its vicious cycle of vapidity over the next election cycle.

As a result, real policy solutions rarely, if ever, materialize.

This is precisely what's caused our dismal political discourse about international trade, and US trade policy has therefore suffered.  The debate over entitlement reform has faced a similar fate: the debts have mounted as the political can has been kicked down the road, and both parties' political cowardice is to blame.  With the Ryan pick, however, it appears that we'll finally have a substantive debate about the need for serious entitlement reform - an issue that, also like free trade, is politically risky but supported by ample economic evidence (see Barro's op-ed for a refresher course, if needed).  And while it's totally unclear whether a Romney/Ryan victory will actually ensure real entitlement reform, what seems clear is that it should have a serious impact on the future of America's political discourse.  If they win, the wonks finally have proof that forcing a real debate about real policy in the face of uncertain public opinion is not a political deathblow.  In short, it shows that the American people can, given the right message and the right facts, overcome their ignorance, sift through the demagoguery and vote for good policy instead of good hair.

If Romney/Ryan lose, however, the policy advisers - and the political discourse more broadly - are in pretty deep trouble for the foreseeable future.  In the aforementioned internal debate, the hacks will have not only those risky poll numbers, but also the following conversation-ending addendum:

"And you do remember what happened with Romney and that Ryan guy, right?  Yeah, that's what I thought."

And at that point, I will pack up my briefcase and move to the countryside, forever unable to turn on the TV for fear of watching yet another bipartisan assault on outsourcing or Medicare reform or whatever.  (Shudder to think.)

So I root for Paul Ryan.  He might not be the best free trader; he might not be my "perfect candidate"; and his victory might not even ensure a conservative solution to our real entitlement crisis.  But if he loses, lord help us, the hacks will have won, and our political discourse will get even worse.

And our TV-watching won't be the only thing to suffer.

Behold, the Utterly Dismal State of American Trade Politics

One of this blog's most frequent refrains is the argument that free traders in the United States - particularly those in the political sphere - need to drastically change course in order to restore the pro-trade consensus here.  Cato's Dan Ikenson and I have written not one, but two papers on this subject since 2009, each arguing that (i) protectionist positions mostly revolve around a few very-trite-and-easily-debunked myths about imports, the trade deficit, foreign competition and the US manufacturing sector; and (ii) the case for free trade is far deeper and broader than the standard pro-trade mercantilism that you most often hear in Washington DC.

Despite ample evidence and polling data supporting our views, it has become abundantly clear in this election cycle that almost no one on Capitol Hill, in the White House, or out on the campaign trail is listening.  In a great new Bloomberg op-ed, NRO's Ramesh Ponnuru (who, by the way, years ago authored one of the great takedowns of Public Citizen and their protectionist benefactor Roger Milliken) explains that DC remains populated by alleged free traders using the same old mercantilist arguments, and that those arguments appear to be increasingly self-defeating (and delusional):

Economists, or at any rate the vast majority of them, say nations should lower their barriers to imports because it promotes the efficient allocation of resources. That argument doesn’t depend on whether other countries are making trade agreements with one another. It doesn’t even depend on whether those countries have barriers against our imports. The theory suggests that if nations lower their barriers to one another’s imports, they will make more gains than if only one country does so. It also suggests that a country makes itself better off by lowering its barriers unilaterally. 

U.S. politicians who support free trade rarely make any such argument, and haven’t done so for decades. Instead they make mercantilist arguments for free trade, in which we must regrettably open our markets to foreign imports as the price for getting other countries to do the same for our exports. In debates over trade agreements, both sides typically accept the notion that imports are bad and exports are good. The question becomes whether the agreement will do more to boost imports or exports.

It isn’t uncommon for administrations that seek to liberalize trade overall to erect barriers for the benefit of this or that industry. The Bush administration briefly imposed steel tariffs to placate members of Congress from the Rust Belt. The Obama administration has placed tariffs on tires (at a cost of at least $900,000 for each job saved). This tactic fits comfortably within the political consensus for free-trade mercantilism. 

In recent years, the debate has narrowed still further because both sides have converged rhetorically. Protectionists in the U.S. do not advertise themselves as such: They say they favor free trade so long as it is fair. Free traders don’t wish to be portrayed as supporting unfairness, and so everyone calls himself a supporter of “free and fair trade.” 

Whatever its theoretical inadequacy, free-trade mercantilism has worked pretty well since World War II. It has enabled a vast expansion of global trade and thus of global wealth. But it is yielding diminishing returns as a strategy for liberalizing trade. Public support for open trade has fallen in the U.S. Majorities in the 1990s thought “the opportunity for economic growth through increased U.S. exports” outweighed the “threat to the economy from foreign imports.” They no longer do.

Ponnuru then concludes that the current mercantilist approach to trade has proven to be a "political failure," and that "the failure of almost anyone in politics to make the real and unequivocal argument for [free trade] has almost certainly been one" of the reasons why public support for it is in the crapper.

If this solid argument sounds familiar to you, it should: it's almost exactly what Ikenson and I argued last year as we explained just how pro-trade mercantilism "sows the seeds of its own destruction":

Many of trade's most vocal and active proponents in government and the private sector have relied too heavily and for too long on a faulty marketing strategy, which posits that more trade and more trade agreements mean more export opportunities, and more exports mean more economic growth and more jobs. The political appeal of that message is obvious, and there is nothing dishonest about it. Exports do contribute to economic growth, which is essential to job creation.

However, that message invites the following retort: if exports help grow the economy and create jobs, then imports must shrink the economy and cost jobs. In failing to explain why that conclusion about imports is wrong, trade proponents have yielded the floor to trade skeptics, who have been more than happy to manufacture talking points about the "deleterious" impact of imports on the U.S. economy. Most of those talking points are misleading or plain wrong, but there has been inadequate effort to correct the record. As a result, too many Americans accept the mercantilist fallacy that exports are good, imports are bad, and the trade account is a scoreboard.

The pervasive view that exports are good and imports are bad is a central misconception upon which rests the belief that trade negotiations and "reciprocity" are essential to trade liberalization. Under this formulation, an optimal trade agreement, from the perspective of U.S. negotiators, is one that maximizes U.S. access to foreign markets and minimizes foreign access to U.S. markets. An agreement requiring large cuts to U.S. tariffs, which would thus deliver significant benefits to consumers, would not pass political muster unless it could be demonstrated that even larger export benefits were to be had. This misguided premise that imports are the cost of exports and should be minimized lies at the root of public skepticism about trade. Ironically, it is also a prominent feature of the favored pro-trade argument.

We conclude by explaining how a more robust pro-trade message - one which focuses on the economic benefits of exports and imports and, more importantly, the moral case for free trade and against protectionism - can improve highly-malleable public opinion and help free trade advocates win the trade debate once and for all.

As noted above, however, no one seems to be listening.  Indeed, things appear to be deteriorating, as the presumptive leader of the pro-trade Republican Party, Mitt Romney, not only has taken the mercantilist route when advocating FTAs, but also has vocally embraced protectionism - at least when it comes to China.  I've already lamented Romney's troubling turn on China, but recent reports indicate that he has really been ramping up the rhetoric over the last few weeks.  First, his top spokespeople are being anything but shrinking violets on the issue:

Mitt Romney’s calls for confronting China as a currency manipulator, intellectual property thief and trade cheat are what distinguishes his economic vision from Republican orthodoxy, his top policy adviser said.

Lanhee Chen, policy director for the presumptive Republican presidential nominee, said while Romney’s plan for “robust” action to confront China on trade issues may be at odds with some in his party and Democrats, it is at the core of his strategy for improving the economy.

“Here’s a place where Governor Romney is really calling for a different approach, for example, confronting China on their currency manipulation, on their intellectual property stealing, on the barriers they put up really to competition from foreign firms,” Chen said in an interview on Bloomberg Television’s “Political Capital With Al Hunt” airing this weekend.

“This is really a path forward that will be quite different from” policies under Presidents Barack Obama and George W. Bush, Chen said.

Romney, 65, “has been in touch” with former Secretary of State Henry Kissinger, a China specialist who disagrees with Romney’s aggressive stance, Chen said, adding: “But look, the bottom line is, Governor Romney is going to do what it takes to get our economy going, including confronting China, and there will be some in both parties that will disagree with him.”

Video of Chen's aggressive comments are here.  And, speaking of video, the Romney campaign has cranked out several anti-China TV ads too:

Two of Mitt Romney’s first three television ads of the general-election campaign boast of how he’d stand up to China as soon as he becomes president...

On the campaign trail, Romney labels China’s leaders as “cheaters” and “currency manipulators.” His ads say the Republican nominee would be a president who “stands up to China on trade and demands they play by the rules.” He has vowed to issue,on his first day in office, an executive order labeling China a currency manipulator.

So, it's abundantly clear that Team Mitt will be yelling about China all the way through November (regardless of what the facts say).  At the same time, however, the article above makes clear that most observers - myself included - don't think that Romney will actually keep his anti-China promises if he becomes the next POTUS.  Indeed, BusinessWeek notes that, according to an unnamed source within the campaign, "all of Romney’s top advisers disagreed with the candidate’s vow to take a harder line on China with new tariffs and an official designation as a 'currency manipulator.'”  Thus, it's pretty clear that Governor Romney's position on China is intended to be a cynical political maneuver rather than a hard promise to impose new taxes on US consumers and to start a trade war with one of America's largest trading partners.  In that way, Romney's China pledges are pretty similar to President Obama's ultimately-empty 2008 promises to re-negotiate NAFTA.

But while Romney's position probably won't lead to the implementation of new protectionist policies if he becomes President (undeniably good news), Obama's similar protectionist proclamations in 2008 show us that such rhetoric is far from harmless.  Indeed, as Ikenson and I noted last year, historical data from Pew's annual survey of US views on trade show that American attitudes toward trade are shaped largely by what Americans hear from the media and their elected (or campaigning) officials:

The dramatic decline in pro-trade sentiment between 2007 and 2008 coincided with a U.S. presidential primary election campaign season in which the Democratic candidates routinely criticized U.S. trade policy and certain trade partners. Perhaps most memorable was the late-February 2008 debate at Cleveland State University on the eve of the Ohio primary, when the late Tim Russert extracted renunciations of NAFTA and pledges from candidates Hillary Clinton and Barack Obama to reopen and renegotiate terms of the agreement...

The results of the 2009 Pew poll... suggest that political leaders can indeed influence public opinion about trade. The greatest fluctuation in public support for trade between 2007 and 2009 came from self-identified Democrats — those paying most attention to the Democratic primary elections and President Obama's early speeches — with opposition swinging wildly from 37 percent in 2007 up to 50 percent in 2008 and down to 30 percent in 2009. Meanwhile, support among Republicans remained steady during this period, as the issue was almost nonexistent during the GOP primaries and rarely discussed by Republican nominee John McCain during the general election campaign.

Assuming that Romney's China-bashing speeches and commercials have a similar effect on the electorate in 2012, it's quite likely that public support for free trade will wane this year and into next.  Indeed, the harmful effects of Romney's message on US trade sentiment could be even bigger than in 2007-08, given that the Democratic party (including President Obama) routinely engages in protectionist pandering during election season, and Romney's position as the leader of the Republican party will certainly diminish the GOP's traditional pro-trade counterweight.

Thus, while Romney's political advisers may view his China-bashing as a harmless way to help pave the road the White House in 2012, President Romney and his team may arrive there in 2013 facing an trade-hostile US electorate that makes any major free trade policies too politically unpalatable to be undertaken.

And they'd have only themselves to blame.

So, if/when this all happens, does anyone actually expect the Romney administration to advocate its new trade proposals using anything except the same old, self-defeating mercantilist arguments?  I try to be optimistic - really, I do! - but it sure ain't easy.

So we'll probably do this all over again in 2014 and 2016 and, well, until we find a politician brave - and smart! - enough to ditch the mercantilism and adopt a new approach to trade based on the realities of today's global economy and the abject falsity and immorality of the anti-trade position.  Trust me, these politicians do exist (I've worked with them), but it's increasingly - and depressingly - clear that they won't be in the White House anytime soon.

Thinking Inside the Box on Trade

Former Minnesota Governor and GOP Presidential hopeful Tim Pawlenty delivered a rousing speech today on his economic vision for America.  The full text of the speech is here, and it's unsurprisingly receiving praise and sneers from the chattering classes (sometimes both in the same commentary).  His calls for a serious reduction in the corporate tax rate from 35% to 15%, the elimination of tax loopholes and a flattening of individual tax rates will certainly help improve American companies' global competitiveness (and attract foreign investment).  And his repeated call for reform of ethanol subsidies is, as I've already noted, not bad considering a lot of his current GOP primary competition.

But Pawlenty's stance on free trade was, well, utterly pedestrian::

Just as the federal government must break down barriers within our domestic markets. We must break down barriers in international markets.

Congress should ratify completed free trade agreements with South Korea — and Colombia. And complete the agreement with Panama. We should start new bilateral talks with our trading partners. To promote our exports.

President Obama set a goal of doubling exports. Yet his policies have prevented this. Mine will achieve it.

Ahh, yes, the political siren-song of mercantilism.  Grrreat.  Of course, this exports-good-imports-not-so-much position is in line with Pawlenty's previous statements on trade, as noted in the Club for Growth's handy primer on the candidate:

In an interview during a trade mission to China in 2010, Pawlenty said that “we all agree from an American perspective that the Chinese manipulation of their currency and pegging of it to the dollar is inappropriate and unfair.” In later comments, Governor Pawlenty did not rule out imposing tariffs on China.

Also, Pawlenty fought against lower trade barriers on sugar when CAFTA was being considered by Congress, and he was in favor of retaining the temporary steel tariffs imposed by President Bush.

While we understand the political considerations Pawlenty had in trying to protect his home state sugar beet industry, his support of trade barriers is equivalent to support of higher costs for consumers – both in Minnesota and across the country.

A 2011 MinnPost article described Pawlenty’s attitude towards trade policy this way: “Pass pending free trade deals with Colombia, Panama and South Korea while looking for more. And don’t be afraid to call out trading partners – China by name – when they don’t live up to their end of the bargain. ‘I’m for free trade, but I’m not for being a chump,’ he said to the approval of the crowd.”

Pawlenty's mercantilist message is, as the Club rightly notes, problematic from an economic perspective, and, of course, it contradicts the strong support for cutting most other types of taxes that the candidate outlined in his pro-growth speech today.  Furthermore, as Dan Ikenson and I noted in a recent paper, Pawlenty's exports-only trade message is also both unnecessary and counter-productive from a political standpoint.  In short, it's just the same old pablum.

Fairly or not, Pawlenty's been routinely characterized as an uninspiring "second-tier" candidate.  On some issues, his speech today might help the Governor shake that reputation, but his unoriginal stance on trade - one that fails to recognize the benefits of imports and the realities of a today's globalized economy, and that contradicts the rest of his pro-growth, low-tax message - sure won't.

New Study: More Trade = More Jobs

One of the big problems with the political debate over US trade policy is that politicians and much of the American public demand that trade policies be sold in terms of jobs, regardless of whether good data tying trade to employment actually exist.  Free traders typically refuse to speak of trade in terms of net-jobs-created because they know that basic economics teaches us that trade liberalization is really about better jobs, not necessarily more jobs.  Protectionists, on the other hand, rarely display such, ahem, economic limitations and are thus all too eager to cite bogus studies tying free trade policies to ridiculously specific numbers of lost American jobs.  (For a great example of this unfairly tilted political playing field, check out this classic column by AEI's Phil Levy on protectionists' absurd claims about supposed US job-losses caused by NAFTA.)

Thus, the typical exchange at a Congressional hearing (or your local watering hole) goes something like this:

Congressman/Bartender: Want to me to support this FTA?  Well, then tell me how many jobs it's going to bring to my district/town.

Naive free trader: Well, sir, free trade really isn't about creating more jobs, it's about productivity gains, creative destruction and better jobs, and, of course, it's about expanding the freedom of the American people to choose how and with whom they do business, rather than forcibly limiting that freedom in order to benefit a select group of well-connected producers and unions.

Angry Protectionist: The FTA will destroy 734.6 jobs.

Seriously, is it any wonder why the poll numbers on trade routinely stink?  Unfortunately, today's economic environment has exponentially increased the political pressure to tie trade (or any other) policies to specific job numbers, so the disadvantage that free traders face in the political arena is even more acute than ever.

That's why a new study in the European Economic Review called "Trade and Unemployment: What Do the Data Say?" could be a really great new resource for those seeking to advocate free trade policies using intellectually honest arguments.  According to the study's authors, there is strong empirical evidence that nations that trade more - through exports and imports - have lower long-term unemployment.  Here's the paper's abstract (emphasis mine):

This paper documents a robust empirical regularity: in the long-run, higher trade openness is associated with a lower structural rate of unemployment. We establish this fact using: (i) panel data from 20 OECD countries, (ii) cross-sectional data on a larger set of countries. The time structure of the panel data allows us to control for unobserved heterogeneity, whereas cross-sectional data make it possible to instrument openness by its geographical component. In both setups, we purge the data of business cycle effects, include a host of institutional and geographical variables, and control for within-country trade. Our main finding is robust to various definitions of unemployment rates and openness measures. Our benchmark specification suggests that a 10 percentage point increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point.

Did you get that?  Ok, me neither.  Fortunately, Reason Magazine's Ronald Bailey translates this nerdspeak into regular English for us regular folk:

[The study] forthrightly asks the question: Does exposure to international trade create or destroy jobs? Their answer strongly backs the observation made by Franklin more than 230 years ago. “A 10 percent increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point,” they conclude. To be a bit more precise, they find, “A 10 percentage point increase lowers the equilibrium rate of unemployment by about 0.76 percentage points.” Trade creates jobs.

In general, the higher a country’s volume of international trade, the higher is its degree of openness. Trade openness is generally measured by adding together the value of both exports and imports and dividing that sum by total gross domestic product (GDP). Crudely, let’s say an economy imports $10 billion annually and exports $10 billion annually and has a total GDP of $100 billion. That would yield a trade openness index figure of 20 percent. Another country with a GDP of $100 billion exports $15 billion and imports $15 billion, yielding a trade openness index of 30 percent.

Roughly speaking, U.S. GDP was $15 trillion in 2010, and exports and imports combined totaled just over $4 trillion, yielding a trade openness index figure of 27 percent. Without going into detail, the European economists derive a real trade openness index by taking differing price levels among countries into account.

The researchers then compare the relative trade openness of 20 developed countries in the Organization for Economic Cooperation and Development with their unemployment rates over time. They take into account other factors such as union membership, national employment protection policies, tax rates on wages, and the generosity of unemployment insurance....

The researchers go on to analyze the effect of freer trade on a selection of 62 developing countries. They take into account features like the size of the black market economy and whether a country is landlocked or not. Again, they find that openness to trade boosts employment, concluding that “the effect of a 10 percentage point increase in openness lowers unemployment by about 1 percentage point.”

So why does free trade create more jobs? The study suggests that freer trade boosts overall productivity, enabling companies to hire more workers. Trade enhances competition which weeds out inefficient firms and allows more productive ones to expand. As the average efficiency of firms in a country increases, they can earn more revenues by boosting production. And that leads to hiring additional workers.

In short, the study's authors have demonstrated through oodles of hard data that all the increased productivity and long-term economic growth caused by trade ends up eventually translating into not only better jobs, but also more jobs.  (And please note that trade deficits and surpluses don't matter - what does matter is total trade, regardless of the "balance.")

Pretty cool, huh?  Actually, it's more than cool - it's a very, very helpful little nugget for the upcoming congressional debate over pending US trade agreements with Korea, Colombia and Panama, which will doubtlessly increase total trade by eliminating barriers on goods and services traded between the countries involved.

Now, let's go back to our earlier hypothetical:

Congressman/Bartender: Want to me to support this FTA?  Well, then tell me how many jobs it's going to bring to my district/town.

Emboldened free trader: Well, sir, countries that trade more have significantly lower unemployment than those that don't, and this FTA will inevitably increase US trade with Korea/Colombia/Panama.  And, of course, free trade is also about expanding the freedom of the American people to choose how and with whom they do business, rather than forcibly limiting that freedom in order to benefit a select group of well-connected producers and unions.

Angry Protectionist: The FTA will, umm, destroy 734.6 jobs.  Hey, stop laughing at me.  Seriously, stop.  That's not cool.

Much, much better.

UPDATE: In a case of crazy coincidence, Cato's Dan Griswold just published a new blog post on the latest bogus "jobs" study.

Tuesday Quick Hits

Work's been pretty rough these last few days, but here are some quick hits to get you through the slower blogtimes:

• "Zeroing" took yet another hit last week: this time by the Court of Appeals for the Federal Circuit, which ruled last Thursday that the Department of Commerce needs to revisit its use of the WTO-illegal methodology in antidumping annual reviews because (i) DOC had abandoned the practice in investigations; and (ii) the US government had failed to offer a good (well, any) reason for the different approach in reviews.  WorldTradeLaw.net's Simon Lester offers some good commentary on the CAFC decision, and the WSJ rightfully applauds it: "thanks to statistical sleight-of-hand, American consumers have paid billions of dollars more over the years in higher prices either because antidumping duties raised prices on imports or because those duties sheltered domestic companies from downward price competition. This was bad economics, and now it turns out it was bad law, too. The World Trade Organization has dinged Washington repeatedly for zeroing. Commerce and Congress have done their best to avoid complying, at considerable expense to American credibility abroad. Most recently, Commerce attempted to stop zeroing for new antidumping investigations while keeping the practice for existing duties, to placate both the WTO and domestic protectionists. Last week's appellate court ruling puts an end to that charade by finding that under existing U.S. law Commerce has to either zero in all cases or zero in none. Since the department has abandoned zeroing for new investigations, there's reason to hope the Obama Administration will disavow zeroing entirely instead of searching for some way around a carefully reasoned and forceful appellate ruling."  Indeed.  I'd only add that the US courts have been the last refuge of America's zeroing proponents (i.e., protectionists) and their buddies in Congress, so the CAFC's latest decision must have them squirming something fierce this week.  And that thought makes me smile.

• Politicians of both parties are lining up in support of the US-Colombia FTA - a strong signal that the Obama administration could finally send the Agreement to Congress sometime soon (everybody likes a winner!).  Dem Senators Baucus and Kerry gave the FTA a nice (albeit mercantilist) plug in a recent WSJ op-ed, and the (admittedly dwindling) New Democrat Coalition in the House fired off a letter to the President calling on him to submit all three pending FTAs asap.  Meanwhile the US business community is also upping the pressure, as this US Chamber blogpost and Caterpillar ad make clear.  Eternal optimist Monica Showalter of IBD has gleefully noticed all of this news and notes something important on Facebook: "With Obama and Santos scheduled to meet Thursday, and Santos refusing up until this point to meet Obama unless there's free trade - I think it is going to happen."  A very insightful point, and I hope she's right, but I'll believe it when I see it.  (Although this announcement re: the Canada-Colombia FTA certainly adds more pressure on the USA.) [Update: Monica has more in this new IBD editorial.]

• Speaking of that Kerry-Baucus op-ed, Cafe Hayek's Don Boudreaux gives it "two cheers," and withholds the third because of something that I've been arguing here for a long time: "A third cheer would be in order had not the senators relied upon a wholly mistaken reason to justify this particular move toward freer trade. In their essay, U.S. imports and American consumers are mentioned a total of zero times, while U.S. exports and American producers (such as farmers, firms, and workers) are mentioned 23 times.... The senators’ argument for freer trade in this particular case undermines the larger effort to persuade the public that free trade is to everyone’s long-term advantage – an advantage that is measured by increases in what we’re able to consume and not by increases in what we must sacrifice."  Exactly!!

• Cato's Ted Galen Carptenter explains why China's inevitable rise to superpower status isn't so inevitable, and why the United States has a lot to say about it.

• The Mercatus Center's Veronique de Rugy explains something I already know and have known for a few years now: the Alternative Minimum Tax sucks and should be eliminated asap.  Mind-blowing fact: "Congress created the AMT in 1969 to prevent 155 wealthy taxpayers from using deductions and credits to avoid paying any federal income taxes....  According to the Congressional Budget Office, last tax season 4.5 million taxpayers were affected by the alternative minimum tax, an increase of more than 4 million taxpayers since 1970."  Sonova...

• The WSJ Asia pens an excellent editorial on how the Japan tragedies have clearly revealed just how dependent American businesses and workers are on imports in this modern era of global supply chains.  The whole thing is worth reading, but here's my favorite passage: "Despite the fears of Japanese products a generation ago, in reality those imports have allowed America to keep its place as the world's largest economy by a country mile. We hope someone on President Obama's economic team is taking note. Trade opponents can always point to the jobs they claim trade has "cost" Americans, but it's rarer to see such an obvious example of how Americans are hurt when trade is suddenly interrupted. The point extends to imports from everywhere. American auto-industry fears over car imports from South Korea have so far helped block ratification of a Korea-U.S. free-trade agreement. That bit of politics hurts Americans who would export to Korea under the deal, but it also hurts the Americans who would benefit from Korean imports. Such as, say, small businesses that use pick-up trucks and currently face higher domestic prices and less competition thanks to a 25% tariff on imported trucks."  Amen.

• Last week USTR released its annual national trade estimate (NTE) report on foreign trade barriers.  It's never anything earth-shattering (and involves a lot of cut-and-pasting from previous years), but it's still a good place to find the next US WTO dispute or two.  (If you don't mind wading through the chaff.)

• Paul Ryan: Stud.

Now that should keep you busy until I come up for air...

Well, That Didn't Take Long

On Sunday, your humble correspondent heaped a little praise on USTR for its rhetorical refocusing of the US Trade Policy Agenda from ridiculously-export-oriented in 2010 to only mostly-export-oriented in 2011.  In particular, the new Agenda actually had several passages which made clear and coherent references to the benefits of imports for US businesses and consumers - a welcome change for those of us who have been constantly complaining about the administration's absurd mercantilist positions over the last two-plus years.

Sadly, it appears that USTR's trade epiphany was rather short-lived.

Reviewing USTR Ron Kirk's prepared remarks before the Senate Finance Committee today, Steve Lamar points out over email:

Number of times Ambassador Kirk talks about exports – 7

Number of times Ambassador Kirk talks about imports – 1*

*Use of the word “imports” is in this context: “In December, the WTO upheld our right to take action to stop a harmful surge of Chinese tire imports...”

Aaaaannnnd we're right back to 2010.  I guess all it took was a little public/political scrutiny to put the new "free trader" version of USTR right back in the ol' mercantilist closet.  (Shocking, I know.)

On the bright side, I guess balance has been restored in the trade universe (or something).

Where Have All the Good Trade Salesmen Gone?

Among the videos that I posted last week in honor of President Reagan's 100th birthday was one of him defending free trade and denouncing protectionism.  After watching that video again, I'm re-posting it here because I was surprised by just how good Reagan's free trade sales pitch was back then, particularly considering the mercantilist speeches of our allegedly pro-trade politicians today and the fact that President Reagan, although he certainly supported free markets generally and sowed the seeds for both the WTO and the NAFTA, was hardly what you'd consider to be an unabashed ideological free trader (unapologetically documented here).



A transcript of the speech - a radio address to the nation from May 1987 - is available here.  In it, Reagan touts the benefits of both exports and imports and explains how free trade spurs competition, productivity and innovation.  He also rejects protectionism outright.  Here's the money paragraph:

When you hear talk about a tough trade bill, remember that being tough on trade and commerce, the lifeblood of the economy, will have the worst possible consequences for the consumer and the American worker. First, it will drive up the price of much of what we buy. But worse than that, it could drag us into an economy-destroying trade war. I'm old enough to remember the last time a so-called tough trade bill passed Congress. It was called Smoot-Hawley, and it helped give us, or at least deepened, the Great Depression of the 1930's. Well, the way up and out of the trade deficit is not protectionism, not bringing down the competition, but instead the answer lies in improving our products and increasing our exports. The Government should work to create the conditions in which fair trade will flourish. We should be trying to foster the growth of two-way trade, not trying to put up roadblocks, to open foreign markets, not close our own.

By Dan Ikenson's and my unreasonably high standards, Reagan's speech certainly isn't a perfect 10, most notably because he harped on the trade deficit and glorified "fair trade" (although in his defense, it's possible that the term "fair" hadn't become the four-letter word that it is today).  But the speech was still a good, solid 7.5, particularly given that the President's very first point was on the benefits of trade for American consumers, and that he mentioned removing obstacles to imports and the inevitably deleterious effects of global trade disputes.  And compared to most pro-trade politicians these days (whose singleminded, troublesome focus on exports earns them maybe a 5 on the Lincicome-Ikenson scale), Reagan's speech deserves more than a little love.

Exit question: Since Reagan's era, the United States has become far more globally integrated and the benefits of free trade are even more universally accepted among (and promoted by) American businesses and economists.  So if Reagan - who, again, was certainly not a free trade dogmatist - could avoid the self-defeating rhetoric of mercantilism when trying to sell free trade and denounce protectionist, then why can't today's elected officials at least do the same?  Why have our politicians' sales pitches regressed?

I have my theories, but they'll have to wait for another blog post.

New Cato Institute Paper: "Beyond Exports: A Better Case for Free Trade"

Dan Ikenson and I have a new briefing paper out tomorrow -"Beyond Exports: A Better Case for Free Trade."  In it, we argue that it's time for free trade advocates in government and the US business community to ditch their decades-old approach of selling free trade through a singleminded emphasis on exports and to take up a more well-rounded messaging strategy.  Here's the lead-in:

Despite trade’s benefits, American sentiment toward it is lukewarm in the best of times, and always vulnerable to manipulation by politicians and media charlatans looking to blame foreigners for domestic shortcomings. Before the end of this year, the 2012 presidential election campaigns will be in high gear—and trade has been a particularly dirty word in stump speeches and political debates in the past. Indeed, one of the reasons for the energetic trade policy push in 2011 is that the political environment next year is expected to be less hospitable to trade initiatives.

The fact that public opinion about trade is so malleable and arguments for restricting it so resonant at times speaks to a failure of free trade’s proponents to make their compelling message stick. It is sad but true that so many Americans need to be reminded of the benefits of being free to choose how and with whom to conduct commerce. But in an atmosphere where demagogues peddle myths to mislead the public into believing that it is preferable for government to limit their choices and direct their resources to chosen ends, it is crucial that the case for free trade be made more clearly, comprehensively, and consistently than it has been in the past.

Thus, in addition to securing the immediate goal of concluding and passing trade liberalizing agreements in 2011, advocates of trade in Congress, the administration, the business community, think tanks, academia, and among the general public should update their arguments and invest in the process of winning the trade debate once and for all. Some of the most compelling arguments for free trade have been only modestly summoned or absent from the discussion for too long.

Readers of this blog will find a lot of these themes familiar -  for the last two years, I've been regularly complainingblogging about the desperate need for US policymakers to revise their trade sales pitch.  Our new Cato paper crystallizes many of those arguments and backs them up with some good data.  The whole thing will be available here tomorrow morning.

Enjoy.

With (Trade) Friends Like These...

I've frequently lamented the attempts of many advocates of trade liberalization and FTAs to champion free trade policies through an exports-only, essentially mercantilist, approach.  Tonight's State of the Union Address - and protectionists' responses to it - perfectly demonstrate why my angst is well-deserved and why free trade proponents in Congress, the White House and the US business community need to ditch the mercantilism and adopt a new sales pitch.

Beyond the simple fact that there are myriad moral and economic arguments for open markets that are equal to or better than an export-centric approach, one of the biggest problems with a "free trade" message based only on exports is that it's completely self-defeating.  As I said last year when commenting on the President's post-State of the Union statements on trade to a group of GOP congressmen:

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.... 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....

Protectionists, of course, are more than happy to exploit this glaring vulnerability and, as I've noted many times here, they've tailored their trade-skeptical (and myth-filled) messages to prey on the public's misconceptions about trade - many of which are fueled by free trade advocates' shoddy trade salesmanship.

Case in point: President Obama's State of the Union sales pitch on the US-Korea FTA:

To help businesses sell more products abroad, we set a goal of doubling our exports by 2014 – because the more we export, the more jobs we create at home. Already, our exports are up. Recently, we signed agreements with India and China that will support more than 250,000 jobs in the United States. And last month, we finalized a trade agreement with South Korea that will support at least 70,000 American jobs. This agreement has unprecedented support from business and labor; Democrats and Republicans, and I ask this Congress to pass it as soon as possible.

The message here is clear: FTA = exports = jobs.  And while exports are certainly a fine and laudable goal, the immediate protectionist response to this argument is exactly as predicted:

• Whether trade creates U.S. jobs depends on net export gains and reducing the trade deficit, which our past policies have not done.
• U.S. export growth under past Free Trade Agreements (FTAs) has been less than half that to countries with which we do not have FTAs.
• The U.S. International Trade Commission's (USITC) official study of the Korea FTA that Obama will emphasize concluded that the deal would increase the U.S. trade deficit.
• Korea FTA's chief U.S. negotiator admitted it would not be a boon for U.S. exports.
• Beware of administration claim that the Korea FTA will "support" 70,000 jobs; the core question is what net effect the Korea FTA will have on U.S. employment.
• The Economic Policy Institute projects American job losses from the Korea FTA at 159,000.
• The December 2010 Obama supplemental Korea trade deal does not alter the increased trade deficit, job loss findings.
• The USITC study identified nine losing U.S. economic sectors that include many high-wage industries, including auto and electronics manufacturing.
• Beware of the administration claim that the Korea FTA could reduce the U.S. trade deficit.
• The auto manufacturing industry may lose a significant number of workers due to the Korea FTA.
• Lack of currency manipulation disciplines in the Korea FTA mean agriculture could also lose out.

Every single one of these arguments is based on the same old protectionist myths about imports, the US trade deficit, and the state of US manufacturing.  And, despite the fact that these myths (and bogus "stats" like those from the union-backed Economic Policy Institute) have been routinely debunked here and elsewhere, they unfortunately sound almost-plausible when cast against the backdrop of the President's mercantilist SOTU statements on exports and the US-Korea FTA (and, of course, other, similar statements from pro-trade members of Congress and the US business community).

Just as troubling is the fact that the anti-trade "response" above actually came out yesterday!  In short, the "pro-trade" message coming from the White House and Congress has become so stale and predictable that anti-traders don't even have to wait until after the message has been delivered before they respond with their tired, mythtastic talking points.  (It must be nice to get paid for repeatedly cutting and pasting the same old arguments over and over again, huh?)

Could you imagine if the President and other trade advocates ever changed their mercantilist tune and spoke about the benefits of both exports and imports?  Or if they defended each American's freedom to engage in voluntary, mutually beneficial transactions with whomever he or she pleases, regardless of the political boundaries involved?  Or if they denounced protectionism as a pernicious, regressive tax on American consumers designed to line the pockets of a few well-connected producers?  Or if they simply explained that the American manufacturing sector has resumed its decades-long rise and remains the world's largest, or that an expanding US trade deficit is closely associated with economic growth, or that 55% of all imports are capitol goods and equipment that American businesses use to remain globally competitive?

For starters, anti-traders' responses couldn't be mailed-in anymore; and they'd actually have to come after the President's remarks, not before them.  Maybe they'd come up with new arguments, but seeing the dreck that they currently peddle, I'm not so sure that they could.  And considering that they've been relying on the same tired playbook for the last twenty-odd years, it would definitely be fun watching them scurry to come up with new dreck for a change.

Crazy thoughts, I know.

Monday Quick Hits

There have been several interesting developments over the last few days, so let's get right to them:

• Eight weeks after the 2010 mid-term elections, the Obama administration, ahem, boldly announces that it has begun the process of looking into whether it will maybe start letting Mexican trucks onto US roads again.  The Transportation Department proposal is here.  The Teamsters are "deeply disappointed," and Mexico sounds pleased, so this is looking pretty good.  But let's be very clear here: nothing has changed yet.  Mexican trucks are still banned from US roads, and $2.4 billion worth of US exports will continue to face retaliatory Mexican tariffs - as they have since 2009 - until this agreement is finalized.  Today, USTR Ron Kirk and his Mexican counterpart Bruno Ferrari optimistically announced that it could be at least 4-6 months before the program begins (it apparently needs congressional approval), and Mexico will stop adding or removing products from its retaliation list.  Nevertheless, the tariffs will remain: "Once we have dates, time frames and the manner in which this Nafta mandate will be met, we'll present and discuss the process to lift the retaliatory tariffs," Ferrari said.

• Are things looking up for the US-Colombia FTA's prospects in the 112th Congress?  According to Inside US Trade, ranking member of the House Ways & Means Committee Sander Levin (D-MI) and Senate Finance Committee Chair Max Baucus (D-MT) separately have announced trips to Colombia over the next few weeks.  These visits will definitely give both top Democrats (and any others joining them in body or spirit) a new excuse to support the FTA, despite strong resistance from US labor unions and many, if not most, of their fellow Dems.  As you may recall, similar trips to Peru back in 2007 gave Levin and former Ways & Means chairman Rangel cover to support the US-Peru FTA.  On the other hand, supporters of the US-Colombia FTA shouldn't get too excited - the FTA remains organized labor's most-hated pending agreement; the White House still hasn't gotten behind the agreement (although the Daley Chief-of-Staff pick is a reason for optimism); and Levin and Baucus are some of the Democratic Party's more reasonable folks on trade, especially trade agreements that would boost automobile and beef exports.  Nevertheless, the Levin/Baucus trips are a good thing, and maybe, just maybe, they're a sign that the Democrats' absurd resistance to the Colombia FTA is fading.

• Martin Feldstein, former chair of Reagan's Council of Economic Advisors recently predicted that the US-China current account deficit should disappear in the next few years.  Today, China announced its 2010 trade balance, and its surplus is dramatically smaller than anyone was expecting.  "Chinese exports increased 31.3 percent last year as global demand recovered, but the extent of China's outperformance was underlined by a 38.7 percent jump in imports, fueled by its voracious appetite for oil, iron ore and other commodities." As a result, "China's full-year [2010] trade surplus was 38 percent lower than its pre-crisis peak of nearly $300 billion in 2008."  I've repeatedly cautioned that global supply chains now limit the predictive value of these trade stats.  Nevertheless, it appears - on the surface at least - that some changes are afoot.

• The Daily Caller reports that the United States is missing out on being a big exporter of, wait for it, horse meat.  But because of a 2007 USDA rule that effectively banned the slaughter of horses, the 1 billion global consumers of horse meat get their food elsewhere.  Oh, and here's a real shock: the "saved" American horses apparently suffer far worse fates than the slaughterhouse, and they're causing serious environmental problems in several Western states.  And the Law of Unintended Consequences wins again.

• Politico: "Leaders of 1,655 companies and associations sent letters this week to ever member of Congress pressing for passage of all three pending free trade agreements (Korea, Colombia, Panama). House letter: http://politi.co/gGKSkb Senate: http://politi.co/gsIam3."  Me: please note the letters' typical overemphasis on exports.  Sigh.

• New research shows that bank deregulation had a significant, beneficial effect on income inequality.  Says Cato's Mark Calabria: "[W]e need to examine banking regulation/deregulation as it actually occurs and is implemented, and not how we believe some all knowing, benevolent government would impose it. The odds seem to me that the more extensive is banking regulation, the more likely it is to be captured by economic elites and narrow interests."

That's all for now.  Happy reading.  (And Go Ducks.)

Selling Trade in the 21st Century

Frequent readers of this blog (all six of them!) know that one of my many pet peeves is the attempt by supporters of free trade to try to sell it to the general public using a mercantilist, exports-only approach.  As I've explained ad nauseam, not only is this approach unnecessary in a 21st century global economy, but it's also self-defeating:

This approach - championed by Republican and Democrat administrations alike - is one that focuses almost entirely on expanding US exports, while completely ignoring the proven benefits of imports and foreign investment for US businesses and consumers. And it is manifest in America's insistence on "reciprocal" trade negotiations with other countries - a decades-old system in which the United States only agrees to open its markets if our trading partners open theirs too. Of course, this outdated system (and the United States' blind commitment to it) reinforces the idea that exports are good, and imports are the bad things that we must reluctantly accept in order to gain new export markets.

The reality, of course, is that both exports AND imports are good, and there are mountains of empirical and anecdotal evidence supporting this central truth - especially in this modern era of global supply chains and multinational investment. But when our leaders' attempts to sell trade focus only on exports, and when "reciprocity" becomes the central tenet of national trade policy, the obvious, yet completely wrong, implication is that the trade balance (exports minus imports) is a "scorecard," and that a trade deficit (more imports than exports) means that we are "losing" at trade. And, sadly, this false implication is readily manipulated by protectionists seeking to restrict global trade (and, by extension, individuals' right to voluntarily engage in, and benefit from, it).

More discussion of this fact is here, here, here and here - did I mention this was a pet peeve?  Thus, you can imagine my consternation when the well-intentioned folks at the US Chamber of Commerce released their Top 10 Reasons Trade is Good for America, and it focused almost entirely on exports.

Here we go again.

Fortunately, Cato's Dan Ikenson saved me a lot of time and effort and provided a fantastic amended version of the Chamber's top 10 list.  Dan's edits are in bold:

1. The United States is the number one manufacturing nation in the world, and that success depends on exports. And since over half of the total value of U.S. imports consists of “intermediate goods” (products that are used as inputs for further value-added activity), manufacturing success also depends on imports.

2. The United States is the world’s number one services exporter and has been since services trade data have been tracked. And one of the reasons that foreigners are able to purchase American services is because they have been able to earn dollars by selling goods to American businesses and consumers.

3. U.S. agricultural exports support nearly a million jobs in the United States. And, agricultural and manufactured imports have made life’s necessities and conveniences more affordable to hundreds of millions of Americans.

4. 95 percent of the world’s consumers lives outside the United States... as do 95 percent of the world’s workers, who produce many of the goods Americans consume as imports less expensively than Americans can, freeing up U.S. resources for investment, innovation, and consumption of the higher value products and services that Americans produce.

5. FTA countries purchased more than 40 percent of U.S. exports in 2009. And imports from those countries have helped extend families’ budgets and reduced the costs of production for U.S. business relying on inputs from those countries.

6. Since the creation of the WTO in 1994, U.S. exports of goods and services have doubled to more than $1.5 trillion. And real U.S. GDP has increased by 50 percent.

7. Imports support millions of U.S. jobs in retail, research, design, sourcing, transportation, warehousing, marketing and sales... and in manufacturing.

8. U.S. exports to China have quadrupled over the past 15 years, and China is now the 3rd largest market for U.S. exports. And U.S. imports from China, too often wrongly portrayed as evidence of U.S. profligacy or decline, have enabled U.S. industries that require access to lower-cost labor for economic viability to be born, to blossom, and to spark the advent of new products and industries.

9. U.S. companies with overseas investments account for 45 percent of all U.S. exports. And foreign companies operating in the United States employ 5.6 million Americans, support a payroll of $408.5 billion, provide compensation that is 33% higher than the U.S. average, account for 18% of U.S. exports, pay U.S. taxes, support local charities, and act as investment magnets in communities across the country.

10. Trade supports 38 million jobs in the United States–more than one in five American jobs. And most Americans enjoy the fruits of international trade and globalization every day: driving to work in vehicles containing at least some foreign content; talking on foreign-made mobile telephones; having extra disposable income because retailers like Wal-Mart, Best Buy, and Home Depot are able to pass on cost savings made possible by their own access to thousands of foreign producers; eating healthier because they now can enjoy fresh imported produce that was once unavailable out-of-season, etc.

Great stuff, and certainly worth repeating at every possible opportunity.  But if you ask me, what's as great or greater is Dan's rock-solid reasoning for trumpeting his amended top-10 list (beyond the basic economics, of course):

Informing new members and reminding old of the benefits of exports to U.S. businesses and workers is clearly a worthwhile objective of the Chamber, the business community, and really anybody interested in economic growth. But in some respect there’s a preaching-to-the-choir element in that approach. You’re not going to find too many policymakers opposed to exports, and the administration has constructed a whole new bureaucracy devoted to the proposition that exports should double in five years.

Where the trade agenda has stalled (and where it always has problems) is on the rough terrain that—for lack of a better catchphrase—might be called “rationalizing” imports. That’s been the hard part of trade adovcacy over the years: “We had to cede some access to our markets, but look what we got in exchange!”

In pitching the very same bilateral trade agreements two and three years ago that the business community is pitching today, then-USTR Susan Schwab liked to remind Congress that the United States had an aggregate trade surplus with the countries with whom the Bush administration had concluded free trade agreements, as though that were the appropriate success metric. “We export more to them than we import from them; let’s call this a triumph!” But anyone inclined to accept that statistic as conclusive could simply visit the Commerce Department’s website and see that, at the time, our overall trade account was in deficit by about $800 billion. Thus, if “exports minus imports” is the measure by which we judge the benefits of trade, then America should shun trade entirely. That sales approach doesn’t seem to be in short- or long-run equilibrium. Mercantilist arguments only ensure that every step forward on trade requires a full-fledged battle. We need better—that is, more comprehensive—salesmanship of trade for the new Congress.

Yes, yes, yes and yes.  As Dan notes, and as I've said repeatedly here, a winning trade sales pitch includes the economic benefits of both exports and imports, as well the basic and obvious morality of free trade (and, by extension, the immorality of protectionism).  Indeed, in a modern political climate increasingly skeptical of Big Government and crony capitalism, the latter moral arguments are probably the most compelling of all.  Otherwise, we're just repeating the same old losing arguments which cede almost the entire playing field to the other side.

Until the well-intentioned folks in Congress, the US business community and elsewhere understand these very simple facts and begin to embrace a smarter trade marketing strategy, a majority of Americans will never buy what free traders are selling.  And after decades of trying - and failing - to market free trade through mercantilism, it's not like we could do any worse.

The Awful (and Utterly Predictable) Results of an Exports-only Approach to Selling Trade

A recurring theme of this blog is my repeated attempts to convince free traders (all five who read this blog) that the current mainstream approach to selling free trade is a dead loser, despite the overwhelming economic support for the good guys' side of the debate.  This approach - championed by Republican and Democrat administrations alike - is one that focuses almost entirely on expanding US exports, while completely ignoring the proven benefits of imports and foreign investment for US businesses and consumers.  And it is manifest in America's insistence on "reciprocal" trade negotiations with other countries - a decades-old system in which the United States only agrees to open its markets if our trading partners open theirs too.  Of course, this outdated system (and the United States' blind commitment to it) reinforces the idea that exports are good, and imports are the bad things that we must reluctantly accept in order to gain new export markets.

The reality, of course, is that both exports AND imports are good, and there are mountains of empirical and anecdotal evidence supporting this central truth - especially in this modern era of global supply chains and multinational investment.  But when our leaders' attempts to sell trade focus only on exports, and when "reciprocity" becomes the central tenet of national trade policy, the obvious, yet completely wrong, implication is that the trade balance (exports minus imports) is a "scorecard," and that a trade deficit (more imports than exports) means that we are "losing" at trade.  And, sadly, this false implication is readily manipulated by protectionists seeking to restrict global trade (and, by extension, individuals' right to voluntarily engage in, and benefit from, it).

This overly long introduction leads us to the dreadful CNN piece below, which first aired this morning.  The segment - part of CNN's "broken government" series - highlights the critical and fundamental flaws with the conventional attempts to sell trade by focusing on exports and ignoring import benefits.



There is so much wrong with this piece that it's difficult to find where to begin, and I probably could write a novel critiquing it (pathetic, I know).  But for now, I'm just going to focus on the "assumptive close" that provides the basis for the entire CNN piece: the trade deficit is an awful thing, so what can government do to stop it?  As I've discussed repeatedly, this "fact" is patently false, but the folks in the piece who are supposedly there to "defend" free trade - USTR Ron Kirk and a Maryland small businessman - speak only of boosting exports and never of imports' value to the US economy.  As such, they utterly fail to refute host Carol Costello's incorrect introductory assumptions about the US trade deficit.  Instead, their "solution" to the trade deficit "problem" is just more exports.  This, of course, will lead most viewers to simply conclude that as long as we have a trade deficit, US trade policy and free trade more generally are bad for the United States.  And since that deficit isn't going anywhere anytime soon, public support for free trade (and politicians' willingness to resist protectionist lobbying) will never improve - especially when the "bad guys" are out there preying on the trade deficit and misleading the public about its allegedly deleterious effects.

But don't just take my word for it.  Here's part of an email that I received today from the anti-trade group Public Citizen's Global Trade Watch, one that's just chock-full of protectionist myths (internal links are mine and will debunk each myth highlighted):

The USTR website lists official sources and then only the Chamber as authorities for trade data - no universities, no unions -- just the country's main corporate lobby!

And the Chamber's website is just wrong. It covers only the impact of exports on jobs. Totally missing from the Chamber's site is any mention of the harmful effects of the massive trade deficit that has accrued since its beloved NAFTA, WTO and similar trade deals went into effect. (That would be a trade deficit going from $25 billion in 1993 to $263 billion in 2009 with NAFTA countries alone).

Government data show we have lost one out of every four manufacturing jobs since NAFTA and the WTO. These are not contested numbers. But the Chamber of Commerce's site makes no mention of the over 5 million manufacturing jobs that we've lost out on due to our deficit-inducing trade policy.

Now, I've gone over all of the myths that GTW is pushing here (and the links will do it again), so there's no need to re-cover that ground here.  Instead, I just ask one simple question that I think proves my point: how can a free trade policy that focuses only on exports ever refute such deficit-driven myths and recapture American support for trade?

The quick answer: it can't.  And until US trade policy and free traders' arguments change, GTW will keep lying, CNN will keep getting away with lazy, wrongheaded "journalism" like the segment above, and the American public will keep worrying about free trade.

I think it's time for a change, don't you?

The Perils of "Reciprocal" Trade Policy

A few days ago, I opined that the United States' use of "Buy American" protectionism as a negotiating crowbar to pry open Canada's own procurement market was a "very, very dangerous" move.  Little did I know that it was actually a precedent-setting event.  Here's Inside US Trade (subscription) with the depressing details:

Following a meeting with Mexican officials, U.S. Trade Representative Ron Kirk this week announced that he has offered Mexican officials to explore a reciprocal procurement deal by which Mexican firms would have access to U.S. government procurement contracts subject to Buy American provisions, provided that Mexico offers reciprocal access to U.S. firms.

This would be akin to an arrangement that the U.S. worked out with Canada last week, Kirk said in a Feb. 9 press conference following a two-day visit to Mexico with Deputy U.S. Trade Representative Miriam Sapiro.

He described the U.S.-Canada arrangement as reciprocal, giving U.S. businesses access to provincial procurement in exchange for Canadian firms bidding on procurement subject to Buy America provisions in the 37 states covered by the Government Procurement Agreement....

“We have committed to work with Mexico in a similar way [as Canada] if Mexico believes that is something that Mexican businesses are interested in pursuing,” Kirk said. “We would welcome the opportunity to have further dialogue and negotiations with the minister of economy to fashion the right program if Mexico so desires.”...

I've commented a few times about why "reciprocity" should not be the goal of free trade policies or trade negotiations, but it's mostly been in the context of "selling trade": the model reinforces the dangerous public misconception that imports are bad, because it - against all empirical evidence to the contrary - posits that our markets should be liberalized only if we get new export market access in return.

But the US-Canada and the US-Mexico negotiations also raise another serious problem with the "reciprocity model" - it implicitly justifies, and even advocates, protectionism.  In this case, we have the United States Trade Representative loudly trumpeting a blatantly protectionist measure - Buy American - because his team was able to use it to open Canada's procurement market, and now they're moving on to Mexico.  The logical extension of this policy is as simple as it is dead wrong: if this Buy American protectionism opened Canada's market, we should raise other barriers to foreign goods and services as a way to get other countries to give us market access!  Never mind that such barriers - as did Buy American - would punish US businesses and consumers and harm the US (and global) economy. And never mind that domestic liberalization benefits the economy regardless of what other countries do.  Nope.  We only open our markets when you open yours.  Ugh.

Of course, the absurdity of Kirk's "reciprocal protectionism" logic is easily exposed when one simply extends it to the Nth degree (Bastiat would be proud).  Just ask: Would the USTR ever advocate raising all US tariffs to their maximum allowable ("bound") rates under WTO rules as a way to then "negotiate" lower tariffs or other market access from our trading partners?  Just as with Buy American, the plan would be consistent with America's "international obligations."  And just like the US-Canada deal, those negotiations could result in "reciprocal arrangements."  But the new protectionist bargaining chips also would mean massive tax increases for American families, dramatic cost increases for American businesses, huge declines in foreign investment (as we commit economic suicide), and probable retaliation from our trading partners.  So USTR Kirk would never propose that.  He'd be laughed out of the room (unless that room was full of union leaders, of course).

And yet he justifies, and even praises, a little Buy American horse-trading because it's "reciprocal" and is now looking for other "reciprocal negotiations" with Mexico?  That's just silly.

As I said last week, "Buy American has been a complete debacle. It has stymied economic growth here at home and encouraged tit-for-tat protectionism abroad. To applaud anything but its complete dissolution is absurd, and to applaud its use as a tool in trade negotiations is very, very dangerous."

Unfortunately, it looks like that "danger" is also very, very real.

Obama Trade Policy: A Simple Explanation

If you're looking for a simple reason for why US trade policy has moved from the White House's backseat to its trunk, look no further than a new Financial Times piece on the four key advisers driving the President's priorities and policies:

Pundits, Democratic lawmakers and opinion pollsters offer a smorgasbord of reasons – from Mr Obama’s decision to devote his first year in office to healthcare reform, to the president’s inability to convince voters he can “feel their [economic] pain”, to the apparent ungovernability of today’s Washington. All may indeed have contributed to the quandary in which Mr Obama finds himself. But those around him have a more specific diagnosis – and one that is striking in its uniformity. The Obama White House is geared for campaigning rather than governing, they say.

In dozens of interviews with his closest allies and friends in Washington – most of them given unattributably in order to protect their access to the Oval Office – each observes that the president draws on the advice of a very tight circle. The inner core consists of just four people – Rahm Emanuel, the pugnacious chief of staff; David Axelrod and Valerie Jarrett, his senior advisers; and Robert Gibbs, his communications chief.

Two, Mr Emanuel and Mr Axelrod, have box-like offices within spitting distance of the Oval Office. The president, who is the first to keep a BlackBerry, rarely holds a meeting, including on national security, without some or all of them present.

As anyone who follows US politics or understands Public Choice Theory can tell you, free trade - with its diffused benefits, concentrated harms, media fearmongering and foreign bogeymen - is not a big political winner here in America.  It constantly polls poorly, and most mainstream approaches to "selling trade" to the American public not only are tepid, but also can end up reinforcing, rather than assuaging, free trade criticism and concern.  As such, Presidents must have a principled dedication to trade liberalization policies in order to be willing to expend the political capital necessary to promote and implement those policies. (This is why Dan Ikenson and I spent 50 pages last year trying to forge a new approach to selling trade in America - too bad the President didn't listen.)

So if this team of Chicago politicos - with little or no dedication to, or understanding of, free trade and its myriad benefits, yet fully aware of its political problems - is really driving the President's policy choices, and if the administration's principled free traders (like Geithner, Goolsbee, Summers and Roemer) are locked in a West Wing closet somewhere, is it any wonder why US FTAs languish, the WTO's Doha Round sits without an semblance of American leadership, and our trade policies reflect a failed-yet-politically-safe mercantilist outlook?

(If you're still wondering about the answer to that question, just think back to 2007-08 and Candidate Obama's stance on NAFTA.)

Selling Trade, Ctd.

As if on cue, Michigan Governor Jennifer Granholm went on CNN this morning to discuss President Obama's new trade initiative and to explain away her administration's dreadful, job-killing policies by - you guessed it - scapegoating free trade (start at about 1:00):



In her attempts to blame Michigan's record unemployment on free trade, Granholm hits on many of the standard protectionist myths: (1) we don't manufacture anything anymore; (2) manufacturing job losses are due to import competition; (3) our trade agreements are unfair and unbalanced, and (4) our trading partners cheat. The only thing she didn't do was rail against the trade deficit (but maybe that's in the director's cut). Of course, one must wonder why a state like Texas didn't get hammered by the same "awful" trade policies, but that's a blog post for another time.

For now, let's focus on President Obama's new plan to sell free trade across America by focusing on increased exports and enforcement, while completely ignoring imports and the true state of US manufacturing and manufacturing employment.  How exactly will that strategy silence Granholm and her fellow protectionists when it implicitly reinforces the very myths that they recklessly perpetuate?  And what will happen if/when the US trade deficit - showing that we import more than we export - doesn't magically disappear?

(Answers: it won't, and it'll make things worse.)

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.