Reshaping US Trade Policy in a Globalizing Economy
Prepared remarks delivered at a Peterson Institute for International Economics event
For weeks, we've heard the same call from a host of Republicans urging immediate action on every pending free trade agreement (FTA). Ironically, they are willing to hold up the most economically significant agreement-South Korea-until they get their way on all of the FTAs.
It's the same rhetoric that's been in place for years, even decades. And it reflects an outdated model of trade that fails to meet our greatest challenge in the 21st century:
The 1990s saw developing countries-with very different economic structures than our own-get into the act. The pace of globalization quickened and brought with it expanded opportunities and new challenges.
The conventional model-"free trade"-is based on the notion that nations are at very different levels of development and have advantages that make trade more attractive. More trade will work out to be complementary and invariably better, the theory goes, and when there's competition, the automatic response will be economic activity at a higher level.
Globalization has challenged the very premise of this model.
Now relations between economies shift very quickly. What was complementary can rapidly become competitive. The basis for competition can be quite quickly altered. A developing economy can become quickly competitive in key sectors, with similar products produced under very different conditions. Dominance in technologies can become overcome quite rapidly. Advantage can be dwindled (and sometimes swindled) in a short-time span. Business enterprises more and more are becoming multinational, shifting operations to nations other than their original base, and sometimes competing with operations in that base.
The Clinton Administration began to grapple with this new international economic dynamic. During the course of the Clinton presidency, I believe we began to see a shift in approach from the old model to a new model.
The Clinton administration negotiated a structure for China's entry into the World Trade Organization (WTO). I was among those who felt that on balance it was better that China join the WTO as a step toward its acting within a rule-based structure. At the same time, it was vital that the granting of the necessary Permanent Normal Trade Relations (PNTR) recognize that China possessed a large, different economic structure, and PNTR must contain provisions to hold China to its commitments.
As a result I joined with Doug Bereuter to insert into PNTR several provisions to assist active enforcement of China's obligation to a rule-based system. These included an annual review at the WTO and a new safeguard to guard against import surges, as well as a Congressional-Executive Commission on China.
When President Bush took office, I urged his administration to build on this progress in developing a new model of trade for the globalized economy. Instead they turned back the clock and returned to the old model. Their perspective was a form of trickle-down trade economics where the assumption is that over time everything works out and adjusts.
As a result there was a strong tendency toward weak enforcement. The Bush administration allowed China to essentially nullify the effect of the provisions placed in PNTR by making a mockery of the WTO annual review and by refusing to act in four Section 421 cases where the International Trade Commission recommended relief to remedy harm caused by a surge of Chinese imports.
Also in a step towards a new model, the Clinton administration acknowledged the relationship between worker rights and trade and competition. They negotiated a ground-breaking textiles agreement with Cambodia that included positive incentives in the form of increased market access for Cambodian products when progress was made on worker rights, and the inclusion of worker rights in the core of the US-Jordan Free Trade Agreement.
But here again Republicans turned back the clock and reflexively dismissed the worker rights issue as "social issues" or as an issue basically of concern to US labor unions and thus a clash between American business and labor.
But this perspective misses the fundamental role of workers in a country's economic development. Workers must have basic rights if they are going to improve their financial standing and climb the economic ladder. This is not only vital to individuals and their families; it is critical to reducing poverty and the development of a country's middle class. Ironically it is an important route both to creating a robust domestic market and expanding trade. What's more, when we are integrating the US economy with that of a developing country, it is important to our businesses, which need consumers to buy their goods and services. It's important to US workers, who should not compete with workers whose rights are suppressed, or who are killed in the exercise of those rights.
The issue of including worker rights in trade agreements came to a head in negotiations of the US-Central America Free Trade Agreement.
The Bush administration had insisted in the 2002 Fast Track law that the standard for worker rights had to be "enforce your own law," no how matter how out of compliance a country's laws were with international standards.
During the CAFTA debate, I travelled to the region, visiting Guatemala, El Salvador, and Nicaragua to get a first-hand look at conditions on the ground. It was apparent that none of the countries afforded workers their basic rights and enforcing existing labor laws would not fix the problem. Passage of CAFTA would more likely than not lock in existing economic inequality rather than help foster the growth of the middle class and all the benefits that are associated with such growth.
CAFTA was approved in the House by a two-vote margin-only after the 15-minute vote was held open for over an hour. A nearly united House Democratic Caucus stood in opposition to CAFTA with this "enforce your own law" standard and illustrated our recognition that international labor standards were one of the central points in the new model we were creating.
When we took the Majority in the US House in 2007 we insisted on changes in the labor, environmental, investment, and intellectual property sections of the pending FTAs.
As a result, the Peru FTA reflected a new model for trade:
- On labor, the FTAs include a fully enforceable commitment that FTA countries will adopt, maintain, and enforce in their laws and practice the five basic international labor standards, including freedom of association and right to collective bargaining.
- On environment, the FTAs include a fully enforceable commitment that FTA countries adopt, implement, and enforce in their laws and practice obligations under seven common major multilateral environmental agreements. Additionally, specifically for Peru, a fully enforceable Annex was drafted requiring Peru to take major specific steps to crack down on illegal logging devastating the Amazon.
- On investment, the FTAs include language explicitly stating that foreign investors in the United States will not be accorded greater substantive rights with respect to investment protections than US investors in the United States.
- And on medicines, to allow generics to enter the market more quickly, the "data exclusivity" provision in the FTAs was modified and a public health exception added.
Chairman Rangel and I were pleased to travel to Peru to work with President Garcia to confirm these changes. At the time, the Peruvian President stated that the amended FTA represented a "New Deal" for international trade.
When we completed work on the Peru FTA and announced our support for it, we made clear this did not indicate support for the Korea, Colombia, or Panama FTAs, as negotiated by the Bush Administration. Each had outstanding issues that needed to be resolved.
Let me first touch on Colombia.
Colombia is important to the United States. As is well-known, it is a major source of drugs in the United States. It has a democratically elected government in a vital part of Latin America-a region the United States has far too often neglected. And under Andean Trade Preference Act (ATPA) and Generalized System of Preferences (GSP) many Colombian goods are normally exported duty-free to the United States, while American companies face tariffs in that market.
In April 2009, and again in January of this year, I went on six-day fact-finding trips to Colombia. In over 60 meetings in Colombia, I had the chance to talk firsthand with business representatives, NGOs, and workers in a wide variety of fields as well as with an array of government officials at various levels, including top Colombian leadership.
These were some of the key facts:
In Colombia, where violence against workers has occurred for decades, there were considerably fewer murders and less violence, but still the highest levels in the world.
While there had been some progress in combating the wholesale impunity from punishment for crimes of violence, there had been limited progress even on the small number of cases that had been selected by consensus as key cases. For instance, as of July 2010, only three of the 42 union murders in 2008 had resulted in a conviction. The new Prosecutor General recently conceded, "the administrative disarray is terrible." Because there is no accountability, violence can persist.
As reported in State Department Reports and ILO findings, in the laws in critical areas and decisively in practice, workers are not able to exercise their basic international rights, in particular their right to organize and bargain collectively. Even when there is a union, under Colombian law employers can deal directly and enter into individual private contracts. And there has been a massive expansion by employers of creating so-called associated co-operatives, leaving the vast majority of workers without a voice in their workplace.
Throughout both trips, I met workers who were denied basic rights.
- I met a single mother working in the flower sector who had not been paid in two months and her benefits had not been paid for six months. She works for a family that owns a number of fields but incorporates each separately to inhibit a worker's ability to associate and bargaining collectively. Three-quarters of the flowers picked by workers in Colombia are shipped to and bought here in America, and some of our domestic flower growers compete with Colombian companies.
- I met a dockworker who brought a chart showing four or five entities, including cooperatives and subcontractors, used to eliminate a direct employment relationship between the worker and the company that operates the port. Most of the ships loaded by workers in Colombian ports come to our nation. There are American companies that produce in Colombia to ship back to our nation.
- During my first trip, I met with 50 sugar cane workers in Cali. Only five or so were directly employed by the owner of the field in which they work; the rest were hired through so-called cooperatives with no labor rights under Colombian law. Many were shuffled among different fields often working longer hours than allowed under Colombia law. One brought his pay stub, and when broken down from all the charges, he was making little more than a dollar a hour. Colombian sugar cane is exported to the United States, albeit in restricted amounts.
For several years, we made clear to the Colombian government that changes to its laws needed to be made to bring them into compliance with international standards including the areas discussed above before the FTA could be considered. Unfortunately, little action was taken by the Colombians during these years.
What is different now-very different-is that the Santos administration is expressing a determination to address conditions affecting the role of workers and their basic rights.
US-Korea Free Trade Agreement
Another key component of a new model of trade policy is active insistence on replacing one-way with two-way trade.
Korea has stood as one of the most closed markets to industrial goods in general and automotive in particular. The US trade deficit with Korea was persistently over $10 billion, 75 percent or more of which resulted from the automotive sector. Korean manufacturers of vehicles and parts had completely open access to the US market, but through use of ever shifting regulatory and tax measures and techniques, American manufacturers were shut out. Korean companies shipped 500,000 vehicles each year to the United States, while America shipped 1 percent of that total. There was a nearly total one-way street on other industrial products, including refrigerators.
We had made clear in constant discussions with the Bush administration that a bottom line must be tight provisions that would assure the opening of the Korean market for American manufacturing.
Specific ideas were dismissed as proposing "industrial policy." The irony is that it was Korea that had a comprehensive industrial policy-a policy that sheltered its markets so its producers could charge more without competition from the United States and use the profits to penetrate the American market.
There were pleas from Republican colleagues and many opinion makers that the FTA should be approved because other sectors, including agriculture and services, would benefit from more trade and that there were nontrade considerations, including the importance of South Korea as an ally. We acknowledged all of that.
What was at stake was best phrased in our discussions with the Obama administration by Ford CEO Alan Mulally when he said that effectively addressing the problems with the US-Korea FTA represented "a vital crossroads" for American trade policy.
The Obama administration has acted to bring this about in the revised US-Korea FTA.
The trade agenda for this Congress should be broad and ensure we go forward on the progress of a new 21st century model of trade, not backward.
It should include:
- The Andean Trade Preference Act (ATPA) and GSP should be freed from hostage and extended for the rest of the session. It is inexcusable that they have been permitted to expire. Instead we should be working together to address outstanding issues relating to longer-term operation of ATPA and GSP.
- It is also inexcusable that Trade Adjustment Assistance (TAA) reforms have been permitted to lapse. TAA should be reinstated immediately.
A 21st century trade policy must recognize that in a rapidly globalizing era not everyone will emerge a winner from trade. Workers-both industrial and service-will be displaced and communities dislocated from the impact of trade. And that's why TAA is so important. Workers in these circumstances need retraining assistance as they transition to new jobs.
Yet, the TAA program is being held up in part as barter for the Colombia FTA and in part because some are antagonistic to the entire program because they say it picks "winners and losers." That is backwards. What TAA does is to help those who have lost because of the impact of trade become winners.
- The Republicans have allowed their earmark ban to hold up passage of critical provisions for domestic manufactures in the Miscellaneous Tariff Bill (MTB) and we should act quickly to approve this legislation.
Last summer, the first of two packages of MTB provisions passed with broad, bipartisan support and was enacted into law. I urge Republicans to move the second package as soon as possible. Estimates suggest that together, the legislation would increase GDP by more than $3.5 billion.
- Congress should approve the US-Korea Free Trade Agreement before Memorial Day.
USTR Ambassador Ron Kirk should send the draft implementing legislation to Congress immediately and request the House Ways and Means Committee undertake an expeditious review and a voluntary "mock markup." After a reasonable period for consultation, the administration should formally send the implementing legislation so that it can be introduced and fast track procedures-including the specific timelines for consideration-started.
- We must have a consistent and active policy toward China so that it follows the rule of law by our strengthening enforcement against unfair trade practices and responding to currency manipulation.
China presents a serious enforcement challenge on at least three fronts: Its system is much more opaque than the systems of all other commercially significant WTO members; its provinces and municipalities adopt WTO-inconsistent laws, contradicting WTO-consistent rhetoric from Beijing; and US companies are often unwilling to help USTR develop WTO cases because they fear China will retaliate against them.
For instance, clean energy-wind and solar equipment manufacturing-are often described as one key to the future of US manufacturing. To get a competitive advantage, China discriminates against US clean energy manufacturers in a variety of ways and has adopted subsidies prohibited under WTO rules.
Unfortunately, resistance to increased action against that discrimination comes from those with rigid ideological objections to active domestic government-private-sector partnerships on development of clean energy manufacturing.
China's discrimination was the subject of a recent "Section 301" petition. I was pleased that USTR filed a WTO case based on one aspect of that petition. But I was disappointed that the Administration was unable to complete its investigation on many of the remaining claims.
We need to direct increased funds to USTR to ensure that it has the tools it needs to investigate and prosecute Chinese WTO violations, as well as the negotiation and enforcement of overall international rules for fair trade.
Finally, this Institute and Dr. Bergsten have spoken eloquently about the need to address currency manipulation. Last year, we acted on a broad bipartisan basis in the House to approve WTO consistent legislation to address China's currency manipulation. The administration must be much bolder. China's currency devaluation costs US businesses an estimated $125 billion in net exports.
The House Republicans' decision that currency issues are not a top priority reflects an allegiance to an outdated model that international trade issues will work themselves out over time without much damage.
- We must seize the opportunity presented by the Santos administration to ensure concrete lasting changes to the conditions in Colombia, so that as trade is expanded, it expands those who receive its benefits.
The Obama and Santos administrations are now actively discussing concrete steps to address and resolve long outstanding issues relating to worker rights in law and practice, and to violence and impunity. It is vital they work expeditiously to implement these important components of trade policy for the globalizing 21st century.
As Ambassador Kirk said in his testimony before the Ways and Means Committee: "Any timetable will be contingent on the successful resolution of these issues."
- Let me say a word about Panama. If Republicans had succeeded, Panama would still be an unchallenged tax haven. But the Obama administration has worked to conclude talks on a Tax Information Exchange Agreement (TIEA)-talks that had been languishing since 2002. Panama is also taking steps to ensure its laws reflect international core standards, including by eliminating legal loopholes that allowed company-directed unions and by eliminating prohibitions on the right to collectively bargain in the maritime sector. Further legislative action is now underway in Panama.
The Administration should hold its ground and insist on movement of each of the various pieces of the trade agenda only as they are ready for action. It is the Republicans who are holding up action on trade issues, not the administration. The approach by Republicans in Congress to hold action hostage has a number of additional detrimental consequences:
- It minimizes the importance of the South Korea FTA. The EU-Korea agreement goes into effect in July, and unless Republicans stop stalling, our companies will be disadvantaged in that market.
- It maximizes partisanship and the polarization that has been endemic in consideration of issues of international trade.
- It distracts attention from other outstanding negotiations where we need to have a full and comprehensive discussion of key issues. This includes the Trans-Pacific Partnership and the WTO Doha Round. There needs to be a renewed effort to understand the importance of the Doha Round that was supposed to be a Development Round and of the outstanding issues separating the major trading nations.
I believe that when historians look back, they will conclude that US trade policy was too slow to adjust to globalization. But I am determined not to let what happened in our trade policy toward Japan in the 1980s happen to our trade policy toward globalization in this decade. At that time, those of us who called for active attention to Japan's unfair trade practices were called proponents of "managed trade." We were told that it would all work out or that Japan was only hurting itself. Years later a US Treasury Secretary admitted to me that there should have been action but that now it was too late.
We were right then and we are right now. The old conventional wisdom about trade policy is outdated, and there is a new model-exemplified by changes to the Peru and Korea agreements-waiting to be seized.