Of all the blurbs I got for my book Free Trade Doesn't Work: What Should Replace It and Why, my favorite is one I got from Robert B. Cassidy, a distinguished former trade diplomat whose career included being Assistant U.S. Trade Representative for China, Asia and the Pacific. His contribution was short, but it made a point, coming from a man who had actually sat at the table where many of America's key trade agreements were negotiated, that our government would do well to grasp. He wrote,
I now understand why so many of the trade agreements that we negotiated never delivered the promises that were made and, if continued, never will.
What an admission! It actually gives one hope that, behind the facade projected by the Obama administration's ever-chipper trade diplomats, who still say (in public) that the U.S. is going to be able to negotiate its way out of its $300-600 billion trade deficits by signing even more trade agreements, wiser heads are starting to cotton onto what's really going on. Because the reality is that the U.S. has been taken -- utterly taken -- in its trade negotiations with other nations for coming-on 40 years now, and it's high time we woke up to this fact.
How can the United States, the sole global superpower, get pushed around by foreign nations when it comes to negotiating trade agreements? This seems odd, even if one doesn't buy into left-wing visions of the U.S. as a global bully-boy. How can America lose again and again, despite its surface reputation for Machiavellian toughness in international affairs?
The key is that economic success doesn't work the same way as military power, where winning and losing is generally clear. In economics, in order to know whether any given event is a winner or a loser for you, you need an accurate conception of how the world economy works, especially when dealing with big-picture issues like opening up U.S. to foreign trade. As a result, bad economic ideas can mislead even a giant like the U.S. into shooting itself in the foot over and over.
America's key problem in this regard has been our trade negotiators' uncritical embrace of the assumption that free trade is always best, no matter what the circumstances. It supposedly doesn't matter whether or not free trade is reciprocated, whether or not our trading partners manipulate their currencies, whether or not America runs a trade deficit: the list goes on and on.
If one treats the universal benevolence of freer trade as a given, then it quite logically follows for the U.S. to be very lax about guarding its own interests when negotiating trade agreements with foreign nations. After all, even if our trading partners do engage in all these varieties of mischief, these agreements will still be good for us. So who cares? In fact, if one assumes that free trade is good across-the-board, trade agreements don't really demand all that much attention qua economic instruments at all, and the door is wide open to use them as tools for other purposes.
For example, all through the Cold War we threw open our markets open to the rest of the world as a bribe not to go Communist, propping up foreign economies and binding them to dependence on the American market. This obviously made sense at one time, but we didn't stop after the Soviet threat had passed. For example, the first Bush administration bought Turkey's support in the Gulf War with (among other things) increases in Turkey's import quotas for apparel, fabric and yarn. America's vast Cold-War network of military bases abroad also has given foreign nations leverage over our trade policy. This has been quintessentially true of Japan, but has also been true of Spain, Portugal, and several other nations. As a report by the Senate Finance Committee once put it:
Throughout most of the postwar era, U.S. trade policy has been the orphan of U.S. foreign policy. Too often the Executive has granted trade concessions to accomplish political objectives. Rather than conducting U.S. international economic relations on sound economic and commercial principles, the executive has set trade and monetary policy in a foreign aid context. An example has been the Executive's unwillingness to enforce U.S. trade statutes in response to foreign unfair trade practices.
Now at one time, America had economic strength great enough to be taken for granted, but presumably, no-one is foolish enough to think that today.
So did American trade diplomats turn into fanatics and get stuck in an ideological dream about free trade? No. Intellectual or ideological fanaticism on this issue is easy enough to find in academia and the editorial pages, but rare in our trade negotiators and diplomatic service. Instead, they tend to have a hazy sense that "economics says free trade is best" which renders them insouciant about possible pitfalls of free trade. Indeed, they often have remarkably shallow knowledge of trade subjects: as Jeffrey Garten, Undersecretary of Commerce under Bill Clinton, noted in 1997, "The executive branch depends almost entirely on business for technical information regarding trade negotiations."
The problem is that mushy convictions don't lead to mushy results. Instead, they render our negotiators intellectually helpless in the face of special-interest pressures for more trade agreements. Many of the largest American companies are now so dependent on their overseas operations, and thus so vulnerable to pressures by foreign governments, that they have become outright Trojan horses with respect to American trade policy. Superficial attempts at hard bargaining in defense of American exports occasionally reflect some well-organized export (or import-competing) industry that has managed to flag the attention of Congress, but are mainly just posturing.
One metric of our government's sheer unseriousness about trade diplomacy is that between 1972 and 1990, fully half the American trade diplomats who left government service went to work for foreign nations. Can you imagine if hundreds of ex-American military officers were hiring themselves out as mercenaries to China's People's Liberation Army?
Thus America's trade diplomacy leaves America naked in a world where other nations pursue the most sophisticated neo-mercantilist policies their bureaucrats can devise, backed up by disciplined diplomacy that puts economic objectives first. Our nakedness has, ironically, made us even more desperate in pushing for free trade: having disarmed ourselves by throwing open our markets, we desperately need to disarm everyone else by forcing their markets open, too. But we try to do this after having thrown away our principal leverage: access to our own market.
We then rationalize this implausible approach with the fantasy that the rest of the world "must" inevitably embrace our own laissez faire economic ideals, including free trade, due to their innate superiority, one day soon. (We've been very patient on this one.)
Our main method of getting the rest of the world to fold its cards has been bribing foreign nations to join our vision of a rules-based global trading system under the WTO. Unfortunately, this bribe has mainly consisted in letting foreign nations run surpluses against us. We have thus become the global buyer of last resort and the subsidizer of a system that in theory needs no subsidy because it supposedly benefits everyone. One irony of this is that the U.S. has been diligently working to pry open foreign markets for Japan, China, and the other neo-mercantilist powers.
Foreign nations sometimes seem genuinely puzzled why the U.S. does not grasp the game being played. So they occasionally make the U.S. offers which we logically would accept if we did understand, offers they expect would quiet down Uncle Sam and make his politicians stop uttering bizarre complaints about "unfair" trade. For example, Japan in 1990 offered a deal to limit its trade surpluses to two percent of its GDP if we would stop trying to reorder Japan's economy to solve our trade difficulties. We showed no interest. Japan's 1990 surplus with the U.S. of $41 billion almost doubled over the next 10 years.
One can't help but wonder what they say about us behind closed doors in Beijing, Tokyo, Berlin, and Taipei. "Uncle Sam, global sucker" would be my translation.
Ian Fletcher is the author of Free Trade Doesn't Work: What Should Replace It and Why (USBIC, $24.95) He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933. He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.
First: The powers that be are 'Shorting' the country. They are able to make money off of the way business is being done. A large corporation has only a fiduciary responsibility, not a national one. And a national responsibility while offering a warm fuzzy does nothing for the bottom line.
Second: It is expensive to do business in the US, our workers need to be paid a living wage and that is several times more than in Mexico and 40 or 50 times more than in China. So by allowing our trade policy or lack there of to be lax we are racing to the bottom. Soon you will be able to get people to work for $50 a day where it used to take $100 and after that it will drop to $20 a day. If you can sustain life on less and less people will take it and business will be happy to pay it.
Our current situation is not a mistake, it is a concerted effort by the super rich to milk every last dime out of this economy, and then rebuild it into something they can even better manipulate. And by owning the government, not the elected one but the real government they can easily do this. And are doing this.
What a mess. The mathematician in me knows that every problem has to be solved from where we are now. It's always easier to say what we should have done. Just convincing all the Americans who still recite the mantra will be challenge enough.
You said :
How can the United States, the sole global superpower, get pushed around by foreign nations when it comes to negotiating trade agreements? This seems odd, even if one doesn't buy into left-wing visions of the U.S. as a global bully-boy. How can America lose again and again, despite its surface reputation for Machiavellian toughness in international affairs?
I am going to take a shot at answering it :
US government allows itself to be pushed because the masters of the universe - a.k.a the plutocrats /Wall street/big corporations wants it to do so. They did very well because of all the trade agreements with fat bottomlinesCan you point to a single instance where the above axis of evil lost because of all those trade agreements?
"Although most of the Economic Elite live and operate inside the US, they are not concerned for our future. To them, the entire world is theirs and they work intimately with other elites throughout the world against the interests of the US public. Ever since the days of Henry Ford, the Economic Elite have needed a thriving US middle class to increase growth and profits, but now, in the global economy, they view the US middle class as obsolete. They increasingly look globally for profits and they would rather pay cheap labor in countries like China and India. On top of the millions of jobs they have already shipped overseas to increase profits at our expense, they are planning to ship an additional 25% of current US jobs overseas as well.
They now see us as the biggest obstacle to their continued consolidation of wealth and resources. This is why they have stepped up their attack on us.
The entire Wall Street bailout is strategically designed to eliminate the US middle class. Every time you hear the word “bailout,” you should think “coup d’état.”"
http://ampedstatus.com/full-report-the-economic-elite-vs-the-people-of-the-united-states-of-america
Thanks again for your thoughtful posts. I just wanted to tell you that I appreciate you. TGIF..
SnickD
Mr. Fletcher, you routinely describe American consumers as "interest groups" instead of the Unions who argue for protection. The factory has expanded beyond its initial walls and now spans the globe with producers working in connection rather than competition. All consumers receive the benefit of increased access to goods at cheaper prices. Inventors get access to cheaper production costs to lower barriers to entry into markets. Jobs depend on working in conjunction with a factory in China. It is the interest groups that favor protecting American producers that compete with foreign producers at the expense of all American consumers and the jobs of those who work with foreign producers.
oops sorry you do that already
Without a coordinated trade/industrial policy we won't progress much. USTR itself is an aberration in the world of trade negotiations. Our major competition, take Japan as an example, has strong Ministries of Industry and Trade (Japan's renamed for cosmetic reasons to con Americans) which are responsible for supporting and protecting industry and also play a major role in both bilateral and multilateral negotiations. MITI also had considerable influence over industry (carrots and sticks) so it was able to focus on a goal. In addition, foreign media supports their own governments and industries, foreign economists don't buy into "trade deficits are caused by macro phenomena", and there is no discussion about trade deficits being good - everyone is clear that they aren't but the U.S.
The cumulative U.S. trade deficit is about $9 trillion and over $100 billion so far in 2010. To maintain the U.S. position in the world and a good standard of living, the U.S. has to eliminate the trade deficit and rejuvenate American manufacturing and tech (closely related). Can it be done? Yes. But only if we look at best practices overseas, benchmark, and adapt in a coordinated way. Religious-like belief in "free trade" will lead to a continual downhill slide. And FDI is not necessarily good for the U.S. This isn't just about money. It is about control.
The US trade deficit will only fall if the (im)balance between domestic saving and investment is narrowed. This has happened recently with the recession. That's why we've seen a sharply lower trade deficit. Are you enjoying the economic times that have accompanied this reduction in the trade deficit?
I refer you to Japanese Law No. 61 of 1995.
Did Japan have problems with exports to the U.S. in the last recession? Of course.
And your contention that "the U.S. trade deficit will only fall if the (im)balance between domestic saving and invenstment is narrowed" is a standard canard for taking no effective action. Impose policies equal to those of our competition (VAT, tariffs, informal barriers, etc.) and increase the cost of imports and there will be investment here to produce those goods and the imbalance will decrease.
The CRS report you keep citing states measures like tariffs don't work. Pure garbage. They create national competitive advantage. As an example, please explain how our trade balance with Korea when it first exported cars to here in the '80s was not impacted by Korean trade policies.
Also, go flog your ideas to Japan, China, etc. If protectionist and industrial policies make no difference they should just get rid of theirs.
Except for the U.S., the game is to make and use every advantage. One big advantage our competitors have is not believing what you are say (though they do foster Americans believing it).
A situation of prosperity for the U.S. that does not also spread benefits to everyone else everywhere is possible. In fact we not only have done that, there are those who advocate for our continuing to try to do so. But what was possible in the short term has already given rise to multi-national corporations and virtually uncontroled global money flows. We can now work in conjunction with all of the other victims of this circumstance to try to bring economic control back into the hands of all workers everywhere, or we can continue to propagate a system which leaves no control in the hands of workers at all.
Is there a vision?
Free trade has not spread the benefits - quite the contrary it shifts the benefits up the economic ladder
the way you maximise prosperity and share welath is not only to develop new tech, but produce it as well
If Americans were still accumulating savings instead of spending home equity financed by overpriced second mortgages there would not be a problem or at least much less of a problem. If Americans reduced their luxury goods purchases by 10% not only would it solve the trade crisis it would also solve the banking crisis.
Too often American blame others for their own failings and this does not help. Although I will agree that the neo-merchantile policies practiced by China and the neo-liberal policies practiced by American business are also hinderences to solving the problem.
http://www.youtube.com/watch?v=akVL7QY0S8A
On consumer education, in the early '90s Korea distributed a comic book in elementary schools showing why it was necessary to buy Korean. There was more sense in that than most of the economic commentary in the U.S.
If you look at U.S./Canadian trade relations it is dominated by the U.S. imposing sanctions on any good that Canada can produce cheaper and more efficiently than the U.S. . Furhter you can't blame the trade imbalance on currency manipulation as the two currencies float freely in the market.
Question: So why does the U.S. run such a huge deficit with Canada?
Answer: Because U.S. arrogance leads consumers to beleive that they deserve to consume more than they produce.
If the U.S. consumers were more rational there would not be a problem with Canada and a much smaller problem with China.
PS: This is like blaming Mexico for supplying the huge demand for narcotics in the U.S....Oh wait a minute that is right, it is Mexico's fault and American drug users are the victims. So much for personal responsiblity.
However I would point out that there was a time when almost all Americans actually accumulated savings and I seem to recall that trade deficits were not such a problem then. But you go ahead and wimper about being a victim after all who need rugged individualism and personal reponsiblity, obviously it must be someone elses fault.
Evil plot, no. America is the victim of its own failure to look at the opposing teams and adapt.