THE BLOG
10/25/2016 06:01 pm ET | Updated Oct 26, 2016

Restoring trust in our trade policy

I'm in favor of trade. I don't know anyone opposed to trade. A better question is, "How should we manage globalization?"

We've lost trust in our approach to globalization. The Brexit vote in Europe was a vote of no confidence. Millions of voters in our presidential campaigns send a similar message. Globalization is not working for us.

We should rethink our approach to globalization if we hope to restore trust.

Strike one for trust in "free trade" - gains go to the top
Under our trade policies since NAFTA, the gains from trade have gone to a few at the top, while workers and communities have lost out - even after counting the cheaper goods we buy from low-wage countries.

The US has lost millions of good jobs, and entire industries have disappeared from our economy. This would be OK if we had created millions of new good jobs. But we haven't.

Workers in Mexico, Honduras, Guatemala and Colombia are still waiting for their gains from trade. NAFTA, CAFTA and other trade deals disrupted their economies. Millions of workers lost their jobs, their social support structures were weakened, and violence increased. Thousands of workers and unaccompanied minors were forced to leave their villages and migrate in search of work.

The issue is not workers in the US versus workers in Central America. The issue is workers in every country versus the 1% in every country.

Strike 2 for trust in "free trade" - bad power relationships
Mistrust reflects the bad power relationships in the policies we've chosen to manage globalization. Our trade policy helps global corporations move jobs and production from the US to Mexico. The same dynamic then applies when workers in Mexico see their jobs going to lower-paid workers in China. Workers in China worry about their jobs going even lower-paid workers in Vietnam. Workers everywhere lose bargaining power.

Global investors understand the power of institutions. Decades ago, they created the WTO, World Bank, International Monetary Fund and the post-NAFTA dispute settlement systems - global institutions dedicated to investors and global companies.

In our domestic economy, we have legal and political institutions that balance public interests with investor interests. This evolved over generations. In 1905, the Supreme Court decided that government played no legitimate role in regulating labor conditions in the economy. No unions, no minimum wage, no overtime, no unemployment insurance, no Social Security.

In the 30's, the Court reconsidered the legitimate role of government in managing the economy. The Court said government could regulate markets if the regulation was reasonable, served a legitimate public purpose, and was not a complete "taking" of the business' value. This standard balances power between investors and civil society. But for the Court's reversal, America would be a very different place today.

Trade deals gave corporations a clean sheet of paper to take back power they had lost to civil society. Trade deals create new rights and set new standards favorable to global corporations. Decades of trade tribunal decisions make it clear that the tribunals pay no attention to our domestic legal tradition of balancing public interests with investor interests.

Provisions in trade deals to protect workers and the environment are illusory and have never been enforced.

Strike 3 for trust in "free trade" - economic integration is not trade
Many accounts of globalization use the terms "trade" and "economic integration" interchangeably. This should be a huge red flag for anyone with a passing grade in an economics class in international trade.

"Trade" takes place between countries that retain their national identities and values, pursue their national interests, and manage their national economies. China, Japan, Germany, and Korea are good examples.

We are also familiar with economic integration - the 50 states of America are integrated. Europe's economy is integrated. Economic integration works best when social cohesion and political legitimacy are strong.

Economic theory says "trade" brings mutual gain. That theory assumes capital investment and technology stay inside the US, and everyone has a good job, and we export as much as we import, so it all balances out.

Economics teaches an opposite condition, which applies to economic integration. That condition can be win-lose.

For instance, a company can close its air conditioner factory in Indiana, and moves that work to Mexico for lower wages and weaker labor and environmental standards. Then, investment and technology flow out, our workers lose jobs and bargaining power, and we run a large chronic trade deficit. With bad power relationships, we get a race to the bottom.

Jeffrey Sachs is an influential economist. He assumed our President, Congress, and trade negotiators would makes policies where globalization's winners would compensate the losers. He is slowly recognizing that the point of having power is to win, and the point of winning is to win, not compensate losers.

Key to restoring trust
History shows that successful economic integration requires political integration in parallel with economic integration. Public trust in globalization will come from a legitimate accountable political system, and from seeing our own interests reflected in the way we manage globalization.

In American history, our original 13 colonies were economically integrated under the Articles of Confederation, which went into effect in 1781. Too weak. We ditched that in 1789, going to a stronger political system - Federalism - with checks and balances, separation of powers, and individual rights. Constitutional power relationships have evolved steadily for the next 200+ years.

Before Europe integrated, Europeans voted on a Constitution, and created two governance institutions - the European Parliament, and a Commission (whatever that is). Europe invested in higher living standards in Ireland, Portugal and other weaker economies, before integrating them.

The Brexit vote and the euro crisis tell us that the European Union may need even stronger political institutions to maintain legitimacy.

Rethinking globalization
"Trade is good" is often mistranslated as, "All trade is good; maximum possible trade." Harvard economist Dani Rodrik calls this "hyper-globalization." It is quite possible that the optimal level of trade is less than what we have now.

Economic integration requires a strong political system in parallel with the economic system. Instead, our failed TPP-like approach gives us corporate-dominated global governance without a global government. Corporate-dominated global institutions serve investor interests, not public interests.

TPP won't work. The process that gave us TPP won't work. TPP would lock in bad policy for a generation or more. That approach has lost legitimacy and it has lost trust.

We can trade, retaining our national interests, our own values and standards, and relying on our own legal and political systems. That could restore trust if it serves the broader public interest.

Or we could integrate - building new institutions that represent civil society at the global level.

For example: Should we fix the NAFTA-TPP dispute settlement system by making global institutions that represent civil society (economic integration), or abandon the dispute settlement system, and use our domestic legal systems (trade)?

What we have now is trying to be both trade and economic integration. It's neither, and it's not working.

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