AMERICAN.COM

The U.S. trade agenda, embodied in three pending agreements, lurched forward yesterday. In recent weeks, it had run aground, wedged between Democrats who were skeptical of the agreements and Republicans who were skeptical of the sweeteners attached to those agreements to lure back the Democrats. How, one wondered, could the Obama administration craft a compromise that would gain enough support to move forward?

They took an approach that only an economist could love: they assumed an agreement and shoved off. The major sticking point had been the extent to which they would revive the expanded portions of the Trade Adjustment Assistance (TAA) program that had expired earlier this year. Democrats generally backed a full renewal of the program. A substantial group of Republicans wanted TAA left at its current, more modest levels. In the end, the administration roughly split the difference.

That was always the most likely outcome, but the hope was that it would emerge in a media spray, with all the major congressional players lining up behind the microphones to take turns praising the breakthrough. That was not how the week played out.

First, the top Democrat on the House Ways and Means Committee, Sander Levin (D-Michigan), held a press conference to announce his opposition to the free trade agreement with Colombia. He disliked the placement of a labor “action plan” outside the body of the agreement.

Then, the White House decided to stick its compromise TAA plan inside the legislation for the Korean agreement. This led Senate Minority Leader Mitch McConnell (R-Kentucky) to declare:

Speaking for myself, I’ve never voted against a trade agreement before. If the administration were to embed a Trade Adjustment Assistance into the Korea trade agreement I would be voting against it.

Senator Orrin Hatch (R-Utah), the ranking member of the critical Senate Finance Committee, said:

This highly partisan decision to include TAA in the South Korean FTA implementing bill risks support for this critical job-creating trade pact in the name of a welfare program of questionable benefit at a time when our nation is broke. This is a clear breach of Trade Promotion Authority and threatens the ability of American exporters and job creators who stand to benefit from the largest bilateral trade agreement in more than a decade. TAA should move through the Congress on its own merit and should stand up to rigorous Senate debate. President Obama should send up our pending trade agreements with Colombia, Panama, and Korea and allow for a clean vote.

In a statement of administrative action, the White House justified its approach:

The provisions extending (TAA) may be included in the bill because they are “necessary or appropriate” to implement the Agreement, as required by Trade Promotion Authority… previous trade agreement implementing bills enacted under Trade Promotion Authority, or “fast track,” have included similar trade-related provisions. For example, the NAFTA implementing bill included provisions to expand TAA benefits and make wholesale changes to U.S. customs law. As with TGAAA renewal, these provisions were not strictly required to implement the relevant trade agreement but addressed matters closely related to those agreements.

You know you’re in trouble when you’re citing NAFTA as an example of how to unify everyone in support of trade.

Could this be a crafty strategy to just please the majority party in each body, the Senate Democrats and House Republicans? There are reports that House Ways and Means Committee Chairman Dave Camp (D-Michigan) approved of the substance of the TAA approach. But a spokesman for House Speaker John Boehner yesterday wrote:

We’re pleased the President may finally send us the three job-creating trade agreements we’ve requested.  But we have long said that TAA – even this scaled-back version – should be dealt with separately from the trade agreements, and that is how we expect to proceed.

Nor do questions about the administration’s approach stop there. Trade experts Sallie James and Scott Lincicome have questioned the legality of some of the funding mechanisms included in the bill.

If this appears to be a slapdash solution, created in a rush, that’s because it is. When these agreements were first signed, back during the Bush administration, they would have given U.S. firms preferential access into these markets. Now, after years of dithering, the scramble is to avoid having U.S. firms disadvantaged in the markets. Our trading partners spent the intervening years negotiating agreements with trade rivals such as Europe and Canada. Some of those are about to come into force and the administration is racing to pass the U.S. versions to level the playing field.

The looming deadlines and the fractious politics may excuse some of the administration’s graceless approach, but not much. After a year and a half of doing little or nothing on trade, the administration announced its plan to move ahead with the Korea agreement one year ago. Since then, the only significant change in the political landscape was the Republican takeover of the House in the 2010 elections, a change which significantly eased the challenge of passing trade agreements. The administration has had a long time to solve this problem.

There are multiple dangers to a clumsy solution. First, it risks failure. That would send a disastrous signal around the world about the potential for U.S. trade leadership. Second, even if the three agreements squeak through after a bloody and divisive battle, it could be a Pyrrhic victory. It would offer little hope for significant future trade endeavors like the Trans-Pacific Partnership or an agreement at the World Trade Organization.

The U.S. trade agenda is now moving forward, but navigating amongst dangerous shoals. The perils and prospects will be taken up tomorrow at a live-streamed AEI session headlined by Senator Hatch, “Are We Falling Behind on Trade?” This will also feature Sallie James of Cato and Howard Rosen of the Peterson Institute, duking it out over TAA in the undercard.

There has been a tendency, particularly in commentary from abroad, to link Tuesday’s election results to a rejection of urbanity, of multilateralism, and of an open approach to the world. The logic seems to be that the Tea Party is replete with barbarians and that any horde that wants to limit the size of government must be purely malevolent.

There was always a logical inconsistency to this argument, at least when examined from the perspective of trade. Why would a group that favored less government intervention in the economy also favor government erection or preservation of trade barriers? The argument only works if one declares that isolationism was the driving force behind the Tea Party, and there doesn’t seem to be much evidence for that. There is certainly some trade skepticism among Tea Party supporters, but it is not clear that this skepticism is out of proportion to concerns among the broader public.

In another bit of cognitive dissonance, foreign commentators, desperate to see their once-soaring hopes for President Obama fulfilled, are still clinging to his promises of a multilateral approach to global affairs. In international trade, though, U.S. openness to the world has stagnated under President Obama. He is only now promising to push forward the free trade agreement with Korea, while the pending FTAs with Columbia and Panama remain dormant. The Trans-Pacific Partnership is still an ill-defined hope, and one that was originally launched under the Bush administration. The one truly multilateral approach to trade—global trade talks under the World Trade Organization—has been essentially moribund since President Bush’s last great push in the summer of 2008. Yet those worried about Tuesday’s election results have still fretted that it is a turn away from multilateralism.

In fact, there are a number of reasons to think just the opposite, at least when it comes to trade. First, consider the remarks of Congressman Kevin Brady (R-Texas) at a Peterson Institute event on trade at the end of October. It is hard to imagine a more favorable take on global commerce, and it comes from the presumptive new Chairman of the House Ways and Means Subcommittee on Trade.

Then there are the particulars of the elections themselves. I tallied up the results of a number of House and Senate elections that had been identified in advance as hinging on trade and found that the more protectionist candidates did very poorly. John Murphy at the U.S. Chamber of Commerce just did a complementary count and reached the same conclusion. This need not herald a new era of trade openness, since leadership still must come from the White House, but the results are promising.

This all fits very awkwardly into a schema in which Republicans are hostile to the world and the Democrats represent pure virtue. Perhaps it’s time to re-examine the schema.

Today’s release of U.S. employment data comes amid the buildup to the Treasury Department’s April 15 decision whether to charge China with currency manipulation. I recently gave testimony on some of the strategic questions surrounding this decision, but the politics revolve around jobs. Despite the upturn in March employment, over 7 million jobs have been lost since the start of the recession.

Those urging a more aggressive approach toward China have tried to outdo each other in holding Beijing culpable for American job loss. It has come to sound a bit like a bidding war. Who will open the bidding?

Fred Bergsten of the Peterson Institute bids 1 million jobs!

We open at 1 million. Who will raise?

Paul Krugman, of Princeton and the New York Times, with a “back-of-the-envelope” 1.4 million!

Ladies and gentlemen, the bid is 1.4. Who will give me 2? Do I hear 2?

There, in the corner, it’s Rob Scott of the Economic Policy Institute! 2.4 million jobs lost to Chinese trade practices!

2.4 million jobs, going once, going twice…

Ah, I see Ray Fair of Yale University, with a bid of…

57,100 jobs gained.

What?

Perhaps my erstwhile colleague does not realize how this game is supposed to be played. That’s not a big number—even in this shaky economy, the economy has added an average 54,000 jobs each of the last 3 months—but how could he get such a different result?

Our more aggressive bidders use a crude approach. They look at the trade gap, assume that every billion dollars of trade deficit equates with a certain number of jobs, and multiply.

Fair, in contrast, uses years of data to estimate a detailed model of how the global economy works. Then he reruns the model under the assumption of a 25 percent appreciation in China’s exchange rate.

His model contains the same effects that the others rely on—increased demand for U.S. goods as Chinese imports become more expensive. But he sees offsetting effects as well: decreased Chinese output and imports; increased U.S. prices; decreased U.S. wealth and wages; increased U.S. interest rates. He finds the latter effects more than outweigh the former.

Fair’s paper is pretty technical. For a more intuitive critique of the outlandish job loss claims, Dan Ikenson’s piece today is an easier read.

The Obama administration has trumpeted its intention to ensure that trade rules are observed and has made enforcement a centerpiece of its trade policy. The premise has been that other countries cheat against the United States. A trade enforcement action leads today’s news, but it is almost certainly not what the administration had in mind.

Brazil is threatening to hike tariffs on U.S. cotton, beauty products, cars, and household goods. Brazil is permitted to do so under the World Trade Organization (WTO) because a dispute panel found that the United States was not observing trade rules under its cotton subsidy program. The United States faced a choice: either fix the program or face retaliation. The lead story in today’s Financial Times quotes administration trade officials as preferring a negotiated solution, but it also described their challenge:

It is unclear how much room for maneuver US officials have. Significant changes to the cotton subsidy programme would require changes to the farm bill—and securing congressional approval might be difficult.

There are a number of interesting points to note about this case. First, one of the problems of stalled global trade talks is that countries turn to litigation over negotiation. The credibility of the WTO then rests upon countries’ willingness to comply with rulings.

Second, there is precedent for an administration dutifully pushing a difficult major reform through Congress in response to a WTO ruling. The Bush administration did just that in the face of European retaliation over a tax case in its first term. It can be onerous, but it is part of being a responsible member of a multilateral organization. It will be interesting to see if the Obama administration can rise to the Bush administration’s standard.

Finally, if we wonder why the Brazilians decided not to wait any longer for a negotiated fix—the WTO decision was last year—it may be because they noted the Obama administration’s treatment of Mexican trucks. In the first months of the new presidency, Congress moved backwards on a NAFTA commitment to allow Mexican trucks to operate within the United States. President Obama signed the bill, but his administration promised to set things right with Mexico. That was a year ago. The Mexicans are still waiting for the promise to be kept, but they’ve slapped retaliatory tariffs on billions of dollars of U.S. exports in the meantime.

Image by Eric Bridiers.

One might have thought the president would draw two lessons from a year’s experience speaking to Congress: First, be concise and prioritize. He has suffered from a diffuse and unfocused agenda. Second, be specific in what he wants Congress to do. His vague calls for healthcare measures in September launched months of internecine squabbling.

For a trade enthusiast, perhaps it’s a good thing that he did not learn the first lesson, or it’s unlikely trade would have made last night’s State of the Union; it has hardly been a high priority in the Obama administration’s first year.

That’s not to say it’s undeserving. If we are to consume less and produce more as a nation, the difference will have to be increased net exports. This is an argument that top presidential adviser Larry Summers has made, but the president’s take in the State of the Union was a bit different. He set a goal of doubling exports over the next five years, with the promise of 2 million jobs. These mercantilist calculations linking exports to jobs are always a bit dicey, but at least he’s taken notice of trade’s potential.

The question is how he would achieve this goal. He proposed a National Export Initiative to overcome obstacles to exporting. That may help, but seems unlikely to bring big gains. The president also called for new market access. And here the president ran smack into all the ideological barriers that have stymied trade policy for the last year. He made favorable noises about Doha, and Colombia, Korea, and Panama, but did not say specifically what he would like Congress to do (in the case of the Free Trade Agreements, he need only ask Congress to vote up or down).

The last year has featured a U.S. trade agenda full of positive sentiments, but devoid of any plan of action. The president’s speech last night did nothing to change that.