Free Trade Doesn't Work

by Ian Fletcher

  By the end of the election cycle, the DCCC, the Democratic Senatorial Campaign Committee, and individual candidates had run more than 160 different anti-free-trade ads across the country.850

  When the dust had settled, 36 new free-trade opponents had been elected to the House: 13 in contests against incumbents, 20 in battles for open seats, and three in special elections. (Eight free-trade opponents lost, so the net gain was 28.)851 And seven new free-trade opponents were elected to the Senate: Mark Begich of Alaska, Mark Udall of Colorado, Jeanne Shaheen of New Hampshire, Tom Udall of New Mexico, Kay Hagan of North Carolina, Jeff Merkley of Oregon, and Al Franken of Minnesota.852 The hallmark trade race of this cycle was in northwest Pennsylvania’s 3rd District, where Democrat Kathy Dahlkemper ousted GOP incumbent Phil English, who had provided one of the final two votes needed to pass CAFTA.853 Winners also included 10 Republican opponents of free trade who either held or won seats while campaigning against free trade.854

  THE OBAMA PRESIDENCY

  In office, President Obama’s free trade convictions have not changed. Ironically, this is probably the correct position for him to take for the time being, as he appears to know nothing about trade beyond the received Ricardian wisdom and therefore has no rational alternative. This was demonstrated by his appointment of free trader Ron Kirk, the former mayor of Dallas, to be United States Trade Representative. In his first policy address, at Georgetown University, Kirk assured the audience of Obama’s allegiance to conventional analyses of the problems of free trade and his consequent determination to push forward with existing policy:

  While the pain of trade can be concentrated at times, its benefits are lasting and widespread. One in six American manufacturing jobs is already supported by trade. Agricultural exports support nearly a million more…And jobs supported by exports of goods pay 13 to 18 percent more than the national average...So we will seek ways to sharpen U.S. trade policy, and to shore up the foundations of global trade today…by rejecting protectionism and supporting the global rules-based trading system.855

  While it is not surprising that Obama would appoint a free trader to this position, what is perhaps more shocking is that his first nominee, Los Angeles Congressman Xavier Becerra, had turned down the position because, as he put it:

  My concern was how much weight this position would have and I came to the conclusion that it would not be priority No. 1, and perhaps, not even priority No. 2 or 3.856

  Given the scale of America’s trade problems, Obama’s priorities may soon change. In the meantime, his appointees to the important Economic Recovery Advisory Board have been, with the sole exception of Richard Trumpka of the AFL-CIO (since elected head of that organization), free traders.857

  Obama has shown his hand in other ways. He announced in April of 2009 that he would not, contrary to his campaign promise, be renegotiating NAFTA.858 He continues to press for passage of more free trade agreements, with the proposed Trans-Pacific Partnership (Singapore, Chile, New Zealand, Brunei, Australia, Peru, and Vietnam) at the top of his list. He fought the Buy American provisions included by Congress in the giant stimulus package of 2009 as that old bogeyman Protectionism.859 In March 2009, reversing his earlier position, he agreed to allow Mexican trucks on U.S. highways despite safety concerns, exposing American truckers to foreign competition.860 Perhaps most importantly, he spoke out against the carbon tariff included in the Cap and Trade legislation passed by the House of Representatives in June 2009,861 only consenting in the end to extremely watered-down provisions. These provisions would require tariffs on goods produced in nations with inadequate greenhouse gas emission standards but:862

  a) They would only take effect in 2020.

  b) They are preempted by any international agreement reached by 2018.

  c) They could be waived by the president with the consent of Congress.

  d) They exempt industries for which the president determines that 85 percent of global production is in compliance.

  e) They exempt industries of countries that have met emissions standards overall.

  All this is despite the fact that Energy Secretary Stephen Chu has publicly backed the idea of serious carbon tariffs,863 and the WTO has recently announced its cautious acquiescence.864

  Like his predecessors, President Obama has tactically bunted and talked out of both sides of his mouth to keep minor trade flashpoints from blowing up into something bigger. For example, he imposed a tariff on Chinese tire imports in September 2009 in retaliation for dumping. While this brought forth howls of ideological anguish from the usual suspects, it was actually a very small move. He did not even impose the full 55 percent tariff permitted by the rules China agreed to when it joined the WTO and recommended by the U.S. International Trade Commission. Instead, he only imposed 35 percent, a clear piece of “I’m not serious” signaling to nervous free traders.865

  THE END GAME ON TRADE

  Obama is not going to be able to support free trade forever. Crisis will eventually come, probably when the dollar finally melts, which will force the public to ask why this happened and thus force the question of whether America’s trade policy has been wise. A sharp decline in the dollar will generate an inflationary shock—and a shock in interest rates—that will capture public attention and quite likely knock the economy back into recession.866

  Ironically, an outright crisis will probably benefit Obama politically, as it will give him room to maneuver out of his earlier free-trade position without looking foolish. It will also help break up the logjam of special interests that currently locks free trade in place. These interests seem impregnable even today in 2010, but the ground is shifting under their feet for two reasons: first, the present trading order depends financially upon America’s inexorably doomed international credit and second, it depends politically upon the public continuing to believe that free trade is sound economics.

  Other events could trigger the final collapse of free trade. For example, the U.S. government has slipped into a tacit commitment to bail out key industries, starting with banking and automobiles. It has thus far been able to do this by means of the bankruptcy code plus massive infusions of public money. But in the case of automobiles, it resisted doing the one thing that would have done the most to help this industry: giving it back the market share it had lost to imports. A tariff was half-heartedly considered in the early stages of the crisis, but vetoed by “Toyota Republicans” led by Alabama Senator Richard Shelby, whose state is the site of auto plants owned by Hyundai, Honda, Mercedes, and Toyota.867 If the cost of providing further industry bailouts without tariff protection becomes intolerable, tariffs may eventually prove irresistible, especially if the U.S. government’s ability to pay for bailouts with borrowed cash instead declines.

  Another possible trigger for the final breakdown of free trade is global warming.868 Even free trader economists such as Paul Krugman have recently conceded that the economic rationale for imposing tariffs on nations which fail to control pollution adequately is impeccable, even within the most utterly conventional economic assumptions.869 In terms of this book, it does not require any of the controversial analyses of Chapters Nine or Ten, only dubious assumption #2 (there are no externalities) of Chapter Five. Americans usually imagine this would involve the U.S. imposing a tariff on polluting nations like China.870 However, it could quite easily involve nations with higher environmental standards than our own, like the Europeans together with Japan, imposing a tariff on the U.S! As French president Nicholas Sarkozy said in September 2009:

  I will not accept a system...that imports products from countries that don’t respect the rules [on carbon emission reductions]. We need to impose a carbon tax at [Europe’s] borders. I will lead that battle.

  And this is managed trade, not free trade.

  DEEPER POLITICAL REALITIES OF THE TRADE ISSUE

  There is a deeper political reality underlying the whole trade issue: both parties are feeling the heat of an intensifying global economic challenge t
o the U.S. and are looking for ways to take the pressure off their voters.

  Withdrawing from free trade (to an as yet undefined extent) is emerging as the consensus Democratic response, even if the party’s leadership doesn’t yet realize how deep are the forces driving this or how far it is likely to go. The emerging Republican response seems to be keeping free trade while opposing immigration—which does not enlarge America’s shrinking economic pie, but does cut it into fewer slices per voter and is therefore politically salable.871

  The clearest sign of this emerging twin consensus was a pair of Congressional votes: on CAFTA on July 27, 2005 and on immigration amnesty on June 28, 2007. Prior to these votes, American politics was aligned on roughly nationalist vs. internationalist lines, with pro-free-trade and pro-immigration views tending to coincide on one side and anti-free-trade and anti-immigration views on the other. Because the pro side dominated both parties, the anti side was effectively deprived of influence over public policy despite representing a majority or near-majority of public opinion.872 But these two votes revealed a majority of Congressional Democrats embracing a pro-immigration, anti-free-trade position that may fairly be described as leftist, while a majority of Congressional Republicans embraced an anti-immigration, pro-free-trade position that may fairly be described as rightist.873 The nationalist and internationalist positions now have few remaining supporters in either party.874

  Both parties are thus inexorably reverting to their natural partisan positions of offering competing left- and right-wing solutions to the same underlying problem. (As previously noted, protectionism is intrinsically neither rightist nor leftist, but as long as Republicans remain free market-oriented, it is a left-of-center position in contemporary American politics.) This firming of the ideological battle lines suggests that the trade issue may ultimately be resolved in a classic Left vs. Right firefight. This kind of transparent and accountable partisan choice is, of course, precisely the way democracy is supposed to work.

  However, the trade issue has not yet fully crystallized in this way, so this process may well be aborted—most likely by the veto power of interest groups in each party—depriving the democratic process of a firm grip on the question. Or the debate could crystallize neatly along partisan lines but get bogged down in secondary issues, making other issues decisive for the electoral fortunes of the two parties. This could easily place a party in power whose trade position opposes what a majority of voters want.

  Luckily, even a broken and incoherent debate could produce an acceptable policy outcome. For example, the U.S. could adopt emergency measures under the pressure of immediate crisis without any fundamental ideological shift—and these measures could prove effective and be followed up later by ideological rationalizations. The clearest precedent for such an emergency move is the 10 percent tariff adopted (and unfortunately abandoned) by President Nixon in 1971.875 This kind of ad hoc solution is also roughly what happened during the Great Depression, when de facto welfare-state Keynesianism was adopted with the ideological infrastructure solidifying later. It may not be the cleanest or most intellectually satisfying way to produce policy, but it does have a history of working.

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