A New American Trade Consensus

The 2008 presidential election was not about globalization or U.S. trade policy. However, the challenges facing the administration of President Barack Obama-the financial crisis, the lengthening and deepening recession-are inextricably bound up with America’s trading relationships. A “business as usual” trade policy will not deliver the economic changes that President Obama has promised the public, nor restore Americans’ faith in their country’s engagement with the global economy.  

The United
States needs a trade policy that is avowedly
self-interested and results oriented to help mitigate the global current
account imbalances that were one of the principal underlying causes of the
financial crisis. It needs a trade policy that puts a new emphasis on bolstering
American manufacturing to insure that the United States produces more of what
it consumes in the future, to reduce trade imbalances, and to sustain the
American standard of living. And it needs a trade policy that is based on
values and standards that connect with the needs and aspirations of the
American people.

The trade policy President Obama inherited has lost
legitimacy. The economic benefits of trade have been oversold and the costs
ignored. It is little wonder that the public is increasingly skeptical of the
advantages of trade and trade agreements, and that the business community sees most
trade negotiations as irrelevant to its needs.

The current economic crisis is a painful reminder that
trade policy has consequences. While many economists discount the trade
imbalances of individual countries, when national trade deficits and surpluses are
allowed to grow too large they can destabilize the world economy, as the need
to recycle funds between creditors and debtors leads to riskier and riskier
financial practices. Moreover, the offshoring of U.S. manufacturing, while a
boon to consumers, has resulted in too few Americans earning too little and producing
too little of what we consume, which has aggravated the country’s current
account deficit.

Building a more sustainable and balanced U.S.
relationship with the world economy will require initiatives on many fronts.
The sick global economy must be restored to health, which means that other nations
will have to share the burden of reviving consumer demand. Along with the United States,
they will have to re-regulate their financial systems and strike a new balance
between export-led and domestic-led growth. Exchange rates must reflect the true
strength of each economy. And trade relations must be revamped with an eye to
reciprocity and a balance of benefits so as to better apportion the costs and
rewards associated with a global economy. Trade policy is not the principal
instrument for achieving these ends, but it can be a useful tool.

In speaking about trade in his speech to the United
Steelworkers in Las Vegas
last July, candidate Obama said that “success should
be measured not by the number of [trade] agreements we sign, but the results
they produce.” However, results can no longer be measured solely by lower prices
for consumers or by increased exports. Trade policy must also be judged by
whether it contributes to a sustainable international balance sheet for the United States.

President Obama needs to reassure a skeptical American public by pursuing a trade
policy that is both muscular and visionary, one that reflects American interests
and values. Such a policy will attempt to assure America’s future competitiveness
while seeking to spread the benefits of globalization both at home and abroad.

The beginning of a new administration affords a unique opportunity
to redefine America’s
trade relations with other nations. President Obama should affirm that U.S.
economic integration in the global market is both inevitable and good for
Americans in the long run. He should declare his willingness to work with
like-minded nations to deepen that integration. But he should also make it
clear that in the future globalization will be pursued with an emphasis on
long-term economic sustainability and the avoidance of destabilizing trade
imbalances.

At the same time, he should reframe American trade policy
around a new set of principles and values. A number of U.S. trade agreements already
include enforceable commitments regarding stronger labor and environmental
standards. President Obama has pledged to incorporate such values in future
trade deals.

However, the aim of U.S. trade policy should be much
more ambitious. America’s
goal should be to create a global market in which competition leads to a race
to the top, not a race to the bottom. In the future, increased access to the U.S.
market should in part depend on foreign suppliers meeting the highest possible health
and safety standards, as well as on their agreeing to labor and environmental
rules. To demonstrate that the United
States has no interest in using such
standards for protectionist aims, President Obama should commit his
administration to pursuing high standards domestically for food products, pharmaceuticals,
and financial services. In all fields, the administration’s long-term goal
should be to ensure that U.S.
standards meet or exceed any in the world. The goal of U.S. policy should be to ensure
best practices in all fields. Only in this way will globalization be synonymous
with a higher standard of living in its broadest sense.

A new
U.S.
trade policy based on the twin pillars of economic sustainability and higher
standards will engender strong opposition and may be difficult to implement.
But the global economic imbalances that are at the root of the financial crisis
and the public’s disenchantment with globalization suggest that it is time for
a radical departure from the past. When it comes to trade policy, the change
candidate Obama promised is long overdue.

Signs of Trouble

Under the Bush
administration, the public’s faith in U.S. trade policy plummeted. The
proportion of Americans who said that trade was good for the country fell from
78 percent in 2002 to 53 percent in the spring of 2008, according to surveys by
the Pew Global Attitudes Project. The decline in support for trade was greater
in the United States
than in any other country in the world, by far.

Americans were particularly critical of the most
prominent manifestation of government trade policy: free trade agreements. In
1997, 47 percent of Americans thought free trade agreements were good for the
country, according to Pew
Research Center
surveys. In 2008, only 35 percent held this view. Moreover, a majority of
Americans now think free trade agreements destroy jobs. Just two years ago,
only a plurality of the public thought so. A majority also believes that free
trade deals lead to lower wages. And, contrary to what economists contend, and
in spite of Americans flocking to Wal-Mart to buy cheap imported clothing, the
public does not think free trade is good for consumers.

Meanwhile, the Bush trade legacy is in shambles.

The Doha Round of multilateral trade negotiations was launched
in 2001 to demonstrate the continued ability of Washington
to show global leadership in the wake of the terrorist attacks on the United States
on September, 11, 2001. At the time, there were widespread reservations in the
business community and in the developing world about the commercial need for
such talks. Doha
is now in limbo, stymied by low foreseeable gains and fear of the costs of
further trade liberalization. Prospects are slim for concluding the round
before 2010, at the earliest, due to the inevitable delays associated with a
new administration in Washington as well as a
new European Commission slated to come in the fall of 2009 and elections in India
this year.

More important, once negotiators return to Geneva, it is unclear what
will remain of the trade liberalization offers now on the table. The July 2008 U.S.
proposal to cap farm subsidies was made at a time of high commodity prices,
when such financial support was less necessary. Now that wheat, corn, and other
commodity prices have fallen sharply, American farmers are reluctant to limit
future government payments. And American hopes of boosting exports to such emerging
markets as India and Brazil
look less promising today. With these economies mired in recession, demand is
down. Moreover, in order to protect their own farmers and manufacturers, some nations
have raised tariffs. As a result, future negotiations will start with duties at
a much higher level. It will take a major effort to get them back down to where
they were before the global recession took hold. There is almost no chance of significant
new market access gains for U.S.
producers any time soon in the Doha Round.

The Bush administration also pursued an ambitious
bilateral and regional trade agenda, negotiating a record number of free trade
deals with Central America, Australia, Colombia,
Peru, and South Korea, among others. The United States
recorded a $17 billion manufacturing trade surplus with these free trade
partners in 2008, partially vindicating this strategy. But the business community
complains that most of these deals involve small markets that offer insignificant
new export opportunities. They also require enormous political and bureaucratic
effort to negotiate and more effort still to obtain congressional approval. Moreover,
the list of possible future free trade partners is limited.

The Bush administration hoped to use such deals to
leverage progress in the Doha Round through a process of competitive
liberalization. The bilateral agreements were intended to send a signal to
other nations that they could either deal with Washington
as a group in Geneva
or unilaterally, where they would have less leverage. The lack of progress in
the Doha
negotiations suggests the strategy has failed. Nor was the Bush administration
able to convince Congress to pass its free trade deals with Colombia and South Korea. Future bilateral or
regional trade agreements need to be based on different strategic assumptions
and involve more attractive partners.

 

American Interests,
Principles, and Values

In hindsight, it is clear
that there were many shortcomings with the Bush trade strategy. But the main lesson
the Obama administration should draw from the Bush trade experience over the
last eight years is that an effective trade policy will require a redefinition
of American interests as well as a recasting of the principles and values that
frame that policy.

The broadest measure of the country’s economic balance
sheet with the world is its current account. In President Bush’s first year in
office the U.S.
current account deficit was $386
billion, or 3.8 percent of GDP. In 2007, the deficit had nearly doubled to $731
billion, or 5.2 percent of GDP. No major industrial economy has supported an
external imbalance of more than 5 percent for long without an economic crisis,
according to the International Monetary Fund. Meanwhile, in 2007 China ran a current account surplus equal to
11.4 percent of its GDP, Germany
a surplus of 7.6 percent, and Japan
a surplus of 4.8 percent.

To balance national ledgers at the end of the year, these
imbalances have required the increasingly innovative recycling of funds from surplus
countries to the United
States. The overwhelming volume of cash
involved, coupled with lax financial regulation, was a recipe for trouble. U.S.
borrowers continually had to come up with more attractive financial products to
entice deep-pocketed foreign lenders to part with their cash. This led to the
creation of questionable mortgage-backed securities and other exotic
instruments that proved unsafe and gave rise to the global financial crisis.
Avoiding similar problems in the future will necessitate preventing the
reemergence of huge current account imbalances.

Most economists believe the United States can safely maintain a
current account deficit of about 3 percent of GDP. The U.S. current account deficit is now declining,
thanks to falling prices for imported oil and reduced U.S. consumer demand as a result of
the recession. But the deficit is still too large. And if, as some economists
predict, the United States
is the first nation to recover from the global downturn, the U.S. current account may worsen
again as American consumers return to their import-dependent lifestyles.

If we are to avoid that eventuality and achieve a
sustainable current account balance, we will have to buy fewer imports and thus
have less need to borrow abroad to pay for them. We need to consume less and
save more. Some curtailment of consumption is necessary because we cannot
continue to live beyond our means indefinitely and because the United States
has been attempting to export its way out of its deficit for the last
generation, to no avail. At any rate, reduced consumption is unavoidable in the
short run given the current economic downturn.

However, a sustainable current account balance may prove
difficult to achieve solely by means of a higher rate of savings. For most of
the period after the Second World War household savings rates in the United States
ranged between 6 percent and 10 percent of GDP. In the early 1990s, the savings
rate began declining, virtually collapsing after 1997. Raising these rates back
to historic norms would require a doubling or tripling of American savings.
That would translate into a concomitant decline in Americans’ standard of
living, a prospect that will be unpalatable to many.

Internationally, any long-term decline in U.S. consumption would have a devastating effect
on the economies of other countries that have come to depend on growth fueled
by exports to the United
States. Until now, foreign overproduction,
largely in China, has
balanced U.S.
overconsumption. This excess production has often been the product of conscious
government policy to promote exports at the expense of domestic consumption. Inevitably,
a reduction in American consumption may force a reduction in those exports.

China
will bear the brunt of that adjustment.  As
Brad Setser, a fellow at the Council on Foreign Relations, pointed out in his
blog, “Given that the U.S. economy is about 3.3 times the size of China’s, and
China’s trade surplus is roughly equal to two-thirds of the U.S. trade deficit,
the increase in Chinese demand needed to equilibrate the increase in U.S.
household savings is equal to roughly 10 to 15 percent of China’s GDP. With
consumption accounting for less than 50 percent of China’s income, Chinese consumption
will have to rise, in other words, by more than one-quarter. This is clearly
unlikely.”

So any effort to re-equilibrate
global trade imbalances based solely on rebalancing savings and consumption
faces many obstacles, both domestically and internationally. One way to break
out of this conundrum is to reconceptualize the problem.

An increase in the U.S.
savings rate should be coupled with a change in America’s growth philosophy. There
needs to be a new emphasis on domestic production. That is, we need to produce
more of what we consume. Reaching this goal will require a multifaceted
strategy in which trade policy can play a part.

Key to any revival
of domestic production of goods and services will be a concerted effort to
improve U.S. competitiveness
through greater funding of research and development; a renewal of America’s
infrastructure; universal, lifelong retraining of the workforce, and a selective
industrial policy aimed at nurturing green technologies and the value-added
production of traditional products, such as steel.

A new U.S.
trade policy, framed by the principals of reciprocity and a balance of benefits,
and rooted in a new set of values-such as environmental sustainability and
consumer safety-can reinforce this new growth philosophy and bolster public
support for continued U.S.
engagement in the world economy.

As the late Robert Hudec, an authority on international
trade law, wrote about the bargain implicit in all international trade agreements
in Development, Trade, and the WTO, a
collection of essays published by the World Bank, “The starting assumption has
been that the obligations undertaken by each country involve a balance of
benefits-the benefits granted to others in the form of a country’s own
obligations, balanced against the benefits that country obtains from the
obligations undertaken by others.” In the mid-1980s, the European Community
suggested making this balance of benefits concept explicit in the Uruguay Round
of multilateral trade negotiations. Brussels
proposed withholding benefits to trade-surplus countries if their markets were not
sufficiently open. Washington rejected the
idea as Japan
bashing. At the time, the U.S.
trade deficit with Japan
was $46 billion; nearly a quarter century later, that deficit is $73 billion. 

The balance of benefits principle deserves renewed consideration
by the Obama administration. Pursuit of a narrow balance of benefits in trade
would be neither workable nor economically sound. The multiple benefits and
costs of any economic transaction, including trade, are difficult to pin down
with precision. And short-run costs can turn into long-run benefits.
Nevertheless, it is possible to recognize when trade has become dangerously out
of balance, as it is today, contributing to the financial crisis. Moreover,
public support for free trade is eroding precisely because people do not
believe that trade agreements are fair or deliver sufficient value to the
country. The Obama administration should frame future U.S. trade policy with eye to attaining
a more economically and politically sustainable balance of benefits.

Reciprocity-making an action conditional upon an action
of a counterpart-is a useful means of pursuing that goal. Article 28 of the
General Agreement on Tariffs and Trade, the predecessor to the World Trade Organization
(WTO), lays down the principle that negotiations should be conducted “on a
reciprocal and mutually advantageous basis.” Historically, reciprocity has been
deemed practical
only between developed
nations
with their roughly matching economies. For trade between rich and poor nations,
the concept
of relative reciprocity, with developed nations accepting less than full
reciprocity from their developing trading partners
in recognition of their poverty and constrained circumstances, has been applied.

Reciprocity, with its inevitable focus on promoting a
country’s exports rather than valuing imports, has long been attacked as thinly
veiled mercantilism. Some economists even argue that unilateral import
liberalization benefits consumers and thus should be pursued even if it is
nonreciprocal and a nation’s exports do not increase. The economic reasoning
behind this argument is sound. But it fails to address the unintended economic
consequences when non-reciprocity leads to the loss of high-paying export jobs
and unsustainable current account imbalances.

A further political complication is that the benefits
from imports are economically dispersed across all consumers while the costs in
the form of heightened competition in the domestic market are concentrated on
just a few domestic producers. So it is politically useful to point to specific
benefits from trade reciprocity to help counterbalance the backlash against the
unavoidable costs of imports.

As Harvard University’s Robert Lawrence and the Brookings
Institution’s Charles Schultz observed in their book, An American Trade Strategy, “Because of U.S. fealty to the free
trade ideology and geopolitical interest in having other countries support it,
the United States
has in practice stopped negotiating for serious reciprocity.” This observation
made in 1990, is even truer today.

The Obama administration can change this. In the 110th Congress,
a small number of Republicans and Democrats proposed reciprocal market access legislation,
HR 3684. “This legislation,” reads the bill’s summary, “will provide additional
leverage for USTR [United States Trade Representative] to ensure that negotiated
agreements result in real market access for U.S.
producers and not just result in eliminating tariffs on imports into the United States.”

The bill would have required the president to certify that reciprocal market access has been
obtained in advance of agreeing to a modification of any existing duty on any
product. It also would have required U.S.
trade negotiators to seek the right to revoke concessions to cut tariffs if U.S.
trading partners do not implement the commitments they have made to open up
their markets. There is a similar “snap back” provision regarding trade in
automobiles in the U.S.-Korea free trade agreement that Congress has yet to
pass.

 

The Policy Implications
of Reciprocity and Balance of Benefits

A commitment to reciprocity and
a balance of benefits should frame the Obama administration’s policy on a range
of trade-related issues, including government stimulus spending and industrial
bailouts, the enforcement of trade laws, and future negotiating priorities.

One example of how this new approach could play out in
practice involves public procurement in planned infrastructure spending, the “Buy
America” issue. Under international trade rules, much government procurement is
open to foreign and domestic bidders so as to obtain the highest-quality
products at the lowest price to the taxpayer. Most major industrial countries
are party to the WTO’s Agreement on Government Procurement, including Japan
and the nations of the European Union. China
and India
have not signed the agreement.

Washington
has long advocated international competitive bidding for major infrastructure
spending. However, the purpose of U.S.
economic stimulus spending is to generate jobs and consumer spending in the United States.
This means that using American taxpayer dollars to buy Chinese steel or
Japanese earthmoving equipment for use in U.S.
infrastructure projects, worsening the U.S. trade deficit in the process, will
likely produce a political backlash and imperil public support for future
stimulus spending. Moreover, many state governments, which oversee much
infrastructure spending and are not constrained by trade rules, must abide by Buy
America requirements.

On the other hand, exports will undoubtedly play a key
role in the recovery of the U.S.
economy. Caterpillar and Microsoft should be able to compete for new business
opportunities abroad as, for example, Japan
and Germany
build roads or install computers in their schools as a means of stimulating
their economies. And, if American manufacturing recovers as part of the
long-term renewal of the U.S.
economy, the United States
will want to maximize its export opportunities.

This conundrum-how to balance immediate economic and
political demands (Buy America) with long-term American interests (the need to
ensure open markets for American products abroad)-posed an early trade policy
challenge for the Obama administration. Congress wanted strict Buy America
rules in the economic stimulus package it passed in February. Foreigners, and
many in the U.S.
business community, worried about the impact of such strictures on their
exports, opposed these rules.

The
Obama administration woefully misplayed the Buy America issue, enabling the
Europeans and others to paint Americans as protectionists, despite the fact that
many of the Buy America proposals under consideration in the economic stimulus
package were arguably consistent with U.S. international obligations.

President
Obama’s failure to push back was particularly striking given that European
outrage was clearly a case of the pot calling the kettle black. The European
Union, which threatened to sue the United States in the World Trade
Organization over Buy America, excludes from foreign competition government
contracts for drinking water, energy, transportation, and telecommunications. Nor
was the EU prepared to pull its weight in reviving the global economy: its plan
to spend 0.85 percent of its GDP on economic stimulus efforts in 2009 compared
unfavorably with Washington’s
plan to spend more than 2 percent of U.S. GDP for this purpose.

President
Obama allowed foreigners and the administration’s opponents to seize the moral
high ground regarding Buy America instead of laying out his own vision of how a
new approach to trade could begin to address the problems facing the United States.
If, in the long term, it is necessary for the United States to produce more of
what it consumes, Buy America can be a useful means of encouraging more
domestic production of everything from steel to earth-moving machinery. As a trade
tool, it can be used to leverage greater stimulus spending by America’s trading partners and to
encourage them to open up more of their public procurement to American
suppliers.

Thus, a hard-nosed application of the principles of
reciprocity and balance of benefits should guide U.S. trade policy going forward.
Chinese and Indian firms, whose governments are not a party to the WTO
procurement code, should be denied the opportunity to bid on U.S.
infrastructure spending until American companies win comparable contracts in
China and India. Japan and
Europe should be put on notice that Washington
will closely monitor their adherence to their commitments and aggressively
pursue U.S.
rights under WTO rules.

At the same time, to head off inevitable disputes that
could take years to sort out, the administration should challenge the world’s
20 major economies, including those that are not governed by the WTO
procurement code, to agree on a set of principals and parameters to guide
massive anticipated government procurement.

A similar code of conduct should be agreed upon regarding
the bailouts nations have already begun to provide to their automobile industries
and are likely to offer to other manufacturers as the global recession deepens.
Washington is planning to give Detroit tens of billions
of dollars. The German auto industry has asked Brussels for up to $54 billion in loan
guarantees. Korean, Chinese, and Japanese firms may well get similar support
from their governments.

Under WTO rules, subsidies are prohibited if they require
recipients to meet export targets or to use domestic goods instead of imported
ones. Other subsidies that may distort trade can be challenged before a WTO
dispute settlement panel. European Union president José Manuel Barroso has already
threatened to challenge U.S.
auto aid under WTO rules.

This threat foreshadows the international legal minefield
governments are blundering into with automobile subsidies. An economically
justified bailout in the eyes of one government is likely to be seen by other
governments as a blatant attempt to change the global competitive balance in a
strategic industry. The trade challenge facing Washington
is how to forestall a check-writing competition, especially in view of Tokyo’s and Beijing’s
deep pockets.

The Obama administration should immediately initiate talks
with Europe, Japan, China, and South Korea to establish industrial
bailout guidelines that spell out what kind of aid is permissible, repayment schedules,
allowable uses for funds, and permissible amounts relative to the size of the
industry. The guidelines should include a “peace clause” to protect countries
from WTO challenges if they adhere to the agreed subsidy parameters. These
guidelines can build on the existing weak WTO subsidies code.

At the same time, Washington
may want to initiate talks with foreign automakers about expanding their
production in the United
States with the aim of ensuring that when
auto sales again pick up in the American market more of that production takes place
on American soil. The Obama administration should remind Toyota,
Hyundai, and Chinese automakers that in the recessionary 1980s, when there were
concerns about the trade deficit and a crisis in the auto industry, Congress
forced the Reagan administration to impose on Japan a “voluntary export
restraint” on autos. This was crude trade policy and bad economics. But it
accelerated Japanese auto making in the United States, resulted in the employment
of tens of thousands of Americans, and stanched the bleeding trade deficit. A
far better policy would be to encourage foreign automakers to voluntarily
expand production in the United
States. The White House can make it clear
that this would be a less painful course of action.

Principles
of reciprocity and balance of benefits should drive the Obama administration’s promise
to make enforcement the top priority of the U.S. Trade Representative. Past
administrations, Democratic and Republican alike, have made similar promises. However,
they chose to narrowly pursue that commitment by challenging specific
violations of the letter of international agreements, alleging, for example, that
European subsidies of Airbus ran counter to agreed limits on such support or
that China
was not enforcing intellectual property rights laws.

There has never been a WTO dispute settlement case
brought in pursuit of the broader WTO principles of reciprocity and balance of
benefits. Trade theologians worry that such a case could blow apart the organization.
Of course, the United States
should be wary of undermining an international institution that it helped to create
and which has proved to be useful in defense of U.S. interests. But the Obama
administration should not shy away from threatening to bring a WTO dispute case
based on an allegation that another nation is failing to provide a balance of
benefits to the United
States. At the very least, such a threat
would stimulate a broader dialogue within the WTO and with America’s trading partners about
how to ensure that the trading system delivers more equitable outcomes.

Reciprocity can also be brought to bear on other
trade-related issues. The United States
and Europe allow the value of their currencies
to be established by the market. China
and, to a lesser extent, Japan
and Korea,
have intervened in currency markets in the past to manage their currencies.
Such currency manipulation has contributed greatly to the current account
imbalances that plague the world economy. Moreover, it lends credence to the
American public’s belief that trade is not conducted on a level playing field.

Willful currency misalignment, like lack of reciprocity,
is an actionable WTO offense that has never been tested under the world body’s
dispute mechanism. The Obama administration should make it clear to its trading
partners that in its pursuit of more balanced benefits from trade, it wishes
them to allow the market to determine exchange rates, and that the United will
assert all its rights under international agreements with respect to currency
issues.

Alternatively, Washington
could propose an international agreement, jointly administered by the
International Monetary Fund and the World Trade Organization, to impose new
discipline on trade surplus countries. This approach was first suggested by
Jessica Einhorn, the former treasurer of the World Bank and current head of the
School for Advanced International Studies at Johns Hopkins. She has suggested
that if a
country runs a surplus on its current account for more than a year and is simultaneously
intervening to purchase foreign exchange at a particular percentage of its GNP,
it should be presumed to be distorting trade and should be subject to an
automatic review by the IMF. Unless a majority of the IMF member governments disagreed,
the WTO could be authorized to impose a surcharge on the exports of that
country sufficient to curb its trade distorting practices.

Whichever approach the Obama administration takes toward
exchange rates needs to be shaped by the underlying principal of reciprocity.
Jawboning the Chinese and others, the tack taken by both the Clinton and Bush administrations, failed. It
is time for a more forward-leaning strategy.

 

Reframing U.S.
Trade Policy

The goal of a greater
balance of benefits from trade policy should also frame the Obama
administration’s efforts to open foreign markets to more U.S. exports.

The idea that the United States can export its way
out of its current account problem is a cruel delusion. For the last
generation, trade advocates have contended that opening foreign markets and
improving American competitiveness will enable the country to grow its way out
of global indebtedness. They have trumpeted the fact that exports have
quadrupled since 1987. But imports have quintupled over that same period. It is
true that the U.S.
current account deficit would be worse if exports had not improved so robustly,
and for this reason expansion of exports must be a component of the Obama trade
strategy. But it is not a sufficient condition for rebalancing world trade.

That said, the Obama trade strategy
needs an export-promotion component. The Bush administration correctly refused
to agree to a Doha Round agreement that lacked ambition. An early 2008
assessment of the proposals on the table in the manufacturing negotiation by Joseph
Francois of the Johannes Kepler University
in Vienna, Austria, anticipated gains of no
more than $40 billion worldwide. That works out to 0.1 percent of global GDP.
The benefits for individual countries were similarly minuscule. At best, U.S.
income would have been boosted by about $500 million. All of Africa
would have gained no more than $800 million. And India would actually have lost as
much as $700 million.

The
agricultural negotiations also promised meager benefits, especially for U.S.
farmers. Average tariffs facing U.S.
farm exports would have fallen from 15.7 percent to 12.5 percent, according to a study by David Blandford,
David Laborde, and Will Martin (Implications
for the United States of the May 2008 Draft Agricultural Modalities) for the International Food & Agricultural Trade Policy
Council.

These potential benefits improved
somewhat through the course of 2008, as new offers were made in Geneva, but they were not sufficient to justify the United States
agreeing to complete the negotiating round. It is little wonder that American
farmers balked at capping their government subsidies in return for such meager
new export opportunities, that the U.S. business community has not rallied in
support of the Doha
negotiations, and that organized labor has been extremely skeptical of them as
well.

A future Doha deal that does
not deliver bigger benefits to the U.S.
economy will not contribute to the rebalancing of the U.S. current account, nor will it
garner the public support necessary to obtain necessary congressional approval.
The Obama administration should continue to insist on an ambitious outcome for
the WTO negotiations: greater market access for U.S. manufactured products in
Brazil, India, and other emerging markets, and greater opportunities for
American service providers-insurance companies, architectural and law firms,
education and health care providers-to do business in those economies. This may require trade liberalization agreements that apply
only to specific industries, such as chemicals or electrical machinery, where U.S.
producers have a competitive advantage and can be expected to benefit from the
removal of foreign trade barriers.

It may also require sector-specific
trade agreements, such as services-only free trade agreements. U.S.
trade in services has nearly doubled in the last decade. America may be more competitive in
services than in any other field. The United States ran a $139 billion
trade surplus in services in 2007, and its services exports were more than
twice those of any other nation. Liberalizing trade agreements with Europe and Japan,
which have comparably developed service sectors and some common regulatory
approaches to service industries, might make sense.

The Obama administration should
explore trade accords on a range of industrial, services, and agriculture
products between like-minded nations if and when the entire membership of the
WTO cannot agree. To break the deadlock in the Doha Round and achieve a
meaningful outcome for American interests, the administration should also be
willing to consider an outcome that does not require unanimous support of all
WTO members, that accords benefits on a reciprocal basis, and may reach
agreement on some, but not all, issues.

At
the same time, the Obama trade strategy should not ignore bilateral and
regional trade agreements, so long as they are framed by the principles of
reciprocity and a shared commitment to high standards. It is not an accident
that the United States
is running a manufacturing trade surplus with its free trade partners at a time
when it has a manufacturing deficit of more than $400 billion with the world as
a whole, according to calculations by the National Association of
Manufacturers.

In pursuit of a more sustainable
trade balance, the Obama administration needs to pursue trade liberalization
with individual countries or groups of nations. But to secure the domestic
political support necessary to succeed in that effort the administration also
needs to rebuild public trust in trade. This will be easier to do by
liberalizing trade with nations that broadly share American values. To that end, the administration should make deepening
and broadening the transatlantic marketplace its highest trade priority.

In 2008, goods trade across the Atlantic
exceeded three-quarters of a trillion dollars, a record. Europeans bought $328
billion worth of American exports, more than four times what the Chinese bought
from the United States
and 17 times more than the Indians bought. Moreover, in
2007, U.S.
companies invested a record $128 billion in the European Union, amounting to
nearly 50 percent of American investment outflows that year. Such investments
earned American affiliates $147 billion in profits in Europe in 2006,
roughly half of U.S.
global earnings that year.

Removing
remaining barriers to commerce in the transatlantic economy might help close
the $107 billion trade deficit the United States
recorded with Europe in 2008. And it would
boost American per capita income by up to 2.5 percent, according to The
Benefits of Liberalising Product Markets and Reducing Barriers to International
Trade and Investment: The Case of the United States and the European Union, an OECD study.

Such an effort will not be easy. As with most modern
trade negotiations, a U.S.-EU negotiation would not focus on the reduction of
tariffs, which are largely insignificant. It would entail the harmonization or
mutual recognition of domestic regulatory standards. These are deeply rooted in
values. Some are legal in nature, such as a commitment to transparency and due
process. Still others pertain to human rights, such as nondiscrimination in the
workplace and the right to organize unions.

Americans and Europeans have more values in common with
each other than they do with people in other parts of the world, sharing high
levels of tolerance of out groups, a belief in gender equity, and political
activism, write Ronald Inglehart of the Institute for Social Research at the
University of Michigan and head of the World Values Survey, which every decade
assesses values in more than 50 countries, and Christian Welzel (in “The
Role of Ordinary People in Democratization,”
Journal of Democracy). Americans and
Europeans are both committed to democracy and believe in the benefits of
competition and hard work. And, as important when it comes to trade issues,
there is a general transatlantic commitment to a market-based economic system.
Fully 72 percent of Americans say people are better off in a free market system,
as do 66 percent of Britons, 61 percent of the French, and 69 percent of
Germans, according to the 2007 Pew Global Attitudes Survey.

If the Obama administration is to maximize the economic
benefits of trade in a balanced manner and pursue a more values-based trade
policy, its chances of success are greater with Europe than they are with China,
India, or any other country.

 

A
Values-Based Trade Policy

Values have
always been an implicit component of U.S.
trade policy, and Washington
has long emphasized certain values over others in its commercial dealings with
other countries. America’s
postwar pursuit of international market liberalization looked to maximize the
interests of consumers-lower prices, greater competition, choice, and quality-rather
than those of producers, which, in the 1950s and 1960s, seemed quite capable of
effectively competing without government help. At the same time, Washington’s efforts to
dismantle non-tariff trade barriers and create mechanisms for international
dispute settlement have effectively been an attempt to extend the reach of
long-held American values involving the transparency of government decision
making, due process, and the rule of law. And many supporters of freer trade have
argued that globalization promotes and reinforces democracy.

Americans
share these values and aspirations for the world. The ready availability of
cheap rugs from abroad does not override
their concern that children should not be working in the factories where those
rugs are made. And despite their faith in the free market and skepticism about
government intervention, they want the production of the food and drugs they
give their children to be regulated, wherever in the world they are produced.

Elections,
whatever else they may be about, reflect the values of the electorate. Candidate
Obama’s promise of change during the recent presidential campaign positioned President
Obama to pursue a new trade policy framed by environmental sustainability and
higher health and safety standards, reflecting the public’s concern over global
warming and toxic children’s toys. A values-based trade policy means that more
political capital and negotiating energy should be put into dealing with
regulatory issues, as in the ongoing transatlantic economic dialogue with Europe. Such a policy would help reconcile the American
people to globalization.

Such a reframing of U.S.
trade policy will present difficult challenges.
In its first two years, the Clinton administration
linked trade ties with China
to Beijing’s
human rights record. The policy failed for two reasons. American values and
Chinese values were too disparate. And the strategy was based on sticks, rather
than carrots, with the administration threatening to deny China access to the U.S.
market for human rights violations rather than rewarding China with
greater market access for improving its human rights record.

Candidate
Obama promised to “use trade agreements to spread good labor and environmental standards
around the world.” More than two-thirds of Americans believe that “labor and environmental
standards should be included in trade agreements with developing countries
because without them companies in these countries will have an unfair advantage
in competing with American companies,” according to the 2007 German Marshall Fund Trade and Poverty Reduction
survey.

A May 2007 agreement between the Bush administration and
the Democratic leadership of the House of Representatives affirmed that the
proposed free trade agreements with Peru,
Colombia, and Panama
and all such future deals would incorporate internationally recognized labor
standards, including freedom of association, the right of workers to engage in
collective bargaining, and the effective abolition of child labor. Failure to
comply with these standards would be remedied through fines and trade
sanctions. The agreement also required future trade accords to adhere to specific
multilateral environmental agreements, including those applying to endangered
species and ozone depletion. Enforcement of those commitments could include
trade sanctions. Such requirements had long been resisted by both Republicans
and the business community. It is likely that such resistance will resurface in
the years ahead given the criticism the 2007 deal received from conservative
quarters.

To fulfill Obama’s campaign pledge, the administration
will need to insist on adherence to the agreement. Its first test may come in
2009 with the renewal of various trade preferences the United States accords the least developed
countries in Africa, Asia, and the Caribbean.
Most of these trade deals include some requirement that recipient nations
accord their people a modicum of labor rights. But enforcement has been spotty
at best. The renewal of trade preference programs is an opportunity to improve
on these standards.

However, the Obama administration’s trade officials must
also recognize that enforcement of “blue” (labor) and “green” (environmental)
standards has never been tested, despite their inclusion in trade deals with Jordan, Chile,
and Peru.
The administration needs to seek an early opportunity to challenge enforcement
of labor and environmental standards in these countries to see if such
provisions actually work. What the administration learns in these instances can
inform its efforts to include such protections in future U.S. trade arrangements.

The White House also needs to be judicious in insisting
on such standards. History demonstrates that the United States has the leverage to
demand blue and green provisions in bilateral trade accords. But any attempt to
include labor and environmental requirements in multilateral trade agreements
is probably a bridge too far and doomed to failure. This constraint is one more
reason for the White House to pursue deeper economic integration with nations
that share U.S.
labor and environmental values, such as the European Union, where such issues
are unlikely to pose major obstacles to agreement.

An even more important values-based trade challenge
facing the Obama administration involves how to balance an open market with the
need to combat climate change. Candidate Obama promised to make the fight
against global warming a top priority. But China is already the largest
emitter of CO₂, the principal greenhouse gas that is rapidly warming
the planet. In 2009, India
will pass Japan
to become the world’s fourth largest such polluter. So Obama can not fulfill
his promise without also convincing China
and India,
which have resisted any binding commitments, to place a greater value on
slowing global warming and curb their carbon emissions. Trade policy can play a
pivotal role in that effort.

In 1997, the U.S. Senate barred the Environmental
Protection Agency from implementing the Kyoto
protocol on climate change by a vote of 97 to 0. Turning around that opposition
will require the Obama administration to allay the fears of energy-intensive
American manufacturers-steel and cement makers, aluminum producers, and the
utilities that supply them-that curbing emissions of global warming gases will
drive up manufacturing costs in the United States. Such firms are increasingly tempted
to move facilities to cheaper production sites overseas in such countries as Brazil, China,
and India,
which have yet to commit to controlling carbon emissions. Such offshoring will
cost American jobs but do nothing to help the global environment. Moreover,
foreign manufacturers, unencumbered by emissions control costs, will flood the U.S.
market with their carbon-intensive products, driving climate-conscious American
firms out of business.

To comply with international trade rules and maximize
benefits for the atmosphere, there needs to be symmetry between U.S.
domestic efforts to curtail global warming and what is done to insure a level
playing field internationally.

If the Obama administration opts for a cap-and-trade
system requiring carbon emission permits for domestic producers, which
candidate Obama endorsed, then those who ship products to the United States should also be
obliged to have emission certificates. Foreign producers lacking such allowances
should not be allowed to sell their products in the U.S. market.

Such import emissions credits might be required only of
carbon-intensive goods, such as iron and steel, aluminum, and cement. Finished
products and other goods whose production does not generate substantial
greenhouse gases might not need certificates. Foreign manufacturers wishing to
sell their products in the United
States could purchase emissions credits on
the global carbon market. And imports from Europe,
which is actively curbing emissions, and goods from economies that produce minimal
emissions, could be exempt.

Requiring import emissions credits would spur innovation
in climate-friendly production technologies, as foreign producers competed for
ways to reduce their need for emissions certificates. And developing countries
would have a new incentive to build cleaner factories whose products would have
easier access to the U.S.
market. Such requirements would also spur demand abroad for American-made,
energy-efficiency-enhancing technologies. This would lower the cost of such
technologies for American users and boost exports, reducing the trade
imbalance.

Any effort on part of the Obama administration to frame a
carbon-sensitive trade policy would have to comport with international trade
rules and pass muster at the World Trade Organization. The WTO requires nations to accord foreign-made products the same
treatment as comparable domestic goods. So whatever emission controls
requirement Congress eventually passes must not discriminate against imports. It
should impose the same burden on U.S.
and foreign producers, exclude the poorest countries that might have trouble
complying, and only be relied upon as a last resort if U.S. efforts to get other nations
to curb emissions have failed.

There is great debate among trade lawyers as to the
legality of climate-related trade measures. Such restraints may be permissible
under the WTO’s environmental exemption to international trade rules-article 20
of the General Agreement on Tariffs and Trade-which permits trade measures to
protect life, health, and natural resources. Ultimately, such questions of
legality will be sorted out by dispute settlement judges in Geneva.

Until that point, the Obama administration must realize
that an overly cautious use of trade policy in defense of the planet will do
the climate no good and only feed public skepticism about globalization. If
trade comes to be seen as worsening climate change, it is trade that will
suffer.

 

Broadening the Values
Foundation for Trade Policy

At home, the debate about
labor rights and environmental standards has proven to be extremely divisive.
To break out of that partisan trap, the Obama administration needs to
articulate a trade policy that pursues a broader, more inclusive set of values:
the protection of consumers through high standards for health and safety. The
economic argument for trade has long been that it benefits consumers. But that
benefit has been narrowly defined by economists to include only lower prices
and greater consumer choice.

Yet consumers have other interests, notably that the
goods they buy do no harm to them or their families. It is the trust that
vegetables from Florida are as safe as produce
from the farmer down the road that permitted the development of a national food
market in the United States.
The future of globalization may similarly depend on trust in the ability of international
trade to deliver high-quality products, not simply lower-priced ones.

As the U.S.
market has become increasingly integrated with the global market, imports have
constituted a growing portion of Americans’ consumption of a range of things that
consumers put in their bodies. Imports now account for more than four-fifths of
the shrimp Americans consume. A similar proportion of the active pharmaceutical
ingredients used to make drugs sold in the United States come from abroad,
including the popular allergy medicine prednisone, metformin, for diabetes, and
amlodipine, for high blood pressure. And, among finished drugs, an estimated
two-fifths are imported. These import shares are likely to grow in the future.

Americans are worried about such imports. In 2008, the Pew
Global Attitudes Survey found that three-quarters of Americans feared that
products made in China
were less safe than products made elsewhere. This is a concern they shared with
people around the world. In 19 of the 24 countries where Pew conducted its poll
at least half of those questioned did not trust Chinese-made goods.

U.S.
trade policy should actively reflect this new trade reality by placing new
emphasis on making certain that imported products are safe and thereby
reconnect trade policy to the broader concerns of the American people.

Asserting higher standards in international commercial
relationships is not new. In the 1880s, refrigeration globalized the meat
industry. For the first time, Nebraska pork
could be shipped halfway around the world to provide roasts for Sunday dinners
in Paris and Berlin. But many of those European consumers
came down with trichinosis because local culinary tastes often dictated that
the pork be served rare, not boiled, which would have killed the trichinae
round worm found in many pork products. To protect their citizens, European
governments eventually banned all imports of U.S. pork. To regain the confidence
of their foreign customers, American hog farmers and packing houses pressed Washington for tougher U.S. food safety regulations. The
resultant 1890 Meat Inspection Act authorized microscopic inspection of U.S.
meat exports. And, eventually, many of the European import bans were lifted. As
Susan Aaronson wrote in Taking Trade to
the Streets, “The United States government used regulatory policy to expand
its exports.”

This experience and the recent flap over tainted imports
of Chinese pet food, toothpaste, and other products are painful reminders that
sustainable globalization requires appropriate regulation, not the
ideologically driven deregulation that has passed for trade policy in recent
years. History also shows that trade-enhancing regulation is best imposed by
exporters upon themselves. Experience also has demonstrated that effective
self-regulation is often not a product of altruism but of self-interest
engendered by threatened loss of market access.

These lessons should guide the Obama administration’s
trade policy. To protect Americans in the face of a rapid rise in food imports
from China, Mexico, and elsewhere, the U.S. budget and
personnel required for inspections of imported food and food additives need to be
dramatically increased.

But a defensive approach to quality control has its
limits. The volume of imports is just too great to inspect each and every
shipment. The onus has to be on foreign producers to improve their quality
control and on other governments to strengthen their own regulatory regimes and
to better enforce their own health and safety laws.

To leverage greater zeal for such enforcement and to lead
foreign producers to demand that their own governments get serious about health
and safety regulation, the Obama administration needs to get tough on imports, dramatically
stepping up both American inspections of foreign-made products and the
rejection of tainted foreign goods.

In 2006, food accounted for only 1.4 percent of the total
value of U.S. imports from China.
But food purchases from China
have tripled in the last decade and will only continue to rise. The recent
difficulties with food products from China have not stemmed from
quantity but quality. Melamine, an industrial chemical used in fertilizer and
plastics, was found in pet food imported from China
that killed cats and dogs, but also ended up being fed to U.S. livestock. Diethylene glycol,
an industrial solvent and prime ingredient in some antifreeze, was found in
exported Chinese-made toothpaste.

The problems associated with seafood imports from China
are illustrative of the broader challenge. There are an estimated 4.5 million
fish farmers in China,
many of whom produce for export. They typically crowd as many fish as possible
into ponds, holding pens, and cages. To forestall epidemic diseases due to
overcrowding and to compensate for the use of water often polluted by
agricultural fertilizers, industrial waste, and partially treated sewage, the
Chinese farmers add antibacterial, antiviral, and antifungal agents to their
fish ponds. These additives include known potential carcinogens. Antibiotics
difloxacin and ciprofloxacin, both approved for human use, are also frequently
used to treat the fish, despite the fact that scientists warn that the consumption
of the treated fish may reduce the effectiveness of these drugs when they are
used to fight diseases in humans.

Such problems have
led to rejections of consignments of Chinese food products by the U.S. Food and
Drug Administration, which is responsible for inspecting most food imports. In the
last three months of 2008, the FDA turned away 505 food shipments from China.

But no one knows how many shipments of tainted products
have slipped through porous U.S.
border barriers. Foreign producers often engage in “port shopping” in which a shipment of seafood rejected at one port is resubmitted
at another U.S.
port with the hope that inspection will be inadequate.

The number of categories of food
imports that might individually be inspected has tripled in the past 10 years,
according to the FDA. But in 2006, FDA
inspectors visually inspected only 115,000 of the more than 8.9 million food
shipments imported into the United
States and sent an additional 20,000 to
laboratories for analysis. The FDA has less than 2,000 food inspectors thinly spread
between ports and domestic food-production facilities.

And whatever the failings of the American inspection
system, the regulatory shortcomings are even worse in places like China and
India, which accounted for a quarter of the FDA’s total number of food
rejections from the entire world in the last quarter of 2008. Yet a 2008 Government
Accountability Office analysis, Federal Oversight of Food Safety, shows that FDA inspections of the
190,000 foreign firms that produce food for the U.S. market decreased from 211 in
fiscal year 2001 to fewer than 100 in fiscal year 2007.

“Right now,” said Donald W. Kraemer,
deputy director of the Office of Food Safety in the Center for Food Safety and
Applied Nutrition at the U.S. Food and Drug Administration, in testimony in
April 2008 before the U.S.-China Economic and Security Review Commission, “we
know very little about the 868,000 entries of seafood that are coming into the
United States, virtually nothing about them. We may know that it came from a
company that we once had trouble with. That’s the kind of information we know
now. But we don’t know what conditions it was produced under. We don’t know
anything about any testing that may have already been done by the government,
by a third-party organization or anybody else.”

Moreover, the government does not
have the authority to require that the Chinese quality control system for
seafood and pharmaceuticals, or similar quality systems in other countries, be
certified before such products can come into the United States.

So, the challenge facing the Obama administration is to
incentivize foreign exporters-and the American firms that buy from them-to
demand standards and enforcement that preserve their growing success in the U.S.
market.

First, Washington needs
to give the FDA the resources it needs to enforce U.S. law. With food imports up and
the number of inspectors down, the Obama administration has to dramatically
increase the government’s food safety budget. But more is needed. Food safety
must no longer be a second-tier priority within the FDA, taking a back seat to
drug and medical equipment safety.

The agency also needs performance benchmarks. In 1992, 8 percent
of all food imports were inspected. Now only about 1 percent are scrutinized,
thanks to an increase in import volumes, a decline in inspections, and, most
important, a pervasive, business-driven deregulatory mindset that prefers small
government to consumer safety. The FDA’s goal should be to inspect at least 15 percent
of all food imports. This target is not unreasonable. The U.S. Department of
Agriculture now inspects 16 percent of all meat imports.

But since no inspection regime can be foolproof, foreign
governments have to do a better job if Americans are to have confidence in imported
food products. The Obama administration needs to put in place trade tools that prod foreigners to better monitor and
adhere to regulation.

Dramatically
increasing U.S.
inspections of imported food and a likely rise in rejections of imported products
should help energize foreign authorities. Since the FDA already uses
risk-assessment techniques to target products from certain countries or problem
exporters, a stepped-up focus would not contravene international trade law. In
addition, the FDA could be required to certify that
countries exporting food products to the United
States have equivalent food safety systems before food
products from those countries can enter the United States.

Sen. Dick Durbin (D-IL) and Rep. Rosa DeLauro (D-CT) have
also proposed requiring that foreign food exporters first be certified by the
FDA before their products can enter the American market. Certification would
require U.S.
inspection of foreign food safety systems and plants, much as foreign meat-processing
plants are now inspected.

“If
we create certification systems,” testified Kraemer, “we might be able to shift
the world, to where we know something about 80 percent of the product coming
in, and there’s 20 percent we know that have not gotten through any
certification process that we have validated. We can then shift our relatively
small resources to that 20 percent and leave only a small amount for
verification work on the remaining.”

Finally, Congress could enforce legislation it has
already passed requiring food to carry labels stating where it was grown or
processed. The much-touted benefits of free markets are premised on consumers
having the information to make informed choices. There is no excuse for denying
consumers their right to know what they are putting into their bodies. And a
trade policy that gives consumers that assurance is more likely to earn their
support.

Making such values and standards issues the foundation of
a new Obama trade policy will be opposed by many economists and business
leaders who will object to the added cost of higher standards. This objection
must first be seen for what it is: an assertion that price trumps safety. This
is a dubious assumption at best. And it is an argument for the existing
paradigm without addressing its shortcomings. Moreover, it raises the bogeyman
of runaway costs, which, in many cases, may not be justified.

The situation with imported catfish from China is
illustrative. In 2004, when Chinese farmed catfish began arriving in the United States,
the price of catfish dropped by $1.00 a pound. To an economist, this is what
trade is all about. Increased global competition driving down prices, which is
good for consumers. But is it? There is no way to know, because the quality and
safety of that catfish is not being adequately tested.

Yet the cost of such testing is insignificant. The
voluntary inspection system run by the National Oceanic and Atmospheric
Administration of the U.S. Department of Commerce can test seafood for
compliance with FDA standards on a fee-for-service basis of about a penny a
pound. Requiring all imported catfish to be so tested, as imported tuna is now,
would probably cost more than that. But it would have no appreciable economic
impact on consumers, would ensure their health and safety, and, possibly most
important, would make certain that trade raises standards rather than lowers
them.

More broadly, a standards-based trade policy would also
pose other risks. Standards could easily become a rationale for protection by
every industry that fears competition from abroad. Avoiding such abuse will not
prove easy.

To
limit the inherent protectionist danger-that standards might be captured by
domestic special interests that have a purely economic goal in mind-the Obama
administration may want to negotiate a special safeguards clause in international
trade law that would enable a country to limit imports that violate its values.
Before invoking such protection, a government, including the U.S. government,
would have to demonstrate widespread public support of a particular value, say
a preference for safety over price. And it would have to show that restricting trade
was less costly than other measures in satisfying its public’s collective
preference for that value.

Such
a proposal is not as big a challenge to existing trade law as it may at first
appear. The WTO already allows countries to adopt rules that limit market
liberalization to protect public health, morality, the environment, and
national security. Many values-based trade actions could be justified by such
exemptions. Where they cannot be, trade laws may need to have flexibility to
accommodate collective value preferences.

Without
such accommodation, public opposition to globalization is only likely to grow,
as people are asked to sacrifice their concerns about the climate or the safety
of the food they feed their children to economic efficiency. If trade debates
come to be framed in that manner, globalization and the benefits it brings will
lose.

Finally, the Obama trade policy should also reaffirm a
long-standing American compassion for the desperately poor. This spirit
motivated Washington
to reduce trade barriers in the wake of the Second World War to spur economic
recovery around the world, and it reflects the generosity that Americans
believe characterizes their historical exceptionalism.

It would be immoral for America to run a trade surplus with
the developing world, for, in effect, the world’s richest nation to sell more
to the poor than it buys from them. Americans intuitively agree. Two in three
favor promoting trade with poor countries in the pursuit of bootstrap economic
development to create jobs and reduce poverty, according to the 2007 German
Marshall Fund Trade and Poverty Reduction survey.

Yet, U.S.
trade policy frustrates that goal by taxing the poor, not the rich. U.S. import duties on products coming from Bangladesh and Cambodia, two countries with per
capita income of less than $2 a day, equal about 16 percent of the total value
of American purchases from those nations. By comparison, U.S. duties on imports from the United Kingdom equal about 2 percent of the
total value of U.S.
imports from that island nation. Moreover, as Kimberly Ann Elliott of the
Center for Global Development points out in U.S.
Trade Policy and Global Development, Washington “discourages developing
countries from exporting goods from precisely the sectors in which they have a
natural advantage” such as textiles, apparel, shoes and travel goods. And, on
average, these goods face tariffs that are triple those for imports as a whole.
Moreover, poor nations face quantitative restrictions on the sugar, dairy
products, and peanuts they can sell in the U.S. market.

Increasing
imports from the least developed countries-notably, not China or India-poses no serious threat to
American well-being. Imports from these economies now account for only 1
percent of total U.S.
purchases from abroad. Nor do they threaten particular industries. Two-thirds
of U.S.
textile and apparel consumption already comes from imports, and less than 10 percent
of these imports come from the least developed countries.

The Obama administration can demonstrate its commitment
to a compassionate trade policy and to the economic development of the world’s
poorest people by unilaterally implementing a commitment that Washington has already made in the stalled Doha
Round. The United States
has promised to end all agricultural export subsidies, which often discourage
domestic food production in developing countries, and to remove all tariffs and
quotas on products from the least developed nations, once the Doha Round is
completed. With the Doha talks now years from completion and the promise of
these concessions having shown that they offer no leverage on the Doha negotiations,
the Obama administration should make these benefits available immediately.

This policy would not be without its complications. Washington’s foreign
policy interests in least developed countries may clash with its foreign policy
interests with key allies. Expanding access to the American market for Bangladeshi
textiles may well eat into Pakistani exports to the United
States, causing employment problems for Islamabad. Many countries may lack the
capital and skilled labor force to take advantage of new opportunities in the U.S. market. It
will prove hard for them to compete with China,
which over the years has used exchange-rate manipulation, subsidies, and
enormous foreign investment to grow its market share in the United States.

 

A New American Trade
Consensus

A change president needs a
changed U.S. trade policy to
rebalance U.S.
economic ties to the world and to restore the American people’s faith in
international engagement. The Obama administration should recast American trade
relations with the world so that they are framed by the principles of
reciprocity and balance of benefits, and have a new values orientation. Such an
approach will prove controversial and meet with resistance, both at home and
abroad. But there is time for such a debate. The Doha Round is on hold, and
other priorities for the most part will preclude action on trade issues in the
first few years of the new administration. The White House should use that time
to develop a new American trade consensus that is both economically and
politically sustainable.