May 5, 2009
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.