Using Trade As A Tool To Shape Globalization

Mar 5, 2007
(Washington D.C.)- U.S. Rep. Sander Levin (D-MI), Chairman of the House Ways and Means Subcommittee on Trade, today delivered a trade speech entitled, "Using Trade as a Tool to Shape Globalization," at the Center for American Progress (CAP).

 

Below is the text of Mr. Levin's remarks prepared for delivery:

Using Trade as a Tool to Shape Globalization
Rep. Sander Levin, Chair
Ways and Means Trade Subcommittee

Center for American Progress
Monday, March 5, 2007
As prepared for delivery

Introduction

The dramatically accelerating pace of globalization is one of the major phenomena of this era.  It is almost a cliche to say that it is here to stay.

Today we are discussing the role of one of its key elements - trade.

Controversy is not new to trade.   But it is intensified with the explosion of globalization.

In these years of the Bush Administration, there is more division on trade in Washington than in many decades.  There has been a serious erosion of the bi-partisan foundation to U.S. trade policy that once reigned and was so important.  There is increased dissatisfaction among the public, as shown by public opinion surveys in the U.S. indicating that "60% thought international trade was bad for creating jobs in this country."

As is often true, various reasons are given for partisanship and public unease, except unfortunately one's own approach to trade policy.

It is said that there is not a proper understanding of the benefits of trade, while the downsides hit home more tangibly.  There is some truth to that.  There needs to be more discussion of the benefits of expanded trade, its positive impacts both in developed and developing nations, including its role in reducing poverty.  But the general public is not foolish.  It knows that huge numbers of consumer goods now come from other nations, including China, and that many services are now coming from places like India.

Another explanation is that it just reflects the increased forces of "protectionism" and "isolationism".  Controversy over trade has always been beset by intense polarization.  It early on turned a positive word "protect" into the totally negative term "protectionism".  But its robotic use by the Bush Administration and others has only served to strangle debate and is a counterproductive response given the fact that Congressional opposition to the Administration's policies comes from many of us with a strong record of supporting expanded trade.  We cannot afford to dismiss the resistance nor caricature it.

Let's remember how the trade debate got to where it is today.

At the end of the Clinton Administration, there was a shift in trade policy toward a more activist approach that as President Clinton said so eloquently at the World Economic Forum and at the University of Chicago:  "to expand trade, but on terms that benefit all people..to have trade agreements that lift everybody up, not pull everybody down."

Those later years brought us the Cambodia Textiles and Apparel Agreement, where an increase in the textile and apparel import quota was included as a positive incentive to strengthen labor standards; the Jordan Free Trade Agreement, which included labor and environmental provisions enforceable in the same manner as all other provisions; and a China PNTR bill with a special safeguard  to shield against import surges, a Congressional-Executive Commission with jurisdiction over human rights, worker rights and rule of law and major provisions for oversight of China's adherence to their WTO commitments.

Each of these initiatives - expanding and shaping trade - passed with broad bi-partisan support.

Unfortunately, the Bush Administration did not build on these successes, but rather took a different approach.  

The basic belief of many, in and outside of the Bush Administration, is that markets will work out their own deficiencies, that the conditions are basically a reflection of the operation of "comparative advantage," and a result of the burst of technology, not trade policy, so the best response often is to "let it be" and at most consider helping those who are hurt.  This approach ends up treating trade liberalization as an end in itself.

Others-myself included-view trade liberalization as an important tool, not an end in itself.  That "leaving it be" often should not be.  It has often led to a passive rather than active approach to key trade issues, a strategy that locks in the shortcomings of the status quo.   Instead, I embrace an internationalist vision that shapes trade policy to maximize its benefits and minimize its downsides.  Growth with equity is the best way to ensure the benefits of globalization are spread more broadly.

I titled my remarks "Using Trade as a Tool to Shape Globalization".  I now want to discuss how this issue of "shaping" globalization relates to the trade issues now pending before the Congress and the Administration.
 
As I do so, I am aware that it can be argued that recognizing the role of some important underlying differences would make it more difficult to reach accord on trade issues and forge the necessary restoration of bi-partisan support for trade.  I disagree. The failure to dig beneath the surface and put differences on the table has only increased the appeal of populism, here in Washington and elsewhere, and in my opinion has undermined our ability to move forward.

I. The Trade Deficit

The U.S. trade deficit set another record high last year reaching $764 billion.  Its causes are multi-faceted, as are the consequences. It is a hot issue inside and outside of Congress. Those who maximize its importance point to the additional historically high dollar reserve held by foreign governments when invested in U.S. treasury notes resulting in historically high indebtedness of the U.S. foreign governments, including China and Japan.  Those who minimize it urge that a main problem is the low savings rate in the U.S. and that the trade deficit went up mostly because of oil imports -- though that does not explain the increases with China and Japan which do not export oil. 

But a perspective on trade policy also appears at work in shaping the minimalist point of view.  It was illustrated during USTR Susan Schwab's appearance before the Ways and Means Committee.  There was not a single USTR chart relating to the rise in imports.  Starting from a far higher base than exports and having in recent months a slightly lower percentage increase, imports remain far larger in dollar terms than exports.   When asked about this, the Ambassador's response was to acknowledge only the positive aspects of imports.  Her example was how imports helped consumers, using as evidence imported flowers available at lower costs to consumers that day for Valentine's Day.   In all of the charts and materials presented that day by USTR, there was no reference to other aspects of imports, such as lost jobs in the U.S and the loss of manufacturing capacity.

This exchange suggested a passivity about major imbalances and their impact.  It has been embodied in the Administration's approach in negotiating the Korea Free Trade Agreement.

 

II. The U.S.-Korea Free Trade Agreement

This is by far the most commercially significant bi-lateral FTA that the Bush Administration has negotiated. 

There are several outstanding issues, including agricultural--beef and rice.

Perhaps the most challenging one relates to Korea's massive non-tariff barriers to American industrial products in general and automotive products in particular.  Since the outset, Korea has had an economic iron curtain against these products, using a combination of tariffs, taxes, and regulations.

The facts tell the whole story.  Last year Korea sold 700,000 cars in the U.S.; the U.S. sold 4,000 in Korea, the fifth largest automotive market in the world.

This is more than an unbalanced field for trade.

The Korean Government wants a reduction in the present automotive tariff (2.5 percent on autos and 25 percent on trucks).  The U.S. automotive industry has insisted that any reduction in the 2.5 percent tariff be tied with measurable increases in access to the Korean market.  The immediate and persistent USTR response to industry and members of Congress has been a flat "no" and in FTA negotiations USTR proposed to set up a working group.

There has been no effort by USTR to see if there was a meaningful formula to assure a real change, dismissing proposals as "industrial policy" and ignoring the fact that two previous Korean commitments in "Memorandums of Understanding" (MOUs) were not worth the paper they were written on.  Korea has successfully pursued an industrial policy, following the Japanese model, of sheltering its market and using profits from higher prices in their domestic market to sell autos cheaper in the U.S. and pour the profits into R & D to improve their products in competition with American cars.  We welcome competition that helps improve our products, but not distorted markets which surely are not part of "creative destruction."

Last week a bi-partisan group of legislators transmitted to the President a specific negotiating position that moves beyond previous negotiating strategies and embarks on a new approach that addresses the United States' legitimate concerns that Korea will not obtain additional access to the U.S. market unless there is reciprocal opening of the Korean auto market.  There are two key components to the bi-partisan Congressional proposal.  The first part addresses the phase-out of the 2.5 percent U.S. passenger vehicle tariff and creates a positive incentive for Korea to open its market to U.S. autos.  The second part addresses Korea's current non-tariff barriers and creates a mechanism - available to all industries - for the United States to take action against future non-tariff barriers.

The Administration's handling of this aspect of the Korea FTA goes beyond a passive approach to a highly unbalanced field in trade.  It is acquiescence in one- way trade, assuming one-way markets will eventually turn themselves into two- way streets or that the one with the closed market will only hurt itself.

It was also suggested in discussion last week with a leading economist that we should not worry about Korea's barriers because even if they were torn down it would not matter much because the U.S. producers would not ship much to Korea anyway.  The problem with this thinking is that addressing any factor in trade is incremental; continuing to ignore parts leads to a rather large whole, indeed a large hole.  And sending the wrong signal in this bi-lateral leads to the wrong message in the Doha Round where progress on non-tariff barriers is also essential.

III.  China

China's entry into the WTO presented both opportunities and challenges.  This Administration has failed to use the tools given to it as part of PNTR to shape the challenges.

As reflected in GAO and other reports, the Administration has failed to use the annual WTO review process to actively press China to comply with its commitments.

In each of the four cases filed under the General Safeguard provision negotiated as part of PNTR in which the International Trade Commission has found the domestic industry deserving of relief, the Administration has refused to take action.

Despite rampant violation by China of its WTO Intellectual Property Rights commitments (the estimate is that 80-90% of books, DVD, CD, and films under U.S. intellectual property protection are sold as counterfeits in China), the Administration has held discussions but never filed a complaint with the WTO. 

Last year, after years of inaction from the Administration, a case was filed regarding auto parts.  Very recently, the Administration announced that it was beginning WTO action against a small slice of China's massive subsidies, which many observers said was a reaction to the November election results and the need for the Administration to appear more active on enforcement as it sought renewal of expiring fast track authority. 

The overall laxity in approach to enforcement is consistent with the underlying belief that markets should be left alone and will balance themselves.  That damage from inaction is less likely than from action, and that the side seeking balance is the "protectionist," not the one violating its obligations.

This has helped lead to record trade deficits with China.  Since 2001, the U.S. trade deficit with China has grown from $83.1 billion to $232.5 billion last year.  In Advanced Technology Products the trade deficit was up 17% from $47.0 billion in 2005 to $55.1 billion in 2006.

A few weeks ago the Trade Subcommittee held the first in a series of hearings on China that focused on the issue of subsidies and intellectual property rights.  Last week, Reps. Artur Davis and Phil English introduced a bi-partisan bill to ensure that the United States starts to apply the U.S. countervailing duty law to non-market economy countries. 

The United States already applies countervailing duties to unfairly subsidized and injurious imports from market-economy countries, and it should do the same with respect to imports from non-market economy countries like China.

A private right of action is necessary because the Administration has demonstrated it either cannot or will not expeditiously address these subsidies itself.  It will also provide the Administration with a critical tool to uncover the subsidies in China that China has refused to notify itself.  Countervailing duty investigations are just that: investigations.  There may be no better way for the United States to identify and quantify the subsidies in the Chinese market - or the injury they cause to industries in the United States.

I look forward to seeking quick action on this legislation.

IV. Peru, Colombia and Panama Free Trade Agreements (FTAs)
 
The FTAs negotiated by USTR with these nations clearly will expand markets in these nations for American products and services as well as agricultural goods like wheat, cotton and soybeans.

Despite the serious controversy over the Central America Free Trade Agreement (CAFTA) -- resulting in its passage by only two votes after a long struggle on the House Floor -- USTR negotiated the same provisions in the three pending FTAs that were in the center of the CAFTA controversy.  As to the rights of workers and the environment, the standard is that nations only must enforce their own laws, no matter how deficient.

In Peru, Colombia and Panama, workers do not have in law or practice their basic international rights, including what is most significant for the vast majority of workers, the right to associate and bargain collectively.  One need only look at reports of the State Department, the International Labor Organization (ILO) or Human Rights Watch.  This issue is not a "social" one, as argued early on by defenders of the Administration's status quo, but an economic one which is what provides its significance and fuels its controversy. 

Domestically, as our nation faced issues of huge gaps in the distribution of wealth and poverty, there was immense controversy over the rights of workers and their role in economic development.  Many business leaders and economists argued to leave the answer to market forces and against "government interference."  Eventually the argument was won domestically that actively shaping the operation of the market to make sure that workers possessed their basic rights would help to create middle classes and spread the benefits of accelerating economic growth. Now globalization has thrust the issues of worker rights into the sphere of economic relations and competition between nations. 

Peru, Colombia, and Panama have huge discrepancies in the distribution of wealth and immense poverty, contributing to make Latin America the region in the world with the widest spread of distribution of income and most often weak middle classes.

Democrats have actively urged that incorporating the core international labor standards in these three FTAs is mutually important for both parties -- for the workers in nations like Peru, for the nation overall which needs to develop a stronger middle class, for workers in our nation who do not want to compete with workers whose rights are suppressed, and for our businesses and its workers who need middle classes in other nations to buy our goods and services.

When former President Toledo spoke in 2006 at an informal meeting of Ways and Means Committee, he said that for globalization to work, its benefits must be more widely shared.  For that to occur, he continued, workers must be able to exercise their basic international rights, and for that to be carried out, the five core labor standards should be incorporated with enforcement in the body of trade agreements.   President Toledo reiterated that position two days later in front of the U.S. Chamber of Commerce.

The first response of USTR was to claim President Toledo did not say what he said. It continued insisting on "enforce your own laws" as the standard, though many of us made clear we would oppose an FTA built on that provision.  A provision that would lock in an unacceptable status quo, or worse.

Since the November election, amidst the talk from USTR about the need for bi-partisan discussions on this issue and about finding a "new template," there has been a shift in their argument against incorporation of the international standards in the FTA. 

USTR and Republicans are claiming that including International Labor Organization (ILO) core labor standards could lead to actions through the FTA requiring significant change in U.S. law.  This argument is a further evasion of the issue.

The 1998 ILO Declaration on Fundamental Principles and Rights at Work represented consensus among 175 countries, in a tripartite process involving governments, workers, and business representatives - including, of course, the U.S. government and the U.S. Council for International Business, as well as the AFL-CIO. 

The Declaration binds all ILO members - by virtue of their membership in the ILO - to "respect, promote, and realize" the core labor standards (freedom of association and the right to organize and bargain collectively, and prohibitions on child labor, forced labor, and discrimination in employment). 

We are not seeking in trade agreements to impose a new standard, or a U.S. standard, only that countries reaffirm an obligation they have already committed to.

In creating a double standard, the USTR proposal creates no meaningful standard at all.  It says to the U.S. "enforce your own labor law."  As to the other nation, it says carry out the ILO standards or have laws that are "equivalent" to U.S. labor law.

To seek "equivalency" with U.S. law misses the point as to the basic developments which need to occur in these nations.  The ILO standards provide a framework and whether a country brings their laws and practices into compliance depends on the situation on the ground in the nation - the traditions, values, socio-economic conditions, and overall legal framework.

For example, as to the rights of workers, the language in the laws of the former Soviet Union may have given workers their rights, perhaps more than the precise language in U.S. labor law. But in view of all of the conditions in the Soviet Union would anyone argue that workers in the Soviet Union enjoyed rights "equivalent" to workers in the U.S.?  If a nation has laws "equivalent" to the U.S. but workers are murdered when they try to form a union, do they have their rights of association?

The USTR proposal shifts the focus from the obligation of these nations to carry out their commitment as signatories to the ILO Declaration, to a legalistic argument over whether the letter of the law in one nation is "equivalent" to those of the U.S. 

For example, in Peru, a system of subcontracts and individual contracts set up by the Fujimori regime eroded the rights to associate and bargain collectively by permitting employers to shift workers covered by collective bargaining agreements to short-term contracts extended at the whim of the employer.   The result of the USTR proposal would be lawyers arguing about whether they could demonstrate "equivalency" with U.S. laws on subcontracting as opposed to whether in Peru workers in reality possess their basic right to associate and bargain collectively.

The ILO has a body of experience in applying these standards that give them meaning in a context relevant to each of these three Latin American nations.  The ILO has examined their laws and the overall conditions in which the laws of each of the nations have operated.  They have issued reports assessing the reality on the ground and have recommended remedial action. 

The USTR proposal turns its back on this experience, and the progress made under the General System of Preferences (GSP) system which relies on the ILO standards.  Other nations would undoubtedly choose to forego bringing their own laws and practices into compliance with the ILO standards and instead try to find some small aspect of U.S. labor law that could demonstrate "equivalency" in the written word.  The U.S. would likely never bring a complaint under the proposal made by the USTR since we would be bringing into the dispute settlement system the entire U.S. labor code.

Legal contentions about written "equivalency" of laws must not be a substitute for a clear obligation with a nation with whom we have an FTA to bring one's own laws and conditions into compliance with basic international standards.

The Republican argument that a two-way street where the U.S.  also reaffirms its obligation as a signatory to the ILO declaration would open U.S. laws to major change denies reality.  The Department of Labor has stated that our laws are basically in compliance.   Furthermore, under the FTA only the other government, not American unions or any other private party in either country could bring a claim under the FTA dispute settlement system; any conduct would have to be a persistent action having a direct effect on trade.

Time is urgent and key issues cannot be finessed.  There is a March 31 deadline for Congress to be given notice and the contents of an FTA by the Administration in order for that Agreement to be covered by the procedures of the present Fast Track Authority.  There are several other issues that need to be resolved including environmental and IPR medicine issues and human rights in Colombia.

As to worker rights, failure to revise these three FTAs to directly incorporate the ILO core labor standards with enforcement and reasonable transition will not only be a ticket to their defeat in Congress, but a missed opportunity.

V.  Currency

In the controversy over globalization, currency issues have moved to center stage.

The Asian nations, China, Japan, and Korea, possess huge trade surpluses with the U.S.   The reasons are complex, there being no single cause but many, including quality of product, a multitude of cost factors, levels of consumer demand and rates of saving.  The U.S. demand for oil, a substantial component of our overall deficit, is not relevant as to these Asian nations which ship no oil to us.

Several questions have arisen as to the role of the rate of currency:

Are the Asian currencies weak and the U.S. dollar strong?  If so, by how much?  Does this make their exports less costly for us to buy and our exports to them more costly to buy?  Can this directly impact trade?  Finally, are there trade- related steps that could be taken by the U.S. to impact the currency valuation?

A few weeks ago, we held our first bi-partisan, off-the-record discussion with Trade Subcommittee members and outside experts on the issue of currency. 

While some economists offer theories that the Asian currencies are not weak vis-a-vis the dollar, I believe the answer is overwhelmingly that they are.  Interestingly, in our session, while there was disagreement among the economists as to China, they all agreed as to the weakness of the Japanese currency.
 
Toyota itself said, "a weak yen, which boosts the value of overseas earnings, added 30 billion yen to the third quarter." It is calculated that this adds on average $4000 to its profits for a car shipped to the U.S. That flow increased by 500,000 last year as Toyota shipped more vehicles here last year than it made in the U.S.

American manufacturers estimate that imbalance with China's currency puts them at anywhere from a 15% to 40% disadvantage.

The response by the Administration has been a rhetorical one with China and denial of a problem with Japan.

It was evident recently when the Administration reacted to indications from the European Union that at the G-7 meeting it was going to try to place on the agenda a discussion of the impact of the weak yen on European manufacturing.  The Japanese indicated their opposition.  Secretary of the Treasury Paulson indicated that he would side with Japan.

One reason given by Treasury was that Japan had not directly intervened monetarily since early 2004.  In a revealing portion on his recent book, the former Under Secretary of Treasury for International Affairs, John Taylor, describes how the U.S. not only countenanced but supported and helped direct the path of such intervention, even though Treasury realized it would injure industrial producers in our nation.

So there is not only the clear precedent of massive Japan intervention -- a signal that such action would again be taken if felt necessary.  There are other explicit policies keeping the yen regulated. They include very low interest rates and an entire host of structural policies that combine to keep Japan's economy fundamentally based on exports, advantaged by the weak yen and sustained by the weak domestic consumer demand. 

The Secretary's position means relying on market forces -- even if they are not free.  The response to one-way trade is that its user will only hurt itself, if not right away, then in the long run.  The trouble is that in the long run the competitors on our side will be gone.

In the past we have tried to leverage action by the Administration by filing Section 301 petitions that would initiate with China discussions as to their currency policies and could result in a case at the WTO if the issues were not resolved.

Others are proposing that we change the law to define currency manipulation as a subsidy so that cases could be brought under U.S. trade remedy laws and that approach will also get full consideration after the non-market economy legislation.

You will see more hearings - some of them jointly held by committees of jurisdiction - and continued efforts to get the Administration to join us in confronting this important issue.

VI. WTO Doha Negotiations

Negotiations of this Round have proceeded in fits and starts.   I am very supportive of the intention of this Round - the Development Round - to spread the benefits of globalization more broadly and more equitably.

There are varying estimates of the increased trade that would result from a successful negotiation.  Some suggest $287 billion.  Others challenge such claims and analyze a quantitative result several times lower.  Past experience with highly optimistic projections, including those claimed for NAFTA, give reason for caution.  There has been only the most rudimentary progress in the significant services negotiations. 

There remain major potential pitfalls.  The Uruguay Round provided a dispute settlement system with finality, a necessary step.  It did not make reforms in the opaque process in the system.  This has allowed panels to roam in their decisions far beyond what was spelled out and agreed to by the parties.  This has undermined support in the U.S. for the World Trade Organization (WTO).

In the industrial sector, during the negotiations at Doha, there was pressure on USTR to assure that non-tariff barriers would receive equal focus as reductions in tariffs.  Despite USTR's assurances that it is being achieved, so far that has not happened.  It is of special importance to our nation, whose manufacturing sector is the most open in the world while other industrial nations like Japan and Korea are virtually closed because of their non-tariff barriers.

To date, of course, the center of controversy has been the agricultural sector. So far the spotlight has been on a potential breakthrough between the U.S. and the E.U.  Less attention has been paid to the impact of an opening of full global market competition on small farmers in developing nations.  A recent study by Carnegie suggested that it could be highly dislocating.  There is considerable evidence in drafting NAFTA that there was insufficient attention paid to the impact in Mexico.

The Bush trade policies have eroded the broad base of bi-partisan support so essential to navigating all of the difficult outstanding issues.

VII. Trade Promotion Authority - Fast Track

Some have suggested that a Doha breakthrough might drive the renewal of Trade Promotion Authority. 

I believe that the issue of renewal of Fast Track cannot be considered abstractly.   
 
It will be several months at least before we know whether there is a breakthrough on agriculture.  Further, as long as there is no success in ironing out key policy differences, with a new majority in Congress, a broad re-authorization should not and will not occur. 

Focusing on renewal of Fast Track now or opposing it is putting the cart before the horse.

It is correct that 535 Members of Congress cannot negotiate trade agreements nor have an open field to amend after negotiation.  But the Executive cannot have an open field to negotiate, with Congress left only afterwards to judge how the points add up.

This Congress will insist on a more meaningful role during negotiations.  The present advisory structure, the Congressional Oversight Group, has been very ineffective, as I saw sitting there in the minority.  Oversight of the Executive by Congress on trade issues these last years has been as routine as oversight by Congress on other sets of key issues.

If there is a Doha breakthrough, we will have to see if this Administration is really willing to have Congress as a major partner, discussing fully where it is going on key issues. 

There already are indications that the Administration has some ideas of where it would press and where it would give way in the Doha round, but it wants to hold these cards close to the vest, without informing Congress until the cards are put on the table.  That won?t work. 

VIII. Trade Adjustment Assistance (TAA)

It also won't work - as too often has been suggested in the past - to suggest that an expansion of Trade Adjustment Assistance (TAA) can facilitate the extension of Fast Track. 

It is vital to strengthen our overall training, re-training, and support system for dislocated workers.  This should not be seen as a substitute for needed changes in our trade policies themselves to help keep our businesses and our workers in operation rather than dislocation. 

While the U.S. has suffered more dislocation than most industrial nations, we have the most inadequate and ineffective structure for assisting and supporting the dislocated workers.  It starts late compared to other nations that move quickly when dislocation is likely, it supports come mainly through unemployment compensation which runs out in 26 weeks, and it is augmented with no comprehensive integrated network of programs.

TAA is an improvement over our unemployment system but it does not cover enough workers.  For those covered it is often hard to access and its training funds run out.  Only one-third or less of eligible workers enroll in training and only 11 percent of those potentially eligible for the health care subsidy (a credit that covers only 65 percent of health insurance premiums) find it useable.

With TAA up for re-authorization this year, we will look at a variety of proposals to strengthen the support system for dislocated workers, including covering service workers, allowing the certification of whole industries, simplifying the application process, ensuring that the training funds are fully adequate and improving the health care component so that it is actually meaningful.

These changes are vital to respond to the loss of jobs among hard-working Americans and to promote the competitiveness of the American workforce.  But, it is just that a response.  It can not be a response to a failed trade policy, because we have the responsibility - first and foremost - to get that trade policy right in the first place.

Time is short, and valuable day have been lost, in part because the Administration has had difficulty adjusting to the presence of a new Majority in Congress.  I remain optimistic that necessity may still be the mother of invention - or in this case change.