A Better Way to Think About Trade

Jul 25, 2013 Issues: Trade

Representative Sander Levin of Michigan, the senior Democrat on the Ways and Means Committee, which has jurisdiction over many trade issues, proposed this week that the United States make a significant change in its approach to international trade. The United States is in the middle of trade negotiations that, while still somewhat under the political radar and seldom on the front pages, have the potential to affect the economy – and many people’s jobs – in ways that could be quite negative or somewhat positive.

Mr. Levin, in remarks earlier at the Peterson Institute for International Economics, laid out a set of issues that are entirely reasonable and could well draw bipartisan support, even in the House of Representatives. (I’m a senior fellow at the institute, but I was not involved in organizing this event.) The Obama administration should pay attention, particularly as any trade deal ultimately needs Congressional support.

Mr. Levin made three main proposals that are directly relevant for the negotiations between the United States and countries on the Pacific Rim, aiming to sign a Trans-Pacific Partnership Agreement. (For a primer on that agreement, I recommend the book “Understanding the Trans-Pacific Partnership” by my colleagues Jeffrey J. Schott, Barbara Kotschwar and Julia Muir – the introduction and two other chapters are free.) The same principles are relevant for other potential trade deals.

The first point is that enforceable labor and environmental standards need to be given more emphasis in American trade agreements with other nations. Recent horrendous events in Bangladesh have driven home the unfortunate truth that if matters are left purely “to the market,” there will be very unsafe factories and dangerous working conditions. People will die, tragically and unnecessarily, producing cheap goods for American consumers.

Under consumer and legal pressure, companies in the United States and Europe are changing how they interact with suppliers – and insisting on higher standards. Richard Locke, director of the Watson Institute for International Studies at Brown University (and my former colleague at M.I.T.), has worked long and hard on these issues, and his conclusion is that while voluntary standards can help, more formal commitments by governments also play a constructive role.

(I recommend his book, “The Promise and Limits of Private Power: Promoting Labor Standards in a Global Economy,” as well as “The High Price of Cheap Clothing,” in which public radio’s Warren Olney discussed the issues with Professor Locke and other experts earlier this year.)

When I discuss these matters with global business executives, almost without exception they are of the opinion that health and safety should be subject to minimum acceptable – and legally enforceable – standards everywhere. Mr. Levin is pushing on an open door.

Mr. Levin’s second point is just as compelling. Japan has just joined the Pacific Rim negotiations, in part no doubt hoping that American tariffs on Japanese cars and trucks will be lowered. But it should not escape American negotiators that despite many years of promises, the Japanese automotive market – for both completed vehicles and components – remains very much closed to foreigners.

In large part, this is because of what economists like to call nontariff barriers – but it is exactly such barriers that the agreement under negotiation is supposed to address. Mr. Levin’s proposal is simple: tie the tariff reduction on Japanese cars and trucks to actual progress with automotive imports into Japan.

Those would not, by the way, have to be imports from the United States; the Japanese might consider letting in some South Korean cars and components (a repeated and reasonable South Korean request). The point is to get beyond promising that markets will be more open to actually removing the de facto barriers to trade.

Many countries claim to engage in free trade. But some governments, and the companies that work closely with them, have become adept at gaming the system – essentially finding various forms of official actions that tilt the playing field. Or if you prefer to be more blunt, engaging in unfair trade practices.

Mr. Levin is talking about removing government distortions, and this is why I expect he may receive a great deal of Republican support.

And this is also where Mr. Levin’s third proposal will really hit a nerve. There are countries that manipulate their exchange rate – lowering (or depreciating, in technical jargon) its value in order to gain a competitive advantage, increasing exports and reducing imports relative to what they would otherwise be.

The nuances of currency manipulation are fascinating and, as Mr. Levin said, the International Monetary Fund has invested a great deal of time and effort in detecting and measuring such actions. (This is part of what I worked on when I was at the I.M.F. in 2004-5 and 2007-8.)

Unfortunately, constraining or preventing currency manipulation through the I.M.F. and other multilateral forums has not been successful, and this potentially matters a great deal for the United States economy (see, for example, a recent report by C. Fred Bergsten and Joseph Gagnon of the Peterson Institute, or a May lecture by Mr. Bergsten).

Again, the issue is cheating within the system, with governments’ getting away with actions that distort markets on a grand scale. Here, too, I don’t know many Republicans who would feel good about this.

Mr. Levin proposes to establish a panel, as part of the Trans-Pacific Partnership Agreement, that would determine if currency manipulation has taken place. (Trade agreements typically include similar mediation mechanisms, but it would be innovative to do this for currency manipulation.) Relying on the I.M.F. or the United States Treasury to make a currency manipulation determination in the past has not worked, primarily for political reasons.

If a country manipulates its currency to gain an unfair advantage, the tariff on its goods and services sold to the United States would rise back to the level that would have existed without the free trade agreement, Mr. Levin proposes. In other words, it is just the additional perceived benefit of the proposed reduction that is on the table in the Trans-Pacific Partnership Agreement or any other free trade proposal.

This is a targeted and responsible proposal. It should get support from both sides of the aisle on Capitol Hill. The Obama administration needs Democratic and Republican votes to get the Trans-Pacific Partnership Agreement and other trade deals adopted.

Top officials should listen carefully to Mr. Levin’s suggestions.

To view the original article.