U.S. Trade Policy in 2005

Feb 15, 2005

On February 15, 2005, Rep. Levin made a presentation at the Institute for International Economics on U.S. trade policy for the year.

As Prepared for Delivery:

I appreciate the opportunity to participate once again in an IIE Forum.  I am especially appreciative today because it adds variety to the legislative diet of recent months, adding the issues of international trade and globalization to the steady courses of Social Security and the budget.

Many of the trade issues we face this year will again be divisive.  Far too many individuals involved in trade policy or international economics, and certainly those in the media, when viewing this Congressional divide continue to draw the wrong line in the sand, however.  The battle lines are not drawn between "free trade" and "protectionism."   The major lines of difference are between those who support expanded trade but differ on whether it is essential to actively shape its terms or whether the market basically works out all kinks so the less one tries to shape the forces of globalization the better.

Some of the trade issues on the agenda for the year provide a good lens to view the distinctions between these two approaches.  In other cases, issues not on the agenda help show the distinctions, as well. 

The Trade Deficit

One of the issues not on the agenda yet is the trade deficit.  Last week we saw that the trade deficit hit a record high $618 billion in 2004, over 5% of GDP.  There are multiple causes of the trade deficit, and the concerns it raises should be stated carefully.  But there is a threshold question of whether we should be worried at all. 

The answer is, "No" for some economic theorists, like those in the Cato Institute, who dismiss "alarmist concerns about the size of the trade deficit."  The Administration, for what seems a combination of ideological and geopolitical reasons, just seems to basically shrug its shoulders, assuming the massive trade deficit is just a natural consequence of America's economic might, and placing the onus on our trading partners.
 
On the other hand, there are those of us who think that a trade deficit of such magnitude - and increasing at a frenetic pace - could be an indicator of a broader range of problems.  The U.S. economy is undoubtedly the most open large economy in the world.  Have our trading partners really opened theirs reciprocally?  Are they playing equally by the rules?  When we see that since 2001 there has been a 22% decline in U.S. exports of Information and Communications Advanced Technology Products, while imports have increased approximately 20%, should we be concerned that other countries are using industrial policy to erode America's comparative advantage?  Shouldn't we be concerned if we are funding the trade deficit by borrowing in unprecedented levels from foreign governments - meaning that more and more future tax revenue will be going overseas, rather than staying to fund programs at home?  Under this view, the massive trade deficit should not be downplayed; it begs for a re-examination of U.S. economic policy, including trade policy, to make sure we are doing all we can to make trade work for America's businesses, workers, and farmers.   

WTO Disapproval Resolution

Some of the issues relating to the trade deficit involve how our government has handled our role in the WTO.  The first item on the agenda this year is likely to be the WTO disapproval resolution.  The origin of this resolution is very interesting.  Most of us have probably forgotten it, but the WTO disapproval resolution was included in the Uruguay Round Agreements Act at the behest of Speaker Gingrich and a coalition of prominent Republicans, many of whom the media would probably call "free traders" - including Dick Armey, Bill Archer, Bill Thomas, Nancy Johnson, David Dreier, and Jim Kolbe.

Gingrich talked about his fear of "defacto surrender of sovereignty." 

It is a foregone conclusion that the Gingrich resolution will fail, and by a significant margin, including with my vote in opposition.  The debate may be used by some who basically want to turn back the clock on globalization just as it will surely be used by others to try and caricature all opponents of the Administration's trade policy.  

But it will also be used by those of us who believe in expanding and shaping trade to raise serious concerns about the WTO dispute settlement system and its clear bias against fair trade and safeguard laws.  Did you know that every safeguard challenge ever filed at the WTO has been successful?  Did you know that over the last 4 years, the U.S. has lost almost 90% (15/17) of cases challenging U.S. trade remedy laws?

The Bush Administration has not challenged these cases vigorously enough, nor have they pursued enough cases to advance U.S. interests.  There has been a sharp drop in enforcement actions undertaken by USTR from an average of 11 cases per year against foreign market barriers to only a total of 12 in the last four years.  The Administration has also failed to give priority to reform of the WTO settlement procedures to provide for more transparency and participation.

China

The two approaches to trade and globalization that I outlined initially are very evident in the many debates over China trade issues.  Those of us who believe in the need to shape trade and ensure rules-based fair trade helped ensure that there would be numerous tools available to the Administration to ensure that China lived up to its WTO commitments.  Unfortunately, the Administration has failed to utilize the tools effectively.  The Administration allowed the WTO annual review to be perfunctory; refused to use the special China safeguard; mishandled the China textiles safeguard; and has refused to challenge China's use of industrial policy to promote domestic production and keep out imports.

A moment on currency.  Fred Bergstein and the IIE have been a vigorous voice on this issue.  At this point there is a growing consensus that China's currency is under-valued.  There are disagreements about the appropriate value and appropriate responses, but almost every serious analyst agrees on the problem.  This Administration has just completely fumbled the ball, however.  Through inaction, inconsistency, and a willingness to accept rhetoric over real results, the Bush Administration has signaled to China that our government is not serious about the issue.  We all share an interest in a stable China, but I cannot understand why the Administration has not called for a revaluation or something similar to it as an interim measure.   

Perhaps the Administration's failure in this area stems from the fact that some economic theorists in the Administration do not really believe there is a problem.  The attitude is if China wants to undervalue its currency and accumulate U.S. debt, okay.  We get cheap Chinese goods and they help keep our interest rates low.  The market will eventually correct this problem.  I can tell you that manufacturers and small businesses I have met with in Michigan and elsewhere do not accept that answer, and neither do I.

CAFTA

Let me finish with what I believe will be the most important and most intense debate of the year, CAFTA. 

CAFTA is in trouble.  It was last year, so much so that there was no effort to bring it up.  All kinds of reasons have been suggested for its perilous state.  Often cited are certain provisions in the agreement which have created opposition within specific sectors, including the apparel and textile industries and sugar producers.  But most often those who have drawn the wrong line in the sand of trade battles simply point to the fact that the CAFTA - which basically allows each nation to set its own labor standards to be enforced -- has brought fervent, united opposition from the American labor movement. 

Viewing trade as a battle between Big Business and Big Labor misses the central issue which is so fully exemplified by the issue of labor standards in CAFTA - the need to expand and shape the terms of trade and competition.

In part to skirt this basic issue, all manner of other arguments are raised by the defenders of the notion that more trade is always better no matter its terms or content. 

Some say core labor standards are "social issues" or "extraneous" to trade.  I believe the very reason they are so contentious is that they are fundamentally economic, just as is true domestically.

Some say that the core labor standards issue in the CAFTA is really an effort to require adherence to American standards.  The truth is what Democrats like me have been seeking is adherence to the five very basic internationally-recognized standards (use of child or forced labor, workplace discrimination and the rights of workers to associate and bargain collectively).

Finally, there is a coordinated effort to defend the CAFTA approach by denying there is a basic problem, arguing that the laws in Central America provide workers the rights under the ILO declaration that each of the nations have signed.  But documents from the State Department, the ILO, Human Rights Watch and other sources say that in reality they do not.  As I have found, a stay in the region for just a few days allows one to observe the lack of adequate laws and effective enforcement.

The effective exercise of basic worker rights, especially the right to associate and be represented in bargaining in the workplace, will affect the status quo within a country, including the economic status quo.  That is why it is so actively resisted.  Providing for these rights is also a test of the meaning of freedom and democracy.  In his discussion about the American effort to spread freedom throughout the world, the President has lauded the words in the book written by Natan Sharansky.  He says the test of freedom is the "town square test" - whether anyone can go to the town square and be heard without punishment.  Workplaces in Central America do not come close to passing that test.

We are missing an important opportunity in CAFTA in four key respects.


  1. Central American workers - The Bush CAFTA will not ensure they share in the benefits of expanded trade.  Last week, in a meeting with Archbishops and a Bishop from four Andean nations, they reiterated again what we heard last year from a similar group from Central America:  "In the absence of binding commitments to respect workers' rights, such workers, especially the majority of the working poor, may not enjoy some of the potential benefits of increased trade."

  2. Central American nations - The Bush CAFTA will not help to alleviate the deep income divide between the very wealthy and everyone else in most of Central America, and indeed might exacerbate it.  In 2002, Honduras, Nicaragua, Guatemala and El Salvador ranked among the 10 worst nations in Latin America in the level of income inequality, according to the UN's Economic Commission for Latin America and the Caribbean.  These nations desperately need a growing middle class.  Industrial workers, equipped with the basic rights to have a say in the workplace, were key to the growth of a middle class in our nation.  This is not happening in Central America and won't as long as hundreds of thousands of workers are suppressed, not empowered, at the workplace.

  3. American workers - The Bush CAFTA does not strive to ensure that over time American workers are competing on a more level playing field with Central American workers who are not suppressed and who have the tools needed to participate fully in their workplace.  Increasingly, U.S. workers see these trade agreements as promoting a race to the bottom, instead of, as President Clinton said, a trade agreement that "levels up, not down."

  4.  American producers - Simply put, we need middle classes in Central America and elsewhere to buy U.S. goods and services.  They will be one necessary part of the solution to our huge trade deficits.

Recent events in Guatemala help to illustrate some of the problems with the Administration's approach to CAFTA. 

In 2000, the Administration began a review of Guatemala's eligibility to receive trade benefits under the Generalized System of Preferences (GSP) and the expanded CBI program, based on a series of serious violations in the area of international core labor standards.

In announcing its decision to continue GSP and CBI in May, 2001, USTR stated that while there had been "serious concern" over the years, including violence against workers, USTR had concluded that a package of labor law reforms enacted by the Guatemalan Congress that same month "provide[d] a foundation for further progress in assuring the security of workers."

After the GSP decision, some employers in Guatemala went to court and challenged the legality of those labor law changes.  Recently, a key aspect of these changes was thrown out by a Guatemalan court.  Basically, the new laws stay on the books, but there is no longer any authority to impose penalties if an employer violates those laws - so the labor laws have no teeth.  The additional labor reforms proposed in 2003 as necessary to bring Guatemala closer to compliance with ILO basic standards remain dormant in Guatemala's legislature.  As far as I know, we have not a heard a single word from the Administration on the evisceration of 2001 labor reforms.

The Administration's silence stands in stark contrast to the USTR's position on another set of changes to Guatemalan law.  USTR has stated categorically that it will not present CAFTA to Congress until Guatemala repeals its recently passed law relating to "test data protection" for medicines.

 The issue of intellectual property rights and access to medicines is a complex one.  We need to be vigilant and vigorous about safeguarding American intellectual property.  How this is balanced with availability of medicines vital for public health in developing nations was intensely debated and addressed by the WTO at Doha.  A balance was achieved which would safeguard the ability of developing nations to take "measures to protect public health ? and to promote access to medicines for all." 

The Administration now seems to be upsetting that balance by taking a one-size-fits-all approach to provisions in free trade agreements relating to public health needs in countries with small economies, low per capita incomes, and few government resources available to promote access to needed pharmaceuticals.  We need to make sure that free trade agreements are not used to undermine the flexibility agreed to at Doha.    

Conclusion

 As is clear from my remarks, I believe that the failure to both expand and shape trade is indeed that -- a failure in terms of advancing the best interests of U.S. businesses, workers and consumers in the global market place.

Let me close by describing why it is a failure in terms of an approach on Capitol Hill.  You may like the thrill of squeaking out one vote victories on trade legislation as was the case on Trade Promotion Authority, but this is a bad way to conduct U.S. trade policy.

The approach of the Administration and the Majority has severed longstanding bi-partisan underpinnings of American trade policy.  As we witnessed in the TPA vote, this approach lead them to make deals inconsistent and indeed contrary to sound trade policy.  The latest reports are that they are on the same path in an effort to squeeze out the votes on CAFTA.

There is still another major detriment of throwing away the chance for a bi-partisan foundation for trade policy. In addition to courting members with unwise deals at the last moment, it means that some opportunities are missed in the first place to tackle some tough issues important for expanded trade but only achievable with strong bi-partisan support.

That is true of CAFTA. We all know that with the end of quotas on apparel and textile products, there is a major struggle ahead to preserve a strong Caribbean role in this sector, including in the U.S.  Doing so requires getting all parties - and I mean all -- meaningfully around a table to see how to maximize the chances, thinking comprehensively and creatively.  Instead we will see again the Administration trying to avoid defeat by courting members with deals at the last moment.

Our need for expanded trade needs better.

Making globalization work for our nation in the short and long term requires more.