America Pays A Price For Sorry Trade Policies

Sep 19th 2011, 13:28 by G.I. | WASHINGTON

WHEN experts try to ferret out the causes of America's lost decade, international trade is often cast as the villain. It may in fact be the victim. In the last decade America's commitment to openness has flagged, and with it, its trade prowess and its appeal as a destination for investment. As international trade and investment have historically been major drivers of productivity, employment, and innovation, this declining engagement with the world may be an important contributor to the malaise that afflicts the economy.

That, at least, is the upshot of an impressively detailed if troubling new report from the Council on Foreign Relations. America, it concludes, risks being left a bystander as the rest of the world integrates further.

The report was produced by a task force headed by Andy Card, the former chief of staff to George W. Bush, and Tom Daschle, former Democratic Senate leader. Its project leaders are Edward Alden of the Council and Matthew Slaughter of Dartmouth College. Task force members include academics, think tankers, and labour and corporate representatives with an interest in trade.

America's share of world exports has slipped more than that of most developed countries over the last decade while its share of direct investment has plummeted precipitously. Meanwhile, the number of export-related American jobs has stagnated and multinational companies are now expanding payroll overseas while cutting it in America, the reverse of their traditional pattern.

Conventional wisdom portrays footloose multinationals as the cause of these economic problems. The Council report instead fingers a growing ambivalence in America to openness. Trade has become increasingly politicised. Congress is increasingly reluctant to grant Trade Promotion Authority, or TPA (which enables a president to negotiate a trade pace that Congress can accept or reject but not amend).

After lapsing in 1994 it was renewed in 2002 by a single vote. Many of the deals George Bush pursued were deeply divisive, including the Central American Free Trade Agreement, and three"”with Korea, Colombia and Panama"”had not been voted on by the time Barack Obama came into office. Mr Obama has not made trade a priority and moved forward on the three leftover FTAs only after reopening negotiations to obtain further concessions, in effect violating the spirit of TPA.

Meanwhile, the rest of the world has raced ahead. Korea and the European Union now have a bilateral trade agreement. Brazil and Argentina will soon be joined by Canada in striking new deals with Colombia, to the detriment of American agricultural exports. Asian countries have concluded or are negotiating 300 trade deals among themselves that exclude America. All these negotiations matter for reasons beyond mere sales:

The United States cannot afford to be left behind, in part because such negotiations often establish the basis for product and other regulatory standards. By allowing the EU, in particular, to gain a first-move advantage, U.S. companies may find themselves forced to conform to European regulatory standards if they are to sell into the world's fastest growing markets.

The federal government is also lackadaisical in its practical support for trade. Less than 2% of its capital-goods exports received government export financing, compared to 3% to 8% in Germany, France and Canada. Meanwhile, America does seem to be on the losing end of the trade-dispute system. The World Trade Organisation is a marvel of international economic diplomacy but the report notes that America's frequent victories there are often "pyrrhic" because years may elapse before the WTO passes judgment, by which time other countries' unfair practices have already done their damage on American industry. What is the solution? The authors propose an ambitious "National Investment Initiative" alongside Obama's "National Export Initiative". This would break down various domestic barriers to attracting foreign investment, the source of high-paying jobs, investment and innovation. Given their diagnosis of the problem this is a reasonable and ambitious prescription. But their vision involves promoting many individual policies that stand little chance in today's polarised political world, such as reducing the corporate income tax rate, ending the taxation of foreign-source income, encouraging more high-skilled immigration and spending more on infrastructure.

A warmer welcome will await their advice that America more aggressively punish other countries for unfair trade practices, either through the WTO or through its own authority to launch anti-dumping and countervailing duty cases, which has atrophied. This, they say, should be paired with efforts to open up foreign markets. This might have the benefit of persuading Americans, who have turned hostile to free trade, that they will not be played for chumps from further liberalisation. But while this might bring temporary breathing room to embattled industries, I doubt it will provide much lasting relief. Bringing more trade cases would push America onto shakier legal ground, increasing the odds it would lose, or provoke retaliation, or both. That would not leave the world better off.

More promising are the report's recommendations for approaching trade policy differently. The political capital invested in TPA has been wasted on too many small-bore trade deals that don't materially alter America's economic fortunes. Better, they say, to focus energy and capital on big ticket deals with major countries like India and Brazil. America should pursue more liberalisation in high-end services, where it is especially competitive, if not through the WTO then through a comprehensive services agreement with Japan, the EU and Canada. This is one policy on which Mr Obama and his Republican adversaries might actually find some common ground.

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Meanwhile, the number of export-related American jobs has stagnated and multinational companies are now expanding payroll overseas while cutting it in America, the reverse of their traditional pattern.

Don't we have BMW, Honda, etc. with plants in the US?

Can you explain some on how a foreign country with lower taxes will sell its parts to it's subsidiary at a higher price for higher profits.

Remember, we have to cut the tax rate before US companies bring the money home.

Less than 2% of its capital-goods exports received government export financing, compared to 3% to 8% in Germany, France and Canada.

I'm surprised it's near 2%. Looks like you found another subsidy that needs cut to zero. Can't we file a WTO complaint, or must we get involve in another Game Theory?

Regards

Don't we have BMW, Honda, etc. with plants in the US?

Sure. And do you happen to remember how long ago those were established? The whole point was that this kind of investment was decreasing, not that it didn't exist.

Part of the problem is that foreign direct investment tends to be seen thru the lens of it being competition to existing domestic companies. New jobs being created are much less noticable somehow than existing jobs being eliminated. Similarly, the job gains from increased exports are somehow invisible, whereas the job losses from increased imports make headline. so what we are dealing with is a perception problem -- one which shows little sign of being effectively addressed.

@hedgefundguy

Export credits are an insurance scheme that insure companies against the risks that their order books won't be fulfilled - its hardly a subsidy.

That's rather a dangerous idea. A comprehensive services agreement must include insurance and pension while those funds in every country has been helping maintain its public finances, hence such an agreement will deteriorate the net saving of the country and expand its gross external debt. What is more, that will in turn further hollow out the American industry, leading to the situation where semi-inflation will be aggravated unless the US imports more goods. Protesting such an agreement is one policy on which Japan, the EU and Canada might actually find some common ground.

jouris,

Mr. Ip said the US businesses are not investing in the US for exports.

I was pointing out that what is good for the goose - foreign firms with plants in the US - is good for the gander.

There are financial reasons for doing this, mainly due to the volatility of exchange rates. ---

ow4744, Mr. Ip was talking of the gov't backing a loan. Privatize the profits, socialize the losses. Credits are a whole different animal.

Regards

Germany has the rest of EU to absorb its trade surplus. Asia has America. Its as simple as that. If the Americans put up a 50% trade barrier to everyone tomorrow the US would have two things Bernake wants, inflation and employment.

I've looked at the report and it conflates two things, as does this blog post:

1. Openness, meaning trade agreements. 2. Export support, which really means a national industrial policy.

Take Solyndra, for example, putting aside any issues about the type of solar film. China is buying control of solar panels with some tens of billions in subsidy. They have decided the future market is worth the investment. We dipped our toe in competing but didn't follow through, meaning we didn't counter China's subsidies in any meaningful way. Sadly, the GOP lesson from this is apparently: don't do anything because government affects the market's function. Since China's government is making the market, that's really a statement that we've decided to give up.

The same thing happened in many other industries. Cars, for example: Japan bought market share with subsidy, which pulled the wealth inherent in the car industry out of the country. They then moved plants into the US at lower wages. We left the competition to the car companies and then blamed them for failing. That isn't an industrial policy. The same thing is true of many fabrication industries, including memory chips and the like.

It is not merely that we decided not to compete but that we sent clear signals to our competitors that we wouldn't. Other than a relative handful of protectionist cases - e.g., steel dumping - our competitors knew we wouldn't respond. This meant they strategic freedom to act, knowing our response beforehand.

Part of what is going on here is that the U.S. has a case of the "Dutch disease", only based on finance. So long as there is a demand for U.S. dollars as currency outside the United States there is a strong tendency for the U.S. as a country to export paper dollars in exchange for goods. Having the world currency is in many ways a curse for the United States. There are other factors: high health care costs in the U.S. and various sorts of non-market based subsidies in other countries for manufacturing-from forced labor to tax credits for their companies. But the main reason is the problem caused by the U.S. dollar being the world's reserve currency.

The major beneficiary of US Export Financing is Boeing. It's only competitor, Airbus, receives export financing and direct financing from the EU. "Cutting the subsidy" would cut US aerospace at the knees.

Which I guess is good because we've obviously knowledgeable hedgefunders around.

It is not obvious that more open free trade benefits the US. Workers salaries have stagnated in the last 10 years and large number of jobs lost to manufacture by being done elsewhere with much lower labor costs. The claim that the US can keep high paying jobs by developing high tech products is not really born out. What is happening instead is that much technological innovation is indeed generated in the US but once the manufacturing has been perfected it is more profitable for corporation to open factories elsewhere. This is not the only reason income disparity between investors and workers has increased by a factor of 2-3 since the 1990's but it is certainly an important factor.

America's decline in international trade of manufactured goods started way back in the 70's when European and Japanese manufacturers outpaced it with new processes in steel production, machine tools and electronic goods to name some. With it came better quality and lower prices American manufacturers could not compete with. Their answer was not innovation, but moving their factories offshore to slave wage countries in a desperate bid to stay competitive. One measure to revive their manufacturing sector led to the half hearted attempt to go metric in 1975 that turned into a dismal failure and set the stage for America's steadily rising unemployment and shrinking wages. Ironically, the staunchest contributors to this malaise are America's blue collar workers and misguided patriots, who steadfastly resist to go with the times and adopt the metric system. What most Americans have yet to learn is that the metric world is not interested in inch products. When it comes to international trade and competitiveness US metrication seems to be the elephant in the room and this article like many others on that subject, proves it.

The insistence of many here in the west that free trade is the path to prosperity strikes me as a lamb demanding to be led through a slaughterhouse.

jouris wrote: "Sure. And do you happen to remember how long ago those were established"?

Here are two good reason why manufacturers won't invest in America. Why incur the extra expense to teach your prospective workforce a measurement system that workers in countries with lower wages and taxes are very familiar with.

The US are still believing they are the most "special" market in the future. The fact is that they manage to keep some of their local jobs in exchange for being the most reliable and predictable customer market in the globe, its like that since the industrial revolution. When the developing countries take that position, there would be no reason to keep those jobs in the US. The new "special" customers will be overseas. Major economies are already trading like the US didnĀ“t exist. China is now BrazilĀ“s biggest trade partner, India is increasing trade in Latin America more and more. With foreign investments, those countries are concerned about the development of their domestic markets to themselves, not to the US. The US products are cheaper in the US, but since so many US governments ignore developing countries domestic markets for so many decades, the governments from those countries made sure all the US goods would be overtaxed in their ports and the only way those goods would ever be cheaper is if they were made in those countries, employing people there.

In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts. Adam Smith argued that in a free exchange both parties benefit, and this blog's aim is to encourage a free exchange of views on economic matters.

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