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Uncle Sam, Global Trade Sucker?

Economics / Economic Theory Apr 14, 2010 - 03:01 AM GMT

By: Ian_Fletcher

Economics

Best Financial Markets Analysis ArticleOf all the blurbs I got for my book Free Trade Doesn’t Work: What Should Replace It and Why, my favorite is one I got from Robert B. Cassidy, a distinguished former trade diplomat whose career included being Assistant U.S. Trade Representative for China, Asia and the Pacific.  His contribution was short, but it made a point, coming from a man who had actually sat at the table where many of America’s key trade agreements were negotiated, that our government would do well to grasp.  He wrote,


I now understand why so many of the trade agreements that we negotiated never delivered the promises that were made and, if continued, never will.

What an admission!  It actually gives one hope that, behind the facade projected by the Obama administration’s ever-chipper trade diplomats, who still say (in public) that the U.S. is going to be able to negotiate its way out of its $300-600 billion trade deficits by signing even more trade agreements, wiser heads are starting to cotton onto what’s really going on.  Because the reality is that the U.S. has been taken—utterly taken—in its trade negotiations with other nations for coming-on 40 years now, and it’s high time we woke up to this fact.

How can the United States, the sole global superpower, get pushed around by foreign nations when it comes to negotiating trade agreements?  This seems odd, even if one doesn’t buy into left-wing visions of the U.S. as a global bully-boy.  How can America lose again and again, despite its surface reputation for Machiavellian toughness in international affairs?

The key is that economic success doesn’t work the same way as military power, where winning and losing is generally clear. In economics, in order to know whether any given event is a winner or a loser for you, you need an accurate conception of how the world economy works, especially when dealing with big-picture issues like opening up U.S. to foreign trade. As a result, bad economic ideas can mislead even a giant like the U.S. into shooting itself in the foot over and over. 

America’s key problem in this regard has been our trade negotiators’ uncritical embrace of the assumption that free trade is always best, no matter what the circumstances.  It supposedly doesn’t matter whether or not free trade is reciprocated, whether or not our trading partners manipulate their currencies, whether or not America runs a trade deficit… the list goes on and on.  If one treats the universal benevolence of freer trade as a given, then it quite logically follows for the U.S. to be very lax about guarding its own interests when negotiating trade agreements with foreign nations. After all, even if our trading partners do engage in all these varieties of mischief, these agreements will still be good for us.  So who cares?  In fact, if one assumes that free trade is good across-the-board, trade agreements don’t really demand all that much attention qua economic instruments at all, and the door is wide open to use them as tools for other purposes. 

For example, all through the Cold War we threw open our markets open to the rest of the world as a bribe not to go Communist, propping up foreign economies and binding them to dependence on the American market.  This obviously made sense at one time, but we didn’t stop after the Soviet threat had passed. For example, the first Bush administration bought Turkey’s support in the Gulf War with (among other things) increases in Turkey’s import quotas for apparel, fabric and yarn. America’s vast Cold-War network of military bases abroad also has given foreign nations leverage over our trade policy. This has been quintessentially true of Japan, but has also been true of Spain, Portugal, and several other nations. As a report by the Senate Finance Committee once put it:

Throughout most of the postwar era, U.S. trade policy has been the orphan of U.S. foreign policy. Too often the Executive has granted trade concessions to accomplish political objectives. Rather than conducting U.S. international economic relations on sound economic and commercial principles, the executive has set trade and monetary policy in a foreign aid context. An example has been the  Executive’s unwillingness to enforce U.S. trade statutes in response to foreign unfair trade practices.

Now at one time, America had economic strength great enough to be taken for granted, but presumably, no-one is foolish enough to think that today.

So did American trade diplomats turn into fanatics and get stuck in an ideological dream about free trade?  No.  Intellectual or ideological fanaticism on this issue is easy enough to find in academia and the editorial pages, but rare in our trade negotiators and diplomatic service. Instead, they tend to have a hazy sense that “economics says free trade is best” which renders them insouciant about possible pitfalls of free trade. Indeed, they often have remarkably shallow knowledge of trade subjects: as Jeffrey Garten, Undersecretary of Commerce under Bill Clinton, noted in 1997, “The executive branch depends almost entirely on business for technical information regarding trade negotiations.”

The problem is that mushy convictions don’t lead to mushy results.  Instead, they render our negotiators intellectually helpless in the face of special-interest pressures for more trade agreements.  Many of the largest American companies are now so dependent on their overseas operations, and thus so vulnerable to pressures by foreign governments, that they have become outright Trojan horses with respect to American trade policy. Superficial attempts at hard bargaining in defense of American exports occasionally reflect some well-organized export (or import-competing) industry that has managed to flag the attention of Congress, but are mainly just posturing.

One metric of our government’s sheer unseriousness about trade diplomacy is that between 1972 and 1990, fully half the American trade diplomats who left government service went to work for foreign nations. Can you imagine if hundreds of ex-American military officers were hiring themselves out as mercenaries to China’s People’s Liberation Army?

Thus America’s trade diplomacy leaves America naked in a world where other nations pursue the most sophisticated neo-mercantilist policies their bureaucrats can devise, backed up by disciplined diplomacy that puts economic objectives first. Our nakedness has, ironically, made us even more desperate in pushing for free trade: having disarmed ourselves by throwing open our markets, we desperately need to disarm everyone else by forcing their markets open, too. But we try to do this after having thrown away our principal leverage: access to our own market.

We then rationalize this implausible approach with the fantasy that the rest of the world “must” inevitably embrace our own laissez faire economic ideals, including free trade, due to their innate superiority, one day soon. (We’ve been very patient on this one.)

Our main method of getting the rest of the world to fold its cards has been bribing foreign nations to join our vision of a rules-based global trading system under the WTO. Unfortunately, this bribe has mainly consisted in letting foreign nations run surpluses against us. We have thus become the global buyer of last resort and the subsidizer of a system that in theory needs no subsidy because it supposedly benefits everyone. One irony of this is that the U.S. has been diligently working to pry open foreign markets for Japan, China, and the other neo-mercantilist powers.

Foreign nations sometimes seem genuinely puzzled why the U.S. does not grasp the game being played. So they occasionally make the U.S. offers which we logically would accept if we did understand, offers they expect would quiet down Uncle Sam and make his politicians stop uttering bizarre complaints about “unfair” trade. For example, Japan in 1990 offered a deal to limit its trade surpluses to two percent of its GDP if we would stop trying to reorder Japan’s economy to solve our trade difficulties.  We showed no interest. Japan’s 1990 surplus with the U.S. of $41 billion almost doubled over the next 10 years.

One can’t help but wonder what they say about us behind closed doors in Beijing, Tokyo, Berlin, and Taipei.  “Uncle Sam, global sucker” would be my translation.

Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95)  He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933.  He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.

© 2010 Copyright  Ian Fletcher - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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