U.S. action on free trade is left hanging

washington -- Just a day after Senate Republicans took the lead in scuttling an overhaul of U.S. immigration laws, House Democrats stiff-armed the Bush administration’s largest-ever trade deal and declared they would deny the White House the authority it needs to cut more deals.

The back-to-back events at the end of June, seemingly unrelated, are pieces of a single trend: the growing effort by members of both parties to find ways to check the rush toward a globalized economy and shield Americans from unfettered competition, whether from foreign products or foreign workers.

For more than a decade, as U.S. manufacturing declined in the face of foreign competition and American companies moved jobs offshore, some politicians -- especially Democrats with close ties to labor unions -- and a very small number of economists have questioned the nation’s commitment to free trade and a global economy.

But such questioning had little effect: U.S. policy continued to operate on the premise that though free trade might create isolated problems, on balance it was overwhelmingly beneficial.

What’s changed is that, with Democrats resurgent in Congress and Bush’s control over his party diminished, critics of globalization have begun moving from talk to action. And in pushing protectionist measures, they are tapping into concerns among middle-class voters, and even college graduates, about job insecurity and stagnant incomes.

“Ten years ago, the received view was that openness was the way to prosperity. The problem is that American workers, and increasingly the middle class, haven’t felt the benefits of opening up,” said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee.

As a result, even though the economy is growing and Washington seemed on the verge of taking expansive new steps on trade and immigration, there’s been an outpouring of protectionist sentiment.

“For a military and economic superpower, we’re not behaving very confidently about our place in the world at the moment, and it shows in the way we’re thinking about our borders both in terms of immigration and trade,” said I.M. Destler, a specialist in the politics of trade at the University of Maryland.

Yet, many analysts warn, the consequences of turning away from global competition could be severe.

“If we start walling ourselves off from the rest of the world, you can be sure other countries will do the same thing. Then we’ll have a real mess on our hands,” said Gary C. Hufbauer, an economist with the Peterson Institute for International Economics in Washington.

China’s recent actions provide a hint at what could happen: Beijing responded quickly to criticism that it had exported tainted seafood and other products -- it executed a senior official and promised new safeguards. But the Chinese government also signaled that it could flex its muscles in the trade arena: It imposed a ban on some U.S. meat and poultry imports.

The ban is a relatively minor problem, but China holds trillions of dollars of U.S. government bonds as a result of the soaring U.S. trade deficit. Any serious move to sell those bonds would drive interest rates up -- with excruciating consequence for millions of Americans.

China’s action was “definitely a tit-for-tat retaliation,” Hufbauer said, “and it’s symbolic of what can be done on a global scale if the United States turns inward.”

The Bush administration has negotiated four bilateral trade agreements, with Panama, Peru, Colombia and South Korea, and was hoping to win congressional approval. It also wanted to renew “fast track” authority to negotiate a world trade agreement in which Congress can only approve or disapprove the deal as a whole.

Pointing to the pending deals this month, Bush said, “Now it’s time for Congress to carry out its responsibilities and approve these agreements.”

Yet the president is given almost no chance of winning approval of the Colombia and South Korean deals. “Fast track” is also in deep political trouble. Only the comparatively small Panama and Peru agreements are given any real chance of getting through Congress.

And the administration faces a new problem: A bill that appears to be racing through Congress would punish Beijing officials if they do not raise the value of their nation’s currency to help improve the balance of trade with the U.S.

Alarmed at the surge in protectionism, free trade advocates are scrambling to reassure working people that they will not be hurt by greater openness.

“The government needs to look at policies that will provide more support, more aid, more training for people who are going through the transition from one job to another, or one industry to another, as a result of globalization,” said Don Evans, who heads the Financial Services Forum, which represents the nation’s 20 largest financial institutions. Evans was Bush’s first Commerce secretary and is a close friend of the president.

In a recent report, the forum concluded that since 2000, “the large majority of American workers” has seen poor income growth and that the benefits of rising productivity have “not been reflected in broad growth in wage and salary earnings.”

That a group as high-powered as the forum and a business conservative as prominent as Evans would declare that U.S. workers have not shared enough in economic growth and then call for new government programs to help them suggests just how fearful Corporate America has grown about the nation’s commitment to free trade.

Among the forum’s proposals -- which Evans portrays as starting points for discussion -- are to make the federal payroll tax sharply more progressive to help low-income and moderate-income workers. It would also create a new program to let communities insure against sudden tax losses because of plant closings and layoffs, a plan that appears contrary to the administration’s desire to get the government out of the social insurance business.

Equally telling about the new tug-of-war over trade has been the maneuvering by major presidential candidates.

On the GOP side, Sen. John McCain (R-Ariz.) has a long record as a free-trader. And former New York Mayor Rudolph W. Giuliani has sought to polish his free trade bona fides with statements such as, “The global economy is a wonderful thing for America.”

But Sen. Hillary Rodham Clinton (D-N.Y.) has distinguished herself from the business-friendly, free-trade policies of her husband’s administration by warning that “the inescapable reality is that globalization, modern technology, economic policy are creating new conditions that threaten our middle-class families “

Clinton has announced that she will oppose the Bush-negotiated South Korean trade agreement, which among other things would eliminate tariff protection for U.S. truck manufacturers.

Sen. Barack Obama (D-Ill.) has sought to maintain his free-trade credentials by avoiding broad statements about globalization. But he has said that he too will oppose the South Korean agreement.

Obama has said he will also join Clinton in supporting legislation to strengthen a plant-closing law passed in the late 1980s -- during the nation’s last major fright over global competition -- that requires advance notice of mass layoffs.

All of this angling is over an issue that as recently as May looked as though it might not figure significantly in the 2008 campaign.

It was in May that congressional leaders and the administration announced that the White House would add labor and environmental standards to trade deals in return for what many understood to be congressional support for at least two of four deals that the administration had recently negotiated, as well as possible renewal of “fast track” authority.

Under fast track, Congress would agree to handle trade agreements with only up-or-down votes and add no amendments, an arrangement the administration considers crucial to negotiating deals.

“This is truly a historic breakthrough,” Rep. Charles B. Rangel (D-N.Y.), chairman of the House Ways and Means Committee, said in May. “Today’s agreement signals a new direction and a renewed spirit of bipartisanship.”

“We now have a way forward on” trade deals and fast track, Rep. Wally Herger (R-Chico), a senior committee Republican, had predicted.

Rangel and Herger hadn’t counted on the reaction of many of the freshmen lawmakers, who attacked the deal so vehemently that the leadership was forced to back down.

“I really think it’s hard for someone who comes from a financial center like New York to appreciate how these trade policies affect the productive areas of the economy,” said Rep. Marcy Kaptur (D-Ohio).

“It’s somewhat of a paper victory because standards are not going to be enforced,” said freshman Rep. Betty Sutton (D-Ohio).

So far, foreign trade continues to grow anyway. A series of studies shows that it has already expanded the U.S. economy by about $1 trillion, or about 12%, and could soon add an additional half-trillion dollars.

And U.S. companies gain an increasing share of profits overseas. In the late 1980s, they made 16% of their profits outside the country, according to the Commerce Department. Today, that figure is 26%.

But trade growth also means that the jobs of millions of U.S. workers are more vulnerable to retaliation by other countries.

“Trade has got such a bad name in Congress and the country,” Rangel said. “Business is going to have to help educate Americans so they can compete if they are going to get these trade deals passed.”

--

peter.gosselin@latimes.com