Free trade unbound

The Los Angeles Times editorial board met recently with U.S. Trade Representative Susan Schwab. Here are some highlights of the discussion:

Free traders on tour

Susan Schwab: The politics of trade and the economics of trade have diverged to the point where it’s really been evident to the Bush Administration, and frankly to a lot of Democrats and Republicans on the Hill, that we can no longer take for granted that the conventional wisdom is that trade is good for the United States.

So any chance we get to get out of town, to get out of D.C., and to interact directly with business people and workers and service providers and agricultural groups, and so on, both to make the case and to get their input, the better off we are. Hank Paulson was out here not long ago, Carlos Gutierrez was out here. Mike Johanns when he was Secretary of Agriculture... I wanted to make sure I got a chance to make it out.

Persuading the protectionists

Susan Schwab: The politics of trade agreements is that you’re fighting anecdotes with data, and date doesn’t always win out. Our principle message is first and foremost the benefits of free trade agreements to the U.S. economy. That’s true whether it’s the Colombia free trade agreement, the Panama free trade agreement or the Peru free trade agreement. We try to remind people that 95% of the world’s consumers are outside this country, and if you want to grow your business, if you want to grow your market, the best way to do it is to be operating internationally. In the case of the four free trade agreements — Peru, Colombia, Panama, Korea — you’re talking about a combined population of over 120 million people. In the Latin free trade agreements alone, you have 20,000 U.S. companies already doing business there. You talk about the Korea free trade agreement, the International Trade Commission has estimated a ten-plus-billion-dollar boost to U.S. GDP. Over $10 billion in U.S. exports...

And so the job implications, even before you get to the geopolitical implications, of supporting allies and supporting governments that are pro-market and pro-democracy and pro-U.S. is a compelling message. And it needs to get out there. It is a message that is best articulated by those of us who are not in Washington, when members of Congress are hearing it from their own constituents.

Reforming sinners

Dan Turner: What you hear from Congress, and from all the Democratic candidates and probably some Republican candidates is that we’re not against free trade pacts. What we want to do is add more labor and environmental provisions and enforce them more. How is that a problem in trying to negotiate these things?

Susan Schwab: I think it’s a good question, and I think we have responded to the question: The question of enforceable labor and environmental provisions has been hotly debated in Washington for more than a decade, really going all the way back to NAFTA. We had labor unions and a lot of Democrats saying they could not see their way clear to supporting free trade agreements. Last May the Bush Administration reached a historic agreement with the congressional leadership on labor and the environment. And for the first time the four free trade agreements — Korea, Peru, Panama, Colombia — would include enforceable labor and environmental protections. Exactly what the labor unions have been asking for, exactly what the Democratic leaders have been calling for. More than what they’ve been calling for in some cases. But not so much as to negate or jeopardize the trade agreements. I mean, you don’t want your labor and environmental agreements to become an excuse for preventing free trade. In this case, part of the mechanism in the agreements can be used to enforce those protections...

Jim Newton: Are the countries with whom you’re negotiating asking for reforms from us as part of a trade agreement?

Susan Schwab: They are. In some cases they can be accommodated; in some cases they can’t. In the case of the Korea free trade agreement, the Koreans were very interested in having us change our anti-dumping and countervailing duty laws, on unfair trade practices. We were unable to do that because those affect every country in the world, and imports from all sources. So that negotiation sort of shifts over to the WTO and the Doha round. There are countries that would love to see us discipline or eliminate our agricultural subsidies. Those are sort of generic, across-the-board items. So that’s an issue that migrates over to the multilateral negotiations.

But yes, there are provisions associated with access to certain elements of the U.S. market that could constitute reforms. Usually our trading partner is willing to exchange much higher barriers and accept significant reforms domestically in exchange for access to the largest market in the world.

So there’s a nasty not-so-secret characteristic of a good trade agreement: Both parties are able to use trade agreements to enact reforms and self-disciplines that we know are good for ourselves. You know, that if you could do it unilaterally you probably would do unilaterally, but you can only do it in the context of leveraging new access. Then it really is a win-win. In the case of the Korea free trade agreement, you have an incoming and an outgoing government that both recognize these reforms are in the country’s best interest. Korea’s market traditionally is heavily protected. These are reforms that they would like to undertake. The Korean market is a very large market; it’s our seventh-biggest trading partner, the eleventh-largest economy in the world. Per capita income is approaching $20,000 a year. The U.S. economy is significantly bigger and we have much lower barriers. But they’re willing to exchange much higher barriers for access to this market.

Who has responsibility now?

Jon Healey: Does the persistent support in Congress for trade-distorting subsidies strengthen your hand in talks at Doha or does it undermine them? I mean if I were one of the trading partners there I’d be inclined to say, “You’re asking us to give up this in exchange for something you’re going to give up, but look at your own lawmakers. They’re not ready to give up anything.”

Susan Schwab: I certainly hear that. My response is that this is not our Doha round offer. My second response is look at the position the administration’s taking on the farm bill, which is a very responsible position. Let me put it this way: If a trading partner is looking for an excuse to blame the United States for the Doha round not coming together, this is as good an excuse as any. But it is an excuse.

Jon Healey: And they certainly have been looking for excuses.

Susan Schwab: They have been looking for excuses, but I’d say it’s an excuse drawn because they are not prepared to do the things they need to do to open their markets. Talk about stuff related to the Doha round: First, once you get to the eighth level of a multilateral negotiation there’s not much easy stuff left to do. You’re left with only the tough stuff.

Second, what is unusual about this multilateral trade round is the role, and I would argue the fundamental responsibilities, of the advanced developing countries: of Brazil, of India, of China, of Mexico, Argentina, Indonesia. If this is to be, as it was meant to be, a development round, if we’re going to be helping the developing countries in the alleviation of poverty, you have to generate new trade flows. And the way you generate new trade flows is by cutting into applied tariffs. Who has the highest applied tariffs that are blocking potential trade flows? In many cases it’s the advanced developing countries. So what kind of obligations are Brazil or China or India willing to undertake, commensurate with their responsibilities? You know, 70% of tariffs paid by developing countries are paid to other developing countries; they’re not paid to us.

Now, we have a responsibility. The president’s embraced our obligation as a leader in the global economy to do our share and then some. But this round will never come together unless the advanced developing countries are willing to do their share.

Who should be defending trade?

Tim Cavanaugh: It’s true there’s a lot of demagoguery on this issue, but isn’t part of this the responsibility of you guys, to lay out how the world works?

Susan Schwab: It’s the responsibility of us guys and of you guys. We have gone through a period where those of us who understood it took for granted that everybody else understood that free and fair trade was good for the economy, while the other side was out there plying their anecdotes and blaming trade for every economic ill. We’ve talked about [Lou Dobbs] from his television pulpit. At the L.A. Chamber earlier today somebody mentioned the lack of economic education. The anecdotes resonate, and they’re better photo opps than the fact that you have this tremendous multiplier effect. Let’s take the Port of Los Angeles —

Tim Cavanaugh: Well there is a very simple example. Maybe at this point it seems like ancient history to people but we went through this incredible cock-up over NAFTA and how NAFTA was going to destroy the country. We experienced certainly the greatest economy of my lifetime after NAFTA, and nobody’s making that case.

Susan Schwab: You just put your finger on it. Nobody’s making that case. We are making the case. It’s hard to get traction, it’s hard to be heard. One question I asked the CEOs I met with at the Consumer Electronics Show was: “Do your employees understand that, you tell me 50-60-70% of your earnings are derived overseas. Do your employees understand that 50-60-70% of their paychecks, arguably, are attributable to the business you’re doing internationally, to open markets for trade and investment?”

We can’t take for granted that everyone gets it. We have to be proactive, out there getting the message across. Better yet is for other people to be proactive, the people who benefit: the farmers, the ranchers, the workers. Here, look at the Port of Los Angeles or any of the other ports in the neighborhood: Whether the product is moving into the market or out of the market, you’re creating revenues; you’re creating jobs through trade. And yet, the Teamsters and the Longshoremen aren’t supporting these free trade agreements. By any measure they benefit from these free trade agreements. Why is this story not being told?

The other thing that’s happened is that it’s easy to blame trade. And this is fighting anecdotes with statistics: No more than 2% to 3% of unemployment, and I mean of overall unemployment in this country, can be attributable to trade. But you would think, if you listened to Ross Perot over NAFTA, or if you listened to Lou Dobbs or some of the presidential candidates, that the negative impact trade has on the economy is overwhelmingly negative. In fact it’s overwhelmingly positive.

Now there are individuals and firms and communities that are negatively impacted by trade. They’re few and far between but they do exist, and there’s a second answer there, which is that we have to acknowledge that, and we have to be looking after them and helping them adjust. And we need to do it in a way that is forthright and effective.

But let’s remember that so much of the change that’s going on in the economy is attributable to productivity enhancements, technological enhancements. And is it appropriate to be behaving differently vis-à-vis a worker who lost their job because they were making slide rules when calculators came along?

Jim Newton: The slide rule business has gotta be in the dumper!

Susan Schwab: No the slide rule business is not doing well. But U.S. manufacturing output has gone up. In the 10-to-12 year period, the decade before NAFTA and the decade after, manufacturing output went up, unemployment went down, U.S. economic growth went up, employment went up. They just aren’t necessarily the same jobs. Every year our economy creates millions and millions of jobs. And our economy loses millions and millions of jobs. Happily, for the last 52 weeks our economy’s been creating more jobs than it’s lost. Bill Clinton got this; he was able to articulate this. George Bush gets this; he believes this fervently. Those of us who understand need to be out there talking about it.

Trade and reform

Sonni Efron: Can you talk about trade agreements as an anti-corruption measure? That’s not immediately apparent.

Susan Schwab: It’s not but it’s really embedded throughout the agreement. Specific examples: One has to do with government procurement; one has to do with rules and regs. In both cases, by proposing that proposed rules and proposed procurements be public and be published, and in the case of procurements be open for a bidding process, you have a degree of transparency that most economies don’t have. Though these are not specifically anti-corruption measures, that’s the effect they have. It’s rule of law, due process, transparency, and you start building these systems in. You have really interesting reform implications that go well beyond trade and commerce.

Balance of trade

Tim Cavanaugh: How concerned, if at all, should Americans be about the so-called balance of trade?

Susan Schwab: The answer is Not Very, but you need to look at the underlying policy. This goes to what I said earlier about trade being blamed for a lot of things that are not about trade policy. One of the underlying forces in the trade deficit is the fact that savings rates in a lot of our trading partners are very high and the savings rate in the U.S. is very low. One of the reasons we’ve seen an improvement in our trade balance in the past year is because economic growth overseas has improved. Earlier in the decade the U.S. was the only economy growing. Now there are other economies growing. So there are a lot of macroeconomic factors, some of which have nothing to do with trade policy. And we need to look at those. We need to look at the fundamentals, at our definition of value, at education. The number itself, an economist will tell you, is derivative. It’s an effect, not a cause. Therefore, you need to ask: what is underlying U.S. competitiveness, what is underlying the strength of our economy? And how do you sustain that — 52 weeks of economic growth. Look at the last couple of quarters: The impact of exports has been fundamental, and that’s going to be the case going forward.