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Good Riddance, Trans-Pacific Partnership!

January 23, 2017

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Trump just signed an executive order beginning the withdrawal of the U.S. from the Trans-Pacific Partnership trade agreement.

Good riddance. I’ve been fighting this for a long time.

As I noted five years ago, when this thing was just beginning, the omens were never good, and Obama should have known better. After the failed promises of NAFTA, a job-destroying trade deficit that has grown despite a long series of free-trade agreements, and ever-more-aggressive foreign mercantilism, it was obvious that America needed a new trade strategy.

This agreement (which may or may not continue without us) includes Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam to start. Eventually, its advocates hope, it will include every nation on the Pacific rim, including Indonesia, the Philippines, Japan, Mexico, Russia, and China. 

Yes, you read that right. China. America was on track for a free-trade agreement with its most voracious mercantilist trade rival. 

Free trade with China. Of all the insane ideas one could possibly come up with...

As I’ve explained before, international trade isn’t just a natural harmony of economic interests, it’s largely rivalry, and mercantilism is how the winners play to win. But we naively refuse to play that game. Instead, we have faith in “free” trade, we think free-trade agreements will save us, and we lose.

When Obama couldn’t sell this thing, his people resorted to bogus economic models to pretty it up.

Hillary Clinton unconvincingly repudiated it, but her long history of supporting free-trade agreements was one of the major things that killed her with the voters.

And if the purely trade aspects weren’t bad enough, the TPP is also a profoundly anti-democratic agreement which signs away our right to govern our own economy. Despite being nominally a “trade” agreement, it contains provisions which interfere with areas well beyond the bounds of trade. To wit, it would (credit to Lori Wallach):

1. Limit how U.S. federal and state officials could regulate foreign firms operating within U.S. boundaries, with requirements to provide them greater rights than domestic firms.

2. Extend the incentives for U.S. firms to offshore investment and jobs to lower-wage countries.

Establish a two-track legal system that gives foreign firms new rights to skirt U.S. courts and laws, directly sue the U.S. government before foreign tribunals and

3. Demand compensation for financial, health, environmental, land use and other laws they claim undermine their TPP privileges.

4. Allow foreign firms to demand compensation for the costs of complying with U.S. financial or environmental regulations that apply equally to domestic and foreign firms.

Taken to its logical conclusion, this all ultimately amounts to the idea that the profitability of investments must be the supreme priority of state policy—overriding health, safety, human rights, labor law, fiscal policy, macroeconomic stability, industrial policy, national security, cultural autonomy, the environment, and everything else.

While there is no justification for going to the opposite extreme and allowing governments to ride roughshod over legitimate property rights, these agreements thus rigidly mandate market-based, property-first solutions to questions where societies must strike a reasonable balance between public and private interests.

So what’s the alternative? That is, what would a “reasonable” trade agreement, the kind Obama promised us as a candidate, but Trump looks like he may actually implement, look like? It would probably embody the following principles (credit to the Coalition for a Prosperous America):

1. Balanced Trade: Trade agreements must contribute to a national goal of achieving a manageable balance of trade over time. I.e. no more chronic500 billion-a-year deficits.

2. National Trade, Economic and Security Strategy: Trade agreements must strive to optimize value added supply chains within the U.S.—from raw material to finished product—pursuant to a national trade and economic strategy that creates jobs, wealth and sustained growth. The agreements must also ensure national security by recapturing production necessary to rebuild America’s defense industrial base.

3. Reciprocity: Trade agreements must ensure that foreign country policies and practices as well as their tariff and non-tariff barriers provide fully reciprocal access for U.S. goods and services. The agreements must provide that no new barriers or subsidies outside the scope of the agreement nullify or impair the concessions bargained

4. State Owned Commercial Enterprises: Trade agreements must encourage the transformation of state owned and state controlled commercial enterprises (SOEs) to private sector enterprises. In the interim, trade agreements must ensure that SOEs do not distort the free and fair flow of trade - throughout supply chains - and investment between the countries.

5. Currency: Trade agreements must classify prolonged currency undervaluation as a per se violation of the agreement without the need to show injury or intent.

6. Rules of origin: Trade agreements must include rules of origin to maximize benefits for U.S. based supply chains and minimize free ridership by third parties. Further, all products must be labeled or marked as to country(s) of origin as a condition of entry.

7. Enforcement: Trade agreements must provide effective and timely enforcement mechanisms, including expedited adjudication and provisional remedies. Such provisional remedies must be permitted where the country deems that a clear breach has occurred which causes or threatens injury, and should be subject to review under the agreements’ established dispute settlement mechanisms.

8. Border Adjustable Taxes: Trade agreements must neutralize the subsidy and tariff impact of the border adjustment of foreign consumption taxes.

9. Perishable and Cyclical Products: Trade agreements must include special safeguard mechanisms to address import surges in perishable and seasonal agricultural product markets, including livestock markets.

10. Food and Product Safety and Quality: Trade agreements must ensure import compliance with existing U.S. food and product safety and quality standards and must not inhibit changes to or improvements in U.S. standards. The standards must be effectively enforced at U.S. ports.

11. Domestic Procurement: Trade agreements must preserve the ability of federal, state and local governments to favor domestic producers in government, or government funded, procurement.

12. Temporary vs. Permanent Agreements: Trade agreements must be sunsetted, subject to renegotiation and renewal. Renewal must not occur if the balance of benefits cannot be restored.

13. Labor: Trade agreements must include enforceable labor provisions to ensure that lax labor standards and enforcement by contracting countries do not result in hidden subsidies to the detriment of U.S.-based workers and producers.

Whether we’re going to get all this from Trump, we don’t know yet. But this is definitely the necessary beginning.

 


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  • All of the topics listed above are certainly worthwhile subjects for discussion between countries. But we would have a hard time reaching agreement about them all even amongst outselves, let alone with other nations whose economic and social systems are vastly different.

    In fact, one of the virtues of money has always been that it enables relations between people who agree on nothing else whatsoever but price.

    Rather than imagine a world in harmony, as our economists do; such that they deny all of the troubles spawned by trade – it seems the reverse view is more plausible: expect troubles all the time and be pleasantly surprised whenever there is smooth sailing.

    To wit, as the Trump administration proceeds to tighten the screws on trade, I would expect the loss of a consumer of last resort, i.e. the U.S., will remove a buffer from the system that has enabled it to function as well as it has.

    When the system breaks down as things now stand the only thing that stands between a given country and the tender mercies of the World Bank is a bank account of its own full of dollars. So we may despise the Chinese for how they produced their own trade surplus, but still recognize that they had to acquire it one way or another.

    Scapegoating and vilifying China or any of the other countries we have trade deficits with, however, will not prove to be a particularly helpful approach to righting the ship of global trade as it begins to founder.

    Good luck President Trump and spare us the wisdom of Dan DiMicco.