For more than 40 years, the US has run trade deficits. The result has been a disaster for jobs, wages, the standard of living of millions of families and the health of many of our local communities. The CPA supports making balanced trade an urgent priority for our federal government.
CPA and other organizations drafted a document listing 13 principles that should be included in any 21st Century Trade Agreement. Over 150 organizations and companies have signed on.
Preamble: Trade agreements are business contracts between countries. They involve rights and obligations, concessions and benefits, performance and breach. The United States has stated that it will negotiate “21st Century Trade Agreements” which presumably will improve upon those of the 20th Century. New trade agreements must include the following principles to benefit America.
1. Balanced Trade: Trade agreements must contribute to a national goal of achieving a manageable balance of trade over time.
Comments: Sustained net exports are needed to offset the cumulative trade deficits of recent decades to ultimately achieve a long term, manageable trade balance. This is a results oriented, quantitative goal. Trade agreement negotiations focused upon procedural, tariff and subsidy concessions often ignore trade balance outcomes. Further, an “export only” goal ignores the net trade balance. The U.S. national interest lies in reducing and eliminating its currently massive trade deficit and resulting foreign indebtedness.
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.
Comments: The U.S. has tended to pursue trade liberalization as an end in itself. Instead, trade negotiations should be conducted to further a national trade, economic and security strategy. The U.S. has lacked a strategy to produce more of what the nation consumes, in both the civilian and defense markets. Conversely, our major trading rivals pursue strategies to ensure persistent trade surpluses and promote the offshoring of U.S. manufacturing. As a result, the U.S. is losing critical mass of production capacity and skilled workers. The term “optimize value added supply chains” is intended to establish that the full supply chain has more value than the sum of its parts in terms of increased production, employment, innovation and growth. Trade negotiations should further - and their success should be measured by achievement of - those goals not just for selected sub-parts but for the supply chain as a whole.
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 for.
Comments: Reciprocity is a fundamental tenet of trade law. This principle rejects the proposition that the U.S. should lead with trade barrier reductions, even without equivalent concessions from the other country, as a strategy to persuade other countries to eventually and voluntarily lower their barriers. The best approach is to extract those concessions during bargaining to ensure fully reciprocal access. Further, past trade agreements have permitted the other country to erect substitute trade barriers, which are not explicitly covered by the terms of the agreement, that nullify the benefits of the concessions. Any new agreement must address the problem of substitute barriers or subsidies through explicit, enforceable language.
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.
Comments: The growth of state owned or state controlled commercial enterprises (collectively SOEs) in global commerce is a substantial and disruptive trade challenge. SOEs are inherently subsidized, ungoverned by and/or resistant to market forces. They crowd out private commerce and are often government policy tools. SOEs should not gain the benefits of new trade agreements or be allowed to disrupt commerce or investment in the private market. By their nature, SOEs disrupt downstream competition, which must be addressed. Trade agreement language should (1) deny new preferences to SOEs and (2) include provisions - whether duties, quotas or other means - that restrict the impact of SOEs commercial and investment activities.
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.
Comments: Fair and market determined exchange rates are fundamental to realizing the benefits of a trade agreement. Persistent currency undervaluation nullifies and impairs concessions obtained through bargaining. General agreement exists that persistent currency undervaluation is a problem, but the approach has been to engage in multilateral, diplomatic negotiations separate from trade negotiations. The diplomatic approach has borne no fruit. This principle makes clear that currency valuation issues must be a part of a trade agreement, and not treated separately.
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.
Comments: Rules of origin determine whether a product or its components “originate” within a contracting country(s) and thus qualifies for favorable tariff treatment. Without rules of origin, any product could be trans-shipped from third countries without restriction, causing free ridership problems where third countries benefit without negotiation-extracted concessions. Stronger origin rules will tend to benefit supply chains within the U.S. while disincentivizing the utilization or trans-shipment of third country products. Rules may vary by product; however, the preservation and/or expansion of the U.S. supply chain should be a substantial governing principle.
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.
Comments: Effective enforcement is key to political support for trade agreements and the trading system itself. Current enforcement mechanisms are too expensive, time consuming and beyond the means of many affected industries to be effective. The problem is exacerbated by the lack of transparency of the details of other countries’ compliance. Provisional remedies would permit a contracting country to take immediate action in applicable cases, while preserving the right of the other country to challenge the provisional action through ordinary dispute settlement mechanisms.
8. Border Adjustable Taxes: Trade agreements must neutralize the subsidy and tariff impact of the border adjustment of foreign consumption taxes.
Comments: Foreign consumption (indirect) taxes are charged to U.S. exports, and they are rebated when foreign companies export to the U.S. Because of our reliance upon income (direct) taxes, the U.S. is unable to reciprocate. The result is that U.S. exports are double taxed and foreign imports to the U.S. are largely untaxed. This is a major cause of offshoring and our persistent trade imbalance. This principle must apply equally to negotiation, performance and enforcement of all trade agreements.
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.
Comments: The WTO and past trade promotion authority statutes recognize that producers of perishable and seasonal agricultural products are particularly susceptible to trade surges arising from over-production, adverse weather or other causes. Short shelf life and/or short selling season characteristics result in producers being unable to store the products until prices rise. Immediate and automatic relief based upon price and/or quantity measures are necessary to prevent irreparable industry harm in these sectors.
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.
Comments: Past negotiations have often treated health, quality and safety standards as trade barriers without sufficient regard for important public safety and quality goals. The result has sometimes been downward harmonization of safety and quality measures under a trade facilitation rationale. Enforcement as to imported products should effectively equal enforcement as to domestic products.
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.
Comments: Domestic taxpayers, globally, expect their tax dollars to be spent on domestic production. Government procurement is, in large part, a policy tool rather than true free market commerce. The federal, state and local governments of the United States are, collectively, the biggest consumers in the world. True reciprocity cannot exist because there is a mismatch in the size of - and transparency of - government procurement markets.
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.
Comments: Trade negotiators agree to language based upon expectations and judgment in pursuit of national goals. However, goals may not be achieved or expectations may not be met. Just as business contracts do not last forever, neither should agreements between countries. Therefore, it is prudent to make such agreements time-limited to ensure that they continue to provide balanced benefits as circumstances change. If a balance does not materialize, the agreement should be renegotiated or discontinued.
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.
Comments: Fair labor standards will simultaneously improve U.S. competitiveness and increase worker prosperity in other countries, enabling them to become consumers of U.S. goods. In the 2002 Trade Promotion Authority (TPA) statute, Congress instructed trade negotiators to pursue goals including: “to promote respect for worker rights and the rights of children consistent with core labor standards of the ILO...and an understanding of the relationship between trade and worker rights”. Congress further defined those core labor standards as: “(A) the right of association; (B) the right to organize and bargain collectively; (C) a prohibition on the use of any form of forced or compulsory labor; (D) a minimum age for the employment of children; and (E) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.”
Sales Factor Apportionment for International Corporate Taxation: Congress can lower the corporate tax rate, improve export competitiveness and fight tax avoidance through profit shifting while preserving tax revenue. The problem of profit shifting to tax haven countries is out of control and must be fixed to put US manufacturers on a level playing field with transnational companies and importers. Switching to sales factor apportionment for corporate taxation fixes these problems and makes income tax border adjustable.
Currency manipulation is ignored in the TPP. But a separate agreement among TPP countries is promoted as addressing the problem. See why that separate agreement does nothing.
How can one more consultation without enforcement fix the problem?
The Trans-Pacific Partnership has no provisions regarding currency misalignment in its text. Instead, there is a side agreement called a “Joint Declaration of Macroeconomic Policy Authorities” that is being promoted as addressing the issue. Unfortunately, the Joint Declaration simply restates existing obligations, fails to provide any enforcement tools and merely relies upon more diplomatic talk.
Since December 1945, currency manipulation has been prohibited under the rules of the International Monetary Fund. Article 4, Section 1 (iii) of the IMF Articles obliges members to: “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members….” This obligation is designed in part to serve one of the fundamental objectives set forth in IMF Article 1: the expansion and balanced growth of international trade. The framers of the post-World War II international system understood that imbalanced trade was mercantilism and sought a monetary system that would avoid one-sided trade results.
Nevertheless, today some 20 countries – 40 percent of the global economy – have achieved a strong competitive advantage, running persistent balance of payments surpluses by maintaining trade imbalances and selling their own currencies to buy US dollars and other financial assets. One country, the United States, has run trade deficits for more than 40 years and has amassed more than $17 trillion in foreign debt. By no stretch of the imagination can this be the sort of “balanced growth of international trade” that the IMF rules are supposed to foster.
Over the past 70 years the IMF has had the authority to enforce Article 4 obligations. In practice, it engages in regular consultations to persuade key members to adjust their policies. The use of mere moral suasion has failed to produce meaningful results, rendering the IMF increasingly irrelevant.
Earlier this year the Congress directed US negotiators to seek to put teeth into the IMF obligations. The logic has a broad appeal: clubs of “free traders” are seen as ways to create higher levels of obligation and more effective solutions to problems that plague the multilateral trading system as a whole. True “free traders” should be the most ready to play by tougher, fairer rules in pursuit of expanded and balanced trade. The Trans-Pacific Partnership agreement concluded on October 5 was the first test of the Congressional mandate.
The TPP flunks that congressional test. Despite an explicit Congressional instruction, there is no currency provision within the TPP itself. Instead, the Treasury negotiated a “Joint Declaration of Macroeconomic Policy Authorities” that largely restates existing obligations, fails to include any additional enforcement tools, and merely adds yet another consultation process. The Joint Declaration:
1. Entails a “confirmation” that each TPP country is “bound” under IMF rules to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage.” Nothing has changed from the obligations agreed 70 years ago.
2. Specifies that each macroeconomic authority is to “take policy actions to foster an exchange rate system that reflects underlying economic fundamentals, and avoid persistent exchange rate misalignments. Each Authority will refrain from competitive devaluation and will not target its country’s exchange rate for competitive purposes.” How else could they have expected to comply with their IMF obligations established seven decades ago?
3. Requires regular reporting on foreign exchange intervention and reserve holdings. Amazingly, this basic information is sometimes withheld from the IMF, so the Joint Declaration might produce a modest improvement in transparency.
4. Establishes regular consultations among the macroeconomic authorities. This will be in addition to the periodic meetings of IMF officials, APEC, the G-7, the G-20 and bilateral consultations. Japan, whose currency has fallen by 55% since Prime Minister Abe took office, is a full participant in most existing fora. The value of one more venue for consultations is highly debatable.
There is ample precedent for taking strong action to correct currency misalignment in conjunction with past major trade agreements. The Tokyo Round and the Uruguay Round were each preceded by a realignment of currencies to reduce imbalances in the world economy. If the Joint Declaration indeed would make any difference in the real world of trade, one might expect it to come into effect immediately. Instead of removing obstacles to TPP implementation by realigning currencies in advance, the Joint Declaration will take effect if and when the TPP enters into force.
The bottom line is the macroeconomic and the trade negotiators together have failed to produce even a modest step forward toward an effective, enforceable currency provision. With the TPP negotiations concluded, the only alternative effective response would seem to be enactment of the Currency Reform for Fair Trade Act (H.R. 820) or its equivalent such as Title VII of the Customs Enforcement legislation that passed the Senate. Either would mandate the use of WTO-consistent remedies to offset injurious currency subsidies. That would be a modest first step toward confronting mercantilist currency policies, and it’s long overdue.
The Smoot-Hawley Act did not cause a trade war. Trade actually fell faster in the 2008 Great Recession than it did after 1929.