Wanted: A shift in U.S. trade policy to benefit middle class

October 05, 2016


[Stephen Herzenberg| October 04, 2016 |Philly]

IT'S OLD NEWS that some Democrats are tone deaf on trade. Right now would be a pretty good time to get a hearing aid.

I had a front-row seat on that tone deafness in the first Clinton administration during its 1993 negotiation of the labor side agreement to the North American Free Trade Agreement (NAFTA).

Before this, I had examined trade in research on the auto industry, including at the U.S. Labor Department. This research documented the growth of northern Mexico as a low-wage production platform for export back to the United States. It made clear that Mexico's production wasn't limited to the low-wage, labor-intensive operations predicted by standard trade theory.

By the time George H.W. Bush announced his intention to negotiate NAFTA, Mexican auto and auto parts production had become another dagger in the heart of the Midwestern U.S. auto complex, following the earlier shift of jobs to the low-wage U.S. south and the rise of Japanese imports.

When NAFTA was announced, I argued that Bush's Labor Department should warn President Bush that NAFTA could be a political liability, opposed by a broad set of anxious Americans.

When that didn't work, I persuaded a Congressional staffer to request a study of U.S.-Mexico trade by the Office of Technology Assessment (OTA) and took a leave from the Department of Labor to help write that study.

OTA's "U.S.-Mexico Trade: Pulling Together or Pulling Apart" tried to reframe NAFTA as something other than a way to achieve gains from trade through each country specializing in what it does best. (Portugal makes wine, England makes wool, and everyone lives happily ever after.)

We argued that NAFTA was a symptom of an unprecedented economic integration between rich and poor countries. This integration had so far been unmanaged, with devastating consequences for workers and communities on both sides of the U.S.-Mexico border.

Our study proposed using NAFTA to manage integration better. This meant going beyond the wish list for U.S. multinational corporations in the Bush NAFTA - such as protections for intellectual property and U.S. foreign investment. Only with provisions that would lift wages on both sides of the border, a side-bar agreement with Japan to reduce North America's total trade deficit in auto and domestic policies to help U.S. workers might economic integration lift up workers and communities rather than destroy them.

I returned to the U.S. Labor Department in late 1992 and got drafted to help negotiate the NAFTA labor side agreement promised by President Clinton in his campaign. I argued on both political and policy grounds for a big departure from the Bush NAFTA, including managed trade with Japan to increase U.S. auto jobs.

Politically, President Clinton had won the election using the slogan "people are tired of working longer for less." The first-world productivity and third-world wages and living conditions in northern Mexico made NAFTA a symbol to blue-collar communities of a frightening future in which Americans would work "even longer for even less."

Unmoved, Labor Secretary Robert Reich took the position that NAFTA wasn't the real threat. Factory workers - "routine producers" - would be out of luck anyway. But even if NAFTA was mostly a messenger that more downward mobility lay ahead, this message was so dire that people would blame the messenger - and the politicians seen as responsible for NAFTA.

Predictably, President Clinton in 1994 lost much of the white working class that he had won in 1992, and the Gingrich revolution took over Congress.

Trade is also one of the few negatives in President Obama's otherwise remarkable record. In the 2008 campaign, he promised a "time out on NAFTA" while campaigning in Ohio. That idea was then forgotten.

The most basic point that Democrats need to get to win people back on trade is that people in factory towns know more about the impact of trade than traditional economists in their Ivory Tower. Manufacturing communities also know more than lawyers in Washington, D.C., or editorial board writers that blithely parrot the "gains from trade."

Bernie Sanders got this basic point, and Donald Trump does a good imitation of someone who does. Hillary Clinton needs to make crystal clear that she gets it, too. And then to make the case that only she will put in place genuinely "fair trade" policies - a very different set of rules governing globalization that ensure, rather than assume, that trade benefits people generally.

Stephen Herzenberg is an economist and the executive director of the Keystone Research Center.

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  • The interesting thing about this Presidential election is that the Bernie Sander’s’ left wing of the Democratic Party is planning to mobilize immediately after the election to push Hiiliary on trade and other issues, which was not done to Obama.

    Meanwhile Congress has already surrendered legislatively most of its power to regulate trade to the President.

    It would be a great accomplishment to drive the political center / Hiliary to support a version of the Buffet voucher plan that Bruce supports.

    What I do not believe, however, is that any form of financial manipulation of trade will put an end to its problems. But the voucher/ scaled tariff does provide a great place to start / aim for politically at this time.

    Longer term, I would like to see the role of Congress in directly managing trade be vastly increased, just like in the good old days; only this time focused less on raising revenue through tariffs and more on strategically balancing trade volumes in different sectors of the economy- energy, manufacturing, etc.
  • This country became the richest, most powerful nation on earth because of its initial mercantilism. Alexander Hamilton convinced George Washington that, if we were to become an independent nation, we must protect our industries with tariffs. This became known as The American System." Anything that we could produce here, including raw materials, was protected by heavy tariffs. Those tariffs generated enough revenue for the government that no income tax was necessary for the first 120 years. Our mercantilism generated huge trade surpluses, and millions of high-paying jobs for Americans.

    In recent decades, those protective tariffs have been “politicked” away in the name of “free trade.” China is now practicing mercantilism, and taking every advantage of our naive “free trade.” China is stealing our jobs, our technology, and our intellectual property, while draining away our wealth. If they were using that wealth to improve the lives of their people, I might find it more acceptable. However, they are using our wealth to build up their military and to enrich the honchos of the Chinese Communist Party.

    Our greedy, incompetent government handed the greatest prosperity engine the world has ever known to a brutal dictatorship that did nothing to earn it. We spent 200 years developing products, manufacturing methods, machinery and markets — then our government threw it all away. What did we get in return? Oh, yeah — we got eight years of Bill Clinton.

    It’s true that cheap goods from China saves the typical U.S. family about $2,500 per year. Unfortunately, the offshoring of our jobs to China is costing the typical U.S. family about $15,600 per year in lost wages.

    The answer to this problem is to force “balanced trade” with China. You can Google “Balanced Trade” for the whole story. The idea was proposed by Warren Buffett in a 2003 article in Fortune. The idea is dirt simple, and is within the WTO rules. Buffett proposed that our government issue “import certificates” to companies that exported goods to China. Those “import certificates” would then allow the bearer to import a like amount of goods from China. This was to be phased in over a five year period, at 20% per year. At the end of five years, our trade with China would be in balance, and millions of our manufacturing jobs would be returned. A family of economists, by the name of Richman, proposed we use a “scaled tariff” to balanced trade with China. You can read about their ideas on their excellent website www.idealtaxes.com
  • Steve, thanks for sharing your own experiences combating free trade policies. I wish I had known more about your background before, as I too was interested in the policies advocated by Reich and my subsequent time spent working on manufacturing at the SVA provided daily lessons about the disastrous effects of U.S. trade policies.

    As for the arguments you make in this essay, I agree with many of the points you make.

    The “Free but Fair” trade paradigm, however, is a waste of everyone’s time. It makes a mess of foreign policy by blaming other nations for our problems. And by focusing on particular products domestically, it focuses attention on the trees instead of the forest.

    Post-election I believe some work needs to be done on finding ways to build a broader more stable political coalition that supports devising new trade policies.

    In my opinion the most promising avenue for bridging the decide between Trump / Sander’s supporters, for example, could built by rethinking and reviving the Blue Green Coalition. The U.S. steel industry provides a wonderful proving grounds for such an effort because it contains both the unionized remnants of the New Deal at the integrated producers, and the rural, white working class in the minimills.