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Idea Lab

DLC | E-newsletter | May 14, 2010
Time for Trade

President Obama set an ambitious trade goal in January: doubling exports in five years. We applaud him for it and support the goal. With one quarter gone and only 19 left to go, we need to step up the pace. With the big health and crisis-response challenges of the administration's first year met, the time has come for trade policy.

The reason emerges from the answer to a logical question: Why do we need to double exports? Answer: We need a strong and sustained recovery to bring down unemployment, and won't get it without a big surge in exports. Government will not provide the demand, because stimulus is about to run its course and probably won't be renewed. And with families saving rather than spending, the demand that drives recovery isn't likely to come from shopping and home buying either. Lacking the powerful domestic demand to sustain a strong recovery -- or perhaps even avoid a second slump -- our only other option is to tap foreign demand by selling America's best products abroad: planes and cars, medical equipment and scientific instruments, software and movies, beef and almonds and wheat, distance education and telemedicine, and all the rest.

To double exports in five years, though, is an ambitious goal. Since World War II, America's exports have doubled roughly each decade, growing at an average of 8.3 percent annually. To double in five years -- from $1.55 trillion in 2009 to $3.1 trillion in 2014 - means raising the rate to 14.8 percent. With one quarter down and 19 left to go; we've made a good start, with 16 percent growth so far in 2010. But that's measured against 2009 -- the worst year American exporters have endured since the Depression. To keep up this pace, policy has to help and the administration must think big.

Currency diplomacy with China is part of the solution. Lower dollar values can be powerful tools to raise exports, and the administration is right both to push China for revaluation and to prefer multilateral coalitions to tariff threats as it does so. But lower dollar values can also be powerful tools to raise energy prices and interest rates and need to be used with care. And China is already America's fastest-growing big market. Exports to China actually did double between 2004 and 2009, from $43 billion to nearly $90 billion in goods and services; this year they are up an astonishing 47 percent, and (with Hong Kong included) account for fully a sixth of all U.S. export growth. We can do more -- particularly with strong policies on market access and intellectual property issues -- but to double exports, we need almost equally good performance in Europe, Canada, Latin America, India, Southeast Asia, and elsewhere. So as important as the debate over Chinese currency rates may be, it isn't the only debate and it isn't enough.

The administration's National Export Initiative, launched in March, is a good start toward a more comprehensive strategy. We like its pledge for energetic export promotion and the work the Commerce Department has done to back it up to date. We also like its commitment to rethink our antiquated export control law, which requires licenses and bureaucratic approvals not only for genuinely sensitive technologies but also widely available products like crude oil, off-the-shelf bullet-proof vests, protective gear for food-processing workers, and bayonet-manufacturing equipment. (Check the list.) Trade enforcement initiatives from the USTR -- six WTO cases are in motion, and the administration has a strong intellectual property program -- will help too. But these are complements, not substitutes, for a vigorous push to open markets through trade negotiations and agreements.

Dual-use goods covered by export controls totaled $50 billion in 2008. National Export Initiative plans call, among other things, for adding 328 export-promotion officials at the Department of Commerce, and raising export-loan guarantees for small and medium-sized businesses from $4 billion to $6 billion. WTO enforcement initiatives go into the tens of billions, taking on high-dollar topics like European "launch aid" subsidies for aircraft. But even together, these aren't enough to meet a $1.5-trillion need. For that we need a cohesive and serious set of market-opening goals, along the following lines:

  • Quickly pass the three signed trade agreements with Korea, Colombia, and Panama, which together bought $60 billion in American goods and services even during last year's crisis, and can provide a rapid export boost as they recover.
  • Reduce limits on the ability of American businesses and farmers to export, not only by export control review but by taking a fresh look at the anachronistic embargo on Cuba, including adding options for civilian manufactured exports.
  • Find creative ways to deal with the complex issues of services trade, standards setting, Internet privacy, and other topics central to developed-world trade: Japan, Canada, and the EU together account for $800 billion of our goods and services exports, more than half the total, and can still do much better.
  • Push faster for larger multilateral initiatives like the WTO's "Doha Round" that help open big developing-world markets like India and Brazil and China; Russia's apparent hope to speed up its WTO membership; and on a longer-term Asian policy foreshadowed by this year's Trans-Pacific Partnership talks.

Such an agenda can bring the fast export growth we need for the president's five-year goal -- and more important, the steady GDP growth that can spur investment and bring down our 9.9 percent unemployment.

It can also, of course, bring the administration into collision with party trade critics -- and this is a price worth paying. The critics have already gotten most of their demands: international labor standards added to free trade agreements, trade deficits down every year since 2006 and cut by half, and on top of that the sharpest decline in imports since 1938. Their response has not been to take 'yes' for an answer on the labor issues, nor to drop the mistaken equation of lower trade deficits with more jobs. Instead it is a bill introduced by Rep. Mike Michaud (D-Maine) last fall, which would bar the administration from opening new markets and is spiked with unintentional political land mines. (We look at two below the electronic fold.) The bill is a bad idea to be rejected, not a thoughtful critique to meet half-way. Should trade critics not wish to participate in a trade policy based on opening markets and exports, the administration should move ahead without them.

Either way, the national need is clear and outweighs some stress in the party. Families are saving; stimulus nearing its end. To move in the next two years from a shaky, stimulus-led recovery to a strong recovery based on private-sector investment and production, we need exports. The president recognizes this in setting his goal. To reach it, his administration needs to move quickly and strongly ahead, on the basis of the bipartisan trade coalitions all Democratic presidents since Wilson have created. With the two great tasks of the administration's first year done - health reform complete, the emergency response to the crisis working -- the time to start is now.


President Obama on doubling exports:

The DLC's Ed Gresser on a new trade agenda:

The Commerce Department outlines the National Export Initiative:

The Bureau of Economic Analysis has a convenient one-page summary of American imports, exports, and trade balances since 1960:

And don't forget -- On another aspect of trade policy, we applaud Congress (and in particular the Ways and Means and Finance Committees) for responding to the emergency in Haiti, with a significant improvement this week of the "HOPE" act waiving tariffs on Haitian-made clothes. Already over the last decade, earlier versions of HOPE helped double Haitian exports and garment employment, while reducing tariff burdens on Haiti by 98 percent. The new bill, with broader clothing benefits, should do even more to help Haiti's economy and workers in the aftermath of January's earthquake. Gresser at the Senate Finance Committee last March on Haiti and the broader question of trade policy vis-à-vis low-income nations: http://www.dlc.org/ndol_ci.cfm?kaid=108&subid=900010&contentid=255120

And a closer look at the trade critics --

The Democratic party's post-1970s division over trade has complex sources: Trade critics draw variously on some legitimate public anxieties, some misguided Naderite paranoia, important questions about America's national competitiveness as developing countries rise, misplaced faith in the effectiveness of America's tariff system as a job protector, and the diminishing membership rolls of private-sector unions. A future Idea Lab will look at this topic in detail and suggest some creative responses to the legitimate anxieties from government, businesses, schools, and non-profits while debunking some mistaken ideas. For now, we simply look at some of the ideas in the bill -- Mr Michaud's HR 3012 http://thomas.loc.gov/ -- which the most devoted trade critics on the party left see as a foundation for future policy.

HR 3012 contains 86 negotiating objectives, which over the next three years would guide a mandatory renegotiation of the WTO agreements, the North American Free Trade Agreement, and the free trade agreements with Jordan and Central America. (Those with Israel, Oman, Bahrain, Morocco, Singapore, Chile, Australia, and Peru are apparently exempted.) None of the objectives call for opening foreign markets, meaning trade policy would not be able to support growth in coming years. Instead the objectives range from unexceptionable restatements of current policy to some novel and in our opinion deeply ill-advised new ideas. Two examples:

1. Likely Nullification of U.S. Enforcement Efforts -- Section 4 (13) of HR 3012 states that, in addition to a standard national-security exemption based on threats to the nation or basic foreign-policy interests, all agreements need to include a clause exempting from dispute challenges:

"measures that the country considers necessary for ... the protection of its own essential security interests, including with respect to infrastructure, services, manufacturing, and other sectors."

Added to the normal national-security exceptions, this creates a near-total right to block enforcement. In practical terms, it would let foreign governments quash virtually all U.S. trade enforcement policies -- at minimum five of the six existing U.S. WTO cases, and likely most of the 62 previous U.S. case victories and favorable settlements -- by claiming 'security' grounds for industrial policies meant to subsidize local favorites or block their American competitors. The EU could use this, for example, to suppress the WTO's likely ruling next month against Airbus launch aid subsidies; China could use it to end the United States' dispute filing on rare-earth export limits.

2. Waiving U.S. Intellectual Property Rights for Climate-Change Technologies -- Section 4 (8), on objectives for intellectual property rights, stipulates that agreements:

"shall ensure that the access of the public to ... to technologies critical to preventing climate change is not obstructed by any provision of the trade agreement relating to the protection of intellectual property rights."

This provision, exempting a whole class of industries from IPR rules, at minimum authorizes and seems actually to encourage China, India, and other developing countries to strip American firms of manufacturing patents and software copyrights covering newly invented green technologies that can reduce emissions. Regardless of whether these countries agree to limit their own emissions, their companies could copy American inventions at will and sell them at home around the world. An obvious target, given these countries' automotive ambitions would be the U.S.-based auto companies now developing electric and fuel-cell cars.

A final comment: Individual objectives like these -- and they are far from the most startling ideas in HR 3012 -- are not the bill's basic problems. A revision could presumably strip them out. The fundamental weakness is the concept. The import limits and managed trade it suggests as guides for policy are poor economics in general, but especially bad in periods like the present crisis, which has driven American demand down and requires us to tap foreign markets for growth. The effect of HR 3012 would be precisely the opposite, prompting global retaliations that, like those of the early 1930s, cut Americans off from export opportunities when we need them most.