Obama's Trade Policy Agenda

On March 1, 2010, Ambassador Ron Kirk, United States Trade Representative, disclosed "The President's 2010 Trade Policy Agenda." Although the agenda claims that the Obama administration has brought substantial change to U.S. trade policy, the policies it outlines have fundamental limitations likely to render its goals mere talk and its results insubstantial. 

The agenda asserts that the administration's goal is "Making Trade Work for America's Working Families." It further asserts that "President Obama's economic strategy halted the slide into a deep economic crisis and laid the foundation for renewed American prosperity that is more sustainable, fairer for more of our citizens, and more competitive globally." But the facts are not so rosy. Since Obama was inaugurated, America's working families have lost one million more manufacturing jobs, the unemployment rate has soared from 7.7% to 9.7%, and real U.S. GDP has declined by 2.4%. The United States may be out of the recession, but it isn't yet out of the depression.

The agenda announces that President Obama has set a goal "of doubling U.S. exports in the next five years" to create two million jobs. It creates a new bureaucracy called the Export Promotion Cabinet, which will fund export promotion programs, tools for small- and medium-sized businesses, and reduction in barriers to trade, and also open new markets. According to the agenda, government officials, in their extreme wisdom, have selected which industries should be promoted -- specifically,

Key cabinet agency officials including the United States Trade Representative and the Secretary of Commerce, along with the Council of Economic Advisers, the National Economic Council, and the National Security Council carefully analyzed growth trends in the world economy and policies the Administration could pursue to help improve U.S. export performance over the 2009-2014 period.

This may be America's first "five year plan," the tool used by regimes when they run an economy from the top down. Unfortunately, the only answer offered concerning how we are going to increase our exports to the world's fastest-growing market, China, is that we will talk about it with them.

The agenda states: "Countries with large trade surpluses should increase their domestic consumption and imports as part of a more balanced growth strategy." With Communist China growing at an 8.7% clip while its Western adversaries decline, why should it change its policy without being forced to do so? Moreover, with China proving that mercantilism works, why shouldn't other countries copy them?

And even if the Chinese government again increases its domestic consumption, as the agenda says it should, it may again keep its people from importing more American goods, as it did in 2009. Not only does the Chinese government manipulate the dollar-yuan exchange rate to keep our products expensive and theirs inexpensive, but it also maintains lists of products that are permitted for purchase by the Chinese government, or by government-owned businesses, or by Chinese consumers using government subsidies. American products need not apply. 

In December, the Chinese government demanded that American corporations move their research and development facilities and patents to China in order to continue to be on its good lists, and Pfizer has already announced that it is moving an R&D facility from Connecticut to China. In sharp contrast, according to the Investigative Reporting Workshop, 80% of the first $1 billion of U.S. stimulus money that Obama spent on wind energy went to foreign producers.

Talk, Talk, Talk

The administration says it wants to make the WTO rules-based system work for the American people. But those rules don't even address the two primary methods (currency manipulations and government lists) that are used by the Chinese government to keep out American products, and there is nothing that would do so in the proposed changes in WTO rules for the Doha Round negotiations. The administration is not addressing the problem. Its initiatives amount to little more than talk, talk, and more talk.

One initiative is the Asia Pacific Economic Cooperation (APEC) forum. The U.S. will host APEC in 2011. The agenda writes, "To this end, we are coordinating with the 2010 host nation, Japan, on an ambitious agenda that engages APEC's broad membership on crucial trade and investment topics for the region's future. Initiatives in APEC are a successfully demonstrated way of building a stronger and constructive American role in the Asia-Pacific market." How many jobs producing goods for export will it create? Not a single one. 

The United States needs to concentrate on jobs, jobs, jobs. But the Obama administration is engaged in discussions with China, India, Brazil, and Russia. It sponsored and entered into negotiations for a regional Asia-Pacific trade agreement, known as the Trans-Pacific Partnership (TPP) Agreement, with Australia, Brunei, Chile, New Zealand, Peru, Singapore, and Vietnam. Not one industrial job has been created or ever will be.

Heritage Foundation Take

Terry Miller, writing on the Heritage Foundation's website ("Obama's Mercantilist Approach to Trade"), objects, as we do, to the idea that the government should pick the winners. But he goes much farther than that. He objects, even, to the goal of balancing trade. He incorrectly calls Obama's Trade Agenda a "mercantilist approach." He is equating self-defense with mercantilism when he writes:

The 2010 Trade Agenda is a recipe for economic failure and stagnation. Much of the focus is on enforcing rules to restrict other countries' access to the U.S. market. It's a begger-thy-neighbor approach in which we would sell more to other countries while restricting their ability to sell to us. Such a model is unsustainable internationally: not every country can run a trade surplus.

But we are not the perpetrator of beggar-thy-neighbor economic attacks; we are the victim. The United States has had huge mercantilist-produced trade deficits for the last fifteen years. From 2001-2008, President Bush let the Asian mercantilists steal about 4.5 million middle-class manufacturing jobs. The result was that by 2008, the Republican Party had lost the House, the Senate, and the presidency. When Miller writes that "not every country can run a trade surplus," he is ignoring the fact that every country can have balanced trade.

The policy of free trade can be traced to free-market champion Adam Smith's condemnation of mercantilism in his 1776 book Wealth of Nations. Mercantilism is the policy of seeking a trade surplus in foreign trade by imposing barriers to imports and subsidizing exports. Unfortunately, that worthy condemnation was incorrectly translated by some conservatives into an argument for unilateral free trade even when trading partners are employing mercantilist policies.

Economic efficiency occurs only when trade is balanced. We trade a basket of goods that we produce with relative efficiency to our trading partners in return for a basket of goods that they produce with relative efficiency. Both countries trade a basket of goods that they value less for a basket of goods that they value more. Both countries gain jobs in efficient industries while losing jobs in inefficient industries. As a result, both we and our trading partners are better off.

The Solution

There is a simple solution. It does not require that the government pick winners. It does not require a new governmental bureaucracy. And it does not require a five year plan. All we need to do is to invoke the WTO rule which lets trade deficit countries require balanced trade.

We could impose a tariff proportional to the trade deficit on all Chinese imports. From then on, any actions taken by the Chinese government to exclude American products from Chinese markets would also exclude Chinese products from American markets. If the Chinese government were to reduce their imports of American products, the tariff rate would go up. If the Chinese government were to increase their imports of American products, the tariff rate would go down. When trade would reach approximate balance, the tariff would disappear.

With his agenda, President Obama is announcing to the world that he will not take unilateral action against mercantilist practices. They can continue to manage our trade relationship so that we run trade deficits while they run surpluses so that they steal our remaining industries and our economic future. We will, however, threaten serious talk on the matter.

The authors maintain a blog at idealtaxes.com, and co-authored the 2008 book Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.