At a time when our country is fixated on a protracted political process passionately promising to cure all our ills, this would be an excellent time for our presidential candidates to put forward their vision to solve the most critical economic issue of our time: our degenerative trade deficit.
Unfortunately they appear to suffer from Trade Vision Deficit Disorder (TVDD), or are simply too fixated on more electability issues. We must take it upon ourselves to provide the remedy. Unlike other seemingly impossible challenges we face, our trade deficit is something we can correct in a relatively short period thus creating millions of well-paying jobs. It is as straightforward as establishing an environment where American exporters are allowed to compete.
First, we the people must demand our candidates understand trade, be able to articulate a comprehensive strategy in dealing with our global competitors and have the guts to fight.
Unfortunately this election cycle is a huge disappointment among the current candidates from
both major parties. Barack Obama and Hillary Clinton have cut and pasted the AFL-CIO antitrade
positions to their websites and routinely include the union’s talking points in their speeches.
They tell us they are going to “fix” the evils of NAFTA or “opt out”. This is the same rhetoric the ultra-left wing Mexican presidential candidate Andres Manuel Lopez Obrador used against NAFTA in the 2006 Mexican election. He lost the popular vote by less than one percent. Lopez Obrador openly campaigned that it was his intention to take Mexico out of NAFTA and aligning the country closer with Venezuelan dictator Hugo Chavez and other radical leftist Latin American governments. This would have been a disaster for Mexico, the United States and the region. Now Obama and Clinton are essentially endorsing the same decision. NAFTA is by far the most beneficial trade legislation Congress has ever passed. Obama and Clinton are both ardently against signed Free Trade Agreements with Colombia, Panama and South Korea, but are awaiting Congressional approval. The year 2007 will be known as the year that Democrats lost their way on trade.
Over on the Republican side John McCain rarely mentions trade and when he does his comments are so elementary our competitors from Beijing to Berlin are standing on their seats smugly shouting “four more years”. Although he supports free trade there is no vision, passion or understanding of the issues. It is this sort of knee-jerk reaction that has gotten us into the huge mess we now face.
We must rid ourselves of trade policy derivations from the Marshall Plan era.
A Marshall Plan export economic mindset that stretches back a half century has set us on course towards $1 trillion trade deficits stretching as far as one can see. It is important to understand how we got into this mess. Only after World War Two did the United States begin to advocate a liberal trade policy. To promote post-war recovery in Western Europe and Asia the U.S. opened its market wide to war-time enemies without requiring equal access for American exports.
The U.S. trade policy that developed during this period is remarkable inasmuch as it permitted friendly countries to discriminate openly against American products with impunity. Domestic financial interests were completely subordinated to U.S. foreign policy. Imports from Germany and Japan were aggressively encouraged whereas the necessity of exports was largely disregarded.
A 1952 declassified document from the National Security Council (NSC) recommended that the entrance of Japanese goods to the U.S. should be “facilitated” to “halt economic deterioration” that “creates fertile ground for communist subversion”. Our bilateral trade agreement with Japan in 1955 completely surrendered domestic manufacturing concerns to foreign policy objectives. The U.S. granted Japan historic tariff reductions on almost all its exports and received no concessions in return.
By the late-60’s it was already clear that our global competitiveness was in rapid decline. However, instead of rethinking and adjusting our trade policies, the same flawed strategy was perpetuated. Our markets were opened further to several Asian, African and Latin American countries while getting very little trade reciprocation in return. It took just twenty years for one of the nation’s greatest miscalculations to become deeply rooted in our culture; essentially subjugating the world’s number one compulsive consumer by unconditionally surrendering its export industries and the futures of millions of Americans whose livelihoods are tied to them.
There is nothing new under the sun in global trade. Britain at the height of its empire in the middle of the nineteenth century embraced unilateral free trade and opened its markets to the world without any reciprocal consideration for its industries. It is fitting to remember within seventy years of this charitable gesture, Britain was nearly broke and its position as one of the world’s leading financial markets evaporated.
To keep American from suffering the same fate, our Marshall Plan mentality must be reversed so that we never cede our once envious export prowess to our competitors and adversaries, and thereby protect the economic future of millions of our citizens.
We must make Trade Promotion Authority (TPA) permanent either by a Constitutional Amendment (highly improbable) or an Act of Congress (very achievable).
Article I of the U.S. Constitution grants Congress sole power “to regulate commerce with foreign nations”. The Constitution grants the president no trade specific authority whatsoever. There is no sphere of government policy where the primacy of Congress could be clearer.
Congress reins supreme on trade unless and until it decides otherwise. Congress is a decentralized institution, particularly vulnerable to pressure from special interest groups and lobbyists. So it does what comes naturally once the politics of benefit seeking spins out of control, it delegates responsibility. If it did not, the result would be a high level of trade barriers and tariffs (resembling many of our most important trade partners) to the benefit of certain groups and to the detriment of the nation as a whole. In 1934 Congress began delegating specific trade authority for predetermined periods of time to the president. Since 1974 Congress has granted every President the authority to negotiate trade agreements for Congressional approval on an up or down vote. In 1994 the President’s Trade Promotion Authority (TPA) lapsed. It was not restored until 2002, passing in Congress by a single vote, 215 to 214. It was one of the most hotly contested and partisan pieces of trade legislation ever. It expired June 30th, 2007. With the over-the-top demagoguery that is now commonly practiced in Congress, Trade Promotion Authority (TPA) will not be renewed at the very earliest until the next administration takes office. Having a lame duck administration unable to negotiate trade puts us at an overwhelming disadvantage in dealing with our competitors.
We must insist upon comprehensive Free Trade Agreements (FTA) with our most important trade partners.
China and Japan alone are responsible for over 60 percent of our merchandise trade deficit. American exporters are also at a tremendous disadvantage in Brazil and India. Our trade deficit will not be reversed until we deal with its root causes. The global reality is that free trade amongst countries rarely exists. Where free trade does exist is interstate commerce between our 50 states, where it has fueled our domestic economy.
We should therefore examine free trade at its purist. Why not have our Free Trade Agreements resemble the kind of trade that exists amongst the states? The U.S. Constitution forbids tariffs amongst states on any kind of product or service. All 50 states are under the same federal laws controlling banking, the environment, labor rights, safety standards and copyright and patent protection. All 50 states use the same currency, not subject to manipulation or devaluation. All 50 states are ultimately answerable to the Supreme Court. Adopting these same standards would eliminate tariffs on manufactured and agricultural products and open up service markets and government procurement. Labor rights, safety standards, environmental protection, intellectual properties, and due process would all be protected and regulated. In short, the playing field would be leveled. They must be pursued vigorously and immediately.
Ninety percent of our trade deficit is from countries with which we do not have Free Trade Agreements. The average duty on products entering the United States is less than three percent whereas the average duty imposed by a World Trade Organization (WTO) member is thirty percent. We do not need WTO but we do need more Free Trade Agreements.
Create the Department of Global Trade
Our command structure is a convoluted mess due to the split authority between the USTR (United States Trade Representative) and Department of Commerce. This split provides the USTR responsibility for “policy”, “coordination” and “negotiations” while providing the Secretary of Commerce “nonagricultural operational trade responsibility”. We must replace the USTR-Department of Commerce two-headed monster with a single Department of Global Trade. The Secretary of Commerce would become the Secretary of Global Trade, possessing real power over a portfolio that offers opportunities for important policy leadership. Unlike today, the Secretary of Commerce would have complete authority over all facets of trade including strategy, negotiations and enforcement.
Forget about trade sanctions.
Trade sanctions rarely have the anticipated effect on our adversaries. Instead, they usually only hurt American manufacturers and workers. We have eager European and Asian competitors tripping over themselves to fill every purchase order and contract we walk away from.
In the past fifty years the United States has gone overboard on sanctions. We have sanctioned more than 80 countries over 175 times. If we include “soft” sanctions such as denying export financing through the EXIM Bank the number would be much higher. Our sanctions threaten two thirds of the world’s population. Over half of the sanctions established in our country’s 231 year history have occurred in the last ten years. Although it is difficult to estimate, sanctions cost American exporters at least $70 billion annually in lost sales which translates into 600,000 jobs. We are deemed by many to be unreliable suppliers beholden to an impulsive Congress. Trade sanctions have become foreign policy “on the cheap” as a way to show disdain without sending in the marines. At least we can all be reassured that Congress can not be blamed for being discriminatory. We literally sanction every country from A-to-Z: Angola to Zimbabwe.
We sanction to fight communism (ironically our trade policies now perpetuate communism in
China). We sanction in the name of human rights, to protect the environment, to stop
weapons and nuclear proliferation, to protest military action, to improve treatment of labor, to
elevate environmental standards, for harboring terrorists, for dealing in expropriated U.S.
property, for drug trafficking, for money laundering and my personal favorite, for having
restrictive trade policies.
In fact, if we consistently applied our policies, only a handful of countries would be left to trade with.
Of course all good people support human rights and don’t want the “bad guys” to get dangerous weapons. However our sanctions are totally out of control. They have robbed the jobs (and lowered the wages) of hundreds of thousands of Americans without having any impact on the targeted countries. If they are to be used, sanctions should be weighed carefully, and be targeted primarily against rogue countries with out-of-control weapons programs. Unless sanctions are airtight and multilateral they have absolutely no chance to succeed.
Why do we continue down a road of such arrogance and assured failure? Too often we fail to realize that our power has some very real limitations. A better solution is to let Americans engage the citizens of foreign countries by traveling abroad, taking with them our values, culture and ideas. By allowing Americans to engage with the world, trade barriers would fall, and the only losers would be tyranny, poverty and ignorance. The next time a member of Congress decides to make C-SPAN highlights by thundering his or her intentions to bring sanctions against some evil regime in the world, let us make sure that they remember who really will suffer: the American worker.
Get tough on Intellectual Property Protection and Counterfeit Goods.
Counterfeit products produced and sold freely at markets in China and exported around the world cost Americans an estimated 750,000 jobs a year and American businesses $250 billion. The bulk of the world’s pirated material comes from China. If China for whatever reason can not close this down, then the Chinese Government must make restitution to US companies and workers being cheated because of their ineptness to govern. We must declare war on Intellectual Property theft and provide the resources to fight it.
We must radically rethink our involvement with the World Trade Organization (WTO).
It is time to stop wasting energy, resources and goodwill and admit that the multilateral Doha Round of the World Trade Organization negotiations is doomed to failure. The WTO talks are at an impossible impasse over the EU (held hostage by France) and Japan’s inability to give up the “opiate” of agriculture subsidies and a block led by Brazil and India unwilling to agree on meaningful Intellectual Property Rights (IPR) protection.
It is much more practical and rewarding to negotiate with one trade partner at a time instead of the 149 members of WTO all at once, each having veto power. Groups are often formed to thwart American initiatives. The WTO has reached the critical mass to be self-sustaining and will never be much more than it is today. The WTO is the trade equivalent to the United Nations.
Take Back Our Trade Sovereignty.
Once upon a time the United States possessed a feared and effective weapon: Section 301 of the Trade Act of 1974. As amended, it is the principal statutory authority under which the United States may impose trade sanctions against foreign countries that “maintain barriers, policies and practices that violate, or deny U.S. benefits under trade agreements or restrict, burden or discriminate against U.S. commerce”.
Super 301 went further and required in 1989 and 1990 the USTR (U.S. Trade Representative) to publicly identify “priority foreign countries” and unfair “priority practices” that were major impediments to U.S. exports. If the offending country was not forthcoming in scrapping their designated barriers, it provided the President authority to retaliate. Super 301 helped open several successful quantifiable market initiatives, especially those with Japan and Brazil. President Reagan deftly used the threat of Section 301 to revalue the Japanese yen. Immediately after the Plaza Agreement in September of 1985 the yen appreciated against the U.S. dollar by over fifty percent playing a crucial role in increasing American exports.
Today, in contrast Beijing steadfastly refuses to allow the RMB (Chinese currency), undervalued
by as much as forty percent, to reflect its true value. The threat of Section 301 has all but disappeared.
You may wonder how China can avoid its responsibilities. The answer is that we have surrendered our trade sovereignty to the World Trade Organization (WTO). The United States is no longer allowed to directly apply Section 301 to pressure trading partners into eliminating barriers to U.S. exports and other unfair practices. U.S. trade enforcement is now in the hands of the WTO’s Dispute Settlement Body (DSB) which essentially takes the U.S. government out of deciding its trade interests. This is tantamount to handing over national security to the largely ineffective United Nations.
Get Rid of Agricultural Subsidies
The true cost of farm subsidies that our tax dollars are supporting should cause outrage among the American people. President Franklin Roosevelt created farm subsidies to aid farmers barely staying alive during Great Depression. This was a necessary and noble cause, however like many government administered programs, it has become perverted. The intension was never to be paying millions of dollars to millionaires. The negative impact that our farm subsidies have abroad can not be understated. They clearly distort world trade, deepen poverty and undermine our credibility. U.S. farm subsidies are currently about $20 Billion per annum. We are not the only guilty party. The E.U. (European Union) pays $67 Billion in farm subsidies (France is the main beneficiary) while Japan pays $33 Billion. As a further barrier to trade, duties on many farm products in the U.S., E.U. and Japan exceed 100%.
American agribusiness exporters routinely sell their products below the cost of production with the American taxpayer making up the difference. It is impressive to witness at foreign trade shows, the pervasive presence of the U.S. Department of Agriculture and American food companies exhibiting their products under its banner. Many of the products being sold are costing the American taxpayer every time an order is placed. The companies benefiting from these subsidized transactions are some of the biggest corporations in the United States. It is a misconception that farm subsidies exist to stabilize the incomes of poor family farmers who are at the mercy of unpredictable weather and uncontrollable price fluctuations. Eligibility for subsidies has nothing to do with low incomes or poverty alleviation but by the crop that is grown. Growers of corn, cotton, rice, soybeans and wheat receive 90 percent of all farm subsidies. Most subsidies go to large corporate farms simply because of how the program is designed and administered.
The top 10 percent of subsidy recipients get nearly 75 percent of all federal funds whereas the bottom 80 percent of the farmers receive a measly 12 percent. This is the largest corporate welfare program in the history of the United States. These subsidies have accomplished the complete opposite of their intended purpose. Instead of saving the family farmer, it has provided capital for large corporations to buy out smaller farms and consolidate the industry with taxpayer money.
Because of this ongoing consolidation, there is an undeniable “plantation effect” happening in the United States. The number of farm operators is rapidly shrinking while the average size of a farm is greatly increasing. These mega-farms employ thousands of migrant workers and tenant farmers that are being paid near poverty wages with limited access to healthcare. Fortune 500 companies that receive massive subsidies include Caterpillar, Chevron, International Paper, John Hancock Mutual Life Insurance and Kimberly Clark. Such diverse individuals as Bob Dole, David Rockefeller, Scottie Pippen and Ted Turner receive large federal subsidies too. Even Ken Lay, the ex-CEO of Enron, received several thousand dollars for not farming his land before his dramatic meltdown.
Unfortunately the present farm bill is only accelerating the transformation of farm subsidies into corporate welfare programs with most of the funds going to highly profitable corporations and celebrity millionaire farmers. The family farmer is rapidly becoming extinct while the American taxpayer continues to be fleeced like an apathetic lamb. To illustrate the impact this has overseas, consider the following. Subsidized U.S. food products being imported to Jamaica are cheaper than homegrown Jamaican crops. This makes it impossible for the dirt-poor farmers to survive. If they are not competitive in their own market, there is no way they can hope to export. Gripping poverty has a firm headlock on them thanks to farm subsidies.
With the U.S. Government guaranteeing American farmers a minimum payment for commodities such as corn, rice, soybeans and sugar, it encourages over production in the U.S. This drives down market prices forcing even higher subsidies paid by taxpayer money and creating surpluses that are dumped around the world and make it impossible for local farmers to compete in their home markets.
Rewrite the tax code so it does not discriminate against U.S. manufacturers and exporters.
Our manufacturers pay a disproportionate share of taxes that fund our schools, support our defense and build our roads. We must rid ourselves of an arcane and convoluted income tax system and move to a simple consumption tax that spreads the burden equally over American made and imported goods. Like our competitors, we must provide tax incentives and rebates to our exporters.
Fairly distribute U.S. government supports recognizing the contributions of manufactured goods to our economy and security.
Whatever funding the American government does provide to promote exports goes to the U.S. Department of Agriculture (USDA). The USDA gets approximately seven times more funding to promote agricultural exports which represent just nine percent of our overall exports than the Department of Commerce (DOC) receives to promote the other ninety-one percent. To add further to this inequity, much of our agricultural exports are subsidized by U.S. tax payers and sold below the cost of production.
The United States is the only industrialized country that taxes its citizens based on nationality rather than their residence.
Unlike the U.S., our European and Japanese competitors do not pay income taxes to their home countries while working overseas. This is a significant incentive for them to relocate overseas to assist their producers in penetrating foreign markets. I have witnessed the tremendous benefit ex-pat communities bring their home country manufacturers. America must provide income tax incentives, like our competitors, to those willing to be the front line soldiers of American exports. The present Foreign Earned Income Exclusion that Americans overseas are subject to is insufficient and outdated.
The Foreign Corrupt Practices Act (FCPA) is an unrealistic, archaic law that is a serious impediment for American companies competing overseas.
It is a law that our European and Japanese competitors do not have to contend with. FCPA, enacted by Congress in 1977, makes it illegal for U.S. companies to pay fees to foreign government officials in order to obtain business or gain some advantage. The trigger for FCPA was the Lockheed Scandal whereby the American aircraft manufacturer paid various Japanese government officials in the course of trying to sell its aircraft. Some of these funds found their way to then Japanese Prime Minister Kakuei Tanaka and eventually forced him to resign from office.
Though I don’t subscribe to paying bribes to foreign government officials, we need to re-think the way that the federal government oversees U.S. exporters. It should be up to U.S. companies overseas, fighting for American exports, to police themselves. The current law, for instance, prohibits paying a “facilitation fee” to a foreign customs officer, even if that is the only way to release goods required to complete a contract. We must understand that in most other countries there is a way to compete and conduct business that may seem out of character with accepted U.S. practices. But by handcuffing U.S. exporters, they will be unable to bring home business that American workers desperately need.
Our U.S. Export Assistance Centers (USEAC) throughout the United States and our Foreign Commercial Services Offices at our Embassies overseas must be provided resources needed to promote and defend our exporters.
We must continue to invest in and build further our infrastructure that promotes American exports. America’s back bone has always been its small businesses and entrepreneurs. The world is a big and daunting place. The U.S. Export Assistance Centers and the Commercial Sections of our Embassies overseas are an important resource in helping American exporters reach potential customers in every market.
Our competitors have armies of lawyers and trade specialists working feverishly to clear away barriers targeted against their exports. The U.S. Department of Commerce which is responsible for enforcing our trade agreements and promoting American exports is woefully understaffed. Gross violations impacting thousands of jobs go unchallenged allowing foreign governments to trample American interests with not even the slightest resistance. Quality trade education must be made available that is predictable, affordable and convenient. A glowing example of the U.S. Government and the private sector working together for the good of the nation is the Florida District Export Council’s Export University program. Hundreds of students have passed through its courses. It is a program that must be rolled out nationally.
The EXIM Bank and SBA (Small Business Administration) are valuable tools and must be expanded upon.
Over seventy percent of American exports are done by SME’s (Small and Medium Enterprises).
They are therefore essential to solving the trade deficit.
Product financing is a major component of any purchasing decision. Our European and Japanese competitors have long been offered soft payment terms subsidized by their home governments. This often makes the difference in winning large export orders that employ thousands of workers.
Each $1 that American taxpayers have invested in the SBA’s export finance program has yielded over $500 in export sales. This is probably the single most successful export promotion program, dollar for dollar, in the entire U.S. government. The EXIM Bank and SBA programs need to be made more accessible with increased borrowing limits and fewer restrictions. These programs are the life-blood of American exporters. Fifty years of successive Republican and Democratic administrations without a comprehensive trade vision has resulted in an infrastructure that is unable to compete globally. Providence has bestowed on ordinary American an extraordinary privilege to change things for the better. It is our duty to seize that right.
It starts with a vision.
Neal Asbury is president of Greenfield World Trade, exporting American-made products to 137 countries worldwide.