Making Progress on Trade and Competitiveness
SOURCE: AP/Wong Maye-E
See also: Progressive Pro-Growth Principles for Trade and Competitiveness by Adam Hersh and Jennifer Erickson
With the United States negotiating major regional trade deals with both the Asia-Pacific and Europe, Congress may face choices in the coming months on international trade that could shape the U.S. economy for decades to come.
Trading is and always has been in the American economy’s DNA and a critical source of its vibrancy. While trade can drive U.S. economic growth, the global trading system we’ve built is also a substantial contributor to the widening inequality that saps opportunities for individuals—and with them, growth potential for the U.S. economy overall. Thus, the question before lawmakers is not whether the United States should trade with other countries; rather, the choice is about how the United States should engage trading partners in an increasingly open and competitive world in order to grow the economy from the middle out.
As the U.S. Trade Representative Ambassador Michael Froman said recently, “Trade done right is part of the solution” to the problems of rising inequality and the slanted international playing field that U.S. workers and businesses too often face in the global economy. We believe doing trade right would mean advancing policies that:
- Establish strong, enforceable standards for fair competition.
- Increase commitments to enforce the hard-fought rules of trade agreements.
- Substantially expand investments in the sources of U.S. competitiveness.
Trade agreements are complex—as are considerations around enforcement and investment. The principles outlined here will help forge a new consensus on how trade can benefit American workers, American businesses, and our trading partners.
Providing enforceable standards for fair competition
Capitalizing on U.S. economic potential for trade and getting better outcomes for people in the United States and in trading partner countries begins with negotiating better international agreements. Unfortunately, many rules of the international trading system that the United States has painstakingly built through the post-WWII era are still lacking in key respects and need to evolve to keep pace with a changing world economy.
Improving the outcomes America reaps from new trade agreements would mean addressing the following:
- Currency manipulation, which allows misaligned exchange rates to unfairly privilege foreign producers and damages U.S. exporters, costing the economy an estimated 5 million jobs in total. It is no wonder this issue elicits a bipartisan call from senators and House members to address this damaging and anti-competitive imbalance. Currency manipulation should be treated as a countervailable subsidy, particularly with the Asia-Pacific countries, where the problem is most pervasive.
- State-owned and state-involved enterprises, collectively known as SOEs, are in some cases subsidized directly and indirectly through non-competitive policies. These wreak economic damage on businesses and workers in the United States and in other countries. In practice, the existence of subsidies and other competitive neutrality-violating policies are difficult if not impossible to evaluate, as they require the timely disclosure of credible financial information—not only from primary companies but also from those upstream and downstream in the production chain. Therefore, agreements with countries with a significant presence of SOEs should proceed on a precautionary principle: Companies should be required to disclose regularly relevant information for independent review by third-party entities to verify compliance with the OECD Guidelines on Corporate Governance of SOEs, certifying that companies are not benefitting from preferential treatment or operating on a noncommercial basis.
- Failure to comply in a timely manner should result in the withdrawal of trade preferences for SOEs and other state-involved companies. This standard should apply at all levels of government—not just central government SOEs—and enable trade enforcement bodies to draw adverse inferences of anti-competitive support in trade remediation cases. Furthermore, treatment of SOEs should clearly allow policy space for unfettered national or subnational provision of public goods and services, focusing disciplines on commercially oriented activities.
- Investor-state dispute settlement, or ISDS, mechanisms allow private investors to sue governments in private tribunals. These should be limited only to expropriation of actual property—those defined and protected in the U.S. Constitution—and discriminatory regulatory practices. It is essential that ISDS not encroach upon the legitimate space for regulation in the public interest, incentivize litigious culture where businesses seek cash payments from governments, and provide an expeditious appellate process—absent in current formulations. To this end, only businesses with clean hands—meaning no outstanding tax liabilities and fines, open investigations with U.S. regulators (such as the Occupational Safety and Health Administration, Environmental Protection Agency, or National Labor Relations Board), or open cases under the OECD Guidelines for Multinational Enterprises—should be able to bring suit under the ISDS.
- Rules of Origin ensure that the countries that receive benefits of preferential trade access to U.S. markets also provide commensurate reciprocal benefits for U.S. goods and services in their home markets. Without strong mechanisms that measure domestic value-added content of goods and set thresholds to determine national origin, global production chains can readily exploit venue arbitrage—producing in countries that are not party to rules of a trade agreement, but moving these goods with minimal value transformation through countries that are party to an agreement. The absence of strong rules of origin effectively extends preferential trade benefits to countries that do not provide those benefits in return to the United States and other partner countries.
- Labor and environmental standards ensure that agreements do not create a ceiling on working conditions, human rights, and environmental protections. While recognizing that trading partner countries all start at different levels of development, the United States should start from and push beyond the so-called May 10th Agreement to use trade agreements as a means to incrementally advance higher standards for trading partners rather than just holding countries accountable for laws in place at the time of an agreement. Labor and environmental standards should be enforceable with meaningful penalties, including through the potential for withdrawal of trade preferences.
Increased commitment to enforcement of trade agreements
Members of Congress should be able to agree on this fundamental nonpartisan point: If the United States is going to spend years negotiating trade agreements, it is also critical to invest in the enforcement of those agreements. When trade rules are violated, the benefits from an agreement tip away from mutual gains of win-win trade.
Resource constraints and broader business and geopolitical considerations all further complicate decisions to take the already difficult job of monitoring and enforcing trade agreements. That is why the Center for American Progress offered this set of policies in our long-term economic growth plan:
- Increase enforcement capabilities through doubled funding for the Interagency Trade Enforcement Center and through subpoena authority for the U.S. Trade Representative, or USTR.
- Increase transparency, accountability, and action via a more effective Trade Barriers Report, a new National Trade Compliance Database, and expanded statistical reporting.
- Press to institute stronger mechanisms to expedite adjudication procedures at the World Trade Organization, or WTO.
The central approach of moving toward more automaticity—in effect, making actions more automatic and putting less onus on individual businesses and unions to initiate action—and each of these other policies are discussed in more detail in “300 Million Engines of Growth.” Consider the simple idea: creating a National Trade Compliance Database. Such a database could track trade provisions by country and list whether a country is in compliance, what it takes to be in compliance, and, if not in compliance, what the U.S. government is doing about it. For example, China’s WTO accession protocol stipulates it can impose specified export duties on no more than 84 items, but 352 products faced export duties in 2013. A simple public database would provide a powerful mechanism for Congress and other stakeholders to fulfill their stakeholder roles and would provide agencies with an important tool to communicate key policy knowledge as well.
Expanded investments in U.S. competitiveness
The idea of marrying trade and competitiveness is not new and was in fact a goal of the bipartisan 1988 Omnibus Trade Act. To improve U.S. economic competitiveness, America will also have to invest in U.S. economic competitiveness. From 2010 to 2013, the United States experienced the largest drawdown in federal spending since the demobilization following the Korean War. To ensure that we invest for the country’s long-term success, which will benefit both public finances and private industry, we should be investing in the three key pillars of competitiveness outlined by the Congressionally mandated 2012 COMPETES Report: research, education, and infrastructure.
For example, meaningful investments in competitiveness that would fit well with a trade agenda could include:
- Reinstating a more effective and permanent research and development tax credit, and moving three key research agencies—the National Science Foundation, the Department of Energy’s Office of Science, and the National Institute for Standards and Technology—onto a path of doubling their budgets by 2020.
- Creating new opportunities for trade-affected workers and communities by helping them transition to new job opportunities, specifically as part of a dramatic expansion of support for private-sector apprenticeships, which have been proven to offer well-paying, middle-class jobs, as well as broader workforce development.
- Investing in infrastructure via $50 billion in up front investments, including reducing the backlog of 66,000 structurally deficient bridges, speeding implementation of air traffic control modernization plans known as NextGen, expanding high-speed passenger rail, and authorizing the president’s America Fast Forward bonding proposal, which would create a deficit-neutral taxable municipal security attractive to large investors.
Avoiding difficult conversations about trade will not rebalance the yawning U.S. trade deficit, rebuild the U.S. manufacturing base, nor strengthen the U.S. middle class. If we are going to obtain trade arrangements that are right for the U.S. economy, we need first to write better rules, then make sure we enforce them, and finally ensure that we are creating the best possible environment for our workers and industry to compete at home and abroad.
Adam S. Hersh is Senior Economist at the Center for American Progress. Jennifer Erickson is the Director of Competitiveness and Economic Growth at the Center.
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