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Can Trade Motor U.S. Economy?

Authors: Edward Alden, Bernard L. Schwartz Senior Fellow, Council on Foreign Relations C. Fred Bergsten, Director, Peterson Institute for International Economics Thea Lee, Deputy Chief of Staff, AFL-CIO Clyde V. Prestowitz, President, Economic Strategy Institute
Interviewer(s): Christopher Alessi
November 7, 2011

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[Editor's Note: This is part of CFR's Renewing America initiative, which examines how domestic policies will influence U.S. economic and military strength and its ability to act in the world.]

The U.S. Congress passed long-stalled free trade agreements last month with South Korea, Colombia, and Panama, reigniting a policy debate over the role of trade in driving U.S. economic growth and competitiveness. Free trade advocates argue that it generates manufacturing jobs and helps develop new markets for U.S. exports, while critics contend that free trade deals often sacrifice U.S. jobs to overseas competitors without assisting displaced workers.

In this roundup, four experts outline measures the United States can take to make free trade an engine for economic growth and competition, while better serving the needs of U.S. workers. CFR's Edward Alden suggests that the United States focus on trade deals with emerging markets, stricter enforcement of trade rules, and a worker retraining program for those displaced by trade. The Peterson Institute's C. Fred Bergsten says that for the United States to be a competitive trade power it must get its "domestic house in order" by reining in its budget deficit. Conversely, the AFL-CIO's Thea Lee says the United States should stop "whining about the budget deficit and start making concrete long-term investments in infrastructure, education, and skills" to better compete globally. For trade to work for the United States today, it will require global rebalancing, says Clyde Prestowitz of the Economic Strategy Institute, who recommends reducing domestic consumption, "while increasing investment, production, and exports."

Edward Alden, Bernard L. Schwartz Senior Fellow, Council on Foreign Relations

There is no question that trade done well can boost U.S. economic growth at a time of sluggish domestic demand. It is also true that trade done poorly will do little to set the economy on a stronger recovery path. For too long, the political debate over trade has been mired in a "trade good/trade bad" food fight that has left the United States stuck while other countries are using trade strategically to lift living standards. It is time for this country to do the latter.

As the CFR's new Task Force Report on U.S. Trade and Investment Policy lays out clearly, there are three pillars to a trade policy that will boost economic returns for more Americans: a trade-opening strategy that focuses on the biggest and fastest-growing markets in the developing world, especially Brazil, India, and China; a renewed commitment to enforcement of trade rules; and a comprehensive worker retraining strategy to help Americans retool for a hyper-competitive global economy.

Increasing trade volumes alone will not fix what ails the economy; the United States still exports too little for a large economy, and has not adjusted well to import competition.

There are some encouraging signs, though far more needs to be done. Congress recently ratified three outstanding free trade agreements, with South Korea, Colombia, and Panama, and reauthorized the useful, if insufficient, Trade Adjustment Assistance program to help displaced workers. The White House-appointed Council on Jobs and Competitiveness endorsed the idea of a National Investment Initiative to jumpstart what has been a steady decline in foreign investment over the past decade. Secretary of State Hilary Clinton has taken the lead in the administration on the need to spur U.S. economic growth through a more ambitious and sophisticated trade and investment strategy. Meanwhile, the U.S. Trade Representative's Office has stepped up in tackling the most egregious subsidies in China in sectors such as clean energy technology.

In 1970, trade accounted for just 10 percent of U.S. GDP; today it is more than 25 percent and rising. But increasing trade volumes alone will not fix what ails the economy; the United States still exports too little for a large economy, and has not adjusted well to import competition. Economic success in the long term depends on the United States becoming not just a bigger trading nation, but also a better trading nation. That is the challenge that both parties in Congress and the administration should be addressing.

C. Fred Bergsten, Director, Peterson Institute for International Economics

The United States runs an annual trade deficit of about $600 billion, or 4 percent of our economy. Elimination of that imbalance would increase annual U.S. economic growth by half a percent to a full percent of GDP for the next five to ten years. This would create three to four million excellent new jobs and bring us halfway back to full employment with no budget cost.

We need to at least double the share of exports in the economy from 10 percent in 2010 to 20 percent in 2020. Moreover, we must focus on the trade balance, and thus the sector's net effect on the economy, rather than simply on gross exports, strengthening our ability to compete with imports as well as penetrating foreign markets more effectively.

Doing so would require forceful new policies from the administration and the Congress. First, the United States must achieve a fully competitive exchange rate for the dollar, which is now overvalued by 10 to 20 percent. The bulk of our current misalignment is vis-à-vis the Chinese renminbi and a small group of other Asian currencies, which must be permitted to strengthen substantially. Achievement of currency equilibrium alone would produce one to three million new U.S. jobs.

The United States must achieve a fully competitive exchange rate for the dollar, which is now overvalued by 10 percent to 20 percent.

Second, the United States must negotiate a substantial reduction in foreign barriers to its exports of services. We are highly competitive in this sector, especially business services ranging from architects and engineers to lawyers and accountants. We already run a services surplus of $150 billion and can at least double that total.

Third, we must get serious about defending the intellectual property rights of U.S. industry and workers. A recent study by the U.S. International Trade Commission suggests that China alone is stealing $50 billion to $100 billion annually of U.S. products.

We will of course also have to get our domestic house in order, particularly with respect to the budget deficit over time, and to strengthen our competitive fundamentals through better education, innovation, tax, and other key policies.

Successive G20 summits have emphasized the need to rebalance the world economy to achieve sustainable growth. This requires substantial reduction, if not total elimination, of the U.S. deficit and the counterpart surpluses in China, Germany, Japan, and several others.

Thea Lee, Deputy Chief of Staff, AFL-CIO

Increased trade has the potential to boost U.S. economic growth--and create jobs--under the right circumstances and with the right supportive policies. Such a boost would be tremendously welcome at the current moment, as most other potential growth engines--consumption, investment, and government spending--do not offer bright prospects.

Increasing net exports is, therefore, an enormously attractive option, and the U.S. labor movement would be delighted to see economic growth powered by exports.

But we need to be realistic about the prospects for significant short-term economic growth fueled by net export growth if our current set of trade, tax, domestic education, and infrastructure policies don't change.

It has been a couple of decades since trade contributed in a significant and sustained way to U.S. economic growth. Instead, we have run chronic and massive trade and current account deficits--even as we have signed new bilateral trade deals and embarked on more multilateral liberalization. And we are not the only country hoping to export our way to prosperity. As we slowly emerge from the global recession, most countries hope to boost growth through exports. Most of those countries have been strategic and concerned about protecting domestic markets through tax, procurement, and trade policies; and most have invested substantially more than we have in modern transportation, communication, and energy infrastructure.

We have run chronic and massive trade and current account deficits--even as we have signed new bilateral trade deals and embarked on more multilateral liberalization.

If we want trade to boost U.S. economic growth--and create good jobs at home--we need to change course. We need trade and tax policies that explicitly focus on job creation, not multinational corporate profits and mobility. And we need to stop whining about the budget deficit and start making concrete long-term investments in infrastructure, education, and skills, so that we have the wherewithal to compete and succeed in a dynamic global economy.

On the trade front, we need to use every tool at our disposal to ensure that our domestic manufacturers and service providers are not facing unfair competition. We could start by taking on currency manipulation, starting with the Treasury Department formally identifying currency manipulators and then using World Trade Organization channels to challenge currency manipulation as an unfair and illegal subsidy. U.S. workers, producers, and farmers are losing now, through our government's inaction and passivity. Addressing currency manipulation has strong bipartisan support, it would yield quick results, and it doesn't cost the taxpayer a dime.

Clyde V. Prestowitz, President, Economic Strategy Institute

Trade has sometimes been a driver of U.S. economic recovery and growth. But this is not always the case. Indeed, global trade is presently a drag on the struggling recovery of the U.S. economy. In the context of high unemployment, low capacity utilization, and falling household incomes, imports are rising faster than exports, thereby increasing the large, chronic U.S. trade deficit and undercutting domestic production and employment. In addition, a continuing movement toward the off-shoring of the production of tradable goods and the provision of tradable services is reducing the potential for new U.S. job creation.

It can be argued that inexpensive imports benefit consumers by keeping prices low and inflation under control. If the United States were at full employment and capacity utilization with robust economic growth this would be a compelling argument. But in the current sluggish economic environment, rising imports tend to depress wages and incomes more than prices so that the benefit to consumers is outweighed by the negative impact on workers and producers (who are also consumers).

In the current economic environment, rising imports tend to depress wages and incomes more than prices so that the benefit to consumers is outweighed by the negative impact on workers and producers.

The familiar mantra that trade is always a win-win proposition is not true. Ricardian free trade theory (PDF) assumes full employment, full capacity utilization, fixed exchange rates, and the total absence of cross border flows of capital, technology, and people. Since these circumstances usually don't apply, the fact is that trade may or may not be beneficial depending on the circumstances.

To make trade work for the United States today will require a global rebalancing. This means that big exporting countries with chronic trade surpluses should increase domestic consumption, invest less, export less, and import more. Conversely, countries like the United States with chronic trade deficits should reduce domestic consumption, while increasing investment, production, and exports.

The United States must produce more of what it consumes, and export more of what it produces. This will require action to prevent currency manipulation that overvalues the dollar, tax incentives for exporters, tax disincentives for consumption (a Value Added Tax for example), and strong financial incentives to attract investment in production of tradable goods and provision of tradable services to the United States.

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