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U.S. Trade Policy

Authors: Christopher Alessi, and Robert McMahon, Editor
Updated: March 14, 2012

Introduction

While trade accounts for an increasing percentage of U.S. economic output--at 25 percent--U.S. trade as a percentage of GDP is lower than that of every other developed country in the world besides Japan. As the forces of globalization have reshaped the global economy, there has been increasing resistance to trade liberalization within the United States. Many in the American labor movement argue that free trade, which they view as unregulated, disenfranchises U.S. workers by outsourcing jobs overseas. Advocates say that expanding free trade will create new U.S. jobs by opening up U.S. exports to a range of foreign markets, boosting competitiveness. While President Barack Obama has sympathized with U.S. labor concerns, his administration has also increasingly turned to trade liberalization to boost U.S. economic recovery in the wake of the Great Recession. Late in 2011, the administration ratified stalled free trade agreements (FTAs) negotiated by the Bush administration while placing fresh emphasis on negotiating a multilateral free trade agreement in the Pacific region.

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A Fraying Consensus on Trade

There is a long history of U.S. bipartisan cooperation on trade liberalization. U.S. policymakers forged a bipartisan consensus on expanding global trade at the end of World War II, building on the momentum of the Bretton Woods conference to form the General Agreement on Tariffs and Trade (GATT) in 1947. The GATT was inspired by a shared belief that lowering tariffs and expanding free trade worldwide would contribute to lifting millions of people out of poverty, and was intended to instill confidence in a free-market system based on fairness, transparency, and the rule of law. With the onset of the Cold War soon after the creation of the GATT, trade expansion's geostrategic dimension grew in importance. President John F. Kennedy linked the advancement of freedom with trade, inspiring the Kennedy Round of world trade talks, which led to significant tariff cuts and trade expansion. "A vital expanding economy in the free world is a strong counter to the threat of the world Communist movement," said Kennedy after signing the 1962 Trade Expansion Act. Two decades later, Republican President Ronald Reagan similarly connected trade to the "tides of human progress" and launched the Uruguay Round in 1986, which Democratic President Bill Clinton later helped complete in 1994. Uruguay established the World Trade Organization.

"The only way we're going to grow this economy is to recognize that our economic strength lies not only with our own productivity, but with our ability to apply that productivity worldwide" – Former Senate majority leader Tom Daschle

Many economists and policymakers have embraced trade liberalization through the years because it is seen as generating greater productivity and wealth through shifting labor and capital from less to more productive economic activities. But there has been growing resentment in some quarters about a failure to adequately address free trade's losers--those working in U.S. sectors like manufacturing, which have lost out to more efficient producers abroad.

This resentment has been directed in part at the high number of FTAs negotiated by the Bush administration. Some say they aided special interests at the expense of other U.S. job sectors, while others object to them in principle as distractions from the potentially more beneficial Doha trade round still under negotiation. Clinton helped shepherd NAFTA to completion and Bush completed eleven FTAs, but the years it took to enact the Colombia, Panama, and South Korea deals reflected a sharp increase in concern among some Americans that globalization has eroded jobs and wages in the United States.

Trade and the Great Recession

President Obama's views on free trade have shifted since he was elected in 2008 in the midst of a global financial crisis. As a candidate for president, Obama was largely skeptical of the Bush administration's free trade policy. He questioned the wisdom of NAFTA and other FTAs, and argued that the agreements did not include adequate safeguards for American workers.

However, amid the slow U.S. economic recovery, Obama expanded his economic growth strategy to include a greater focus on trade. During his 2010 State of the Union address, he announced the National Export Initiative. The plan outlined a strategy to double U.S. exports within five years (NYT), creating two million new jobs. The administration is so far on track with its plan, with many economists saying that rising U.S. exports--which are at $180 billion per month--have been instrumental in helping the U.S. combat its economic malaise. Notably, farm exports hit $137.4 billion for fiscal year 2011, while petroleum products reached $90 billion.

In September 2011, as unemployment remained stuck above 9 percent, Obama proposed the $447 billion American Jobs Act, an economic stimulus package focused on creating new jobs. Obama called for government investment in U.S. manufacturing and for the ratification of the languishing South Korea, Panama, and Colombia FTAs to boost U.S. exports.

"There is no question that trade done well can boost U.S. economic growth at a time of sluggish domestic demand." – Edward Alden, CFR

Still, Obama and many congressional Democrats remained opposed to ratifying the Bush-era FTAs until Congress agreed to pass an extension of Trade Adjustment Assistance (TAA), a program to assist U.S. workers displaced by the deals. In the fall of 2011, a divided Congress passed an extension of TAA, paving the way for the ratification of the three FTAs. The president signed them into law in October 2011. Among the chief supporters of the deals was the U.S. agriculture industry, while many labor groups remained skeptical that they would generate significant export growth. The South Korea deal has been considered the most significant U.S. free trade agreement since NAFTA (WashPost). According to the U.S. International Trade Commission, it has the potential to create around 280,000 U.S. jobs and boost U.S. exports by more than $12 billion.

Trade with the Asia-Pacific Region

In addition to bilateral free trade, the Obama administration has also made regional free trade in the Pacific a growing priority. In late 2009, U.S. Trade Representative Ron Kirk announced that the United States would continue negotiations initiated by the Bush administration a year prior with Australia, Brunei, Chile, New Zealand, Peru, Singapore, Vietnam, and Malaysia over a new Pacific-based multilateral trade deal known as the Trans-Pacific Partnership.

The Obama administration highlighted its commitment to implementing TPP when it hosted the annual Asia Pacific Economic Cooperation summit in Honolulu in November 2011. Obama said the nine TPP nations had "reached the broad outlines of an agreement" (CNN). At the same time, TPP received a boost when Japan indicated it would join the trade negotiations (NYT). The eleventh round of TPP negotiations is set to be held in Melbourne, Australia, in March 2012.

However, Asia's economic powerhouse, China, has not figured in the TPP negotiations, fueling speculation on both sides of the Pacific that the United States is trying to limit China's economic influence in the region. Writing in support of this policy on ForeignAffairs.com, Bernard K. Gordon of the University of New Hampshire argues, "A Trans-Pacific Partnership composed of Japan, the United States, Australia, and the group's smaller economies represents a healthier alternative." The Financial Times' David Pilling says TPP is a logical U.S. economic response to booming trade within Asia and between the continent and other emerging markets. "The TPP is an attempt to regain the initiative by opening up Asia-Pacific markets more fully to U.S. business," he writes.

"TPP is an attempt to regain the initiative by opening up Asia-Pacific markets more fully to U.S. business" – David Pilling, Financial Times

Other analysts caution that the focus on TPP and bilateral FTAs jeopardizes the relevance of the World Trade Organization and the stalled Doha Round of free trade negotiations. CFR's Jagdish Bhagwati has repeatedly criticized Obama for failing to promote Doha when discussing trade. If Doha does not advance--it has been basically stalled for a decade--it would undermine the WTO's "credibility as the principal guarantor of rules-based trade" and leave "trade liberalization entirely to discriminatory liberalization under preferential bilateral agreements," Bhagwati wrote at Project Syndicate in September 2011.

Still, the United States has successfully used the WTO adjudication process to sanction nations like China over unfair trade practices. In March 2012, the Obama administration, along with the EU and Japan, filed a "request for consultations" with China at the WTO (LAT) over its restrictions on exporting rare earth metals.

Trade and U.S. Competitiveness

Experts remain divided over the short-term growth and employment benefits of free trade. In a November 2011 CFR Expert Roundup, CFR's Edward Alden wrote, "There is no question that trade done well can boost U.S economic growth at a time of sluggish domestic demand." He added that trade today accounts for more than 25 percent of the U.S. GDP. In the same roundup, Thea Lee of the AFL-CIO labor organization countered, "It has been a couple of decades since trade contributed in a significant and sustained way to U.S. economic growth." She added that current U.S. trade policies have hurt the economy: "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."

C. Fred Bergsten, director of the Peterson Institute for International Economics and a leading trade advocate, has highlighted the country's $600 billion annual trade deficit. "Eliminating that imbalance," Bergsten wrote in a September 2011 New York Times op-ed, "would create three million to four million jobs, according to the Commerce Department estimates, at no cost to the budget." He says the United States can take a number of unilateral steps to make its exports more competitive and remedy the trade deficit-- including allowing the dollar to weaken by 10 to 20 percent and challenging China at the World Trade Organization over its manipulation of its currency, which keeps Chinese manufacturing goods inexpensive. Moreover, Bergsten believes the United States could become more globally competitive if it reduces the barriers to exporting American services--the work of architects, engineers, and lawyers--for which he says the country actually runs a surplus of $150 billion.

Peter Morici, a business professor at the University of Maryland, also thinks that the trade deficit is a significant obstacle to U.S. job creation and economic growth, though he advocates less trade and greater incentives for the consumption of domestic goods. "Oil and Chinese imports account for virtually the entire trade gap. The failure of the Bush and Obama administrations to develop abundant domestic oil and gas resources and address subsidized Chinese imports are major barriers to reducing unemployment," Morici argues in a January 2012 editorial on TheStreet.com.

A Future U.S. Trade Agenda

A September 2011 CFR Task Force Report on U.S. trade and investment policy calls on the United States to develop an active, "pro-America" trade policy that seeks out untapped foreign markets--while boosting the U.S. economy and job creation--and better uses trade as a diplomatic and development tool. The report notes that trade as a percentage of U.S. GDP--25 percent--is the lowest of any developed economy other than Japan. "It's also clear that we're falling behind on trade, while other countries are pushing ahead," former Democratic Senate majority leader Tom Daschle, a chair of the report, told CFR last year. "The only way we're going to grow this economy is to recognize that our economic strength lies not only with our own productivity, but with our ability to apply that productivity worldwide," Daschle added.

The Obama administration has a wide-ranging trade agenda for 2012. In addition to implementing last year's ratified FTAs and continuing TPP negotiations, the administration is focused on opening up trade with Russia, which was admitted to the WTO in December.

Despite the Obama administration's accelerated efforts on expanding U.S. trade, the president has not requested congressional authority to negotiate new bilateral trade deals. Trade Promotion Authority (PDF)--which gives the president the capacity to unilaterally negotiate FTAs and have them considered by Congress with an up-or-down-vote--expired in 2007, and Obama has not asked Congress to renew it. At the same time, Senate Democrats rejected a proposal by Republicans (Reuters) in September 2011 to grant the president TPA authority. Still, in January 2012, the administration proposed a plan to consolidate six federal trade and commerce agencies in an effort to remove governmental bureaucratic red tape and increase U.S. exports.

At the periphery of the U.S. trade agenda sits the European Union. While the United States and the EU are each other's largest trading partners--with trade flows of about $3.6 billion per day--the transatlantic partners have never negotiated a free trade agreement. However, at the January 2012 World Economic Forum in Davos, both British Prime Minister David Cameron and German Chancellor Angela Merkel called for developing an EU-U.S. free trade deal, with Merkel noting, "the potential of our cooperation has not yet been tapped" (AP). U.S. Trade Representative Ron Kirk responded that the United States was considering an FTA (WSJ) with the EU as one of a number of potential options. In the past, EU and U.S. leaders have resisted forging a bilateral FTA to avoid undermining the Doha negotiations. But at Davos, Cameron and other leaders expressed pessimism about the future of Doha. "We have to be frank about it. It didn't work," Cameron said of last year's European push for renewed Doha talks.

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