Trade

On the eve of his first G-20 summit meeting, President Trump faces one of the most important decisions of his young administration: whether or not to impose tough restrictions on imported steel.  If he follows through on his threats, he will anger U.S. allies, defy powerful Republicans in Congress, harm big steel-using industries such as autos and construction, and likely roil financial markets that have so far been buoyed by his presidency. But if he walks away, he will be seen as abandoning a core campaign promise, and will demonstrate to both friends and foes that he is a paper tiger who can be pressured to stand down rather than make a tough decision. Fortunately, for the president and the world, there is a third option that would prevent both of these harmful outcomes. President Trump should announce that he is suspending any immediate action on steel in return for a pledge by the large steel-making countries to pursue immediate and urgent negotiations to tackle the serious problem of overcapacity in the industry. He will reserve the right to take unilateral action if such negotiations fail, and set a deadline—perhaps six months—for the talks to show significant progress. In one stroke, Trump would demonstrate both firm resolve and a willingness to negotiate with other countries to solve pressing trade problems. This model of using threats to induce cooperation is one that Republican presidents have deployed successfully in the past. In 1971, faced with a potential run on U.S. gold reserves, President Richard Nixon broke away from the fixed exchange rates of the Bretton-Woods system and levied a temporary 10 percent tariff on most imports. But he signaled immediately that he was prepared to lift the tariffs if other countries would negotiate on more favorable exchange rates, and four months later did so as Japan, Germany, and other countries fell in line. And in 1985, again faced with an over-valued dollar, a fast-growing trade deficit and rising threats from Congress to block imports, President Ronald Reagan persuaded trading partners like Japan and Germany to revalue their currencies to deal with the growing imbalances. In both cases, negotiations and the threat of unilateral action solved real economic problems for the United States while largely avoiding damaging protectionism. The Reagan approach is a better one this time. With America’s trading partners deeply worried about the U.S. tilt to protectionism, imposing tariffs immediately on steel is more likely to trigger retaliation than to induce cooperation. By holding off on immediate action, the president would re-assure allies and trading partners, while still making clear his determination to solve the problems plaguing trade in steel. Here’s what President Trump should do. The Commerce Department is currently investigating, under Section 232 of the Trade Expansion Act of 1962, whether steel imports are harming the U.S. defense industrial base in a way that threatens U.S. national security. While the premise is questionable since the military is a small steel user and most imported steel comes from trusted allies like Canada, Mexico, and South Korea, Section 232 has the virtue of giving the president great flexibility in deciding when and how to restrict imports.  Other tools are either limited or unusable. Conventional anti-dumping cases target specific products from specific countries, and are too easy to circumvent. And the so-called “safeguard” procedures, which were used by the George W. Bush administration to block steel imports in 2001, have been neutered by unfavorable rulings in disputes brought to the World Trade Organization. Armed with a favorable Commerce Department decision, which is expected imminently, President Trump would then have a free hand. He could choose to block some or all steel imports, in whatever combination of products and from whichever countries he chooses. Given the size and importance of the U.S. steel market, that discretion would give him enormous leverage over the world’s steel-producing nations. What should he do with that leverage? Secretary Wilbur Ross has said that if the administration acts, “it will be in the hope of provoking a collective solution by importing nations.” That is the right goal. Trump should announce that he is urgently convening a negotiation among all the major steel producing nations in order to force a reduction in the industry’s chronic overcapacity. The structure is already in place—G-20 leaders last December created the Global Forum on Steel Excess Capacity to address exactly such problems, but only strong U.S. action can make it meaningful. In particular, the United States should rally other G-20 steel producers both to address their own overcapacity and to increase pressure on China—which has heavily subsidized and rapidly expanded its steelmaking far beyond its domestic needs. If the pressure succeeds, and China and other nations shut down steel mills to cut capacity—and not just offer promises to reduce capacity, which China has repeatedly failed to meet—then the United States would win without firing a shot. If the pressure on China does not succeed, the United States would at least enjoy greater international support for acting unilaterally, and lessen the likelihood of damaging retaliation. Indeed, it might be able to persuade other importing nations to put similar restraints on Chinese steel exports until Beijing agrees to tackle the problem with more urgency. President Trump sold himself to the American people as a master negotiator who could get a better deal on trade and other issues. The steel decision represents the first real test of that claim.

Disaggregating the broad dollar.

Ford announced this week that instead of building its new Focus – the best-selling car in the world – in a new $1.6 billion dollar Mexico-based plant, it will ship cars for North American customers from China. Ford has promised that its decision won’t reduce its workforce. Yet even if that is true, American workers will lose. Today the compact Focus uses steel from Wisconsin, axles from Oregon, seatbelts from Indiana, grills from Michigan, tire pressure sensors from Tennessee, front-side shafts from North Carolina and Ohio, and the list goes on. With the shift, these raw materials, parts and components will be sourced and put together in Asia, eliminating dozens of U.S. based suppliers, and likely costing many of their employees their jobs. While assembly was scheduled to move from Michigan to Mexico, that would have ensured ongoing American employment – as over 40 percent of the value of vehicles “made in Mexico” comes from U.S. factory floors and U.S. offices. For products imported from China – as the new Ford Focus will be starting in 2019 – this number is a negligible 4 percent. Ford made the decision first and foremost for market reasons. China’s 28 million vehicle market is the largest in the world. And while U.S. demand for smaller cars has faltered, in China it is growing at a robust 4 percent annually. Already nearly half of the million Ford Focus models sold each year go to Chinese buyers. Importing vehicles isn’t an option as the United States doesn’t have a free trade agreement with China, so cars coming from abroad face a stifling 25 percent tariff. View full text of article, originally published in Americas Quarterly.

This week: the actors behind the 2016 blackout in Eastern Ukraine, internet censorship in Africa, North Korea, and modernizing NAFTA.

During the election campaign, Donald Trump protested mightily against the large trade deficits the United States was running with China, with Mexico, and even with Germany. Not once did he mention trade with Canada as a problem. And yet Canada—which is still the second largest trading partner of the United States, just behind China—is shaping up as the biggest test for the new administration’s trade policy. The United States is now waist deep in no fewer than four major trade conflicts with Canada—over lumber, steel and aluminum, aircraft sales, and dairy. Lumber is Canada’s third largest raw materials export to the United States, after oil and natural gas. Canada is the largest exporter of steel and aluminum to the United States, and aircraft are Canada’s second largest manufactured export after motor vehicles. Dairy has long been among the most politically sensitive of products because of the concentration of production in French-speaking Quebec. Collectively, these actions pose a major threat to Canada’s economy. The stakes, in other words, are extraordinarily high. Americans are so used to ignoring Canada that it would surprise most to know that Canada has a long history of fighting hard for its own interests on trade. Canada was the first country to retaliate in kind against the infamous Smoot-Hawley tariffs passed by the Congress in 1930, initiating a series of measures to block U.S. imports and fighting a national election largely on the issue (the Conservative candidate, who favored still higher tariffs on U.S. goods, won). Canada also negotiated aggressively and successfully in two rounds of free trade talks with the United States (the 1988 U.S.-Canada Free Trade Agreement and the 1994 North American Free Trade Agreement), and punched far above its weight in the Uruguay Round negotiations that created the World Trade Organization. The four trade battles are distinct, but taken together they represent a broadside challenge to Canada, which still relies on the U.S. market for some 70 percent of its exports. Over just the past few weeks, the United States has slapped hefty import tariffs on lumber, is threatening tariffs on sales of Bombardier aircraft to U.S. airlines, and is nearing the completion of a Commerce Department investigation that could block Canadian exports of steel and aluminum. And U.S. agriculture secretary Sonny Perdue last week slammed the Canadians over what he called “unfair and underhanded” measures to restrict imports of U.S. dairy products.  The lumber fight is an old one, dating back to the mid-1980s. Canadian governments have long taxed timber differently than the United States, charging the companies a fee—known as “stumpage”—on timber that is primarily harvested from government-owned land. American timber producers have long complained that Canadian timber is under-priced, and that Canada’s governments are in effect subsidizing sales to the U.S.—mostly for home construction—which undercut U.S. timber companies. The issue tends to be particularly acute when the Canadian dollar is weak against the U.S. dollar, as it is currently. But while the conflict has regularly flared up, the two governments have always worked hard to try to find negotiated compromises. Not this time. The United States instead slapped import duties of up to 24 percent on Canadian timber imports in April, and a second round of tariffs is coming soon. The aircraft fight is a new twist on an old dispute. Boeing, the largest U.S. exporting company, has been in a three-decade long struggle with Airbus, the European consortium, over dominance of the long-haul aircraft market. Boeing argues, with considerable merit, that Airbus grew to capture about half the global market in no small part due to generous subsidies from France, Germany and the UK. Airbus in turn alleges that Boeing receives its own share of subsidies, not least through the big tax breaks offered by Washington State and other state governments. In decades of wrangling, however—including a decade-long dispute before the WTO—neither the United States nor Europe has resorted to unilateral trade sanctions against the other. Bombardier, the Montreal-headquartered aircraft maker, is a comparatively small player, competing primarily with Embraer of Brazil in the market for smaller regional jets and short-haul propeller aircraft. But Bombardier’s latest models—its C-Series aircraft—for the first time will compete directly with Boeing’s smallest jet, the 737. And Boeing has responded by launching a major trade case against Bombardier alleging that the company received unfair subsidies from Canadian governments, bringing the threat of new tariffs that could freeze Bombardier out of the U.S. market. The U.S. International Trade Commission ruled last week that the investigation could proceed. On steel and aluminum, the Trump administration looks set as early as this week to impose sweeping new import restrictions in the name of protecting national security. President Trump said in a speech in Cincinnati last week that he was preparing to "stop the dumping" that is "coming in and killing our companies and workers." Both steel and aluminum are sectors that face global gluts, largely because of increased Chinese production, and there are indeed serious trade distortions that need to be addressed. But Canada is an innocent bystander in the fight—a longstanding, reliable supplier of both products, including for U.S national security needs. Canada has insisted that its steel exports are in no way a threat to U.S. security. The one place where Canada does truly have something to answer for is its longstanding restrictions on dairy imports. It is a touchy political issue in Canada—much like rice in Japan or cotton in the United States. Canada actually was prepared to open its market a bit further—as part of the Trans-Pacific Partnership (TPP) trade agreement that was concluded in 2015. But President Trump walked away from the TPP on his first day in office. This litany of trade disputes will be a huge test of the U.S.-Canada trade relationship—and indeed of the future of U.S. trade relations with the rest of the world. Canada seems unlikely to turn the other cheek if the Trump administration slaps on further import restrictions. The province of British Columbia has already asked the federal government to block exports of thermal coal, mostly from Montana, which is currently being shipped to Asia through Vancouver. B.C.’s Premier Christy Clark, who recently won a narrow re-election, said: "We've gone from seeing Americans as being good trading partners to being hostile trading partners." The fallout is likely to be worse if Canada gets targeted by the restrictions on steel or aluminum. The message that would be sent to the world by two such close allies and partners as the United States and Canada engaging in a genuine trade war would be enormously damaging not just to the two countries but to the integrity of the global trading system. The U.S. and Canadian governments need to find a way to come together quickly to negotiate sensible compromises that respect the economic interests of both countries.

The challenge of how to help those left behind by rapid economic change—whether caused by technology or global competition—has moved to the center of the U.S. national debate in a way it has not been since the 1930s. Trade competition, especially from China, was a significant factor in the disappearance of nearly six million U.S. manufacturing jobs in the 2000s, and President Trump’s criticisms of U.S. trade policy helped him to victory in November in the Rust Belt states of Michigan, Pennsylvania, Ohio, and Wisconsin. Despite the White House focus on the issue, however, trade is only a small part of the disruption. Retail industry employment is rapidly shrinking in competition with Amazon and other online retailers, self-checkout machines continue to replace cashiers, and autonomous vehicles will soon come to replace truck and taxi drivers. Technology will leave few segments of the labor market untouched: new computer programs are already replacing some forms of entry-level legal work and investment planning, while machines with rudimentary artificial intelligence capabilities are already writing basic news stories. In our new Renewing America Discussion Paper, "A New Deal for the Twenty-First Century," we argue that the central economic policy challenge for the United States and other advanced economies is how to prepare the workforce to manage this rapid pace of change. It is far from obvious that there will be a shortage of work—indeed as the population ages, some countries in Europe are already struggling to fill available jobs, and American companies are complaining of growing labor shortages. The problem will instead be to ensure that the workforce is prepared to fill the new sorts of jobs that will become available as consumers redeploy their savings from automation into spending on other goods and services, and that the labor market and public policy are working together to create rising living standards for more Americans. Young people starting careers should be equipped with the education and skills needed to adapt to multiple job and even career changes over the course of their lives. Older displaced workers will need help to find new jobs, and often alternative careers, that can put them back on a path of rising incomes. There is no other issue on which it is more urgent that Republicans and Democrats find a way to come together than on a “Twenty-First Century New Deal” that helps more Americans find decent work in a time of rapid economic change The worrisome alternative is that Americans will embrace a still more radical politics that threatens to compound the damage. Already, both parties are flirting with populist “quick fix” remedies. President Trump walked away from the Trans-Pacific Partnership trade agreement—which would have helped many of the most competitive U.S. industries—and is calling for a “massive” renegotiation of the North American Free Trade Agreement (NAFTA) with Mexico and Canada. He has threatened to impose reciprocal tariffs on imports that would raise prices on a wide variety of goods, disproportionately hurting low-income consumers, and inviting retaliation that would harm successful U.S. exporters. The Democrats have their own quick fix myths. With most in the party having rejected NAFTA and other trade deals, Democrats will hardly be in a position to criticize any new trade protectionism, even if it backfires. One staple of progressive Democrats is the proposal to double the federal minimum wage to $15 per hour, which would boost the wages of some lower-income workers. But such a large jump in the minimum wage nationwide would discourage hiring workers, while encouraging an even faster adoption of automation that would eliminate even more retail and service jobs. Railing away at large banks or the top one percent, however justified, provides good applause lines but does not address the workforce challenge the country faces. A bipartisan new deal would instead be premised on helping individuals to acquire the education and skills they need to prosper in a fast-changing economy. Washington needs to step up by doing far more to help finance mid-career education and retraining, to remove impediments in the economy that discourage workers from moving to better-paying jobs, and to assist those who are forced to take a significant wage reduction. These propositions should make sense both to Republicans, who stress personal responsibility and hard work, and to Democrats, who believe as well that government has an obligation to offer a helping hand. The approach would have three pillars: First, Congress should establish lifetime career-training loan accounts for all citizens. These accounts could be used for courses at qualified providers of certificate programs, at community colleges or other educational institutions. To prevent rip-offs, loans could be used only to attend schools that regularly report, subject to audit, their permanent job placement rates. Loans could also cover some temporary income support. Importantly, like many college loans today, repayments of career-training loans would be tied to a percentage of future income. Those who find high-paying jobs would be expected to repay the full loan amount, while those who earn less would repay less. The cost to taxpayers would be modest—the estimated subsidies for income-contingent college loans, for example, is roughly $75 billion for more than five million borrowers over the first two decades of the program, less than $4 billion annually. And that number does not take into consideration the additional tax revenues that will result when many individuals are re-employed at higher salaries. Secondly, governments at both the federal and state levels should do more to help Americans move from regions where jobs are being lost to regions where they are being created. The movement of workers from state to state, once a vaunted feature of the flexible U.S. labor market, is falling. High-wage job growth is increasingly clustered in faster-growing cities, and the U.S. workforce has become less mobile. Government is doing little to help. The Trade Adjustment Assistance program, for example, which assists workers who lose their jobs to trade competition, includes financial support for relocation. But that program only covered 58,000 out of the nearly 8 million people who were unemployed in 2015, and the relocation grants are small, covering only 90 percent of moving costs and a lump sum of just $1,250. Aid for relocation should be universal and more generous, helping all displaced workers who need to relocate to find employment.There are other barriers to labor mobility that should be tackled as well. Occupational licensing is much too restrictive, affecting roughly one-quarter of all jobs in 2016, up from just 5 percent in 1970, according to the Council of Economic Advisers. Many states do not recognize credentials earned in other states. While national certification has gained some ground among teachers, for example, most states require a new certification every time a teacher moves from another state. Such regulatory restrictions are a needless burden on people trying to make a better life for themselves. Third, the reality is that re-training is not going to be attractive or successful for all displaced workers, especially those reluctant to move to where better jobs exist. But the government can play an important role in helping these workers get back into the labor market, even if the new jobs pay significantly lower wages than previous ones. This can be done through wage insurance, which since 2002 has been available to only a small slice of American workers: only full-time employees over the age of fifty with pre-displacement incomes up to $50,000 who can prove their jobs were eliminated by trade. This program should be made universal.In 2016, the Congressional Budget Office (CBO) estimated the current annual cost at just $3 billion; even a huge expansion in wage insurance would not come close to what Washington is now paying people not to work. For example, the percentage of workers receiving Social Security Disability (SSDI) benefits has nearly doubled since 1990; even accounting for an aging workforce, the additional cost to taxpayers for is nearly $50 billion for what has for too many become a permanent unemployment benefits program. Wage insurance, in contrast, rewards responsibility and hard work because, unlike unemployment insurance, it only kicks in when a worker accepts a new job paying less than his or her previous one. Much like the last time that economic nationalism reared its head in the 1920s and 1930s, with damaging consequences that worsened the lives of most Americans, what is needed now is a new set of policies that lift Americans, without harming the United States’ economic relations with the world. But for either or both parties to embrace this twenty-first-century deal, they need to shed some of their old shibboleths. For Republicans, it is a way to turn Trump’s rhetorical commitment to the well-being of the working class into actual measures that can help better their lives. So far, the president instead seems to be forgetting those election promises and turning again to the long-standing GOP agenda of cutting taxes on the wealthy and hoping the benefits trickle down. For Democrats, our suggested approach would be a more effective way to help working Americans than the set of policies the party pushed during the last election: the expensive promise of free college education, a nationwide fifteen dollar per hour minimum wage, and opposition to more trade deals. The goal should be to provide what Americans—especially those who feel left behind by technology, globalization, and the rapid pace of change—have made it clear they want: new opportunities for decent, well-paying jobs of the sort that were once well within reach.

MILAN – The word “openness” has two related but distinct connotations. It can mean that something is unrestricted, accessible, and possibly vulnerable; or it can mean that something, such as a person or institution, is transparent, as opposed to secretive. The first meaning is often applied to trade, investment, and technology (though most definitions do not match opportunity with vulnerability), which have always driven structural economic changes, especially with respect to employment. Structural change can be simultaneously beneficial and disruptive. And policymakers have long had to strike a balance between the abstract principle of openness and concrete measures to limit the worst effects of change. Fortunately, academic research and historical perspective can help policymakers respond to this challenge intelligently. Consider the experience of Northern Europe’s small developed countries, which tend to be open, and for good reason: if they were not, they would have to over-diversify the tradable parts of their economies to meet domestic demand. That would impose high costs, because the small size of the domestic market would prevent them from achieving economies of scale in technology, product development, and manufacturing. But these countries’ openness has increased the economic and political salience of investments in human capital and a strong social safety net. Social-security policies are doubly important for small, specialized economies, because an external shock to one tradable sector can affect the entire economy. It wasn’t always so. Small- and medium-size economies such as Canada, Australia, and New Zealand used to have protectionist policies that over-diversified their tradable sectors. But with increased international trade and specialization, the cost of domestically produced goods – such as cars – relative to imports became too high for consumers to bear. In the 1980s and 1990s, these three countries began to open up, and experienced difficult structural transitions that nonetheless boosted productivity and provided broad-based benefits to citizens and consumers. Still, striking the right balance is never easy. Canada, Australia, and New Zealand are all resource-rich countries that are susceptible to the “Dutch disease” – when one strong, capital-intensive sector hurts other sectors by pushing up the value of the currency. This has given rise to continuing concerns about under-diversification, which would make them vulnerable to volatility in global commodity markets and pose challenges for employment. We tend to associate structural adjustments with international trade and investment. But industrial activity changes within countries all the time, and creates local- and regional-level challenges. For example, US textile production, once heavily concentrated in New England, shifted mainly to the South (before relocating to Asia and other lower-cost locales). In 1954, then-Senator John F. Kennedy wrote a long, fascinating article in The Atlantic in which he attributed this undesirable dislocation in New England to tax subsidies in southern states. Such practices, he argued, would lead to inefficiently high levels of industrial mobility, because corporations would pursue profits wherever they could, regardless of the impact on individual communities. To prevent this race to the bottom, Kennedy called not for free trade, but for regulations to make trade more fair and efficient. Indeed, structural changes are necessary to improve dynamic efficiency. But so, too, are policies to ensure that investments and economic activities are based on real comparative advantages, and not on transitory “beggar thy neighbor” incentive structures. This is particularly important during periods of rapid structural change. Because supply-side adjustments are slow, painful, and costly, they should not be made unnecessarily. But, like closed economies that miss out on the benefits of trade altogether, open economies with significant institutional or political obstacles to structural change will underperform. This explains why many open economies today are failing to adapt to new technologies and trade patterns. Too often, policymakers want to prevent change from occurring at all. But while blocking change can protect existing industries and jobs for a while, doing so dramatically deters investment, and eventually hurts growth and employment. A country’s economic and social-security structure can also stand in the way of change. As former Greek Finance Minister Yanis Varoufakis observes, the promise of a long-term growth dividend from structural reform is not enough to allay people’s concerns about the immediate or near-term future, especially in a semi-stagnant economy. If you replace something with nothing, you have to expect significant political and social resistance. If structural reforms are not accompanied by social-security reforms, they are likely to fail. The “Agenda 2010” reform program initiated by former German Chancellor Gerhard Schröder in 2003 is a good example of this multi-prong approach; but it proved to be politically perilous for Schröder, who was not re-elected in 2005. How reforms are sequenced also matters. For example, incumbent workers will be much more concerned with social-security reforms in a poorly performing economy than in a booming economy. Political resistance to structural reforms – especially from older incumbent workers – will be stronger in a low-output, high-unemployment economy, because it is worse to be laid off in such conditions. As a rule, a government should not introduce structural reforms until it has first gotten its economy moving with fiscal and investment-oriented policies. Proceeding in this order will reduce the political resistance to change. As it happens, Europe is currently experiencing a modest but significant surge in growth. But whether policymakers will take advantage of this opportunity to pursue needed reforms is anyone’s guess. One final lesson to bear in mind is that structural change is not just an unfortunate side effect of growth and the creation of new jobs and sectors; rather, it is an integral part of these processes. One can see this clearly in successful developing countries, where the recipes for growth include openness, modern sectors, trade, high levels of investment, and an expanding human-capital base. These countries are not spared from structural shifts and distributional challenges. But their transitions are faster and less painful, because investments run broadly across their public and private sectors, and across tangible and intangible assets. Developed economies are not so different in this respect. A significant across-the-board increase in investment might not fix all of their distributional and adjustment problems. But it certainly would help to spur growth and reduce economic and political frictions in their structural adaptations. This article originally appeared on project-syndicate.org.