Trade

When World War II ended 70 years ago, much of the world – including industrialized Europe, Japan, and other countries that had been occupied – was left geopolitically riven and burdened by heavy sovereign debt, with many major economies in ruins. One might have expected a long period of limited international cooperation, slow growth, high unemployment, and extreme privation, owing to countries’ limited capacity to finance their huge investment needs. But that is not what happened. Instead, world leaders adopted a long-term perspective. They recognized that their countries’ debt-reduction prospects depended on nominal economic growth, and that their economic-growth prospects – not to mention continued peace – depended on a worldwide recovery. So they used – and even stretched – their balance sheets for investment, while opening themselves up to international trade, thereby helping to restore demand. The United States – which faced considerable public debt, but had lost little in the way of physical assets – naturally assumed a leadership role in this process Two features of the post-war economic recovery are striking. First, countries did not view their sovereign debt as a binding constraint, and instead pursued investment and potential growth. Second, they cooperated with one another on multiple fronts, and the countries with the strongest balance sheets bolstered investment elsewhere, crowding in private investment. The onset of the Cold War may have encouraged this approach. In any case, it was not every country for itself. Today’s global economy bears striking similarities to the immediate post-war period: high unemployment, high and rising debt levels, and a global shortage of aggregate demand are constraining growth and generating deflationary pressures. And now, as then, the level and quality of investment have been consistently inadequate, with public spending on tangible and intangible capital – a critical factor in long-term growth – well below optimal levels for some time. Of course, there are also new challenges. The dynamics of income distribution have shifted adversely in recent decades, impeding consensus on economic policy. And aging populations – a result of rising longevity and declining fertility – are putting pressure on public finances. Nonetheless, the ingredients of an effective strategy to spur economic growth and employment are similar: available balance sheets (sovereign and private) should be used to generate additional demand and boost public investment, even if it results in greater leverage. Recent IMF research suggests that, given excess capacity, governments would probably benefit from substantial short-run multipliers. More important, the focus on investment would improve prospects for long-term sustainable growth, which would enable governments and households to pursue responsible deleveraging. Likewise, international cooperation is just as critical to success today as it was 70 years ago. Because the balance sheets (public, quasi-public, and private) with the capacity to invest are not uniformly distributed around the world, a determined global effort – which includes an important role for multilateral financial institutions – is needed to clear clogged intermediation channels. There is plenty of incentive for countries to collaborate, rather than using trade, finance, monetary policy, public-sector purchasing, tax policy, or other levers to undermine one another. After all, given the connectedness that characterizes today’s globalized financial and economic systems, a full recovery anywhere is virtually impossible without a broad-based recovery nearly everywhere. Yet, for the most part, limited cooperation has been the world’s chosen course in recent years, with countries believing not only that they must fend for themselves, but also that their debt levels impose a hard constraint on growth-generating investment. The resulting underinvestment and depreciation of the global economy’s asset base are suppressing productivity growth and thus undermining sustainable recoveries. In the absence of a vigorous international re-investment program, monetary policy is being used to prop up growth. But monetary policy typically focuses on domestic recovery. And, though unconventional measures have reduced financial instability, their effectiveness in countering widespread deflationary pressures or restoring growth remains dubious. Meanwhile, savers are being repressed, asset prices distorted, and incentives to maintain or even increase leverage enhanced. Competitive devaluations, even if they are not policymakers’ stated objectives, are becoming increasingly tempting – though they will not solve the aggregate-demand problem. This is not to say that sudden “normalization” of monetary policy is a good idea. But, if large-scale investment and reform programs were initiated as complements to unconventional monetary-policy measures, the economy could move onto a more resilient growth path. Despite its obvious benefits, such a coordinated international approach remains elusive. Though trade and investment agreements are being negotiated, they are increasingly regional in scope. Meanwhile, the multilateral trade system is fragmenting, along with the consensus that created it. Given the level of interconnectedness and interdependence that characterizes today’s global economy, the reluctance to cooperate is difficult to comprehend. One problem seems to be conditionality, with countries unwilling to commit to complementary fiscal and structural reforms. This is especially evident in Europe, where it is argued, with some justification, that, without such reforms, growth will remain anemic, sustaining or even exacerbating fiscal constraints. But if conditionality is so important, why didn’t it prevent cooperation 70 years ago? Perhaps the idea that severely damaged economies, with limited prospects for independent recoveries, would pass up the opportunity that international cooperation presented was implausible. Maybe it still is. If so, creating a similar opportunity today could change the incentives, trigger the required complementary reforms, and put the global economy on course to a stronger long-term recovery. This article originally appeared on project-syndicate.org.

The following is a guest post by my colleague Yanzhong Huang, senior fellow for global health at the Council on Foreign Relations. The Trans-Pacific Partnership (TPP), a regional trade and investment agreement currently being negotiated by twelve countries representing 40 percent of global GDP, has pushed to the surface old and new questions about the complex relationship between trade and global health. Will intellectual property provisions included in the treaty hinder, as the skeptics fear, developing countries’ access to safe and more affordable drugs? To what extent will the investment provisions (known as investor-state dispute settlement, or ISDS) open doors for private firms to challenge the sovereign rights of national governments to regulate in favor of public health? What should the United States do to advance special rules for certain industries and foster innovation without undermining public health standards of citizens in all signatory nations? In this next installment of The Internationalist podcast series, CFR Senior Fellow for Global Health Yanzhong Huang speaks with Suerie Moon, research director and co-chair of the Forum on Global Governance for Health at the Harvard Global Health Institute. Listen in to hear Moon’s important insight into the potential dangers to global health governance contained in the current TPP agreement and how she thinks those pitfalls can and should be avoided.

The United States concluded into its first bilateral free-trade agreement, with Israel, in 1986. Since that time, it has entered into some 20 other such agreements, most notably the North American Free Trade Agreement (NAFTA) with Mexico and Canada in 1993. Yet as Congress debates fast-track Trade Promotion Authority (TPA) legislation and the pending Trans-Pacific Partnership (TPP) with Asia, the debate feels stuck in a time warp. With many areas of public policy, time tends to soften the edges of political controversy and raise the quality of public debate. The Nixon-era Clean Air Act remains controversial, for example, but almost no one argues that surface ozone and particulates are good for you. There are big questions about proper regulations and standards, but not much disagreement than clean air is better than dirty air. Social Security and Medicare were both roundly denounced when they were introduced, but now the debate is a much narrower one on costs and benefits. Yet with trade, it seems impossible to approach a sensible middle ground. Supporters promise jobs-a-plenty and a consumer cornucopia, while opponents warn of jobless stagnation, rising inequality and eroding standards. I have watched the trade debate for more than two decades now, and I’m still not sure I have a firm handle on exactly what has gone wrong. But I’m pretty certain that the answer involves some combination of the following. The Sins of the Fathers: When President Bill Clinton decided to support NAFTA, which was mostly negotiated by his Republican predecessor George Bush, it was not at all clear that he could get it through a Democratic Congress. Yet failure, which would have damaged relations with our two close hemispheric allies, was unthinkable. And so he did what politicians – and he was a very good one – often do: he promised the moon. I believe that, on-balance, NAFTA has been good for the United States, and in particular has encouraged needed political and economic reforms in Mexico. But many of the administration’s promises were flat-out wrong: where Clinton had promised a growing trade surplus and declining illegal immigration from Mexico, precisely the opposite happened over the decade following the pact (though both numbers are now moving in the right direction). The same story played out when Clinton was fighting in 2000 for the congressional votes needed to admit China to the World Trade Organization (WTO). The president of the U.S.-China Business Council, a coalition of American companies doing business with China, went so far as to predict that “[o]pening China’s markets to U.S. products and services under this agreement is the biggest single step we can take to reduce America’s growing trade deficit with China, a problem we have faced for a decade.” President Clinton, noting that China would have to dismantle a range of trade barriers while the U.S. would need to do little, called it “a hundred to nothing deal for America when it comes to the economic consequences.” As with NAFTA, those predictions were flat-out wrong – the U.S. trade deficit with China soared and, while the United States has benefited in many ways from growing trade with China – including the boom in smart phones and inexpensive solar panels -- there were indeed huge economic consequences that followed for the United States, including the loss of many manufacturing jobs. The result of such over-promising has been that many in Congress, particularly Democrats, remain deeply skeptical of whatever the Obama administration now promises on trade. The trust gap is so large that even measures that are obviously good for the United States – like new trading rules with Japan that might finally loosen that country’s web of protectionist barriers – are still highly controversial. Whose Preferences? Trade agreements are about the rules of doing business across borders. As such, business speaks with a very loud voice. Commentators like Joseph Stiglitz pretend to have discovered a “secret corporate takeover of trade.” Clearly, they weren’t paying close attention. I spent nearly a month in Geneva in November and December 1993 as a reporter covering the end of the Uruguay Round negotiations that created the World Trade Organization (WTO), and the corporate lobbyists owned the place. The U.S. negotiators would go talk with the European Union or the Japanese or the Canadians, share all their notes with the corporate lobbyists, and go back and do it again. There is no question this was undue influence, but it’s been the case in trade agreements for decades. Part of the problem is that the companies are the only ones that understand their own businesses in enough detail to know what provisions in trade agreements actually make a material difference, and the negotiators have no choice but to consult with them. But it also means that issues like long patent protection for drugs – which are clearly in the interests of the pharmaceutical companies but not necessarily in the interests of patients – made their way into trade agreements simply because the corporations wanted them there. The process has actually opened up considerably since then – labor unions and the environmentalists and consumer advocates are now on the advisory groups for the U.S. Trade Representative’s Office and can see the negotiating texts just like the corporate lobbyists. But the process is still far too closed and secretive. And there’s no need for it. As part of the U.S.-European Union negotiations on a new Trans-Atlantic Trade and Investment Partnership (TTIP), for example, the European Commission has promised to publish on its website all of its negotiating positions and the actual legal language of its proposals. It’s (Not) All About the Exports: Politicians (and 18th-century mercantilists) love exports. Every time there’s a trade agreement, administration officials are quick to trot out the claim that “every $1 billion of exports creates X American jobs.” The “X” keeps changing because of investments in technology and rising productivity. During the NAFTA debate, each $1 billion of exports was said to create 12,086 jobs; today it’s just 5,210. But the focus on exports alone makes two mistakes: first, it ignores the many benefits Americans get from lower-cost and often higher-quality imported goods; and secondly, in a world of global supply chains, it ignores the gains that U.S. companies realize from lower cost intermediate inputs, like the steel for cars, that are assembled into finished products. I applaud President Obama’s gutsy decision to go pitch the TPP deal at Nike headquarters in Oregon. Nike does not make athletic shoes in the United States (it imports them from Vietnam, China and other places in Asia), and does little exporting. But it employs 26,000 Americans. many of them in an array of well-paid design and marketing jobs, and has helped transform the humble sneaker into a lucrative consumer commodity. The economic gains for the United States are obvious – even without the exports. Winner-Take-All Politics: If I had to pick a single reason for the degraded quality of our trade debate, it is the relentless refusal by the supporters of freer trade to acknowledge that trade creates both winners and losers. This is not at all in question among economists. The classic theories of trade conclude that trade makes all countries better off by allowing specialization that increases scale and boosts productivity. But they also acknowledge that there are winners and losers; some jobs will be lost to imports, and some wages will be cut because the work can be done more cheaply overseas. The argument in favor of freer trade, and it’s a powerful one, is that the aggregate benefits outweigh the costs. But success in a more competitive global economy requires a commitment to help the losers as well – through job retraining, income assistance, targeted subsidies and other measures that soften the blow. Most European countries do these things, and support for free trade in Europe (with the exception of France) remains  higher than in the United States. In this country, the most ardent supporters of free trade are also the ones most opposed to measures that would help more Americans prosper from freer trade. An honest debate over the TPP would acknowledge these challenges, and see the administration and Congress working together both to advance freer trade and to ensure that as many Americans as possible are the beneficiaries. Instead, both proponents and opponents are again trotting out competing half-truths, and trying to bludgeon their way to victory. I have watched this happen on every trade vote for more than two decades. I’m still hoping for something better.

Today is the official launch of Latin America Goes Global. Led by Christopher Sabatini, adjunct professor at the School of International and Public Affairs at Columbia University and formerly editor-in-chief of Americas Quarterly, the new site already has many talented and thoughtful Latin American policy experts on board. Kicking it off, Sabatini has a piece on “The Media’s Bipolar Disorder with Latin America,” arguing that the common tropes trotted out in discussing politics in the region not only miss the real story but also skew policy responses in unhelpful ways. Both Evan Ellis and Jerry Haar look at the Trans-Pacific Partnership (TPP) and what it means for the region. And Kirsten Cowal highlights the rising profile of LGBT issues in her piece “The Other History Making Moment at the Summit: LGBT Rights.” For those interested in the hemisphere and its future, this new site is worth putting on your daily reading list.

As the debate over the Trans-Pacific Partnership (TPP) heats up in Congress, some (including myself) have argued that the trade deal would advance U.S. security interests in the Asia-Pacific. In this guest blog post, Daniel Slane and Michael Wessel argue this view is misguided. The authors serve, respectively,  as a Republican and Democratic Commissioner on the U.S.-China Economic and Security Review Commission. The views they express are their own.The Trans-Pacific Partnership (TPP) is now being touted as the answer to U.S. security concerns with the People’s Republic of China. This is just the latest argument from TPP proponents to advance fast track trade negotiating authority in Congress and to ease passage for the TPP under expedited and preferential procedures. Unfortunately, this argument just doesn't hold up to scrutiny.Over the last several years China has assumed an increasingly aggressive role in Asia. Its posture challenges the interests of many of its neighbors; Japan, for example, has scrambled jets repeatedly as China has tested the perimeters of its defense and confronted fishing and other vessels. China has challenged the maritime interests of other nations in the South and East China Seas. China has laid claim to small land masses as a way of expanding its territorial interests and is shoring up small reefs with airstrips and outposts to counter the interests of others in the region. China has tried to establish offshore oil rigs in waters claimed by Vietnam and is directly countering the interests of other nations in the region.TPP won’t address any of that, however. Proponents who argue that the TPP is vital to countering China’s ambitions are ignoring the fact that those countries aren't rushing into China’s embrace. In fact, just the opposite is true. Several of the TPP participants are more interested in stronger alliances with the United States which aren't dependent on preferential trade relations and new trade agreements. In essence, they need the United States as a counter to China, and the TPP is not a factor in assessing the risks that China poses. Our "pivot to Asia" doesn't need to be anchored by a new preferential trade agreement.Indeed, Secretary of State John Kerry recently reaffirmed the U.S. commitment to Japan’s defense which he said was "iron clad." Japan announced new U.S.-Japan defense guidelines with that country taking on an expanded role. The TPP did not secure that change in Japan’s defense posture; self-interest did. The U.S.-Japan security relationship is the strongest it’s been in decades.In some ways, the increasing investment by U.S. companies in TPP countries identified as an objective of the agreement by the United States might diminish our foreign policy and national security flexibility. Our experience in China provides some guidance. Because of the vast investments by U.S. companies there, they have often acted as lobbyists for the PRC because they are worried about protecting their investments. We can expect that, as U.S. company investments in the TPP countries increase, the potential for our firms to "protect" their investments by advocating for the interests of their host country might be counter to some of our foreign policy or national security interests. If a TPP country, for example, wanted to provide expanded access to port facilities for Chinese vessels at a time when they were adverse to U.S. security interests, our companies might put pressure on their friends in Congress and the U.S. government to moderate their views in support of the TPP partner.This isn't unheard of. U.S. multinational interests argued against imposing strict sanctions against China after the Tiananmen Square massacre. They lost that battle as the students, joined by others, stood up to their government and the Clinton Administration had no choice but to act. The bravery of the students trumped the interests of corporate America, but people shouldn't have to put their lives on the line to advance their cause.China’s increased military spending is also, in part, fueled by its massive currency manipulation, which has allowed China to build enormous currency reserves and has helped fuel its economic success. Addressing currency manipulation in the TPP has been deemed off limits by U.S. negotiators, signaling to China and others, that the subsidized Chinese exports can continue to support budget expenditures on military modernization.Finally, the further dispersion of supply chains puts our national security at risk by creating the potential for increasing procurement of materials for our military from outside the United States. The offshoring and outsourcing of production has an impact on the defense industrial base, ranging from loss of capabilities to reduced skill levels to diminished R&D. Supply chains are vulnerable to natural disasters as well as human events. Of course, the U.S. is not going to be totally independent in meeting its defense procurement needs, but the domestic defense industrial base is at risk and TPP has the potential to further undermine our domestic capabilities.It’s been a long time since advocates for the TPP tried to sell the agreement as a net job creator for America. Yes, exports may increase, but imports will certainly increase as well and, if history is a guide, our trade deficit will increase. Deficits are not a sign of strength--if they were, every nation would be trying to run them. Deficits diminish economic growth which is one of the foundations of a strong nation.Our alliances and relationships in the region are strong and aren't at risk. Self-interest is promoting a deepening of those relationships and a new trade agreement might, over the long term, actually undermine our national security interests. TPP should be judged based on its core economic value to the United States and for how it will improve domestic production and employment and strengthen the middle class. Raising false security arguments only highlights the significant limits of the underlying agreement.

With the anticipated introduction in Congress this week of legislation that would give President Obama the authority to conclude massive regional trade agreements in Asia and Europe, the issue of trade and its impact on the American economy is about to take center stage in Washington.  To help shine some light on the issues at stake, we have substantially updated and revised, and are re-releasing today, the Renewing America infographic Scorecard and Progress Report on U.S. Trade and Investment Policy. This report, like others in the series on education, corporate taxes, worker retraining and other issues, is intended to assess how the United States is doing against its peer competitors in Europe and Asia in creating a policy environment that enhances the competitiveness of the U.S. economy.  The conclusions will not be entirely to the liking of either advocates or critics of the U.S. trade agenda. Compared to the sometimes outsized claims of proponents, the U.S record on trade and investment has been mixed. While U.S. exports are growing fairly strongly, the United States does not export as much as it should for an economy of its size and product mix. While the United States still attracts more foreign investment than any other country, our share has dropped sharply over the past decade, and the United States has lost more ground to China than other advanced economies. In contrast to opponents of further trade liberalization, however, the United States is likely to be among the biggest beneficiaries of additional trade opening. We are the most competitive in those sectors where the barriers to trade remain highest, such as business services, and where the potential gains from stronger rules prohibiting anti-competitive practices are the greatest. Service sectors like architecture, financial consulting, legal services and others now provide twice as many U.S. jobs as manufacturing, most of them at good wages. Removing trade barriers and strengthening rules in these sectors would almost certainly benefit the U.S. economy. The Obama administration, despite its initial reluctance on further trade opening, has tried to tackle some of these challenges head-on. The National Export Initiative, the Obama administration's first big trade initiative, rightly focused government policy on boosting the country’s lackluster export record, even though it has fallen well short of the president's stated goal of doubling U.S. exports. The creation of SelectUSA in the Commerce Department and the launch of the annual investment summits for the first time have seen the U.S government do what every other country in the world does by actively marketing the United States as a desirable investment location. The administration has undertaken similar efforts to encourage tourism to the United States, which is an often overlooked source of export earnings. And finally, the Obama administration has embraced the most ambitious U.S. trade agenda in two decades--including the Trans-Pacific Partnership (TPP) with Japan and 10 other Asia-Pacific countries, and the Trans-Atlantic Trade and Investment Partnership (TTIP) with Europe. While there are important substantive issues that must still be resolved in the negotiation of each of these agreements, their successful conclusion would put the United States in an enviable position in terms of international competition. Removing trade restrictions and aligning regulations where appropriate would make it easier for U.S.-based businesses to sell into the two other largest markets in the world, and thereby encourage investment in the United States. And, while the rising dollar is currently a source of concern, the United States today -- blessed by falling energy costs and technological leadership -- is a highly cost-competitive place to invest. Americans, it seems, understand the potential with trade. For 15 years, Gallup has regularly asked the public whether it sees foreign trade more as “an opportunity for economic growth through increased exports” or as “a threat to the economy from foreign imports.” This year, 58 percent of Americans said they saw more opportunity than threat, versus just 33 percent who answered the opposite. Those numbers are the strongest since the early 2000s, when Americans had enjoyed more than a decade of robust U.S. growth. The conclusions of this report will not resolve, of course, what are certain to be wrenching debates in Congress over whether to grant Trade Promotion Authority (TPA) to President Obama. But they should at least help frame the right questions--namely, where does the United States stand today against its peer competitors in Europe and Japan, and what are best ways to build on our advantages and minimize our deficits in the future?  We hope this report will be a helpful contribution to that discussion.

Politics, as the saying goes, makes strange bedfellows. This is certainly true in today’s fast-changing U.S. trade debate. The Obama administration has counted on strong GOP support for the centerpiece of its second term agenda: the Transpacific Partnership (TPP). Suddenly, right-wing Republicans are making common cause with left-wing Democrats, attacking the proposed twelve-nation blockbuster deal. The reason for this odd coupling? A little thing called sovereignty. Once upon a time, trade politics on Capitol Hill were predictable. Republican legislators were, on balance, supportive. They depicted trade liberalization as an engine of growth and prosperity, the international accompaniment to deregulation and lower taxes at home. Congressional Democrats were skeptical, warning of massive job losses and a regulatory “race to the bottom.” They charged Republicans of shilling for corporate America and showing indifference to the plight of the American worker. Republicans, in turn, accused Democrats of protectionist pandering to union bosses and tree huggers. Given these dynamics, a Democratic president seeking trade promotion (or “fast track”) authority needed to cobble together a legislative coalition heavily reliant on GOP support to counterbalance opposition from his own party. Bill Clinton used this approach to win passage of the North American Free Trade Agreement (NAFTA) and to secure U.S. entry into the World Trade Organization (WTO). President Obama has taken the same approach, working with Republicans like Senator Orrin Hatch of Utah and Representative Paul Ryan of Wisconsin to try to secure trade promotion authority for his administration. Those plans now risk being upended by the outrage of conservatives and libertarians over a draft of the emerging trade deal. The lightning rod in this case is a provision for “Investor-State Dispute Settlement” (ISDS). The ISDS procedure would create a binding arbitration mechanism whereby private companies that believe that they have received unfair or discriminatory treatment from governments of other TPP nations can challenge those governments and seek compensation. This international panel of arbitrators would not be composed of professional judges, but by independent lawyers operating under rules established by the United Nations Commission on International Trade Law or the International Center for Settlement of Investment Disputes. The TPP would not be the first trade agreement to include an ISDS provision—not by a long shot. The United States is already a member of fifty accords containing such clauses. But TPP would be the first time the provision has been included in a mega-trade deal. And while the United States has only rarely been subject to ISDS complaints in the past, critics predict that it will increasingly become a target as TPP empowers nine thousand foreign-owned firms to bring cases against U.S. federal, state, and local governments. As might be expected, left-leaning groups denounce ISDS provisions as a threat to regulations that keep U.S. citizens and workers safe and employed. The lobbying group Public Citizen warns that the TPP “would grant foreign corporations extraordinary new powers to attack the laws we rely on for a clean environment, essential services, and healthy communities.” The United States Trade Representative’s office has tried to dispel such fears, but it has not helped its case by keeping the emerging text secret while consulting heavily with U.S. corporations in the drafting process. On Capitol Hill, Senator Elizabeth Warren of Massachusetts was quick to the barricades. “Agreeing to ISDS in this enormous new treaty would tilt the playing field in the United States further in favor of big multinational corporations,” she warned in the Washington Post. But she also added an interesting wrinkle. “This isn’t a partisan issue. Conservatives who believe in U.S. sovereignty should be outraged that ISDS would shift power from American courts, whose authority is derived from our Constitution, to unaccountable international tribunals.” Mission accomplished. Since the New Year, a growing number of diehard conservatives in Congress, such as Representative Dana Rohrabacher of California, have joined liberals like Representative Rosa DeLauro of Connecticut in opposing Obama’s trade agenda. Tea Party Republicans, skeptical of both Wall Street and international organizations, are making common cause with left-wing legislators, making it more difficult for GOP leaders Mitch McConnell and John Boehner to deliver the sort of legislative majorities in the Senate and House that Obama needs to secure the TPP. As a clearly tickled Senator Bernie Sanders of Vermont, an independent who caucuses with the Democrats, told the New York Times, “Some of my conservative friends are worried legitimately about the issue of sovereignty.” Outside Congress, conservatives are similarly divided. The influential Club for Growth, a political action committee, supports the TPP. So does the powerful Heritage Foundation, which argues that the “arbitration of freely accepted commitments…does not undermine national sovereignty.” The libertarian Cato Institute takes a contrary view, regarding ISDS as a giveaway to foreign companies at the expense of U.S. ones, as well as portending greater challenges to U.S. laws and regulations. Elsewhere on the right, reports the New York Times, both the conservative Eagle Forum and TheTeaParty.net are “strongly opposed” to the TPP. These fissures are challenging what has been a longstanding anomaly in the conservative defense of U.S. sovereignty. For decades, the U.S. right wing has resisted treaties that would bind the United States (and other countries), in spheres ranging from human rights to environmental protection to nuclear weapons. But international trade treaties have generally been given a pass. The deepening TPP debate suggests this era is ending. (Indeed, one wonders if today’s divided Republican caucus would have succeeded in delivering U.S. entry into the WTO—an organization that commits its members to accept a binding dispute resolution mechanism, including the decisions of an independent Appellate Body.) For liberal skeptics of trade on Capitol Hill, the growing sovereignty concerns of their Republican counterparts are a godsend. For President Obama, they are a nightmare. With approximately 150 of 188 House Democrats having already signed a letter opposing fast track, the president will lean overwhelmingly on Republican support to get the 218 votes he needs for trade promotion authority. He may not get it from the fragmenting GOP caucus. For six years, Republicans in Congress have been dead set against handing Mr. Obama any sort of legislative victory. In this case, the bogeyman of an unaccountable international tribunal with the ability to rule on behalf of foreign corporations against the U.S. government—as well as state and local governments—only adds to the president’s TPP hurdles.

I am having a hard time making up my mind about economic pluses and minuses of the Trans-Pacific Partnership (TPP), the pending trade deal that will deepen economies ties between the United States, Japan and 10 other Asia-Pacific nations. Nick Martin, a cycle shop owner in Colorado who has been made a poster child for the deal by the White House, has shown me why. I love cycling, but I especially love bicycles. My wife and I spent our honeymoon touring Europe on bikes. I ride to work as much as I can. To my mind the bicycle is the most nearly perfect of inventions, one that multiplies the efficiency of purely human energy. Bikes are also beautiful objects--if I didn’t ride mine all the time, I’d hang it Seinfeld-style on the wall. I am especially proud of my road bike, a Cannondale aluminum-framed bicycle that proudly carries a “Made in the USA” logo. The bikes are assembled in a small factory in Bedford, Pennsylvania. Or at least they were assembled in Bedford. Last year, Cannondale shut down the plant, which was its last in the United States, and moved the remaining production to China and Taiwan. Today, there is almost no bike production left in the United States. Trek, the Wisconsin-based company, does have two factories in its home state that build the highest-end carbon frame bikes that can cost in the thousands of dollars. But all the rest of its production is offshore. The National Bicycle Dealers Association says that about 99 percent of bicycles sold in the United States in 2013 were imported, mostly from China and Taiwan. While there are still dozens of very small, specialized bike makers in the United States, total domestic production in 2013 was about 56,000 bikes, compared with 16.2 million imports. Enter Nick Martin. The White House--eager to build support in Congress for the controversial TPP deal--last week shared an email from Mr. Martin, in which he identifies himself as “a cyclist and the proud co-owner of The Pro’s Closet.” Mr. Martin is an enthusiastic proponent of the TPP, arguing that it will open large new international markets for his product. Excellent, I thought. A new, start-up bike manufacturer poised to sell into global markets. Exactly the revival of American manufacturing that we’ve been hearing so much about. Indeed, there have been some encouraging recent developments. The Bicycle Corporation of America, a New Jersey company that hasn't made a bike in the United States since 1990, announced last November that it would open a new factory in South Carolina. The key was a decision by Wal-Mart, the world's largest retailer which has been criticized for its reliance on Chinese imports, to increase it purchases of U.S.-made goods by $250 billion over the next decade. These will be the first U.S.-assembled bikes sold by Wal-Mart in more than a decade. I had assumed that the White House was championing another "made in America" success story. Only on a closer read, Mr. Martin’s company does not actually make bikes. It does not make components for bikes. It doesn’t make gear or clothing for cyclists. What it does is to sell used bicycles and equipment over the Internet, using eBay and other e-commerce platforms. The TPP, which would include new rules on digital trade and would further lower tariffs, should help him find new overseas buyers. “International customers aren’t just good for business abroad; they’re great for my Colorado communities,” he wrote. “Why? Because selling in more markets means I can hire more people here at home.” There is much to admire in Mr. Martin’s business. Like many American companies, he has found innovative ways to create new markets where none existed before. Buying or selling a used bicycle once meant putting an ad in your local newspaper; The Pro’s Closet takes in bikes from everywhere--including the leftovers from professional cycling teams--and resells them online, taking a cut of the profits. More than half its customers are international. It’s also environmentally friendly (“Buy something that already exists,” the company says. “It’s the greenest way to go”). While I haven’t seen any stats on it, I’m sure that fewer bicycles are ending up in the landfill these days simply because there are more ways than ever before to find a buyer for your old bike. All the same, compared to actually making new bicycles, the economic potential of the internet resale business would seem to be rather limited. Even today, Trek says it still employs nearly 1,000 people in the United States, about half of those in manufacturing. Bicycle Corporation's new South Carolina factory has hired 75 new workers, though at very modest wages, and its goal is 200 in four years.  The Pro’s Closet currently employs just thirty. This is part of what trade does of course--it creates enormous economic churn. It has become cheaper to make many things, and especially commodity products like all but the highest-end bicycles, in lower wage countries. That’s great for consumers, and for retailers – there are four bike shops right in my neighborhood that probably wouldn’t be there if they couldn’t sell the cheaper imports. Rich countries like the United States have to find new ways to adapt and prosper despite the loss of that manufacturing work. Mr. Martin’s business is doing that, and the TPP will undoubtedly help not only his company but other small online retailers as well, creating new jobs and new opportunities in this country. And TPP or no TPP, the United States is not about to re-emerge as a big manufacturer of bicycles – the economics simply don’t work. But I must admit to a bit of nostalgia for what has been lost as the world economy grows ever more competitive, a trend that the TPP will only accelerate. I admire Mr. Martin’s entrepreneurial energy, and hope he succeeds wildly. But I am going to hang on to my Made in the USA Cannondale until one of us breaks down.

In my previous blog post, I described how artemisinin-based drugs were discovered in China in the 1970s and 1980s. Given their potency for the treatment of malaria, one would expect that Chinese made artemisinin-based drugs quickly became the first choice medicine in the global fight against malaria. Much to the chagrin of Chinese scientists and pharmaceutical companies, the World Health Organization (WHO) did not list a single one of China’s antimalarial drugs on its procurement list until 2007. Why have Chinese companies been boxed out of a market for a drug that was invented by Chinese scientists and extracted from a plant native to China? The issue is not that China lacks interest in exploiting the drug’s commercial value overseas. As early as the 1980s, Chinese pharmaceutical firms were seeking to market their antimalarial products globally. The problem, as Dana Dalrymple noted in his book, was that as China had largely withdrawn from the rest of the world, Chinese research institutes and pharmaceutical companies lacked the necessary funding and expertise to independently break into markets traditionally dominated by multinational pharmaceutical companies. Subsequently, Chinese officials and scientists asked for help from the China International Trust and Investment Corporation (CITIC), the only Chinese state enterprise that was authorized to deal with foreign investors. Through CITIC, Chinese drug developers and manufacturers partnered with Western counterparts to make artemisinin-based antimalarial products available to the rest of the world. In 1988, Guilin Pharmaceutical forged a partnership with Sanofi-Synthelabo that supplied the French pharmaceutical firm with artemisinin. This partnership facilitated the marketing of Artesunate monotherapy worldwide. In 1994, the Academy of Military Medical Sciences (AMMS)—the original patent holder in China—sold its international rights to market artemisinin-based combination therapy (ACT) to Ciba-Geigy, which was a Swiss company that later became Novartis. In return, Novartis agreed to source the Active Pharmaceutical Ingredients (APIs) of its antimalarial treatments from China and pay AMMS an annual royalty equivalent to 4 percent of its annual sales overseas. In 1999, Novartis became the first pharmaceutical company to launch a fixed-dose ACT called Coartem (artemether-lumefantrine). Kunming Pharmaceutical, AMMS’ partner in developing the first ACT, eventually became the supplier of APIs to Novartis. By 2001, the WHO had ordered 150,000 treatment courses of monotherapies from Sanofi, of which Guilin Pharmaceutical was the supplier. However, at almost the same time, the WHO launched a series of policy initiatives that seemed to only reinforce Novartis’ first-mover advantage in the ACT market. In March, the WHO kicked off the Prequalification Medicines Programme, under which a new drug could be procured via the WHO only if the quality of the product conformed with WHO criteria for efficacy, safety and quality. In April of 2001, the WHO recommended the use of ACTs in countries where Plasmodium falciparum malaria was resistant to traditional anti-malarial drugs. The rigorous prequalification process raised the barriers for market entry for Chinese-made ACTs, as no Chinese pharmaceutical firms were good manufacturing practice (GMP)-approved by the WHO. It came as no surprise that Novartis’ Coartem became the first and only fixed dose ACT to meet the WHO prequalification requirements. In December, the company formed a ten-year formal alliance with the WHO to provide ACT for use by public health systems in developing countries without profit. In 2002, Coartem was added to the WHO’s Essential Medicines list for purchase by UN agencies that distribute medicine in the developing world. By 2011, when the alliance was formally brought to an end, Novartis had delivered more than 700 million treatments of ACT through the arrangement. With support from the newly established Global Fund to Fight AIDS, Tuberculosis and Malaria (the Global Fund), the WHO was able to significantly expand its procurement of artemisinin-based therapies from two million in 2003 to thirty million in 2004. In light of growing concerns regarding artemisinin-resistant strains of malaria, the WHO began to seriously promote ACTs. In 2006, the UN stopped ordering monotherapies from Sanofi. At that time, Coartem accounted for nearly 80 percent of the ACT drugs purchased by the WHO. Some Chinese pharmaceutical companies complained that even though Coartem was purchased by UN agencies at cost price ($2.4/person), similar Chinese products could be marketed at much lower price ($1/person). If that was true, scale-up of ACT treatments in the developing world might have been constrained by Coartem’s relatively high price. To be fair, partnership with multinational pharmaceuticals has involved technology transfer that has enabled Chinese companies to meet international quality, health, safety, and environment standards in the production of APIs, thereby enhancing the latter’s research and development capabilities. The ACTs later developed by Guilin Pharmaceuticals admittedly were more similar to generic versions of Sanofi’s products. Chinese pharmaceutical firms also benefited financially from being the major suppliers of artemisinin for multinational pharmaceutical firms. Being situated at the low end of the value chain, though, China was unable to reap the lion’s share of the benefits from the market: it was reported that the API to final formulation profit ratio is 1:20. Chinese API producers are also vulnerable to the fluctuations in the international market. In April 2004, when the Global Fund approved funding ($200 million) for the procurement of ACTs, the Artemisia annua (the source of artemisinin) planting season had already passed, which resulted in de facto shortage of the starting material and steep rise in API price. The shortage was widely reported, leading to unrealistically high forecasts on the potential of the market. Consumed by the zeal for artemisinin, the API producers in China increased from three in 2004 to more than one hundred in 2006, most of which were not even GMP certified. Meanwhile, the total acreage devoted to plantations of A. annua increased to 800,000 mu in 2006, four times the level needed to sufficiently meet market demand. The surplus of the starting material became clear when the WHO lowered its forecasts in 2005, prompting a free fall in the price for A. annua and APIs. In consequence, most of the new API producers went belly up. The 2004-2006 artemisinin bubble nevertheless has not deterred Chinese pharmaceutical firms from pursuing its globalization strategy. Supported by the state, Chinese pharmaceutical firms since 2007 have become even more aggressive in promoting their anti-malarial products globally. But how successful are their efforts? This will be the subject of my next blog post.  

This is a guest post by Nathaniel Glidden, intern for the Council on Foreign Relations Africa Studies program. He is currently pursuing a Master’s in International Affairs with concentrations in Development and Cities & Social Justice at The New School. For the past fifteen years, South Africa has been taxing poultry imports from the United States. This chicken tax has not been popular among representatives in the U.S. Congress. Senator Chris Coons of Delaware has been particularly vocal, and his opposition was again reported on in a New York Times article two weeks ago. Senator Coons’ concerns are twofold: the tax hampers U.S. poultry exports, one of Delaware’s staple industries. Additionally, the tax is considered unfair given that South Africa receives trade benefits under the African Growth and Opportunity Act (AGOA), a non-reciprocal trade program that allows sub-Saharan countries party to the agreement to export approved products to the United States untaxed. As a member of AGOA since 2000, South Africa has benefited from untaxed exports to the United States for products such as luxury automobiles and wine. Despite the grumblings among members of Congress, South Africa has been reluctant to remove the poultry tax.  In part, the South African government claims that removing the tax would undermine local producers as U.S. poultry is cheaper than South African poultry. Additionally, South African officials have found justification in the World Trade Organization’s protectionist “anti-dumping” laws, which permit countries to impose levies on a product if it is introduced into a market at less than normal value. South Africa is protecting its local economy not just from cheaper U.S. poultry, but also poultry imports from the Netherlands, Germany, and the United Kingdom as well. Though the chicken tax is intended to protect the local poultry industry, it has unintended consequences. It raises prices because local suppliers do not provide enough poultry to meet local demand. Though in accordance with the World Trade Organization’s protectionist “anti-dumping” law, South Africa’s chicken tax, which can be as much as 82 percent of the value of poultry imported, has become a thorn in the United States’ side. Senator Coons has gone so far as to recommend that the United States discontinue its AGOA partnership with South Africa. AGOA expires this year and will be up for reauthorization in September. As South Africa faces a projected growth rate of a meager two percent, it is in its interest to re-sign AGOA in order to maintain its export revenue stream. What remains to be seen is whether Senator Coons’ efforts will sway the Obama administration, which is in favor of re-signing the agreement with South Africa. If Coons succeeds, the U.S.-South Africa bilateral relationship along with South Africa’s trade benefits and economic opportunities may change for the worse.

There are two possible reactions to the news that Canada and the United States have finally ironed out the last wrinkle and can now move ahead with the much needed new International Trade Crossing of the Detroit River.  It will create thousands of short-term construction jobs (far exceeding the much better-known Keystone pipeline project) and will speed movement of goods and people between Michigan and Ontario . I know I should celebrate it as a creative example of cross-border cooperation to solve a thorny problem. It is, as the Department of Homeland Security noted, an "innovative approach." But mostly I’m just deeply embarrassed. To cut to the conclusion: we are getting a new bridge, but our neighbors to the north are putting up every penny for it. Here’s the shortest version of the story I can tell. The Detroit-Windsor border crossing is the second busiest in the world, just recently surpassed by Laredo, Texas. It handles about a quarter of all Canada-U.S. trade, which happens to be the largest trading relationship in the world. It is also slow and badly congested because the 86-year-old Ambassador Bridge and the 85-year-old Detroit-Windsor tunnel cannot handle the volumes of traffic. Plans for a third crossing were drawn up in 2001, but were held up by self-serving lobbying and a lawsuit launched by the American owners of the privately-held Ambassador Bridge. While that was being sorted out, the problem of how to find the $2 to $3 billion to build the new bridge remained a huge hurdle. The United States has a backlog of at least $6 billion in infrastructure upgrades and new projects at U.S.- Mexico border alone, but Congress has only appropriated funds to cover a fraction of that need, and the Obama administration has stopped even asking for it. And as my colleague Heidi Crebo-Rediker has pointed out, the United States is far behind other advanced countries in using public-private partnerships to pay for new infrastructure projects. So in 2012, the Canadians set up their own partnership and agreed to finance the whole project--including land acquisitions on the approach routes through Detroit--with repayment to come through tolls. That left just one piece for our cash-starved government in Washington--about $250 million to build the customs plaza on the U.S. side to inspect and process the traffic coming from Canada. But even that was a bridge too far--in its budget request this year, the Obama administration did not even ask Congress for the money. Speculation had begun swirling that maybe the Canadians could somehow pay for this too, but my friend Roy Norton, Canada’s consul-general in Chicago, smartly knocked this down last year. “For people to muse about Canada paying for it really is preposterous,” he told the Detroit Free Press. “We’re paying for fifteen-sixteenths of this project. It’s silly.” Silly indeed. But so is the whole way the United States funds--or mostly doesn’t fund--its roads, bridges, sewers and all the arteries of a modern society. And so the Canadians have indeed agreed to pay for the customs plaza as well, folding it into the same Canadian-led public-private partnership that will pay for the bridge. Congress still needs to find about $100 million to pay for staffing the new facilities (unless, I suppose, they put Canadian customs agents in the booths, in which case those worried about the sellout of U.S. sovereignty might actually have a point). But that doesn’t need to happen until the bridge is completed in 2020. Again, I know I should be happy about this. As the CFR’s recent Task Force on North America noted, with business costs rising in Asia, the North American region has a chance to become the most competitive in the world. The new bridge will help lower costs in one of the busiest trade corridors in the world, and will make both Michigan and Ontario more attractive places to invest. It is badly needed, and long, long overdue. But the outcome is still mortifying for the United States. When are we going to start behaving like a real country again?

During a seemingly successful trip to Asia last November, U.S. President Barack Obama announced several breakthroughs. Among them was a promise that the United States and Asian nations would proceed toward the Trans-Pacific Partnership (TPP) free trade deal. Obama and Chinese President Xi Jinping also announced a new climate deal, the first between the two powers, which will commit both the United States and China to significant emissions cuts over the next two decades. The TPP would seem to be just one of many indicators of our growing interconnectedness with Asia, and indeed of the interconnectedness of the entire world. Today, riots in Missouri are immediately broadcast on Al Jazeera in the Middle East; Facebook boasts hundreds of millions of users in India; and a plane crash in Indonesia is tweeted about around the world within minutes. But many deeper trends point in a different direction. Since the late 2000s, despite the superficial connectivity of Facebook and Twitter, the world has entered a period of what you might call deglobalization. Global trade growth has slowed dramatically from its normal pace. Banks’ investments and lending outside their borders has plummeted, and investors have pulled out of stock markets across the developing world. Cross-border migration is down. A comprehensive index of globalization produced by the Zurich-based research organization KOF Swiss Economic Institute, which includes such variables as investment dollars, tourism figures, and information flows over the Internet, finds that “globalization has stalled since the outbreak of the [international] financial crisis in 2008.” You can see more of my analysis on the continued power of deglobalization in the Boston Globe.