Trade

I have long been a strong advocate of foreign investment in the United States, and have argued against discriminatory tax rules, short-sighted security restrictions, or other government measures that discourage foreign companies. Now Volkswagen, the German carmaker, has given me one more reason to like foreign investors; the company could play a role in changing what has become a self-destructive anti-union ideology that permeates too much of American business and political culture. A little background. Volkswagen is betting big time on the United States. The company three years ago invested $1 billion in a new plant in Chattanooga, Tennessee that employs nearly 3,200 local workers to make the Passat for American buyers. Over the next five years, it plans to invest another $7 billion in North America, with the goal of selling a million vehicles a year in the United States by 2018. Companies like Volkswagen have raised hopes that the United States could see a significant manufacturing revival. While foreign direct investment (FDI) growth remains too weak, nearly half of it is in manufacturing, in sectors like pharmaceuticals, electrical equipment, and cars. About 17 percent of the U.S. manufacturing workforce is employed by foreign-owned companies. Wages at foreign-owned companies are about 30 percent higher than the U.S. average, likely because that investment is concentrated in better-paying manufacturing jobs. The Obama administration has recognized the importance of FDI--the “Select USA” summit hosted in Washington last fall was the highest level effort in U.S. history to attract more of this sort of investment. Some of that investment growth, especially in the auto sectors, has taken place in southern states where generally lower wages and an anti-union culture are attractive to many companies. In the 30 years since Toyota and Honda started building cars in the United States, not a single foreign automaker has been unionized. That may change this week. The United Autoworkers Union (UAW) has launched a drive to unionize VW’s Chattanooga plant. And to the surprise and horror of many local politicians, the company has encouraged the union. The vote at the plant begins today and ends Friday. Volkswagen is in a difficult position. Its German factories are all unionized, represented by the powerful IG Metall union, and it would be awkward at least for the company to actively oppose unions in the United States. More importantly, VW would like to establish in the factory a German-style “works council,” which are cooperative arrangements between management and employees designed to promote efficient operations and a happy staff--not exactly radical ideas. The council helps the company to plan staffing and set working conditions; the company generally shares with the council details of its finances, so that employees better understand the competitive pressures that management is facing. The works councils were very helpful in allowing German companies to avoid big layoffs during the financial crisis, for example, agreeing instead to spread shorter hours across the workforce. The works councils do not bargain directly on issues like wages and benefits the way a union can. But under the peculariaties of U.S. labor law, the only way to establish such a works council is if the employees are first unionized. "Our works councils are key to our success and productivity. It is a business model that helped to make Volkswagen the second-largest car company in the world," said Frank Fischer, chairman and CEO of Volkswagen Chattanooga. So, while remaining formally neutral during the UAW drive (which is precisely what companies are supposed to do under U.S. labor law), VW has been supportive of the idea. That stance has enraged some politicians. Senator Bob Corker (R-TN) has warned that the union would hurt the city and state and discourage future investment. Governor Bill Haslam has spoken out against the union, and several state politicians have threatened to withhold any future tax or other incentives for VW to expand in the state. And that threat is coming exactly when VW is poised to make a decision on whether to expand its Tennessee plant to build a new midsized SUV, or locate the production in Mexico instead. The big question, of course, is whether the UAW will hurt Volkswagen, which is already falling short of its North American sales targets, and perhaps discourage other companies from investing in the state. There is a history to be sure, in which the generous labor contracts and inflexible work rules negotiated between the UAW and the Big Three U.S. automakers played a role in pricing those companies out of the market in the 1970s and 1980s, opening the door for import competition. But that is ancient history at this point; over the past 20 years, the UAW--which is just a fraction of its former size--and the other big industrial unions have made one concession after another to try to save American manufacturing jobs. Ford, Chrysler and General Motors are now earning record profits, and sharing some of it with their unionized workforce.  Arthur Wheaton, a professor at Cornell University's School of Industrial and Labor Relations, told USA Today, "Volkswagen considers their works councils their strategic competitive advantage.” The company should at the least be able to test that theory in Tennessee. Other companies may see things differently. And workers at other foreign auto plants in the south may well decide, as they have in the past, that they have no need for the union. But the employees at VW should be free to make their own decision. If the local politicians would take a deep breath, they might actually discover that a little unionization is good for the company, good for its workforce, and good for the state.

Yesterday I spoke with A Martínez from KPCC’s “Take Two” about Secretary Pritzker’s trip to Mexico and the country’s outlook more broadly. You can listen in here. I look forward to your hearing your thoughts on Twitter, Facebook, or in the comments section.

President Obama has been nothing if not a model of consistency in his State of the Union speeches, focusing again and again on the critical need to lift up America’s struggling middle classes. There is no more important issue on the agenda today. But in any political leader, consistency and conviction need to be twinned with a sense of opportunity and timing. And last night’s State of the Union speech was a big missed opportunity in that regard. More than at any point since Democrats lost control of the House of Representatives in 2010 following the health care overhaul, President Obama actually has a chance for major legislative victories this year. House Republicans are seriously considering passing immigration reform, which has been the president’s top priority for the past three years. With major trade negotiations under way with Asia and Europe, the president will need new trade promotion authority to move the treaties through Congress, and the Republicans seem prepared to give it to him. And tax reform, while a longer shot, has made modest progress thanks to the tireless work of House Ways & Means chairman Dave Camp (R-MI) and outgoing Senate Finance Committee chairman Max Baucus (D-MT). Each of these issues merited barely a mention in the speech, and on none of them did the president give any kudos to Congress for the efforts being made. House Speaker John Boehner (R-OH), aware of the rising political costs of his party’s current stance on immigration, is risking confrontation with his Tea Party wing to try to move forward. He is expected to release a set of principles for immigration reform this week that is likely to leave many Republicans unhappy. The president could have offered a small olive branch, as he has done previously, by encouraging the House to move ahead with its own set of proposals, which could then be reconciled with the Senate bill passed last year. Instead, he only offered clichéd restatements about the value of immigration reform to the U.S. economy. On trade, many congressional Democrats are certainly less than enthusiastic about passing trade promotion authority, and Obama clearly wanted to avoid a fight with his own party. He instead offered the blandest possible endorsement--“We need to work together on tools like bipartisan trade promotion authority.” But if Obama is unwilling to challenge his party directly on trade, as President Bill Clinton did in passing NAFTA, how can he expect Speaker Boehner to do the same on immigration? And on tax reform, rather than calling out the Camp-Baucus efforts and offering a pat on the back and a willingness to work together, Obama stuck to his formulaic call to “close loopholes” and end “incentives to ship jobs overseas.” The president certainly has a right to feel burned by the Republican Congress. His efforts over the years to reach a grand budget bargain with Speaker Boehner, for instance, came to naught. But again, politics is about change and possibilities, and just because compromise failed in the past doesn’t mean it can’t succeed in the future. Obama at least acknowledged the recent deal that has finally called a truce to the budget wars, but would it have hurt to give a shout out to its architects, Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA)? Or perhaps a mention of the critical role played by House Appropriations Committee chairman Harold Rogers (R-KY) and his Senate counterpart Barbara Mikulski (D-MD)? At the least, the president missed an easy opportunity to build some good will. Instead, the president’s advisers seemed to have persuaded him that, rather than using this moment of possibility to build some issue-by-issue bipartisan alliances on big pieces of legislation, this year was the time to focus on “executive action.” That means no need to try once again to find messy compromises with the Republicans, but it just feeds into the GOP meme that the president is abusing his authority and ignoring the Congress. And the list of promised executive actions was underwhelming--a “College Opportunity Summit,” new “manufacturing hubs,” reform of job training programs, and a new retirement savings bond. These are all worthy initiatives, but hardly the stuff of a strong presidential legacy. The things that really matter require Congress to act. The president’s advisers may be right that there is little chance for cooperation with Congress, especially in yet another election year. And certainly there are important parts of the president’s agenda (a minimum wage increase, an infrastructure bank, an unemployment insurance overhaul) that simply don’t have the necessary GOP support. But with Republicans almost certain to retain the House in elections this November, there are two options--try to seize the opportunities that are there for cooperation, or live with three more years of legislative gridlock and occasional executive actions too small for the scale of the problems.

This is a guest post by Robert Maxim, research associate, competitiveness and foreign policy, for the Council on Foreign Relations Studies program. On Friday President Obama will unveil his plan to curb the surveillance practices of the National Security Agency (NSA). When he does, he could inadvertently give a boost to the ambitious U.S.-European Union free trade negotiations. Last June, just weeks before the first round of Transatlantic Trade and Investment Partnership (TTIP) negotiations, Edward Snowden revealed that U.S. government agencies were collecting millions of European citizens’ personal data. Though TTIP is colloquially known as a “trade agreement,” its primary focus is regulatory barriers, not lowering tariffs. The United States wants to use TTIP to prevent barriers to the international transfer of personal data—the very data that the NSA was collecting in bulk. The disclosures provoked outrage among EU officials, and several European heads of state threatened to call off the trade talks. Though negotiations have since begun, European concerns about privacy need to be alleviated in order to ensure the continued free flow of data. In recent months the EU has dropped its strident rhetoric and began to seek compromise with the United States. President Obama should take advantage of the opening. Privacy is considered a fundamental human right in Europe. In 1995 the EU passed the Data Protection Directive, which codified the right to privacy of personal data. This directive prohibits the transfer of an individual’s personal information to countries that the European Union deems to have inadequate privacy standards, including the United States. Transferring personal data such as names, credit card information, birthdates, or telephone numbers across borders is essential to international trade, and has only grown more important with the rise of the Internet economy. In order to ensure that this type of data could continue to be exchanged, the two parties established a "Safe Harbor" agreement in 2000. This agreement allowed American companies that voluntarily complied with the Data Protection Directive to transfer personal information back to the United States. In response to the Snowden revelations, the European Parliament called for a full review of the Safe Harbor program, which was led by the European Commission’s Justice Minister Viviane Reding. In the wake of the disclosures, Ms. Reding was among the most outspoken critics of the Safe Harbor agreement. She argued that Safe Harbor “could be a loophole” undermining EU data protection laws, and that it was time for the “development of European clouds” so that the U.S. government could not access European citizens’ data. The two sides came to a working agreement in early July, launching separate privacy negotiations alongside TTIP. In theory this structure would allow the trade negotiations to continue even if the two sides could not agree on how to proceed on privacy. In reality, it would be nearly impossible to complete a trade agreement containing provisions ensuring the free flow of data without resolving the issue of privacy protections for that data. In November the EU offered an olive branch. The European Commission published its Safe Harbor review, and called for only moderate reforms to the program. The recommendations included requiring Safe Harbor companies to disclose whether U.S. law allows public authorities to collect data from them, making dispute resolution processes available and affordable to individuals, and enhancing inspections of Safe Harbor compliance and fraud. Considering the staunch public posturing by many EU officials, the report came as a surprise. However, a full overhaul of American privacy law (which is formed from a hodgepodge of different provisions in the Constitution, consumer protection laws, and federal case law, rather than a single directive like the EU) would have been a non-starter, and could have derailed the wider TTIP negotiations. TTIP will be a boon for the EU economy, with studies predicting gains of up to €119 billion per year for EU GDP. By maintaining a hard line on privacy, Europe may have lost out on those economic gains, and the United States probably would not have changed its privacy laws anyway. It is in the United States’ interest to implement the EU’s Safe Harbor recommendations. They are good policies, and will serve as a lifeline for EU negotiators to move past the privacy issue. Additionally, President Obama should incorporate the recommendation from his presidential advisory committee that the personal data of non-U.S. citizens be treated with the same protections as data on American citizens. This will show that the United States has learned from the incident and is committed to treating its allies as equals. Europe is currently undergoing an overhaul of its own privacy laws, which will keep the issue on the forefront of many peoples’ minds. This is not just an issue that the two sides can “wait out.” A trade agreement that protects the free flow of data without resolving how governments can collect and use private data may not gain popular support within Europe. And losing popular support could doom the TTIP effort.

Alan Berube and Joseph Parilla at the Brookings Institution recently published a report on the impressive amount of North American regional trade (with a great interactive that traces exports and imports across the continent). U.S. cities send and receive over $500 billion in goods from Mexican and Canadian cities—out of a total $1.1 trillion in intra-regional trade in 2012. The vast majority (some 69 percent) of this trade is in advanced industries (aerospace, automotive, electronics, machinery, pharmaceuticals, and precision instruments), an economic bright spot in the recovering U.S. economy. Here is a quick look at just how vital the United States’ regional trading ties are for its economic strength and competitiveness. When many Americans think of U.S.-Mexico and U.S.-Canada trade, border states are often what come to mind first. While it is true that Texas, Michigan, and California pulled in some of the biggest trading numbers (with combined regional exports and imports of $463 billion), this is only part of the story. Some forty-one U.S. states have Mexico or Canada as their number one export destination, stretching far across the American heartland (all of the green states in the map below) and supporting some 14 million jobs. Only the nine yellow states have a primary export destination somewhere outside of the region. U.S. Census Bureau Much of the trade moves along the region’s robust supply chains, which stretch from Querétaro to Detroit to Windsor. On average 40 percent of the value of U.S. imports from Mexico and 25 percent of those from Canada actually come from the United States, compared to imports from the rest of the world where U.S. input is closer to 4 percent. This means that of the $277 billion in goods that the United States imported from Mexico in 2012, some $111 billion of the value was created in the United States. This is compared to U.S. imports from China where—despite being a much larger sum of $425 billion—only $17 billion worth of value was made in the United States. In addition, data from the World Trade Organization database reveals that 72 percent of automotive part exports, 71 percent of clothing exports, 55 percent of textile exports, and 58 percent of telecommunications equipment exports stay in the region—meaning the three countries are both making and consuming these products together. Still, this intra-regional trade as a percent of total trade has been on the decline over the past decade. Though absolute numbers are growing, they are growing more slowly than trade with the rest of the world—reflecting both internal factors, such as U.S. border inefficiencies and higher security costs and external issues, including China’s emergence as a major trading player and Canada and Mexico’s trade diversification. As we look forward, efforts to reverse this trend and re-strengthen continental supply chains will be crucial for pushing the United States’ economy back on its feet, as these numbers show how important the United States neighbors are and will be for its prosperity.

Never again. That was the sentiment I remember hearing over and over from developing country officials following the tumultuous completion of the Uruguay Round negotiations in 1993 that led to the creation of the World Trade Organization (WTO) two years later. Once again, most of them believed, the United States and the European Union had dictated the final terms of a global trade agreement and forced it down the throats of the rest of the world. These countries were determined to have far more say in the shape of any future deals. For the past two decades, until this month’s modest agreement in Bali to adopt new “trade facilitation” measures, the developing countries have made good on that threat. They have insisted that any new global trade agreement, such as that pursued unsuccessfully over the past decade through the Doha Round, pay special attention to their needs and priorities in areas like agriculture, manufacturing and intellectual property rules. Their united opposition has made it impossible to conclude another big global trade round on terms acceptable to the U.S. and EU. The full article is available here at World Politics Review (trial subscription required)

President Enrique Peña Nieto’s administration finished off an ambitious first-year reform agenda this past week, pushing historic energy and political reforms through Mexico’s Congress. These reforms—and the earlier labor, education, fiscal, and telecommunication reforms—aim to boost economic growth (which slowed to 1 percent over the past year) and entice foreign investment in once closed-off sectors. Here is a piece that I wrote for the January/February 2014 edition of Foreign Affairs on why, especially given the recent changes, Mexico is a hot market that investors will want to watch. Just over a year ago, as President Enrique Peña Nieto started his administration, the domestic and international press were touting “Mexico’s moment” and the rise of “the Aztec tiger.” Now, the naysayers have returned. Their pessimism stems in part from disappointing economic results: Mexico’s GDP growth has fallen, from nearly four percent in 2012 to around an estimated one percent in 2013. The negativity also reflects the impatience of pundits and markets, as the economic dividends from Peña Nieto’s ambitious economic reform agenda have yet to appear. Today’s vocal disappointment discounts the positive changes Mexico has undergone and continues to make. Over the last three decades, Mexico has made the transition from a commodity- and agricultural-based economy to one dominated by manufacturing and services. It is also finally moving forward on a host of overdue domestic reforms. Internationally, the country is firmly situated within North American supply chains, augmenting its global competitiveness. And these advantages should only grow with Mexico’s involvement in both the Trans-Pacific Partnership (TPP) and the Pacific Alliance, two of the most dynamic free-trade negotiations of this century. If Mexico is able to make its legislative changes stick and harness its geostrategic potential, the country will excel over the next five years, benefiting its people and making it a good bet for investors. You can read the rest of the article here.

This month’s conclusion of the Bali World Trade Organization meetings was hailed by many business leaders and politicians as a major step forward for multilateral free trade, and an important step toward resuscitating the current round of WTO talks. But in reality, the results of Bali were minimal—officials at the meeting failed to reach any consensus on most of the substance on the table for the next WTO round, instead just deferring any substantial items on the WTO agenda. And, the Bali meeting obscured some far more disconcerting facts about the state of trade. Since the end of World War II and the birth of the modern international economy, business leaders have come to accept an iron law: Global trade always expands faster than global economic growth. Between the late 1940s and 2013, that assumption held true almost every year. During that time period, trade  grew roughly twice as fast as the world economy annually, as fresh markets opened up, governments signed free trade pacts, new industries and consumers emerged, and technological advances made international trade cheaper and faster. Now, this iron law may be crumbling. Over the past two years, international trade has grown so slowly that it has fallen behind the growth of the world economy, which itself is hardly humming. You can read my whole piece on the slowdown in global trade, and the reasons for this decline, here.

The Renewing America initiative is releasing today a new Progress Report and Infographic Scorecard, “Trading Up: U.S. Trade and Investment Policy,” which looks at the challenges and accomplishments of the Obama administration in international trade policy. As I wrote in an op-ed for Reuters today, “The Obama administration has quietly embraced the most ambitious agenda on trade and investment liberalization in the past two decades.” But that ambition faces many challenges. As we note in the report and display in the Infographic, the administration will fall well short of President Obama’s pledge to double exports by the end of 2014, and foreign investment in the United States has been weak for most of the past decade. And the United States still faces the biggest trade barriers in the sectors where it is most competitive, like business services. The current set of trade negotiations—the Trans-Pacific Partnership (TPP) in Asia, the Transatlantic Trade and Investment Partnership (TTIP) with Europe, and World Trade Organization (WTO) negotiations on services and information technology—offer what I call "a once-in-a-generation opportunity for a do-over." About 39 percent of all U.S. trade is currently covered under free trade agreements; if the deals with Europe  and Asia are concluded successfully, that figure will jump to 64 percent. The hurdles are big of course. Dan Ikenson, trade analyst at the CATO Institute, tweeted this morning that my analysis was "a triumph of hope over experience." He may well be right: the latest attempt to salvage something out of the 12-year-old Doha Round of world trade talks was floundering in Bali, Indonesia as our report was released. But the stakes are high as well. More than 30 percent of the U.S. economy is now wrapped up in international trade, and America's success or failure in global markets will go a long way to determining the living standards of my children and others in the next generation. One piece of good news is that the public gets it. As I wrote yesterday, the most surprising result in the new Pew Research Center-CFR poll, America's Place in the World 2013, was that — "despite continued weak growth, rising inequality, high unemployment and stagnant wages — fully 77 percent said that increasing trade and business ties with the rest of the world is a good thing for the United States. Two-thirds say they see more benefits than risks from engagement in the global economy." That too may be a triumph of hope over experience. But it is also a challenge to America's political and business leaders to deliver.

Are Americans becoming more isolationist? That appears to be the top-line conclusion from a fascinating new poll released this week by the Pew Research Center and my organization, the Council on Foreign Relations, called America’s Place in the World 2013. In the survey, 52 percent of Americans said that the United States should “mind its own business internationally,” the highest percentage since the question was first asked in 1964, and up from just 30 percent a decade ago. Similarly, 80 percent of Americans agreed with the statement: “We should not think so much in international terms but concentrate more on our national problems and building up our strength and prosperity here at home.” This is again a record number, and one that has increased fairly steadily over the past half century. It is certainly easy to conclude from numbers like these that America is turning inward. But I read the poll quite differently. Instead of a cry for withdrawal, Americans want to engage the world in ways that make the United States stronger at home, and reverse the long, insidious decline in living standards for many Americans. The most surprising result in the poll was that -- despite continued weak growth, rising inequality, high unemployment and stagnant wages -- fully 77 percent said that increasing trade and business ties with the rest of the world is a good thing for the United States. Two-thirds say they see more benefits than risks from engagement in the global economy. The message is very clear: Americans do not want to withdraw from the world, but rather embrace it in ways that bring greater benefits to more Americans. In the face of rising economic challenges and fierce international competition, the public is not calling for withdrawal but rather for measures that increase the gains from globalization. That was the core recommendation of the CFR Independent Task Force on U.S. Trade and Investment Policy, on which I served as co-project director, which called for “a pro-America trade policy that brings to more Americans more of the benefits of global engagement.” An equally fascinating insight from the poll is that achieving that goal of more broadly shared benefits from globalization may require a re-thinking by America’s elite more than by its broader public. Alongside the general public opinion survey, Pew surveyed nearly 2,000 members of the Council on Foreign Relations. CFR members are, by any reasonable definition, an elite, representing those with distinguished records of success in business, finance, politics, government, law and other fields. (Full disclosure – while I am employed by the Council on Foreign Relations and work with CFR members in many different capacities, I am not a “member” of CFR.) On most questions asked in the survey, the public is not markedly more isolationist than CFR members, which is a surprising result. Both are similarly concerned about discouraging terrorist attacks and preventing the spread of weapons of mass destruction, and are similarly cautious over policies aimed at improving living standards in developing nations and promoting democracy. CFR members are more worried about climate change (57 percent vs. 37 percent of the public), but the public is actually more keen on strengthing the United Nations (37 percent vs 17 percent for CFR members) and promoting human rights abroad (33 vs. 19). Where the differences are stark, Pew notes, is that “many of the public’s domestically oriented goals are not shared by most members of the Council on Foreign Relations.” Fully 81 percent of Americans believe that “protecting jobs of American workers” should be a top foreign policy concern vs. just 29 percent of CFR members. And only one-in-ten CFR members is worried about reducing illegal immigration, compared to half of the general public. The poll does not try to explain those big gaps, but the reasons are fairly easy to deduce. CFR members are generally not concerned about losing their jobs to overseas competition – indeed they mostly fall into a social class that has prospered from globalization. Nor would they be much concerned over competition for jobs from unauthorized immigrants, which affects primarily low-skilled, low-wage Americans. It is possible that slightly different wordings would have elicited different responses. “Protectionism” is such a discredited term, for example, that if the poll had asked instead about “expanding jobs for American workers,” CFR members might have been more enthusiastic. But there is clearly a great divide here. I found one question particularly fascinating. When asked whether it was a good for the U.S. economy if foreign companies set up operations, not surprisingly 96 percent of CFR members agreed. But 62 percent of the general public also favors such foreign investment, presumably for the jobs and higher wages it brings. Going the other way, however, 73 percent of CFR members also thought it was also good for the U.S. economy if American companies move abroad; an equal number of the general public disagreed, saying this would hurt the U.S. economy. Again, the difference is not surprising. As my former Financial Times colleague (and now Liberal member of the Canadian Parliament) Chrystia Freeland has written so eloquently, the new elite is global and mobile, whereas most Americans are not. The poll results represent a clear challenge to those who have benefited greatly from globalization to help in spreading those benefits more widely. It is not a cry from an American public that wants to reject the world, but rather a plea from many who want to be fully included.

International sanctions have thus far failed to convince North Korean leadership that they cannot survive as a nuclear weapons state.  With its policy of simultaneously pursuing economic and nuclear development, North Korean leaders clearly assume they can manage the economic costs resulting from nuclear development. But the costs of such a policy are staggering compared to the economic benefits North Korea might enjoy without nuclear weapons. Comparing the estimated costs of the nuclear program to economic growth with the benefits of becoming a normal economy integrated with its neighbors reveals the steep price of the byungjin policy. Yonsei University professor Lee Doowon projects that North Korea’s trade volume would grow by 5.6 to 8.3 times from that of 2008 levels if North Korea were to become a normal economy.  Lee also calculates that a normal inter-Korean trade relationship would increase the relative importance of inter-Korean trade as a contributor to North Korean Gross National Income from around 7 percent in 2008 to over 40 percent, which would contribute to much faster overall growth for the North Korean economy. Using these figures, I project that if North Korea were to move toward reform and denuclearization, inter-Korean trade would grow rapidly from the present amount of roughly $2 billion per year to approximately $11 to $16 billion per year by 2020. The difference in the scenarios’ projected growth rates suggests that North Korea’s refusal to denuclearize will cost inter-Korean trade almost $10 billion per year by 2020 and $50 billion in cumulative trade through 2020. This graph shows two estimates of projected growth in inter-Korean trade were North Korea to pursue both economic reforms and denuclearization. The green line is projected trade without denuclearization. Even if North Korea promotes economic reform without denuclearization, such as through the proposed special economic zones (SEZs) in each of the thirteen provinces as well as through increased efforts to attract international investors South Korean investors will probably not be able to respond under current circumstances. While North Korean reform efforts could increase domestic political pressure on the South Korean government to expand inter-Korean economic ties even without denuclearization, such pressure seems unlikely to persuade President Park Geun-hye to back away from her insistence on North Korea’s denuclearization prior to economic support. As such, North Korea’s nuclear program remains a major obstacle to the South Korean private sector from supporting North Korea’s renewed emphasis on improving its economy.  In the absence of denuclearization, North Korean efforts to promote economic development will probably not result in increased inter-Korean trade and investment. To estimate the likely trajectory of Sino-DPRK trade through 2020, I use the 13 percent rate of growth that Jilin provincial authorities have targeted in their plans through 2020 as a baseline for projecting Sino-DPRK trade were North Korea to pursue economic reforms and integration with its neighbors.  The extent to which North Korea implements economic reforms as a component of its current policies will likely affect growth rate in Sino-DPRK trade relations, with Chinese sources of trade and investment perceive North Korea as an environment in which there is opportunity to make money.  In comparison to the conditions of denuclearization necessary for South Korean firms to invest in inter-Korean trade, some Chinese private investors may seek to enter an economically reformed North Korea without regard to denuclearization. This graph shows the difference in projected Sino-DPRK trade in the event that trade continues on its present track (red line) and the projected growth of inter-Korean trade under a reform and denuclearization scenario (blue line). The shaded area represents potential growth. In a scenario of regional economic integration, Sino-DPRK trade volumes could be up to $10 billion per year higher by 2020 than the expected Sino-DPRK trade volume in the absence of reform.  If one combines the projected costs to Sino-DPRK and inter-Korean trade, North Korea’s nuclear development will cost the regime over $100 billion in trade by 2020.  This is all the more remarkable when one considers that North Korea’s overall trade in 2012 did not reach $10 billion. The leadership has enshrined its nuclear accomplishments in its constitution, as an achievement of past leaders, and as a main objective of the new leadership.  The decision to prioritize nuclear development along with economic development as main pillars of North Korea’s current policy suggests that the leadership does not feel it needs to give up its nuclear capabilities. It also suggests that the international sanctions imposed as a consequence of North Korea’s past missile and nuclear tests have not decisively affected the leadership’s calculations. Instead, the North Korean leadership appears to believe that its nuclear deterrent capabilities have provided the political space necessary for the regime to focus on economic improvement and even to pursue limited economic reforms. On the one hand, international sanctions imposed on North Korea for its nuclear pursuits may deprive North Korea of resources it needs in order to improve its economy. On the other hand, North Korea calculates that its current efforts will prove to be a pathway by which the country can break out from economic sanctions and emerge as a “powerful socialist state.”  North Korea’s ability to find this pathway likely depends not on the country’s own efforts, but rather on China’s willingness to support North Korean economic reform efforts regardless of Pyongyang’s nuclear program.

International trade negotiations are at a crucial stage. The multilateral front, with the World Trade Organization (WTO) at its center, is facing a foundational crisis. In a new expert brief, The High Stakes in Regional Trade Talks, Jaime Zabludovsky Kuper and Sergio Gómez Lora explain that the future of international trade, at least in the short and medium term, depends heavily on the outcome of regional agreements such as the Transpacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).