The go-to talking point when a trade agreement is in trouble in the United States is to invoke the specter of China. When TPP began to falter, the rallying cry for passage was that if we failed to seal the deal, China would score a win, not just commercially, but geopolitically as well. At the time, some called out this rhetoric. But now, as President Trump’s threat to withdraw from NAFTA looms, the China meme is resurfacing.
Are these valid arguments? We’ll tackle the geopolitical argument first.
Why did Congress create USTR?
As it turns out, Congress had decided views on the geopolitical approach to trade negotiations, and they were not positive ones. U.S. trade negotiations were, historically, handled by the State Department. That changed in 1962, when Congress passed the Trade Expansion Act. That Act created the Special Representative for Trade Negotiations (later renamed the U.S. Trade Representative), housed within the Executive Office of the President.
The record of debate is replete with grievances from an array of Members from all over the country about how the State Department had handled trade policy. They lamented bait-and-switch tactics by the Germans over chicken and giveaways to the Japanese on fish. With respect to the latter, Senator Bartlett of Alaska articulated a frustration more widely felt in both chambers:
The State Department testified that . . . we must not embarrass our good neighbor and must keep our relationship with Japan free of avoidable irritations . . . . I acknowledge . . . the rightful place of the Japanese in our line of defense against communism . . . But . . . I do not think it is fair, I do not think it is just, to place upon the Bristol Bay fisherman the burdens of our international commitments to this Nation.
Senator Byrd got to the heart of the issue, pointing out that:
our allies are also our competitors in world markets.
House Ways and Means Committee Chairman Wilbur Mills did not mince words in explaining the impetus for creating a new office to take charge of negotiations:
We provided for a special representative in order to make certain that negotiations under this act would be more effectively conducted than in the past . . . . Congress intends that the negotiations be prepared for and carried out differently than in the past . . . The Department of State . . . did the negotiating previously. It was not our intention that this group would continue its past dominant role.
Congress was so frustrated with U.S. trade policy that not only did it create a new office to handle the negotiations, but it also created an interagency trade group to advise the negotiator so that the interests of industry, agriculture, and labor would be taken into account, rather than ignored. Indeed, the Special Representative was created for the purpose of chairing that group; the Senate disagreed with the House approach of simply having an existing cabinet official chair the group on the grounds that a chairman independent of any specific agency would have an “overall broader perspective.”
This debate remains relevant today. Congress was very clear that domestic prerogatives should not be offered up as a sacrifice on the altar of foreign policy. Accordingly, any argument that a trade agreement is justified on the basis of foreign policy would seem to be a repudiation of Congress’ intent in creating USTR in the first place.
But let’s look at the foreign policy argument anyway.
The Foreign Policy Argument
The most glaring problem with the foreign policy argument is that there seems to be little effort to provide empirical evidence to support it. It certainly sounds sophisticated to say that we need these agreements to achieve our foreign policy ends. However, there seems to be a dearth of evidence to indicate that it’s true. Even if it were true at a global level – for example, the WTO – it does not follow that bilateral or regional deals offer the same results.
Indeed, there are reasons to consider that the foreign policy premise is flawed. Is there a more basic reflection of a close allied relationship than collective defense? Yet a decade after NAFTA entered into force, Mexico pulled out of its collective defense agreement with the United States. Nicaragua, a party to CAFTA, followed suit in 2012.
In the meantime, we do have a collective defense agreement with Japan and with European countries through NATO. Those agreements exist despite our not having a trade agreement with either, outside of the WTO.
The foreign policy argument, at least as a justification for bilateral or regional deals, doesn’t seem to hold much water. Indeed, if the United States had never argued that TPP was necessary as a matter of foreign policy, would its collapse have then been viewed as a foreign policy failure?
The Rules of the Road
As to the commercial effects of these agreements, the argument is that they are necessary to keep China at bay and to improve U.S. competitiveness. In an interview with the Wall Street Journal, President Obama asserted that “if we don’t write the rules in trade, China will.”
Let’s break that down.
China’s trade agreements don’t include environmental rules, or labor standards. Yes, that’s writing the rules, in a way – the rules are that there are no rules. On the other hand, an agreement between Vietnam and China that has no rules on labor and environment in no way stops the United States from negotiating an agreement with Vietnam that includes rules on labor and environment. That matters, because it means we aren’t in a race to the finish line with these deals, and if China gets there first, we lose.
In fact, turning the negotiation of these agreements into a race to the finish is a dangerous way to end up with bad rules. Precisely because the rules the United States seeks in these agreements do become the rules of the road, when we get them wrong, the entire trading system gets them wrong. And as we’re seeing with NAFTA, fixing them later isn’t as easy as it looks. Thus, it is imperative that we get these rules right, not agree to subpar rules just to conclude an agreement before China does.
China is supposedly terrified of TPP because it solidifies U.S. influence in the region. The article linked above, written by a former diplomat, picks apart that argument.
But the actual rules in TPP are also problematic: China would have been a huge beneficiary of TPP. Why? Because the rules that govern whether a good is eligible for preferential tariff treatment under TPP allow more than half the content to be made with Chinese goods. It’s not just TPP, either: in the deal with Korea, up to 65% of the vehicle can be Chinese. That makes Korea the perfect channel for China to offload its excess production of steel and aluminum. Think about it: China, which ignores market forces, overproduces steel and aluminum. Its overproduction puts U.S. companies and workers out of business. China then sells its excess production to Korean manufacturers, who produce goods that are shipped to the United States duty-free.
Is it so surprising that voters in the Midwest proved to be trade skeptics in 2016?
And bear in mind that the auto rules are among the toughest rules in these agreements.
The loopholes take on even more urgency when you consider that our trade agreement partners must meet standards in those agreements, including labor and environmental standards – the very “rules of the road” that are supposedly critical to establishing a level playing field. But non-partners don’t have to comply with them. As a result, Korea is obliged to adopt and maintain these standards, but China is not. Yet, China can supply up to 65% of a Korean car that enters the United States duty-free, without being subject to the labor or environment provisions of the agreements. It stands to reason that China should be obliged to meet these rules too, if it wants to supply the content — or the content requirements should be stricter.
If China really is a threat, and we want to counter it through trade agreements, then shouldn’t the China memers also endorse stronger rules of origin and supply-chain standards, so that China can’t free-ride off other countries’ commitments?