Trader woes

It got less media coverage than Iraq or the Mideast crisis, but one of the topics discussed by Illinois Sen. Barack Obama in his recent meetings with foreign leaders was the vital issue of international trade.

Since we live in the most trade-dependent region of the U.S., we have a special stake in trade policy as it will unfold in a new presidency. The following tells how we got to here and what to expect in the future.

In the years leading up to President John Kennedy's 1961 inaugural, Democrats were seen as internationalists and multilateralists on trade as well as on other issues. Opposition to open global trade mainly came from old industries, at the heart of the Republican party, which wanted protection. Kennedy in his 1960 campaign promised "to get America moving again" economically.

A centerpiece of his program was the 1962 Trade Expansion Act (TEA), which committed the U.S. to multilateral liberalization of trade in goods and services. It received one-sided congressional approval, supported by a broad business-labor-agricultural coalition. Among the TEA's most avid supporters were the auto and steel industries and unions (which, now, are among the most avidly protectionist). As a practical matter, it was not difficult to mobilize broad support for the legislation. In 1962, the U.S. enjoyed a favorable 2-to-1 trading advantage with the rest of the world.

The multilateral Kennedy Round of trade negotiations, which followed, was concluded during the Johnson administration. It broadly reduced tariff and other barriers to global trade. Subsequent multilateral liberalizations followed, under the auspices of the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO). They, too, brought broad reductions in trade barriers — though least successfully in agriculture, protected in almost all countries because of potent political pressure brought by farm lobbies.

Meantime, the global economy was changing. Former hewers of wood and drawers of water in the undeveloped world were rising on the economic ladder. Countries with low-cost labor were drawing jobs from other countries one step up the ladder — Mexico pulling jobs from the U.S., China drawing jobs from Mexico, lower-cost Asian countries drawing jobs from China. The U.S., for its part, continued to prosper because of international trade, giving up low-value, low-tech jobs but gaining high-value, high-tech jobs. (The pattern was foreseen many years before. In 1966, for instance, during the Johnson administration, I ran a White House textile-policy task force which examined how to keep that industry thriving. We found, at the end, that there really was no way to do so. It was one of those industries where manufacturing increasingly would move offshore, no matter what domestic steps were taken. The best we could do was institute education and training programs which would help textile workers move to industries of the future.)

Things really began to turn in the late 1970s-early 1980s as "old" industries, such as autos and steel, and their unions began to grasp for government support. U.S. international trade commission rulings transparently favored domestic steel. A federal bailout kept Chrysler alive — and thus contributed to global overcapacity in the industry. Labor unions in less competitive industries, frustrated at their shrinking member bases, adopted a fresh tactic. They began demanding that global trade negotiations no longer restrict themselves to trade issues per se but should be expanded to include labor and environmental standards as subjects of negotiation.

At face value this seemed a good idea to progressive and environmental groups in the U.S. Why shouldn't Mexico, for instance, and other lower-wage countries be forced to treat their workers and their environments as well as we did? Problem was: These issues had never before been a part of trade negotiations. Less advanced countries knew, in advance, that they would be stuck in the third world if forced to adopt first-world standards they could not afford. The environmental/labor standard demands became a rallying point for old-industry domestic unions, and their allies, and a sticking point for trading partners who saw them as disguised protectionist devices. (This debate came to full flower during the failed 1999 World Trade Organization meeting in Seattle, where developing countries walked out over such issues.)

The notion of a North American Free Trade Area had been kicked around for decades by a small group of economists led by Sperry Lee of the National Planning Association. It was taken up briefly by California Gov. Jerry Brown. But it was mainly seen as a faddist notion, the problems of which would outweigh benefits. For one thing, the U.S. and other developed countries saw regional trade arrangements — such as a U.S., Mexico, Canada arrangement — as being quasi-protectionist. If the three North American countries melded their economies, for instance, neighboring Caribbean, Central American, and South American countries would be left on the outside and discriminated against. The European Union (formerly the Common Market) was seen as a one-off exception because it had security/political considerations behind it, although organized originally as an economic union. Better, it was thought, to focus on multilateral, global liberalization in which all countries simultaneously would lower their barriers.

Then Mexican President Carlos Salinas proposed to President George H.W. Bush the idea of NAFTA. Salinas' motivation, mainly, was to use NAFTA to open and liberalize the Mexican economy, which, he thought, would not otherwise be liberalized. He saw NAFTA as a way to get North American capital into Mexico and Mexico's surplus labor into North America. Bush bought into the notion and helped sell Canada as well. Economists and trade specialists, who previously had scorned the notion, came to see it as progressive, despite opposition in particular from U.S. companies and unions already undergoing pains of adjustment.

NAFTA became a centerpiece issue in the 1992 Democratic primaries and presidential campaign. Jerry Brown, once NAFTA's champion, courted labor votes in industrial states and became its opponent. Arkansas Gov. Bill Clinton, the frontrunner for the Democratic nomination, weighed the pluses and minuses and eventually came down for NAFTA — mainly because by then it had come to be seen (inappropriately, in my judgment) as a litmus test of whether a candidate was internationalist or protectionist. He won the fall election and sent the NAFTA Treaty to Congress. It passed, but a majority of Democrats opposed it. Since that time, Democrats increasingly have opposed international trade deals — often flying the environmental/labor standards flag in doing so. The present Bush administration, unable to get global WTO deals, has concentrated on getting a series of bilateral trade deals with other countries. These deals, of limited value, also have drawn strong Democratic opposition. It now appears problematic that any major trade liberalization is possible.

Obama, whose background and education predispose him toward free trade, sang an increasingly protectionist tune in the Democratic nominating contest this year. His principal opponent, New York Sen. Hillary Clinton, became lead vocalist for protectionism in industrial states, and Obama felt it necessary to blunt her appeal. He has in the post-primary season implied that his nominating-campaign trade rhetoric might have been overblown.

He has, however, promised to renounce and renegotiate NAFTA and has opposed free-trade agreements with Colombia, South Korea, and Central America, much to the distress of the countries involved. He has neither endorsed nor supported the so-called Doha Round, the current global trade negotiation that is the latest in a line of such since the original Kennedy Round.

The Doha Round remains the U.S.'s and other countries' best chance to do something important for expansion of global trade, investment, and growth. Right now, though, it remains stuck in neutral. The U.S. last week tried to jump start the round by proposing a cap on agricultural subsidies. The European Union has made a similar proposal. But emerging economies, led by Brazil, have opposed their initiatives. The U.S. and EU want the emerging countries to cut tariffs on autos, chemicals, and other industrial goods in return for U.S./EU cuts in farm subsidies. In the background loom the contentious environmental/labor-standard issues.

Obama, who calls regularly for multilateral programs to fight world poverty, is thus put in the uncomfortable position of seeming to oppose the multilateral initiative — the Doha Round — which would most allieviate global poverty by unblocking markets for third-world exports. The Doha Round, believe it or not, has been ongoing since 2001 — seven years of painful negotiation without any immediate success in sight. If successfully negotiated tomorrow, moreover, it is doubtful that the U.S. Congress would approve the deal, especially since the 2009 Congress almost surely will be more heavily Democratic, and protectionist, than the present one.

Arizona Sen. John McCain, the putative Republican nominee, has stuck to a pro-free-trade platform. Yet during the primary season, he made promises to Michigan, Ohio, and Pennsylvania workers implying he would as president bring back their industrial jobs. They read the promises as implying tough policies against foreign economic competitors and immigrant labor. Moreover, McCain is seen as the major political figure most identified by the same voters with permissive policies toward Mexican immigrants. He is certain, during the fall campaign, to compete for their votes by getting tougher on both trade and immigration.

NAFTA was a dubious and marginal initiative which has brought neither the pluses nor minuses to the American economy that its supporters and detractors initially predicted.

• Since NAFTA — not necessarily because of it — U.S. manufacturing output has grown far more rapidly than before it.
• The average U.S. unemployment rate has fallen by a quarter.
• Hourly compensation in business and industry has grown more rapidly than pre-NAFTA
• U.S. agricultural exports to Canada and Mexico have expanded.
• Trade among the three countries has trebled.

Much of this would have taken place with or without NAFTA. The two NAFTA environmental bodies, created by NAFTA, have gotten some 135 environmental infrastructure projects started along the U.S.-Mexico border. Some U.S. jobs, and especially jobs in politically potent industries and unions, have been lost, although they have been more than replaced by other jobs.

The global shifts in production and employment, over the past 50 years, can in many ways be seen as a triumph of internationalist, mulilateral initiatives launched by President Kennedy and the World War II generation which set them in motion. But all that high-minded stuff can seem irrelevant to the Gary, Ind., steelworker in his 50s who lives in a deteriorating neighborhood, plagued with foreclosures, and who is untrained for any other job. If he could find one, it would not bring with it steel wages and benefits.

Either Obama or McCain will enter the presidency next January with big financial/economic problems on his desk. Among those problems will be what to do about the Doha Round, about multilateralism in trade, and about coping with an increasingly protectionist Congress. It will take real leadership to bring us back to where we once were on trade.