Trade and Investment

Will the US pass fast-track trade negotiation powers?

Hosuk Lee-Makiyama
Director, European Centre for International Political Economy
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Trade and Investment

Well, they say the TPP deal is now “practically wrapped up.” The House and Senate Leadership have now tabled the bipartisan Trade Promotion Authority (TPA) bill that must now slouch through the Congress. It will be the first real trade debate in thirteen years, and the world has changed – but the politics on the Hill have not. Actually, few congressional debates are as predictable as the one on international trade.

The bill is set for a smooth sailing through the House, while the real fracas is in the Senate and the split within President Obama’s own party. Senator Ron Wyden (D) reportedly came under immense pressure from the unions and environmentalists to walk out of the deal. As the old saying goes about the one-eyed who is king, the outgoing Minority Leader Harry Reid will “not even consider the bill” until there are guarantees it will benefit the middle class. The TPA bill comes equipped with a 60-day public review period of the trade agreements; it also includes trade adjustment assistance (TAA) – a rarely used benefit package for workers displaced by global trade invented in the Clinton era.

The split in the Democrat leadership may seem a little exorbitant… almost a little rude, given that the TPP – sometimes berated as an instrument for US control of the Asia-Pacific – must be sold to its main beneficiary: the United States.

As so often when electorates deal with major trade agreements, the debate is seldom about the agreement itself but an abstraction of something larger and existential. When the Congress is voting on the TPA bill, it is not taking a stance on whether the executive office should be given a stab at opening up the Asian and Japanese markets, or whether to surround China without using aircraft carriers. Instead, it is a proxy vote on globalisation and the increasing income gaps at home. Some will be livid over how America lost out to China, stealing American jobs, or that trade only makes the rich richer.

If the truth is to be told, trade has always been a minor factor to the US economy. The US may be the world’s second largest exporter, but the contribution from trade is relatively small compared to its rich domestic market. Thanks to globalisation, US exports of goods and services (as a share of GDP) increased from ten to fourteen percent, which is still very low compared to economies like China (26%), Germany (46%) or Singapore (191%).

Yet US exports are considerable in absolute terms: In 1996, by the second Clinton administration and establishment of the WTO, the US exported US$4,745 per capita (compared to China’s mere US$170). Eighteen years later, US exports have increased by US$1,426, outperforming China’s by almost two to one. It makes you wonder about the size of winning margins some people need, and why America persists in making itself out to be a loser when it is a winner. Sure, China had a huge increase in percentage terms. But you get that if divide any number by near-zero.

Hosuk Lee-Makiyama

However, these increases in GDP are just that – increases in domestic product of a country – which do not automatically translate to higher wages and welfare for its middle class. Indeed, growing income inequality has become a permanent feature of most industrialised countries, but more trade and wider income gaps are not necessarily unrelated. Some European socialists (like the Swedes) may even tell you that free trade is a prerequisite for creating a wealth to redistribute in the first place.

One of the untold mysteries-cum-tragedies of the US economy is the drop in wages: Real wages started to freefall in the beginning of the 1970s. As inflation ate away pay raises, workers fell backwards into a socio-economic time warp: the average weekly wage dropped 22 percent from 1972 until the mid-90s, when they hit the rock bottom at US$550. Although we never fully recovered, these wages did not rise again until the Clinton years, when they rose rapidly to stabilise around US$600-610 during the terms of President George W. Bush.

The Clinton-Bush era (if there was ever such a term) saw a period where not only wages increased, but income differences started to slow down for the first time in recent times despite a record trade deficit of US$720 billion annually, contradicting the notion that trade and imports spur income inequality. When the Gini-index (the ratio between the highest and lowest income groups) is plotted against manufacturing imports, the line starts to move in circles – a sure sign there is little connection between inequality and imports.

Hosuk Lee-Makiyama

Trade economists will tell you that the real trade gain for the middle class is on the import side: the more foreign stuff you let into your economy, the more you gain. Trade negotiations are simply about acting coy – imported cars, flat screens, iPods, fleece sweaters, and tacky Christmas ornaments helped significantly to curb US consumer prices since the millennium. Without imports, the inflation would have surpassed the Chinese economic bubble, and once again eroded worker salaries.

While inexpensive imports helped keep the domestic prices down, US export prices increased 15 percent during the same period. In short, American households got far better mileage on their dollar and could afford more, while America focused on making more valuable and future-proof items. This trend is still ongoing. US export prices are continuously rising, whereas China sees their prices falling rather than rising despite their drastic efforts to move up on the ladder.

The final question is about job losses. The economy shed about one-tenth of its manufacturing jobs between 1996-2008, or about 1.5 million job losses, a considerable number by any account. But during the same period, exports created 2.7 million new jobs according to the Department of Commerce. Now, trade agencies love to beat their own drum, and it is probably wise to take such numbers with a pinch of salt. But even in the unlikely case where all manufacturing jobs were lost due to imports – and not a single job was lost to domestic competitors, robots, or incompetent CEOs (i.e. pretty unlikely) – job creation from trade exceeded destruction by a hefty margin.

Moreover, in that period 20 million new jobs were created elsewhere – for every manufacturing job lost, 13 new jobs were created in the services sector. An increasing number of retail, engineering, and technology companies – like Target, GE, IBM, or Apple that were exclusively in assembling items – have branched out to services. Over the course of twenty years, assemblers changed their job descriptions to customer advisers or consultants. Some manufacturing jobs disappeared because they were upgraded, and not necessarily lost. To the extent there were layoffs, many workers were swallowed up by the new jobs in the services sector. This is why the Trade Adjustment Assistance funds for those displaced by trade were rarely used; trade displaced relatively few, and those who were found better opportunities thanks to trade.

All in all, America seems to have come out on top in the trade game. The country is producing US$1,426 more per person thanks to it, and fared way better than China. But how the income boost from trade is divided between the have and the have-nots is not a question that the TPA bill could settle in 2015. That question is better saved for a year later: the 2016 Presidential elections.

This article first appeared on the E15 Initiative Blog. The E15Initiative is jointly implemented by the International Centre for Trade and Sustainable Development (ICTSD) and the World Economic Forum. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Hosuk Lee-Makiyama is the Director of  the European Centre for International Political Economy (ECIPE).

Image: A woman holds a cluster of U.S. flags. REUTERS/Robert Galbraith. 

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