It is time for what the Japanese call hansei (reflection over one’s mistakes) among the Davos crowd—the corporate chieftains, business lobbyists, policy wonks and journalists who sold Washington and other world capitals on the glories of free-trade deals over the past few decades. Of all the messages emanating from the American electorate in the 2016 campaign, popular hostility toward trade agreements is one of the most resounding. It is also perhaps the only grievance that unites left and right.
Donald Trump’s success in storming his way toward the Republican presidential nomination is due in no small part to the derision he routinely heaps on trade deals the United States has struck with other countries. Likewise, Bernie Sanders’ attacks on trade agreements help fuel his populist insurgency, forcing Hillary Clinton to back away from the Trans-Pacific Partnership, the pact among 12 Pacific Rim countries that she once championed as secretary of state.
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In response, many Davos men and women will be tempted to do what they’ve done in the past: Hunker down. Wait out the election and hope for a return to business as usual—negotiating more complex bilateral or regional free-trade accords. Presidential campaigns often feature a candidate or two who seizes the spotlight and soars in the polls for a while by railing against trade agreements—notable examples including Ross Perot in 1992, Pat Buchanan in 1996 and John Edwards in 2004. Sometimes even the victors stake out moderately anti-trade positions, as Barack Obama did in 2008 when he vowed to revamp the North American Free Trade Agreement.
Business as usual would be a big mistake. A different approach to trade is in order. Trump and Sanders are delivering a double-barreled message from across the political spectrum, one that is deeply felt in American society and unlikely to go away soon. Thus the voters’ uprising of 2016 warrants more than the oft-repeated bromides about the virtues of economic integration. The politics of trade has changed in a profound way, especially now that the Republican Party—until recently, led by ardent free-traders and a reliable supplier of congressional votes for trade agreements—has shown that its grass-roots voters will rally to a candidate who scorns the old orthodoxy.
Paradoxically, the upshot could be a blessing in disguise for international trade—if trade negotiators adjust accordingly and focus on what’s important, which is preserving the overall system. That means strengthening rules at the global level that keep the world safe from rampant protectionism, rather than constantly seeking to eliminate more impediments to the movement of goods and services across borders.
Yes, the U.S. economy benefits when foreign markets become more receptive to American exports and when prices fall due to import competition. But far too much emphasis has been placed in recent years on striking new trade agreements among limited groups of countries. The advantages of lowering trade barriers have become relatively marginal in recent years, for the simple reason that those barriers have already fallen far since the initiation of the modern trading system at the end of World War II. The tariffs that the United States imposes on imported goods average only a little more than 2 percent—and although that’s an admittedly crude measure of market openness, it provides a good indication of how little the overall economy would be affected by further liberalization.
Put simply, the economic advantages to pushing for such trade deals are no longer worth the huge political costs. And if the TPP is to stand a prayer of enactment, it should be presented to Capitol Hill as the last regional or bilateral trade deal that the United States will enter. In the face of persistent domestic opposition, the United States—and the world—needs to declare a moratorium on such efforts.
The political atmosphere might also improve if the social safety net were mended, providing globalization’s losers with effective forms of aid. Too few workers displaced by imports and offshoring have received the retraining and other support they need from existing programs; Washington should spend whatever it takes to give those people wage supplements sufficient to offset their lost incomes, at least temporarily. Instead, the U.S. government has traditionally spent relatively little on such “trade adjustment assistance” programs for displaced workers. And beyond such palliatives, a shift toward a “defensive” rather than an “offensive” trade policy is essential. The best way of achieving that goal would be to shore up the World Trade Organization, which maintains caps on the trade barriers of its 162 member countries but is struggling to ensure its viability.
Boosters of trade deals need to recognize that they badly underestimated the downside. They always acknowledged that layoffs and falling living standards would inevitably afflict some segment of the working population when imports flood into domestic markets and factories move overseas, but the impact is taking a far greater political toll than they anticipated. Today, a large swath of the American public clearly perceives foreign competition as inflicting too much pain on U.S. workers to be worth whatever benefits economic theorists may calculate. Outside the United States, too—Europe, in particular—globalization is under heavy assault.
And even if the upside of trade pacts outweighs the downside—as economists almost universally agree—the gains have often been oversold. (Full disclosure: As a newspaper reporter and author, I have done my share of praise-singing for low trade barriers.)
It’s easy to see why the denunciations of trade deals by Trump and Sanders might be dismissed in some quarters as an election-year phenomenon that will have no lasting significance. Time after time, such surges of populism on the campaign trail have failed to keep the White House from pushing agreements through Congress and negotiating new ones. Obama not only buried plans to redo NAFTA; he secured congressional approval for a trade pact with South Korea that had been negotiated during the George W. Bush administration (after renegotiating some of the terms), and he made the TPP one of his signature initiatives.
Unsurprisingly, therefore, an oft-whispered scenario among Washington’s trade enthusiasts goes something like this: Once Clinton wins—as she likely will—she’ll find a way to backtrack on her criticism of TPP. Then she’ll ensure progress on further measures to expand opportunities for U.S. companies overseas, such as the proposed Transatlantic Trade and Investment Partnership between the United States and the European Union. After all, the person she has hinted will take responsibility for managing economic policy—her husband—is a guy who as president pursued one of the most ambitious trade agendas in U.S. history, including congressional approval of NAFTA, completion of a sweeping global trade accord known as the Uruguay Round, and negotiation of the deal that paved the way for China to join the WTO.
Reverting to the policy of wheeling and dealing with friendly countries to open more and more markets will only invite more populist attacks—and to what end, if the benefits are no longer as substantial as they used to be? Given the mounting danger of protectionism, a much larger payoff would come from a broad, sustained push to preserve and fortify the WTO, which despite its many flaws is a crucial linchpin of stability in the global economy.
The WTO is the current embodiment of the system established after World War II to prevent a reversion to the mutually destructive trade conflict of the 1930s. Because countries take their trade disputes to independent WTO tribunals, they refrain from tit-for-tat retaliation that can turn into trade wars. And they abide by their commitments to keep lids on their trade barriers, knowing that failure to do so would result in WTO-applied sanctions.
But a host of troubles are besetting the Geneva-based trade body. The failure of WTO-sponsored global trade talks, known as the Doha Round, has dealt a serious blow to the organization’s credibility. Moreover, the WTO’s centrality to the global trading system is in doubt thanks to the proliferation of bilateral and regional trade agreements. Hundreds of these have been negotiated in the past 25 years, ranging from the big and well known (such as NAFTA) to the small and ridiculous (such as the Singapore-Jordan free trade agreement). Partly that is because trade negotiators prefer striking smaller, easier deals to the long, hard slog involved in thrashing out an accord at the multilateral level.
As a result, the WTO’s ability to continue performing its vital functions is imperiled. Although the trade body is not about to disintegrate overnight, its authority might erode to the point that member nations start to flout their commitments and ignore the rulings of WTO tribunals. That would greatly increase the threat of trade wars and hasten a breakdown in the system that has helped keep trade blocs and protectionism at bay.
To all this, the most vociferous trade critics might say, so what? Trump in particular shows no sign of caring about the WTO, or even understanding its basic principles. His threats to slap 45 percent tariffs on Chinese goods, and 35 percent tariffs on Mexican goods, would grossly violate the rules that the U.S., as a member, has pledged to uphold. Such tariffs would do nothing to bring U.S. jobs back home anyway, because American multinationals would simply move their Chinese and Mexican operations to other low-wage countries.
Suppose a Trump administration imposed high tariffs across the board; that would keep some U.S. companies from moving abroad. But the number of American jobs destroyed in the process would surely exceed the number saved. Many foreign countries would retaliate by raising their own tariffs against U.S. exports, devastating American companies that depend on overseas markets. Financial markets, foreseeing a collapse in profitable international commerce, would crash, with recessionary consequences of unimaginable magnitude.
Valuable as the WTO is in keeping the trade peace, one of its biggest weaknesses is the lack of rules to deal adequately with the rising giant in the trading system—China. As Trump himself often notes, Beijing has used an artificially cheap currency to gain an unfair competitive advantage for its exports, with American manufacturers and workers bearing the brunt of the Chinese juggernaut. Although the Chinese currency isn’t nearly as undervalued anymore, Beijing uses other methods, including cheap credit and power supplies, to give its manufacturers a leg up against foreigners—all of which poses a severe challenge to the rules-based WTO order.
Having flopped with the Doha Round, the WTO is aiming to gradually revitalize itself by launching a series of negotiations on issues of limited scale, such as e-commerce and fisheries subsidies. Understandable as this modesty may be, a much bolder approach—perhaps even a new round—is necessary to prevent atrophy of the WTO’s institutional strength. A new round wouldn’t have to result in a massive lowering of trade barriers as past ones did; it could modernize rules and address threats of protectionism—such as those involving currency manipulation—that have arisen in the 22 years since global rules were last overhauled. China’s industrial policies must also be squarely faced.
As for the TPP, it may help induce China (which is excluded) to come to the negotiating table and change some of its most problematic practices. But henceforth, U.S. trade negotiators should devote their energies to enhancing the resilience of the WTO and drop new attempts at bilateral or regional trade deals. Otherwise in the future, the Davos crowd will find itself up against anti-trade candidates who are more formidable than Trump and Sanders.