Chapter 1: U.S. Trade Policy in Crisis
The United States has led the world in an unprecedented reduction of barriers to international commerce during the past seventy years. The major tool in liberalizing world trade has been to negotiate multilateral reciprocal trade agreements in which America and its trade partners agree to mutually reduce trade barriers. Additionally the U.S. has negotiated bilateral and regional free trade agreements in which the parties to the agreement eliminate all barriers to trade between themselves. Today this approach is under serious attack. The outcome of the debate on the United States’ trade agreements policy will have enormous consequences for both the nation’s economy and its foreign policy.
By William Krist
Following World War II, America’s leaders believed that it was critical to establish international trade rules that would lead to a steady reduction of barriers to trade. Policymakers believed this was necessary to enable the world economy to recover from the devastation of the Great Depression and the war, and that it would help prevent international disputes that could lead to future conflicts.
Accordingly, the United States and its allies negotiated the General Agreement on Tariffs and Trade (GATT) in 1947 and, under the GATT’s auspices, the United States led the world in eight rounds of multilateral negotiations to reduce trade barriers. Only several dozen countries participated in the earliest rounds, but by the end of the last successful round in 1995, the Uruguay Round, 125 countries participated.
In 1950, the developed countries’ tariff rates averaged 40 percent; but fifty years later, after the implementation of most of the Uruguay Round concessions; they had fallen to an average of 4 percent. Additionally, nontariff barriers such as quotas and arbitrary standards were also removed. Spurred by this enormous liberalization of trade barriers, world trade exploded; imports and exports, which accounted for only some 10.9 percent of the U.S. gross national product in 1947, rose to just under 30 percent in 2008 before the global financial and economic crisis, and have been just over 30 percent in recent years. Most economists believe this growth in trade contributed enormously to U.S. economic growth in the post–World War II years.
The reduction of trade barriers, of course, was not the only cause of this increase in trade, but it was probably one of the most important factors. Other developments, such as better and cheaper transportation and communications, also played a significant role.
By 1995, U.S. efforts to liberalize trade had achieved enormous success. The just-completed Uruguay Round not only substantially reduced trade barriers but also transformed the postwar GATT into a more extensive system of international trade rules that covered services and intellectual property, as well as goods, and that included binding dispute settlement procedures. In recognition of this strengthened role, the GATT was renamed the World Trade Organization (WTO).
In addition to the Uruguay Round, U.S. trade negotiators had completed negotiations for the North American Free Trade Agreement (NAFTA). This agreement, which expanded a 1989 agreement with Canada to include Mexico, went into effect January 1, 1994, and required the elimination of substantially all barriers to trade between the three countries, thereby creating a duty-free market of some 450 million people that accounted for 24 percent of total world gross domestic product.
The WTO and NAFTA generated increased concern about “globalization” and the role of America’s trade agreements among a broad swath of the American public. Although there are many aspects of “globalization,” the focus in this book is on economic globalization, which refers to the interdependence of national economies whereby companies and workers compete across borders, and goods, services, and capital can flow relatively freely around the world.
Some early dispute settlement cases in both the WTO and NAFTA led the environmental community to view the United States’ trade agreements as an enemy of better protection of the environment. Labor in the United States increasingly viewed trade liberalization as a mechanism to transfer good jobs from the United States to the rest of the world. The development community was similarly concerned, but for the opposite reason—that is, that the trade agreements would open developing countries up to competition from the developed nations that would destroy their infant industries. Additionally, the developing countries believed that the Uruguay Round was unfair to them by requiring them to adopt expensive new rules, such as for the protection of intellectual property, while not providing expanded market access for the products they produce.
These concerns bubbled over into mass protests against globalization and the WTO in late November 1999. The WTO had hoped to launch a new round of multilateral negotiations to further liberalize trade, including trade in agriculture products and services, at its Ministerial Meeting in Seattle. However, labor unionists, environmentalists, prodemocracy groups, human rights advocates, and others (even including some middle-aged hippies wanting to relive the Vietnam War protests) took to the streets in what became known as the Battle in Seattle. After four days of sometimes violent protests, on December 3, 1999, the WTO Ministerial Meeting collapsed in failure amid tear gas and anti-globalization protests. (Although the protests were an indication of public concerns regarding trade policy, most observers believe that the Ministerial collapsed because there was an insufficient consensus among the main participants to launch a new multilateral round.)
Two years later, in November 2001, following the horrific terrorist attacks of September 11, 2001, the WTO negotiators were finally able to launch the new round. In the context of the terrorist attacks, this new round, dubbed the Doha Development Round, had an ostensible emphasis on promoting economic development in the poorest countries.
In the early 2000s, in addition to seeking multilateral negotiations to further remove global barriers to trade, the United States sought to negotiate regional and bilateral agreements. The rationale for negotiating bilateral and regional agreements was to press forward on market liberalization and to provide incentive for countries to complete the Doha Round. The biggest regional U.S. agreement was to be a “Free Trade Area of the Americas” that would include all the nations in South, Central, and North America, except for Cuba. Although significant progress was made, these negotiations collapsed in 2005, primarily over disagreements between the United States and Brazil.
U.S. negotiators did have some successes, however, implementing free trade agreements (FTAs) with the six nations of the Caribbean Basin, as well as with Chile, Peru, Singapore, Australia, Bahrain, Morocco, Oman, Colombia, Panama, and South Korea. Congress, which must approve
trade agreements for them to become law, had grave concerns about the labor provisions in the Colombia agreement and with the threat of unfair competition from reducing trade barriers with South Korea, and it refused to approve the agreements until the Obama administration had renegotiated the relevant provisions.
Today the United States and the rest of the world are only slowly emerging from the 2008–9 global financial and economic crisis, the worst such event since the Great Depression of the 1930s. Most economists believe that further reducing world barriers to trade could strengthen economic growth. Unfortunately, the multilateral negotiations in the Doha Round have so far failed, and some countries have imposed new barriers to trade, which could jeopardize future economic growth.
Many policymakers and businesspeople view the lack of progress in trade liberalization as a temporary problem, and believe that these obstacles would be overcome if the trade community did a better job of making its case for the benefits of trade. Some free traders view globalization as inevitable; in this view, the United States may have some setbacks, but over time globalization will inevitably continue. However, this is not necessarily the case. A better course of action is to seriously consider the critics’ concerns and to develop a trade policy that better promotes broad U.S. interests.
The “Golden Era of Globalization” and Its Aftermath
Today’s globalization has a precedent in the period from 1896 to 1913, when world trade roughly doubled. A century ago, capital moved freely across borders, and European investors eagerly bought bonds that financed economic development in the United States, South America, and Australia. Unlike the current period of globalization, people in 1900 could move across many borders freely, without passports. The market for goods, then as now, was basically global.
Late-nineteenth-century globalization was driven largely by improvements in transportation and communications. Early in the century, countries built canals and railroads, and refrigeration techniques were greatly improved. Later, the costs of shipping declined as steamships replaced sailing ships and the telegraph dramatically lowered the costs of communication. Trade around the world became much more possible and affordable.
Trade policy also played a role. David Ricardo’s theory of comparative advantage, which suggested that all nations were better off engaging in international trade, had become highly influential. A number of countries signed treaties to cut trade barriers, and some countries were unilaterally reducing barriers to trade. In 1888, for example, Italy signed treaties with Spain and Switzerland, and Mexico signed agreements with Britain, Japan, and Ecuador. The United States reached three major trade agreements in the 1800s and early 1900s—with Canada (1855–66), Hawaii (1876–1900), and Cuba (1903–34).
This golden age ended on June 28, 1914, when an assassin’s bullet killed Archduke Franz Ferdinand and Europe descended into World War I. When the war finally ended in 1918, the world trade system was in tatters. Unfortunately, the United States turned its back on international cooperation, and the victorious European powers demanded harsh reparations from Germany.
After the war, the United States was in deep recession, with unemployment of about 20 percent. In the early 1920s, however, the U.S. economy took off, spurred by new technologies such as the automobile and radio, Federal Reserve policies of low interest rates and an expanded money supply, and deep cuts in business taxes. Responding to business pressures, Congress raised import tariffs several times during the 1920s.
By 1924, good economic times began to spread to Europe and the Roaring Twenties were in full force. However, as a result of loose monetary policy, several bubbles formed, first a housing bubble, which popped in the mid-1920s, and then greatly inflated prices on the New York Stock Exchange. The stock market bubble, of course, ended with the stock market crash beginning October 29, 1929, which ultimately led to a fall of 89 percent in the Dow stock index by July 1932.
In the face of the stock market collapse, policymakers made several serious mistakes. Although economists continue to debate the causes of the Great Depression, two major policy failures stand out. First, the Federal Reserve, which had pursued too loose a policy in the 1920s, now let the money supply shrink by a third by 1933. Second, policymakers failed to act as some major banks failed.
However, trade policy also played an enormous role. On June 16, 1930, President Herbert Hoover signed the Smoot-Hawley Act, which substantially raised U.S. tariffs on imports. This legislation had started out as a bill that would have only raised tariffs on some agricultural products. Unfortunately, other congressmen and senators inserted their own proposals for duty increases, and by the time the bill passed Congress, tariffs were to be raised on some 890 products.
Other countries immediately retaliated or even took preemptive action as the bill was being debated in Congress. For example, in May 1930 Canada imposed new tariffs on products that accounted for about 30 percent of its imports from the United States. Britain abandoned its traditional free trade stance and signed preferential trade agreements with its multiple colonies that discriminated against nonmembers such as the United States. And Germany signed bilateral trade agreements with the Eastern European nations, while Japan sought to establish a Greater East Asian Co-Prosperity Sphere.
The result was that world trade plummeted 66 percent between 1929 and 1934. High tariffs were a factor in the drop in trade, as was the drop in income because of the worldwide Depression of the early 1930s.
Although most economists do not believe that the Smoot-Hawley tariff was the major cause of the Great Depression, almost all believe that it was an enormous policy mistake; in fact, 1,028 economists wrote President Hoover as the bill was being passed by Congress urging him not to sign the legislation. With the world deep in the Depression, however, it was a mistake that could not be simply reversed once tariffs were raised, given that politically the United States could not then unilaterally reduce tariffs with unemployment running at more than 20 percent. It required an ingenious policy initiative—the Reciprocal Trade Agreements Act—to begin the process of expanding world trade.
The Reciprocal Trade Agreements Act of 1934
By 1934, unemployment in the United States had reached 21.7 percent. President Franklin D. Roosevelt, elected in 1932, recognized that the Smoot-Hawley tariffs had been an enormous mistake; however, he could not unilaterally reduce them without congressional approval. And Congress would not have granted approval with almost a quarter of all Americans unemployed.
In theory, the president could have negotiated trade treaties with other countries to reduce foreign trade barriers. However, under Article 1, Section 8, of the U.S. Constitution, it is Congress—not the president—that has the power to impose and collect import duties and to regulate commerce with foreign nations. Accordingly, any such agreement would need to have been submitted to the Senate as a treaty, which would require a two-thirds vote of approval. Additionally, because changing tariffs is a revenue measure, the agreement would need to be approved by the House of Representatives. In the economic and political environment of 1934, it would have been impossible to obtain congressional approval for a treaty that reduced U.S. tariffs.
Roosevelt’s secretary of state, Cordell Hull, came up with an ingenious solution. Working with Congress, he developed legislation—the Reciprocal Trade Agreements Act (RTAA)—to give the president authority to negotiate trade agreements that would reduce U.S. tariffs in exchange for reciprocal concessions from other countries. In a major break from the past, agreements negotiated under this authority would not require congressional approval; that is, Congress delegated its constitutional authority to impose tariffs to the executive branch for the period the RTAA was in effect. Congress was willing to do this because most members recognized their mistake in the logrolling exercise that resulted in the Smoot-Hawley tariff bill and because the approach of mutually negotiating tariff reductions with the United States’ trade partners picked up support from industries anxious to expand export sales.
The stated purpose of the RTAA, which the president signed on June 12, 1934, was “expanding foreign markets for the products of the United States (as a means of assisting in the present emergency in restoring the American standard of living, in overcoming domestic unemployment and the present economic depression, in increasing the purchasing power of the American Public.” To achieve this purpose, the act gave the president authority for three years to enter into bilateral trade agreements with foreign governments that could increase or decrease any existing rate of duty by up to 50 percent. The RTAA specified that “the proclaimed duties and other import restrictions shall apply to . . . all foreign countries.”
The Department of State under Secretary Hull had the lead in negotiating these agreements, supported by an interagency committee that included the Commerce, Agriculture, and Treasury departments. The first agreement was with Cuba in 1934, followed by Belgium, Haiti, and Sweden in 1935; and by Brazil, Canada, Colombia, Finland, France, Guatemala, Honduras, the Netherlands, Nicaragua, and Switzerland in 1936. The RTAA was reauthorized in 1937, 1940, and 1943; by 1945, when the RTAA was extended again, the United States had negotiated agreements with twenty-eight countries. Because of the approach of reducing U.S. tariffs only on products where the partner was principal supplier, the duty reductions were not large. In fact, the U.S. Tariff Commission calculated that the average U.S. tariff only declined from 46.7 percent to 40.7 percent for the first thirteen country agreements.
After World War II, President Harry Truman used the RTAA as authority to negotiate the first multilateral trade round after World War II, the Geneva Round, which was concluded between the United States and twenty-two other countries in 1947 and reduced tariffs on a wide variety of products. The results of the Geneva Round were then codified into the newly negotiated General Agreement on Tariffs and Trade (GATT), which President Truman implemented by executive order under the authority of the RTAA.
The fundamental pillar of the GATT, enshrined in Article I, is the most-favored-nation (MFN) clause, which requires all signatories to grant the same trade treatment to all members that is granted to any member. To the original architects of the postwar GATT system, bilateral agreements were anathema. They believed that the web of special agreements spun by Germany, the United Kingdom, and Japan after World War I had contributed to the political tensions that spurred World War II. Additionally, they believed that bilateral or regional agreements generally caused more harm to nonmembers than benefit to the members. Accordingly, the GATT sought to ensure that the trade rules and benefits applied equally to all members.
From 1934 to 1962, the RTAA was extended eleven times; during that period, the stated U.S. objective for trade agreements remained the same: to strengthen the United States commercially by expanding its exports through mutual tariff reductions. Following the Geneva Round, four more rounds were held between 1949 and 1961, although these only reduced trade barriers to a minor extent.
Each of the bilateral agreements negotiated before World War II and the first five multilateral rounds negotiated under the GATT only achieved modest results. Because tariff reductions would be made on an MFN basis, there was concern that some countries might try to benefit from other countries’ concessions without reducing their own high duties. To minimize the potential for such “free riders,” the RTAA specified that the United States could only reduce tariffs on products where the “primary” supplier of the product to the United States also agreed to reduce its own tariffs.
This approach proved to be very restrictive, and it limited the extent of trade liberalization. Negotiations were conducted on a “request-offer” basis, whereby a country would request specific concessions from its negotiating partners, which then would offer specific commitments, and this cumbersome process would continue until a package of limited concessions was put together.
Although these trade rounds reduced the tariffs imposed by members on imports from other members, GATT members were free to impose any trade barriers they wanted to on nonmembers. In fact, the United States imposed Smoot-Hawley level tariffs on imports from the Soviet Union and other Communist Bloc countries from 1951 until 1974, when the president selectively waived these duties on some Communist Bloc countries while retaining them on others, and Smoot-Hawley tariffs still apply to North Korea and Cuba.
The rationale for trade agreements was generally stated in terms of promoting the United States’ commercial interests, but it was recognized that trade was also important to its foreign policy interests. As President Roosevelt said in his 1945 message to Congress requesting that the trade agreements act be renewed, “We cannot succeed in building a peaceful world unless we build an economically healthy world.” (Ironically, the first step listed by President Roosevelt to “build an economically healthy world” was “to improve currency relationships.” This was never done, and today the world’s out-of-kilter currency exchange system is still the greatest danger to the world trade system.)
In 1962, Congress passed new legislation to authorize the president to negotiate trade agreements for three years. This new legislation, the Trade Expansion Act, continued the basic concept underlying the RTAA of reducing U.S. tariffs in exchange for reciprocal concessions from U.S. trade partners. However, it made a major change to the previous approach by providing that any agreements would have to be approved by Congress rather than be automatically implemented under presidential authority.
Under the mandate of the Trade Expansion Act, President Kennedy negotiated a major multilateral trade round—the Kennedy Round—which reduced U.S. tariffs on industrial products by almost one-third. The breakthrough came because negotiators agreed on a formula for reducing tariffs that the developed countries would apply across the board with only limited exceptions, rather than the request-offer approach used in previous rounds.
Although the Kennedy Round focused on reducing tariffs, it included a code addressing antidumping practices. Congress passed most of what the administration had negotiated, but it included language prohibiting U.S. adherence to the agreement on antidumping. This, understandably, infuriated the United States’ trade partners, which felt that they had agreed to a whole package that included this change to U.S. law.
Presidential authority to negotiate trade agreements expired after 1967. However, by the early 1970s, it was recognized that the nontariff barriers maintained by many countries were substantially damaging the United States’ export potential. President Nixon accordingly sought and obtained new authority to negotiate via the Trade Act of 1974.
Because of the experience with the Kennedy Round, in which Congress refused to pass one element of the negotiated package, the United States’ trade partners had made it clear that they would not enter into negotiations unless the United States provided better assurances that the whole package would be approved. Accordingly, the Trade Act of 1974 embodied another new innovation, the so-called fast track provision, which specified that Congress would vote up or down on any agreement without amendment and within ninety legislative days. With this assurance, the United States successfully negotiated the Tokyo Round trade agreement, which was approved in 1979.
Like the Kennedy Round, the Tokyo Round also significantly reduced tariffs, with the nine major industrial nations cutting their duties by one-third, and thus bringing their duties down to an average of 4.7 percent. Even more important, for the first time the Tokyo Round addressed nontariff barriers to trade. Throughout the early years of the GATT, high tariffs were the primary tool used by governments to restrict trade. By the end of the Kennedy Round, however, tariffs had been substantially reduced, and nontariff measures became more visible and more prevalent.
Although the Tokyo Round was very successful in further opening up trade for industrial products, virtually no progress was made with regard to agricultural trade. The United States and a number of other countries continued to maintain high tariffs on agricultural products, and many countries, including the United States, limited imports of many agricultural products by quota restrictions. Additionally, the European Union, the United States, and others provided significant subsidies to their domestic producers, thereby greatly distorting world trade patterns.
In September 1986, the GATT launched the Uruguay Round at its Ministerial Meeting in Punta del Este. By the time this round concluded in 1994, in addition to continued reductions of tariffs, agreements had also been reached on services, the protection of intellectual property, and investment. The developed countries agreed to give up several protectionist systems, including the Multi-Fibre Arrangement on textiles and the future use of “voluntary restraint agreements.”
It also set out a framework for rules on agriculture, although it did not significantly liberalize existing practices. Unlike the Tokyo Round, the Uruguay agreement was set out as a “single undertaking,” which meant that countries had to take either the whole package or none of it, with the exception of the government procurement, civil aircraft, bovine meat, and dairy agreements, which remained plurilateral agreements.
Negotiators also agreed on a new binding dispute settlement system with timelines for deciding a dispute. Countries that were injured by other country practices that violated the agreement now had a robust mechanism to obtain compensation or to authorize retaliatory measures.
In recognition of this new status for world trade rules, the GATT was renamed the World Trade Organization (WTO).
The current multilateral trade round, the Doha Development Round, was launched in 2001. These negotiations were supposed to improve the developing countries’ ability to participate in the world trade system, and to substantially liberalize trade in agriculture and services as well as further reduce barriers to trade in nonagricultural products.
The Spread of Bilateralism
As noted above, the fundamental pillar of the GATT was that all concessions were to be granted to all GATT member countries. GATT members were free to apply any duties they wished to nonmembers, but members were to receive MFN treatment. The original GATT included an exception to this rule for countries that formed a customs union or free trade area subject to review by the GATT membership.
Early on, however, the MFN principle faced challenges. Both the United Kingdom and France were permitted to retain the preference agreements they had granted to their colonies. Then, in 1957, Germany, France, Italy, Belgium, Luxembourg, and the Netherlands formed the European Economic Community (EEC), which was to eliminate barriers to trade between the six, establish a common external tariff, and implement a common agricultural policy. The United States fully supported the EEC, which was viewed as a mechanism to ensure that there would be no future wars between France and Germany and that would be a buffer against the expansion of the Soviet Union.
While supporting the formation of the EEC, other European countries were concerned that their economic interests would suffer as their exports to these six nations would face discrimination compared with sales by EEC members. Accordingly, in 1960 the United Kingdom, Austria, Denmark, Norway, Portugal, Sweden, and Switzerland launched the European Free Trade Area, which would eliminate tariffs on trade among themselves while allowing each to maintain its own external tariff.
The United States, however, shied away from preferential trade agreements until 1985, when the United States entered into a bilateral FTA with Israel, which was negotiated primarily for foreign policy reasons. Israel was seen as a staunch U.S. ally in the Middle East, and the agreement was intended to cement that relationship. Additionally, there was a minor commercial interest: Israel had negotiated an FTA with the European Communities that would place U.S. exporters at a commercial disadvantage vis-à-vis their European competitors. It was felt that a United States–Israel FTA would counter that commercial disadvantage.
In 1989, the United States entered into its second postwar FTA, this time with Canada, as can be seen in table 1.1. This agreement, which was primarily motivated by commercial considerations, built on the Automotive Products Trade Agreement signed in 1965, which led to duty-free trade in autos and parts.
Two years later, in June 1990, U.S. president George H. W. Bush announced the Enterprise for the Americas Initiative, which envisioned an eventual FTA that would extend from “Anchorage to Tierra del Fuego.” The objectives of this negotiation were based on both foreign policy and commercial considerations. From a commercial perspective, the Free Trade Area of the Americas (FTAA) would open up major markets, particularly Brazil and Argentina. From a foreign policy perspective, it was envisioned that an FTAA would foster stability and democracy in the United States’ neighbors to the south.
In 1994, the United States, Canada, and Mexico launched NAFTA, under which all trade barriers were eliminated, including agricultural barriers, and investment was opened up; the agreement also included side pacts on environment and labor. However, the agreement did not require the United States to curb its huge agricultural subsidies.
In 2001, Jordan became the next country with which the United States negotiated a bilateral FTA. The U.S. motive for negotiating this agreement was entirely political. The agreement, built on a system that the United States had earlier implemented, allowed goods manufactured in Jordan in “qualified industrial zones” to enter the U.S. duty free, provided that the product incorporated a specified level of raw materials and parts from Israel. The intent of both the qualified industrial zones and the FTA was to promote peace between Israel and its neighbors.
Shortly after the September 11, 2001 terrorist attacks, the United States launched an initiative to promote peace in the Middle East by announcing the intention to negotiate a Middle East Free Trade Agreement, which would extend from the Persian Gulf to the Atlantic Ocean. A flurry of negotiations and agreements resulted, including agreements with Morocco (2005), Bahrain (2006), and Oman (2009). The hope was that an FTA including both the Arab nations and Israel would promote peace in the Middle East, and by stimulating long-term economic growth, would discourage terrorism.
Note: NAFTA = North American Free Trade Agreement; CAFTA-DR = Central American Free Trade Agreement-Dominican Republic.
Source: World Trade Organization, “Regional Trade Agreements Information System,” http://rtais.wto.org/UI/PublicSearchByMemberResult.aspx?MemberCode=840&lang=1&redirect=1
As progress on the Doha Development Round and on the Free Trade Area of the Americas waned, the United States turned increasingly to bilateral negotiations. Robert Zoellick, the U.S. trade representative at that time, articulated a strategy of “competitive liberalization,” under which the United States would pursue bilateral and regional FTAs partially for their own sake and also to spur broader multilateral negotiations.
In September 2003, FTAs were signed with Chile and Singapore, and in August 2004 with Australia and five Central American Common Market nations (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua). The Dominican Republic subsequently joined this latter agreement, which became known as the Central American Free Trade Agreement–Dominican Republic (CAFTA-DR). Subsequently, FTAs were implemented with Colombia, South Korea, and Panama.
Currently, the United States has completed negotiations with eleven other countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) for a regional trade agreement called the Trans-Pacific Partnership (TPP). This agreement is now awaiting approval by the U.S. Congress before it can go into effect, and there is strong opposition to this agreement within Congress. Additionally, most of the candidates for President have come out in opposition to the TPP or expressed strong reservations. If the agreement does pass Congress, the TPP would build on agreements that the United States already has with Australia, Canada, Chile, Mexico, Peru, and Singapore and it would be an important template for future negotiations with other Asian Pacific countries and multilateral negotiations.
The United States is also in talks with the European Union for a trans-Atlantic FTA, and these negotiations could conceivably be concluded by the end of 2016. Given the enormous commercial importance of the United States and the EU, a successful negotiation would likely have enormous commercial impact.
The Making of Trade Agreements Policy
Congress has the power to regulate commerce with other nations under the U.S. Constitution, as noted above, whereas the president has the authority to conduct foreign policy. Accordingly, both Congress and the administration are heavily involved in the formulation of U.S. trade policy. The formulation of trade policy is very political, because changes in U.S. trade barriers and access to other markets have an economic impact on all states and congressional districts and on all industries—and hence have a large influence on voters.
As a result of the experience with the Smoot-Hawley tariff bill, Congress has often delegated authority to negotiate trade agreements to the president under what has been known as “fast track authority” and more recently as “trade promotion authority” (TPA). This authority was included in legislation establishing the WTO in 1994, but that authority expired on July 1, 2007. After eight years without trade promotion authority, Congress finally reauthorized it in early 2015 and the President signed it into law on June 29, 2015.
Even when the president does have trade promotion authority, however, Congress still exercises enormous power over the whole process of negotiating trade agreements. First, of course, Congress can refuse to approve the agreement; for example, Congress refused to pass the South
Korean agreement until improvements had been made to better protect the ability of the U.S. auto industry to do business in South Korea, and Congress refused to pass the Colombia agreement until more actions had been taken to protect workers’ rights. Second, in granting the president negotiating authority, Congress defines the objectives of the negotiations and the terms of the authority, including such aspects as the maximum depth of tariff cuts permissible and the number of years the president has this authority.
Third, Congress requires the administration to consult closely with the relevant committees as negotiations proceed, and it requires the Office of the U.S. Trade Representative (USTR) to provide detailed briefings on a regular basis to interested committees. If Congress has concerns, it can hold oversight hearings or even threaten to withhold appropriations through its budgetary responsibilities. Congress, of course, is very sensitive to the concerns of the public, and currently there are significant concerns among the broader public regarding globalization and the United States’ trade agreements.
Even when the president does have trade promotion authority and has consulted closely with Congress as the negotiations proceed, however, it often can be extremely difficult to obtain congressional approval of an agreement after negotiations have been completed. For example,
Congress delayed passage of the agreements with South Korea, Colombia, and Panama for several years and forced the administration to go back and negotiate some changes to these agreements. The reality is that some important segments of the private sector have to lobby aggressively and effectively for approval of the agreement and opposition by important segments needs to be minimized if the agreement is to gain Congressional approval.
Within the administration, the president sets the broad parameters of the U.S. approach to trade policy, including the negotiation of trade agreements, within the constraints set out by his legislative mandate. Until 1963, the key agency responsible for administering trade policy under the president’s guidance was the Department of State. Under congressional pressure, however, President Kennedy created a new Office of the Special Trade Representative (STR) in the White House. At that time, Congress believed that the Department of State was giving too little attention to U.S. commercial interests. The intent of the new office was to have a balance of U.S. commercial, foreign policy, and other interests.
In the Trade Act of 1974, Congress expanded STR’s responsibilities, gave the office a legislative charter, and made STR accountable to both the president and Congress. STR’s responsibilities were again expanded in 1979, and STR was renamed the Office of the United States Trade Representative, a White House office headed up by the U.S. trade representative, a Cabinet-level officer.
USTR chairs an interagency committee process that develops positions for negotiations and makes recommendations to the president in the case of significant differences in positions between agencies on the negotiations. This interagency process, which includes nineteen federal agencies and offices, operates at two levels. The Trade Policy Staff Committee (TPSC) is the senior civil service level and meets frequently to develop positions or options. When the TPSC is unable to reach a consensus, the issue is taken up by the Trade Policy Review Group (TPRG), which is at the undersecretary level. In the event that the TPRG is unable to reach a consensus or considers that the issue requires presidential approval, the National Economic Council will submit final options to the president for decision.
USTR has enormous power in this whole process. First, USTR chairs both the TPSC and the TPRG and determines what issues get taken up and how the options will be set out. Second, USTR has the lead in international negotiations, which gives it enormous leverage in the policy process. As a small agency of some two hundred people, USTR can develop its positions relatively quickly, well before larger agencies have had a chance to get guidance from the political level, which gives USTR substantial credibility in interagency debates.
Finally, and perhaps most important, USTR is mandated by U.S. law and historically has had extremely close relations with the congressional committees most responsible for trade policy: the House Ways and Means Committee and the Senate Finance Committee.
The career staff at USTR is generally at a very senior level. USTR normally recruits career officials who have made significant contributions in one of the agencies—such as the State, Treasury, Commerce, or Agriculture departments—or have had senior positions on a congressional staff, generally the House Ways and Means Committee or the Senate Finance Committee.
Although most career officials in USTR have had some economics, only a few have graduate degrees in economics, while an increasing number have law degrees. Most of the U.S. trade representatives have backgrounds in law and politics, as can be seen in Appendix 1. Many of the career staff at USTR believes that free trade is inherently good and that the more a trade agreement lowers trade barriers, the better.
Trade negotiating authority since 1974 has included a requirement that USTR establish advisory committees from the private sector. Currently, some seven hundred individuals serve on twenty-eight advisory committees, representing various industries, agricultural sectors, and other expertise, such as environmental interests.. Each of these committees is required to report to Congress on its views of any trade agreements negotiated by the administration. Other than the specialized committees, such as environment and labor, the advisory committees are heavily dominated by large multinational firms.
USTR’s role is to develop and implement a policy that promotes U.S. economic and commercial interests, within the limitations of domestic U.S. politics and with the need to gain an international consensus for trade liberalization. Because this is essentially a job of balancing objectives and constraints, few parties to the process obtain all they want. Historically, the view in USTR—only half-jokingly—is that if everyone is unhappy, then it must be the right policy.
The U.S. approach to trade agreements has achieved enormous success since the RTAA was passed in 1934. Trade liberalization, largely driven by the United States’ trade agreements policy, has benefited it and the world economically, and these U.S. agreements have advanced U.S. foreign policy interests.
However, today the outlook for continued multilateral trade liberalization is uncertain. The Doha Development Round negotiations have failed to reach an agreement after fifteen years of effort. The United States, the European Union, and Japan have been unwilling to make substantial changes in current agricultural programs, and the advanced developing countries—particularly India, China, and Brazil—have been unwilling to significantly reduce their industrial tariffs. Many other developing countries have been skeptical about new trade agreements, believing that they got a raw deal in the last trade round, the Uruguay Round.
Negotiations for bilateral and regional FTAs are also struggling. A major regional agreement sought by the United States, the Free Trade Agreement of the Americas, failed due to the unwillingness of the United States to open up its agricultural trade and that of its partners, particularly Brazil, to reduce tariffs on industrial goods and commit to disciplines on services. The South Korea, Colombia, and Panama agreements faced strong opposition in Congress and had to be renegotiated before Congress finally gave approval.
Presidential authority to negotiate agreements under fast track procedures was renewed in 2015 after a lapse of eight years. However, even when this authority was in place, some agreements barely passed Congress; for example, CAFTA passed the House by just two votes, and congressional leadership had to hold the vote open for close to an hour in order to round up the necessary votes.
The major U.S. trade initiative of the past five years – the Trans-Pacific Partnership – has successfully been negotiated but approval is uncertain given strong opposition in Congress and on the Presidential campaign trail.
Among the American public, support for trade agreements such as the WTO and NAFTA is at low levels. For example, a March 2016 poll by Bloomberg Politics found that 65 percent of respondents believed the U.S. should have more restrictions on imports while only 22 percent believed there should be fewer restrictions. And a June 2015 CNBC survey found that 50 percent of respondents believe our trade agreements have more drawbacks than benefits, with only 42 percent feeling that there were more benefits.
In fact, the multilateral system of trade rules so painstakingly developed since World War II is increasingly being undermined by trade barriers and distortions not addressed by the rules. The GATT/WTO system is based on the expectation that there will be a roughly level playing field in the trade arena between countries. However, some countries, such as China, are pursuing neomercantilist policies that challenge this assumption and injure the United States’ economy.
Roger Altman, who was the U.S. deputy treasury secretary from 1993 to 1994, expresses the current crisis in trade policy in stark terms: “The long movement toward market liberalization has stopped, and a new period of state intervention, reregulation, and creeping protectionism has begun. Indeed, globalization itself is reversing. The longstanding wisdom that everyone wins in a single world market has been undermined.”
The trade policy community argues that trade liberalization is like riding a bicycle: Either we move forward or we fall off. Today, the United States is clearly in danger of falling off. Like the last period of globalization, this era also has the potential to end badly. Governments have played a significant role in liberalizing trade since World War II, and they could just as easily play a role in shutting off trade.
Today, the United States needs a trade policy that recognizes that trade liberalization can have rough edges, and that liberalization needs to be consistent with other important national goals. It needs to be a policy that not only does no harm but also seeks to promote other important goals as appropriate. Such a policy needs to take the concerns of the critics seriously and respond with constructive action rather than just more talk.
 There are many definitions and aspects of “globalization,” including its economic, political, and social dimensions. My focus here is on the economic dimension; the KOF Institute defines economic globalization as characterized by “long distance flows of goods, capital and services as well as information and perceptions that accompany market exchanges.” KOF also publishes an index of globalization by country and region and year going back to 1970. “KOF Index of Globalization,” http://globalization.kof.ethz.ch/.
 The official name for this round of multilateral negotiations is the “Doha Development Agenda.” However, all other trade rounds have been called “rounds.” Because that terminology is more informative than “agenda,” the Doha negotiations are referred to as the “Doha Development Round” in this book. Trade negotiating rounds have generally been named after the city where the negotiations were launched or took place, and that was the case with the Doha Round, which was launched in Doha, Qatar. The Kennedy and Dillon rounds were exceptions to this practice and were named after a key individual responsible for the round.
 In 2001, the United States did have two bilateral free trade agreements already in place with Israel and Jordan, in addition to NAFTA.
 An important element of the 28 nation European Union today is that people can move freely from country to country within the Union. However, this is being increasingly questioned given the threat of terrorists moving freely from country to country.
 David Ricardo’s theory of comparative advantage was set out in 1817 in Principles of Political Economy and Taxation (London: John Murray, 1821).
 Robert Pahre, Politics and Trade Cooperation in the Nineteenth Century (Cambridge: Cambridge University Press, 2008), 160–61.
 Douglas A. Irwin, From Smoot-Hawley to Reciprocal Trade Agreements: Changing the Course of U.S. Trade Policy in the 1930s, NBER Working Paper 5895 (Cambridge, Mass.: National Bureau of Economic Research, 1997), 10.
 U.S. Department of State, http://future.state.gov/when/timeline/1921_timeline/smoot_tariff.html.
 See, e.g., Jude Wanniski, “Why Wall Street Crashed,” January 8, 2005, http://www.polyconomics.com/ssu/ssu-050108.htm.
 Chapter 474, 48 Stat. 943, 19 U.S.C., Sect. 350 (a).
 Irwin, From Smoot-Hawley to Reciprocal Trade Agreements, 28.
 For a description of the GATT multilateral trade rounds, see World Trade Organization, “The GATT Years: From Havana to Marrakesh,” http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm.
 The United States had envisioned an International Trade Organization, which would have broad authority for trade policy, economic development, investment, and other elements of commercial policy. Although the International Trade Organization was approved by the United Nations in 1949, President Truman withdrew it from congressional approval in 1950 when it was clear it lacked the votes to pass.
 The United States’ trade partners implemented the GATT as a treaty, which has a higher legal standing than an executive order. E.g., under U.S. law, a treaty overrides state law, whereas state law trumps an executive order.
 Roosevelt’s message to Congress asking that the Trade Agreements Act be renewed is available at http://www.presidency.ucsb.edu/ws/index.php?pid=16597&st=bretton&st1=#axzz1reBUWyfF.
 A customs union is formed by two or more countries that eliminate trade barriers between themselves and adopt a common external tariff, whereas the members of a free trade area eliminate barriers between themselves but each retains its own external tariff structure.
 The EEC began as a customs union between Belgium, France, Germany, Italy, Luxembourg, and the Netherlands. The EEC then expanded in 1973 to include Denmark, Ireland, and the United Kingdom; and it expanded again in the 1980s to include Greece, Spain, and Portugal. In 1993, the EEC further evolved from a customs union to become an economic union, renamed the European Union, with the intent to have common commercial regulations and the free movement of labor and capital. Austria, Finland, and Sweden joined in 1995. And in 2004 Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia joined. In 2007, Romania and Bulgaria joined, bringing the European Union’s membership to twenty-seven states, and Croatia became the twenty-eighth member in July 2013. (Source: http://europa/eu/about-eu/countries/member-countries/.)
 Interestingly, the first STR (later to be called USTR) was Christian Herter, who had been secretary of state two years previously, and was one of the major U.S. political figures in the early 1960s.
 The federal departments on the TPSC and TPRG are Agriculture, Commerce, Defense, Energy, Health and Human Services, Homeland Security, Interior, Justice, Labor, State, Transportation, and Treasury; and the agencies are the Council of Economic Advisers, the Council on Environmental Quality, the Environmental Protection Agency, the Agency for International Development, the National Economic Council, the National Security Council, the Office of Management and Budget, and, as a nonvoting member, the U.S. International Trade Commission.
 In 1981 newly elected President Reagan wanted to abolish the USTR and was sharply reminded by Congress that USTR was legislatively mandated.
 See USTR’s Web site for a listing of advisory committees and their recommendations: http://ustr.gov/about-us/advisory-committees.
 Polling data is available at http://www.pollingreport.com/trade.htm.
 Roger C. Altman, “Globalization in Retreat: Further Geopolitical Consequences of the Financial Crisis,” Foreign Affairs, July–August 2009, 2–7. at 2.
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