Trade Policy Today: What’s New and What’s Not

Show Notes

Populism in Place: The Economic Geography of the Globalization Backlash A working paper by J. Lawrence Broz, University of California, San Diego; Jeffry Frieden, Harvard University; Stephen Weymouth, Georgetown University

The Hidden Wealth of Nations by Gabriel Zucman

Failure to Adjust: How Americans Got Left Behind in the Global Economy by Edward Alden

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Transcript

Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the audio before quoting in print and write yeutterinstitute@unl.edu to report any errors. Transcripts will be posted within one week of the show.

Jill O'Donnell: Welcome to Trade Matters, a podcast of the Clayton Yeutter Institute of International Trade and Finance at the University of Nebraska-Lincoln. I'm Jill O'Donnell. Our guest today is Edward Alden, Ross Distinguished Visiting Professor at the University of Western Washington and Senior Fellow at the Council on Foreign Relations. Edward Alden, thanks for being here today on Trade Matters. We appreciate it.

Edward Alden: Great to be with you, Jill. Thank you.

Jill O'Donnell: Sure. So I'd like to start with a broad, big picture question for you. I know that you're a longtime observer and thinker and writer of trade policy, and so I'd like to start with this. It seems that various pieces of trade policy have become more intertwined over the last year to 18 months or so. So if a person is looking at a particular trade policy in one area or in isolation, you might be missing something. And I think the steel and aluminum tariffs are one example. As you know, the US imposed these tariffs in March of 2018 on a national security basis, which triggered cases at the WTO. But the WTO appellate body is on the verge of collapse by the end of this year for other reasons. Do you think that trade policies that may be aimed at different areas or outcomes are more intertwined now than before or not?

Edward Alden: Well, I think, I mean trade has always been deeply intertwined with other parts of the economy and the government's economic policy. I mean, at the end of the day, the goal of trade is to try to maximize the well-being of Americans, raise their income, make it less expensive for them to purchase high quality products and hopefully do the same for other countries around the world. And so it's tied to a lot of different aspects of economic policy. I think what we've seen, particularly with the Trump administration is it being, is trade being tied in very closely to matters of security policy. So the claim that steel and aluminum imports were in some way threatening US national security, the possibility that we'll see tariffs on autos for the same reason, this administration has tied trade much more directly to national security than we had seen previously. You see this particularly in the relationship with China that we can talk about more. So I think that's one broader linkage. And I think the other one that you alluded to in the question is the link essentially to American sovereignty. I mean, what we've seen over the sort of 50, 75 years leading up to the Trump administration was the US and other governments gradually seeding a little more decision making authority to international bodies, particularly the WTO. The same with we, the United States, other countries have entered into these rules, and we agree to be bound by the decisions of arbitration panels in the WTO as to whether we're complying with those rules and whether other countries are complying with those rules. This administration, the Trump administration sees that as a fundamental threat to American sovereignty, sees it as weakening the American position as the strongest and most powerful economy in the world, and really wants to go back to an earlier era of rules in which strong countries basically did what they wanted with respect to international trade rules and practices. And so we're seeing trade now get tied up in this larger debate over the freedom of the United States to do what it wants to do in the international economy.

Jill O'Donnell: And I wonder if that debate seems new to you, Ted, as well, or how new? So this reminds me of something that you wrote about in your book, Failure to Adjust, which came out in 2017. And you mentioned just a few minutes ago, the idea of maximizing the well-being of Americans, and then the idea of American sovereignty, and how we interact as a country with international institutions. You, in your book, Failure to Adjust, talked a lot about something called the Peterson memo written by a native Nebraskan, who's originally from Kearney, Nebraska. Peter G. Peterson, he served as an advisor to President Nixon and wrote a very prescient memo in 1971 at the request of President Nixon. And a lot of these themes appeared in that memo. A central argument of that memo as well was that the US and the world, even at that time, was slow to realize structural and competitive challenges to US economic dominance that were emerging. You featured that memo very prominently in your book. Tell us a little bit more about that, and why that is, and why it's still so resonant today.

Edward Alden: Yeah, I mean, to start with the outside of your question? None of this is particularly new. I mean a lot of what we're seeing happen in international economic policy now from the use of tariffs to protect domestic industries to something of a currency war going on now between the United States and China and Japan and Europe have a role in it as well. These are very familiar things from the 1920s and the 1930s. I think the assumption in the United States has been for a long time that, well, will we learn from those mistakes in the 1920s and '30s? Countries who were very inward looking, trying to maximize their own economic benefits at the expense of other countries, so-called bigger than neighbor policies. And I think the assumption we've all lived with for a long time is that the United States as the world's most powerful country had learned the lesson from those mistakes and other countries who were going along. The challenge that Peterson identified, and this is way back in the 1970s, is that the US became comfortable with globalization at a period when it was by far the world's dominant economy. I mean in the 1960s, we didn't actually trade all that much with the rest of the world, not because the US was a protected economy, not because our tariffs were particularly high. They weren't part of the world. They were quite low. It's just we made everything better than every other country. Our cars were better, our washing machines were better, you know, our farm equipment was better. Everything we made better than everybody else.

When Peterson wrote his memo to Nixon in 1971, Nixon had appointed him as his chief international economics advisor, which was actually kind of a new position in the government recognizing the growing importance of the international economy. Peterson said, look, that kind of golden era post World War II in which we're the dominant economy, that's beginning to wane already in the early 1970s. The Japanese are coming back. The Germans are coming back. Peterson was quite prescient, and he said he foresaw what he called the rise of the East Asian rim as being a new center of world economic power. And this was long before China was even a blip in terms of its economic capabilities. And he said, look, we in this country are going to have to adjust to a more competitive world economy, and that means we have to start thinking about things we've taken for granted. You know, is our education system working well enough to create the most highly educated, skilled workforce in the world? Do we have world class infrastructure so that we're getting our products to market efficiently, and we can compete effectively with other countries? Are we leading the world in research and development so we're on the cutting edge of new products? And then I think particularly relevant to the moment we're in now, are we recognizing for all of the benefits of trade, it has some negative impacts in certain places. You know, if you were in a, you know, furniture making town or a textile making town in North Carolina, NAFTA was not a good thing for you. And China's coming to the WTO was not a good thing for you. And we've seen in the economic research in the last decade that in particular China's entrance in the WTO had a pretty devastating impact on manufacturing in the heartland of the United States. These were the places at the end of the day that sent the 2016 election to Donald Trump because Trump went out, and he said, look, trade has has been bad for Pennsylvania. It's been bad for Ohio. It's been bad for Michigan. And that was a message that really resonated. And Peterson foresaw that. He said, look, we can't pursue a policy that's in the general interests of the United States freeing up trade and allows certain places in the country to pay all the costs. We've got to do things to help those communities. And that, I think, was the biggest failing we as a country made. And you can't say we weren't warned because Peterson wrote his memo in 1971.

Jill O'Donnell: Yes. And I saw that it actually sold 10,000 copies, as you note in your book.

Edward Alden: It was quite well written. Peterson, he was an elegant writer, and it got some attention at the time but never really sort of worked its way into the thinking of people at the highest levels of the government, unfortunately.

Jill O'Donnell: So, as you mentioned there just a moment ago, Ted, discussions about trade policy and its impacts often quickly turned to discussions of domestic policy and things like trade adjustment assistance or policies that deal with US domestic economic competitiveness. How do you think about those issues now, and where do you see, which areas do you see or do you think that we should be most focused on when it comes to domestic policies that can impact how we think about trade or how the role that trade plays in our lives?

Edward Alden: I mean, and this is actually sort of good news, the list is really long. I mean if you look at some of the debates going on among the democratic candidates right now for president in 2020, there are a lot of interesting ideas floating out there. You know, Mayor Pete Buttigieg recently released a set of proposals for reviving rural America that draw on a bunch of ideas that I've been working on at the Council on Foreign Relations. A lot of other people have been working on having to do with, you know, expanding rural broadband, updating and modernizing, retraining, and trade adjustment assistance. Looking at the use of immigration policy to attract skilled immigrants to places in the country that are seeing depopulation and falling housing prices, using tax incentives in intelligent ways to try to attract businesses to places that have been struggling. So there's a whole set of good ideas out there. I worked with former Obama commerce secretary, Penny Pritzker, and former Michigan governor, John Engler, on a report for the Council of Foreign Relations that came out in 2018 looking at the impact of automation and globalization on the labor market. And we have a whole broad range of recommendations for things that can be done through domestic policy to try to address some of these concerns. There are a lot of good ideas out there. We unfortunately have not had very functional government, and this is not partisan. This is, you know, either party. We haven't had very functional government at the national level for a long time now.

A lot of interesting things happening at the state level- a lot of smart governors out there, a lot of things happening in a bipartisan way at the state level. National Governors Association has had some great initiatives on infrastructure and worker retraining and skills for the future and things like this. But we really do need more national leadership on these issues because they speak to how do you, how do we as a country address disruptions in the labor market, whether it's caused by competition from China or Mexico, or it's caused by automation, the coming of robotics and artificial intelligence, which are radically changing the sorts of jobs people do, and in many cases throwing people out of work. And we have to figure out more effectively as a country how to respond to that challenge, or people are going to get upset. And when people are upset they respond in ways that can sometimes do some significant economic damage.

Jill O'Donnell: Do you think that there's too much of a focus on the causes of those challenges that distracts from focusing on what the solutions could be, no matter the cause?

Edward Alden: I actually, that's a great question. I actually do. I think the climate, I mean we, there's, you know, endless debate in the economics profession over, you know, is trade causing the disruption, or is technology causing the disruption or changing consumer preferences? I think that matters a lot less than just acknowledging that changes, we live in an era of very rapid change when, you know, if you're looking at a 50 year career, you're going to have to modernize your skills pretty regularly. The nature of your job is likely to change multiple times. You're likely to hold multiple jobs with different organizations. And we've got to have a system that allows Americans to successfully navigate that journey. And I think actually those measures are a lot more important than debating exactly what the cause of the disruption is. We know the disruption's there. The question is what are we going to do about it?

Jill O'Donnell: In your book, Failure to Adjust, you wrote toward the end of the book that the federal government should give states and local development officials a much bigger voice in setting Washington's international negotiating priorities. What would that look like?

Edward Alden: Well, I, what I recommend in the book, and there'd be different ways to do this, but there's an elaborate advisory structure for US trade policy, in order to give federal government information it needs to set priorities in international trade negotiations. Almost all of that now is coming from the corporate sector in one way or another, you know, the pharmaceutical industry and the steel industry and the aircraft industry and the auto industry, semiconductors, you name it. They all have a powerful voice in the making of US trade policy. There's nothing per se wrong with that, but the problem is that even the best US corporations now are not particularly loyal to the United States. They're global corporations, loyal to their shareholders. They're looking for the best returns, investing wherever those returns are likely to come from. And so the result is you can have policies that are quite good for the corporations, but not necessarily particularly good for the United States.

One of the reasons I argued for a more powerful state and local role is that this is what governors and mayors are doing. They're trying to attract investment to their states and communities. They're trying to develop a workforce that will make companies want to invest in those places. They're looking for export opportunities abroad and trying to help companies in their states succeed in global markets. And so what I argued is that ought to be a much stronger input into the making of federal trade policy than just what the corporations want to see, and the Canadians have a pretty good structure this way in which the provinces have a powerful role in shaping federal trade policy in Canada. So I argued in the book for really kind of restructuring the whole advisory system for federal trade policy to give state and local officials a much stronger voice.

Jill O'Donnell: And do you see any prospects for that happening?

Edward Alden: I mean, this is, as you know, and as your listeners will know, a very odd and potentially quite disruptive moment in trade policy. I mean, the Trump administration is busy tearing down the structure of rules in which trade has operated for many decades now. And I think there are sort of broadly two possibilities that come out of that. One is simply the return to a sort of more chaotic ad hoc world in which, you know, in the United States and other countries that will negotiate one off deals here and there. We'll really move back to the sort of situation we were in really a century ago. The other possibility, I think, is people will look for creative ways to move forward and build a more durable foundation for the trading system. And I think here in the United States, that means restoring some kind of confidence that US trade policies actually serving, broadly speaking, the interests of Americans. And I think, you know, if you had a system in which state and local officials who are a lot closer on the ground to the concerns of their constituents, very often had a bigger voice. I think that would help. Whether that will happen or not, I don't know. I know we're right now we are in a period of tearing down rather than building up. So all of these proposals, mine included, for building something new are aspirational at the moment. And none of us really knows whether these kinds of things are likely to happen or not.

Jill O'Donnell: So let's talk for a moment then about the World Trade Organization has a long standing structure that has helped facilitate international trade for a couple of decades, and before that, the GATT, the General Agreement on Tariffs and Trade, almost a year ago now in October of 2018. When you spoke on a panel at the Brookings Institution, you said quite forthrightly, "I think the WTO is dead." And I wonder, tell us what prompted that assessment, and do you still hold that view?

Edward Alden: I do. I would get rid of the, I think a qualification at this point. What prompted that assessment was that the WTO is a continuation of the old, I mean just briefly, not to get into the acronym soup too much, but you know, the General Agreement on Tariffs and Trade was a fairly loose structure established after the Second World War in which countries, initially mostly Western Europe and the United States and Japan, and then gradually more and more of the world, got together and agreed on a reciprocal basis to cut their tariffs to try to increase the flow of trade globally. And then over time it got involved in other rules, things like agricultural subsidies, which will be very familiar to your listeners in Nebraska and trying to restrain distortive government policies of one sort or another. But basically it was a loose set of rules, and adherence was voluntary, right? If you broke the rules of the GATT, there was no penalty unless you, you know, unless, you know, the United States or Germany or whatever country was involved, unless these countries allowed themselves to be penalized. There was no way for the GATT to enforce the rules that countries had agreed to. That changed with the creation of the WTO in 1995. For the first time, the United States and the rest of the world agreed to assist them of binding dispute resolution. If you broke the rules of the WTO, if another country brought a complaint and won, then it was entitled to slap tariffs on your exports in order to compensate for the fact that you had violated the rules. That was, if you think about it from the perspective of international relations, which is what I studied in graduate school, that was in a utopian undertaking. For the most part, countries don't give up their sovereignty. They don't allow international tribunals to decide whether their actions are justified or not. And the basic condition of international relations is state autonomy. And countries do what they have the power to do. So it was in that sense an amazing creation, and for about 20 years or so worked pretty well. But I don't think at this point there's going to be any consensus coming from the United States or anywhere else in the world to reconstruct that system of binding dispute settlement. I mean you mentioned right at the outset in your first question, steel and aluminum tariffs. At some point the WTO may rule on whether those tariffs are permitted under WTO rules. If it rules against the United States, the United States will ignore the ruling. And it's quite likely that there will never be a final ruling in any case because what they call the appellate body, which is the second level of appeals and the final level of appeals in the WTO, is about to cease functioning because the United States has been blocking the appointment of new judges. So the WTO as a structure of rules with a binding system for resolving disputes is dead. Possibly some kind of halfway house between the GATT and the WTO can be resurrected. We'll see. But I think when the history is written there, there will have been that sort of 20 plus year period when the system functioned reasonably well. And then I think the history books will record that it ceased to exist somewhere around now.

Jill O'Donnell: Bold prediction. Okay. Thank you, Ted. You called the binding dispute resolution system a "utopian undertaking" because countries do not typically voluntarily give up sovereignties. So do you think that sovereignty is always going to get in the way of creating freer and better and more trade between countries?

Edward Alden: I mean, I think it will, and in some respects it should, right? I mean if you go back to the creation of the original GATT system, it was a compromise. And it said what we want to do is free up trade consistent with the advance of domestic welfare. I mean trade is good, and it has a lot of value in and of itself, certainly in terms of binding countries more closely to one another. But at the end of the day its purpose is to make citizens and countries around the world better off than they would have been otherwise. And so there's always a balance between the goal of freeing up trade and the goal of domestic welfare. And sometimes they overlap very neatly, and everybody's happy. But other times there are some real conflicts. I mean, you know, again, getting back to Nebraska, the question of farm subsidies, right? I mean we have a elaborate farm subsidy regime in this country that goes back to the 1930s. And we can debate where it makes sense and where it doesn't. In a lot of cases, that regime runs afoul of international trade rules because under international trade rules, you're not supposed to give your farmers special advantages by subsidizing them. And so there's always this question of where's the balance, right? How much do we want to create a system of rules whose goal is to maximize trade flows around the world? But where do we need to balance that off with particular government interventions that are aimed at enhancing the welfare of particular parts of the population? And that's constantly a dialogue that needs to be going on. So I'm certainly not a proponent of ceding all government sovereignty in the interests of expanding trade by whatever means possible. I think there needs to be a balance. And there are those that argue, I think there were other causes to some of the backlash against trade, but there were those who argue that the system got too much out of whack, that governments ceded too much of their ability to do things that improve domestic welfare just in the interest of expanding trade. So it's a delicate balance.

Jill O'Donnell: It is. And you mentioned agriculture and of course that is fundamental to the economy of Nebraska. And as you know, American farmers have faced retaliatory tariffs on their products for over a year as a result of US trade tensions with China and others. But focusing on China, I think there are a lot of people who perceive a kind of fundamental unfairness in the US, China economic relationship and seem to think that something should be done by the United States to address that. However, farmers have been in a sense caught in the middle of this, these tensions. And I wonder how do you think agricultural producers should think about that at this time?

Edward Alden: Well, I think what they should think is yes, absolutely, something should be done about China, but that doesn't mean doing something stupid. And unfortunately what we've done is something stupid, which is operating unilaterally as a country to slap ill-considered tariffs on Chinese exports, which have resulted in Chinese retaliation, targeted primarily at American agriculture. And the result is that the American farmers are going to lose markets, not just in the short run, but in the long run, in the largest country in the world, and one that is getting wealthier and whose demand for agricultural products is going to grow. The Chinese are going to find other sources. They're going to go to Brazil. They're going to go to Argentina. They're going to go to other places. They're not going to allow themselves to be so dependent anymore on American exports. And that's going to be extremely costly for American farmers. I mean, we can have a larger conversation about some of the challenges with China. I think they are very real, primarily with respect to leading edge technologies where the Chinese have a pretty sophisticated system for obtaining and copying and re-engineering the best American technologies and the best German technologies and other countries as well. And that does pose a real challenge. But tariffs are a blunt and unsuccessful instrument for going after that problem. So I'm assuming, you know, I've lived on both coasts this year, on the East coast and the West coast, and I have been shocked at the tolerance of the agricultural community for this president's approach. I don't think it was ever likely to work. I think they are the big losers from that approach. It's not to say China's not a big problem, but you have to address it in a far more sophisticated way than this administration has been doing.

Jill O'Donnell: So we've talked a lot about challenges in trade policy, both longstanding and more recent. I wonder, when you look around the globe, do you see any positive developments that make you hopeful about international trade?

Edward Alden: One of the very interesting developments has been to watch the rest of the world rally around this modern trading system that was championed by the United States and created largely on an American vision. The rest of the world is basically the same. Look we kind of like most of this, right? We liked the WTO, and you have the Canadians and the Europeans and the Japanese and others trying to come up with proposals to address some of the American concerns about the dispute resolution system, see if they can find a way to move forward. You have these same countries continuing to pursue ambitious regional trade agreements United States, pulled out of the Trans-Pacific Partnership right at the beginning of the Trump administration. Now there are 11 countries, went ahead and concluded and moved forward with it anyway. I mean that's another place, unfortunately for Nebraska farmers where US farmers are being disadvantaged. Japan has cut its tariffs on agricultural imports for exports coming from Canada and Australia and New Zealand, but not for the United States because the US is out of the TPP. The Europeans have concluded a new trade agreement with South America. The Mexicans have been very active. So you see the rest of the world actually embracing the system even as the United States has been turning away from it. What concerns me is just in pure power terms, if you've got the, you know, if you've got the two elephants in the world and the trade system, the United States and China, fighting with each other constantly, the rest of the world kind of gets trampled, and you're seeing that. I mean, Europe's hurting. Japan is hurting. Africa is hurting. Latin America is hurting. This trade fight between the United States and China has knock on effects around the world. So despite the good intentions of other countries, despite their active efforts to try to keep the system alive, in sheer power terms, they're there in a weak position, I'm afraid.

Jill O'Donnell: Last question for you today, Ted, which I've asked every guest and will ask every guest on this podcast, and that is, what have you read lately about trade, a book or an article that is most striking to you or most illuminating for you?

Edward Alden: Well, I'd sort of mention two things. One is an article that was just published recently in International Organization by three political scientists, Lawrence Broz, Jeff Frieden, and Stephen Weymouth called Populism in Place, the Economic Geography of the Globalization Backlash, which has new evidence just reinforcing that we have to think about trade in local terms, not just national terms because the impact differs significantly from place to place. And if you're not, if policy makers are not paying attention to both the positive and negative impacts in different parts of the country, there will be unhappy political consequences from that. So that was a powerful article.

Other things I'm reading are sort of more broadly, I mean you asked at the outset about the connection of trade to everything else. I've just been reading Gabriel Zucman's book, the Hidden Wealth of Nations about the growing use of tax havens around the world, both by individual wealthy individuals and by corporations. And so, you know, it's important to remember that the modern global economic system is not just a trading system. It's a financial system, and it's creating a lot of challenges in terms of, for instance, governments effectively taxing either wealthy individuals or corporations to raise the revenue to do these other things we're talking about. I mean, if you're talking about domestic initiatives to try to soften some of the downsides of globalization and automation, that costs money. Governments have to be able to raise taxes to do that. But corporations, wealthy individuals are incredibly successful at moving their money around to different places in the world in order to either avoid or evade taxes. And so I think, getting back to your opening question, it's very hard to understand trade unless you understand some of these other interconnections. So that's what I'm reading at the moment.

Jill O'Donnell: Yes, you've drawn a lot of those connections for us today, Ted Alden, and we thank you very much.

Edward Alden: Great to be with you, Jill. Thank you very much.

Jill O'Donnell: That's it for this episode of Trade Matters. Hear more from Edward Alden in person or via livestream on October 10th when he will deliver keynote remarks at a conference called What's on the Horizon for International Trade hosted by the Yeutter Institute in partnership with the Nebraska Farm Bureau. A big thank you to Bryce Doeschot, Haley Apel, and Brianne Wolf for helping produce this podcast. Join us next time for a conversation with Michael Salerno, Vice President of Global Banking at First National Bank.

Please subscribe to Trade Matters on iTunes or Stitcher. If you have ideas or topics you would like to hear about on Trade Matters, we'd love to hear from you. Send us an email at yeutterinstitute@unl.edu, or follow us on Twitter at @YeutterUNL [corrected.] Opinions expressed on Trade Matters are solely those of the guests or host, and not the Yeutter Institute or the University of Nebraska-Lincoln.