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Breaking The Trade Deadlock

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By Sebastian Mallaby
Monday, November 20, 2006

The trick in the new era of divided government is to find deadlock-breakers: issues that advance the agendas of both sides as well as the interests of the country.

In domestic economic policy, the best deadlock-breaker is tax reform. The existing tax deductions for health care, home mortgages and savings are outrageously skewed in favor of the rich, so Democrats should want to restrict them. Restrictions would save the Treasury billions, advancing the Republican goal of keeping marginal tax rates as low as possible.

In international economic policy, the right deadlock-breaker is less obvious. The two parties have opposing attitudes on the subject of trade: Republicans see it as a source of growth, Democrats as a source of inequality. This split is undermining the U.S. ability to play its traditional postwar role in driving global trade liberalization. And if anti-trade Democrats can win elections when unemployment stands at 4.4 percent, they may do even better next time.

To an extent that neither party acknowledges, the popular formula for bridging this divide is bankrupt. Ever since the passage of the North American Free Trade Agreement in 1993, this formula has consisted of jamming labor and environmental protection into trade pacts. But the real reason Democrats oppose trade has little to do with foreigners' stance on union rights or endangered species and a lot to do with the fact that trade harms some U.S. workers. Mexico could abide by every convention of the International Labor Organization and still undercut U.S. wages -- and Democrats who represent displaced American workers would still detest NAFTA.

So labor and environmental clauses will never reconcile Democrats to trade. To forge a bipartisan consensus, we need a different approach. Here is a three-part formula.

First, Democrats need to be honest about development in the poor world. It's wrong to pretend that labor regulations, whether inserted in trade agreements or adopted by governments, are a powerful engine of rising living standards in developing countries: Weak governments have no means of enforcing them. Some of the greatest anti-poverty success stories -- South Korea in the 1970s, Indonesia in the 1980s, China over the past 15 years -- took place in authoritarian countries where labor regulations were puny.

The real key to raising living standards is economic growth. And growth, in turn, is highly correlated with trade openness. One World Bank study showed that poor countries whose trade grew as a share of the economy recorded gains in income of 5 percent per year in the 1990s; by contrast, poor countries whose trade did not expand had no income gains whatever. So Democrats need to accept that holding up trade agreements to insert labor protections is going to harm workers, not help them.

Instead, Democrats should be frank about their real reason for ambivalence on trade, which is that some Americans suffer from it. This gets to the second part of the formula: Republicans need to get serious about the fact that, since 1980 or so, real incomes for the majority of Americans have stagnated. Republicans cannot expect support for trade unless they do more to compensate workers who get hit by globalization. They should be working with Democrats to improve the social safety net, linking progress on that front to continued trade liberalization.

Finally, both parties should cooperate on overhauling the nation's farm program, which comes up for renewal next year. The existing subsidy regime lavishes more than $20 billion a year on farmers, almost twice what gets spent on subsidizing college for poor children. About 70 percent of the money goes to the richest 10 percent of farmers, so the rhetoric about supporting struggling family farms is hogwash. This is corporate welfare for agribusiness, and neither party should defend it.

But a burst of farm reform would not just be good in itself. It would unlock trade liberalization. The Doha round of global trade talks, which promises benefits far greater than the bilateral and regional deals now pending in Congress, has bogged down over agriculture: The Bush administration proposed some cuts in subsidies, but not enough to shame the Europeans into offering serious tariff reductions, and so the whole deal faltered. If the new era of divided government produced a bipartisan push for farm reform, Doha could be resuscitated.

Of course, it's a long shot. But the Bush administration now has a pragmatic deal maker at Treasury who is passionate about trade, and the Democratic leadership in Congress has no particular love for farm subsidies. Meanwhile, anti-poverty groups are planning a lobbying drive on farm reform. Bread for the World, a faith-based alliance that claims to generate half a million constituency contacts with Congress annually, aims to focus half of these on the farm bill next year.

smallaby@washpost.com


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