Jared Bernstein, a former chief economist to Vice President Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of the new book 'The Reconnection Agenda: Reuniting Growth and Prosperity.'

 


President Obama and his family react along with Cuban President Raul Castro to an exhibition baseball game Tuesday between the Cuban national team and the Tampa Bay Rays at Estadio Latinoamericano in Havana. (Jonathan Ernst/Reuters)

The time has come to create a new category of person in this town: Someone who supports expanded trade and is all for globalization with a voice for working people here and abroad, but who has completely soured on so-called free-trade agreements (FTAs), as they too often squelch that voice.

The need for this new type of person comes from two sources. First, after years of studying, critiquing, trying to improve and even helping to promote FTAs (when I worked for the Obama administration, I helped with the South Korean FTA), I’ve come to view the process as impossibly broken and essentially corrupted. It’s opaque, the end product is incomprehensible to most people, the input (and thus much of the output) is imbalanced, the politics are a hot mess, some of what’s called “free trade” is actually protectionist, and while many elites remain committed to evermore FTAs, there’s little trust among the people.

Second, if you suggest any of the above, you’re quickly labeled as a knuckle-dragging protectionist, not fit for elite company.

But can such a creature as I’m proposing exist? If we want globalization and expanded trade to proceed apace, don’t we need FTAs?

No, and I’ll give you examples in a moment. But whether you like it or not, and I’m a big fan, the globalization toothpaste ain’t going back in the tube. In fact, given the depth of congressional gridlock, we’re a lot more likely to expand trade without FTAs than with them.

The most recent example of expanded trade without FTAs is front page news: Cuba. As President Obama admirably works to update our outdated diplomatic relations with Cuba, U.S. companies are figuring out ways to gain a presence there. I don’t foresee a Starbucks on every other corner of Havana anytime soon — the Cuban government will carefully control the economic opening to tap the much-needed benefits to their economy of expanding trade with a first-world country — but what we’re seeing unfold there is a microcosm of the type of nuanced trading arrangement that could never be negotiated with Congress. If it were up to many in that body, Obama wouldn’t even have gone there this week, and there would have been no way for any of our companies to follow him.

Instead, a U.S. company will build small, low-cost tractors there, U.S. hotel managers will manage an historic Havana hotel (one whose ownership will remain with the Cuban government, as foreigners cannot own property in Cuba), Cisco Systems is to “partner with a Cuban university to develop an Internet technology academy and … General Electric is working on an aviation and energy deal.”

That’s all without an FTA anywhere in sight, not to mention an antiquated embargo still in place.  The extent of government control may well limit the benefits of trade to many Cubans, at least initially, and I am not suggesting that more trade alone is the solution to the oppressive aspects of their regime, but this is progress.

On a much larger scale, there’s China, with whom we’ve never had an FTA. In terms of total trade in goods, China was our largest trading partner last year. Of course, we’ve long bought a lot more from them than they’ve bought from us. We ran a goods trade deficit with China to the tune of $366 billion in 2015, about 2 percent of our gross domestic product, which is about where it has been since 2010.

With trade flows and deficits of those magnitudes, we must manage our trade with China. In the past, that’s meant trying, often fruitlessly, to prevent them from holding down the value of their currency, a tactic that provides their exporters with a significant price advantage over ours. Their currency looks reasonably aligned right now, but the value of currencies of some other countries (e.g., Singapore, Taiwan, and Korea) are substantially misaligned to the low side.

Surely, tackling this portentous currency problem with large Asian exporters would require FTAs, right?

To the contrary, our trade negotiators explicitly tell us that they cannot get enforceable currency rules into an FTA, with the Trans-Pacific Partnership (TPP) as the most recent example. The other countries with whom we’re negotiating simply won’t allow it, which should give you a sense of its importance.

The answer must instead be for the United States to take action outside of FTAs, creating rules to impose countervailing duties, for example, on exporters who manage their currencies to gain an unfair trade advantage (the International Monetary Fund has established ways to identify currency manipulation).

What about the other stuff we do in trade agreements? Well, some of what’s in there, like protecting patents that artificially boost drug prices, we’re better off without (our poorer trading partners are particularly better off without such protectionist measures). Some other initiatives sound good but lack teeth. The TPP, to its credit, says signatory countries must have minimum wages, but it says nothing that would prevent a country from setting its wage floor at the equivalent of one cent.

How about dispute settlements? That’s been a big selling point for FTAs, as investors hesitate to do business with a country like Vietnam absent the confidence that the rule of law will protect their investments. It’s a fair point, but it must be weighed against the notion of multinational companies suing governments through a tribunal that supersedes sovereign law in a system that allows no appeals. TPP cheerleaders point out that the United States has never lost one of these cases, so why worry? But we should worry about the ability of emerging countries to enact product, environmental and labor protections that multinationals might not like (read this useful discussion of such concerns).

Moreover, from the perspective of creating this new creature that supports trade but not trade agreements, the key question is do dispute settlement rules in particular, and FTAs in general, actually boost trade and trade flows? The answer is far from obvious, and my read of the evidence is that trade will continue to expand with or without FTAs. Do not conflate trade with trade agreements.

The determinants of trade flows are many and varied. They include exchange rates, relative incomes and growth rates, political regimes (as in Cuba), tariffs and non-tariff barriers, like currency manipulation or arbitrary rules applied to imports. In a perfect world, perhaps we could negotiate these issues in ways that took account of the needs of all stakeholders here and abroad, far beyond those of the investor class. But in the real world, that hasn’t happened.

That’s not a roadblock; it’s a new opportunity. We must continue to try to open markets, as may be occurring in Cuba, and to pressure existing institutions, including the World Trade Organization and the International Monetary Fund, to facilitate expanded trade without disempowering working people. Here in the United States, we must simultaneously pursue more balanced trade while helping to build the high value added supply chains that could help revitalize our manufacturers.

Would politicians oppose this idea of more trade without trade agreements? I doubt it, at least not the ones who aren’t simply doing the bidding of the multinationals. As one high-ranking, pro-worker politician from a state with a lot of exports told me, “I’d love to never again have to vote for an FTA.”

The TPP could still squeak through, though I doubt it. But longer term, I suspect this politician will get his wish. The era of FTAs is likely behind us for now. I know for a fact that there are many who feel as I do — supportive of trade but deeply dissatisfied with FTAs. Join us in injecting a new, progressive option into an old, stale D.C. debate.