PPI | Political Memo | February 25, 2002
Trade Debate in the Senate
By Edward Gresser
Trade policy has two sides. On one hand, trade liberalization creates growth and raises living standards by opening foreign markets and reforming the U.S. trade regime. On the other, it produces a more competitive and demanding economy at home. Sound trade policy thus, while opening markets at home and abroad, must also help "expand the winner's circle" at home by helping workers equip themselves with the tools to succeed as competition grows.
Last year's trade debate dealt in essence with the first half of this agenda. In December, the House passed a "Trade Promotion Authority" (TPA) bill with a strong negotiating agenda, including a Free Trade Area of the Americas, a new WTO negotiating Round, and other agreements. The House did not, however, make any major effort to strengthen the domestic side of trade policy.
In coming weeks, the Senate has a chance to improve on the House's work. It will take up both a TPA bill introduced by Senators Max Baucus (D-Mont.) and Charles Grassley (R-Iowa), and a significant reform and expansion of the Trade Adjustment Assistance (TAA) program -- the principal means of assisting workers affected by foreign competition -- designed by Baucus along with Majority Leader Tom Daschle (D-S.D.) and Senator Jeff Bingaman (D-N.M.). Together, these represent a strong and comprehensive agenda for the next five years of U.S. trade policy.
The first question for any TPA bill should be whether it sets the right agenda and deals with the right issues. Three topics in particular deserve examination: the agreements the bill authorizes, the policy issues it is meant to solve, and the way it deals with the controversial relationship between trade, labor, and environmental policies.
The Baucus/Grassley bill has two major practical goals: completion of a new WTO Round and creation of a Free Trade Area of the Americas. (WTO accession for Russia is a goal of comparable importance, but one requiring no change in U.S. trade policies other than a grant of permanent Normal Trade Relations, and thus outside the scope of TPA legislation.) The bill also reserves the option for other trade agreements at less ambitious levels. Each of these has its own strategic and commercial value:
Free Trade Area of the Americas (FTAA): Negotiations for the FTAA -- a project envisioned by Democratic presidents from Franklin Roosevelt through John F. Kennedy and Bill Clinton -- began at the second Summit of the Americas in Chile in 1998. Set for completion at the end of 2004, the talks are now moving to the crucial stage, at which governments file proposals for the final text in such areas as market access for industry and agriculture, subsidies, services liberalization, electronic commerce, the shape of dispute settlement, and other chapters.
WTO Round: The new WTO Round, launched last November in Doha, will center on reform of trade in agriculture and services. It will also cover trade and the environment, anti-dumping policies, and some subsidy issues as well as industrial market access. This will also be the first round in which new WTO members -- notably China and Taiwan, but also new democracies in Europe and Asia like the Baltic Republics, Albania, Croatia, Slovenia, Bulgaria, and Mongolia and others -- take part. It offers commercial opportunities at least comparable to those of any previous trade round, and can make a significant contribution to economic reform and integration for the Balkans, Eastern Europe, and other regions transitioning from communist to market-based systems.
Other Agreements: The bill specifies no other goals (except free trade agreements with Chile and Singapore, where talks began under the Clinton administration and are now nearly complete.) However, it enables administrations to propose to Congress further agreements when commercial, strategic, or policy reasons justify them. Central America appears to be the likely first partner; Asia, where China has begun an ambitious set of regional negotiations and the United States may risk falling behind as the decade continues, should receive more attention.
These agreements have major political and strategic implications. The FTAA in particular seems likely to decide the fate of America's relations with its neighbors in the Western Hemisphere for decades. Congress' vote, projected for 2005, appears likely either to create a community of democratic government and shared destiny throughout the hemisphere, or a renewed atmosphere of embitterment and anti-Americanism in Latin America. But while they have strategic consequences, trade agreements are in the most direct sense economic policies aimed to create better jobs and raise the standard of living.
Here, the Baucus/Grassley bill's agenda will address at least four major issues:
Services Trade and Electronic Commerce: First, trade policy in high-tech industries -- especially services, but also all users of e-commerce -- has fallen behind technological change. Propelled by computers, global telecom networks, and the Internet, U.S. trade in services like law, basic and value-added telecom, finance, media, and others has grown by almost $200 billion since the WTO was created in 1995. But neither the WTO nor any bilateral or regional trade agreement (except that with Jordan) addresses e-commerce; and though new WTO members like China, Albania, and Taiwan have made wide commitments, the WTO has effective services agreements only in telecom and finance. U.S. businesses in these fields thus not only face existing market barriers, but are at risk of new forms of discrimination. The new agreements can reduce barriers now in place and prevent new ones from arising.
Agricultural trade reform: Second, agriculture is the goods sector in which highly competitive U.S. producers face the highest and most complex trade barriers. In most industrial fields, subsidies are limited and export subsidies banned; in agriculture, using figures from the United Nations Food and Agriculture Organization and the WTO, annual agricultural trade is about $300 billion; total trade-distorting subsidies by governments may total one-quarter or even one-third of this, and Europe provides over $8 billion a year in export subsidies. Likewise, agricultural tariffs are much higher than tariffs on manufactured goods or natural resources, averaging 40 percent worldwide while industrial tariffs range from 2 percent to 5 percent for wealthy countries and somewhat higher for developing countries. And non-tariff trade barriers like quota policies and state trading requirements have all but vanished from trade in manufactures, but remain common in agriculture.
Unfair Trade Practices: Third, recent years have raised sharp controversy over subsidies and other policies contributing to overcapacity in manufacturing. The principal U.S. vehicle for combating them is the anti-dumping law. The law has been criticized on grounds of economic theory, notably by Alan Greenspan, and while offering some relief to domestic industry, appears to be a second-best remedy. Even frequent anti-dumping cases by steel firms -- 200 since 1980 -- have failed to prevent a crisis affecting the entire industry; meanwhile, steel-using firms complain that the cases raise costs and hurt their competitiveness. Ultimately, trade negotiations should address the more basic policies at the root of such persistent problems. Baucus/Grassley includes new procedural requirements for any changes in the U.S. laws, and adds to the House bill a negotiating objective of eliminating or reducing subsidies, cartelization and other practices.
U.S. Trade Regime: Finally, the U.S. trade regime is flawed and needs reform. America liberalized its economy considerably under President Clinton, and remains the world's most open large market. But the U.S. trade regime -- in particular tariffs -- still tilts steeply against the poor. While overall U.S. tariffs average about 2.5 percent, our tariffs on clothes and shoes average around 18 percent and 10 percent respectively, and often rise higher.1 This hurts poor Americans -- who spend more of their money on these necessities -- far more than the rich. It also means poor countries, where most urban jobs are in light manufacturing, face higher barriers than wealthy nations that specialize in information technology, services, or similar fields. By reforming these policies, the new trade agreements can thus help raise living standards at home, and treat people in the poorest countries a little more fairly.
Finally, the Baucus/Grassley bill deals reasonably with the most controversial debate of the 1990s: treatment of labor and environmental policies in trade agreements. Most notably, it goes well beyond the Roth/Moynihan 1997 fast-track bill in this field to envision labor and environmental chapters for future trade agreements modeled on the recently approved U.S.-Jordan Free Trade Agreement.
1997 Bill: The 1997 bill, endorsed by the Clinton administration, included one negotiating objective on "Regulatory Competition." This called for prevention of "the use of foreign government regulation and other government practices, including the lowering of, or derogation from, existing labor (including child labor), health and safety, or environmental standards, for the purpose of attracting investment or inhibiting United States exports."
Baucus/Grassley Bill: The 2002 Baucus/Grassley bill deals with a much wider range of issues, including new procedural labor and environmental review requirements, reform of investment provisions in current U.S. trade agreements, and inclusion of labor and environmental provisions in future agreements. Its main goals include:
U.S.-Jordan Free Trade Agreement/Enforcement of National Laws: Calls for incorporating in future trade agreements provisions along the lines of those in the recent U.S.-Jordan Free Trade Agreement, which call for full enforcement of national labor and environmental laws, and allow the United States to seek redress through dispute settlement if foreign governments refuse to enforce those laws, and the failure affects trade or investment flows.
ILO Core Labor Standards: Overall negotiating objective of encouraging countries to respect the International Labor Organization's core labor standards -- abolition of forced labor, abusive child labor, and workplace discrimination, and the rights to freedom of association and collective bargaining.
Labor and Environmental Policy Reviews: Makes permanent the Clinton administration's policy (continued under President Bush) of requiring environmental reviews of trade agreements, and creates a similar requirement for labor policy reviews. Such reviews can have two benefits: First, they can suggest ways in which trade policy, consistent with a commitment to open markets, can improve labor and environmental standards overseas. Second, they can debunk unwarranted concerns, notably the fear that weak standards might drain investment from the United States.2
"Win-Win" Policies: Lowering trade barriers and subsidies that interfere with environmental protection. Options could include reducing or eliminating tariffs on goods -- like power plant scrubbers or pollution monitoring equipment -- useful in controlling and reducing pollution; easing provision of services like waste management, recycling or alternative energy production in foreign countries; and cutting environmentally destructive subsidies in fisheries, agriculture, forestry, and other resource fields.
Investment Policy Reform: Reform in investment clauses of trade agreements like Chapter 11 of the North American Free Trade Agreement. This would prevent frivolous suits like that filed by Methanex of Canada against the state of California3; make sure foreign investors in the United States receive no more protection against expropriation than U.S. laws allow; and strengthen transparency and public access in dispute cases. It also maintains the broader goal of openness and the rule of law in investment -- which is important to the United States, as the world's largest recipient of foreign direct investment.
Transparency: Greater public access to dispute settlement procedures (i.e. cases in which the United States or an American trading partner alleges violation of a trade agreement) as well as in investment arbitration. In total, this is a significant advance in the domestic debate for Democrats who believe trade policy can contribute more in these areas.
This already sets a difficult task for U.S. negotiators. A bill that goes much further will risk creating a mandate they cannot possibly fulfill. Many developing countries, including democracies like India and Brazil, argue that including labor issues in trade negotiations will lead inevitably to discrimination against poor countries, simply because they are poor and their wages are lower. Such concerns can be manipulated for political reasons, or to avoid opening markets at all; but at bottom they represent deep and sincere fears. South African Trade Minister Alec Erwin (who is not personally opposed to opening discussions on trade and labor) flatly predicts that "if you want to make labor standards an actionable issue in the WTO, you will blow the system apart."4
In this environment, attempts to go much further than the Baucus/Grassley formula -- in particular, efforts to set new labor standards or mandate sanctions for enforcement -- will simply frustrate negotiations altogether. The result would mean losing both trade reform and labor and environmental goals. The bill's approach strikes a reasonable balance and deserves support.
On trade policy grounds, then, the Baucus-Grassley bill is a good approach, consistent with the House bill and somewhat more ambitious in a few areas. Its principal innovation is less in trade policy per se than in its focus on "expanding the winner's circle" at home, through a plan drafted by Senators Bingaman, Baucus and Daschle to reform and expand the "Trade Adjustment Assistance" program, or TAA.
As our stake in the new global economy grows, so does our responsibility to ensure that all Americans have the chance to compete and succeed. Trade liberalization must go together, ultimately, with a new social compact to create a vibrant, democratic capitalism based on a new domestic agenda which:
offers all U.S. workers lifelong access to career training;
provides greater career security by allowing them to control health and pension resources;
redefines corporate responsibility in a world of borderless markets; and
gives workers a greater stake in the rewards of economic competition.
This new domestic agenda would allow more workers to secure an equity stake in their company and participate in entrepreneurship, while providing incentives, tools, and opportunities to succeed in the New Economy. While not the broad reform of TAA that may ultimately be required, the Bingaman/Baucus/Daschle plan is a step in the right direction, creating a simpler program offering more meaningful support to more workers.
Most students of the issue consider computerization and technological change, rather than imports, the leading cause of job dislocation.5 But it would be idle to pretend that trade policy does not increase competition and the pace of change as the U.S. market opens.
The principal U.S. public means of dealing with the trade-related aspects of these problems is an entitlement program called Trade Adjustment Assistance or "TAA." TAA assists around 200,000 Americans a year, offering extended (18-month) unemployment insurance and two years of job training. TAA recipients tend to be older and less-educated workers; the average age of TAA recipients is about 43, and 80 percent of them (as compared to 42 percent of U.S. workers) have high-school educations or less.
While TAA has generous benefits, at a cost of approximately $400 million a year, it has proven in practice to be somewhat ineffective in helping dislocated workers. The reasons are several. As investigations by the GAO have found, TAA is:
Complicated: TAA is split into two different programs, one for NAFTA-related competition and one for trade competition generally. Probably justifiable in the immediate aftermath of NAFTA's passage, nine years later this is a source of confusion and some inequity -- an auto worker displaced by competition from plants in Canada can get more benefits than one displaced by German or Korean competition. Further, beneficiaries of both programs complain about heavy paperwork and confusing forms. Finally, smaller and more isolated communities, where new jobs are often harder to find, face a relatively greater burden in managing paperwork and eligibility requirements than larger communities.
Difficult to Apply For: Only groups of workers or unions can file for TAA when factories close. This makes TAA harder to reach for non-union workers, forced to organize themselves after large layoffs, and the less-educated workers who tend to be more vulnerable to trade competition.
Limited in Coverage: The general TAA (as opposed to NAFTA TAA) does not provide benefits for workers in "secondary" industries -- that is, suppliers to the factories primarily affected by competition. For example, workers in a semiconductor plant unable to compete with foreign rivals can get TAA, but workers in a machine tool factory that supplies its capital equipment cannot. In addition, most workers outside manufacturing industry -- notably fishermen and farmers -- do not have access to TAA.
Limited in Scope: TAA's goal is to help workers upgrade skills and prepare for more demanding jobs. To that end, both general and NAFTA TAA provide generous unemployment insurance and training benefits. But neither program offers meaningful assistance with some of the most painful features of job loss. Loss of health coverage can make long-term training unaffordable in practical terms, especially for older workers with families; on the other hand, older workers with long employment records at a single company are often deterred from taking new jobs quickly by the prospect of sharp and sudden drops in wages.
Problems beyond these also remain. The Trade Deficit Review Commission, for example, notes that smaller and more isolated communities for which trade competition is especially intense have more trouble adjusting than larger cities; Sen. Evan Bayh (D-Ind.) has suggested a program for assisting such communities. Likewise, Congress could consider improved incentives for employers to assist with job placement.
Ideally, over time the United States would work toward a far simpler program, providing an effective training option, incentives for rapid return to work, and help to ensure that workers can keep health coverage and use the same pension fund as they move to new jobs. Bingaman/Baucus/Daschle is a constructive and valuable step in the right direction.
Reflecting GAO investigations and recommendations made by the bipartisan Trade Deficit Commission in 2000, Bingaman/Daschle/Baucus will make TAA easier and simpler to use, assist a broader range of workers, and begin to address problems such as health coverage and wage maintenance. It includes the following new features:
1. Simplification and broader coverage: Combines the general and NAFTA TAA programs into a single program, and opens opportunities for TAA job training and unemployment insurance benefits to all primary and secondary workers who lose jobs as a result of trade competition or shift of investment. It also makes farmers and fishery workers eligible for TAA benefits. The bill funds this expansion by increasing the annual TAA authorization from $90 to $300 million.
2. Eased Applications: Where current regulations require groups of workers (or unions, or other designated worker representatives) to file applications for TAA, Bingaman/Baucus/Daschle would let employers, state employment agencies and others file on their behalf. Especially for workers in small companies and non-union workers, this should make benefits easier to reach. Later implementation should ensure the ability to file on-line.
3. Health Insurance Tax Credit: Provides a 75 percent subsidy for health care expenses for workers enrolled in TAA job training programs who choose to buy personal COBRA health care coverage, and additional grants to state Medicaid programs to support health care for dislocated workers.
4. Income maintenance: Includes a pilot "wage insurance" program for workers over 50 years old (who are most likely to suffer sharp drops in income on taking new jobs) for eight months after taking a new job.
1. For example, Cambodia, a least-developed country whose major exports are clothes, pays effective tariffs nearly 30 times higher than highly industrialized Singapore, whose exports are dominated by IT goods, scientific and surgical instruments, and so on.
| Singapore |
$30,170 |
$15 billion |
$100 million |
0.6% |
| Cambodia |
$260 |
$1 billion |
$150 million |
15.8% |
2. The United States is the world's largest site and destination for foreign direct investment; about $273 billion (largely from Europe) entered the United States in 2000 while American firms sent $114 billion overseas. In total, the most recent figures indicate that foreign firms have about $1.238 trillion in direct investment stock in the United States, and American firms very slightly more ($1.244 trillion) abroad. Over 70 percent of U.S. direct investment overseas is in seven wealthy economies -- Australia, Canada, the European Union, Hong Kong, Japan, Singapore, and Switzerland.
3. Methanex has filed a case claiming $970 million in compensation for "expropriation," in the form of lost sales, resulting from California's decision to ban a gasoline additive called MTBE (methyl tertiary-butyl ether). The bad was issued after MTBE was found to leach out of underground storage tanks, risking groundwater contamination.
4. Alec Erwin, Minister of Trade and Industry for Republic of South Africa, Remarks at Southern Africa Economic Summit, June 6, 2001.
5. Import competition is fierce in some specific industries. However, across the entire economy, import growth is more a measure of growth rates and the standard of living than of job loss or creation. In fact, between 1993 and 2000, import growth averaged nearly 10 percent year, and job growth averaged over 2 million per year. In the first year of the Bush Administration, by contrast, imports shrank by 5 percent, or nearly $60 billion -- the first decline since the 1980s -- and the number of jobs shrank by 1.8 million.
Edward Gresser is director of the Project on Trade and Global Markets at the Progressive Policy Institute.
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