A Bad Trade

When Barack Obama was elected back in 2008, he committed to breaking with the same flawed trade policy the United States has followed for a generation. Obama promised a new page, one that focused on creating American jobs and protecting the environment. Instead, his administration has flip-flopped on these campaign promises and is now pushing free trade agreements (FTAs) that are projected to cost American jobs, undermine U.S. negotiating credibility, and could even dampen the president’s electoral prospects in 2012.

For years, U.S. trade policy has ignored America’s massive trade imbalance with China and focused instead on expanding the controversial North American Free Trade Agreement (NAFTA) model — in which corporate profits are protected, but jobs are offshored — to additional countries. Obama came into office promising to change that; he made specific commitments to alter the NAFTA model going forward, renegotiate NAFTA itself, and take action on China’s overvalued currency. These reform promises were partnered with intensive trade-focused member outreach by unions, and they helped move white working-class voters into Democratic majorities in key swing Midwestern states during the 2008 campaign.

But Obama has kept none of his promises. Instead, he appointed Clinton-era officials, such as Larry Summers and Timothy Geithner, who remain staunch defenders of the trade status quo. The administration has tried to push through three FTAs left over from George W. Bush’s administration, meeting resistance from Congress and the Democratic political base.

No wonder Americans are angry. Since NAFTA went into effect in 1994 and the World Trade Organization (WTO) began its operations a year later, 43,000 American manufacturing establishments have closed, more than 5 million manufacturing jobs have been lost, median real wages have stagnated, and inequality has skyrocketed to levels not seen since the robber-baron age. Brand-name goods once made in the United States are now being made offshore and imported back for sale, leading to massive, growth-dragging trade deficits. There’s not even evidence that the trade agreements do the one thing they’re assumed to: boost U.S. exports to foreign markets. U.S. exports to the 17 countries with which the United States has active NAFTA-style trade deals have grown at half the pace of exports to countries with which Washington has not signed deals, putting these pacts into perverse conflict with the administration’s stated goal of doubling U.S. exports.

NAFTA-style deals also make it easier to offshore jobs by limiting the risks U.S. firms face when relocating to low-wage countries. Multinational corporations have long complained that foreign judicial systems provide unreliable protection for their overseas investments, not to mention the risk that governments there might introduce new labor or environmental regulations they don’t like. Presumably, these concerns are an important barrier to shuttering factories in places like Peoria and Buffalo.

But now, NAFTA-style deals make it easier to offshore, removing this deterrent. They allow corporations to bypass national judicial systems and launch attacks on governments in international tribunals for interfering with their future expected profits. The judges for these cases are selected in part by the corporation, and the trade-pact rules they judge against have been tailored to corporate demands.

Often the mere threat of one of these cases can cast a chill on public-interest regulation. For instance, in August of last year, Canada paid U.S. firm AbitibiBowater $130 million to stop the company’s NAFTA arbitration from going forward. The company argued that NAFTA gave it the right to resell its timber-harvesting licenses and water-use permits after having closed down a paper mill in Newfoundland. Canadian legal scholars argued that the federal government’s concessions to AbitibiBowater undermined the "concept of water as a public trust" and created new property rights where Canadian law does not usually recognize any. All told, more than $350 million has been paid to date in these cases; there are nearly $9.1 billion in claims in the 14 investor-state cases outstanding under NAFTA-style deals, relating to environmental, public health, and transportation policy.

Unsurprisingly, Americans who have lived through this reality want something different. Polls by Greenberg Quinlan Rosner show that opposition to more-of-the-same trade policy is one of the few things that unite Americans of different incomes and political persuasions. The last three election cycles brought over 100 new lawmakers from both parties to Washington who campaigned and won on a platform of fair trade and opposition to more NAFTAs. Yet despite all this, Obama is still pushing three FTAs — with Colombia, Panama, and South Korea — that are a throwback to the 1990s.

Moreover, Obama doesn’t seem to have learned anything from the Bush administration’s disastrous FTA with Peru in 2007. When the 2006 election brought Democratic majorities to Congress, it became clear that no FTAs were going to move unless they were amended to address certain congressional concerns. Top Democrats made clear that they wouldn’t sign on until Panama eliminated its tax-haven policies, Peru reversed the destruction of Amazonian forests, and Colombia stopped the violent murder of unionists, Afro-Colombians, and other rights defenders. Democrats also demanded changes to lopsided commercial provisions of the South Korea FTA, which the U.S. International Trade Commission projected would increase the overall U.S. trade deficit.

Of these, only Peru moved. Democratic trade leaders in Congress agreed to changes in the pacts’ labor and environmental terms, including a specific commitment by Peru to make changes in how it governed its forests. Obama backed the trade deal as a presidential candidate, and Congress passed it in late 2007. But not before a bitter fight that divided the Democratic Party. A majority of House Democrats opposed the deal, arguing that the pact failed to fundamentally alter the NAFTA model.

Divisions were also worsening in Peru. While the U.S. Congress was weighing the Peru FTA, the country’s president, Alan García, penned a series of op-eds (see here, here, and here) accusing Peru’s indigenous groups and his political opponents of invoking environmentalism and indigenous rights as a pretext to block access to mining and timber exploitation in their ancestral lands. He deemed them as having a "manger dog" ideology, in apparent reference to an Aesop fable. Unsurprisingly, indigenous groups did not like being likened to dogs, no matter the literary provenance.

The trade pact came into effect in January 2009, just as Bush was leaving office and before Peru had implemented its labor law reforms or environmental commitments. The Bush trade team simply certified Peru as having met its labor and environmental obligations, over the protests of the Democrats who had made the 2007 deal and outlined a host of ways that Peru was not yet in compliance.

Then it got worse. After the FTA was approved, García began pushing a set of trade pact-related forestry changes that would take some steps to improve governance in the sector, but which would also relieve the government of some of its obligations to consult with indigenous groups before making changes to forestry, mining, or timber policies impacting their lands.

Indigenous groups predictably opposed these moves, calling an indefinite popular mobilization beginning in early April 2009 that led to protesters blockading roads in the town of Bagua. Police tried to forcibly remove the blockade, culminating in a bloody massacre in June in which 10 civilians and 23 police officers were killed. The New York Times reported that according to Peruvian Foreign Minister José García Belaunde, "The ultimate aim of the protesters was to prevent Peru from carrying out a trade agreement with the United States, because one of the most contentious of the decrees that were suspended on [June 11, 2009] would bring Peru’s rules for investment in jungle areas into line with the trade agreement." Environmental groups called on the Obama administration to declare that none of the Peruvian government’s supposed investment-opening measures were stipulated by the FTA; the administration refused. Despite the violence and the lack of a new forestry law, Peru’s FTA privileges have never been suspended.

The Peru experience is full of teachable moments. First, don’t trade concessions today for promises of change in the future. Congress should have required Peru to implement its labor law reforms and forestry policies first and taken the time to see whether they were working before holding a vote on the trade pact. The additional time would also have allowed stakeholders in both the United States and Peru to appreciate how truly divisive the trade pact was going to be in both countries. And it would have provided the opportunity to ensure improved Amazonian conservation could be achieved in a manner respectful of all Peruvians.

Unfortunately, the Obama administration appears to have learned none of these lessons.

On July 22, 2010, when 110 House members from both sides of the aisle wrote to Obama with a shortlist of changes — meant to remove the most damaging NAFTA-like provisions from the South Korea pact — the administration ignored the letter. Instead, Obama announced a narrow addition to the FTA on Dec. 3 that exempts U.S. cars from having to meet Korean auto safety and environmental standards. Perversely, this exemption may make it more difficult for Detroit to sell cars in South Korea because the high-profile supplemental deal will be seen by Korean consumers as a signal that U.S. cars don’t have to meet Korean standards.

Meanwhile, on the Panama deal, Obama inked a bilateral tax agreement that will supposedly commit the country to collect and share information about tax dodgers. But the language allows Panama to refuse an information request "where the disclosure of the information requested would be contrary to the public policy" of Panama. Given Panama’s long-standing public policy of encouraging tax-haven activities, this loophole is big enough to keep its offshore economy alive and kicking. We simply have no idea whether and how Panama will cooperate with its tax commitments and other long-standing congressional demands for reform.

On the Colombia deal, Obama administration officials have announced an "action plan" that ignores most of the labor and human rights improvement metrics outlined by senior Democratic Congress members, not to mention labor and human rights groups. Most importantly, the administration plan does not require a reduction in (much less an end to) unionist or Afro-Colombian murders before the deal can go into place. These abuses have worsened in recent years. In 2007, when Bush signed the Colombia deal, 39 unionists were murdered. In 2010, the number was 51.

None of these initiatives would pass the laugh test in domestic politics. But they’re even less tenable in international relations, where unpredictability is the norm. Obama’s advocacy of three FTAs firmly in the Bush-Clinton-Bush mold risks alienating both his core supporters and the broader set of middle-class voters whom Democrats need to win elections. Sadly, the president’s "supplemental deals" to move the FTAs forward risk sending a signal to America’s trading partners that creating political cover is more valuable in Washington than creating jobs, pushing American exports, or ensuring environmental conservation.