The new trade cops

So President Obama is putting his money and his authority where his mouth is.

Yesterday, pursuant to comments in his State of the Union message, he issued an executive order establishing an Interagency Trade Enforcement Committee in the Office of the U.S. Trade Representative for the purpose of enforcing U.S. and international trade laws and of assuring a level playing field for U.S. workers and products and services. In announcing the new group in a speech to auto workers in Michigan, the president repeated the obligatory line that "American workers are the best workers on earth, and when the playing field is level, I promise you, America will always win."

This is an important move and the most serious of its kind since I was put in charge of the Reagan administration’s Strike Force to halt unfair trade in the mid-1980s. It signals a major change of attitude and at the same time raises two key questions: Can trade law and trade agreements be effectively enforced and will U.S. workers always win on a level playing field?

For most of the past sixty years trade deals and trade law have largely not been enforced. On the one hand, economists and trade negotiators were mostly of the view that unilaterally open American markets are good for the American economy even in the face of protectionist or mercantilist trading partners. On top of that, they believed the U.S. economy to be pretty much invulnerable to foreign competition. They therefore had no great interest in policing the agreements they promoted and negotiated. On the other hand, the agreements and the enforcement machinery, such as it was, were structured so as to depend largely on complaints from private parties to initiate any action. Thus the government would usually (not always) wait for some affected corporation or labor union to file a complaint before even collecting data on suspected trade law violations. As I noted, a Strike Force was established by the Reagan administration in response to intense trade frictions with Japan in the 1980s, but this was short lived and did not at all change the deeply rooted dynamics of trade complaints and enforcement.

The Obama initiative is bigger and significantly funded and signals a major shift in sentiment. It has become clear over the past twenty five years that the U.S. economy is vulnerable and that unilateral free trade is not necessarily a win-win proposition. Even several completely conventional, long time orthodox free trade economists such as Peterson Institute Director Fred Bergsten have called some of China’s policies the most protectionist of all time. In the past, those who urged enforcement of trade laws were typically castigated as protectionists or Japan bashers or some kind of other basher by the apostles of the conventional wisdom. This greatly inhibited trade law enforcement. Now, with mainstream voices calling for action that inhibition is not only gone, but the pressures have shifted in the direction of enforcement. After all, what’s the point of making agreements if they’re not going to be enforced, especially in view of the fact that dyed in the wool free trades say they should be.

But the question at this point has become whether the laws and the deals really can be enforced in any meaningful way. Of course, anti-dumping investigations can be undertaken and duties imposed and subsidies can be countervailed if proven to be doing damage. But these kinds of actions have a very narrow focus, proceed at the pace of molasses in winter, take enormous time and energy, and always occur after most of the damage has already been done. This kind of enforcement is not useless, but it is not likely to change behavior or the nature of the economic interaction. Broader cases against industrial and other policies that effectively nullify the concessions and undertakings of trade agreements can be filed in the WTO and probably should be. But the WTO rules are not always clear cut and in any case are not well tested in many areas, nullification and impairment being one of them. Moreover, a flood of actions in the WTO against a country like China will be seen as a hostile action and is likely to engender tensions with Beijing that could be quite uncomfortable. This will make the US. and other Governments hesitate to act decisively. Most importantly, the rules are often vague and subject to interpretation. Many of the most powerful policies and practices that hinder market access or that distort markets, such things as implicit investment guarantees in key industries or control of distributors by major producers are not clearly illegal and, in any case, are tools that are being used by various U.S. states or that the United States might want to use in the future.

Finally, it’s not clear that Washington should want to abolish some of these policies and practices because it is not true that American workers will always win on a "level playing field." The playing field for U.S. workers playing with Germany is pretty level. Indeed, many say it favors the United States in that Germany’s social welfare charges and taxes are higher and its unions more powerful than those of America. Yet, America runs a large trade deficit with Germany and long ago stopped making things like machine tools, tunnel boring equipment, and scientific instruments that Germany still does a good business in.

I certainly hope that the new Enforcement Unit will be aggressive and well led and that it will erase some egregious instances of unfair trade. But the major reasons why the United States is suffering declining international economic competitiveness is not unfair trade so much as absence of its own economic and competitiveness strategies. For instance, the United States does not match the investment packages of countries like China, Singapore, and France that induce the off-shoring of production. These packages are not illegal and no trade cases  can be filed against them. But they will help to make it very difficult for U.S. workers to compete on what will be officially declared a level playing field.

What America needs in addition to the Enforcement Committee is a Competitiveness Strategy Committee  that would draw from the policies of countries like Germany, Singapore, and China and figure out how to compete with them.