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Will the TPP do anything for America's giant trade deficit?
At the height of the U.S.-Japan trade frictions of the 1980s, the Treasury Department proposed a set of negotiations under the rubric, Market Oriented Sector Specific. The acronym MOSS led to these being called the MOSS (think moss on a tree) Talks.
Some experienced negotiators at the time suggested that it was really just More Of the Same Old Stuff (also, of course, MOSS). In fact this was only a bit unfair because despite some eventual opening in some of the selected sectors most of the Japanese market long remained virtually impervious to penetration by non-Japanese companies.
President Obama's introduction last week of Mike Froman as his new U.S. Trade Representative and of Penny Pritzker as his new Secretary of Commerce brought this old play on words back to my mind. In his press conference, the president said: "Mike believes -- just as I believe and just as Penny believes -- that our workers are the most competitive in the world, so they deserve a level playing field."
For more than 30 years, I have been listening to presidents of both parties make almost that exact statement. They typically make it when they want Congress to give them trade negotiating authority for to ratify some so-called free-trade deal they have just negotiated. Implicit in the statement is the notion that American workers and the companies by which they are employed are highly competitive and prevented from conquering the world of business and commerce only by unfair trade that the president is going to make fair demanding in free trade negotiations that our trading partners play fair and square.
If this is not the most misleading statement presidents make, I don't know what could be. For starters, it's simply not true that American workers and companies are always the most competitive. The playing field is pretty much as tilted for German workers and companies as for the Americans, yet Germany has the world's biggest trade surplus while the United States has its biggest deficit.
Yes, Germany is a bigger exporter than China and has a bigger trade surplus. Yet, German wages are higher than U.S. wages, the German regulatory environment is stricter than that in America, and Germany is a welfare state that most Americans think is socialist. How is this possible you ask? The answer is that German workers and companies make things no one else makes and make them of a quality unrivaled by anyone else. That's what being competitive really means -- you win even though the field is tilted.
Nor do presidents intend to level the field, and, in any case, they wouldn't know how even if they actually intended to. Take the case of China joining the World Trade Organization (WTO) in 2001. The U.S. trade deficit with China had risen from $10 billion in 1990 to around $84 billion in 2000. The White House told the Congress that putting China in the WTO would open its markets and result in a flood of U.S. exports that would reduce this deficit and create millions of U.S. jobs. Congress duly signed off, and 10 years later the U.S. trade deficit with China was $315 billion as millions of jobs were off-shored.
During this time, the Chinese yuan was managed by Beijing to be undervalued versus the dollar as a way of indirectly subsidizing Chinese exports while also indirectly protecting Chinese markets. In addition, the April 27 edition of The Economist details the wide range of large subsidies that helped make Chinese exports so competitive over the past decade. These measures were certainly tilting the playing field. Yet the Obama White House, like the Bush and Clinton White Houses before it, took no steps to offset this. Indeed, it did not even publicly acknowledge that the Chinese currency was being managed.
Nor is the purpose of the trade negotiations really that of leveling the playing field. Take the proposed Trans Pacific Partnership (TPP) free trade agreement that is currently the centerpiece of the Obama White House's trade policy. Of course, it calls for improvement around the edges such as better protection of intellectual property, further reduction of (already low) tariffs, and measures to ensure that state owned companies play like private, commercial firms. But when I asked about the purpose of the TPP at a White House meeting two years ago, the answer given was that it is mainly to show America's commitment to Asia and to demonstrate that America is "back" in Asia. This means it is really all about geo-politics and little about level playing fields.
That is why the negotiators are not even talking about the two things that are the most powerful determinants of current trade flows - strategic currency value management and financial investment incentives like tax holidays, free land, and capital grants that are used as bribes to induce off-shoring of production.
So next time you hear a president or other top official talk about how competitive American workers are and how they will always win if they can just get a level playing field, be sure you understand that they are unlikely actually to have the opportunity to play on such a field.
(Clyde Prestowitz is a former US Trade councilor in the Reagan administration. This originally appeared in Foreign Policy)