Money Talks

Octavian Report: Why do you think that the run-up to the presidential election has seen such a strong movement, after so many years of bipartisan consensus, away from free trade?

Ambassador Susan Schwab: Obviously, this has been an election about elite opinion versus populism. I think trade, and trade policy, and trade agreements have gotten caught in the crossfire. You would have to go back well before the Great Depression to find two presidential candidates that raised as many questions as the current ones do about trade policy and trade agreements.

Both of the current presidential candidates say they’re for free trade and trade agreements but you wouldn’t believe it from the atmospherics and from their specific comments during and since the primaries. I think part of what’s going on is you’ve got candidates that are campaigning against trade and pro-trade positions, but it really is more than that. It is trade, and trade agreements-in particular, being used as a proxy for other issues people are concerned about.

Look at the underlying polling data pretty much across the political spectrum: if you ask people what they care about, what they are worried about, trade is way, way down on the list. Trade almost doesn’t make the list.  When you ask about trade agreements as a general matter, the American people generally support trade agreements and they support trade. You wouldn’t know that from their politicians or from most Democrats running for office — and certainly not from either Hillary Clinton or Donald Trump.  Interestingly, if you look at Pew Research Center data, the majority of Bernie Sanders supporters also support open trade and trade agreements. Younger voters in particular support more open trade and trade agreements. Where you tend to have less support for trade is older white male voters, and even then when you ask them about things that they care about, international trade and trade agreements are pretty low on their list.

There is also a real disconnect between perceptions and reality when it comes to, for example, the actual numbers associated with trade and manufacturing. This extends to elites, by the way; indeed, there are a lot of “elites” right now that appear to be seriously misinformed about the U.S. economy, trade, and the impact of trade agreements. You notice this increasingly in commentators, in the media, and in others, who are basically drinking the Kool-Aid based on no facts or very few facts.

I suspect many would be surprised to learn that U.S. manufacturing output continues to go up and has gone up fairly steadily year after year after year. There was a dip after the Great Recession, no question about that. But it’s nonsense to say that the United States doesn’t make things anymore. We make a whole lot.  We just do it with significantly fewer people. That is a fact.

Interestingly, Germany and Japan, major manufacturing countries, have also seen pretty dramatic declines in the numbers of people working in manufacturing jobs — just like we have — and for many of the same reasons. They don’t have large trade deficits like ours; in fact Germany and Japan are pointed to as countries that are exporting large numbers of manufactured goods. We export large numbers of manufacturing goods, too; it’s just that the manufacturing goods that we export are not necessarily the consumer goods that the average American sees when he or she goes into a retail store. We’re manufacturing and exporting airplanes, and heavy equipment, and chemicals. The average consumer sees and is buying apparel or footwear. Cars are  another good example — although we do make cars, some of the ones with the highest U.S. content sometimes have foreign labels because auto manufacturing involves moving car parts and assembly all over the place. The average retail consumer won’t see evidence of this but in fact manufacturing output is up in the United States, even since the recession. Yet manufacturing employment, while up a little recently, is generally on a major downward trend, as is the case in most of the developed world (including other manufacturing giants like Japan and Germany).

OR: If Donald Trump were to be elected, what do you think would happen with free trade in terms both of existing agreements and its general future?

Schwab: I am reluctant to get into this ridiculous political melee. Neither of the presidential candidates are making a whole lot of sense when it comes to trade policy. Both of them have renounced the Trans-Pacific Partnership, which is a perfectly good trade agreement that makes much more sense if you embrace it than if you abandon it, both in economic terms and in geopolitical terms. Some of the things that Donald Trump has talked about in terms of potential trade policy make no sense whatsoever and would be devastating for the U.S. economy. Some of the things that Hilary Clinton has talked about don’t make a whole lot of sense, either. It really raises questions about what kind of direction U.S. trade policy would take under a new administration.

A bombastic protectionist trade policy that raises major barriers to imports — in the case of what Donald Trump has talked about — doesn’t make a whole lot of sense within an agreed multilateral trading system. That system has taught us that if you raise a lot of barriers against other countries shipping to the United States, they’re going to raise barriers against your exports. And guess what? 95 percent of the world’s customers live outside this country. That doesn’t make economic sense. It doesn’t make economic sense whether you’re a consumer or a producer for export. On the flip side, if the U.S. market is already more open than other countries’ markets, than it stands to reason that we benefit from market-opening deals with other countries.

OR: Trump has suggested appointing a certain aggressive, deal-making type of businessperson, as opposed to someone used to operating in the context of international law and diplomacy, to the position you once held. How would that play out?

Schwab: That’s a really good question. Over the years, the U.S. has fielded negotiators with all sorts of experience — diplomats, businesspeople, lawyers, politicians. Some really good; some less so; some tough; some into details; all different. Keep in mind that the kind of person and the kind of negotiator that Donald Trump has been criticizing and campaigning against is probably one of the people you’re talking to right now. I am hardly an unbiased observer here. I’ve had private sector experience but I’m the architect of some of the agreements that he’s been criticizing, and I’ve been involved in negotiating trade agreements both as a career person and as a political appointee on and off for 30 years. Some of the very best negotiators we have are career technocrats who understand the complexities of the 10,000 line items of a tariff schedule. Some of it is very technical just like many kinds of commercial agreements.

You need your visionaries, your strategists, your tacticians, and you really need your experts. You’re negotiating with from one to 150 other countries, and other countries have different systems in terms of how they make decisions; they have different political imperatives. Keep in mind these are government-to-government negotiations. These aren’t corporate deals.  So you need to have a sense of how the other governments get to “yes.” Do they answer to a parliament? Are they an autocratic regime? Do they need the deal? Do they think they need the deal? Are they doing it for economic reasons, commercial reasons, geopolitical reasons? What are their motivations? Are they motivated at all? Do they care what other countries think? Do they care about public opinion or elite opinion or peer pressure? All of those come into play. For that you need some expertise beyond being a clever negotiator who can get to some bottom line that — oh, by the way — meets with the approval of the United States Congress.

Then you’ve got negotiator styles. As USTR I came to appreciate how personalities really do count; there is a “play well with others” component to it. If your counterparts don’t care to spend time with you, then it’s going to be harder to get a deal even if you’re the American, or you’re the European, or you’re the Chinese — because nobody has to do a trade agreement with you. If you are capable of putting together a deal that the other side can’t refuse, they won’t refuse it. But in trade policy terms what that means is putting something on the table that consists largely of concessions. And I don’t hear any of our candidates suggesting that that’s what they have in mind, right?

OR: Do you see the Trans-Pacific Partnership surviving a Clinton victory?

Schwab: If it doesn’t get done by the end of the year, then that really raises questions about its viability going forward.  President Obama faced this kind of question coming in because he campaigned against the free trade agreements that had been concluded in the Bush administration and then had to figure out how to get them enacted. Bill Clinton campaigned against NAFTA and then had to figure out how to get it enacted. In each case they endeavored to make some changes in the agreement before they sent it up to the Hill. That’s one approach. Hillary Clinton has been very emphatic that she has no intention of moving ahead with TPP. Period. And I have a hard time seeing her walking back from that. It would be an economic loss and a geopolitical embarrassment. If she were elected and decided to have a trade policy — by no means certain; it took President Obama a few years — her maneuvering room related to and beyond TPP would depend largely on what happens in the Congressional campaigns and how well she is able to work with Congress. That bears attention because the trade agreements that got through during the Obama administration got through largely with the vast majority of Republicans and only a small but brave number of Democrats voting “yes.”

The labor unions have gone out of their way to stomp all over those Democrats who had the temerity to vote “yes” on those trade agreements and in particular for Trade Promotion Authority (TPA) — the legislative mechanism the President has to move trade agreements on the Hill.  The Republicans who are running for reelection this time have been really beaten up by Democratic challengers with the president’s TPP bill. Who is left after the election; who controls and by what margin; how grumpy are the members when they return — all this will all have an impact.

The failure to move TPP and other future trade deals would have both negative economic and geopolitical consequences.  21st-century trade policy challenges are generally not covered by existing multilateral agreements, only some bilateral and regional deals like TPP. The issues that are criticized — issues related to, for example, state-owned enterprises; issues related to the environment — are only addressed in bilateral and regional deals and those are the very deals that are being blocked now (which is ironic). Forced technology transfer and intellectual property protection: some of those issues are the ones that we have the best chance of addressing through contemporary trade agreements and those are the ones that are being blocked. There’s a lot of irony associated with the anti-trade movement today.  There’s a lot of cutting off your nose to spite your face going on.

OR: How do you see the future of U.S.-China relations playing out if TPP survives — or doesn’t?

Schwab: China’s emergence onto the global commercial scene is a lot of the problem with the politics of trade today.  I say that without wanting to suggest that China is causing the problem or intentionally the cause of the problem. China is such a huge player.  Whereas, for example, in the 1980s the global economy could sustain export-led growth from the Asian tigers, the global economy can’t sustain that same export-led growth from China, because of the magnitude.

Then you have China being a mixed-market economy, where important aspects of the market have not been allowed to evolve, not been allowed to work.

In advance of joining the WTO in 2001, China implemented an enormous number of economic reforms. And there is a lot of evidence that China’s double-digit growth rate was in part attributable to the reforms it undertook at that time. But we started to see a pullback from some of those market reforms beginning in about 2005. That was when we started taking China to the WTO on enforcement cases in the Bush administration. Today there continue to be some real issues with respect to WTO rules on the part of China. But China is by no means the worst, and China is also the victim of more protectionist actions on the part of other countries in the world than any other country. Ironic. Not necessarily actions by the U.S. but other countries —primarily other emerging economies.

Other issues associated with China include challenges like overcapacity, again having to do with a lack of market signals. China has severe overcapacity in steel, for example, in aluminum, in solar panels; we’ve seen it in a variety of other products. That overcapacity is then dumped around the world and stresses producers, communities, and countries. Sadly, it has undermined the health of the global trading system and countries’ attitudes about trade policy and free trade. And it hasn’t helped China much, either.

OR: Do you see any hope for a deal with Europe, post-Brexit?  What do you make of the rise of anti- globalization sentiment there?

Schwab: In the case of the TTIP negotiations, the Trans Atlantic Trade and Investment Partnership negotiations — and I’m admittedly U.S.-centric in my perspective here — I think both sides see problems with the other. The irony is that we are so closely intertwined in terms of trans-Atlantic trade and investment, and yet we are fairly set in our respective ways when it comes to certain trade matters and standards-setting. The idea of TTIP was to further facilitate trade and investment across these two large economic entities.  Nobody could argue that we’re talking about lowering standards, and yet the anti-globalization and anti-U.S. folks in Europe immediately found things to attack.  The anti-trade folks in the U.S. aren’t quite as far along, because at the moment there is less to shoot at.

But it turns out that reducing barriers to trade and investment between two highly integrated, mature economies is still easier said than done. The Europeans are hung up on their agricultural protection, for one thing. Some of it might have been a bandwidth issue on both sides. The Europeans were negotiating with the Canadians at the same time as TTIP. There’s been a lot of pushback on the part of some European constituencies, as I mentioned. I was surprised in trips that I’ve taken to Europe how much pushback there has apparently been on things like investor-state dispute settlement, even though they have a half century worth of successful experiences with bilateral investment treaties that include such provisions. A number of such issues have bubbled up and a small vocal group has seemed to mushroom into a larger anti-trade group and the politicians haven’t yet found a formula for pushing back.

Brexit was more nationalistic, is my sense, than protectionist — meaning U.K. voters wanted to take back control of their own regulations. In some cases, though, they were clearly influenced by anti-immigration sentiment.

OR: Do you think that the U.S. does a good enough job enforcing trade agreements and protecting our rights under them?

Schwab: I think we do a good job.  There’s a bandwidth issue but other countries would tell you we do a really good job of enforcing. We have lots and lots of anti-dumping actions going on. Once we impose anti-dumping duties against a country it’s really hard to get them removed. Other countries would argue that U.S. anti-dumping and countervailing duty — meaning anti-subsidy — laws are biased in favor of domestic producers. We would argue other country’s laws are biased in their own favor. We would argue ours are transparent and fair; other countries would say that ours are very tough. In terms of taking actions to the WTO, enforcement actions, we take a fair number of them. This administration has, the Bush administration did before it. They take a while to move through the system and then you need to follow up. But keep in mind, if you get to the point of retaliation, chances are you were unable to fix the underlying problem for the U.S. exporter.

One of the challenges, quite frankly, in taking enforcement actions to the WTO is finding U.S. companies that are willing to back enforcement actions because they have to provide data and face the prospect of being pressured abroad. The U.S. government’s not in a position to subpoena data or to develop the evidence on their own and you need that evidence or data to take the case. U.S. firms or farm groups are, not surprisingly, reluctant to put themselves in a position where they can be fingered by a foreign government and face the risk of retribution. The U.S. government tries to shield them, but there is a limit you can do in terms of filing complaints without evidence to present.

OR: Do you think those kinds of trade disputes are effective or do they ultimately become counterproductive?

Schwab: I think they’re an important and very healthy part of the system. Good, valid trade disputes — and there are different types of trade disputes — and enforcement actions are what make the system credible. I think they’re really important.  As a government, I don’t think you should ever pull your punches for foreign-policy reasons. The Chinese, the Russians and a few other governments occasionally appear to get huffy about trade enforcement actions being a foreign policy slight. When I was USTR, I found this was a problem with newcomers to the WTO and more autocratic regimes, and I would try to explain that if you’re going to take these trade agreements seriously, you need to be businesslike in their enforcement. It’s not personal and it makes the system work for everyone. If agreements are not enforced, then they will be violated again; if their credibility is undermined, you aren’t going to be able to negotiate future agreements.  Your citizens, your parliament aren’t going to support the negotiation of future agreements if they don’t believe the current agreements are enforced. I believe that very, very strongly.

OR: Do you see the current upsurge in anti-trade sentiment as temporary or the start of a new era?

Schwab: It really is too early to know.  It doesn’t look good, but this is not the first election where we had major party candidates running against trade and trade agreements. It is the first in my recollection when both did so, and so poisoned the environment for those on both sides down ballot.

OR: Do you think the proponents of free trade do a bad job of explaining their position?

Schwab: Yes. They — meaning we —could do a better job. It’s a complicated conversation, though. It’s always been easier to blame foreigners and blame imports.  That is unfortunate but true. I worry, as I said at the beginning, about the extent to which elites are willfully drinking the Kool-Aid on this without having access to the data, without questioning a couple of studies that purport to say that maybe trade agreements aren’t so good.

There’s a study that says in the seven years after China joined the WTO there was manufacturing job loss on the order of one to two million related to the products that China exports to the United States. Well, during that seven-year period the U.S. economy created approximately 22 million jobs each year and lost — again on an annual basis — approximately 19 million jobs. There is always tremendous churn in the economy. Of that one to two million manufacturing jobs, we don’t know where they went; how many moved to the Southeastern U.S.? We also know that during the most recent period when the U.S. has been losing manufacturing employment, so have Japan and Germany.  With manufacturing output up and manufacturing employment down; aren’t we really talking about technology and productivity shifts, rather than trade policies and trade agreements? No one suggests that with less than three percent of the U.S. workforce in agriculture — down from a majority at the turn of the previous century — that trade or lack of competitiveness or a decline in output somehow are at fault.  These are structural shifts at work, accelerated somewhat by globalization. And the key question is how best to respond. If you think trade and trade agreements are the core problem, you will look to trade and the absence of trade agreements for answers and you will be wrong. Trade is a distraction from the real problems — other than for those limited number of individuals and communities that are, in fact, negatively impacted in a direct way. For these, we need to draw on more targeted solutions through Trade Adjustment Assistance and other programs. To the extent the problem involves structural shifts in our economy, the answers lie in responding to those, including through education, skills training, addressing infrastructure needs, tax and regulatory policies that promote growth and innovation, and the like.