Remarks by Christopher A. Padilla
Under Secretary of Commerce
for International Trade
Reflections and Projections:
A Trade Transition Memo for the New Administration
Washington International Trade Association
November 13, 2008
(As Prepared for Delivery)
The stock market is taking a beating. A crisis of confidence in the financial system has ricocheted around the globe. Banks have failed and some well-known companies are teetering. Recent waves of immigrants are a focus of resentment in America, and foreign capital is viewed with suspicion. So perhaps we shouldn’t be surprised to hear a statement like this from an elected political leader:
“With America’s high standard of living, we cannot successfully compete against foreign producers because of lower foreign wages and a lower cost of production… [lowering tariffs] would force Americans to compete with laborers whose wages are sufficient to buy only one-eighth to one-third of [what you] can buy.”
You could be excused for thinking that the quote I just read – and the scene I just described – are from the present day. In fact, that statement was made more than seventy-five years ago, by President Herbert Hoover, before signing the most protectionist legislation in U.S. history.
There are some scary parallels to today, as we grapple with a serious financial crisis, deep anxiety about our economy, and a resurgence of populist opinion against globalization. The incoming president will face more political pressure for protectionism than any other U.S. chief executive since 1930. How President-elect Obama responds to this pressure will define the course of the global economy – and America’s economic identity – for a generation.
Ironically, this challenge comes at time when thriving exports and investment are responsible for virtually all of the good news in America’s economy today. Even as we dipped into negative economic growth in the third quarter of this year, continued strong exports contributed a positive 1.1% to economic growth, though this was overtaken by slumping consumer spending and investment.
Renewed suspicion about economic openness comes, as it did in the 1930s, at a time when the world economy is more highly inter-connected than ever. The Bush administration, in which I have been privileged to serve, put Trade Promotion Authority to good use: we have signed or implemented free trade agreements with 17 countries that together comprise a combined market of well over 100 billion new consumers. The U.S. trade surplus with our current FTA partners stands at more than $10 billion. In the past eight years, total exports grew by 63%, rising to new all-time record levels and recording double-digit growth rates for four consecutive years.
As I prepare to leave public office, I’m struck by how far we have come in the last decade. In 1998, presidential trade negotiating authority went down to defeat over whether enforceable labor and environment provisions would be part of trade agreements. Today, they are. Congress and the President reached an historic bipartisan agreement on May 10, 2007 to spell out exactly what those labor and environment provisions should look like. Yet important free trade agreements still remain stuck in Congress, and anti-trade sentiment is at new highs. Why? It is important that we be honest about the reasons. For the past ten years, the trade debate focused on labor and environment conditions in foreign countries. But as we have now come to discover, opposition to trade agreements was never really about that.
In fact, the trade debate is really about something far more fundamental; something far more consequential to our identity as a nation. It’s not even just about trade. The debate is a contest between two very contrasting ideas about America’s place in the world.
On one side are the forces of pessimistic populism. They fear the world – and blame its products, its people, and its investors for our economic anxieties. They believe America cannot compete, so they seek barriers to foreign imports. They believe that foreigners cheat, so trade agreements are inherently unfair. They worry about how much of our debt is held by foreigners, believe certain sectors must be off-limits to foreign investment, and are highly suspicious of immigrants – even legal ones. Pessimistic populism is not unique to one political party: it operates at both ends of the political spectrum, and even in the mainstream media. Turn on the television to watch Lou Dobbs blame almost every problem on imports, immigrants or both.
I stand on the other side of this debate, with those who embrace the enduring optimism of economic openness. This is the belief that America’s openness is the secret ingredient in our national recipe. It is our openness that gives us a leg up in the global economy – we are stronger as a nation precisely because we welcome the world’s products, ideas, investment, and people to our shores. Our openness to trade gives us access to the world’s products at affordable prices, keeps us on our competitive toes, and creates new markets for our exports. Being open to foreign investment capital provides lubricating oil for the American economic engine. Receptivity to foreign ideas, students, and scientists makes us a global hub for innovation. And as the proud son of an immigrant, I know that our nation is continuously revitalized by hard-working people eager to make a new life in our country.
The president-elect is likely to face massive protectionist pressures, with the current financial crisis adding fuel to the fire. As he and a new trade team prepare to take office, I offer to my successors ten lessons that I’ve learned that may be useful.
Lesson #1: There are reasons to worry about China’s direction, but not the ones you read about in the newspapers.
The populist forces calling for the economic isolation of China have grown much stronger since President Clinton won bipartisan support for a policy of economic engagement eight years ago.
Our new president will face strong pressure to “do something” about China’s currency. The Bush Administration pushed for a faster move toward a flexible, market-based exchange rate for the RMB. But I’ve learned that it is important not to assume that there are easy or simple solutions to the issues in the U.S.-China economic relationship. In fact, the dirty little secret of the currency wars is that the yuan has appreciated by about 20% since July 2005, and yet our bilateral trade deficit with China has actually increased by about 30% over the same period. That’s because the huge U.S.-China trade relationship is driven by many complex factors and sources of comparative advantage that go far beyond exchange rates. Passing legislation to punish China for the relative value of its currency might make people feel better, but it won’t reduce the bilateral trade deficit and could invite catastrophic retaliation.
Protectionist pressures on China come from many quarters. For example, U.S. quotas on Chinese textile imports expire at the end of this year and, under the terms of China’s WTO accession, cannot be renewed. We have faced calls to impose new constraints even though China will not even fill its existing quota levels for imports this year. Production costs in the PRC have increased sharply and factories are moving elsewhere in Asia; wage rates in China have increased nearly 50% in the past year alone. I’ve learned that decisions on China policy must focus on the facts, rather than the fears, about China’s economy.
Currency battles and sectoral fights tend to divert attention from some worrying trends in China that will have much longer-term implications for the global economy. In the past three years, China’s domestic economic reform process has slowed considerably. Thirty years after China’s initial opening to the world, policies that had encouraged ever-more access for foreign products and increased foreign investment are now being curtailed or reversed. Instead, China has begun quietly implementing a range of measures – in technology standards, in competition law, in services regulation, and in foreign investment reviews – that ring of economic nationalism. The long-term effects on U.S. competitiveness in China’s huge and fast-growing market could be severe, and bear close scrutiny.
It is also vital that China improve its ability to police its own economy. The United States has long worried about fake handbags and pirated software from China. But recent product and food safety incidents lend a deadly new urgency to the need for China to improve the regulation of its own businesses. And it will be important also to watch closely the role China takes in international economic institutions. As the recent financial crisis demonstrates, we have a strong interest in China playing a responsible role as a stakeholder in multilateral institutions. Unfortunately, at the most recent WTO ministerial China adopted a surprisingly defensive posture on agriculture and industrial goods that – if left unchanged – would make a global trade agreement difficult to achieve.
Lesson #2: When it comes to free trade agreements, standing still means falling behind.
The United States does not have the luxury of the world waiting for us to figure out what to do about FTAs. The race is on, and we’re already behind.
Nowhere is this danger greater than in Asia, a region which is increasingly trading with itself. There are more than 100 free trade agreements (FTAs) in existence or under negotiation within Asia today. The United States is party to virtually none of them. Meanwhile, the United States is losing market share in Asia and is the source of only about ten percent of Asia’s imports, down from 20 percent two decades ago. Building on the free trade agreement with Korea, the United States should actively pursue a Free Trade Area of the Asia Pacific (FTAAP) to cement America’s role as a Pacific economic power. If we stand still, our inaction could well give rise to an economic “Pax Sinica,” in which a surging China has the opportunity to shape Asia’s economic architecture as it would prefer, rather than as we might like.
There is a similar need for leadership in Latin America. Once the Colombia and Panama free trade agreements are approved, as I am confident they will be, the United States will have FTAs in place with more than two-thirds of the Western Hemisphere’s population. In the face of a backlash from anti-market extremists in Venezuela, Bolivia, and elsewhere, there is an opportunity to discuss how our various FTAs in the Hemisphere might be “knit together” to accomplish President Clinton’s goal of a free-trade zone of market economies stretching from the Arctic to the Strait of Magellan. As a first step, recently-implemented CAFTA provisions on cumulating clothing content within the region could be expanded to other sectors and regions.
Much depends, however, on what the new Administration decides to do about the North American Free Trade Agreement (NAFTA). Changing NAFTA will not do much to mitigate the opposition to it. Even a re-negotiated NAFTA would still face strong opposition from die-hard populists, who are far more interested in canceling the agreement than in debating the finer points of Mexican environmental law. And one must assume that in any re-opening of NAFTA that Canada and Mexico would have wish-lists of their own, perhaps involving some very sensitive political issues for the United States. If re-opened, it would require a considerable investment of the new administration’s time and political capital just to keep NAFTA in place. The risk is that while we are re-negotiating one agreement from fifteen years ago and sitting still on others, the rest of the world will be racing forward to sign free trade agreements without us.
Lesson #3: The rumors of the death of Doha are greatly exaggerated.
Doha is not dead. To be sure, hard negotiations remain, but many hard compromises have already been struck. The United States has invested seven years of grueling hard work that has brought a global agreement within reach. A global agreement in the Doha negotiations of the World Trade Organization would be an historic and signal accomplishment for the new administration, much as the Uruguay Round agreement creating the WTO was a hallmark of President Clinton’s time in office.
But the important lesson I’ve learned is that Doha is not and cannot be treated as a donor’s conference. India, China, and Brazil are not just emerging economies, they are emerging trading powers that bear a new responsibility for the success of the multilateral system.
Lesson #4: Trade Promotion Authority is hard to get, but worth the effort.
TPA is something few like to discuss, but which any President needs and should want. If the new administration decides to pursue any new free-trade agreements, or even if it wants to re-open old ones (which I certainly wouldn’t recommend), it will need the authority to negotiate deals with trading partners that will be assured an up-or-down vote in Congress. The decision this spring to ignore the TPA timelines for the Colombia FTA should not ever be repeated. The May 10 bipartisan agreement provides a very solid basis on which TPA can and should be renewed.
Lesson #5: Preferences are not entitlements.
Programs like GSP, ATPA, CBI, and AGOA are marvelous tools of economic reform and development, and should be stepping-stones toward deeper two-way reciprocal trade arrangements. But preferences are a lot like farm subsidies: they are easy to grant, but very hard to take away. Unfortunately Congress seems hooked on preferences; it is nonsensical that we can muster 300-vote majorities to give unilateral preferences to trading partners such as Colombia, but cannot find the will to approve a reciprocal trade agreement that would open Colombia’s market to U.S. exports.
I have learned to be very cautious about proposals that would vastly expand U.S. unilateral trade preferences. Developing countries get used to preferences and are famously reluctant to give them up; upcoming “preference erosion” negotiations are a sleeping monster in the WTO. And if countries like Bolivia don’t meet the criteria, their preferential access should be quickly revoked.
Lesson #6: FTAs, even with small countries, help to fight poverty.
On a vacation to Guatemala in 2006, I was driving in a rural area of the country when I noticed billboards saying, “Nuestro Futuro es Brocoli” – “Our Future is Broccoli.” Stopping at a gas station, I queried a local farmer as to the meaning of this strange message. He told me that in rural Guatemala, Mayan peasant farmers who for centuries had subsisted on corn and beans were now growing cash crops like broccoli for export, making money to send their kids to school. He didn’t say so, but I knew that CAFTA had done more to diversify the rural economy in Guatemala than decades of failed anti-poverty initiatives.
I’ve learned that FTAs are not only trade agreements but also as powerful tools to fight poverty. Opportunities abound. In Africa, for example, the new administration could use FTAs with reform-minded governments as a development model for others to follow; Ghana and Rwanda are two interesting possibilities.
Lesson #7: Foreign investment keeps America open for business.
The current financial crisis has taught us that now more than ever, we need to keep our country open to foreign investment and capital flows. Yes, the Chinese and the Indians have an awful lot of our money from our purchases of their clothing, toys, machinery, and electronics. I’d rather encourage them to re-invest that money back in the United States than see them use it to build domestic national champions to compete with us. The CFIUS process must be used with great care and caution, not as a tool of financial protectionism.
Lesson #8: In trade, to get the votes, you have to call the vote.
Trade votes are tough votes, for Republicans and Democrats, for freshmen and for veterans, no matter who controls Congress. I remember sitting with Ambassador Portman in the Speaker’s office on the day of the CAFTA vote. A steady stream of people kept coming in to say, “the votes aren’t there; maybe we should pull the agreement from the floor.” They’d been saying that for months. I remember thinking that I’d heard the same thing during the debates on TPA, on NAFTA, and on China PNTR. Many say the same thing today about the Colombia agreement. Generally speaking, it’s true that many members stay on the fence until the last possible moment, so you’re never completely sure all the votes are there. The only way to find out is to ring the bell and call the vote. When the bell is rung for the Colombia FTA, I am quite confident that it will pass with strong bipartisan support.
Lesson #9: Omit needless statistics! Trade CAN be discussed in human terms.
Pessimistic populists tell stories about real people who lost their jobs. Trade proponents break out the PowerPoint charts. We will lose that debate every time. There are real-life stories about people whose lives that have been made better because of open trade. We need to find them, and then go out and tell them, over and over and over again. And we should not be shy about openly discussing the benefits of imports, which make a wide variety of affordable, quality products available to us every day.
Lesson #10: Beware the “if only” chorus. Protectionists cannot be appeased.
The history of the 1930s means that few will admit to being protectionist.
Instead we hear from the “if only” chorus, who would have us believe that they will support trade if only there is just one more policy adjustment, one more condition, one last little bit of fine-tuning that – if accomplished – will suddenly yield easy victories for trade agreements.
Don’t believe it; hard-core opposition to trade is not really about the various preconditions that are demanded. Putting labor and environmental provisions into trade agreements did not prove to be the magic pathway to a new bipartisan consensus on trade. The May 10 agreement on labor and environment was ground-breaking and historic, yet populist opposition to trade is today stronger than ever.
The hard reality is that protectionists cannot be appeased. Just as we spent the last decade debating labor and environmental conditions for trade agreements, we may spend the coming years debating worker retraining programs, wage insurance, and pension and healthcare portability. All of these are important and worthy goals. But while finding common ground on these ideas may be necessary to rebuild bipartisan support for trade, that alone will not be sufficient. Something more is needed.
The fundamental question our country must answer is this: do we believe in openness for its own sake? Not as a necessary evil to be mitigated; but as a core strength to celebrate? Will we confront populist pressures and overcome them by offering a bold, optimistic vision of an America that is strong because it is open? Will we stand up for the proposition that our openness to the world – to its products, its people, and its investment capital – is fundamental to what we stand for as a nation?
In answering such questions, we cannot hedge. In the face of a coming surge of populist pressure to put up walls around America, nothing less than a full-throated campaign in support of openness will suffice. If our new president chooses to plant his flag firmly on the ground of openness, I will do everything in my power to help him. Thank you.