A setback to American leadership on trade

The Senate’s rejection of Pre­sident Woodrow Wilson’s commitment that the US would join the League Of Nations was the greatest setback to American global leadership of the last century. While not remotely as consequential, the House votes last week that, unless revisited, would doom the Trans-Pacific Partnership, send a similarly negative signal regarding US willingness to take responsibility at a critical time for the global system.

Repudiation of the TPP by Congress would neuter the presidency for the next 19 months. It would reinforce concerns that the vicissitudes of domestic politics are rendering the US a less reliable ally. Coming on top of US failure to stop or join the Asian Infrastructure Investment Bank, it would signal a lack of US commitment to Asia at a time when China is flexing its muscles. And it would strengthen companies overseas at the expense of US businesses.

Both the House and Senate have delivered majorities for the trade promotion authority necessary to complete TPP. The problem is with the complementary trade adjustment assistance programme, designed to assist American workers, which most Republicans do not support and Democrats are opposing in order to bring down the TPP. It is to be fervently hoped that a way through will be found to avoid a catastrophe for US economic leadership.

Perhaps success can be achieved if its advocates can acknowledge that rather than being a model for future trade agreements, the TPP debate should lead to careful reflection on the role of trade agreements in America’s international economic strategy.

Four points seem salient. First, the era of agreements that achieve freer trade in the classical sense is over. The world’s remaining tariff and quota barriers are small, and often result from deeply held cultural values, such as Japan’s attachment to rice farming. What we call trade agreements are in fact deals on the protection of investment and on achieving regulatory harmonisation and establishment of standards in areas such as intellectual property. There may be substantial potential gains from such agreements, but their merits must be considered case by case. No reflexive presumption in favour of free trade should be used to justify further agreements.

Second, there must be a balancing of the political cost of legislating trade agreements. If just a fraction of the US political capital expended on the TPP had been devoted to supporting reform of the International Monetary Fund and ad­equate funding for international fin­ancial institutions and the UN, those objectives could have been attained, with greater benefit. Trade deals are of­ten defended on the grounds that commerce builds ties to other nations. A rebalancing by the US towards backing multilateral institutions that provide support for other countries, and away from demands for changes to their domestic policies, would enhance US prestige and influence.

Next, there should be careful consideration of the ramifications of trade deals that include some countries but exclude others. Where the grouping is natural, as with the North American Free Trade Agreement, or it reflects a clear political strategy, the argument is stronger than where the criteria are not clear. In rec­ent weeks, political necessity has led ad­vocates of TPP to offer increasingly ag­gressive formulations about how it enables the US to gain ad­vantage at the expense of China. We may come to reg­ret such provocation. But it will become important down the road to consider possible Chinese membership of TPP on terms no different from those applied to others.

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Last, the global economic challenge is profoundly different from a generation ago. Just after the cold war and the Latin American debt crisis, and with Asia’s China-led renaissance in its early stages, the challenge was to enable new mark­ets to emerge. Trade agreements that encouraged adoption of market institutions in developing economies and helped them access the industrial economies were crucial in creating a global economy. Today, we have such an economy, one that has supported the greatest economic progress in emerging markets. It works spectacularly well for capital and a cosmopolitan elite that moves effortlessly around the world. But it presses down on the middle classes who lack the wherewithal to take advantage of new global markets and who do not want to compete with low-cost foreign labour. Our challenge now is not to create more globalisation, but to make sure the globalisation we have works for all our citizens.

Ultimately, trade diplomacy must be one component of a broader approach whose primary stakeholders are not just global companies but also those concerned with economic equity, the environment, opportunities for workers to migrate and financial stability. If the TPP is to be secured, there must be clear signs that international economic diplomacy will turn to these concerns.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary