On May 10, 2007, Congress and the Bush Administration announced a new bipartisan trade policy that would, among other provisions, guarantee enforceable labor and environmental standards in U.S. free trade agreements.
And while requiring our trade partners to meet internationally recognized standards for protecting workers’ rights and for protecting the environment is a commendable goal, it has been met with controversy, especially as to the affect it will have on the interests of U.S. manufacturers.
“Our trading partners should not be rewarded for gaining competitive advantage by repressing their workers and by permitting their air and water to become dirtier as they modernize and become more industrialized,” commented Alan Tonelson, Research Fellow at the United States Business and Industry Council (USBIC), an association representing small- and medium-size manufacturing companies.
According to Tonelson there is no question that many U.S. manufacturers suffer major competitive disadvantages when they have to compete against foreign rivals that do not have to pay the same kinds of regulatory costs as U.S. companies.
“The problem is that no one has come up with a remotely workable way to monitor and enforce conditions in the countries of our trading partners,” said Tonelson, “and that is one of the biggest problems with the New Trade Policy.”
The difficulty arises in enforcing American standards in other countries – how would the U.S. government monitor labor conditions and pollution violations – and what would be the consequences for not meeting our standards?
Tonelson envisions an unworkable scenario: “Think of it this way, how many zillions of American bureaucrats would have to be running around how many zillions of Chinese factories to make sure things are on the up-and-up, and how many zillions more American bureaucrats would have to be running around Indonesia, Brazil, India, Mexico, Pakistan, Vietnam and any other of our trading partners?”
“We do not have the manpower to monitor and enforce these provisions and we are never going to have it,” Tonelson noted. “It simply defies the ability of any government.”
The New Trade Policy, in an attempt to deal with enforcement standards, is focusing on aspects of our national trade policy that have been debated since NAFTA became a front-page issue in the early 1990s, “but have become purely symbolic and cannot possibly affect U.S. trade flow one iota,” Tonelson said.
There are many other aspects of U.S. trade policy that should also be considered and which the USBIC believes that the New Trade Policy fails to address, including currency manipulation, subsidies, intellectual property theft, and discrepancies in tax systems, such as Value Added Tax rebates, and trade expansion with low-income countries that are unable to afford U.S. products.
In a statement issued by the USBIC after the New Trade Policy was announced, the USBIC said that trade expansion with countries that are too poor to become consumers of U.S.-made products but are able to become producers of goods destined for the U.S. market is causing the U.S. trade deficit to reach dangerous levels.
“It has been known for quite some time that poor countries cannot jump start their own growth by cultivating their own market at home,” explained Tonelson. “These countries can grow only by selling their products to much wealthier countries.”
This “export-by-growth” model was manageable in the 30 or so years since the end of the Second World War when third world countries were really inert economically, especially in the manufacturing sector, and when these countries were the relatively smaller countries on the East Asian rim, such as Taiwan, Korea and Hong Kong.
“But once the export market started to include China and Mexico and other countries, that’s when it started to threaten trade stability, and in fact, has become a major threat to the stability of the entire world trading system,” said Tonelson, “because we are increasingly relying for production on countries and regions that cannot consume a reasonable share of that production.”
Although the belief has been that these poorer countries would start to become less poor and would be able to eventually afford more goods from other countries, including the U.S., this has not always been the case.
Tonelson noted that there was a great deal of rhetoric in the 1990s about emerging markets and countries that were transitioning from state-led economic strategies to something more liberal, such as China, and although the extent of Chinese reform has been astonishing, it is still not a free-market country, and is far from it.
“I don’t think that anybody who was generally trying to understand international trade dynamics could have possibly concluded that these new markets would emerge to a large enough scale, soon enough, to rebalance the trade flow for decades, if then,” Tonelson commented.
As for why these emerging markets haven’t quite “emerged” yet, Tonelson gives as reasons the staggering rates of un- and under-employment, rock-bottom wages and enormous populations that are growing rapidly, “which does not do much to turn people into regular consumers of western-branded products, which is what we make here in the U.S.”
To address one of America’s biggest trade policy challenges, the USBIC is endorsing the prompt passage of the bipartisan border equalization tax measure that is about to be introduced by Reps. Bill Pascrell (D-NJ), Michael Michaud (D-ME), Duncan Hunter (R-CA), and Walter Jones (R-NC).
According to a statement from the USBIC, “this bill would redress the inequities faced by U.S.-based producers by the World Trade Organization’s failure to address the trade distortions created by foreign Value Added Tax (VAT) systems and their rebates to exporters.”
A Value Added Tax is based on the estimated market value and added to a product or material at each stage of its manufacture or distribution, with the tax ultimately passed on to the consumer. It was originally introduced in France in 1954, and is now part of the tax structure of most Western European nations.
“The USBIC has determined that major distortions have been created for international trade flows by the fact that most U.S. trading partners use Value Added Tax systems and the U.S. does not,” said Tonelson. “And almost all the countries with a VAT also rebate the VAT for exports.”
Since the U.S. does not have a VAT system, we are ultimately hurting American manufacturers, “because it gives products coming into the U.S. a hidden subsidy and it also imposes a not-so-hidden penalty on U.S. exports,” contends Tonelson.
“And that is because U.S. exports, once they cross that foreign border, must pay the VAT and therefore the price of U.S. products go up,” Tonelson said.