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As President Obama begins his second term, our gross domestic product is in recovery mode. But the jobs market is still in a Great Recession. Unemployment hovers stubbornly around 8 percent. At current rates of growth, it isn’t likely to fall to the projected “new normal” of 6 percent for another eight to ten years. An even higher proportion of the population cannot find a full-time job, and there are more long-term unemployed workers than ever before.

Obama spent little of his first term working on job creation, mistakenly believing he’d already solved the problem with his stimulus. Last fall, facing a slowing economy and high unemployment before Election Day, he finally shifted his policy focus. Let’s hope that this time around Obama realizes that fixing the jobs hole is critical, and that it will require every tool in his kit. The national obsession with cutting the deficit immediately is likely to limit further fiscal stimulus and investment in infrastructure, which is why the president must not neglect another key strategy: rethinking America’s trade policies.

Until now, the president’s attitude toward trade has not differed in any serious way from that of his predecessors. He has taken a few steps to curb Chinese imports but has made no comprehensive push to ensure our partners are trading fairly or to adjust past agreements in light of our nation’s employment emergency. Obama not only failed to keep a 2008 election promise to amend the North American Free Trade Agreement with Canada and Mexico; he reaffirmed NAFTA’s outdated principles when signing new trade agreements with countries such as Colombia and Panama.

The president’s actions here are something of a mystery. He still seems to think that bilateral free-trade agreements (FTAs) — agreements with individual nations to cut tariffs and other barriers to the trading of goods and services — are a key path to job growth. This past year, he spoke repeatedly about doubling exports through the signing of these agreements, claiming their implementation would help create jobs in manufacturing. But he ignored the impact of imports, which tend to increase under FTAs and cause trade deficits that send jobs overseas. Some manufacturing jobs have come back since the lowest point of the recession, but as Robert E. Scott of the Economic Policy Institute notes, this phenomenon is due almost entirely to the increase in domestic demand as the economy improves rather than to the Obama Administration’s trade policies.

Late in 2011, the president signed an FTA with South Korea. Since the agreement’s implementation last March, there has been a substantial rise in America’s trade deficit with Korea. It is likely, says Scott, that the United States will lose nearly 160,000 jobs because of the agreement.

Perhaps FTAs are Obama’s way of placating a business community otherwise so critical of Dodd–Frank reregulation policies and the administration’s call for higher taxes on the rich. The deals benefit no one so much as exporters and companies that invest overseas, a fact that might also explain why the FTAs Obama likes are the same kinds that were favored by George W. Bush.

There is another troubling side to Obama’s trade policies. Trade agreements can be used to pressure our partners to improve labor standards in their own countries in exchange for access to and new investment from the U.S. market. In other words, we could foster progressive employment-standards improvements of the kind we implemented here in the late nineteenth century. Rising wages and better conditions abroad would in turn level the playing field for American companies.

Obama has talked about enforcing labor standards internationally — and he claims his FTAs do so, if modestly. But he now seems willing to jettison this critical principle as he pushes for one of the broadest trade agreements yet, a nine-nation pact called the Trans-Pacific Partnership. The TPP originated under Bush but is only now nearing completion. The president has been eager to finalize the partnership, which he views as a possible bulwark against spreading Chinese influence, a part of his administration’s new Asian focus. But the deal would include Vietnam, whose labor conditions are among the worst in the world, a fact unlikely to be affected by membership in TPP. Given how enticing access to Vietnam’s large, growing economy is to American businesses, Obama has decided simply to look the other way.

Its inclusion of Vietnam isn’t the TPP’s only worrisome element. The agreement contains an unfortunate provision adapted from NAFTA. Like Clinton before him, Obama is so determined to stimulate investment that he has been willing to give individual companies the right to sue national and state governments over regulations such as capital controls or minimum wages that might present obstacles to trade. Under these provisions, a formal challenge by a business is sent to an international tribunal of experts, which decides whether the regulations in question ought to be changed and whether a nation will be sanctioned with fines. The results of such tribunals could well spur further deregulation, thus watering down standards governing everything from worker safety to unionization. If this sounds like a deliberate relinquishing of national sovereignty, that’s because it is.

NAFTA offers several good examples of how the tribunal system works in practice. In 1999, the Canadian company Methanex sued the state of California for barring the sale of the gasoline additive Methanex made. A university report had found that the poisonous additive could contaminate groundwater. Though Methanex didn’t ultimately win the $1 billion suit, trade analysts say the claim had a chilling effect on subsequent state regulations.

“For all the talk about bipartisanship, the only real bipartisanship under Obama has been over trade agreements,” says Mark Levinson, chief economist of the Services Employees International Union. “The Republicans have loved them.” What is clear, Levinson says, is that TPP will protect corporations far more than it will workers or the environment.

For those like me who studied free-trade economics in their youth, the hold of its simple, compelling promise — that if every country exports what it makes most efficiently, everyone is better off — can be difficult to shake. After World War II, the rapid growth in global trade seemed to confirm this belief. Europe and then Japan became wealthy, the United States still wealthier.

But as this nation’s trade surplus turned into a deficit in the 1970s and we increasingly traded with low-wage nations, the flaws in free-trade theory became apparent. It required heroic assumptions that were often ignored — for starters, that all trading countries would always enjoy full employment. Thus the fifty-five-year-old machinist who lost his job as American production moved abroad would find a new one waiting for him.

The theory also assumed that trade was really free, but this was never completely the case. There were many non-tariff barriers to trade: state subsidies to businesses, restrictions on the distribution of foreign goods, cultural inhibitions about the buying of them, and, most conspicuously, manipulation of currencies to make exports artificially cheap. The United States was not innocent in this regard. For example, it consistently maintained quotas on Japanese imports to protect Detroit automakers.

All other things being equal, free trade among nations deserves promotion. Protecting domestic jobs at the expense of subsistence jobs in poorer nations is hardly a humanist approach. But the failed record of free-trade agreements can no longer be ignored. Twenty years after the passage of NAFTA, the evidence from that agreement and a dozen or so other FTAs is overwhelming. All have fallen short of their basic promise of benefiting all participant nations. NAFTA may have been responsible for the loss of as many as 700,000 U.S. jobs, according to Robert E. Scott, as the trade deficit with Mexico soared. Trade liberalization with China over the past decade, which led to a trade deficit of some $300 billion last year — about half America’s overall deficit — may have cost the nation 2.7 million more.

Economic relationships are admittedly complicated. Some economists argue that trade deficits do not automatically result in lost jobs. Lower prices on foreign goods free up resources to be spent in other parts of the U.S. economy. So the United States could in theory thrive as trade deficits rise. But even simplistic government models, which claim any tariff is an impediment to growth, show only a marginal improvement in America’s GDP due to NAFTA, according to Kevin Gallagher, an economist at Boston University. And these same models, says Gallagher, show several hundred thousand lost jobs.

The intransigent unemployment rate is not the nation’s only job concern at present, or even its greatest. Many of the jobs created since the recovery began in mid-2009 are simply bad — they pay low wages and offer few prospects for better work in the future.

Many mainstream economists believe that growth is simply not strong enough because it’s still held back by high levels of household debt from the housing boom. Once debt levels fall, they argue, faster growth will solve our problems. But this can’t be the whole answer when so many bad jobs are being created even while the economy grows. And it is increasingly obvious that trade has a lot to do with job quality.

Fortunately, there are signs the conventional wisdom is beginning to change. The Princeton economist and former Federal Reserve vice chairman Alan S. Blinder was among the first mainstream economists to admit that almost anything that could be automated could be manufactured overseas. Labor economists such as David Autor of MIT and Lawrence Katz of Harvard wrote papers showing that middle-class jobs were being lost as Americans bought products from foreign companies and domestic companies moved production offshore.

In 2008, a few months before becoming Obama’s chief economic adviser, Lawrence Summers wrote a piece in the Financial Times acknowledging that

there are reasons to think that economic success abroad will be more problematic for American workers in the future. First, developing countries increasingly export goods such as computers that the US produces on a significant scale, putting pressure on wages. At the same time, rising global prosperity increases the rewards accruing to the already highly paid producers of intellectual property goods such as films.

But few bold new plans to address these facts are forthcoming. The chief response to the growing recognition of the challenges free trade brings has been the call for a better-educated workforce, which will supposedly allow the United States to make ever more sophisticated products with which less developed nations can’t compete. And who could argue with that? Education is like motherhood and apple pie to economists. But they’ve been relying on the same narrative since the 1980s. I doubt we can wait another ten or twenty years for this education revolution — nor is it likely ever to come, given Washington’s attachment to reducing the deficit at the expense of investing in the nation’s future. In any case, improved education is at best a partial answer. To most economists, tinkering with the fundamentals of free trade is simply off-limits.

There ought to be a way to moderate the damage done by free trade without undermining its advantages. For a century after the Civil War, economic growth in the United States went hand in hand with rising wages. If a large national economy can be win-win, why can’t a large world economy?

We could start by analyzing every trade agreement to see who wins and loses. The U.S. International Trade Commission does just that, but its methodology is not open to public scrutiny, and the results of its analyses do not occasion serious debate.

Next, we could take more seriously the goal of creating and enforcing higher labor standards abroad. In 1998, the International Labour Organization developed a list of such standards, including guarantees of unionization rights and provisions against child labor and basic forms of age-, gender-, and race-based prejudice. But enforcement will be shoddy unless Obama takes the lead, and it looks like he won’t.

A third approach is to curtail currency manipulation, which frequently harms American producers of goods. Thea Lee of the AFL-CIO argues that provisions to prevent currency manipulation should be built into new trade agreements. Others have suggested levying tariffs on imports unless such manipulation is stopped.

It is also time for more aggressive industrial policies in the United States, including direct investment in new technologies and infant industries and significantly more subsidies of nondefense research and development. As a proportion of GDP, such spending has fallen significantly in recent years. Finally, a safety net including not just unemployment insurance but also high-quality job training should be developed for those put out of work by trade.

But President Obama’s first step should be to rethink TPP. With a new term, he has a new chance on trade policy. He cannot afford to be tepid in pursuing serious change this time around.


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February 2014

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