How to fix America's dysfunctional trade system
America's trade policy is in incoherent shambles. Decades of neoliberal "free trade" pacts — which as often as not simply gave corporations an end run around the state, or their very own rigged, pseudo-legal system — have created terrible social carnage around the world and a furious political backlash. And President Trump's incoherent, haphazard response has done little to change the system, let alone reform it in a sensible fashion.
Overhauling such a gargantuan, world-spanning system is a dizzying task. But Timothy Meyer and Ganesh Sitaraman at the Great Democracy Initiative have a new paper that presents a solid starting point for developing a fundamental reform of American trade structure.
Meyer and Sitaraman identify three large problems with the status quo, and propose policy solutions for each:
- The complicated and unbalanced structure of the bureaucracy that oversees trade policy
- The enormous pro-rich bias that is built into trade deals
- How the inequality resulting from trade routinely goes totally unaddressed
Let's take these in turn.
The extant trade bureaucracy — as usual for the American state — is highly fragmented and bizarrely structured. There is the Department of Commerce, the United States Trade Representative, the Export-Import Bank, and the U.S. Trade and Development Agency, plus the International Development Finance Corporation coming soon. Then there are a slew of other agencies that have some bearing on trade-related security or economic development.
Meyer and Sitaraman logically suggest combining most of these functions into a single Department of Economic Growth and Security. The point is not just to streamline the trade oversight structure, but also to make it consider a broader range of objectives. Neoliberals insist that trade is simply about making the self-regulating market more "efficient," but trade very obviously bears on employment, domestic industry, and especially security.
For instance, for all its other disastrous side effects, Trump's haphazard tax on aluminum has dramatically revived the American aluminum industry. Ensuring a reasonable domestic supply of key metals like that is so obviously a security concern — for military and consumer uses alike — that it wouldn't have even occurred to New Deal policymakers to think otherwise. It takes a lot of ideological indoctrination to think there's no problem when a small price disadvantage causes a country to lose its entire supply chain of key industrial commodities.
Then there is the problem of pro-rich bias. Put simply, the last few decades of trade deals have been outrageously biased towards corporations and the rich. They have powerfully enabled the growth of parasitic tax havens, which allow companies to book profits in low-tax jurisdictions, starving countries of rightful revenue (and often leading to companies piling up gargantuan dragon hoards of cash they don't know what to do with).
Corporations, meanwhile, have gotten their own fake legal system in the form of Investor-State Dispute Settlement trade deal stipulations. As I have written before, the point of these arbitration systems is to create a legal system ludicrously slanted in favor of the corporation — allowing them not just to win almost every time, but to sue over nonsensical harms like "taking away imaginary future profits."
Meyer and Sitaraman suggest renegotiating the tax portions of trade deals to enforce a "formulary" tax system — in which profits are taxed where they are made, not where they are booked. This would go a considerable distance towards cracking down on tax havens — who knows, perhaps Luxembourg might even develop some productive business.
Finally, there is the problem of distributive justice. Again contrary to neoliberal dogma, trade very often creates winners and losers — witness the wreckage of Detroit and the fat salaries of the U.S. executive class. Meyer and Sitaraman suggest new mechanisms to consider the side effects of trade deals (and ways to compensate the losers), to take action against abusive foreign nations (for example, by dumping their products below cost, or violating environmental or labor standards), and finally directly taxing the beneficiaries.
Something the authors don't discuss is the problem of trade imbalances. When one country develops a surplus (that is, it exports more than it imports), another country must of necessity be in a deficit. The deficit country in turn must finance its imports, usually by borrowing. That can easily create a severe economic crisis if the deficit country suddenly loses access to loans — which then harms the exporting country, though not as much. This has been a disastrous problem in the eurozone.
The U.S. does have extremely wide latitude to run a trade deficit, because it controls the global reserve currency, meaning a strong demand for dollar-denominated assets so other countries can settle their international accounts. But this creates its own problems, as discussed above.
To be fair, this is not exactly an omission for a paper focused on domestic policy. Creating a specifically international trade architecture would require an entire paper of its own, if not a book or three. But it would be something future trade policymakers will have to consider.
At any rate, it's quite likely that trade policy will be a major topic of discussion in 2020 — if for no reason other than Trump's ridiculous shenanigans in the area. However, even that demonstrates an important fact: The U.S. president has a great deal of unilateral authority over trade. Democrats should be thinking hard about how they would change things. This paper is a great place to start.