Welcome to another edition of “What’s the Deal?”, the blog that is always on the fast track, and always remembers to refill the TP.
In this week’s post, we’ll discuss a certain trade deal involving the U.S. and several Asian Pacific and North American countries that has generated significant controversy. While the debate unrolls around the country about the impact of the trade deal on Americans and the economy, it evokes the question: why do countries make trade deals with each other? And when they do make deals, how do they work and what impacts do they have?
To answer these questions it’s helpful to look back at past American trade policy and trade deals and their connections with the labor force, technology, commodity prices and more. Though not all information on the current trade deal is available yet, once the details are made public, we can use our historical lens to see what conclusions can be drawn about why this deal is controversial.
The Current: Fast Track to a Tough Vote
On Monday, President Obama signed into law a “fast-track” legislation for voting on the controversial Trans-Pacific Partnership (TPP), a trade deal with 12 Pacific Rim and North American countries. Though this “bill to vote for a bill” passed with bipartisan support, President Obama diverted from the support of many in his own party as Democratic stalwarts and progressive representatives such as Bernie Sanders, Sandy Levin, and Elizabeth Warren strongly opposed the fast track vote and the TPP in general.
This “TPA” or trade promotion authority as the fast track is known, grants the President and the U.S. Trade Representative Michael Froman the authority to have the trade agreement be a Yes or No vote in Congress; no further amendments to the bill can be made once the TPA is in place. Even with the “Yea or Nay” decision process in place, however, the TPP still has to be agreed upon by a majority of Congress – not a forgone conclusion by any means.
The TPA: Once negotiations are completed on the agreement, Congress promises to either accept or reject the entire package without making amendments. This portion of TPA is essential, otherwise Congress is likely to start amending the first line of any agreement and probably would not stop making changes until the very last sentence
The all or nothing approach to deciding on trade deals is controversial as many people feel that the people do not have a chance to voice their opinion on the deal and that Congress is effectively shutting out their own regulatory power.
Who is Responsible for Trade Agreements? Why the need for Fast Track?
As seen from the congressional compromises in U.S. history, trade deals were historically the responsibility of Congress to approve deals (Congress must approve all treaties with other countries) initiated by the Department of State (executive branch). In 1962, the Trade Expansion Act created the office of the Trade Representative and appointed the Special Trade Representative (STA) to be a specific adviser to the President and Congress with the responsibility of setting U.S. trade policy and trade investment relations at the rounds of global trade organization talks.
This is the current STA Michael Froman’s job during the current negotiations for the TPP. Froman must walk a tightrope amidst negotiating a deal with so many countries. These countries also know that Congress must approve the deal and that Congress is famous for making many amendments – some of which may not be to the liking of the member countries. This “Fast Track Approval” has its roots in the 1934 Reciprocal Trade Acts which gave the President a final word on tariff rates set by Congress. The fast track morphed in the Trade Act of 1974 to return the final deciding power back to Congress. This renewal of the same act is what was just granted in the TPA passage.
TPP: Because It’s Been 11 Years
The purpose of the trade agreement is to lower tariffs (or other trade barriers) on imports / exports (such as agriculture, goods, and services) in all countries involved and to establish new rules on labor, the environment, intellectual property rights and foreign direct investment.
Currently, the U.S. has Free Trade Agreements (FTAs) with 20 countries and many other trade & investment frameworks with others, but there is no overarching deal with Asian-Pacific countries (Between them, the participating countries make up 40% of the global economy). Lowering trade barriers is a typical part of most trade agreements so that countries have an easier time selling goods they produce and have easier access and lower costs on imports with all countries involved.
The huge trade deal is the first major trade agreement for the U.S. since the North American Free Trade Agreement (NAFTA) was agreed upon in 1994. In conjunction with the TPP, President Obama is attempting to work with the European Union on a separate giant trade deal called the TransAtlantic Trade and Investment Partnership (TTIP). The deals are controversial as they cover huge breadths of trade and international policy related to the environment, labor, imports/exports, and of course tariffs.
Were trade deals always controversial? What historical trade deals and policy give a good background for how the U.S. conducts its international trade and why the large deals are controversial?
Turns out the Economy was and still is Interconnected
The current aim of American trade policy has been to maintain open markets (free trade) and spurn tariff protected industries. This policy has been in place for decades, but was not always the case. American industries were specifically sheltered by high import tariffs for much of the country’s history.
Low to moderate tariffs (proposed by Alexander Hamilt0n) in the 1790s suggested not protectionism, but encouragement of imports with duties to help finance the debt accumulated in the Revolutionary War. Hamilton’s ideas were a precursor to early American trade policy: encourage trade, but protect fledgling industries.
Trade was cut nearly completely by the Embargo Act of 1807. President Thomas Jefferson’s efforts to spurn Great Britain (who had been seizing American ships to attempt to force America’s hand in taking their side during the Napoleonic wars) effectively cut off international partners and imported commodity prices rose by about 33% and by one estimate, the static welfare cost of the embargo was about 5% of GDP.
Though Jefferson was effective in cutting economic relations with Great Britain, the overall experience was a negative one for American finance and industry – resulting in a repeal and reopening of trade during the non-intercourse act of 1809. One effect of turning inward during this time was a reallocation of resources from trade dependent industries (eg. Shipping) to crop production such as cotton – but this embargo adventure showed the importance of international trade for the American economy and its economic dependence (for the moment) on its former colonial ruler.
Tariff-ic Changes Part of U.S. Political dichotomy
Tariff rates rose into the 19th century until 1830 to help finance the War of 1812 and Western expansion. This included the famous “Tariff of Abominations” of 1828 so called because the protective tariff raised costs of imports so much so that the cost of living particularly in the South rose significantly. This tariff and the legislative fights that ensued following it saw one of the first attempts (first by South Carolina’s Senator Calhoun) to break away from the Union and was another representative example of the schism between North and South.
The period of 1830 – 1860 saw one of only two periods in which the tariff rate declined (the other being 1930 – present). Protectionists (led by Senator Henry Clay) generally desired higher tariffs and attributed high tariffs to high prosperity and income. Free traders (led by John C. Calhoun) thought the inverse was true. So, the two political sides forged a series of tariff acts and compromises that were intended to lower import tariffs gradually until a sharp reduction in 1842.
Beginning with the Tariff Act of 1832, high tariffs were levied on goods such as cotton, iron, and wool – goods that were intended to be protected. The compromise act of 1833 lowered the same tariffs annually by small percentages that still afforded these industries protection until 1842, when sharp reductions would take the tariff duties to a horizontal 20% level that Calhoun and the free traders desired. Each of these levels was gradually reduced until 1857 when new legislation was passed, and a “near free trade” level was reached. The lowering of duties on certain items was quite dramatic: The duty on rolled iron for instance decreased from 87% in 1834 to 20% in 1846, a 67% drop!
A good example of how technology has its effects on international trade policy is best seen through the iron industry. England had access to its own iron deposits, coal deposits, and the technology to use both in order to manufacture and export rolled iron and pig iron very cheaply. Due to this cheaply available import, American iron manufacturers would be in need of protection by a tariff. The use of anthracite coal in the iron making process in the 1840s, however, increased production of iron in the U.S. and lessened the need for protective tariffs – coinciding with the dropping tariff rate.
Some of the tariff acts occurred near or around economic panics in the U.S. The protectionist side tried to pinpoint the crises of 1837 and 1857 to the lowering of trade barriers. In reality, the crises were not related to the tariff acts, but more to the bank failures, speculation, and unduly expanded credit that occurred alongside. Similarly, free traders have attempted to show that higher tariffs were the cause of panics and that lower tariff rates improved economic activity and trade.
What the trade debates in the mid 19th century show is that protective tariffs (trade barriers) and their effect on costs and the economy as a whole were not a direct connection. Often there were several other underlying features which impacted the economy on a greater scale than the protective tariffs.
Tariffs or Free Trade = Large-scale Economic Growth?
Following the Civil War, high tariffs returned to protect domestic production from imports, one example being sugar production in Louisiana. The McKinley Tariff of 1890 raised prices on imported goods such as tinplating that encouraged the development of fledgling American manufacturers.
Rapid GDP growth in the late 19th and early 20th Century, it has been argued, was caused by higher protective tariffs such as on sugar and tin plating. The evidence shows, however, that similar to earlier in American history there is a correlation, but not necessarily causation. Labor force production and capital accumulation in non-traded sectors had a larger impact than protective tariffs.
In a different period of economic growth, the post-world war II era saw huge economic gains, but protective tariffs were relatively low.
Similarly, the post 1973 era ushered in an era of “free trade” but economic growth was significantly lower than the post-war decades and remained sporadic until the late 1990s. So again, little claim can be made for causation of economic growth following the initiation of higher protective tariffs or removing trade barriers domestically.
In the late 1800s, the U.S. changed from an exclusive exporter of commodities and net importer of manufactured goods to an exporter of both commodities and manufactured goods. This is accounted for by an abundance of natural resources from the settling and expansion of the country’s borders as well as growth of industry, technology, and labor to match. Once the U.S. had become a net exporter, economic growth could increase even further if market access were achieved. Unfortunately, many overseas markets had in place many of the same trade barriers that the U.S. themselves had had to protect their own industries.
The “free market” benefits everyone, especially America
The initiation and control of trade with other countries has been a sign of ascension to an upper echelon economy and world power throughout history. The first international trade “agreements” were hardly agreed upon, but mainly a result of an intimidation factor and saber rattling. From French and British outposts in India, to the Portuguese along the African coast and the Dutch in the East Indies, trade came to be synonymous with colonialism and intimidation.
When Commodore Matthew Perry flew the American flag from a naval warship outside of Japan in 1854, the act was intended to force the Shogun regime to open their markets to the West, similar to the Opium Wars initiated by the British to open Chinese markets a decade earlier. China itself became an open trading partner with the U.S. in 1844 with the Treaty of Wangxia and in 1858 with the Treaty of Tianjin after the 2nd Opium War. These deals were seen as unequal as they gave Americans privileged status in trade and extracted concessions from the Chinese.
Similarly, when President Roosevelt sent a fleet of sixteen battleships nicknamed the “Great White Fleet”carrying 14,000 soldiers and 250,000 tons of arms in 1907 on a global tour, it was a not-so-subtle showcase of American power. While the military specter was impressive following a victory in the Spanish-American War and annexation of Hawaii, it was also a symbol of economic might and power for the Americans that was echoed in a new-found colonial reach from the Pacific (the Philippines) and Hawaii to the Caribbean and Central America.
Following World War 2, the U.S. and other countries wanted to set up as much free trade as possible for the purpose of opening up economies on a global scale. The aim was to prevent super-protectionist and isolationist policies that resulted in the Great Depression and initiated a totalitarian drive to War. The highly protectionist Hawley-Smoot Tariff of 1930 was famous for sowing distrust among nations with high tariffs on agricultural goods first, then protective tariffs on other manufacturing sectors. High tariffs along with the onset of the Great Depression (Hawley – Smoot was less a cause, than a result of the depression) ground international trade to a halt with U.S. imports from Europe declining from 1.3 Billion in 1929 to 380 million in 1932.
The initial agreements called the General Agreements on Tariffs and Trade (GATT) were a precursor to the current installment of this global free trade network called the World Trade Organization (WTO, begun in 1995).
The creation of the GATT and WTO turned the focus of trade from small, bilateral arrangements to a global scale marketplace where all countries involved voluntarily lowered tariffs to increase trade activity. The WTO now consists of over 150 countries and has operated with the general mantra of “reciprocity“, the idea being that member countries will make agreements with other members to lower their tariffs on something if the other does it too. (with certain industries allowed to be protected under “exemptions” such as some agricultural products). Member countries also agree to not add extra taxes to imported goods, or sort of reroute protectionism.
While the GATT and WTO have been in general a success for opening markets for exporters and importers alike, developing countries that are members may be left with little power once they enter a deal with a larger economy or larger exporter. Consequently, many other trade organizations have been created in the last few decades as organizations with specific interests or that already had regional agreements.
Many feel that the WTO is a modern day method for larger economies to coerce smaller developing markets into opening their markets without sufficient protection from tariffs. This legacy and difficulties with the WTO make larger trade agreements sensible in the long term.
Conclusion: Large Trade Deals and Modernizing Rules
Most people would agree that creating an arena for free trade to open international markets along with rules on environmental protection, the rights of labor, and digital guidelines are much needed in the internet age. More than 80% of Americans are in favor of international trade agreements – mainly because of the prospect of opening international markets and cheaper prices. Quarrels and disagreements begin, however, when the trade agreement process is not transparent and international agreements are highly influenced by small cadres of global businesses and governments.
The biggest gripe with lowering trade barriers is that there can be negative effects on American laborers who would see their own domestic market flooded with cheaper goods from other products; essentially, American goods sold at home would have less protection from tariffs as imports would be cheaper.
The effect of globalization facilitated by trade deals, such as NAFTA, has held down wages in rich countries and labor force participation according to a new paper by Ann Harrison of the University of Pennsylvania. This effect is intended to be offset by a corrollary to the TPP, the TAA, or trade adjustment assistance; designed to assist American workers whose job has been cut or directly impacted by international trade. The impact on American workers is the primary reason that AFL/CIO labor unions are very outspoken in their opposition to the deal.
Another issue with the potential positive impact is that the impact on GDP is minimal, estimated at only 0.2%, and comes mainly from the 12th member of the TPP, Japan, whose lifts on trade barriers may not include agriculture and auto parts (details yet to be released). The pro-TPP argument usually consists of “Falling tariffs = greater US exports and higher US GDP.” But this argument is too simplistic and not entirely accurate as the numbers portrayed by models show relative minimal impact.
The more potentially sinister side of the deal concerns the rules portion which constitute some of the controversy. The TPP is supposed to establish rules in trade so that labor rights are followed in all participating countries and that certain environmental standards, such as the trade of illegal products (such as ivory) or endangered species is prohibited. But of course relaxation of standards or strict implementation cannot be confirmed because the details are still not public. So if there are issues, the devil certainly is in the details. Will these rules, if stringent, actually be enforced? If the rules are broken, are there quick ways of dealing with the problem? Will global businesses have more control over telecommunications and the internet as a result?
There are significant worries about the scrapping of environmental regulations, rules about internet providers having to invest in hardware and availability, and about labor rules. Further, Senator Levin complains that the TPP does not address whether or how climate change issues should be addressed.
These issues and lack of details are harped on by many Democrats as reasons to oppose the TPP and especially the fast track. Now that the fast track is in place, the TPP will be fiercely debated with these issues and transparency at the forefront by progressives such as Elizabeth Warren.
Finally,the idea of the TPP seems to make sense from all sides, but as its written in its present form (that is already fast track approved and can’t be amended), it is missing key elements and may fail to bring about the economic objective at the expense for an added piece to President Obama’s legacy. His strong push for the deal even with missing components supports this notion. The U.S. has as much a political agenda with the trade deal as economic. The TPP is part of President Obama’s strategic “pivot” to Asia to potentially counter China’s economic influence in the region and attempt to address the allegations against China that they manipulate their currency to make import/export deals in their favor.
Without China’s inclusion in the deal, the world’s second largest economy, (nearly 1st) who can make a huge difference in the Asian-Pacific market, will attempt to close their own trade deals with the same countries as the TPP – so the lowering of trade barriers may be more favorable to the Chinese in the end.
All these arguments and more are at the table as Congress debates the trade deal and gives either the thumbs up or thumbs down.
Until the next 3 letter acronym,
LOL, your faithful historian,
Eric G. Prileson
Sources and Further Reads:
Accessed July 2, 2015. http://www.nber.org/reporter/summer06/irwin.html.
“ASEAN Framework For Regional Comprehensive Economic Partnership.” ASEAN Framework For Regional Comprehensive Economic Partnership. Accessed July 1, 2015. http://www.asean.org/news/item/asean-framework-for-regional-comprehensive-economic-partnership.
“Asia-Pacific Trade.” AsiaPacific Trade. Accessed July 1, 2015. http://asiapacifictrade.org/?page_id=470.
Elms, Deborah K., and C.l. Lim. “An Overview and Snapshot of the TPP Negotiations.” A Quest For a Twenty-First Century Trade Agreement The Trans-Pacific Partnership, 2012, 21–44. doi:10.1017/cbo9781139236775.007.
“Fair Wind Blowing.” The Economist. The Economist Newspaper, 2015. http://www.economist.com/news/united-states/21656187-what-trade-deal-asia-could-most-usefully-include-fair-wind-blowing.
“Japanese-American Relations At the Turn of the Century, 1900–1922 – 1899–1913 – Milestones – Office of the Historian.” Japanese-American Relations At the Turn of the Century, 1900–1922 – 1899–1913 – Milestones – Office of the Historian. Accessed July 9, 2015. https://history.state.gov/milestones/1899-1913/japanese-relations.
Kinzer, Stephen. Overthrow: America’s Century of Regime Change from Hawaii to Iraq. New York: Times Books/Henry Holt, 2006.
“Levin Floor Statement On TPA and TAA.” Levin Floor Statement On TPA and TAA. Accessed July 1, 2015. http://democrats.waysandmeans.house.gov/press-release/levin-opening-remarks-tpa-hr-1314#.vxrje9cz_b4.twitter.
“Obama Signs Trade, Worker Assistance Bills Into Law.” The New York Times. The New York Times, 2015. http://www.nytimes.com/aponline/2015/06/29/us/politics/ap-us-obama-trade.html.
“The Opium War And Foreign Encroachment | Asia for Educators | Columbia University.” The Opium War And Foreign Encroachment | Asia for Educators | Columbia University. Accessed July 6, 2015. http://afe.easia.columbia.edu/special/china_1750_opium.htm#war.
“The Tariff Of Abominations: The Effects | US House of Representatives: History, Art &Amp; Archives.” The Tariff Of Abominations: The Effects. Accessed July 7, 2015. http://history.house.gov/historicalhighlight/detail/36974.
Taussig, F. W. “The Tariff, 1830-1860.” The Quarterly Journal Of Economics 2, no. 3 (1888): 314. doi:10.2307/1879417.
“WORLD TRADE ORGANIZATION.” World Trade Organization. Accessed July 8, 2015. https://www.wto.org/.
“What Is The Trans-Pacific Partnership (TPP) Really All About?” The Baseline Scenario, April 2015. http://baselinescenario.com/2015/06/04/what-is-the-trans-pacific-partnership-tpp-really-all-about/.
“What You Need to Know about the Trans-Pacific Partnership.” PBS. PBS. Accessed July 1, 2015. http://www.pbs.org/newshour/making-sense/full-dress-battle-awaits-know-tpp/.
“Fast Track Passes and Symbolically the Rig Count Increases for the 1st Time This Year…” Fast Track Passes and Symbolically the Rig Count Increases for the 1st Time This Year… Accessed July 1, 2015. http://www.dailykos.com/story/2015/06/29/1397584/-fast-track-passes-and-symbolically-the-rig-count-increases-for-the-1st-time-this-year.
The Ex/Im Bank, OpEd column, by Barack Obama, published in the Boston Globe, 7/1/2015
Irwin, Douglas A. Historical Aspects of U.S. Trade Policy National Bureau of Economic Research, Research Summary 2006. http://www.nber.org/reporter/summer06/irwin.html#N_4_