That we need leaders who can unite the American people has become a cliche. So perhaps one should be glad that Bernie Sanders, a sharp-left Democratic candidate for president, and Donald Trump on the Republican side, agree on at least one thing: U.S. trade policy is bad.
Both argue that current trade arrangements harm the U.S. economy and pledge drastic changes if elected.
At the risk of being a wet blanket, let me suggest that neither of the two — nor any other candidate in the race — would or could actually change much on trade if elected. U.S. trade policy is complicated, and enacting drastic changes would open up whole bins of worms. Sanders and Trump obviously do not know what is involved, and neither does the great majority of the population. So a little review of history and issues is useful.
For nearly the first century and a half of our nation’s existence, we did exercise autonomy in setting tariffs and other trade relationships. By this, I mean that we did not consult with other nations on what our tariff levels might be. And, in law at least, there was no reason why we could not set one level of import duty on a product from Germany and a different one on the same product made in China.
However, the Reciprocal Trade Agreements Act of 1934 began to change all that, and the process was advanced after World War II by trade sections of the Bretton Woods conference and institutions that re-established international economic relations.
These included a planned International Trade Organization strangled at birth by a U.S. Congress that refused to ratify U.S. participation. A much more modest General Agreement on Tariffs and Trade took on some of what had been planned for the ITO in terms of coordination of international trade. This agreement, which had little actual power and a tiny staff, eventually transformed into today’s World Trade Organization in an eight-year negotiation process beginning in 1986.
Both of these, the U.S. RTAA and the multilateral GATT-WTO, sprang from a reaction to the U.S. Smoot-Hawley Tariff of 1930. That high-tariff law had touched off rounds of beggar-thy-neighbor trade restrictions by many nations that, taken together, helped make the Great Depression far more global and far more severe than it might have been.
It became immediately apparent that Smoot-Hawley was a tragic mistake. The RTAA was a Roosevelt administration initiative to undo some of the damage. Largely for domestic political reasons, it emphasized reciprocity. The president was authorized to negotiate with other nations, on a one-by-one basis, to lower restrictions on imports of each other’s products. You scratch my back and I’ll scratch yours.
Up to then, tariff changes had been unilateral. Now they were bilateral and were codified in agreements that had the force of international law rather than in simple domestic legislation. They could not be changed except through new negotiations or through a difficult process of repudiation of what were essentially treaties.
The post-World War II GATT made these negotiations multilateral. All member nations negotiated with each other in periodic “rounds” of talks. The principle of nondiscrimination became primary. Canada did not have to charge the same taxes on imports of tableware or boys underpants as did, say, Denmark. But if either agreed to a lower tariff on these items, the new rate had to apply to goods from all other member countries. Canadian import taxes for each item had to be the same whether the source was Japan, Brazil, France or any other member country.
Duties charged on imports from nonmember countries could be higher, and they could vary by country of origin. But in a leveling-down process, any single member country had to treat every other member country as well as it treated “the most favored nation.”
One result was that when a new country joined the GATT, all member countries automatically had to tax imports from this new member at exactly the same levels as they had previously taxed all the rest. If one had charged higher duties on goods from that country before it joined, the lowering was automatic and mandatory. It did not involve any direct, one-to-one negotiations with the new entrant, only those discussions internal to the group as a whole and between the group and the applicant.
Now, if a newly elected President Sanders or President Trump wanted to get tough with the Chinese, all he could do legally is petition other WTO members for a new round of talks.
Yes, we simply could flaunt the terms of the legal contract we have signed. The U.S. is notorious for doing that, but only in limited ways, as with Canadian softwood and Brazilian soybeans.
And yes, a president could ask Congress to pass a law withdrawing our country completely from the WTO, or NAFTA, for that matter, without any negotiations at all. Countries can legally repudiate treaties they have signed. But this is an all-or-nothing measure.
And make no mistake about it, U.S. repudiation of its membership in a world trade regime that we helped establish and that every administration, Republican and Democrat, has supported over 80 years would throw the global economy into chaos.
The forces of populist nationalism and even xenophobia are stronger now in many regions, especially Europe, than they have been for 70 years. Reaction to the dominant global power picking up its marbles and retreating into economic isolationism would be strong.
My home state of Minnesota is highly dependent on trade. Corn, soybeans and pork all have much higher prices to farmers than if we did not export. Ditto for pacemakers, heart valves and all the sorts of high- and low-tech products made by local companies. But nearly every state is affected and particularly those for which agriculture is important. We have an enormous amount to lose from an end to the existing system.
Yes, Donald Trump would have one believe that with his negotiating experience, he could go directly to the Chinese and they would somehow limit sales from Chinese companies to U.S. buyers. But he does not have a threat to back that up. And our country has a lot to lose.
There is no question Sanders and Trump are correct in arguing that increased trade, especially that which resulted from China entering the GATT-WTO system, has done harm to blue-collar labor and benefited owners of capital. Economists have been correct for 240 years in arguing that trade can benefit both countries. But it does not benefit everyone in each country.
Moreover, there are practices, such as measures to artificially lower the exchange value of one’s currency, on which our nation historically has some legitimate complaint. But after six years of a near-zero interest rate policy, we no longer have much credibility on that issue.
Sanders and Trump are forging a bipartisan anti-trade cohort. More moderate and well-informed Republicans and Democrats need to form a countervailing bipartisan movement that defends the basic structures and agreements U.S. trade policies have fostered for 80 years.
St. Paul economist and writer Edward Lotterman can be reached at email@example.com.
2 WAYS TO SEE LOTTERMAN IN BOISE
Ed Lotterman, the former Federal Reserve economist whose column has run in the Statesman for 10 years, will speak Friday, Nov. 20, at the Boise Metro Chamber of Commerce’s annual economic summit.
The event is from 8 a.m. to 10 a.m. at the Boise Centre, 850 W. Front St. The cost is $35 for chamber members and $45 for nonmembers, and includes breakfast. To register, go to boisechamber.org or contact Mike Swain at (208) 472-5212 or firstname.lastname@example.org.
The Statesman also invites readers to meet Lotterman and discuss economics over coffee. Anyone interested may come at 10 a.m. Thursday, Nov. 19, to the Statesman office at 1200 N. Curtis Road. There is no charge.
Please let Business Editor David Staats know if you plan to attend: (208) 377-6417 (leave a message), email@example.com or @DavidStaats.