Stirring up trade policy thinking

All the briefers, including me, opposed the Korea deal. (N.B. to anyone thinking of complaining troubled by the stacked deck: The globalization cheerleaders that run Congress and dominate the think tank world have perfected this practice.) The audience consisted of Hill staff plus a few journalists and policy activists. 

Except for my remarks and the questions they generated, the session revolved tightly around the latest report by the U.S. International Trade Commission of how a Korea deal would affect the U.S. economy and American trade flows (accessible at http://www.usitc.gov/publications/docs/pubs/2104F/pub3949.pdf). 

Treaty opponents fixated on the ITC conclusion that fully implementing the tariff cuts and related changes required by the agreement would increase America’s trade deficit with the world (due mainly to trade diversion), and harm certain industrial sectors. Supporters in the audience were equally fixated on the ITC conclusion that the deal’s provisions would increase U.S. exports to Korea faster than it promoted imports from Korea, and shrink the bilateral trade deficit.

Congress mandates such ITC studies of upcoming trade agreements, and the Commission is an independent government agency. So vigorously debating the ITC’s findings seems sensible – until you realize that the Commission’s forecasting record rivals that of the whiz who predicted Dow 36,000. 

Not that the Commission’s economics staff in particular lacks for dedicated professionals who do much valuable work. It doesn’t. But to determine the impact of U.S. trade agreements, you’d do just as well consulting a psychic.

The classic example is the Commission’s 1999 study of the effects of China’s entry into the World Trade Organization. According to this study – which you can read yourself at http://www.usitc.gov/publications/docs/pubs/332/ES3228.pdf – the tariff reductions and eliminations on both sides associated with this decision were going to increase America’s trade deficit with the PRC on a one-time basis (a standard metric) by $586 million. 

But the WTO deal’s tariff-related terms were expected actually to reduce the U.S. global deficit on a one-time basis by $674 million. 

China has now been a WTO member since the end of 2001, so the results are in. I’ll put it this way: I’m glad my name’s not on that report. From 2002 through 2010, the annual U.S. goods trade deficit with China skyrocketed by nearly $170 billion – nearly 300 times more than the $586 million tariff-produced improvement the ITC projected. 

The WTO-related tariff and similar changes may or may not have narrowed the global U.S. trade deficit by $674 million during these years. But that’s chump change compared with the $164.3 billion by which that deficit unquestionably did jump. 

In fairness, the ITC noted that tariffs and similar quantitative trade barriers would not be the only trade practices changed by the WTO accession agreement. China, it emphasized, engaged in a wide array of nontariff trade-distorting practices, and although the WTO admissions process targeted many, their effects on exports and imports were hard to quantify. 

The ITC also specified that of course its conclusions assumed full compliance with the agreement. In addition, as the report’s authors rightly stressed, the terms of trade agreements are hardly the only determinants of trade flows. Domestic economic policies, and national and global economic and financial conditions all play big parts, too  – and that just covers the economics-related forces. 

All of these complications apply to the Korea report, too. But they unavoidably (except, I guess, in political and policy circles) raise the question of why the ITC even bothers to publish estimates that it realizes are woefully incomplete. More important: Why does Congress keep demanding them in the first place?

Just as inexplicable are the thoroughly bipartisan politics of ITC fetishism. Congressional Democrats, especially in the House, have tended to oppose conventional trade liberalization exercises like the Korea deal (and indeed generally opposed WTO membership for China). 

As made clear during the Auto Caucus briefing, they and other critics know about the ITC’s dreadful forecasting record. They also know that the Commission’s admitted inability to quantify the effects of nontariff barriers inevitably produces overly rosy forecasts. But the critics kept returning to the Commission’s conclusions anyway – possibly thinking that the agency still mysteriously retains credibility among lawmakers. 

Congressional Republicans, have tended to support conventional Korea-like trade liberalization exercises (along with WTO membership for China). They’re clearly turning into the “Government can’t do anything right” party. Yet all of a sudden, the ITC, despite its record, should be viewed as gospel? Or is for some unspecified reason an exception to the rule?  

Fortunately, the effects of proposed trade agreements can be analyzed rigorously without fetishizing the ITC. But the critics need to get public officials out of the statistical weeds, and  think much bigger themselves. 

For example, as I told the Auto Caucus, the main reasons that no conventional Korea trade deal can possibly promote U.S. economic interests on net are essentially the same reasons that U.S. trade policy with China, Japan, and even many European countries has flopped so miserably for so long. 

First, the fundamental economic structures and objectives of these countries are so incompatible with America’s that, barring wholly new U.S. liberalization strategies, they preclude mutually beneficial trade with the largely open American economy. Second, the idea of rule of law is so alien to the East Asians in particular that agreements seeking to proscribe trade barriers one by one – and especially the nontariff barriers – are completely meaningless and unenforceable.

No one should be surprised that supporters of the trade policy status quo keep ignoring these realities – even after decades of soaring deficits and resulting national debts, massive job destruction, and lost growth opportunities. But if so many trade policy critics keep softpedaling them, and stay inside the box, it’s hard to imagine changing the nation’s increasingly dangerous trade policy course.

Alan Tonelson, is a Research Fellow at the U.S. Business and Industry Council, a national business organization representing nearly 2,000 small and medium-sized domestic manufacturers. The author of “The Race to the Bottom” (Westview Press, 2002), he is a regular contributor to the Council’s AmericanEconomicAlert.org website.