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The Peterson Institute Agrees That Trade Agreements, Bilateral or Multilateral, Can Alter the U.S. Trade Deficit

The Congressional Research Service (CRS) recently released a report asserting that, “Economists generally argue that it is not feasible to use trade agreement provisions as a tool to decrease the deficit because trade imbalances are determined by underlying macroeconomic fundamentals.” Ironically, the scholar they cite in support of that claim has repeatedly said the very opposite.

The CRS report cites a policy brief written by C. Fred Bergsten from the Peterson Institute for International Economics that says most economists argue that reducing the U.S. budget deficit is the most effective, if not only, “policy initiative that would reduce the U.S. current account deficit on a lasting basis.” Bergsten does not provide sources in support of his claim.

In the brief, Bergsten omits a substantial body of literature that illustrates how trade agreements have had substantial effects on U.S. trade deficits. But more perversely, Bergsten himself has claimed that inclusion of certain terms in trade agreements can alter the U.S. trade balance.

Earlier this year, in a piece on renegotiation of the North American Free Trade Agreement (NAFTA) Bergsten wrote that, “... currency manipulation is an unfair trade practice that can have huge effects on trade flows and trade balances, and it is thus quite appropriate for the administration to address it in their trade negotiations.”

Bergsten co-authored another paper in 2012 suggesting that not only has currency manipulation increased the U.S. trade deficit, but it has also caused substantial job loss in the United States:

This buildup of official assets — mainly through intervention in the foreign exchange markets — keeps the currencies of the interveners substantially undervalued, thus boosting their international competitiveness and trade surpluses. The corresponding trade deficits are spread around the world, but the largest share of the loss centers on the United States, whose trade deficit has increased by $200 billion to $500 billion per year as a result. The United States has lost 1 million to 5 million jobs due to this foreign currency manipulation.

Bergsten points out later in the 2012 paper that adding strong and enforceable currency manipulation provisions in multilateral or bilateral trade agreements could help alleviate this problem.

While a bevy of editorial writers and news reporters often repeat the claim that trade deficits are caused by macro-economic factors, not trade agreements, Bergsten himself has often made the opposite point. This begs the question of why the Congressional Research Service would have as its one source in support of a specious claim an economist who has regularly argued the very opposite.


Import Alert: Careful What You Eat During Thanksgiving

Trade Deals Like NAFTA Have Led to a Surge of Imported Food, Threatening Food Safety in America

There’s a good chance that some of the food you will eat during Thanksgiving was produced outside the United States. In fact, about 50 percent of fresh fruit and 94 percent of seafood consumed in the United States is imported. But even though Americans are consuming more imported foods today than ever – largely due to trade deals like the North American Free Trade Agreement (NAFTA) – the vast majority is never inspected before it reaches your plate.

Since 1993, U.S. food imports from Mexico and Canada have tripled, increasing from 10.6 million to 32.2 million metric tons. During the same time, U.S. food imports from the rest of the world grew as well, but only at half the rate.

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While the average American diet relies more and more on imported food, safety regulations and food inspections have not kept up. Only one percent of most food, including dairy, seafood and fruit, are inspected by federal regulators. Less than ten percent of meat and poultry is inspected.

Yet, “trade” agreement rules, like those in NAFTA, require us to import meat and poultry from any processing facility in any country that is deemed to have “equivalent” safety standards, even if core parts of U.S. food safety requirements are not met. Before NAFTA, only meat and poultry from individual processing plants in Canada and Mexico that met U.S. safety and quality standards – and that were certified as doing so by U.S inspectors – could be sold here. NAFTA not only required us to allow imports produced under the other countries’ differing standards, but required us to accept meat from any and all processing plants in Mexico and Canada that were certified as complying with those countries’ domestic standards, not necessarily U.S. standards.

The non-partisan Government Accountability Office describes the federal oversight of food safety as an area of “high risk for fraud, waste, abuse, and mismanagement, or most in need of transformation.” Their 2016 report says one of the top obstacles to food safety is that “a substantial and increasing portion of the U.S. food supply is imported, which stretches the federal government’s ability to ensure the safety of these foods.”

Unfortunately, things may get worse. President Trump has proposed a budget cut of $83 million to the food safety programs administered by the Food and Drug Administration, which oversees 80 percent of the U.S. food supply.

Recent polling shows that food safety is one of the top issues voters are concerned about in the ongoing NAFTA renegotiation. That’s why a coalition of labor, environmental, family farm, consumer, and faith organizations representing over 12 million people has demanded that the renegotiated NAFTA require all imported food to meet U.S. safety standards and mandate more robust inspection. Plus, the groups are demanding that a NAFTA replacement restore the country-of-origin labels on meat that were eliminated in 2016 after the Canadian and Mexican governments successfully attacked the popular U.S. policy as an illegal trade barrier.

NAFTA’s food safety rules are a recipe for disaster. So as you sit down to enjoy your Thanksgiving meal, be careful what you eat!


News Analysis: Next Round of NAFTA Talks May Bring Renegotiation to an Inflection Point if Canada and Mexico Refuse to Engage on U.S. Proposals

From Lori Wallach, Director, Public Citizen’s Global Trade Watch

Renegotiation of the North American Free Trade Agreement (NAFTA) faces a critical juncture as the fifth round of talks officially starts Friday in Mexico City.

At issue is whether Canada and Mexico will engage on a series of proposals to significantly reshape NAFTA that were submitted by the United States during the fourth round of talks in October – and, if they refuse, how the administration will respond. Also at issue if they do engage is what additional proposals the administration will put forward to deal with the abysmal labor standards and wages in Mexico. How these issues play out will greatly affect the fate of NAFTA.

The U.S. proposals from October would reverse some of NAFTA’s incentives to outsource investment and jobs from the United States and are among reforms that Democratic and Republican members of Congress, labor unions and other NAFTA critics spanning the political spectrum have demanded for decades. More than 930,000 U.S. workers have been certified under just one narrow government program as losing their jobs to NAFTA.

The administration has made clear that the choice facing Canada, Mexico and the corporate lobby is either a new approach or no NAFTA. Ironically, the corporate lobby’s strategy increases the likelihood of a no-NAFTA future.

The corporate lobby’s response to the administration’s proposals to eliminate NAFTA job outsourcing incentives suggests that the new reality of a different NAFTA or no NAFTA is being dismissed as a bluff, or that the corporate lobby prefers no NAFTA. Whether a case of magical thinking or ideological rigidity after years of corporate interests dictating U.S. trade policy, the fifth NAFTA renegotiating round will reveal whether the corporate lobby has persuaded the governments of Canada and Mexico to join a game of high-stakes poker that increases the odds of the no NAFTA outcome.

Given that the U.S. Chamber of Commerce, National Association of Manufacturers, Business Roundtable, Coalition of Service Industries, PhRMA and other business lobbies have spent decades and hundreds of millions to insert protections and policies unrelated to trade into U.S. “trade” agreements, they may prioritize defending the protections they won. But why associations representing U.S. farmers and ranchers would get on that ideological bandwagon is inexplicable. The Farm Bureau and commodity groups have joined the Chamber in the our-way-or-the-highway approach that paves the way to a no NAFTA outcome. But the agriculture sector is most reliant in sustaining NAFTA and its duty access for U.S. exports.

If the United States were to withdraw from NAFTA, the pact’s implementing legislation would authorize the president to proclaim a reversion of trade terms between the three countries to the Most Favored Nation tariff levels of the World Trade Organization (WTO). Forty-six percent of U.S. tariff lines, 50 percent of Mexican tariff lines and 76 percent of Canadian tariff lines are duty-free under the WTO, and the existing tariffs would be drastically lower than those before NAFTA because the WTO tariff cuts have been fully implemented. The current average WTO Most Favored Nation applied tariffs on a trade-weighted basis for the United States, Mexico and Canada are respectively 2.4, 4.5 and 3.1 percent.

However, agriculture is the outlier: U.S. exports to Mexico, beef, pork, poultry and wheat would face significant tariffs. (Almost all U.S. corn exports to Mexico, by far the largest U.S. agricultural export, would be duty-free. Mexico went duty-free for yellow corn for all WTO countries in 2008, thus 95 percent of U.S. corn exports to Mexico would be duty-free without NAFTA. A large share of U.S. soy exports also would be duty-free under Mexico’s WTO tariff rates.) Just assuming hypothetically that the president withdrew from NAFTA and chose not to revert to duty free treatment for Canada under the 1988 U.S.-Canada Free Trade Agreement, which was suspended not terminated when NAFTA was enacted, WTO tariffs for Canada would be significant for U.S. exports to Canada of wheat, barley, dairy and beef. 

That farmers have the most to lose under the no-NAFTA outcome and do not have a dog in the fight over auto-sector rules of origin or foreign investor protections, for instance, makes even more perverse their participation in the Chamber’s dangerous game of trying to shut down any discussion of the U.S. NAFTA restructuring proposals that enjoy wide support outside the corporate lobby groups.

U.S. Trade Representative Robert Lighthizer’s response to team status quo’s declaration that the proposed reforms are non-starters was to declare: “These changes of course will be opposed by entrenched Washington lobbyists and trade associations.” The corporate lobby has been in a full meltdown since, operating under a premise that somehow rejecting the proposals will make them go away.

In contrast, Lighthizer has raised a tantalizing prospect: a new trade agreement model could rebuild broader consensus for trade expansion, creating a new bipartisan coalition to pass a NAFTA replacement. The proposals that have triggered the corporate hissy fit would further this goal. There is wide support in Congress and among unions, small businesses and consumer groups for the October U.S. proposals to:

  • Eliminate some investor protections that make it cheaper and less risky to move American jobs to low-wage Mexico,
  • Roll back waivers of Buy American and other domestic procurement preferences that outsource U.S. tax dollars rather than reinvesting them to create jobs at home,
  • Tighten the rules of origin so that goods with significant Chinese and other non-NAFTA content would no longer enjoy NAFTA benefits, and
  • Require NAFTA countries to review the agreement every five years to ensure it is meeting desired outcomes and affirmatively agree to extend it.

Assuming that the countries can engage in real negotiations at the fifth round, the next step toward building broad consensus for trade expansion will involve the administration creating proposals to raise labor and environmental standards and wage levels in Mexico. There is no real remedy to NAFTA’s outsourcing incentives unless a new NAFTA raises Mexican wage levels. Canada’s proposal for a new NAFTA labor chapter is much closer to what unions in all three countries seek than the already-rejected Trans-Pacific Partnership (TPP) labor and environmental standards language that has served as the template for U.S. proposal to date. At the same time, the U.S. administration is exploring what new approach could remedy the clear failings of the labor provisions in past U.S. pacts, a problem made glaringly clear with the recent Central America Free Trade Agreement ruling that persistent, severe labor abuses in Guatemala did not violate the standard U.S. trade-pact labor rules included in that pact.

Also key to attracting large blocs of voters in favor of a revised deal will be not adding the TPP’s extended monopoly protections for pharmaceutical firms or terms rolling back food safety and financial regulation. The administration is inclined to support these terms, but various TPP signatories led by Canada rejected the very provisions last weekend, which derailed efforts to sign a TPP-11 deal.

In an odd role reversal, longtime critics of NAFTA hope Canada and Mexico will engage on the U.S. reform proposals during the fifth round. In contrast, if the NAFTA partners mimic the corporate lobby’s dismissive non-started approach, this round of talks could be the beginning of the end for NAFTA.

Given that low wages and lax environmental standards in Mexico draw firms to relocate production and jobs from the United States, the best outcome for workers in all three countries from the ongoing NAFTA renegotiations is a new agreement that raises standards. Indeed, raising wages in Mexico is essential to reversing American job outsourcing to its southern neighbor, where average manufacturing wages are now 9 percent lower in real terms than before NAFTA. However, because NAFTA includes provisions that explicitly incentivize outsourcing, and almost a million American workers have been certified as losing their jobs to NAFTA, and every week NAFTA helps corporations outsource more middle-class jobs, no NAFTA is better than more years of the current agreement.”


Asia Trip Spotlights Chasm Between Trump Campaign Rhetoric on Trade and Action, Raising Political Stakes for Meaningful Deliverables

WASHINGTON, D.C. – With President Donald Trump beleaguered on many fronts, the stakes for delivering on his trade promises are high as his first trip to Asia features the very nations Trump targeted with the heated trade critique that helped him win the presidency. Undoubtedly there will be announcements of “breakthroughs,” so below we offer some indicators to measure the actual trade outcomes.

Trump pledged to make U.S. trade policy “a lot better” for working people, starting with day-one action to reverse the China deficit, renegotiating or ending the “job-killing” Korea Free Trade Agreement (FTA) and reducing the U.S. trade deficit with Japan. But so far, beyond formally burying the Trans-Pacific Partnership (TPP) – a pact widely acknowledged as already dead for a lack of majority congressional support – Trump has accomplished nothing on the Asia trade front.

The lack of action is especially problematic because many of Trump’s trade critiques – including those raised by Democrats for decades - are correct. Since his election, the situation is getting worse and whether Trump can deliver on his pledges to bring down the trade deficit and create American manufacturing jobs will be  measurable via monthly government trade and jobs data.

  • The latest monthly U.S. goods deficit with China reached $35 billion (August), the largest in nearly two years. The China deficit is on track to be higher in Trump’s first year than in 2016. Absent real changes in China trade policy, Trump cannot deliver on his pledge to bring down the U.S. trade deficit and create American jobs given China typically represents nearly half of the overall U.S. goods and services deficit.
  • After doubling the U.S.-Korea goods trade deficit in its first four years, the Korea FTA is again on track for another large deficit by the end of Trump’s first year in office with the auto industry centered in his politically crucial Midwest states slammed while U.S. farmers have yet to see the promised gains.

Ironically, the trip also spotlights the hollowness of the panicky claims from the corporate lobby. No, Asian nations have not signed an alternative trade deal, the Regional Comprehensive Economic Partnership (RCEP), with China after the TPP’s demise. RCEP is as stuck as ever. No, the TPP did not go forward minus the United States. Expect claims of ‘general agreement’ on that goal on the sidelines of the Asian Pacific Economic Partnership summit in Vietnam. But in fact, the administration’s decision to roll back the investor-state dispute settlement (ISDS) corporate rights and tribunals in the North America Free Trade Agreement (NAFTA) renegotiations reflects an issue that has bogged down Japan’s efforts to get the remaining 11 countries to enact TPP. No, Trump has not launched a China trade war. Indeed, the promised trade actions on steel and aluminum are mired and the 100-day plan touted this spring proved to be a repackaged list of things China promised the Obama administration.

Some less-than-obvious indicators of concrete action would include:

 CHINA: Will Trump terminate negotiations for a U.S.-China Bilateral Investment Treaty (BIT) that the Obama administration nearly completed? Or, as China demands, revive this deal that would make it easier to outsource more American jobs to China? China has indicated some “new” trade deals could be in the offing during Trump’s visit. One way to unpack whether these are simply rewarmed promises from the past or real change will be the fate of the China BIT, an expansive treaty started by the Bush administration and almost completed by Obama. The pact, which China is keen to sign, would give Chinese firms broader rights to purchase U.S. firms, land and other assets and newly expose the U.S. government to demands for compensation from Chinese firms empowered to attack U.S. policies in extra-judicial ISDS tribunals. Former Goldman Sachs executive-turned National Economic Council chief Gary Cohn reportedly shut down plans to terminate the China BIT negotiations earlier this year.

Given that the administration is demanding a major roll back of the ISDS provisions in NAFTA, it would be notable if Trump does not shut down the China BIT, which provides special protections to firms that outsource to China and simultaneously would greatly expand U.S. ISDS liability. Because only a small portion of foreign investment in the United States is now covered by ISDS agreements, to date the United States has avoided paying corporations over ISDS claims. But with China continuing to invest aggressively throughout the United States, a BIT with China would greatly increase U.S. liability. According to a soon-to-be-unveiled Public Citizen database on the footprint of Chinese investment here, total investment reached over $45 billion in 2016 including over 40 acquisitions of American assets worth at least $50 million each, a high-water mark for inbound investment. Buyers include large Chinese conglomerates with ties to the government like Dalian Wanda as well as state-owned enterprises like the Chinese sovereign wealth fund, China Investment Corporation. Chinese investors have entered U.S. sectors similar to those in which foreign investors have launched the most egregious ISDS cases worldwide such as energy and pharmaceuticals. These 2016 deals include Chinese purchases of over 100 oil wells in Texas and a pharmaceutical distribution center in Kentucky.

KOREA: Will Trump push for changes to the 2012 U.S.-South Korea Free Trade Agreement (FTA) or will his visit focus only on North Korea? How to peacefully resolve North Korea’s nuclear escalation is a thorny question. What should happen with the Korea FTA is an entirely separate question that is not complicated. Civil society organizations and many Democrats in Congress opposed the U.S.-Korea FTA in 2011 when the deal was before Congress because at its heart are new rights and powers for corporations to raise medicine prices and attack environmental, health and financial stability safeguards and to get duty free access for goods with significant Chinese content.

U.S. exports to Korea actually declined after the pact. U.S. average monthly exports to South Korea have fallen in nine of the 15 U.S. sectors that export the most to South Korea, relative to the year before the FTA. U.S. exports to South Korea of agricultural goods have even fallen 5.4 percent in the first five years of the FTA. As with most other U.S. FTAs, imports into the United States soared. Thus, the U.S. goods trade deficit with Korea increased by 85 percent in five years. The U.S. goods trade deficit with Korea is once again deteriorating as imports from Korea grow faster than U.S. exports to Korea, reaching $2.3 billion in the latest available monthly data (August 2017).

A broad network of Korean civil society organizations, trade unions, public health organizations similarly opposed the U.S.-Korea deal. Opposition Korean parliamentarians raised many of the same concerns over corporate rights and ISDS, financial stability, access to medicines and more.  The deal sparked violent clashes among parliamentarians after parliament was physically barricaded to avoid a vote and then when tear gas was unleashed in the legislative chambers.

JAPAN: Will Japan agree to a bilateral U.S. trade agreement and/or specific measures to reduce what is the third largest bilateral U.S. trade deficit (behind only China)? The U.S.-Japan goods trade deficit was $74 billion in 2016, and Japan has been a permanent fixture on the U.S. Treasury Department’s “monitoring list” for currency manipulation. It is unclear whether Trump can achieve much to address the deficit or the bipartisan call for binding disciplines on currency manipulation, which Japan rejected in the context of the TPP. But, interestingly, the administration’s position on ISDS in NAFTA is thwarting the Abe administration’s efforts to salvage the widely-rejected corporate rights enshrined in the TPP via a “TPP-11” deal. Many TPP countries, including Malaysia, Vietnam, Australia, and others, had only accepted the ISDS provisions under extreme duress to make a deal with the United States. But recent comments by U.S. Trade Representative Robert Lighthizer about the U.S. proposals to radically roll back the ISDS provisions in the context of the NAFTA renegotiations has emboldened the opposition to these provisions among the TPP-11 nations. Lighthizer’s explanation of why investors do not need ISDS were widely circulated in Australia, New Zealand, and elsewhere.

The New Zealand government, for instance, had been supporting Abe’s efforts to salvage the TPP with minimal changes, but New Zealand’s recently elected new Prime Minister Jacinda Arden, announced this week that her government would “do our utmost to amend the ISDS provisions of the TPP” and that her Cabinet has “instructed trade negotiation officials to oppose ISDS in any future free trade agreements.” Adding this bombshell to the reported 50 requests by the TPP-11 countries to freeze or amend the deal’s clauses, including shelving intellectual property provisions on pharmaceutical data, the prospects for a TPP-11 deal in Vietnam are diminishing.  Even in Japan itself, the political foundation within Abe’s ruling Liberal Democratic Party (LDP) is on much shakier ground for a TPP-11 deal.  Koya Nishikawa, a former agriculture minister and LDP leader who was key in delivering needed support from the powerful farm caucus for the TPP, recently lost his seat in the Japanese Diet.  Without Nishikawa, Japan’s already skeptical agricultural sector may not be supportive of a TPP deal.

  • On TPP-11 dynamics: Jane Kelsey, University of Auckland, kelsey@auckland.ac.nz;
  • English-speaking expert from Japanese civil society on TPP-11 and Japan’s political dynamics surrounding trade: Shoko Uchida, Director, Pacific Asia Resource Center, kokusai@parc-jp.org