Monday, January 23, 2017

Abandon the TPP? Renegotiate NAFTA? Trump is not the end of the world

In my social media circles I'm seeing links to stories about the new Trump Administration. Social media informs me that the Trump Administration took down information on climate change, LGBT issues and civil rights. In the news, we learn that most of what he did on the first day was ceremonial. He signed nomination documents and executive orders. His staff changed the White House website to be more in line with the ideology of his campaign, and maybe even his party.

Social media tells me how awful and dark a Trump Administration will be. I just don't believe the gloom and doom of Trump. I'm an optimist.

Here's an example of why I'm an optimist. A search for "trump tpp" reveals that Trump will formally withdraw the US from the Trans Pacific Partnership. He wants to renegotiate NAFTA and has already made it policy to pursue that goal. The Detroit Free Press reports:
But on Friday, shortly after Trump was sworn in, the administration pledged to negotiate "tough and fair" trade agreements with the goal of creating more U.S. jobs as one of its top policy issues posted on Whitehouse.gov.
"This strategy starts by withdrawing from the Trans-Pacific Partnership and making certain that any new trade deals are in the interests of American workers," the statement says. "President Trump is committed to renegotiating NAFTA. If our partners refuse a renegotiation that gives American workers a fair deal, then the President will give notice of the United States’ intent to withdraw from NAFTA."
ABC News from Australia reports that:
A White House statement issued soon after Mr Trump's inauguration said the United States would also "crack down on those nations that violate trade agreements and harm American workers in the process".
The statement said Mr Trump was committed to renegotiating another trade deal, the North American Free Trade Agreement (NAFTA), which was signed in 1994 by the United States, Canada and Mexico.
Exiting from the TPP and fixing NAFTA are not exactly your garden variety conservative goals. They are progressive goals that Democrats have quietly ignored for decades. Anyone aware of the turn to the left with Jeremy Corbyn in the UK can see the same thing. During his campaign for president, Trump told us we can call him "Mr. Brexit". Now he is starting to prove it.

I note that of the many things he said and promised during the election, this issue, the free trade issue, is one that he has been very consistent on. I sincerely hope that he is true to his pledge on bad trade agreements.

As I've written before, the TPP is not a free trade agreement. The primary purpose of that agreement is is to strengthen and lengthen intellectual property rights. In a sense, it is designed to export our intellectual property laws to other countries, particularly with respect to China. If you want to make products abroad, but worry about having to deal with cheap knockoffs, then stronger intellectual property laws fit the bill. In that context, we can see that the TPP was designed to keep jobs in China while depriving Americans of those jobs.

This is fine if you're an oligarch living in America. This is not fine if you work in manufacturing and have no college degree. Could Trump be thinking about his wealthy benefactors? Sure. Did he nominate very wealthy people to positions of power in the federal government? He did. But his plans for exiting the TPP and renegotiating NAFTA seem to be tacit acknowledgment of the trade deficit (and the pain of American manufacturing workers). The only other candidate who made trade an issue central to his campaign was Bernie Sanders.

In at least one debate I've had in social media, I saw what might seem like an overarching goal for the TPP: for the United States to write the rules for the Asia Pacific region. Some have expressed concern that if we lose the TPP, we lose a chance to reign in China. Really?

China is more than a billion strong in population. They have a massive military, their economy is growing and they build many of the products that we use everyday: phones, computers and TVs. Considering our relations with China now, I doubt that one trade agreement is going to do much to control them. Even if it did, who will benefit from such control? The middle class? The TPP has been characterized as NAFTA on steroids, so I think we can make an educated guess as to who will benefit from it: the top 1%.

Why is the TPP seen as NAFTA on steroids? There are provisions in the TPP for ISDS, also known as investor state dispute settlement. TPP proponents claim that ISDS in the TPP was designed to provide additional safety for investors to protect against nationalization of their factories overseas. Economist Joe Stiglitz at the Roosevelt Institute offers some additional insight. He notes that the United States is insisting on ISDS for another trade agreement with Europe, the Transatlantic Trade and Investment Partnership. Stiglitz says that Europe already has strong legal safeguards as strong as the United States, so what gives? ISDS is for banana republics, not Europe. Stiglitz offers another possible motivation for ISDS, freedom from Congress:
While defenders of ISDS sometimes claim that it prevents discrimination against foreign firms, foreign firms have sued—and won—even when they are treated no differently from domestic firms. In fact, these provisions discriminate in favor of foreign firms: A foreign firm can sue the U.S. government in private arbitration for cash rewards if it thinks government actions violate the new rights and privileges granted by TPP, but domestic American firms have no such recourse in U.S. courts. Two arbitrators can, in effect, undermine decisions of Congress and the president, ordering billions of dollars in payments for their lost investment value and guesstimated lost profits.
Under TPP, foreign investors could sue over pretty much any law, regulation, or government decision. The agreement guarantees a “minimum standard of treatment,” a vague standard that corporate-friendly arbitrators have interpreted liberally in past decisions, inventing obligations for governments that do not exist in the actual text of agreements or host countries’ laws.
I can see it now. A major American corporation does an inversion and uses their foreign corporation to sue the United States over a law they don't like. Cute. The TPP may allow us to assert control over China, but it undermines our sovereignty as a nation. Doesn't that seem sort of expensive?

There were a few economists who noticed that over the last 30 years, the trade deficit led to stagnating wages and then to the collapse of the housing bubble. One economist who noticed is Dean Baker from the Center for Economic and Policy Research. How many economists with PhDs missed the housing bubble? As far as we know, every economist at the Federal Reserve missed the housing bubble, but if they did see it coming, they sure weren't talking about it. Even Paul Krugman at the New York Times missed it. 6 economists predicted the collapse of the housing bubble before it happened. Dean Baker was one of them and warned us about it.

Baker is also one of the few economists who understands that what matters is not the federal budget deficit. What matters is the trade deficit. The US trade deficit for 2015 was about $500 billion a year. We've had trade deficits for as long as I can remember, but according to this chart, our balance of trade was relatively flat until about 1976.


Notice also that the trade deficit really took off at the start of the Bush Administration. That would be around the time that NAFTA started to kick into gear. That is demand that is going to other countries and leaving ours. Is it any wonder we experienced a massive recession when so much demand leaves our country? Our massive trade deficits have persisted across 36 years of Republican and Democratic leadership. That means during all that time, it didn't matter which party was in power, they weren't thinking about the middle class.

Were Bush and Obama diametrically opposed? On some issues, sure. But given the way the trade deficit has persisted between them, they seem to be in agreement on trade. This is not a partisan issue. Both parties understand that the system is rigged and they won't change it unless they're called on it.

Companies like Dell, HP, Microsoft, Apple, Intel, and Walmart depend on the trade deficit for their profits. They depend on foreign labor to keep their margins high. Wall Street depends on trade policy to depress wages so that money is redistributed to the top, not the bottom. To make Wall Street's dreams come true, Americans saw their factories leave the country in droves. Americans missed many chances to make the products so familiar to us, like computers, phones and game consoles. America can make those products, but the people who write trade policy say they should not.

Intel was co-founded by Andy Grove, an industrialist from the 1960s. He knows what it takes to build a company that manufactures memory and processors for computers. He helped to create the wealthy and powerful company we know Intel to be today. But he saw what Silicon Valley was doing. They were designing new products and sending the jobs to make them overseas. He saw how that kind of business was a dead end. He also saw that when we move manufacturing overseas, we lose the know-how and the shop smarts to make things. In 2010, Andy Grove reminded us that innovation starts in the shop.

I used to be a sheet metal worker. I used to build and install the ducts that carry the air from the air conditioning system on the rooftops of commercial buildings to the offices where people work to keep them cool. I witnessed first hand, how people think about making things. We found shortcuts, better tools and better technology, for cutting, bending, and folding sheet metal. All of that is what Andy Grove refers to as know-how. When we send our manufacturing work overseas, we don't just lose the jobs, we lose the knowledge and experience required to build what we buy in the stores.

Now that I think about it, a manufacturer uses offshore labor to make a product and limit or eliminate domestic competition. If they locate their manufacturing plants in places where the government can provide slave labor, and they get an unbeatable process for manufacturing goods while limiting domestic competition.

If Trump is able to address the trade imbalance and correct it so that we have a balance of trade, we can bring jobs home. Every year, $500 billion in demand is being spent elsewhere as our trade deficit. That loss of demand is a drag on our economy. That means our economy has had to rely upon bubbles to keep it going. Most Americans lose money in bubbles. Where does that money go? To the people who have the experience to make money from bubbles: Wall Street. They are the people who want to keep things as they are, and they have the money to influence Congress and keep it that way. They gave us our bubble economy.

$500 billion in demand is equivalent to roughly 5 million jobs, and that is just the direct effect. No Republican or Democratic Administration has been willing to correct our trade deficits for at least 36 years. Bernie Sanders, an independent Senator from Vermont, understood the problem and campaigned on fixing it. Clinton understood the problem, but seemed loathe to fix it because she was beholden to the money that wanted to keep the trade deficit in place.

Conservatives are not willing to spend enough money to replace the demand lost through the trade deficit. They are not willing to raise taxes to get the money needed to generate that demand. As Robert Reich notes, Democrats are on life support, and they have not been brave enough to put forth a progressive policy that works. If Clinton would have won, she would have done what Bill Clinton did, "we'll take what we can get from the Republicans". That's what they called leadership in the 1990's. That is a big part of why we are here now.

Donald Trump ran on a promise to fix this problem. This is why he did so well in the Rust Belt. They want their jobs back and voted for him based on that promise. With Trump's announcements on the TPP and NAFTA, he seems intent to deliver on his promise.

While I see my fellow liberals and progressives gnashing their teeth and assigning blame in order to make sense of their losses in November, I see Trump as an opportunity to right the imbalance of trade to bring back the jobs that allowed America to prosper.

For the record, I am not a Trump supporter, or denier. I have an open mind and am waiting to see what will happen next. I just don't believe in the gloom and doom about Trump. I am an optimist, and I am looking for opportunities for progressive policies to succeed, even with Trump as president.
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