Old Wine, Broken Bottles
Another missive in Foreign Affairs from a member of the American TPP negotiating team. What’s offered this time is a less politically viable, more technically problematic version of what Ambassador Froman proposed. This one is not TPP per se, but rather elaborate packaging for the same core idea: a TPP-ish arrangement to replace the WTO.
This time, the pitch is courtesy of Wally Adeyemo, former Deputy Secretary of Treasury, and his former advisor. During the Obama Administration, Adeyemo did a stint negotiating the TPP side letter on exchange rate manipulation (though it’s not called that). The side letter doesn’t seem to be part of the actual TPP text (why not?), but I found it here.
Both proposals have a common defect: they are grounded in the Bob Rubin/Larry Summers/Milton Friedman/libertarian philosophy common to Treasury folk, where the underlying goal is to liberate capital from national constraints, be they tariffs or regulations. Geopolitics is usually invoked as a justification because it’s more marketable.
“This is the core split in the Democratic party on trade.”
The recommendation before us today is a customs union, which the authors claim John Maynard Keynes proposed in 1944. He didn’t. Keynes wasn’t a free trader, nor he did he think the unfettered movement of capital was healthy. What he proposed was a clearing union, which was intended to address exchange rate issues in a post-gold standard world. Now, an article in Foreign Affairs in which the authors elaborate their views on Keynes’ clearing union idea would be intriguing! Especially because they seem to side with Keynes over his American counterpart, Harry Dexter White.
Alas, we have this mess of a trade proposal instead. The question is: do we keep serving up old ideas — some version of “capital first, people second” — or do we learn from failure and devise something better? This is the core split in the Democratic party on trade.
Let’s hope we aren’t going to see one of these articles every month; I’m already running out of wine bottle metaphors.
The Concept
The authors propose that market economies get together and form a customs union. They say they want members who uphold “ambitious” standards on labor, environment, rule of law, and “market oriented regulations.” They refer to these standards as “rules of the road,” a phrase that is, literally, TPP marketing. It’s always been a puzzling metaphor; we can’t even agree with our own motherland as to which side of the road to drive on.
A customs union is a very particular type of free trade agreement: all the parties take down tariffs among themselves and then create a common tariff wall.
“A customs union is a free trade agreement on steroids. If you thought getting TPP through Congress was a challenge…. ”
The stated goal of the proposal is to create a bloc of countries to coalesce against non-market economies. Their target is the PRC, and they are not wrong to be concerned about PRC mercantilism. But they’re looking to include Vietnam in this customs union — Vietnam which, as a Communist country, is a non-market economy. The authors are not arguing that their customs union will incentivize Vietnam to become a market economy; instead, they contend that the union affords Vietnam a terrific opportunity to “move up the value chain.”
Their position on Vietnam recalls the group of Biden Administration officials who purportedly sought to dodge the whole communism problem by simply deeming Vietnam a market economy. That gambit led to this warning from Democratic Senators. Vietnam remains, in eyes of the Department of Commerce, a non-market economy. In making that decision, the authors’ Commerce colleagues noted that:
“The State Bank of Vietnam is still not independent and continues to intervene in the foreign exchange market to influence the value of the dong. Labor unions remain dominated by the state-controlled Vietnam General Confederation of Labor, hindering genuine collective bargaining and ultimately creating conditions for suppressed wages and labor costs.”
Keynes’ clearing union was intended to deal with the problem of currency intervention, by the way.
If you want to propose a customs union with Vietnam in it, then propose a customs union with Vietnam in it. But don’t claim to be proposing a customs union of market economies.
In any event, with a customs union, the parties would not only have to negotiate away the tariffs among themselves, but the parties would also have to negotiate a common external tariff. And, of course, thousands of rules of origin that need to be modernized to reflect post-pandemic concerns about supply chain fragility.
The United States has exactly zero customs unions. Not even with Canada, with whom we (as of today) have the longest undefended border in the world.
Their proposal is more of the same in that the main goal is still getting rid of tariffs. But it’s also more of the same when it comes to regulations. It’s garden variety neoliberalism: they argue the WTO didn’t do enough to discipline non-tariff barriers. Non-tariff barriers are things like … regulations. The real problem is not that the WTO did too little, but that it did too much, rejecting the legitimate use of sovereign regulatory power. The authors may not be in alignment with the current Administration on tariffs, but it sure seems like they are on non-tariff barriers.
A customs union is a free trade agreement on steroids. If you thought getting TPP through Congress was a challenge….
The Impossibility of Execution
Moving on to execution, the challenges multiply.
The authors want a customs union of members with ambitious standards, and a common external tariff of “up to five percent” for nonmembers with “relatively high standards.” This is what the parties would have to negotiate to make this happen.
For purposes of deciding who’s in the customs union:
eliminating tariffs among themselves
a common external tariff (it won’t be a single number for all goods)
definition of “ambitious standards” for labor
definition of “ambitious rules” for environment
definition of “ambitious” standards for rule of law
definition of “ambitious” standards for “market-oriented regulations.”
And then, for purposes of deciding who is subject to the tariffs of up to five percent:
definition of “relatively high standards” for labor
definition of “relatively high” rules for environment
definition of “relatively high” standards for rule of law
definition of “relatively high” standards” for “market-oriented regulations.”
Phew!
The goal is, apparently, to create “meaningful but nonprohibitive trade barriers” for non-members with these “relatively” high standards, because that will “incentivize them to join the union without imposing disproportionate costs.”
Let’s explore the issue of incentives and costs. As it is, a 5% tariff — the high end of their cap — is very unlikely to incentivize much (as currency manipulation experts know well). It’s not that far from our MFN rate of 3.4%, and we know how that worked out. But it’s not clear what their basis is for deciding what constitutes “disproportionate costs.”
A little math illustrates the point. The union members have a tariff of 5%; but suppose a nonmember has labor and environmental standards such that their cost of production is 15% lower than for members. In that case, the 5% tariff is hardly “disproportionate” — in fact, it’s not high enough, because the nonunion member is better off staying outside the union. That doesn’t even get into the question of a country with low standards that also provides subsidies to lower the cost of production even further.
They also seem to want Bangladesh to be part of this union. Bangladesh is home to globalization’s version of the Triangle Shirtwaist Factory Fire. The authors don’t betray any awareness of Bangladesh’s longstanding challenges respecting labor rights. This is a bad look by itself, but especially when paired with treating Vietnam like it’s a market economy when, as Commerce pointed out, Vietnam (despite being a member of TPP) still engages in wage suppression. This is precisely why capital-first trade will inevitably run into a buzzsaw: its proponents don’t really prioritize addressing labor arbitrage.
“If you thought getting the steel and aluminum deal with the EU done was a challenge....”
And that’s all before you get to the third tier of countries, those that do not have “relatively high standards.” They would face “significant penalties” — the authors use the word “penalties” — on trade with customs union members. Just like the common external tariff, Members would have to agree on those “penalties,” too.
That’s a lot of stuff to negotiate. And here’s the core problem with using geopolitics to justify this approach: the foreign policy blob seeks strength in numbers — the more the merrier. Yet if your goal is to achieve something with high standards, inverse proportionality sets in: the greater the number of parties, the lower the standards.
Now, bear in mind that even as the United States was protecting Europeans from Russian aggression, we still couldn’t reach a deal for common steel and aluminum tariffs – two metals you need for defense. If you thought getting the steel and aluminum deal with the EU done was a challenge….
Anti-Coercion Coercion?
The proposal’s critique of the current Administration’s approach is that it’s too unilateral.
Yet their proposal is arguably even more aggressive. Some of our trading partners with “ambitious” or “relatively high” standards have free trade agreements with the PRC, and they live in the PRC’s neighborhood: Australia, for example. Remember, the purpose of the customs union is to impose punitive tariffs on non-market economies like the PRC, which will then be moved to change its behavior to access this very rich unified market.
Are we asking our allies to break their FTAs? Because it’s hard to see how we can collectively impose “punitive” tariffs if our allies are otherwise giving imports from China duty-free treatment.
The list of countries that have FTAs with the PRC is … not short. Is the goal to force these countries to choose between us and them? If so, I’m not sure they choose us. Australia and Singapore already have FTAs with us, so market access won’t be a carrot. Isn’t this more evidence that this whole undertaking is, at its core, just TPP?
The United States should think carefully about our trading relationships with countries that have deep supply chain integration with non-market economies, because those supply chains can operate as pass-throughs for non-market distortions. But that’s about protecting ourselves against the adverse effects of those distortions — not forcing our trading partners into an “us or them” corner.
“A veto for me, but not for thee?”
The authors propose a decision-making mechanism for this regime that would address what they perceive to be the source of gridlock at the WTO: consensus decisionmaking. They acknowledge their structure would give the United States “more voting power.” Aside from how that’s likely to be received by others (a veto for me, but not for thee?), their reasoning is flawed. Even if we don’t take into account that we did agree to a half dozen agreements at the WTO in 2022, we at least need to recognize that the GATT also operated by consensus — with lots of successful negotiations to show for it.
Arguing that the WTO is a defunct institution now seems to be the stalking horse to justify perpetuating the same underlying trade policy we had for decades, but through other means. This blog is no WTO cheerleader, but that whole “WTO is dead” argument is specious.
Is There a Another Way?
“This proposal is but another stab at moving us closer to the apocryphal ‘global free market.’”
Whatever lip service the capital-first crowd pays to labor rules, this proposal is but another stab at moving us closer to the apocryphal “global free market.” They declare that they want to “let markets function.” That sounds nice, although the New Deal was about making markets function. But this “let markets function” line is precisely the kind of thinking that led to the creation of the WTO, and then the accession of the PRC. And the suite of pre-pandemic FTAs, including TPP. Did we achieve a global free market, or did we incentivize widening inequality and a global democratic recession?
The good news is that the authors’ old colleagues at USTR did think through many of these challenges. We even published a suite of model texts designed to be building blocks for a new and improved version of globalization. Building blocks - a modular approach that allows us to figure out where there’s alignment with our allies and work from there, rather than dictate “rules of the road” or compel them to take sides. Rereading the non-market policies and practices model text is sobering, because some of it arguably applies to us, now. But that is a problem we will have to confront: our credibility is not what it was.
We also published a series of policy papers on supply chain resilience, including suggestions for approaching trade deals on a sectoral basis. It’s irresponsible to pursue tariff cuts without making sure you’re solving for resilience.
In addition to all of that, we published an article (in Foreign Affairs!) that did get into the Bretton Woods vision for trade, including Keynes’ endorsement of a 1945 American trade proposal.
“A modular approach allows us to figure out where there’s alignment with our allies and work from there.”
The model texts were so compelling that the current Administration tried to take them off the website.
Which is a pretty good sign that if you’re looking to distinguish yourself from what’s happening today, we’re on to something.