American Prospect | 22 September 2016
The new rules of the road: a progressive approach to globalization
by Jared Bernstein & Lori Wallach
hile political and media elites wonder why international trade has emerged as a top election issue this year, we were not surprised. Our question is more, “What took so long?”
Obviously, the anti-establishment candidacies of Senator Bernie Sanders and Donald J. Trump were instrumental in elevating the issue, but it is not hard to identify the energy source behind the current debate: The inherent inequities in the “trade” agreements pushed by the United States for the last 30 years have finally surfaced, and the voices of the people and the communities long hurt by those deals are finally being heard.
The important question for progressives is, “What now?” How can we tap this moment such that we bring lasting change to an area of tremendous portent—globalization?
Globalization isn’t going away.
The first thing to realize is that, despite Trump’s nostalgia for a bygone era when the United States was insulated from global trade, stopping or slowing trade is not at issue. Global trade volumes—imports plus exports—have grown from 25 percent of global GDP in the mid-1960s to 60 percent today. In the United States, that same metric has grown from 10 percent to 30 percent (with imports a larger share than exports over almost that whole time; i.e., we’ve run trade deficits). We view that expansion as potentially positive, as it is through expanded trade that we seek new markets for U.S. products, expand the supply of goods and services, and provide emerging countries with opportunities to grow by trading with wealthy countries.
But trade and contemporary free trade agreements (FTAs) are far from synonymous. Today’s FTAs, of which the Trans-Pacific Partnership (TPP) is Exhibit A, are not mainly about cutting tariffs to expand trade nor are they about jobs, growth, and incomes here in the United States. Rather, they’re about setting expansive “rules of the road” that determine who wins and who loses.
With 500 official U.S. trade advisers representing corporate interests having been given special access to the policy process while the public, press, and largely Congress have been shut out, it is not surprising that corporate interests have thoroughly captured the negotiating process and ensured they are the “winners” under these rules. Their message to the rest of us has been: “Don’t worry, this will be great for you, too. And, hey, if it isn’t, we make it all better with adjustment assistance and some training.” The fact that the hollowness of such false promises are finally evident to the broad electorate provides an opening to come up with new rules of the road.
The new rules must prioritize the economic needs of low- and middle-income families while preserving the democratic, accountable policymaking processes that are essential to creating and maintaining the environmental, consumer, labor, and human-rights policies on which we all rely. In what follows, we briefly outline our “Out with the bad, in with the good” reform of FTAs. We also recognize that achieving such inclusive policies will require a new policymaking process to replace the current system of opaque negotiations, a system heavily influenced by hundreds of official corporate trade advisers while the “fast-track” process limits Congress’s role and largely shuts out the public.
Initiatives that must be part of the new “rules of the road”
Enforceable currency disciplines: When the rules are fair, Americans can benefit from expanded trade. But when trade partners are free to lower the value of their currencies to gain trade advantages, the negative effects are twofold. First, with the “terms of trade” artificially tilted against us, countries with large and persistent trade surpluses subsidize a flood of imports into the United States while unfairly pricing our goods out of their markets. Second, the capital flows that facilitate this imbalance have given rise to underpriced credit, bubbles, and, ultimately, recessions. Therefore, we must include enforceable rules against such practices in the core texts of our trade agreements and enact domestic legislation that triggers automatic action against currency manipulators, rather than simply triggering reports or dialogue.
Enforceable and substantive labor and environmental rights and standards: Global commerce absent a floor of enforceable international labor and environmental standards can produce a race to the bottom between nations in wages, working conditions, and environmental and health safeguards. Globally accepted labor and environmental standards exist, but they lack effective enforcement.
An efficient way to address this problem is to change the sequencing of FTAs in this space: Instead of enacting FTAs with a future commitment to enforce labor and environmental standards, any benefits to partner countries in terms of market access must be conditioned on confirmation that labor and environmental rights are not only provided on paper through changes to those countries’ laws, but are being enforced with real changes on the ground before the FTA takes effect, with benefits being halted if conditions deteriorate.
Rewarding those who play by the rules: In order for the benefits of our trade agreements to flow to the workers in the countries that sign the pacts and play by the rules, we must have clear “rules of origin” that can’t be easily gamed. Under the TPP, for example, a car assembled in a TPP country could enter the United States with duty-free privileges even if a majority of the car’s parts come from China. By tightening “rules of origin” so that only goods with a solid majority of member-country content are treated as originating from member countries, the benefits of the deal will more appropriately flow to its signatories and their workers.
Selecting appropriate trade partners: The goal of U.S. trade agreements should be to facilitate trade flow, create jobs, and raise wages. Having the right trade partners is as important as having the right rules of the road. Here again, sequencing matters. Bad actors that violate worker and/or human rights or have long records of currency cheating will not become good actors if we simply invite them to trade more with us. Sadly, there is considerable empirical evidence from past U.S. trade initiatives with China, Vietnam, Russia, and other nations that supports this view.
Therefore, we must select trade partners based on their countries’ records of compliance with the terms of past trade agreements, international labor and environmental standards, and human rights and other criteria. While no country has a perfect track record, there is a well-understood continuum of compliance, and known bad actors should be barred from the negotiating table until they’ve made proven, effective efforts to begin cleaning up their acts.
Initiatives that should not be part of the new rules of the road
Investor-state dispute resolution: We understand and respect the view that, absent some form of investor protections, developing economies may lose potential investments when the risk is high. But the current investor-state dispute settlement (ISDS) process overly privileges international investors while sacrificing hard-won institutions of sovereign democracy. And the data show that countries with these agreements do not attract more investment.
By allowing investors to bring disputes to a panel of three corporate lawyers that can judge the actions of sovereign governments, the current ISDS system shifts multinational corporations’ investment risks onto the public. It exposes the entire panoply of a nation’s policies and its treasury to broad liability if a private panel finds that state actions harmed individual investors’ offshore activities.
And, this exposure is growing, as a recent explosive four-part investigative series by Pulitzer Prize–winning journalist Chris Hamby revealed. Other research reveals considerable speculation by financial investors in ISDS cases. Such investors either purchase companies with the express purpose of filing an ISDS claim or directly bankroll cases in order to claim a share of the fine. (Investors refer to this practice as “third-party funding of international arbitration against foreign sovereigns.”) Gus Van Harten, a law professor who has studied these activities, finds that investors “can get an award for billions of dollars when that award would never come out in domestic law. It’s just a jackpot for speculators.”
Investment risk must be borne by the investors themselves; it is their skin, not ours, that should be in the game. Operationally, this means that international investors must self-insure against the risk engendered by trading with countries that have legal systems they do not trust. Surely, today’s innovative capital markets could handily price such insurance, which some investors already use.
The corporate empowerment agenda underlying ISDS is perhaps most apparent in the context of the proposed Transatlantic Trade and Investment Partnership (T-TIP) between the United States and the European Union. It’s evident that its purpose is not to safeguard bona fide investors from the capricious decisions of unstable governments, but to enable them to end-run the democratically established standards of signatory countries that have fully developed and transparent systems of law.
Rules that limit consumer product protections: We must eliminate the rules in our trade agreements that require us to import food and other products that do not meet our safety standards. We must also eliminate limits on border safety inspection and on labeling regimes that provide consumers with the information they need to make knowledgeable choices in the marketplace.
Patent and copyright protections: Trade agreements are not an appropriate instrument for requiring countries to establish “rent-seeking” protections for intellectual property rights. Given that the World Trade Organization already requires countries to enact lengthy patent and copyright protections, future trade agreements must not further limit the competition that brings down medicine prices and ensures affordable access to life-saving drugs. Nor should they limit the ability of governments to negotiate prices with pharmaceutical firms for bulk purchases of medicines (to be used through government health-care programs such as Medicare and Medicaid). Extensions of copyright terms through trade pacts undermine access to information, and in the case of specific terms in pacts like the TPP, can undermine internet freedom.
Rules that limit financial regulation: Inadequate oversight of financial markets was a widely recognized cause of the Great Recession. This realization created the political space, against an extremely well-funded opposition lobby, to pass the Dodd-Frank financial reform package. We must not allow trade agreements to undermine this process or foreclose future improvements, and must therefore eliminate rules limiting financial regulation. Specifically, we must avoid bans on the use of capital controls and other macro-prudential safeguards and reject constraints on domestic regulatory policies that limit the size of financial institutions. We must also ban especially risky financial products or require firewalls to limit the spread of risk across financial products.
Rules that privatize public services and limit service-sector regulation: Our current trade agreements limit federal, state, and local governments’ abilities to maintain essential public services, establish new ones, and regulate services provided to consumers. These limits must be eliminated. Trade pacts must include requirements that all service providers that operate within the United States—whether domestic or foreign—comply with U.S. environmental, land-use, safety, privacy, transparency, professional qualification, and consumer-access laws and regulations.
The process by which FTAs are negotiated must change
Ideas like these will not become reality without a new trade policymaking process. A more transparent process with opportunities for meaningful engagement, accountability, and oversight by the public and Congress—rather than the current regime that privileges the commercial interests that have long captured these negotiations—is needed.
Transparency: From the choice of prospective trade pact partners, to the formulation of initial U.S. negotiating positions, to years of back and forth on agreement texts, to final trade-offs to conclude a deal, the trade agreement process is uniquely secretive and exclusive. Trade negotiators from the countries in on the deal hammer out the agreement in private, with strict rules against releasing information or preliminary drafts to the public—including elected officials. Negotiators can meet with outside interest groups, and they do, but these groups are rarely allowed to see the agreement in progress and thus have no way of knowing if their input is heeded. In fact, the process in the United States has gotten worse over time, as in recent years trade documents have been subjected to national security classification rules.
This must end. At issue is not the nuclear codes but the formulation of policies that will affect the everyday lives and economic prospects of all Americans. The draft texts that U.S. negotiators propose and the texts of agreements after each negotiating round must be made publicly available. The argument for the current process is that, were negotiators to be more transparent, stakeholders and political bodies would constantly be challenging their decisions and they’d never make progress. But this is clearly an untenable, undemocratic position: “If the people or their congressional representatives knew what we were doing, they’d never leave us alone!”
Democratic, accountable policymaking processes: Our current trade agreement policymaking process was designed in the 1970s, when trade agreements focused mainly on traditional trade matters such as cutting tariffs and opening quotas. Whether or not providing an exclusive, privileged role to commercial interests in such negotiations was a good idea then, it is not today. It has enabled wholesale corporate capture of the process and thus the morphing of “trade” agreements away from a focus on trade and toward a focus on harmful non-trade, often protectionist, policies.
Even if the scope of “trade” negotiations were refocused on actual trade expansion and the use of trade agreements to implement the types of policies we recommend, the current advisory system is indefensible. The vast majority—85 percent according to The Washington Post—of those who gave input to our trade negotiators on the TPP were from “corporate interests and their related trade associations.” Our trade negotiators’ response to this imbalance has been to add new committees—for instance, on the environment—which are comprised of industry and public-interest advocates. Predictably, these committees simply deadlock on recommendations, while the committees focused on other industries and issues remain corporate-dominated.
Rather than tinkering with the advisory system’s composition, we should eliminate it entirely. If proposed U.S. texts and draft texts from negotiations are made publicly available, the main official advantage of the committee system—access to that information—would disappear. U.S. positions on trade deals can be formulated the way other U.S. federal regulations are: through the on-the-record public process established under the Administrative Procedure Act to formulate positions, obtain comments on draft texts throughout negotiations, and seek comments on proposed final texts.
Replace the fast-track process: To obtain agreements that benefit a wider array of interests, we need a process that formalizes the transparency and inclusiveness of the reforms described above. That includes establishing explicit criteria with which to select future negotiating partners, setting mandatory negotiating objectives based on the guidelines laid out above, and, rather than the executive branch unilaterally deciding when a “deal” is done, requiring Congress to certify that objectives have been met. A congressional vote on an agreement’s text before it is signed and entered into is essential to ensuring an open public debate.
We need a new model of globalization. Both the process and substance of FTAs has become unacceptably undemocratic and dominated by a narrow group of corporate interests. It has taken decades for the fundamental injustice and inequity of this reality to achieve political salience, and now that this has occurred, the results are not pretty. Many voters who have long been arrogantly dismissed by political and economic elites as simply too short-sighted to recognize their own interests are rising up against both those established elites and globalization itself.
Yet there is nothing inevitable about this version of globalization nor the current U.S. trade agreement model. Developing countries can raise their living standards through trade with wealthier nations, and advanced economies like our own can benefit from access to export markets and the increased supply of goods that trade can bring. But we will not see better outcomes unless we derive and implement a new set of rules of the road.
Could these ideas come to fruition in next administration? While it is hard to imagine a Congress that is both gridlocked and heavily financed by multinational business interests embracing progressive change in this space, trade policy is uniquely influenced by the executive branch. And for interests promoting trade liberalization, the old model simply has no future. Thus the only way forward on international commercial agreements and trade liberalization will require a rethinking of the rules. In the context of a choice between nothing or a new thing, a new administration empowering government agencies that promote labor, consumer, and environmental goals and riding herd over a refocused Office of the U.S. Trade Representative, headed by a trade representative committed to reforms, has the potential to transform trade policy in the spirit of the above ideas. Congress would then have to approve the new approach, but if these new trade goals proved to be popular with an electorate unhappy with the current rules of the road, this could be one area where the new Congress might follow the new president’s lead.