by Eric Shierman
How many bad policies need to be adopted to allow Congress to pass the three long delayed free-trade agreements with Korea, Panama, and Columbia that allow us to create jobs without spending money? For politicians pandering to the public’s need for scapegoats on all woes economic it’s two: extending Trade Adjustment Assistance (TAA) and the Currency Exchange Rate Oversight Reform Act (China currency bill). This is where presidential leadership is needed, but in its absence the Speaker of the House has stepped up to the plate.
The three free-trade agreements passed on Wednesday night with the Korean deal getting the most support while the Colombian deal got less. HR3080 (Korea) passed 278-151 in the House and 83-15 in the Senate. HR3079 (Panama) passed 300-129 in the House and 77-22 in the Senate. HR3078 (Columbia) passed 262-167 in the House and 66-33 in the Senate. The only members of Oregon’s delegation to vote for all three were Greg Walden and Ron Wyden. Pete DeFazio and Jeff Merkley voted against all three. Kurt Schrader and Earl Blumenauer voted for the Korean and Panamanian deals but voted against the Colombian deal.
These trade agreements are such good deals, they should have passed with flying colors long ago through a Congress that is always talking the talk on jobs. The problem is that some Democrats oppose them because the base of their party does so passionately. Why only some Democrats, not most? Unlike their primary voters, Congressional Democrats’ staffers studied at mostly Ivy League schools. Find me an economist teaching at Harvard that advocates trade protectionism.
The evidence that free-trade is beneficial while attempts to curtail it are harmful is so clear, there really is not even a real debate anymore amongst economists. This is especially true for the United States where most of our imports are raw materials and components needed for final assembly. When the Bush Administration levied tariffs on imported steel in March 2002, this did more damage to our domestic auto industry than any wage increases negotiated by the UAW.
Since the two most demonized deals went into effect nearly two decades ago, NAFTA and the Uruguay round of the GATT that created the WTO, American domestic manufacturing has boomed. Yes you read that correctly, US MANUFACTURING HAS BEEN BOOMING. If you listened to these angry mobs that tried to intimidate Earl Blumenauer’s vote, you would think that the peak of American manufacturing was 1977. It was 2007. Having dropped along with the entire world’s manufacturing during this global recession, American manufacturing has rebounded more than 20% since its nadir in 2009, enjoying a faster recovery than most of the world. Of course this is if we measure manufacturing the way economists do, by output rather than the way activists do, by employment under a collective bargaining agreement.
The cause of the decline in manufacturing employment has very little to do with trade. The largest source of manufacturing job loss has been through productivity gains. Are we going to levy tariffs against domestic manufacturers for using bar codes, automation, and lean production processes? Trade gets the blame because it is always too easy to scapegoat foreigners.
The great domestic manufacturing economy that we have today would not exist had it not been for the presidential leadership of Bill Clinton. He forced NAFTA and the GATT through Congress knowing it would anger his union supporters. He did it because it was the right thing to do. The most lucid defense of free-trade ever written is 1997’s Pop Internationalism by Paul Krugman. Indeed Krugman was a specialist in trade policy for which he won his Nobel Prize. Progressives follow Krugman like the gospel on fiscal matters outside of his expertise, but reject sound economic science from the same man.
Unlike Bill Clinton’s leadership, Obama dithers on trade, reluctant to take a firm position one way or the other. Our most professorial president knows the science but leads like a weather vane. He campaigned against Clinton’s trade policies in the 2008 primary, going so far as to promise to renegotiate NAFTA, while letting his economic adviser Austan Goolsbee reassure the Canadians that he wouldn’t. Once elected, Obama of course, didn’t. He largely ignored trade for his first two years. It is only with industry and Boehner’s pressure that Obama finally submitted the three agreements to Congress last week. For his own political cover they were linked to passage of TAA and possibly the China currency bill.
As expensive as TAA is, its cost does not exceed the benefits that the trade deals present. Seeing this linkage as inevitable, Boehner negotiated a curtailed program that reduced benefits to a price Tea Party Republicans could vote for while Obama seemed willing to let the issue languish as a poison pill, letting him voice tepid support for the deals in speeches knowing he would never have to sign them. Now thanks to Boehner, Obama will be able to sign the Korea deal with the president of South Korea by his side in a state visit, looking all presidential for the cameras.
Currency Exchange Rate Oversight Reform Act (China currency bill)
The China currency bill is another story. It seeks to penalize China for the value of its currency. Perhaps the bill’s backers are able to accuse China of devaluing its currency because few Americans read the Financial Times let alone the Wall Street Journal. China has been doing nothing of the sort. They have learned from Japan’s mistakes. Japan did undervalue its currency which by 1990 fueled an equity bubble the likes of which the world had never seen, and Japan has yet to recover from its collapse.
For more than 20 years China has pegged its currency to the US dollar. When we go up they go up; when we go down they go down. This is Bretton Woods not competitive devaluation. When their neighbors devalued their currencies in 1997, China remained a pillar of stability, responsibly maintaining a value of $.12 to the dollar until 2005. Since 2005 the Chinese Yuan has already been allowed to appreciate against the dollar by more than 30%.
If China’s currency floated, it would likely appreciate much more, but why? Because it is the dollar that is falling in value! We are the ones debasing our currency. The Bank of China’s monetary policy has been to peg their currency to our sinking ship.
We need to be careful what we ask for here. To maintain their peg, the Bank of China must buy US Treasuries, mostly 10 year notes. Forget a trade war; what if they actually complied? A sudden drop in demand for US treasuries would raise our long-term interest rates. As the developed world sits upon a global sovereign debt bubble that is beginning to collapse in Europe, this is no time for radical moves of any kind in the bond market. A gradual adjustment that is already playing out is what we need, not shock therapy. How did we come to a point where the People’s Republic of China displays more sound financial judgement than the US Senate?
The Currency Exchange Rate Oversight Reform Act promises to be our generation’s answer to the Smoot Hawley Tariff Act of 1930. Like Herbert Hoover, Obama does not have the will to stop it. It passed the Senate on Tuesday 65-35 with nearly every Democrat voting for it and 16 Republicans joining them. The White House has said very little on one of the most dangerous pieces of legislation working its way through Congress. Once again Boehner has taken the lead. He announced last week that he will not be letting it come to a vote in the House.
From averting us from self-inflicted disaster of either triggering a trade war with China or a flash crash in Treasuries and by cutting a smart deal that links a curtailed TAA to pass along with three job creating trade agreements, Boehner has shown incredible deal-making skills when the will for compromise is in short supply. All of this contrasts with Obama who has managed to anger his base anyway and yet never manages to get a deal through Congress without its Speaker (Pelosi or Boehner) holding his hand.
Eric Shierman is a partner at Creative Destruction Investment Partners, writes for the Oregonian under the pen name “Portland Aristotle” on the MyOregon blog, and is the author of the forthcoming book: A Brief History of Political Cultural Change. His articles can be read at:http://connect.oregonlive.com/user/PortlandAristotle/posts.html