# A New Look at American Trade Politics

Date July 21, 2005 I. M. DESTLER(Professor, School of Public Affairs, University of Maryland, USA) SADAMORI Keisuke(Director, Americas Division, Trade Policy Bureau, METI) TANABE Yasuo(Vice-President, RIETI)

## Summary

I would like to talk, essentially, about some of the conclusions, assertions and recommendations in my new edition of American Trade Politics, which was finally finished just last month after the first comprehensive editing and updating since the last edition was published 10 years ago. The book includes four new chapters, including new conclusions, and this presentation summarizes what is new.

My friends ask how I can possibly keep writing about trade since everything is always the same. To them, nothing seems new and the first several years of the new century look very much like the 1980s. As was the case back then, there are special interests that are fighting trade liberalization (i.e., sugar now versus textiles then), a huge trade deficit for the United States (currently $700 billion), a big country target to blame for all that is wrong (i.e., China now versus Japan then), and again a tough legislative battle concerning free trade arrangements (i.e., DR-CAFTA now versus NAFTA then). However, my opinion is that looks are deceiving. Much is new in American trade politics and a lot of changes have taken place, certainly since the 1980s. Therefore, there are three new interpretive chapters (9, 10 and 11) in the book that introduce three new fundamental things. Chapter 9 argues that traditional protectionism in the U.S. is weaker than ever. Chapter 10 argues that the same globalization that has weakened protectionism has given rise to social concerns about the impacts of globalization, sometimes called the "trade and..." issues -- namely trade and labor standards and trade and environmental standards. Finally, Chapter 11 argues that partisan division and rancor in the U.S. Congress has grown. On the decline of traditional protectionism, the original book is written around the notion that the central problem of trade politics is concentrated business interests seeking protection. Producers who, for whatever set of reasons, cannot compete internationally therefore seek to deal with it by blocking or limiting imports. This certainly seemed to be the defining issue of trade politics when the book was first published, and it has not disappeared. Nevertheless, the number of businesses in the U.S. that are overridingly protectionist and asking for new protection has declined almost to the vanishing point. Let me offer a historical illustration. Both in the 1980s and in the past decade, there was a rapid expansion of U.S. trade deficits with huge imports putting a lot of competitive pressure on U.S. producers. Thus, in the 1980s, the textile, steel, auto, shoe, machine tool and semiconductor industries were all seeking new protection. In the past decade, however, it was just the steel industry that got new protection and that lasted for only 19 months starting in 2002. The basic answer to the question of why there has been less protectionism than before, despite the huge trade imbalance, is globalization. In addition, there may be some sort of tipping point. While an increase in imports initially means that greater reaction from competing producers leads to greater pressure and protection, at some point U.S. producers themselves become very dependent on imports for their parts. They become globalized and dependent on exports as well. Therefore, there are fewer industries operating in the old style of producing from inputs made exclusively at home. For example, between 1970 and 2000, the share of the U.S. economy devoted to the production of goods declined from 43% to 35%. However, trade in goods as a proportion of gross domestic product (GDP) went up from 4% to 10%. In other words, a larger share of a decreasing proportion of the U.S. economy is being traded and the ratio of goods trade to goods production has more than tripled. This has had an impact, for example, on the politics of textiles. The U.S. textile lobby, which had, through the postwar period, always demanded and received exceptions, in the late 1980s and early 1990s began to develop what are called "rules of origin" as a new strategy to counter the internationalization of the apparel industry and the increasing move away from quotas given the demise of the Multi-Fiber Arrangement. In the negotiations surrounding the North American Free Trade Agreement (NAFTA), for example, rules of origin were crafted that provided that clothing entering the U.S. duty- and quota-free had to be made of cloth and fiber produced within North America, thus boosting U.S. producers of these inputs. Similar rules of origin exist with the Central America Free Trade Agreement (CAFTA), which has been endorsed by a major share of the U.S. textile industry for the same reason that it supported NAFTA. This is not to say that these formerly protectionist industries have become free traders, but they have moved from a protectionist stance to one of writing the rules in a globalized game. If that is the case, why is it that trade politics is still contentious? One reason is that there are stubborn protected "redoubts" such as the sugar and cotton industries which, it would seem, possess strong political backing. While such holdouts still exist, compared to the protectionism of the past, they are only a small share of the U.S. economy and they cannot explain the difficulty currently evident in trade politics. Basically, the two other new things -- social issues and partisan division -- are the main reason. First, with regard to social issues, the problems are fairly well known. Essentially, the same globalization that has led to the decline of protectionism has also led to a rise of social concerns. The anti-globalization movement made famous in Seattle was a manifestation of this. To the degree that there is a single logic behind their position, it is that international trade weakens or threatens established national standards. In a highly competitive global environment, it is harder to maintain national labor and environmental regulations. This gives rise to anxiety about a "race to the bottom." In the United States, this is a parallel to the nationalization of the U.S. economy around 1900, when the states were no longer able to regulate the economy and the national government had not yet developed the means to do so. Nowadays, though to a lesser degree, national governments cannot regulate and the international regime has not developed the means to do so. This causes problems for trade politics because these issues divide the political parties. Unlike trade traditionally, which tended for most of the post-World War II period to be a bipartisan, centrist issue, domestic labor and environmental issues really divide Democrats and Republicans, with Democrats pushing new regulations and Republicans resisting. International negotiations on these issues are also difficult and the United States is often perceived abroad as practicing a "new protectionism." The social issues were probably responsible for Bill Clinton's failure to get "Fast-Track" (now called Trade Promotion Authority or TPA) legislation approved in 1994 in the Uruguay Round legislation, and in 1997 when he made a major push for it as a stand-alone bill. These issues provide the rationale and an important part of the reason for Democratic opposition to TPA in 2001 under the Bush administration and to CAFTA today. I argue in my book in some detail that because these issues are in large part symbolic, it ought to be possible to find a compromise. This leads to the final new development that shapes U.S. trade politics: the upsurge in partisanship in the Congress. If parties do not talk to each other anymore, it is hard for them to negotiate compromises. While on issues such as the war in Iraq, tax policy or social security, there are substantive differences between Democrats and Republicans, on trade, there are essentially no differences at the mass public level. For example, a recent poll on CAFTA showed that 50% of Republicans and 51% of Democrats support it. In the Congress, however, there is a big difference. In the Senate, which is usually the more bipartisan of the two bodies, Republicans voted in late June 43-12 in favor of CAFTA and Democrats voted 10-33 against. In the House of Representatives, vote counters believe that somewhere around 10 Democrats out of 205 will end up voting for CAFTA. [NOTE: In fact, 15 Democrats did.] This reflects the broader 21st-century U.S. political structure, with a reasonable public on the one side and polarized elites on the other. Particularly among the elites that are active in political parties and represent Americans in the Congress, the middle disappears, as does bipartisan communication and collaboration. A striking illustration of the partisan trend is the contrast in the liberal versus conservative distribution of members of the U.S. House of Representatives in the Congress of 1969-1970 and in 1999-2000. In both cases there are Democrats on the left and Republicans on the right with quite a clear ideological difference. In the distribution of 1969-1970, however, there is a lot of overlap in the middle. Thirty years later, this center is essentially gone. Senator John Breaux, who was one of the last centrists, referred to this as the "incredible shrinking middle." There are two large causes of this partisan polarization. One is that political parties in the United States have become more ideologically cohesive in the last 40 years, with conservative southern Democrats becoming Republicans and liberal Republicans becoming Democrats. The other reason is that there has been regular redrawing of congressional districts. After correctly determining that people in the United States were unequally represented, the Supreme Court ruled that congressional districts had to be made equal. Therefore, every 10 years a census is taken, which decides how many votes each state gets in the Congress, but also establishes a new distribution of the population within the state and therefore requires that district lines be redrawn. This has led to divergence from the democratic norm in that congressmen now choose their constituencies, whose borders are drawn in such a way as to secure a safe victory. This makes for more polar views because despite the lack of a threat from the opposing party in any particular constituency, a member still faces a potential threat from his own party in the renomination primary. Since primary voters tend to be on the extreme, members must reflect this in their own issue positions. This is, I should repeat, an overall substantive trend. When it comes to trade, the pattern of the shrinking middle does not fit that well. For example, on the mandatory vote now taken every five years on whether the United States should withdraw from the World Trade Organization (WTO), 46 Democrats and 39 Republicans voted in favor of withdrawal last month. This suggests that parties are not totally different and that there is a broad center supporting the WTO and U.S. involvement therein. However, in a process in which, on issues in general, opinions are polarized; if increasingly policies are made by the parties and not by the committees as used to be the case; the result is that, as in the House Ways and Means Committee in 2001, essentially the majority excludes the minority. In the vote in 2001, the Democrats overwhelmingly opposed the granting of new Trade Promotion Authority and the Republicans were subject to major political pressure to come in line. The end result was passage by a very narrow margin of 215-214. Should the legislation on CAFTA pass, it is likely to follow the same process. [NOTE: It did, by a 217-215 vote.] There is a near-term solution and a long-term solution to this problem. The near-term solution assumes that the CAFTA bill is passed with the support of Republicans who voted to withdraw from the WTO. If in the future, in the wake of the bitter division that helped get CAFTA passed, discussions on the Doha Round are resumed, bipartisan relationships will have to be rebuilt. This is presumably the political strategy that the new United States trade representative, Rob Portman, has been following and will follow in rebuilding relations with Democrats. In addition, it is necessary to seek a real deal in the Doha Round, with substantial concessions from U.S. trading partners. Getting greater market access in countries like India and Brazil and non-agricultural market access, as well as deals on agriculture and the services industry, will help mobilize people in U.S. business, whose support can be used to fight opposition from those who will clearly be losing out in the Doha Round bill, such as the sugar or cotton industries. Historically, global deals have been easier to get through the Congress than bilaterals. For example, the Uruguay Round legislation establishing the WTO passed the House of Representatives by 2-1 margins in both political parties and the Senate by 3-1 margins. It is also important for the U.S. to remember that it will have to get in order to give, and in turn will have to give in order to get. Finally, my fundamental solution is to take steps toward what I consider the best long-term answer, which I call the "New Social Compact." As discussed in American Trade Politics, this essentially means a combination of two things: Complete the move toward globalization, meaning full liberalization in trade and markets on the one side, and implement truly significant programs for people who are globalization's losers on the other. There is a new book published by the Institute for International Economics (IIE) [The United States and the World Economy: Foreign Economic Policy for the Next Decade] which has a chapter by Gary Hufbauer and his colleagues which estimates "the big number." This refers to a summary number that quantifies how much the United States gains from liberal trade. The Hufbauer team estimates that the gross domestic product in the United States is$1 trillion higher every year because of liberalization thus far. The rough estimate of the remaining gains to be had from full liberalization stands at an additional $500 billion a year. However, the estimated costs too are not trivial and are particularly concentrated. The gains from globalization are unequally distributed in the United States as elsewhere and a lot of Americans lose. Therefore, there is a real need for big, consequential programs to help these losers. We currently spend about$2 billion a year on trade adjustment programs; we should spend \$20 billion, and broaden them to include all workers displaced by economic change.

While there were some significant reforms in trade adjustment assistance, negotiated with the Senate on a bipartisan basis as part of the trade legislation of the TPA bill, those reforms essentially broaden the program available to those who are displaced by trade. However, it is difficult to prove who loses a job because of trade and who loses a job more generally. Thus, there should be programs available to all in the form of stipends and retraining, wage insurance, and business tax credits.

There has been a drastic change at METI in how it does its work. In the 1980s and 1990s, we were mostly working on sectoral trade disputes and the classic fight against protectionism in the United States. Currently, those jobs in the ministry have almost disappeared and more work is being done concerning the WTO and China. Therefore, I think that the change in our work reflects the sort of structural changes that were pointed out in Professor Destler's presentation.

To start off the discussion, I would like to ask what the outlook of American trade politics is in the coming two years. For instance, in addition to the changes that were pointed out, the Bush administration is suffering from declining political momentum and increasing partisanship, not limited to trade. At the same time, there has been steady bipartisan support for a sort of "anti-China bill." It seems to me that there are a lot of political difficulties ahead in dealing with the Doha Development Agenda.

Dr. Destler: I should add that my long-term solution in theory is perfect because most Republicans want open trade and Democrats want major social remediation programs, so we give them both. However, recently a lot of Democrats have been voting against trade and a lot of Republicans have been voting against social programs, so it is not easy politics in the short-run to do what I said, especially given the budget crunch.

Given President Bush's approval levels, which have been dropping below 50 percent, and his dependence on the strength of House Majority Leader Tom DeLay, who in recent months has been suffering a few hits, it would seem that the political trends are going against the president. There are of course more Republicans in the House now than before, so there is a bigger margin to play with, but that is the short run. In two years, the general expectation is that the Democrats will gain seats in the House, and the question then becomes whether a trade deal can be made that has broad enough interest group support so that it is not dependent on the same process as can be seen in the TPA or CAFTA votes. Unless moves are made to win more bipartisan support and Congress somehow climbs back from extreme partisanship, it could be hard to make any deal work.

Q: Mr. Sadamori's comment confirmed your point that the Japanese market is no longer really a target. Does this mean that the Japanese market is now perceived as a totally open market now?

A: The short answer is no, but it is perceived as a less important market than it was in the late 1980s and early 1990s. During that period, U.S.-Japan trade was increasing every year; but more recently it has been kind of flat. I think that the fact that Japan is no longer seen as a relentless juggernaut that is going to swallow all in its path means that the issues have become less sensitive. A lot of U.S. industries have adjusted, whereas in the 1980s they were feeling the pressure. I think that partly because of the rise of Japan in the 1980s, the U.S. was pushing Japan to do more in the global talks. Now the negotiators do not seem to care as much as they did, for example, that Japan is not among the Group of Five that rescued the Doha Round last summer. Also, while Japan is more open than in the 1980s, the agricultural issue still remains.

Q: The current situation reminds me of the U.S. attitude toward Japan in 1985, but back then the Plaza Accord allowed the Reagan administration to make macroeconomic adjustments to the trade issue. What is the U.S. Government's position toward China?

A: The period around 1985 was one of "managed conflict" and getting to know each other. I think that the Japanese inclination when things got too hot was to do something to cool them down, even if it meant the appearance of yielding to pressure. In some respects, the political process in Japan back then seemed to want that pressure.

However, there is no evidence that the Chinese political process operates that way; some evidence even points in the other direction. Moreover, we do not have that much experience with each other, and the communication and level of understanding is not as good. So there is a lot to worry about, but our economies are mutually dependent. In fact, China is highly dependent on the U.S. market, so there is logic behind their taking actions like they have just taken on the exchange rate to counter the imbalance in China's growth, which is increasingly dependent on exports. The United States also depends on China, Japan and other Asian countries to buy its treasury bills, of course.

I think it is likely that the Chinese will have to do more to strengthen their currency. What worries me is that they will not do enough, but I would suppose that once they get into the game they will have to keep playing it so as not to end up with a messy patch. In the short and medium term, I suspect U.S.-China economic relations will work themselves out.

Another problem is that even if the Chinese make a substantial revaluation, it is not exactly going to balance U.S.-Chinese trade and it will not make a lot of difference in the U.S. trade deficit. On the other hand, it will make it easier for other Asian countries to let their currencies rise, and this will bring the U.S. deficit down more, so it is not a bilateral but a regional question.

Q: I think the difference in the attitude of the U.S. Congress with respect to China now and Japan in 1985 is the anxiety over military security issues. What is the relationship between those in Congress who use a harsher language on trade and the exchange rate in China and those who are alarmist about China's future military expansion?

A: I think the two groups overlap, but they are not identical. There are different committees and specializations, but economics people will be responsive to alarms about security and people concerned about security will also be responsive to alarming arguments from economics. That is of course a fundamental difference between the China situation now and the China situation looking into the future.

What is remarkable about China's strategic deterrent is how modest and unthreatening it is. The Chinese so far have been behaving in a very restrained way and nobody recognizes it, or they suspect that the situation will turn dangerous in the future. Over time, China has been increasing defense spending, especially with respect to the Taiwan issue, and it is a rising power with a plausible projection to become the greatest power in the world. In that circumstance, we are going to have intrinsic difficulties with them. Particularly if the Chinese political system continues to operate in the same way as today, that will add to the anxiety of the Americans and the Japanese. Right now I do not see China as a great threat, but who knows what will happen in 50 years?

Q: With respect to the WTO antidumping and dispute settlement negotiations, I would argue that rather than there being less protectionism in the U.S. than in 1985, a different form of protectionism is being expressed. It does depend on the context, but nevertheless it is still raw protectionism. What is your view on this?

A: My argument on antidumping is the opposite of what I say on all the other things: no change in use of antidumping since the 1980s. In Chapter 9 there is an updated calculation about what is going on in antidumping and basically cases are being initiated at the same rate, with a near majority being steel cases. There is also a trend that the number of products under anti-dumping orders is on the increase. However, I do not think this matters very much. It matters more in that people make anticipatory and post-hoc price adjustments, so this is real and it is protection. Nevertheless, given that the declining U.S. steel industry accounts for 46% of our antidumping cases, it suggests that this is something less than a general phenomenon for American trade.

Q: What is your view on the very weak support from U.S. industry for the Doha Round?

A: Part of the problem is that much of U.S. business feels that they are basically operating in open markets already, but I think that business support for a round tends to look stronger in retrospect and that it tends to come fairly late in the game, partly because businesses try to withhold their leverage to get the most that they can. I agree that it is a concern, though if we had considered the situation in 1991 and 1992, you might not have thought that business support was that strong in the Uruguay Round.

Q: You mentioned the decline of traditional industry-based protectionism, but do you see any future problems with the outsourcing issue in the services industries once groups get organized to oppose that?

A: I think the question would be what mechanism they would use and what law they would like to pass. It is very hard because it is not clear how you impose a national regulation or restriction on outsourcing. While outsourcing has received a lot of publicity, there are also a lot of complications and interesting barriers to how far it can go: for example, requiring equal credentials among professionals in different countries. In any case, I suspect that it would be too complicated to figure out how to broadly restrict outsourcing.

Q: What is your opinion on why former U.S. Trade Representative Bob Zoellick has survived within the Bush administration? I would assume that he and President Bush do not really get along.

A: They are just very different people. There were reports that they did not get along and that the president disparaged him rather willfully and unnecessarily in meetings. However, Bob Zoellick was clearly a performance guy. He was negotiating deals (Singapore, Chile, Morocco and Australia) and regardless of their actual trade significance, he was clearly producing results. He was also technically very competent and aware of the politics. I think that he would have been a more powerful USTR if he had been friends with the president, but the fact that he was able, competent and successful internationally was a very important factor and made him effective without having the personal support of the president.

*This summary was compiled by RIETI Editorial staff.