Policies and practices called into question when they don’t level the playing field

May 2015 - Two trade bills before Congress are generating intense debate and discussion. The Trade Promotion Authority (TPA) bill, if passed, will limit Congress to a Pass or Defeat vote on future trade legislation and allow no amendments. The second bill, the Trans-Pacific Partnership (TPP), is a treaty with 11 countries.

The Obama Administration is seeking passage of both these pieces of legislation; their stated purposes are to counter China’s immense influence throughout Asia, open markets to American exports and protect intellectual property. This is a large agenda to expect any “free trade” agreement to achieve.

Since no one can debate TPP because it has not been published, let’s put some thoughts down about “free trade,” a phrase that generates a variety of impressions. The most prevalent are theories first published by European economic scholars regarding specific economic activities. 

One example is David Ricardo’s theory of “comparative advantage,” which was based on the fact that European nations had surplus products and that this surplus was created by the comparative advantage one region had over another for specific products. The classic example was that England had excess wool and found it could trade that surplus to Spain in exchange for importing wine. The wool-for-wine comparative advantage was based on the rural economy and was really barter based.

This theory was simple and effective hundreds of years ago. It was indeed free trade—a direct process determined that X bales of wool should equal Y barrels of wine.

Today’s trade system is very complex and managed by national governments and international treaties. Policies have created the World Trade Organization, General Agreement on Tariffs and Trade, NAFTA, KOFTA and several others to which the United States is a party. There is no comparative advantage in these agreements.

Deficits

Many people think the United States consistently runs a trade deficit because of high labor costs. That may be true for some products exported by countries that do have low wages. But how does this explain why the U.S. had a $74 billion trade deficit with Germany in 2014, which pays higher wages than the U.S.? Last year’s deficit with Germany was twice the rate experienced in 2010.

The vast majority of America’s trading partners have a value-added tax (VAT) system, which is refunded to companies that export goods. Germany’s VAT is 19 percent. So when a $100,000 BMW is placed on an outbound ship, the German government hands $19,000 to the automaker for that export. Germany imposes a VAT on all imports. This means Ford Motor Co. pays an extra $7,600 to sell a $40,000 Explorer to a German buyer. In effect, Germany subsidizes exports and taxes imports from the United States. Is this free trade?

Exchange rates

One common practice that distorts trade is to manipulate national currency. For example, Japan valued its yen at 80 to the U.S. dollar in 2012. The central government later revalued the yen at 120 to a dollar. The yen’s 50 percent depreciation has had the effect of increasing income for Japanese companies that export to the United States. The lower yen discourages investment in the United States, lowers the cost of Japanese imports to the U.S. and raises the cost of U.S. exports to Japan. 

Toyota Motor Corp. has experienced a windfall as a result. In fiscal 2012, before Japan devalued its currency, Toyota earned roughly $3.5 billion. In fiscal 2015, earnings soared to $19.8 billion–more than General Motors Co. and Volkswagen AG combined. Toyota will spend some of its windfall on research and development. Toyota now has more to invest, putting U.S.-based automakers at a competitive disadvantage. Does currency manipulation create free trade?

Stacking the deck

These are examples on how the international trade in goods is stacked against profitable U.S. industrial production. Why not have TPA designed to help American manufacturing? Our government’s trade policies should level the playing field so that it works for Main Street, not Wall Street.

The administration’s claims about the pure benefits of TPP should be viewed with a great degree of skepticism. The last “free trade” agreement our government approved was the U.S.-Korea Free Trade Agreement in 2011. The Obama administration pledged this deal would increase exports of American goods by $10 billion to $11 billion and that 70,000 American jobs would be supported by the increase in exports.

Before the Korean treaty took effect, the U.S. exported $43.5 billion worth of goods to Korea and Korea exported $56.6 billion worth of goods to the U.S., for a trade deficit of $13.1 billion. After three years under this deal, U.S. exports to Korea last year totaled $44.5 billion (up only 2.3 percent) while Korean exports to the U.S. were $69.6 billion (up 23 percent), which nearly doubled the trade deficit to $25.1 billion. This imbalance has likely cost tens of thousands of manufacturing jobs in America. Is this free trade?

Bad for Americans

These “free trade” deals are stacked against America’s manufacturing base. We are giving away our ability to create wealth and in the process, we are lowering our standard of living.

Finally, look at the TPP. In 2014, the United States had a trade deficit of over $155 billion with the 11 countries named in the treaty. This deal will prove to be as bad for average Americans as the Korea FTA.

Sure, the insiders in Washington will do very well. The people, however, will suffer with reduced income and fewer opportunities for employment. Is this “free trade”?

Bill Hickey is president of Lapham-Hickey Steel Corp., a Chicago-based processor and distributor of metal products with six U.S. locations. He has been with the 89-year-old company for 40 years. He has long held leadership roles with the Metals Service Center Institute.