Restore Sovereignty to U.S. Trade Policy

by WILLIAM R. HAWKINS June 14, 2016

World Trade Organization

The May report from the Department of Labor was shocking, reinforcing a public mood that has long placed job creation at the top of issues this election year. Only 38,000 net new jobs were created last month, which was about 120,000 fewer than most economists had forecast. It was a drastic drop from the 160,000 jobs initially reported in April, which was itself a drop from March. May was the weakest since September 2010. The report also subtracted jobs from the April figure, bringing it down to 123,000 new jobs. Though employment has continued to grow, its slowing pace is much too low to sustain an economic recovery. A prosperous economy should be creating jobs at two to three times this year's average rate. So what was already the slowest recovery from a recession in eighty years seems to be stalling.

The public already feels this. About 458,000 people became discouraged in May and gave up looking for work. This meant that the percentage of working-age Americans in the labor force declined to 62.6%, near a four decade low. The Department also reported, "The number of persons employed part time for economic reasons (also referred to as involuntary part-time workers) increased by 468,000 to 6.4 million in May, after showing little movement since November. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find a full-time job." The unemployed are thus not the only ones suffering hardship in such a poor labor market. Millions are struggling to do the best they can, but the opportunities are not available for them to do the work they need and want to do to get ahead----or even stay even.

Employment in health care, professional and business services increased, but employment in mining, construction and manufacturing declined. Other sectors remained stagnant. A factor not in the Labor report that contributes greatly to whether jobs are created in America (or not) is the international trade balance, which has been showing a large and expanding deficit. A deficit measures the loss of employment mainly in the manufacturing sector and its related services. The damage the deficit is doing to the economy has been masked by the drop in oil prices and imports. Between 2014 and 2015, the value of oil imports dropped by $157.3 billion, which was a clear boost to the economy. However, it was offset by the increase in other goods imports so that the total still went up by $10.4 billion, to the staggering sum of $745.7 billion for 2015. That's money that went to fund jobs overseas rather than at home. 

The latest in a long series of international trade agreements that have opened the American market to foreign rivals is the Trans-Pacific Partnership (TPP). The backlash that makes its Congressional adoption doubtful is fueled by the failure of past trade policy based on the sophistry of "free trade." A March Bloomberg poll found "Opposition to free trade is a unifying concept even in a deeply divided electorate, with almost two-thirds of Americans favoring more restrictions on imported goods instead of fewer....the issue unites the country like few others, across lines of politics, race, gender, education, and income." No wonder both Donald Trump and (now) Hillary Clinton oppose TPP.

TPP is largely irrelevant in the larger picture of how the U.S. regains control of its economic fate to boost economic growth and job creation. At the core of the problem is the World Trade Organization. The WTO is a supranational agency established in 1995 to prevent nations from adopting trade policies that give their domestic industries an advantage over foreign rivals. Headquartered in Geneva, its current Director-General is Roberto Azevêdo, a career diplomat from Brazil. It can declare national legislation "illegal" if it harms foreign interests. Such a "rule of law" is inherently illegitimate because it violates national sovereignty. As Azevêdo stated last week at a symposium in London. "No WTO member can unilaterally decide what its rights and obligations are."

Indeed, when I was working on Capitol Hill I was aghast at how deeply the WTO had penetrated policy making. Time and again, proposals to boost the American economy were blocked by the claim "the WTO will disapprove." This is not the independence the Founders fought for.

The WTO was produced by the Uruguay Round talks conducted under the General Agreement on Tariffs and Trade (GATT) from 1986 to 1994. Neither Presidents Ronald Reagan nor George H. W. Bush showed any interest in creating a new supranational body to govern trade. The WTO idea originated in Europe with the aim of preventing the U.S. from protecting its home market. It was President Bill Clinton who accepted the WTO idea as part of his post-Cold War notion of a new world order based on the classical liberal ideology of disarmament, world governance and free trade. Though this trilogy of ideas came into prominence in the post-Napoleonic period, it took its American form in the post-World War I vision of President Woodrow Wilson, whom President Clinton admired. The end of the Cold War seemed to present another chance for these liberal ideas to be implemented. The role of the WTO in this scheme was demonstrated by Vice President Al Gore who, at the signing of the WTO agreement in Morocco, squared the circle of liberal thought by claiming that those American servicemen lost in the Gulf War had "died for the United Nations."

Yet, once again, these liberal notions have failed across the board. Most conservatives have understood these failures in defense and foreign policy, but do not think of trade policy. They have forgotten the wisdom of the Founders, exemplified by the nation's first Treasury Secretary Alexander Hamilton whose ideas were once the core of the Republican Party during the time when the U.S. was becoming the world's leading industrial power. And they seem unaware that the WTO outlawed a key policy of President Reagan, the use of voluntary export restraints (VRE) negotiated in traditional diplomatic fashion.

Between 1981 and 1987, Japanese auto imports were limited to 1.65 million units annually by a VER agreement negotiated by the Reagan Administration supported by the threat of protectionist legislation in Congress. Assured of a domestic market, the Big 3 American automakers increased their investment in plant, equipment, research and development. Productivity in the industry rose faster than the industrial average and prices did not rise as fast as in the rest of the economy. Japanese automakers invested in the U.S., opening assembly plants to get "behind" the import barrier. Yet even with American production, Japanese automakers lost market share to the re-energized Big 3. Its success was why other countries demanded that the WTO prohibit this practice.

Unexpectedly, the Obama administration is making some modest moves against the WTO. The dispute settlement process is central to the WTO. Member states bring cases before three-judge panels to block actions by other member states which they claim are "unfair" trade practices. If they win, the WTO gives them permission to retaliate, a right they already possess as sovereign states --- but a right they lose if the WTO rules against them. On May 12, the Office of the U.S. Trade Representative announced it would oppose the reappointment of a South Korea judge because of his rulings. Judges have a four year term. This led to charges by liberal backers of "global governance" that the U.S. was "politicizing" the WTO (see the article by professors Manfred Elsig, Mark Pollack and Gregory Shaffer in the June 6 Washington Post). This is nonsense because any system that involves confrontations between nations over matters that impact their domestic economies (upon which their prosperity and security depend) are inherently political. Any government that does not try to influence the system to protect its national interests is not doing its job.

On May 25, the Department of Commerce took unilateral action against imports of corrosion-resistant steel from China, India, Italy, South Korea, and Taiwan that were being "dumped" into the U.S. market to the disadvantage of American steelmakers. A 236% prohibitive tariff will be imposed. Due to he slowdown in the world economy (especially in China), there is a global surplus in steel capacity. Every country is trying to make other countries "adjust" downward by dumping their surpluses overseas to force rivals out of business. By the same token, the U.S. must do what it can to resist this onslaught and maintain its own capacity and jobs.  The domestic capacity utilization rate in crude steel production sharply declined from 76.96 percent in 2014 to 70.86 percent in 2015, dropping back almost to the low point of the recession in 2009. Last year, the U.S. imported more steel than it produced, a dangerous situation for such a strategic industry.

The key here is that the U.S. is not taking its case to the WTO, but acting under its own national laws. This is exactly how it should be. What President George W. Bush said in regard to the UN should to the WTO: "America will never seek a permission slip to defend the security of our people."

The Commerce decision came just before the  annual U.S.-China Strategic and Economic Dialogue which took Secretary of State John Kerry to Beijing. With strong action at home backing his play, Kerry was able to get a pledge from China to cut back its steel production to relieve the market glut. While not as formal as a VER, and needing close monitoring given Beijing's reputation for lying, it was progress the old fashioned way. It should be noted that a similar market glut is pushing Chinese aluminum exports; but since the U.S. has not taken action on this front, Beijing did not make any concessions in talks with Kerry about limiting production. As always, negotiations must be backed by strength.

This is the way to restore the proper order to U.S. trade policy; simply ignore the WTO and take direct action to protect the American economy; its domestic producers and workers. Diplomatic archives around the world are filled with documents that no longer have any role to play in world affairs because they do not fit the needs of major nations. It is time the WTO was tossed in that pile. It would be easy. The WTO was not established by treaty, it was only "implemented" by Congress, not "ratified." As an executive agreement, all the White House needs to do is ignore it. As the largest economy and trading state, America has the power to lead by example. The WTO will simply wither on the vine as national sovereignty and statesmanship return to the center of U.S. policy-making.

William R. Hawkins is a consultant specializing in international economic and national security issues. He is a former economics professor and Republican Congressional staff member.


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