In our last blog entry, we examined some of the promises made in the Trans Pacific Partnership (TPP) informed by the opinions of scholars and economists. A survey of free trade legislation since the Bretton Woods conference at the end of World War II gives cause for skepticism. According to economists, the Achilles heel of trade reform is that free trade has been misused as a foreign diplomacy tool, or that it seems impossible to enforce. But what can be done to eliminate the negative impact that free trade agreements have had on U.S. manufacturing and American jobs? What can our legislators do to ensure that free trade reform is fair to both America and our trading partners? To help answer that question, we looked at today’s export scene and at the auto manufacturing industry in particular. Auto manufacturing has a large stake in the agreement, as it directly employs more than one million Americans and impacts the jobs of many millions more.
Positive Signs for U.S. Manufacturing and Exports
According to MIT’s Observatory of Economic Complexity, the U.S. is the second largest export economy. The U.S. still has a negative trade balance of $731 billion, but during the last five years, exports have increased at an annualized rate of 8.5% from $9.67 billion in 2009 to $1.45 trillion in 2014. These figures paint a hopeful economic picture. The most recent growth in exports are led by refined petroleum and cars.
The Problem: Unfair Trade Practices
The American Automotive Policy Council (AAPC) understands the pivotal role the TPP will play in maintaining and expanding America’s robust auto exports. The organization states that “the industry depends on free and open international trade—FCA US, Ford, and General Motors export about a million vehicles per year to over 100 countries, and one out of five American produced vehicles by these three companies are exported.” However, while the AAPC has supported every past U.S. Free Trade Agreement, it’s important to note that several countries included in the TPP have a history of using currency manipulation to gain an unfair trade advantage over their trade partners, “undermining the expected benefits of a TPP agreement in the U.S.” Countries like Japan are the main offenders, and they would hinder access to growing markets in Malaysia and Vietnam. As we mentioned, currency manipulation is one of several “state sponsored trade weapons” that make free trade seem “impossible to enforce.” However, the AAPC doesn’t think it is impossible. The organization references Jared Bernstein’s article, “How to Stop Currency Manipulation,” as a springboard for possible solutions.
The Solution: Stop Currency Manipulation
Bernstein, a senior fellow at the Center on Budget and Policy Priorities, says the TPP pitch hasn’t won over many on either side of the partisan divide. However, it could salvage itself if it adds a chapter on currency manipulation. According to the article, C. Fred Bergsten of the Peterson Institute for International Economics estimated that America’s trade deficit “has averaged $200 billion to $500 billion per year higher as a result of the [currency] manipulation” by the rest of the world, resulting in the loss of one million to five million jobs. The article also suggests several ways to deal with countries involved in currency manipulation, including a tax on the imports of offending countries and the temporary canceling of certain trade privileges. However, the most powerful and immediate way to level the playing field might be to impose what Jared Bernstein calls “reciprocal currency intervention.”
If currency management is universally recognized as a major issue, then why hasn’t it been successfully addressed? Bernstein believes it is due to an overreliance on “quiet diplomacy.” Bernstein says, “They [past administrations] believe that writing down rules in a trade agreement is too risky, with the potential to scuttle the whole deal.” Time and time again, countries have found ways around the rules of free and fair trade, through the use of “state sponsored trade weapons” like currency manipulation. To prevent foul play and encourage American prosperity, economists like Bernstein and Bergsten advocate for putting some legislative backbone into our trade agreements with written measures against currency manipulation. If not, many of America’s biggest manufacturing industries, including those that employ scores of welders, may be negatively impacted.