Defeated Again: Understanding The American Congress Votes on Trade

When the U.S. Senate first rejected the bills on Trade Promotion Authority (TPA), I wrote that it may have marked the day the Americans quit leading on trade.  Although the Senate subsequently managed to squeak through the necessary authorizations, the votes from the House of Representatives today suggests I was right.  Getting the United States to show leadership on trade is somewhere between a tough and an impossible task.

To recap where we are: although the United States has been negotiating multiple trade agreements for years, the U.S. Trade Representative (USTR or basically the trade minister) does not formally have trade authority as delegated from Congress.  Under what used to be called fast track and is now known as Trade Promotion Authority (TPA), Congress lets the White House lead on trade.  Congress sets up the parameters for negotiations and expedited procedures for final approvals. 

USTR went ahead with talks in the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Promotion (TTIP) “as if” the provisions of TPA were in effect.  The White House had opted not to try for renewal sooner (the last version expired in 2007) because they were not convinced that Congress would view the request favorably in the absence of information about what sorts of agreements were under negotiation.  Therefore, the executive branch decided to negotiate first and seek permission at a later date, when it would be more clear to the legislative branch what sorts of benefits and costs might be on offer.

With the TPP waiting for TPA to close the agreement, it was no longer possible to pretend that authorization was in place.  The other TPP member countries have refused to discuss the most sensitive aspects of the negotiation in the absence of clear authority from Congress to pass the final deal without amendment.

Hence the push to get TPA, starting with the Senate.  The original bill was defeated, only to be resurrected days later. 

The Senate votes set up the challenge for the House now.  If the House version of TPA does not exactly match the Senate’s bill, members from both sides would have to sit down and reconcile the inconsistencies.  The final, combined, bill would have to be voted on again by both bodies.

Given the difficulties in getting TPA, no one wants a situation where members of Congress are forced to vote twice.  Hence, the House version had to match the Senate version exactly.

Which leads us, depressingly, to today’s House votes.  The Senate bill had done two things—it renewed authorization of Trade Adjustment Assistance (TAA) and granted TPA.  (An earlier post discussed TAA in more detail.)

The House was reluctant to vote on a similar combined bill.  Thus, they split the bill into two halves—first a vote on TAA and then a vote on TPA. 

The TAA bill went down to defeat.  Even Democratic members of the House that are in favor of the idea of assistance for displaced workers voted against TAA renewal.  This bill, many argued, was insufficient for one reason or another.  Republicans that are not fans of TAA at all had to step up and try to push it over the finish line.  But it was not enough as 86 Republican and 40 Democrat yes votes lost to 303 no votes.

Once TAA was defeated, it also spelled the end to TPA.  This is because the House and Senate versions of the bill have to match.  The Senate authorized both TAA and TPA.  Therefore, the House must also have matching legislation in place. 

In a grim attempt to snatch victory from the jaws of defeat, House members then proceeded to vote—narrowly—in favor of TPA (219-212).  This looked, to people not familiar with the intricacies of Congress, like a success.

But it is not.  Hence, for the second time in weeks, Congress refused to show leadership on trade. 

What comes next is unclear.  It is possible that the House will figure out a solution to what is again being called a “procedural snafu.”  Maybe sufficient members on both sides of the aisle will reconsider their votes on TAA.  Perhaps the Senate will revote on TPA without TAA or with a different version of TAA that might be acceptable to the House. 

Even if this can be fixed, it means that the TPP may not close as planned.  Chief negotiators were expecting to meet on June 22.  This—at best—now looks optimistic.  The deadlines have always been perilously short. 

Once the immediate crisis is resolved one way or another, it is certainly worth thinking hard about why Congress has twice voted against trade.  (And against the President in spite of a full-court press the likes of which Washington has rarely seen in recent memory.) 

I am on my way to Washington DC and will write another blog post once I’ve had the chance to discuss issues with trade and business experts from the ground.  Perhaps only inside-the-Beltway naval gazers can make sense of what has been happening.  Because much of Asia (at least) has been watching in amazement as American legislators reject what most in this region see as common sense.  Cutting off your nose to spite your face does not seem a sensible policy.

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

The TPA Vote: The Day America Stopped Leading on Trade?

The U.S. Senate’s apparent inability to proceed with Trade Promotion Authority (TPA) may represent the day when the Americans conceded leadership on global trade. 

The vote that blocked consideration of TPA highlights to the rest of the world that the Americans cannot be counted on to get things done any more. The Trade Promotion Authority (TPA) bill is not just about the Trans-Pacific Partnership (TPP). 

TPA is meant to cover a set of extremely important, next generation, trade deals with: the 11 other parties in the TPP; up to 19 members in an expanded TPP by 2020; the Europeans in TTIP; more than two dozen countries in services (TiSA); a hugely important grouping of members in the information technology space (ITA2); with China and others over opening up government procurement markets in a clear and transparent manner (GPA2); more than 160 countries in implementing new rules to move goods faster and cheaper across borders (the WTO Bali deal on trade facilitation); and anything else that might begin negotiations in the next 5 years.

The Senate had an opportunity to outline their primary objectives and allow the Executive Branch to see what is the best possible deal that could be gained.  Afterwards, Congress will vote on each individual agreement after consultations along the way.

These ought to have been key objectives for every member of both parties.  Yet some members in the Senate have allowed misinformation to guide their thinking.  Most damaging has been a set of arguments about currency manipulation, disguised as a discussion about "enforcement" or "enforceable provisions."  The agreements currently on the table--all of them, but especially the TPP--already have extremely strong enforcement provisions built in.  These help to ensure that participating members in each deal follow the rules.

Currency manipulation is not about enforcement of a trade deal.  It is simply a bad idea.  It is not workable and will not address the supposed problem.  Even worse, the collateral damage might end up ensnaring the United States by preventing actions that the Americans may want to take in the future.  

But insisting on including this set of rules alongside the TPA debate just illustrates the nature of the debate in Washington.  It is not about creating helpful rules to guide trade in the next five years.  It is about following narrow, domestic partisan interests and using flawed arguments. 

In the end, it also shows the rest of the world that the United States cannot be viewed as a trusted partner because--no matter how much you bend to accommodate the Americans in a negotiation--they will always add one more bitter pill and insist that you swallow it.  Even then, passage of the final deal is never assured.  

The TPA legislative vote has been cast by the White House as a “procedural issue.”  It is true that the specific problem in voting was whether or not the TPA bill could be considered on its own, or in conjunction with three other bills.  One is presumably not controversial—to renew ongoing trade programs with Africa.  One is to provide worker training for workers harmed by trade (Trade Adjustment Assistance or TAA).  Finally, the worst idea on the table, of having something with currency manipulation as a key objective in (all?) trade agreements.

While Washington has gotten stuck in partisan battles over TPA, the timing for TPP has only gotten worse.  This agreement does not just include the United States.  Delays over TPA have held up the conclusion of the TPP.  If the Americans end up unable to pass the implementing legislation on the TPP until after the next election in 2017, other members may also face similar domestic challenges between now and then that permanently stop the TPP.

By 2017, who knows what will have changed in the other TPP members?  Canada votes in an apparently close election in October.  The Japanese Prime Minister has staked a great deal on the TPP and his tenure length is unknown.  Chile just reshuffled the cabinet.  The domestic scene in Malaysia is also uncertain.  The Australian Prime Minister has already been forced to survive one vote on his leadership.

This "procedural" issue in the United States Senate over TPA could end up like the proverbial butterfly flapping its wings.  The consequences of this delay could, indeed, reverberate for a long time to come.

***

Let me reprint part of an earlier post to explain again why currency manipulation should never have been an objective and certainly does not deserve to shut the Americans out of a responsible leadership role in trade:

Any sort of currency manipulation clause is unlikely to solve the problem it is ostensibly trying to address.  Worse, in order to ensure that American interests are not undermined, the provisions have to be carefully crafted such that they might never be triggered.  The final point of damage—even if there are virtually no circumstances under which such clauses might be used, America’s trade partners in the TPP might simply refuse to conclude negotiations at all.

So what is the problem so many backers of such legislation are trying to address?  In brief, governments can give a competitive advantage to their export industries if their currency is lower in value than their export partners.  The difference in currency values effectively makes imported goods cheaper in the foreign market, encouraging consumers and producers to buy more, relatively cheaper, foreign goods than relatively more expensive domestic items. 

How would a government go about making this happen?  If a government intervenes in currency markets, it can drive down demand for its own currency (or drive up demand for foreign currencies) by buying and selling currency.  

Another way to accomplish the same thing is to print more money domestically.  If there is more money in circulation now, the value of any given note is lower.  However, governments engaged in such behavior often argue that such policies are not aimed specifically at artificially depressing the value of the currency for the purpose of generating an unfair trade advantage. Therefore, such behavior is not considered currency manipulation, at least as members of Congress appear to want to define it. 

The purchase of assets by the government can also change the value of currencies, even if the objective is to stimulate the domestic economy.

Singapore loosened monetary policy recently in response to weaker oil prices and low domestic demand.  The government argued it was using one of the primary items in its tool kit to address low inflation, since it does not use interest rates as a tool. 

Thus, governments may have lots of legitimate reasons for adjusting currencies without the specific intention of getting a leg up for exports.

It may be important to note that not every country is able to manipulate currencies.  If the country is small, especially with limited demand, the value of the currency is more likely set by market forces.  A country with limited resources cannot intervene very much to buy or sell currencies.  And, finally, the United States has a unique position in the global economy.  Since the U.S. dollar functions as a reserve currency, it allows the United States to have different options than anyone else in the markets (for the moment, at least, but that is another story).   Let me also note that because of this position, the United States does not have to intervene in currency markets like anyone else.

Efforts to stop countries from “unfairly manipulating” their currency will not work. 

There are many reasons why not, but start with the fact that most countries in a position to manipulate currencies also have complex economies.  These economies rely on both exports and imports.  For many firms, exports can only be produced with imported content.  By depressing the value of the currency to make exports cheaper, imports become more expensive.  As a result, firms may not actually be competitive in the export market since the price of imported content of the final goods might be more than offset by whatever the discount on the export side might be.

Equally key, for the most complex products, the value of the benefit from a depressed currency is likely to be small.  Consider an i-Pod, for instance.  Imagine that China were, in fact, manipulating their currency to a massive extent—say 50% off the presumed “normal” value of the yuan.   In this hypothetical context, it might appear that Chinese intervention is dramatically affecting the price of the device in the American market.  But, in fact, the total amount of Chinese content in an i-Pod could be as little as $4 of the $150 sales price.  Thus, the extent of the “unfair” advantage of Chinese currency might make a whole $2 difference to the final buyer.

Recall that this example gives figures for a truly exceptional rate of currency intervention at 50%.  The actual extent of manipulation is likely to be considerably smaller.  This means that the total price difference could be literally pennies.

While other products may not show such dramatic figures, the point is that—in most complex, higher value items—the content is likely to be provided by multiple countries.  As a result, even crazy high manipulation is unlikely to affect the final price very much. 

The Big 3 auto companies are driving the issue of currency manipulation in Washington.  But a car in the modern, globalized economy is very much like an i-Pod.  Even if you could determine that a China or a Japan was intervening to depress currency prices by a lot, the total difference in the price of a finished car is still likely to be much more modest than people realize.

To make this pressure by the Big 3 auto companies more surprising, many of the cars sold in the United States today are actually manufactured in whole or part in the United States (or NAFTA countries).  Thus, the value of potential manipulation on the total cost of a car is small. 

Practically speaking, a currency manipulation clause has additional challenges.  How can the specific amount of currency tweaking be measured?  Currencies change regularly in the open market, so a trade agreement has to take this into account somehow.  Even in the alleged cases of Japanese or Chinese manipulation, few could agree on the extent of intervention—was it 10 or 45% or something in between?

What is the appropriate response to such intervention?  Even if a trade agreement could specify the triggers for determining manipulation, then what?  Many of the proposed “solutions” appear to run afoul of other laws and regulations.

The United States, clearly, does not want to become ensnared in its own rules either.  Depending on how defined, basic American policy in the independent Federal Reserve could be challenged by foreign governments.  Problems like this make whatever provisions that might end up in trade agreements so tightly restrictive that they can never be applied or it might mean that the United States breaches the rules and argues for non-intervention in its own affairs. 

Finally, none of the specific partners currently negotiating the TPP are keen to see rules on currency manipulation included.  This agreement has been under discussion for more than five years.  To add a controversial (to put it mildly) item so late in the game is to risk imploding the whole deal.

Some may argue that TPP partners have already accepted proposals and provisions that they do not like.  What is different about currency manipulation from other American ideas?  At some point, however, pushing too hard may make others snap.  This is likely to be that point.  Adding a very unpopular and unworkable idea like currency manipulation clauses into the TPP mix at this late day is a truly dreadful idea that should be discarded immediately.

***Talking Trade is a blog written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

The TTIP Paper Conundrum: A4 versus US Letter

This week American and European trade negotiators are meeting in Brussels for the 8th round of Trans-Atlantic Trade and Investment Partnership (TTIP) trade talks. 

TTIP is, perhaps, the most difficult trade negotiation ever. 

This statement will likely be met with complaints by current and former trade officials who will argue that other agreements were much more challenging.  The early global talks in the General Agreement on Tariffs and Trade (GATT) had to operate in a world with no rules at all governing international trade.  Each provision—every sentence and even every word—required careful thought since it was unclear what sort of implications might follow from different commitments. 

The GATT’s successor organization, the World Trade Organization (WTO), has been unable to bridge differences across what are now 160 different members.

The North American Free Trade Agreement (NAFTA) talks were no picnic, as the types of integration imagined in the deal were deeper and broader than most commitments to that point.  European Union (EU) market integration negotiations have also proven difficult since many of the regulations struck deep into domestic territories.

Even the parallel Trans-Pacific Partnership (TPP) negotiations with 12 parties across the Pacific have taken more than 20 rounds across nearly 5 years with conclusion still elusive.

In spite of the difficulties faced by officials in these other megaregional deals, TTIP is still more challenging.  Why?  Largely because the agreement on the table now has more win-lose, binary options than previous trade deals.

Since the EU and the United States have broadly similar approaches to trade and market liberalization, much of the normal “meat and potatoes” of a trade agreement are not so critical for these negotiations.  Tariffs (with some exceptions, especially in agriculture) are relatively low.  Services and investment (again with some exceptions) flow relatively freely.  Even the sorts of non-tariff barriers that confound trade in many places are relatively modest.

The real benefits from TTIP come from harmonized or reduced regulations and closer alignment of standards.  The economic payoff from getting companies to use only one set of standards or to comply with one broad set of regulations would be incredibly significant.  A producer could create one product to be bought and sold in all 28 individual member markets of the European Union and the United States.

Yet the costs of harmonization in TTIP are also potentially enormous.  As the most basic example of this problem, consider the paper conundrum.  When the deal is done, what sort of paper will it be printed on?  A4 or US Letter size?  The former is the European standard for paper and the latter is the American default.

A4 paper is 210 x 297 millimeters or 8.3 x 11.7 inches in size.  US Letter is 216 x 279 mm or 8.5 x 11 inches.  Even the approaches to measurement—metric versus imperial—are different.

To really unlock the economic benefits of TTIP, not having to produce, stock and carry two sets of paper sizes would be very important.  The harmonization of standards around paper size would allow firms to more easily shift from producing for the American market to the European market and vice versa. 

But note that this simple decision—to agree on the paper used for the agreement—also brings significant other changes to the economy.  Printers, printer software and copiers may need alteration.  Binders, three-hole punches, folders of every description would also need to change.  File cabinets would be made redundant if they do not fit the new paper size.

Most notably, however, the burden for this change would fall on only ONE side of the agreement.  There is no way to standardize or harmonize paper sizes in TTIP without putting one side at an advantage and imposing a major financial burden on the other party.

Officials in past deals will quickly argue that similar win-lose outcomes have taken place all the time in such trade negotiations.  But the difference, I think, is that past agreements like the GATT or NAFTA or even the EU itself had the potential to enlarge the pie and to create other types of win-win outcomes.  In other words, trade officials could think creatively about how to balance the benefits more broadly and the upside potential of new markets usually was sufficient to offset the relatively modest number of groups, firms, industries or sectors that suffered (or thought they might suffer) a particular loss from an agreement.

TTIP is wading deep into regulatory and standards territories where win-win outcomes are not likely.  A key point of the whole exercise, in fact, is to eliminate divergence between these powerful markets.  The only way to get to such an outcome is to either agree on one or the other existing standard or create some sort of new standard that imposes costs on both sides (and, presumably tries for equal costs to both parties).

Let me illustrate the problems again with several additional examples. 

In autos, there are clear differences of opinion over regulatory issues.  To take a small example, the very premise of EU and American rules over the safety of auto bumpers is different.  The EU side is primarily concerned about pedestrian safety in crafting bumper standards.  The Americans are worried about crashes between autos and have standards to cover higher speed impacts.  How can these two differences even be reconciled?  It is (as I understand it) not possible to create a bumper that simultaneously takes pedestrian safety and head-on collision safety as equally important in manufacturing.  If the TTIP chooses, it will automatically privilege one side over the other.  Yet, if officials do not make a decision, firms will have to pick one set of manufacturers to work with or the other or continue to manufacture completely different products for both markets.  The whole purpose of harmonization will have been lost.

Similar problems abound in TTIP.  On food safety issues, the regulatory principles behind the rules are often fundamentally different.  The EU side generally approaches food with the understanding that food must be proven safe before it can be sold.  The Americans generally argue that unless food is proven unsafe, it is suitable for distribution. 

In data privacy and protection, both sides approach the issue differently as well.  Again, reconciling the two approaches would have benefits for firms trying to operate in both key markets.  But it is not possible to somehow “split the difference” between the two regulatory approaches because they start from different points.

Officials are not oblivious to these challenges.  They are especially working in this round, it appears, on mutual recognition.  Under this approach, both parties would recognize, for example, that a product that meets safety standards in one market could be viewed as meeting the regulation in the other market.  Chemical products could be tested in one market and automatically approved in the other market. 

But this does not really get around any fundamental differences in the first place.  If I believe that chemicals can only be certified as safe under the rules that my regulators have created, why would I trust the safety of your product using a different set of rules (and ones that I, presumably, trust less or I would have incorporated them into my own rules in the first place)?

Hence, despite the renewed momentum behind the talks and potentially significant economic benefits, the TTIP faces the toughest set of challenges of any trade agreement.  If it somehow succeeds, it will be an entirely new kind of trade deal—closer to an imagined “21st century” agreement than anything else out there.  But the obstacles to closure are deeper and wider than seem to be appreciated thus far on either side.

Negotiating Secrecy

When you go to buy a house, you would never show up at the door bearing your income tax returns, pay slips and bank account balance information that you just hand over to the other party.  To do so would give a major advantage to the seller of the house.  It would allow the other side to decide whether your offer is a lowball one or genuinely fair offer, given your particular financial circumstances. 

Trade talks are even more complex types of negotiations in which both sides benefit from the flexibility to make--and trade--offers and counteroffers.  Both sides need to be able to explore a range of outcomes that could satisfy the demands of each.  The two parties are not simply trying to arrive at a single point (the price of the house) or resolve a narrow range of issues (the price of the house plus the date of the handover or the price plus date plus the inclusion of a coveted light fixture in the dining room). 

Advanced trade negotiations include 20-30 different chapters covering a huge range of issues and topics.  The final agreement is a package of elements designed to give everyone some areas of “gain” and minimize prospects for loss.  Issues have to be addressed in their own right as well as balanced across different topics.

This is what has always made it difficult for trade negotiators to publicly release texts of ongoing deals.  Doing so too soon is the equivalent of handing over tax returns for a house buying expedition.  It removes flexibility and makes it difficult, or even impossible, for negotiators to move off their original offers.  To put offers out publicly in a trade deal can make it impossible for either side to respond, since the interested public will know precisely what was “bargained away” and have a poor appreciation for what might have been gained elsewhere. 

Of course, there is a long distance between releasing zero information and handing over the keys to the bank vault.  Officials can, and should, provide news about ongoing trade talks.  But the balance is tricky, as too much information or key details revealed in the wrong place or at the incorrect time can make it impossible to creatively arrive at a complex, satisfactory outcome for all parties.

This is what makes the European Union’s decision to release information in the ongoing Trans-Atlantic Trade and Investment Partnership (TTIP) so surprising.  The European Commission did not just decide to provide helpful, plain spoken overviews of their broad objectives in different chapters.  Instead, they have opted to release the actual, legal proposals that they presumably have offered up to their American counterparts.

Cecilia Malmstrom, the EU Trade Commissioner, told Christian Oliver of the Financial Times, “It is important that everyone can see and understand what we are proposing in TTIP and—just as importantly—what we are not.”

But look at how quickly this noble sentiment runs into practical problems on the ground.  To take just one example from my literal first look at a random piece of text: the proposal on sanitary and phytosanitary measures says in Article 17.1, “The Parties recognize that animals are sentient beings.”  The rest of the article is about exchanging information and experiences on aligning standards for breeding, holding, handling, transporting, and slaughtering animals. 

This statement, released this early in the context of talks, creates problems both ways.  If the agreement provisions in Article 17 are to be legally binding, many farmers and others involved in animal husbandry and associated fields will be extremely concerned about what sort of acts might bring them into violation of this provision.  On the other hand, if it is not legally binding but merely advisory in the end, many other groups will be rightfully upset that if animals are sentient beings, then violations of their humane treatment will not be found to be legally unacceptable. 

In short, releasing texts can create significant problems since it hems in negotiators and can make it impossible for them to maneuver.  In a large scale agreement, managing coalitions of support can already be a major problem.  If information is presented too soon, and particularly before it has been put together in a package with other elements, it may be impossible to create a zone of agreement at all.

{Another post later this week will take up the issues of interest group mobilization in the face of such information as well as the growing levels of expressed outrage at a lack of transparency in key trade agreements.}