My "State of the Union" Is Stronger on Trade

President Barack Obama gave his annual State of the Union address on January 20, 2015.  In a familiar refrain heard in such speeches, he characterized the state of the union as strong.  While the speech may have been strong, the trade portion of his remarks could have been more powerful and persuasive. 

The specific portion of his speech covering trade ran for several paragraphs: 

“21st century businesses, including small businesses, need to sell more American products overseas. Today, our businesses export more than ever, and exporters tend to pay their workers higher wages.

But as we speak, China wants to write the rules for the world’s fastest-growing region. That would put our workers and our businesses at a disadvantage.

Why would we let that happen? We should write those rules. We should level the playing field.

That’s why I’m asking both parties to give me trade promotion authority to protect American workers with strong new trade deals from Asia to Europe --(applause) -- that aren’t just free but are also fair. It’s the right thing to do.

Look, I’m -- I’m the first one to admit -- I’m the first one to admit that past trade deals haven’t always lived up to the hype, and that’s why we’ve gone after countries –- (applause) -- that break the rules at our expense. But 95 percent of the world’s customers live outside our borders. We can’t close ourselves off from those opportunities. More than half of manufacturing executives have said they’re actively looking to bring jobs back from China. So let’s give them one more reason to get it done.”

The good news? 

1) This is the lengthiest statement on trade out of President Obama in a long time.  The relevant trade portions of last year’s State of the Union address contained only the following:

“…And when ninety-eight percent of our exporters are small businesses, new trade partnerships with Europe and the Asia-Pacific will help them create more jobs.  We need to work together on tools like bipartisan trade promotion authority to protect our workers, protect our environment, and open new markets to new goods stamped “Made in the USA.”  China and Europe aren’t standing on the sidelines.  Neither should we.”

2) This year, by contrast, the President specifically asked Congress to grant Trade Promotion Authority (TPA). 

3) The President expanded the argument about why he needs TPA from a set of pure economic arguments into suggesting it is necessary to protect American workers and set new rules of the game for fairness.

The less positive news? 

1)  Obama specifically fingered China to provide the frame for why TPA is needed at this time.  Arguing that China will rewrite the rules of the trading game might get him more votes and more support from Congress in passing TPA in the short run.  But this statement may ultimately cost him (and the United States more broadly) significantly in the longer term. 

China needs to be inside the TPP agreement in the future.  This is important not just for helping ensure that Chinese economic growth and restructuring takes place along the most compatible lines for the United States, but also because China’s eventual entry into the TPP will deliver significant benefits to the United States and to American companies.

2) By commenting that the United States should “write the rules” it suggests that the Americans have not already done so, especially in the context of the TPP.  This is clearly not true.

How else could Obama have discussed trade?  By going on offense and not just playing defense, for a start.  If I had been asked to write the justification for TPA and support for American trade agreements, my own State of the Union speech draft would have read:

“The data shows that the American economy remains the primary engine for global economic growth.  While we continue to grow, the rest of the world is starting to struggle.  This presents an important opportunity for us. 

The United States has some of the most productive, innovative and creative companies in the world. High quality products can be found in manufacturing, in services, and in companies both large and small.  

It is critical that we continue to show economic leadership and write rules for the global economy that will empower our companies in the future.  We need to work together to pass trade promotion authority to give our negotiators a key tool to close economic deals.

The United States has always been a leader in the global economy.  We must maintain our seat at the head of the table in discussions at the World Trade Organization on goods and services, and in key trade agreements with both Asia and Europe. 

These are the types of trade agreements that can provide American companies with greater opportunities for exports and give American workers a shot at broader range of high quality jobs.

Look, I’m the first one to admit that past trade deals haven’t always lived up to the hype.  But we cannot respond to a world where 95% of the world’s customer’s live outside the United States by withdrawing.  We must provide opportunities for the millions of Americans who work hard every day by continuing to design a global economy that works for everyone.”

My State of the Union would remind everyone that the United States has always shown strength in trade.  Now, partisan battles in Washington threaten to keep the U.S. on the sidelines.  But this need not be the case.  It is time to show leadership, starting with the passage of TPA.

Promoting Trade: Congress and the Passage of Trade Promotion Authority (TPA)

As the Trans-Pacific Partnership (TPP) negotiations with the 12 international trading partners nears conclusion after five long years of hard bargaining, the battle for the future of the agreement inside the United States is heating up.  There are two key elements of the fight: Congressional approval of Trade Promotion Authority (TPA) and passage of the implementing legislation necessary to bring it into force in the United States. 

 In the U.S., Congress has the authority to regulate commerce, which includes setting tariffs.  But getting 535 members of Congress to negotiate trade agreements is not practical, so historically the executive branch has handled these tasks.  In the 1970s, this arrangement was formalized.  Members of Congress decided to explicitly give the role of negotiating trade agreements to the White House (subject to a number of specific provisions).

 Under what used to be called “fast track” and is now labeled “Trade Promotion Authority” (TPA), Congress is to be notified of the intention to launch negotiations. Congress is given 90 days to respond.  The United States Trade Representative (USTR) office is also tasked with gathering information about the future direction and important elements for the talks during this time period from a range of key stakeholders including business groups.  After the initial comment period is concluded, USTR is required to keep Congress informed as negotiations continue.  Finally, Congress has promised to vote the entire trade agreement up or down without amendment at the end by a simple majority vote in both chambers. The timeline is shown below.

Source:  Cooper, CRS, January 13, 2014

Ideally prior to the start of new negotiations, USTR would receive TPA from Congress, with the broad parameters and objectives set for any trade agreements to be negotiated during the time covered by the approval.  However, this was not done for the TPP as the latest version of TPA expired in 2007.

The outgoing George W. Bush administration announced its intention to join what became the TPP in September 2008.  The Obama White House decided not to press Congress for renewal of TPA in 2009, but rather started negotiations in March 2010 by following the provisions of TPA “as if” it were active. 

Over all the years of TPP negotiations, the White House did not seriously pursue votes in Congress to support renewal of TPA. But now, as talks enter the closing phase, TPA is necessary to finish the agreement.  Without TPA, Congress can amend the agreement from the opening sentence to the closing word.  As I always joke, without TPA in place, someone in Congress will propose amending an opening line of "The 12 parties of the TPP..." to "The Glorious United States of America and the 11 other parties of the TPP..."

Without TPA, Congress could also allow the agreement to die in committee or tangle ratification in an endless filibuster.  In short, without the provisions of TPA in place prior to the closure of the agreement, the TPP will likely fail to be ratified by Congress.

The first problem for 2015, then, is to secure passage of TPA.  The last time the bill was authorized, in 2002, the votes were very close: approval by 215 to 212 in the House of Representatives and by a margin of 64 to 34 in the Senate. All indications are that a TPA vote may be equally close this time. 

Note that the passage of TPA, however, will not mean smooth sailing for a TPP deal.  In authorizing TPA, many members of Congress want to place strict conditions on elements of a final deal that must be present before they will grant approval.  Most controversial is an ongoing discussion of including legally binding rules to prevent trade agreement members from manipulating their currencies.  (This terrible idea will be the subject of a later post.)

Ideally, TPA will be granted—as it has always been—for a range of trade agreements and not simply given for the TPP.  The United States is simultaneously engaged in multiple negotiations over trade: with the European Union in the Trans-Atlantic Trade and Investment Partnership (TTIP); with nearly two dozen countries on the sidelines of the World Trade Organization (WTO) in the Trade in Services Agreement (TiSA); with 80 countries at the WTO in updating the Information Technology Agreement (ITA); and with more than 160 countries in the WTO in the Doha Development Agenda (DDA).   All will need a version of TPA, at least before any agreement can be implemented and enter into force for the United States.

 The White House has finally begun a whip count operation this week to start the TPA procedures in earnest.  This ought to be backed by forceful pressure from President Obama to get TPA as quickly as possible.  Tonight’s State of the Union address is the best place to begin.

Then the next phase of the battle for TPP—passage of the final agreement—can be joined.

Transparency, Congress and the TPP

The EU Commission’s decision (discussed in the Talking Trade blog post of January 12, 2015) to publish proposal texts was prompted by increasingly strident complaints about secrecy in the TTIP negotiations. 

These concerns follow similar criticisms about a lack of transparency in the Trans-Pacific Partnership (TPP) negotiations.  Claims of silence from the TPP talks are not new.  From the earliest days of negotiations in 2010, some groups have been fighting against the “excessive secrecy” surrounding the talks. 

Such language has only escalated in the nearly 5 years that bargaining has been taking place.  For example, on January 8, US Congresswoman Rosa DeLauro (D) held a press conference where she denounced the lack of transparency in TPP negotiations. 

Politicians, of course, frequently make statements that do not entirely match the facts on the ground.  In DeLauro’s case, as a sitting member of Congress, she has complete and total access to every element of the TPP texts.  She does not need to go across to the US Trade Representative’s (USTR) office either, as she can summon someone with the exact documents she requires at any time.  A staff member would likely sit with her and explain whatever specific questions she might have with the materials.

In addition, USTR has held over 1,600 briefings for Congress over the course of negotiations.  The Congresswoman could have attended these meetings where she would have been able to provide her specific inputs to whatever sections or clauses she felt necessary.

For the past several rounds of TPP negotiations, key Congressional committee staff members have been traveling with the negotiators to each meeting.  These staff members (and, presumably, their elected bosses) have extensive knowledge of the contents of the agreement. 

To prevent leaks of information, though, USTR has imposed a set of specific rules for the TPP texts.  These limit the ability of all Congressional staff members to view the texts.  Instead, only staff members of the Senate Finance Committee or House Ways and Means Committees with security clearances are allowed to read the texts.  Congress members are not allowed to have or make copies. 

These rules have probably made it more difficult for members of Congress to analyze the whole document.  However, if all 535 members of Congress and their staff had access to texts, it might just as well have been posted directly to the Internet.

A remarkable number of people have had access to all or portions of the texts in the United States, since “cleared advisors” are allowed to review proposals and materials.  It is true that the bulk of the cleared advisors are industry representatives, with smaller numbers of labor, environmental groups or academics on the list.  Obama administration rules to dilute the power of lobbyists also affected the composition of cleared advisors.  But it also means that USTR has not created the pages of the TPP rulebook in a vacuum without input from Congress and others.

Nor are these rules unique to the TPP.  Similar rules were first outlined by Congress in 1974, when legislators created provisions that used to be called fast track and are now called Trade Promotion Authority (TPA).  In fact, at the time of the original fast track, the advisory committee included 700 industry representatives appointed by the President.  Just a handful of Congress members were entitled to review materials at all and nothing was to be provided to the public.

The content of the final TPP agreement has also benefitted from a unique element of these negotiations—the “stakeholder” meetings attached to negotiating rounds.  All sorts of industries, associations, and activist groups were able to give presentations directly to negotiating officials from across the TPP members.  These stakeholder meetings were held from about Round 6-Round 19, giving firms and others an opportunity to express a wide variety of views about the negotiations.

It is not clear yet how much the stakeholder meetings influenced the negotiating texts or final positions.  But it did provide a novel way for government officials across the set of participating countries to gather feedback and suggestions.

As noted in the earlier post, there is a continuum between releasing texts and sharing no information at all.  I am opposed to releasing even draft texts as this severely limits the ability of a negotiator to find creative compromises and solutions to satisfy the needs of the parties.  But USTR might have done a better job communicating about the TPP. 

However, for all the complaints about a lack of transparency in the TPP from people based in Washington, DC, information about the talks has been even more scarce in the other 11 participating countries.  The other members have varying degrees of formal feedback mechanisms available for providing input into the talks, but no one has had the degree of access provided to U.S. companies and others in Washington.  In many cases, foreign companies and groups have gone to DC to present their information to the Americans, rather than try to reach their own representatives.

If it were not for American outreach efforts and communication through advisors and lobbyists that have been picked up by media outlets of all kinds, there might be zero news on the TPP today. 

For a demonstration of the relative openness of the TPP, try searching for news on the Regional Comprehensive Economic Partnership (RCEP).  This is a trade deal that brings together 16 countries in Asia, including China, Japan, South Korea, India, Australia and New Zealand with the 10 members of ASEAN.  Without cleared advisors, Congressional briefings, or stakeholder events, there is almost nothing at all getting out from the RCEP talks after 6 rounds of negotiations. 

So, although communication on the TPP could certainly be improved, claims of excessive secrecy are overblown—especially those criticisms coming from members of Congress.

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.}

Unleashing Vietnam’s Textiles

In Hoi An in Central Vietnam.  This charming town could be viewed as ground-zero for tailoring.  Over the past few years, the number of tailor shops has zoomed past 500.  Most are located in the old, UNESCO-heritage listed central core that is only a kilometer or two across.

Tourists are here from everywhere, with a strong presence of Europeans and Australians at this time of year.  The number of hotels in the area has also increased markedly in the past five years to service the increasing demand from overseas visitors to this region.  Few people leave Hoi An without at least a few items of clothing stashed into their suitcases or newly purchased bags or backpacks.

Despite the roaring success of the tailor shops in Hoi An and the textile sector as a whole in Vietnam, the industry is set for a significant change in the coming five years. 

Vietnamese officials have been extremely active in signing free trade agreements.  They are in the last stages of work on a deal with the European Union.  They just signed an agreement with Russia, Belarus, and Kazakhstan.  But the biggest prize will be the completion of the Trans-Pacific Partnership (TPP). 

Vietnamese apparel exporters face competitive challenges getting their products into the United States, including relatively high and complicated tariffs.  Exporters are also at a disadvantage compared to manufacturers in countries like Mexico with existing FTAs with the Americans, since Mexican textiles have significantly reduced tariff rates.   Despite these problems, Vietnam’s clothing exports have continued to rise.

Under the TPP, many of the current tariffs are set to fall significantly.  To take advantage of these benefits, however, the agreement also calls for textile and apparel producers to use complex rules of origin (ROO). ROOs are necessary in FTA agreements to ensure that only products produced in member countries can take advantages of the benefits provided by the agreement.  If an FTA were finished without ROOs, any country (whether they are actually a member of the deal or not) could simply ship items and enjoy the benefits of reduced tariffs:  it would be no different than receiving the payoff from unilateral tariff cuts. 

The United States requires an especially complicated ROO for apparel—the so-called “yarn forward” rule.  Under yarn forward, items in a product must be made with the original yarn in the fabric sourced from the United States to qualify for FTA benefits.

Right now, Vietnam’s textile manufacturers generally use imported cloth.  Most comes from China.   Under a different set of textile rules, the “cut and sew” method of determining origin, Vietnam could continue to manufacture products as they currently do but would have the added benefit of lower tariffs in the American market.  The U.S. market is of prime importance to the clothing industry of Vietnam.

Note that cut and sew ROOs would not allow third-parties or non-members to sneak into TPP markets.  Members like Vietnam would still be required to demonstrate that a portion, like 40% of the final value of the product, came from Vietnam or other TPP member countries to obtain lower tariff benefits.

But the cut and sew rules are largely not allowed in the TPP either.  Instead, under strong pressure from American textile manufacturers, U.S. officials have stuck with yarn-forward ROOs for most products.

This presents a challenge and an opportunity for Vietnamese textile and apparel manufacturers.  While Vietnamese firms have done quite well under the current system and could continue to use the same sourcing methods for yarn and fabric, they cannot send the finished products to the United States under the new, lower tariffs.  If firms want to benefit from lower tariffs (perhaps 10-40% lower depending on the product), they will have to change sourcing patterns to get U.S. or TPP-made yarn and fabrics.

Hence the potential exists for radical changes in the textile industry in Vietnam.  In the past, Vietnam has not been able to wean itself off reliance on the Chinese market for raw materials.  Chinese-made fabrics have come to dominate the trade, even here in Hoi An. 

But since it became clear that the TPP is likely to materialize, firms are beginning to plan for the future.  Vietnam has started getting more and more companies (particularly from South Korea and China), relocating production of weaving, spinning and dyeing to here.  These are quite capital-intensive industries, so it has always been a challenge for local firms to decide to open such plants themselves.  The TPP, however, is such an important opportunity that these facilities are now necessary.

Another post will track some of the new inward investments.  For now, it is enough to note that the tailors of Hoi An are likely to offer new products in the future.  This includes a different range of fabrics for creating the dress, suit or shirt of a tourist’s dream.  Perhaps a new set of shops will be offering denim in five years, for example.  Certainly, the number and types of locally manufactured fabrics is likely to be dramatically larger than what is on offer now.