By Daniel Hanson - 10/11/11 11:25 PM EDT
With fears of a second recession growing, President Obama is hammering Congress to pass an ambitious and controversial jobs bill. But his public shaming hasn’t kept the bill from stalling, and it’s obscuring a potentially game-changing development: Washington could finally be ready to play “Moneyball” on trade.
Congress is set to pass, with strong bipartisan support, three bilateral trade agreements this Wednesday. The pacts — with Colombia, Panama and South Korea — would generate substantial job and export growth in an economy that sorely needs both. And while boosting exports by an estimated $13 billion and jobs by 380,000 won’t by themselves turn the economy around, their passage could set the stage for much larger gains in years to come.
Successful bilateral agreements characterized the Bush administration’s approach to trade policy as Washington successfully concluded small-scale, free-trade agreements with Australia, Chile, Bahrain, a spate of countries in Central America and others. Likewise, trade blocs like the Pan-Arab Free Trade Area, the Gulf Cooperation Council and the Southern African Development Community have demonstrated that an individualized approach can be wildly successful at curtailing protectionism, increasing the certainty of openness and creating genuine trade increases.
Despite these wins, the U.S. in recent years has increasingly embraced large-scale multilateral trade agreements designed to build upon the supposed success of the World Trade Organization (WTO). Such an approach reeks of lofty idealism but rarely accomplishes its goals. The Doha Development Agenda, started in 2001, was meant to inject life into the WTO by upgrading its mechanisms for 21st-century trade providing the next stage of trade liberalization. Still languishing a decade later, the Doha Round has not only failed to accomplish its objectives, it has underscored the foolishness of such an approach to free-trade promotion.
The simple fact is that the political differences of the actors involved grow too large to be addressed as more countries are added to negotiations. With the decline of American economic power, reaching an agreement at a meeting featuring more than 150 countries faces insurmountable hurdles about the diversity of market concentration, the growth of regional blocks, the complexity of behind-the-border trade-offs in service regulations, the instability of currencies and the increased assertiveness of emerging markets.
The WTO was created out of the General Agreement on Tariffs and Trade through a series of eight multilateral trade negotiations (MTNs). A review of these MTNs suggests that, as a general rule, each successive round is less effective than its predecessor. The first round, held in Geneva in 1947, included 23 participants and concluded in less than a year. It reduced or eliminated more than 45,000 tariffs, lowering the taxes on one-fifth of all world trade. As a result, trade expanded by 10 percent per year on average into the 1990s. By contrast, the most recent successful round, with its 123 participants, concluded in 1994 after seven painful years of negotiations. Despite this, it only managed to affect some 20,000 tariffs. Since the mid-90s, trade expansion has fallen to 7 percent per year, and the startling fact is that most of this expansion is attributable to the agreements signed back in 1947. With no end in sight for Doha and almost two decades since the last successful MTN, the 150+ country slate is proving still less effective.
Meanwhile, the economic gains from these MTNs offer little hope for growing the world economy. Doha, initially heralded as a “development round,” has slowly whittled down its estimates of possible development gains from $100 billion at its inception to less than $20 billion now. Such a figure — roughly on par with bailing out a medium-sized bank — comes with binding commitments carrying huge political costs while creating inconsequential gains. The pending agreement with South Korea alone offers more than half these gains.
The three trade agreements with Colombia, Panama and South Korea were ready four years ago, but Washington twiddled its thumbs, choosing to focus on other economic priorities rather than sensible trade negotiations that could fuel American jobs. Meanwhile, other countries have seized the mantle of promoting free trade. Canada concluded an agreement with Colombia in August that has already begun to pay dividends, and the European Union beat the U.S. to South Korea’s markets with an agreement that took effect in July.
To revive the trade agenda, the Obama administration and Congress must collectively realize the importance of trade for future economic growth. With that in mind, they should take practical steps to negotiate free-trade agreements on a smaller scale and abandon the misguided notion that showing up at a multilateral ministerial meeting is enough to promote liberalization. Easy gains could be made by focusing on eliminating all tariffs below 3 percent and adopting a uniform code for rules of origin with all our trading partners. Additionally, the U.S. ought to claim a leadership role on vital global trade issues like illicit weapons trafficking, capital flows and food and water security. Finally, the U.S. should assist smaller, poorer nations in their accession to existing mechanisms like the WTO and their negotiations for more favorable treatment through specific trade agreements.
Such moves might be a shot of caffeine for the sleepy U.S. trade agenda, which in turn can jump-start job growth by growing our export markets. Congress should use the three pending agreements to foster a renaissance in U.S. trade policy for the good of U.S. consumers and employees.
Hanson is an economics researcher at the American Enterprise Institute.