Fair Trade Rising?

With the manufacturing sector representing only 12 percent of GDP and 8 percent of U.S. workers, it’s easy to see how the financial press and politicians could begin to take it for granted. 

But this year’s presidential race threw an unexpected spanner into the global machine churning out “free” trade agreements.

Months before the presidential election the Trans-Pacific Partnership Agreement seemed inevitable, but now it’s dead in the water. And with it went the momentum favoring the European next step — the Transatlantic Trade and Investment Partnership. A reworking of NAFTA even seems a possibility. 

The biggest manufacturer in Alabama to take a hit in recent years has been United States Steel Corp., which has announced layoffs of 1, 300 workers at its Alabama plants in the last two years — owing, say company officials, to market conditions that include unfair imports, especially from China.

We talked about trade for this month’s issue with the president of the Alliance for American Manufacturing, Scott Paul. Founded in 2007 and located in Washington, D.C., the AAM is an alliance of the United Steelworkers union and leading U.S. manufacturers, including United States Steel Corp.

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When you look at most of the international trade agreements we’ve entered into, either with NAFTA or with the China accession agreement with the World Trade Organization, we’ve bargained away a lot. Particularly the way the rules are crafted in trade agreements, putting workers in competition with workers who are paid cents on the dollar in countries where there is little or no environmental regulation and where central banks manipulate the currencies and governments heavily subsidize manufacturing operations. 

The deals have not been well negotiated, and the rules that were established are often poorly enforced. I don’t know that either party has done a great job laying down or enforcing the rules. 

I believe in a global economy, and I welcome foreign investments and trade, but I believe it has to be balanced. If the rules are such that they are all focused on cheap imports and at the expense of job growth, we have to have a look at whether it is working. 

In the recent presidential election, it’s pretty clear that a whole lot of people thought it wasn’t working particularly well. There really was this uprising. Since many of the swing states played an outsized role in the election, the manufacturing sector received a lot of attention, although it hasn’t in terms of past policy. We just had polls done on the manufacturing issue by a largely Democratic pollster, Mark Merman, and a largely Republican pollster, Whit Ayers. They discovered that Hillary Clinton won nonmanufacturing households by 4 percent. Donald Trump won manufacturing households by 18 points. Which would have been unexpected, but that this was an issue he drove home every day. 

There are a couple of things that a new administration can do. In general, through the Commerce Department, it can be very aggressive in outreach to domestic industries, to explore the array of unfair trade practices and what executive action could be taken. In a lot of trade cases, an administration can initiate the action rather than relying on the domestic industry to get the ball rolling. And a lot of manufacturers can’t afford the time and expense of initiating a case. 

The NAFTA agreement is more than 20 years old and was negotiated in an era that didn’t anticipate exchange rates being used as they have been. The provisions of NAFTA that were intended to promote a level playing field, by addressing enforcement of labor and environmental laws in Mexico, are completely inadequate. 

It does make sense to look at another NAFTA, and Canada has an incentive to do this also. All three countries who are a party to NAFTA are in competition with Asia, and if there is a better deal, it could help them competing with the Chinese and others. The U.S. has the richest consumer market in the world, and don’t think that is something Mexico and Canada would want to walk away from.

It is the politicians who are talking about this, and maybe in an extreme way, who are doing much better than anybody anticipated. Trump certainly indicated he wanted to renegotiate NAFTA, and there is no suggestion that he has changed his mind. 

Another thing that can be done on trade policy is that we have to do serious negotiation with China about market
access and the size of the trade deficit.
There are a number of ways to approach it, but it’s going to be a priority. 

On Wall Street, there are a lot of very responsible financial institutions that provide capital to manufacturers, and manufacturing is a capital-intensive industry. But since the financial service sector has been deregulated, beginning in the 1970s and with the 1999 repeal of the Glass Steagall Act, instead of a utility, the financial industry has become the master of the rest of the economy, including manufacturing. You have these large investment banks that are driven by quarterly investment reports. If you are someone for whom an investor has to be more patient, the drive to quarterly earnings can turn into cost cutting that drives production overseas. Whether it’s research and development or training of workers, things that used to be seen as added value are now seen as cost centers — things investors don’t want.

The extremely strong dollar for the last 20 years has been great for the investment banks, because with the strong dollar they have the reserve currency and can call the shots. But for the manufacturing sector, imports are cheaper than they should be and exports are way more expensive. If the dollar were a little more competitive, export growth wouldn’t be as sluggish. Instead, import of goods has gone way up and displaced some production. 

Even as the global economy has been changing, the governments of Germany and Japan have recognized that manufacturing is the irreplaceable core of their economies, and having a policy focused on manufacturing is good not just for manufacturing but for the whole economy. You see it in worker training and research and development and capital availability for small and medium sized manufacturers. For many years, we did as well with investment in manufacturing — in trade policy, collaborative research and development and cooperative education. 

Since the 1990s, elected politicians have focused on financing four-year colleges in order to help people to succeed. There is no doubt that that has hurt manufacturing, but there is reason to be hopeful that we can change this. States that have had a focus on apprenticeship programs have had better results. We can learn from the Germans and Japanese. 

Some of this does take public investment, but the argument is that you’re making an investment in workers and infrastructure, particularly to boost the economy, and those things are going to be returned to the state. Workers will earn wages, which will generate revenues back, and the investments in research and infrastructure are going to make your state an attractive investment for companies looking to locate. A lot of states are very quick to give tax abatements, but I know from listening to companies looking at sourcing decisions, they want to know there is a high quality work force, good infrastructure and good natural resources — factors that get overlooked when these decisions are being made. 

Chris McFadyen is the editorial director of Business Alabama. 

Interview by Chris McFadyen

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