Skip to content

Reforming U.S. Trade Policy for Shared Prosperity

Trade was an uncontroversial topic not so long ago. For most of the postwar era, trade worked well for the United States and for many other countries. A bipartisan consensus supported continuing trade liberalization as long as it was accompanied by full employment. Yet trade always had winners and losers, as economies adjusted to different costs of production among trading partners. Over the last few decades, the number of American workers losing from trade mounted and the losses spread across hard-hit communities. For these and other reasons, trade has become so controversial that it is now a key pivot point in politics and elections.

What changed the equation? Among many factors, perhaps the most fundamental was that the U.S. trade model itself changed, begin­ning in the 1980s. Instead of the gradual reduction of tariffs that had characterized trade policy, it became instead an instrument to project specific economic and regulatory policies into trading partner coun­tries through behind-the-border measures. And the choice of which policies we chose to project was increasingly dominated by the inter­ests of global corporations and the financial sector.

Trade became a determinant of winners and losers not only because of the comparative advantage of our trading partners but because U.S. trade policies privileged American investors and firms over American and other workers. Our trade policy featured strin­gent protections for offshore investors, but weak protections for labor and the environment, along with a failure to even enforce those protections. At a time when the integration of the global economy brought a surge of workers into the global labor force and tilted bargaining power in favor of investors and firms, U.S. trade policy augmented the rights and power of capital rather than seeking to rebalance it toward working people, communities, and the environment. Moreover, globalization has been a major contributor to climate change, as intermediate and finished products repeatedly cross oceans and continents. It is now paramount that the nation and the world shift away from fossil fuels while accelerating major investments in green innovation and infrastructure.

The way forward is not “isolationism” but rather a profound reorientation of U.S. trade policy. A new approach needs to establish rules that push wages and working conditions upward globally, while incentivizing the move toward low-carbon economies. This essay sets out an analysis of what went wrong in multilateral and bilateral trade policies and offers a concrete list of steps to change that.

What Went Wrong: From Global Prosperity to Global Deregulation

The WTO’s predecessor, the postwar General Agreement on Tariffs and Trade (GATT), was highly influenced by President Franklin D. Roosevelt’s New Deal policies. The GATT established treaty-based rules, principles, and governance that sought to increase global trade in a manner that allowed plenty of room for national policy. Under this trade regime, nations would still be able to orient themselves toward the pursuit of financial stability, full employment, and long-run prosperity. A golden age of capitalism ensued. Between 1950 and 1973, average incomes in the United States and the rest of the world grew at a faster rate than they had for the prior century—and haven’t been beaten since.

Not only did the United States prosper, but so did countries like Japan, South Korea, and to some extent Brazil and Mexico. Each fostered national policies for innovation and industrial development that enabled them to become global traders themselves. GATT, unlike the successor World Trade Organization, left plenty of room for development policies and a managed form of capitalism.

Beginning in the 1980s, however, the Reagan and Bush administrations, and their counterparts overseas, transformed GATT from a treaty-based multilateral tariff regime aimed at balancing global com­merce and national economic goals into what became the WTO. The new trade organization used trade negotiations to facilitate deregulation and project behind-the-border measures into developing coun­tries.

The GATT system was very good to the United States and the world economy, but the more recent trade regime is yielding diminishing returns. Economists estimate that trade liberalization injected $1 trillion into the U.S. economy between 1947 and 2002, yet more than 90 percent of those gains had already occurred by 1982. The benefits of trade deals since that time have been marginal and are shrinking. They may even be negative when one offsets the losses against the gains. Indeed, if all the tariffs in the world were completely eliminated, there would be only a one-time bump in the world economy of just 0.7 percent.

Efforts to further liberalize the global economy under WTO auspices were stymied in 1999 when many WTO members pushed back against a further deregulatory agenda. In response, the United States pursued a policy of “competitive liberalization” that leveraged its market power to promote numerous bilateral and regional deals that went far beyond the WTO’s terms.

Rather than allowing states to regulate the financial sector and other areas of key public interest, as permitted under the multilateral GATT regime, more recent deals such as nafta and the TPP seek to further deregulate financial flows and constrain regulations meant to foster domestic firms and employment. Many of these treaties allow corporations to sue governments under investor-state dispute settle­ment (ISDS) through private tribunals that usually side with foreign firms over host country regulations on finance, public welfare, and the environment.

Investors versus Labor

These competitive free trade agreements have done little to improve overall economic growth. Looking at nafta as a salient example, studies by congressional researchers have consistently concluded that the effect of the agreement on overall U.S. gross domestic product was likely very small—“probably no more than a few billion dollars, or a few hundredths of a percent.” Economists from Yale University, the National Bureau of Economic Research, and the Federal Reserve concluded that, at most, nafta spurred a one-time bump in U.S. growth by a mere eight-hundredths of 1 percent.

If there was so little effect overall, why is the agreement still so controversial? It is precisely because trade creates winners and los­ers—something long recognized by trade economists—as economies adjust to different costs of production in trading partner coun­tries. The losers may be as numerous as, or even more numerous than, the winners, especially in the short-to-medium term. Nafta was the first trade agreement that eliminated tariffs between relatively high-wage economies (the United States and Canada) and a low-wage developing country (Mexico). Further, nafta and subsequent U.S. free trade agreements created new protections for cross-border in­vestment, along with the ISDS mechanism for investors to assert their claims against governments. And it offered guaranteed access for the goods and services produced by those offshore investments back into the lucrative U.S. market.

These pro-investor measures in nafta and subsequent U.S. trade agreements created additional incentives for firms to move their operations to Mexico and elsewhere to take advantage of low wages and permissive regulation. Thus, beyond immediate winners and losers among sectors and workers directly affected by trade opening, these agreements strengthened investors’ bargaining power and weak­ened labor’s, thereby setting up workers for continuing losses in the fu­ture. Investors could and did move production to lower-cost coun­tries, eliminating jobs in the United States or threatening to leave in order to depress wages here.

While it has traditionally been difficult to measure the actual impact of trade agreements on jobs and wages due to the multiple factors affecting labor markets, new research methods and better data have recently produced robust estimates of these effects. For example, a study that looks at the effects of nafta by measuring each industry’s vulnerability to Mexican imports and each locality’s dependence on vulnerable industries finds that wage growth was dramatically lower for blue-collar workers in the most affected indus­tries and localities, with negative spillover effects on service-sector workers in those localities as well. What small gains did accrue from the agreement flowed to large firms and wealthy households in the United States. At a time of increasing inequality, with particularly harsh effects in some regions, the impact of nafta continues to be felt and raises important questions about the potential effects of its successor, the usmca.

As the gains from trade have been shrinking, its costs have been growing. For example, the IMF found that the countries that liberal­ized their financial services industry, as many trade and investment pacts required them to do, were among the worst hit by the Great Recession. Rather than investing the profits from globalization into productive and employment-generating activity, many global cor­porations have been choosing to speculate with their profits and buy back their own stock.

The U.S. government isn’t redistributing the gains from trade, either. Research from the Brookings Institution shows that the people who lose their jobs because of free trade are not compensated enough to make up for their losses through Trade Adjustment Assistance, a program that theoretically helps those who lose from trade to adjust through training and income support.

Nor have the losses for American workers translated into widespread gains for workers and communities overseas. Indeed, nafta boosted Mexico’s trade and investment, yet its per capita growth has hardly budged. Environmental damage, however, has followed since nafta shifted pollution-intensive manufacturing south of the Rio Grande. Rural communities have suffered as more than two million Mexican farmers and farmworkers lost their livelihoods to cheap imported corn and other agricultural products exported from the United States.

China’s Challenge

For all the WTO’s faults, the global trade body actually offers a fairer structure than that offered in regional deals like nafta. Under the WTO’s “one country, one vote” negotiation structure, trading part­ners are able to push back on the most invasive proposals and thus retain considerably more room for their own policymaking than under U.S.-led bilateral and regional deals. While the United States has been using such trade deals to lock in deregulation at home and with weaker trading partners, China has pursued its own course under the relatively flexible framework of the WTO.

Like the United States in an earlier era, China sought to integrate with the global economy while pursuing a domestic industrial policy for growth. China’s strategy was to invest heavily—more than 40 percent of annual GDP for decades—in infrastructure, industry, and innovation. China also kept a tight rein on financial markets to ensure they were steering credit and investment into domestic industries.

Until the turn of the century, China refrained from joining the WTO and regional and bilateral trade and investment treaties. Regardless, U.S. and other multinational companies jumped at the chance to invest in China. Despite strong conditions on the Chinese side (of the kind that the United States does not permit under deals like nafta) most global corporations were more than willing to trade technology and know-how for access to the fastest growing market in world history. Alongside the many joint ventures that China re­quired, China also invested heavily in its own technology parks, research and development, and education through the public purse and a series of national development banks. Many U.S. firms also pushed China to maintain a “competitive” wage and currency envi­ronment so they could reap the benefits as global exporters, including back into the U.S. market.

We know the story from there. The former World Bank economist Branko Milanović has shown that the winners from these strategies were China and the richest in the United States and industrialized world. The losers were the middle and working classes here and across the industrialized world. China disregarded the West’s advice on keeping wages low; average incomes rose dramatically, and Chi­nese wages are higher now than in Mexico and even parts of Europe. According to the World Bank, in 1990 more than 750 million people in China lived in extreme poverty (less than $1.90 per day), representing almost 70 percent of the entire population. Despite some lingering rural pov­erty, just 1 percent of Chinese today are extremely poor—though inequality is on the rise and China’s industrial boom has come at a heavy environmental cost.

Meanwhile, the United States pursued the opposite course. The U.S. strategy was to largely disinvest from infrastructure and indus­trial innovation and ease financial, labor, social welfare, and environmental protections—all this supposedly to reduce the cost of doing business and make incumbent U.S. firms more globally competitive. Some firms thrived, but the broader U.S. economy did not. According to the World Bank, investment in the United States has fallen from 25 percent of GDP in 1980 to 19 percent now. According to the Hamil­ton Project, wages for all but the top 1 percent of wage earners have remained stagnant or declined in the United States since the early 1980s, as the country lost competitiveness in key, well-paying indus­tries.

It’s no surprise that China maximizes the policy space that the WTO allows. Meanwhile, the United States disdains industrial policy and promotes deals that further deregulate corporations and weaken protections for working people. Looking at the record of disputes, there is no question that China pushes the limits of WTO rules in an effort to develop their economy. So is China the villain? Or is it the United States and other industrialized nations, who under the GATT regime used similar strategies to build global market share only to “kick away the ladder” by pushing through more antidevelop­ment trade rules once they thought their own corporations would forever have the upper hand?

As the United States resists a serious domestic development strate­gy, China is doubling down on a new round of investment and innovation. As Western companies use ISDS to stamp out attempts to reduce the use of climate-harming fossil fuels, China caps the use of fossil fuels, and invests in renewable technologies that have become the envy of the world.

How Trump’s Trade Policy Fails

Trump’s tariff war has been popular in some quarters, but a closer look suggests that Trump’s policies are unlikely to revive a balanced and more equal U.S. economy, nor will they spur development across the world.

First, even where tariffs improve conditions for certain favored industries, they squeeze other businesses. For example, higher tariffs on imported steel and aluminum are already raising costs in the automotive industry and construction, which are big employers. That was a lesson the White House should have learned from reviewing what happened when President George W. Bush experimented with similar across-the-board tariff hikes in 2002.

Even more importantly, trade deals are not ends in themselves but tools to achieve broader economic policy goals. Trump lacks any overarching economic plan that these tariffs would support. His trade measures are not connected to any set of innovation, industrial, or infrastructure policies. Instead, we have a major tax cut that jeopardizes our ability to invest in the future and undermines investments in health care, social security, and environmental integrity that we have already made.

President Trump criticized nafta’s shortfalls and has delivered a renegotiated agreement. While it includes some minor improvements, it is largely a nafta 2.0 that will bring infinitesimal economic bene­fits and accentuate inequality. It also includes new provisions that increase downward pressure on regulation for health, the internet, and the environment.

By the U.S. government’s own account, the usmca will yield a one‑time increase of three-and-a-half-tenths of 1 percent in GDP (0.35 percent) six years after the agreement goes into force. A study published by the IMF estimates that Canada and Mexico would each have a very slight welfare gain while the United States would have a slight loss, and that the overall effects on the three countries’ GDPs would be negligible. Moreover, the types of models used by the usitc and the IMF have long been criticized for overestimating benefits while ignoring costs. For instance, the usitc assumes that stringent new protections for data companies and cross-border services will increase GDP because they will “reduce policy uncertainty” by freez­ing current regulations or preventing new ones. In fact, without the positive value attributed to these regulatory constraints, usitc finds that the overall impact of usmca on U.S. GDP, employment, and wages would be negative. Most of the benefits from these new protec­tions will go to ITC firms, digital platforms, and biotechnology companies, which tend to be monopolistic and/or to seek rents. The usitc overlooks the impact of more industry concentration on higher prices, which reduce wages’ purchasing power, and on the ability of governments—including the United States—to regulate in the public interest.

The usitc projects that U.S. employment will hardly increase under the deal, even with the positive value it spuriously assigns to reduced regulatory space. The effect on employment would be a one-time increase in total employment of a small fraction of a percent (0.12 percent), or 176,000 jobs after six years, when the U.S. economy has completely adjusted to the agreement. This one-time addition is about the same as the number of jobs that are created by the U.S. economy monthly in a year of moderate growth. About 70 percent of the jobs would be in the service sector, and most would go to workers with no college education, meaning that most of the new jobs are likely to be low-paid. In an economy where wages have stagnated for decades except for the highly paid, usmca would hardly move the needle, and even then the slight move would be in the wrong direc­tion. Furthermore, the projections are inflated by the assumption that the labor market is permanently tight due to full employment, an obviously unrealistic assumption.

The agreement will restrict the right of the parties—including the U.S. government—to adopt new regulations that would protect the public interest. For example, the digital trade chapter prevents the United States from instituting new requirements that its citizens’ personal and financial data must be kept domestically to protect it from malign or less secure handling abroad. Articles 19.11 and 19.12 should be eliminated or significantly revised to provide policy space for future action. The chapter also appears to restrict the future ability of the government to increase regulation of harmful content on digital platforms by imposing stringent limits on the liability of internet service providers for disseminating such content. Article 19.17(2) should be eliminated. At a time when the public and policymakers are becoming more aware of the dangers as well as the benefits of the digital environment, it is inappropriate to use the back door of a trade agreement to constrain governments from enacting new laws and regulations to protect public interests from the distortions created by these concentrated and networked firms. The usitc report acknowledges that “the United States, Canada, and Mexico have yet to estab­lish many types of regulations potentially governing international data transfers,” and the same is true of platforms’ liability for harmful content. The usmca restricts the ability to do so in the future.

Usmca intellectual property protections also constrain the United States (as well as Canada and Mexico) from future efforts to reduce prescription drug prices by locking in the number of years pharmaceutical companies can avoid competition based on their test data. In general, stronger intellectual property protections produce rents (profits generated by a privileged position in the market rather than by competitive advantage) for the corporations that hold them, rather than for individual inventors. They reduce the incentive for new research by allowing firms to collect rents from prior breakthroughs for longer periods. Article 20.49 should be eliminated or the period of protection should be substantially reduced.

It is worth noting that these changes and similar provisions that restrict policy space for the United States and other governments are identified by the usitc report as the main source of gains from the agreement, based on the claim that reducing policy uncertainty will lead to greater investment. Evidence indicates, however, that investment responds most strongly to growth prospects rather than to anticipation of regulatory behavior. The effects of reduced policy uncertainty are fundamentally a benefit to the profitability of firms and private capital—but at the expense of government policy space and public preferences in terms of privacy, security, access to afford­able medicines, and other public and social goods. This is a clear reflec­tion of the fact that trade policy as practiced by the United States (and some other countries) is a form of mercantilism in which the USTR bargains for the interests of leading sectors of the economy and the key firms in those sectors.

Five Principles for a Trade Policy That Works for People—at Home and Abroad

Trump can be credited for one thing—globalizing the conversation about the need for trade policy reform and projecting it across tele­vision screens, research papers, and Twitter feeds. A stepwise change in international trade and investment is needed in order to rebalance the inequalities characteristic of today’s global economy. Toward that end, we propose five principles to guide a conversation about how trade and investment treaties can facilitate a redirection of the world economy toward shared and sustainable prosperity.

(1) Reform the U.S. trade policy template to guarantee policy space for national-level initiatives. The United States and its trading part­ners need the policy space to boost demand in support of sustainable and inclusive economies. This requires an active mix of fiscal and monetary policies as part of a general expansion of government spending that covers physical and social infrastructure, adequate social protection, access to health care for all, and investment in a green and sustainable environment. Regulating private financial flows will be essential to steering private finance toward these broader social goals. Curtailing misdirected business and financial practices will be key to reining in corporate rentiers and crowding in private investment to productive activities. The Trump initiatives in usmca that create more rents for pharmaceutical, IT, and platform firms should be reversed. More progressive tax policies—including on in­come, wealth, corporations, property, and other forms of rent in­come—are needed to address income inequalities. These will be much more effective if coordinated internationally.

A significant part of the current tension between the United States and China stems from the conflict between the U.S. market-led ap­proach and China’s state-led development approach. The United States emphasizes the primacy of private sector firms and their inter­ests. In numerous ways, U.S. trade policy uses American market ac­cess as leverage to achieve benefits for favored domestic sectors and firms. ISDS, for example, creates supranational rights for private in­vestors. U.S. trade policy creates rents for pharmaceutical manufacturers and other corporate holders of intellectual property, and seeks to insulate U.S. digital firms from liability for harmful content or privacy violations. For its part, China has pursued a state-led approach that uses foreign investors’, producers’, and sellers’ desired access to its market as leverage to develop its own productive capaci­ty, to move toward the global technological frontier, and to create jobs for its huge population.

Many of the policies that could correct some of the most serious problems currently facing the United States (rising inequality, huge wealth concentration, bifurcation of opportunity between a handful of metropolitan areas compared to smaller cities and rural regions, and climate change) require a more state-led approach rather than the small-government, market primacy mantra of the last four decades. A trade template that privileges private firms and sectors, tries to constrain governmental intervention, and fosters regulatory convergence toward lowest-common-denominator regulations for the bene­fit of U.S. firms abroad is not a policy truly in either the domestic or international public interest. Therefore it is important that policy toward China and others should focus on legitimate complaints (e.g., actual theft of intellectual property) and not on an a priori notion that industrial policy, subsidies for desired economic activity, or state-owned enterprises are inherently bad or wrong.

(2) Upwardly harmonize labor standards. Labor and environmental standards and protections are essentially cross-border problems. Economists have long recognized that trade will lead to convergence of wages between higher- and lower-wage countries (unless the low-wage country represses wages, as many do), and politicians have long recognized that “the failure of any nation to adopt humane conditions of labour is an obstacle in the way of other nations which desire to improve the conditions in their own countries” (Treaty of Versailles, ILO Constitution preamble).

Many of the problems facing U.S. working households are the result of misguided domestic policies that compound the pressures posed by globalization of finance and production. The solutions re­quire a combination of reformed domestic labor policy and reformed trade policy. On the domestic front, raising wages in line with pro­ductivity can come about by giving workers a strong right to unionize and bargain collectively, not to mention adequate minimum wage guarantees. Job insecurity also needs to be corrected through appro­priate legislative action (including on employee status, informal, and precarious work contracts) and a stronger social protection system, all of which can be achieved through domestic policy changes.

Reform of trade policy regarding labor is needed because the global labor market is now more integrated than ever, with a huge global labor force available to investors and producers. This shifts bargaining power away from workers and to owners of capital. In addition, some countries intentionally suppress wages and violate workers’ rights to gain unfair competitive advantage in global mar­kets. Workers’ advocates have championed the use of trade rules and market access as leverage to counter these abuses and encourage respect for labor standards at home and abroad. But the current labor template used by U.S. trade negotiators has not succeeded in achieving the desired upward convergence of wages and labor standards. Therefore a more effective and robust labor template is needed, at least for deep integration trade deals like usmca. While the labor chapter of that agreement continues the trend to expand the scope of the parties’ commitments to protect labor rights, it does nothing to strengthen overall enforcement of labor rights—meaning that even seeming improvements in the commitments will have little impact in practice. Instead, here are five areas where the U.S. template needs to be changed:

(i) Greater use of pre-ratification requirements. The moment of maximum effective leverage to improve labor laws, regulation, labor inspection, and enforcement mechanisms of trading partners is before an agreement is ratified. The United States started to do this beginning in 2011 with Colombia and has continued with this approach. The detailed labor action plans that result, however, must be made enforceable after ratification through robust trade enforcement mech­anisms if progress is to be sustained.

(ii) The arbitration system for labor and environmental provisions must be reformed. The current U.S. template for arbitration under trade agreements is flawed in many ways, including the possibility of endless delays. When it comes to issues involving public goods like human and labor rights and environmental protection, however, it is profoundly inadequate. This inadequacy was particularly apparent in the failure of the United States to prevail in the only labor case it has ever taken to arbitration—one that addressed egregious and widespread violations of labor rights in Guatemala. Despite acknowledging that violations occurred, the arbitrators declined to hold Guatemala responsible for violating its obligations under the trade agreement and did not impose any sanctions.

Critical public interests such as labor rights cannot be left to the mercy of private arbitrators, many of whom have severe conflicts of interest. Under current U.S. trade pacts and usmca, the arbitrators need only have expertise in trade law or labor law, which could be in anti-union private employment law practice. Instead, labor disputes should require arbitrators to have demonstrated expertise in inter­national labor rights and standards. The arbitration mechanism should include a standing description of the charge given to the arbitral panel that includes defending and upholding international labor standards as negotiated by the International Labor Organization and defined and applied by its expert committees. There should be an appellate body to appeal decisions by individual panels that go against workers’ rights and international labor standards. Other obvious loopholes in the current arbitration template, such as requiring that violations of the labor commitments occur “in a manner affecting trade or invest­ment” and through “a sustained or recurring course of action or inaction” in order to be considered in breach of the treaty must be eliminated, not merely narrowed through footnotes as currently proposed in usmca. These limitations are not applied to corporate investment or intellectual property rights and there is no justification for applying them to labor and environmental obligations.

(iii) An additional, new enforcement mechanism is also needed that can target inspection and remedial action at the individual firm level. By focusing at the level of specific firms that are accused of violations, it will be faster and easier to determine whether they are in violation and will spare firms that are in compliance with the obligations of the agreement. Currently, a novel approach to inspection of suspect firms is under discussion with respect to usmca based on a proposal from Senators Ron Wyden and Sherrod Brown. This would entail inspection by a cross-border team from two or more of the countries to examine claimed violations. It would allow a rapid and targeted re­sponse and create a strong deterrent effect for violations by firms.

(iv) Utilize border measures (tariffs, denial of entry, etc.) to exclude products of firms that violate labor standards and obligations. The United States currently excludes products made with forced labor under long-standing trade law and this should be expanded to viola­tions of other core labor standards. A law from 1922 (still formally on the U.S. trade law books although not utilized in practice) directed the president to create an adjustable tariff to compensate for differences in wages and other costs of production between the United States and its competitors. These and broader measures that are avail­able for commercial interests show that this is a workable ap­proach and a new template should provide a clear and efficient mech­anism for excluding products made in violation of workers’ rights.

(v) Finally, Congress should create a new right of action by stake­holders to compel the government to enforce the labor and environment terms of trade agreements. Such rights exist for private commercial interests and should be extended to the public to compel action to enforce labor and environmental terms. This would establish a last-resort safety net for failure by the United States or other governments to implement these obligations. The reluctance of the United States and other governments to pursue enforcement of the labor terms of agreements has been observable over the twenty-five years of their existence, with the Guatemala case the only one ever to be arbitrated.

(3) Upwardly harmonize environmental standards. With respect to the environment, old problems like polluted waterways and now climate change defy borders and their solutions require cross-border cooperation. The usmca fails to even mention climate change, despite the fact that the WTO and the United Nations have shown that trade agreements increase carbon dioxide emissions and that North Ameri­can emissions from fossil fuels are the second largest of any region in the world. Trade and investment treaties have to be tools to shift the global economy away from fossil fuels in a manner that is socially inclusive. What is more, within the trade and investment regime itself there is a fundamental need for adjustment financing for those workers and communities currently dependent on fossil fuels to shift into new frontier sectors of economic activity in an inclusive and just manner. The elements of upward harmonization of environmental goals are roughly the same as those for harmonizing labor policies. A greater use of pre-ratification agreements will help improve laws, regulation, inspection, and enforcement mechanisms. Likewise, the arbitration system for environmental regulations must be reformed through strengthening environmental qualifications of arbitrators. Further, Congress should create a new right of action by stakeholders to compel governments to enforce the environment terms of trade agreements. And last, we need to prioritize the acceleration of trade, investment, and technology relevant to goods and services that pre­vent, mitigate, and help adapt to climate change.

(4) Rebalance trade and investment governance. The governance of trade needs to be reformed to make it inclusive and transparent. The privatization of dispute resolution to private firms through investor-state dispute settlement (ISDS) should be reversed. The WTO model of state-to-state dispute settlement, whereby nation-states can prop­erly weigh the private versus the social costs and benefits of trade issues, should continue to be the core of a multilateral trade system. Both trade negotiations and dispute resolution, however, need to be carried out in a more transparent and inclusive manner. The Washington Post, in an investigative report titled “Industry Voices Dominate the Trade Advisory System,” revealed that U.S. trade policymaking is run by the very corporate interests that get to enforce their favored treaty terms through ISDS.

Trade negotiators operate in an essentially neo-mercantilist context in which they seek greatest advantage for favored or politically con­nected sectors and firms in their own country. When this was mainly a question of lowering tariffs during the GATT decades, the net result was a gradually liberalizing global economy that offered some oppor­tunity to most countries and avoided the harshest adjustment costs. As noted above, however, the United States has included more and more behind-the-border measures that require changes in regulations and policies that bind both the trading partners and the United States. These policies touch on politically important and sensitive issues including access to medicines, digital privacy and liability, food safety, etc.

When these issues are determined domestically, there are political processes that allow the public to express preferences and demand accountability of policymakers. And regulatory processes allow input from a broad spectrum of stakeholders. But when trade negotiators determine which policies to advance through binding trade treaties, they can undermine and constrain not only other governments’ policy space but that of the United States as well.

(5) Make a serious commitment to adjustment assistance both domestically and internationally. When the European Union began to integrate, the region agreed on a set of uniform minimum standards for the environment, health, and worker protection so that cross-border competition would not undermine living standards across Eu­rope. This reflected wide agreement that deep integration would lead to a convergence of standards, with either a race to the bottom or upward harmonization. Recognizing that poorer countries could have difficulty meeting those standards, the EU set up adjustment funds for regions and individuals. The EU’s European Investment Bank and national development banks such as Germany’s KfW were refueled to invest in technologies and companies to get them ready for the expanded marketplace. While the implementation of the EU’s good intentions has often disappointed, it is essential to recog­nize that deep integration requires harmonization and that it doesn’t happen auto­matically.

Over the decades of U.S. development, these principles were sometimes embraced as part of our own internal market expansion, for example through the Fair Labor Standards Act that set minimum standards for wages, hours, and working conditions across all the states. More recently, however, the approach has been inadequate, and we have seen a competition across states to relax protections for workers and the environment in order to draw investment. The inadequacies are seen glaringly in the failure of trade adjustment assistance policies to compensate workers, households, and communities for losses due to trade. More broadly, U.S. policy over recent dec­ades has failed to provide adequate domestic standards and programs that ensure decent jobs, a healthy environment, a functional financial system that invests in the real economy, and a social safety net that maintains adequate living standards. U.S. trade policy has not only failed to counterbalance the harsh effects of globalization, it has often tilted the playing field further in favor of investors and firms, and against the interests of working households and communities—with serious consequences for its own citizens, the rest of the world’s people, and the planet itself.

This article originally appeared in American Affairs Volume IV, Number 2 (Summer 2020): 32–47.

Sorry, PDF downloads are available
to subscribers only.


Already subscribed?
Sign In With Your AAJ Account | Sign In with Blink