Republican presidential candidate Donald Trump is threatening to leave the World Trade Organization and rip up agreements like the North American Free Trade agreement, and his critics predictably are branding him everything from "wrong-headed" to "insane." But here's the real deal.
When our politicians and diplomats negotiate trade deals, we lose because they don't know a good deal from a bad one. For instance, when President Bill Clinton signed NAFTA in 1993, he believed it would "create 200,000 jobs in this country by 1995 alone." Instead, the U.S. has lost over 700,000 jobs, according to the Economic Policy Institute, while our trade deficit with Mexico has rocketed from $1.6 billion in 1993 to $60 billion in 2015, according to the Commerce Department.
Clinton also lobbied for China's entry into the World Trade Organization (WTO) in 2001, promising China would "play by the same open trading rules we do." Instead, the U.S. has had to file WTO case after case against China's questionable trade practices on products ranging from apparel, aircraft, and autos to shrimp, steel, and textiles.
Despite numerous WTO "victories" for the U.S., most have been pyrrhic. It takes years to adjudicate a case. In the interim, American companies go bankrupt, China takes over the market, and the court ruling becomes moot. This happened to Bethlehem and 30 other steel companies that went bankrupt waiting for relief.
As a second glaring flaw, many of America's trading partners rely on value-added taxes, and WTO rules permit VAT rebates on export sales. However, the U.S. has no VAT — yet our exports don't receive similar corporate income-tax rebates. While Congress has tried three times to modify our laws to get equal treatment, each modification was rejected by a hostile WTO, giving foreign competitors a huge tax-break edge.
The WTO also provides little or no protection against four of the most potent unfair trade practices many of our trade partners routinely engage in — currency manipulation, intellectual property theft, and the use of both sweatshop labor and pollution havens. America's status as the largest market in the world with a freely floating exchange rate and the world's most advanced set of environmental and work safety regulations makes us a defenseless victim.
As for 2012's South Korean free trade agreement, Secretary of State Hillary Clinton called it a "cutting edge trade deal" that would create 70,000 new jobs. All we've gotten is a near doubling of our South Korean trade deficit and more than 75,000 jobs lost, according to the Economic Policy Institute.
All of America's free trade agreements share fundamental flaws. For example, there is no automatic rollback if China, Mexico, or South Korea fails to honor its commitments. Nor is there adequate assistance for displaced American workers. There's not even a required renegotiation if a deal turns out lopsided — as these so obviously have.
We also rarely negotiate even the easiest of concessions. For example, the Obama-Clinton team never fully analyzed what products South Korea was importing from somewhere other than the U.S. but with some help from the Korean government could have been imported from the U.S.
There are also non-tariff barriers (NTB) our trading partners regularly use to offset lowered tariffs — we experienced the same kind of tactics with Japan in the 1980s, so we should be on guard. In the Japanese case, America experienced its first real flood of illegally subsidized Asian imports, but a free trading President Reagan acted decisively as the free trader Trump would: Reagan imposed stiff defensive tariffs on Japanese imports.
Despite all these fundamental flaws, American negotiators keep making the same mistakes. Besides hurting our workers, chronic trade deficits stifle economic growth while we now owe China and other trading partners trillions in U.S. Treasury debt.
Here's the tragedy — and one that would never occur if an "art of the trade deal" Trump were in the Oval Office: All of our bad trade deals could have been good ones if we had simply bargained tougher. Safeguards going forward should include: (1) prompt triggers and automatic renegotiations if the trade gains are not distributed fairly, (2) equally prompt relief against NTBs, (3) ironclad sanctions against currency manipulation, (4) zero tolerance on intellectual property theft, and (5) stringent environmental and health and safety standards — without the proverbial "wiggle room" characterizing proposed deals like the Trans-Pacific Partnership.
It's not too late to save America's existing trade deals through tough renegotiations. Donald Trump knows that as the world's largest and most lucrative market, America has an enormous bargaining chip.
In any negotiation or renegotiation, our guiding principle should be this: Enter into a free trade agreement only if it both increases total trade and reduces our trade deficit. When these two conditions are met, real world trade will converge with textbook theory, this country will be far more prosperous, and a now shattered faith in the global trading order will be restored. Only a Reagan or a Trump-like figure in the White House will achieve this goal.
Commentary by Wilbur Ross and Peter Navarro. Ross is an international private equity investor. Navarro is a business professor at UC-Irvine and a policy advisor to the Trump campaign.
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