McCain’s Trade Deficit « The Washington Independent
Image has not been found. URL: /wp-content/uploads/2008/09/mccain-leaning1.jpgSen. John McCain (R-Ariz.) (WDCpix)
“Free trade,” said Sen. John McCain, the GOP presidential nominee in all but name, “ is the best thing that can happen to our nation. If I were president, I would negotiate a free trade agreement with almost any country willing to negotiate fairly with us.” He excoriates Sens. Hillary Rodham Clinton and Barack Obama for preaching what he calls “the false virtues of economic isolationism.” Trade looks likely to be a central issue in the general election campaign.
That’s all to the good, because America desperately needs an adult debate about U.S. strategy in the global economy. But for that to happen, both McCain and his Democratic opponent will have to go beyond what is now merely an exchange of rhetorical spitballs.
Image has not been found. URL: http://www.washingtonindependent.com/wp-content/uploads/2008/08/politics.jpgIllustration by: Matt Mahurin
McCain has been a consistent advocate of Washington’s current trade policies. He has voted for every treaty presented to him – the North American Free Trade Agreement, the Central American Free Trade Agreement, the World Trade Organization, Permanent Relations with China. He opposes adding protections for labor rights and the environment to those securing investment rights in trade accords. He opposes efforts to revoke the tax breaks that businesses get for investing abroad. He doesn’t believe in industrial policy to create jobs here at home. He opposes steps to penalize moving jobs off-shore.
But McCain has contributed more heat than light to the trade debate. His often repeated position is: “I’m a student of history. Every time the United States has become protectionist and listened to the siren song [of protectionism], we’ve paid a very heavy price… It sounds like a lot of fun to bash China and others, but free trade has been the engine of our economy. Free trade should be the continuing principle that guides this nation’s economy.”
But McCain has contributed more heat than light to the trade debate.
But surely, any “student of history,” or member of the Republican Party, should know that the U.S. economy developed and prospered behind protectionist tariff barriers throughout its history. Republican presidents were leading advocates of high tariffs to bolster American industry. It was only after World War II, when U.S. industry dominated a world exhausted by war, that Washington became an advocate for more open trade. Protectionism is as American as apple pie. Trade policy in its modern form is a corporate strategy, not a “continuing principle.”
McCain’s mantra in defense of free trade echoes what most defenders say, from mainstream economists to The Washington Post editorial page. Assertion – “free trade benefits America” – replaces analysis. Boosterism – “we can compete with anyone” – supplants the cold calculation that used to be the hallmark of America’s business community. Authority – and the money and power of the Wall Street lobby – displaces argument.
But, not this time. This simply won’t work anymore. It is not 1980, when feckless Reagan policies started racking up ever larger trade deficits. It’s not 1992, when the economic adviser Robert E. Rubin convinced President Bill Clinton to embrace free trade fundamentalism.
In 2008, working Americans are making less than their fathers would have made 30 years ago. Inequality has reached heights not seen since 1929. The United States has lost one in five manufacturing jobs since 2000. Establishment economists like Alan Blinder warn that as many as 30 million service jobs are “contestable” in the global economy.
Even after the dollar has lost more than 30 percent of its value to the euro, the United States is running a current account deficit that requires borrowing or selling off assets at the rate of $2 billion a day. We’ve suffered $4.3 trillion in global losses since 2001. Foreign countries – from China to the oil-producing nations – sated with dollars, are ever more reluctant to take on more U.S. treasury bills. They’ve started diversifying their reserves into euros and yen, and are setting up giant sovereign investment funds to purchase real assets instead. Soaring oil prices – responding in part to the fall of the dollar – are effecting one of the largest transfers of wealth in the world’s history.
Surely it is incumbent on McCain – and on the defenders of the current course – to explain how they plan to get the country out of this hole. Or why they think that it doesn’t matter that we are the world’s largest debtor, and that the dollar is slowly being debased.
The International Monetary Fund warns that the U.S. trade imbalance is destabilizing. If nothing changes, the market will solve the problem. The dollar will continue to decline; the U.S. economy will go into recession. Imports will grow more expensive; exports more competitive. Eventually, the U.S. accounts might come into better balance.
That’s what we’re headed for now. The dollar has lost 32 percent of its value to a basket of major currencies, including the euro. Exports are growing faster than imports. Last year, the current account deficit declined from a staggering 6.2 percent of GDP in 2006 to 5.3% in 2007. If the economy tanks this year and the dollar continues its fall, our trade imbalance should decline further. But no politician would admit that recession and decline of the U.S. internationally is the strategy we should follow.
Moreover, the market, despite all the fatuous nonsense about the earth being flat, doesn’t exactly rule here. China, Japan and the Asian tigers all peg their currencies to the dollar. (They’ve limited the dollars decline in relation to their currencies to about 13 percent). The U.S deficit with China continues to rise. They’ve been buying bonds – and now investments – to prop up the dollar so they can continue to capture manufacturing jobs and markets. This mercantilist policy – a direct violation of the spirit of the WTO – is the one model of development that seems to work.
Arguably, as Kevin Phillips notes, Washington has been pursuing its own mercantilist strategy. We’ve put our manufacturing sector at risk, but subsidized and protected agribusiness, the military-industrial complex and, most particularly, Wall Street. U.S. policy has been designed to make America the world’s banker, the key handler of investment transactions. It remains to be seen whether the staggering losses suffered from the follies of the shadow banking system has undermined that strategy.
McCain keeps saying that U.S. workers can compete with anyone on a level playing field, and he is suggesting that is what the current trade accords create. But this rhetorical fantasy is divorced from the reality of today’s global marketplace.
Thirty years ago, perhaps, unions raising objections to job losses could be dismissed as protectionists, pessimists preaching “economic isolation.” Now we’ve seen the reality caused by our trade strategy. And those defending it can’t simply repeat the same old mantras without addressing the new and forbidding realities that we face.
McCain, aware of how the public has turned against trade, now admits, “open markets don’t automatically translate into a higher quality of life for every single American. Change is hard, and while most of us gain, some industries, companies and workers are left to struggle with very difficult choices.” So he now suggests a wage insurance program that will ease the transition of skilled workers to less skilled, lower paying jobs. When they lose a good job and are forced to take lower paying work, McCain’s program will cover about half their loss for a couple of years.
But this loser’s subsidy won’t help workers with the health care and retirement benefits that are often lost in the transition. It won’t help those, even more in duress, forced into part-time work. Part of it will be pocketed by Wall-Mart and other low-wage employers reducing wages for new hires enjoying the subsidy. It is hard to see how easing the way to low-paid work helps sustain a vibrant middle class in the global economy.
Americans have learned not to expect much from candidates or campaigns. Slogans and slurs drown out real policy debates. But this year, Americans are paying attention and looking for answers. We deserve a serious debate about what surely is the fundamental challenge facing this country: How, in a global economy, can the United States dig itself out of the hole it is in, and sustain the strong middle class that is the triumph and cornerstone of American democracy?
If McCain really thinks extending our current trade policies is the ticket, then he owes us a bit more than rhetoric and cheerleading. He owes us an explanation of what his strategy is and why it will work better than the last 30 years.
Or if he really is happy with how things are going – having announced that the economy made “great progress” under President George W. Bush — he should admit that he thinks this thing is working just the way he wants.
[Next week: How Democrats need to step up and what a real strategy would include]
Robert L. Borosage is the president of the Institute for America’s Future and co-director of its sister organization, the Campaign for America’s Future. He has contributed to The Washington Post, The Los Angeles Times and The American Prospect magazine.