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  • OTRI.USA
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  • OTVI.USA
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  • TLT.USA
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  • WAIT.USA
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  • DATVF.ATLPHL
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  • DATVF.CHIATL
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  • DATVF.DALLAX
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  • DATVF.LAXDAL
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  • DATVF.SEALAX
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  • DATVF.LAXSEA
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  • DATVF.VEU
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  • DATVF.VNU
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  • DATVF.VSU
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  • DATVF.VWU
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  • ITVI.USA
    9,682.710
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  • OTRI.USA
    7.700
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  • OTVI.USA
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  • TLT.USA
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  • WAIT.USA
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American Shipper

Who pays for the international system?

Lesson from the election is that new thinking on tax, trade, and foreign policy might be required

   Not a day goes by without an article commenting on whether global trade liberalization is responsible for significant job loss in the United States and a contributory factor to stagnant wages for America’s middle class.
   The flurry of articles is the result of the fact that trade, particularly free trade agreements, was a central issue in the presidential campaign for both Republican candidate Donald Trump and Democratic primary candidate Bernie Sanders. But the discussion over proposed trade policies is really symbolic of something more important: who pays the cost of the global trading system?

   Since World War II, the United States inherited the “international system” from the United Kingdom, a system that rests on three principals:
   1) Free navigation of the seas to support the American security umbrella protecting small nations from aggressive larger countries.
   2) The global financial system enabling the flow of capital with the U.S. dollar as the reserve currency.
   3) The multi-lateral, rules-based trading system in which nations freely trade with each other on an equal basis.

   While the British Empire favored free trade, it had a preferential tariff system for its colonies. During World War II, President Franklin D. Roosevelt devised a plan to “lend-lease” war materials to Great Britain which could not be transferred, and such articles were to be returned to the United States at the end of the war.
   The most interesting part of the Lend-Lease Agreement is Article VII which provided that Great Britain, “in return for aid furnished under the Act of Congress of March 11, 1941, the terms and conditions thereof shall be such as not to burden commerce between the two countries, but to promote mutually advantageous economic relations between them and the betterment of world-wide economic relations.
   To that end, they shall include provision for agreed action by the United States of America and the United Kingdom, open to participation by all other countries of like mind, directed to the expansion, by appropriate international and domestic measures, of production, employment, and the exchange and consumption of goods, which are the material foundations of the liberty and welfare of all peoples; to the elimination of all forms of discriminatory treatment in international commerce, and to the reduction of tariffs and other trade barriers.

After World War II, with Europe’s and Japan’s economies in ruins, the United States supplied the goods and services to rebuild its allies and supply its own growing population with basic necessities plus consumer goods. By the 1980s, modern China could never have arisen without a large U.S. economy to absorb China’s exports to fund the re-industrialization of China.

   For more than 70 years, the United States has born the costs of the international system. American military personnel are stationed around the world and have fought numerous wars to provide security and stability among nation states.
   When the burden of fighting a war not directly connected to defense of the United States caused domestic political upheaval (for example, Vietnam), the United States was able to sidestep the problem of who bears the burden of providing security by switching to a volunteer military.
   As for the global financial system, the U.S. Federal Reserve Bank has become the closest thing we have to a “world government,” as it provided liquidity to credit markets and served as the lender of last resort to financial institutions and other central banks during the 2008 financial crisis.
   Now traders hang on Federal Reserve officials’ every word concerning interest rates. Those words impact stock markets around the world far beyond the organization’s statutory mandate of price stability and full unemployment for the American people.
   Even the privilege of the U.S. dollar serving as the world’s reserve currency, enabling Americans to settle debts in their own currency, has a cost – a strong dollar makes U.S. exports more expensive and less competitive in world markets.
   For the third pillar of the international system (i.e., global trade), some additional historical perspective is necessary. We often forget that the Unites States is a relatively young country at a mere 240 years.
   For the better part of American history, China was in economic decline and comprised a small percentage of global trade in relation to its population. Russia, meanwhile, retreated to a self-imposed exile from the global economy for 70 years of Communist rule.
   After World War II, with Europe’s and Japan’s economies in ruins, the United States supplied the goods and services to rebuild its allies and supply its own growing population with basic necessities plus consumer goods. By the 1980s, modern China could never have arisen without a large U.S. economy to absorb China’s exports to fund the re-industrialization of China.

   For the average American worker, whose frame of reference is from the 1950s onward, they perceive that their jobs have evaporated due to:
   • Outsourcing to a less developed country with lower labor costs
   • Insourcing to either immigrants under the H-1B visa program (at the high end) or perhaps illegal immigrants (at the low end)
   • Automation through the adoption of new technology

The hard truth is that American policymakers have not adequately addressed how to deal with the negative impact of global trade on American jobs.

   If economists are correct that the United States has lost about 2.4 million manufacturing jobs as a result of China’s accession to the World Trade Organization, then Americans who lost those jobs showed up at the ballot box and voted for Donald Trump in 2016.
   No doubt many U.S. companies have been able to grow their business through selling products and services to new foreign markets. Nonetheless, the hard truth is that American policymakers have not adequately addressed how to deal with the negative impact of global trade on American jobs. Traditionally, the quid pro quo for Trade Promotion Authority (“fast-track” legislation for an up or down vote on a free trade agreement) is an extension of Trade Adjustment Assistance (TAA) which reimburses educational and training expenses incurred by employees certified by the Department of Labor as losing their jobs due to trade. As any trade attorney can attest, the TAA process is arduous and can often feel like a pyrrhic victory even if a worker is awarded money under a TAA claim.
   Before Congress votes on any free trade agreement, the U.S. International Trade Commission prepares a report estimating the potential job loss as a result of the free trade agreement. Understandably, the proponents of free trade agreements laud the new markets for American companies and insist such economic activity will outweigh any negative effects of job losses.
   Recent research has indicated that the United States granting Permanent Normal Trade Relations to China had a big impact on U.S. manufacturing employment because it removed the uncertainty concerning the duty rates applicable to imports from China, and the low yuan-to-dollar peg did the rest.
   Certainly no Member of Congress took to the floor of the House or the Senate and said “some American workers will need to lose their jobs so that China can have a middle class.”
   The United States will need strong political leadership to forge a new consensus between U.S. corporations and American workers in order to support further trade liberalization.
   This will require new thinking on tax policy, trade policy, and foreign policy to envision what the “new” international system should look like as Donald Trump’s election has underscored that the American people will no longer tolerate paying all the costs of the international system for the benefit of allies and adversaries alike.

Marianne Rowden is President and CEO of the American Association of Exporters and Importers following years of service as the association’s general counsel. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of AAEI.

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