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Can Obama build growth by building trade?

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December 5, 2013

Containers are loaded onto the Mol Matrix in a general view of the Port of Los Angeles. (REUTERS/David McNew)

Containers are loaded onto the Mol Matrix in a general view of the Port of Los Angeles. (REUTERS/David McNew)

The Obama administration has quietly embraced the most ambitious agenda on trade and investment liberalization in the past two decades.

The United States is currently juggling no fewer than five high-level trade negotiations: free trade talks with the European Union; the Trans-Pacific Partnership (TPP) talks with a dozen Asia-Pacific countries; a new Information Technology Agreement covering trade in high-tech goods; negotiations on liberalizing services trade though the World Trade Organization, and a last-ditch effort this week to agree on new trade facilitation measures at the WTO ministerial meeting in Bali.

This about-face on trade from President Barack Obama’s first term is remarkable.

In 2008, candidate Obama promised to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico to add tougher provisions for protecting worker rights and the environment. Once in the Oval Office, he stalled for several years before even sending to Congress three free trade agreements — with South Korea, Panama and Colombia — that had been completed by the Bush administration. Today, however, the administration’s trade agenda is the most far-reaching since the late 1980s and early 1990s, when the United States was negotiating NAFTA and the Uruguay Round of world trade talks.

The new direction is as much accidental as deliberate. Except for the new talks with Europe, the various trade initiatives have been slowly advancing for many years and are now coming to fruition. But it also reflects the administration’s belated recognition that opening new global markets is vital for generating stronger U.S. growth.

The U.S. economy still has a long way to go in realizing the full benefits of open trade and investment, according to our new report. The administration will fall well short of Obama’s pledge to double exports by the end of 2014, and foreign investment in the United States has been weak for most of the past decade. The biggest trade barriers remain in sectors where the United States is most competitive — particularly business services like engineering and architecture. Reversing these trends is critical for jump-starting the still anemic economic recovery.

Exports and imports now account for more than 30 percent of U.S. gross domestic product, three times as much as in 1970. Succeeding in global markets is vital for generating faster growth. But for too long the United States has failed to play to its strengths.

Take foreign investment. The United States, with the world’s largest consumer market, is highly attractive for companies around the world. But we’ve never bothered to sell ourselves, while other nations are doing so vigorously. In the past decade, the U.S. share of foreign direct investment fell from nearly 40 percent of the world’s total to just 17 percent.

For the first time, Obama last month hosted in Washington a national summit, bringing together chief executives from foreign companies with federal, state and local officials to promote the United States as an investment location. The president announced that, in future, attracting foreign investment would be “a formal part of the portfolio for our ambassadors and teams around the world.” U.S. competitors in Europe, Canada and elsewhere have been doing that for decades.

Or look at business services. The business service sector, as Georgetown professor Brad Jensen has highlighted, now accounts for 25 percent of U.S. employment — more than double that of manufacturing — while paying employees a solid average wage of $56,000 per year.

Despite the U.S. comparative advantage in services, however, these sectors have, until recently, been second-class citizens in trade negotiations. U.S. service exports to China and India, for example, still face an effective tax of nearly 70 percent — making it hugely difficult for U.S. firms to compete in those markets. Freeing services trade is high on the agenda of the Transatlantic Trade and Investment Partnership (TTIP) talks with Europe, and the TPP in Asia, but the United States is digging itself out of a deep hole.

Despite those obstacles, the United States still manages to run a $200 billion annual trade surplus in services. But that has not been enough to offset the continued weakness in manufacturing — where the United States runs a huge trade deficit. While U.S. export growth has been strong coming out of the 2009 recession, the U.S. share of global exports fell sharply over the past decade.

The negotiations now on the table offer a once-in-a-generation opportunity for a do-over. About 39 percent of all U.S. trade is currently covered under free trade agreements; if the deals with Europe and Asia are concluded successfully, that figure will jump to 64 percent.

A new set of rules that brings gains for the most competitive U.S. industries, and helps to make the United States a more attractive investment location, could be the Obama administration’s most lasting economic legacy.

Edward Alden is a senior fellow specializing in U.S. economic competitiveness at the Council on Foreign Relations. This article draws on research from the council’s new report, “Trading Up: U.S. Trade and Investment Policy,” part of the council’s Renewing America initiative.

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One Response to Can Obama build growth by building trade?

  1. Jon

    December 6, 2013 at 2:07 am

    I’d be a lot more sympathetic if the new agreements didn’t include some seriously wild and wacky ideas about copyright terms.

    J