WASHINGTON, November 11, 2016 — My first trip to China was in 1994 when I visited Yichang, the proposed site of the mega Three Gorges Dam. My mission was straightforward: endear myself to potential Caterpillar customers while learning as much as I could about the dam to convince the U.S. Export-Import Bank to support American exports to the project.
While there, a likable Chinese official took me aside and gave me some friendly advice. He said, “I sincerely wish you luck, but here in China we have a lot of people so it is better to have 100 workers with shovels than just one employed with an imported Caterpillar bulldozer.” Being a bit of a smart alec, I replied, “Have you ever considered 1000 workers with spoons.” His response was quick and harsh, “That’s ridiculous!” He then paused, smiled, and said, “but you have made your point.”
Now I’m not claiming credit, but my point evidently took hold. Even though trade and technology were viewed as threats to jobs, China opened many of its markets while making massive investments in infrastructure, education and technology. Obviously more change is needed, especially on political freedom, but in 22 years China has dramatically transformed.
The question today is whether the U.S. should now pivot in the opposite direction. As the election demonstrated, the politics of trade is being challenged in ways we haven’t experienced since the 1930s. Today protectionist and isolationist rhetoric seem to again be in fashion.
Part of the problem is fear. Speak out in favor of NAFTA or the Trans Pacific Partnership – or any of the other free trade agreements – and one risked the wrath of Donald Trump and an eerie silence from Secretary Clinton. Consequently, most of the traditional business and agricultural champions of free trade cowered in the political shadows.
By ceding the public arena, support for trade has waned. That’s too bad because America is still very much a trading nation and NAFTA along with the other free trade agreements have been successful. The increase in trade, fueled in part by these agreements, have raised the income of the average household by $13,600 per year.
Also, few appreciate just how important Mexico and Canada are to the U.S. economy. Today one in three U.S. exports go there. That’s more than we export to the top 13 largest economies combined! To be clear, that means we export more to Canada and Mexico than all the exports to China, Japan, Germany, UK, France, India, Italy, Brazil, South Korea, Russia, Australia Spain and Indonesia. Plus, our NAFTA partners are allies, friends, hardworking and integrated into the supply chains of many U.S. companies – and are the top tourist destination of Americans. So why are so many quick to demonize our neighbors?
The better question would be: how do we get other countries to follow the NAFTA model? So far, eighteen have by agreeing to free trade agreements with the U.S. They include Israel, Jordan, Chile, Colombia, Peru, Korea, Australia and Singapore to name a few. Perhaps to the surprise of many Americans, the U.S. has experienced the most rapid export growth to these markets and has a trade surplus with nearly all of them.
Put another way, today about 400 million of the world’s 7.4 billion people live in Mexico, Canada and the other 18 countries with whom the U.S has free trade agreements. Together, these consumers buy nearly half of U.S. exports. When trade is truly free and fair American workers, farmers and businesses do exceedingly well. We should celebrate free trade agreements and not rush to demonize them.
Instead of attempting to refute the success of free trade agreements, trade critics quickly shift their focus to our trade relationship with China. And here they may have a point. About half of America’s $737 billion trade deficit is with China. Economists come up with all sorts of benign reasons for this imbalance which range from “China saves too much” to “the US doesn’t save enough” to “we all like to buy inexpensive stuff from China.” Others say it’s because of currency manipulation, trade barriers or cheating – and over the long run, it won’t matter because the money eventually gets reinvested in the U.S. They all may be right – or wrong.
On China, I personally side with the Average Joes who say, “something is just not right. The trade deficit with China is too big.” Politicians then often point to China’s entry into the World Trade Organization as the main culprit.
Here’s my take. While a large bilateral trade imbalance may or may not be sustainable economically, it clearly isn’t sustainable politically. If nothing else, this U.S. election proved it. Even though China buys a lot from the U.S. – it’s our third largest export market and that’s mainly because there are so many Chinese consumers. On a per capita basis, the average NAFTA consumer buys nearly 38 times more American products than the average Chinese consumer.
But the problem wasn’t China’s entry into the WTO. It joined nearly two decades ago on terms that made sense for the 1990s. Since then, no country has embraced economic change more significantly than China. Massive investments have made China dramatically more competitive.
Yet our trade rules haven’t changed. In the old days, this wasn’t a big deal because the General Agreement on Tariffs and Trade held negotiating rounds to revise the rules every decade or so. That meant the terms of trade could be revised, so long as the direction was toward greater trade liberalization. Today, trade negotiators around the globe have concluded that it’s too hard to revise WTO rules. So, we are all stuck with outdated rules, and this particularly affects trade with countries that have changed the most. And that’s China. What’s surprising is that China knows it, but it has generally taken the attitude of ‘why change unless you have to’?
So, what do we need to do? Here’s my take in descending order:
- Improve American competitiveness. When we are competitive, trade is seen as an opportunity. When we are not, trade is seen as a threat. We know the drill: lower taxes, fewer regulations, improved infrastructure, and better education. Or to use the Caterpillar analogy, we need policies that embrace high-tech bulldozers rather than labor-intensive shovels or spoons.
- Start/complete a WTO Round. A WTO agreement would be by far the best, most comprehensive way to enhance global trade. Plus China and other major economies have proven track records of complying with WTO commitments. Yes, it would take a Herculean effort to achieve success. But instead of complaining about what can’t be done or focusing only on bilateral and regional workarounds, let’s confirm a modern-day Hercules as our new U.S. Trade Representative and get it done.
- Aggressively defend and expand the free trade agreements. Business, consumers and even many politicians know these agreements are working. Passing the Trans Pacific Partnership is a logical next step as it would bring Japan, Malaysia, Vietnam, New Zealand and Brunei into the free trade agreement club. Plus it would modernize NAFTA and better protect intellectual property. If we don’t do it, don’t be surprised if Japan does a version without us and that would turn what should be lemonade for the U.S. into lemons.
- Negotiate a bilateral agreement between the U.S. and China. Armed with Trade Promotion Authority (TPA) President Elect Trump could start negotiations in his first 100 days. Former AIG Chairman and CEO Hank Greenberg has been calling for this for years. It may be the only positive way to better balance trade. The biggest problem is it too would be exceedingly hard to negotiate. But when comes to negotiations the President-elect has a unique skill set. So, let’s go for it.
What’s the alternative? Start a trade war. If all else fails, why not? It has been about 86 years since the last global trade war. The U.S. started it and it was a doozy. Trade collapsed, unemployment skyrocketed, breadlines, dictators, and eventually World War II ensued. Who knows, the 1930s and 40s might have been boring had Hoover, Smoot and Hawley not been so keen to curry favor by protecting the U.S. from imports. The problem is that so few are around who remember it. A new trade war would remedy that.
Of course, I’m being facetious. However, without a trade war it’s hard to prove the consequences of protectionism. But as this election has demonstrated, it’s also hard to prove the benefits of trade even when we experience them in our daily lives. Which makes it so important that we keep trying.
By William C. Lane. Bill spent 40 years with Caterpillar and serves is the Chairman Emeritus of the U.S. Global Leadership Coalition. He is also a Board Member of the Washington International Trade Foundation.
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