Donald Trump was on to something when speaking about foreign trade in Vietnam last week. And he was right to focus on reciprocity and fairness in trade relationships. But it takes more than that, and more than clever negotiators making good deals – either multilateral or bilateral – to fix things.
In the US, foreign trade has been a bogeyman for years – though only to the extent one’s own ox is being gored. These days, few people are willing to pay thousands of dollars instead of a few hundred for a smartphone, nor are crowds demanding that Wal-Mart raise prices on its imported wares.
In theory, free trade creates more competition that leads to cheaper and better goods for the consumer – and thus creates more demand. But certain things need to go right – inside and outside the negotiating room.
First, the negotiators have to perform. They’re human and face immense pressure from politicians and administration officials throwing their weight around for industry seeking special favors. Rarely is sentimentality or even national security involved. Though dressed up as national interest, in less enlightened countries this is called bribery.
This leads to curious inconsistencies by free-trade adherents – as when American negotiators demand access for US beef and rice, while arguing that American cows produce such divine milk that imported milk is poison by comparison.
But assuming both sides give up something in exchange for something else, it’s usually possible to reach an agreement.
However, US negotiators tend to think the signing ceremony is the success. What happens afterward if the agreement is proven flawed, circumstances change, or the other side cheats? Well, that’s somebody else’s problem. It’s also why many people are skeptical of trade agreements.
Trade agreements have dispute settlement provisions, but these are unwieldy and expensive, and so slow the damage is done before things get fixed. Trade lawyers billing US$1,000 an hour welcome such cases, of course.
Giving free trade a bad name
The classic bad trade deal allowed China into the World Trade Organization (WTO) in 2001. This in effect rewrote the existing deal to change the rules – giving the People’s Republic of China a raft of exemptions and a staggering advantage over the US and other parties.
And even worse, Chinese counterfeiting, intellectual-property theft, and strong-arming foreign companies has never been seriously challenged.
China built up its own industries while getting free access to US and other major markets.
Estimates of US manufacturing-job losses from China’s premature entry to the WTO range from 1 million to 3.5 million. Regardless of the actual number, this jolt to the system – described as “traumatic” by a Massachusetts Institute of Technology labor economist – gave foreign trade a bad name that will last a while.
Don’t blame everything on the government
It’s easy to blame “the government” for screwing everything up. But that’s unfair. Besides the government, corporate executives deserve credit.
Stating the obvious, management has a duty to compete – even with foreigners.
Consider the United States’ experience since the 1960s – which is perhaps President Trump’s own frame of reference. Foreign competition was blamed for the decline of the US auto and steel industries. But how about incompetent management?
Instead of modernizing and improving operations and products, industry leaders demanded government protection from competition. In one classic example, the Japanese were accused of working too hard, so the US pressured the Japanese government to create new holidays.
And the mantra “maximizing shareholder value” as company management’s sole duty has caused as much damage as China joining WTO. Like lemmings, US industry chased cheap labor around the world – either to “maximize shareholder value” or because “everyone else is.”
“Maximizing shareholder value” was not chiseled in stone on Mount Sinai. How about a duty to employees? Then shareholder value will take care of itself.
Cool-sounding, hip management fads of “outsourcing” and “offshoring” have done their share of damage.
Going to the PRC to get fleeced – while handing over technology? Well, “everyone else is doing it” – and the Chinese will “work for nothing.”
‘Maximizing shareholder value’ was not chiseled in stone on Mount Sinai. How about a duty to employees? Then shareholder value will take care of itself
And perhaps there’s a duty to local communities and society writ large?
In exchange for a point or two of return on equity, you keep people working in decent jobs – and even able to buy some of the stuff you and others make. Enough companies do it and it has a cumulative effect.
Instead, boneheaded management (not foreign competition) helped gut communities and created the US “Rust Belt” – where opioids are seen as a plausible career option to a Wal-Mart greeter’s red vest and $10 an hour.
Foreign trade isn’t to blame.
It’s not only management
Labor also had a role to play.
Anyone old enough (as Trump is) should remember organized labor’s contribution. When things were going good and the US was on top, labor got lazy and greedy. As my father, a young man during the Depression, used to say – “nice work if you can get it.”
And labor-union officials sometimes resembled the Mafia – and not always figuratively.
One can’t blame this on foreigners.
So Trump is, once again, basically correct. Insisting on reciprocity and even redoing existing trade deals such as the North American Free Trade Agreement (NAFTA) make sense. And playing rough if necessary is also called for.
But going after the Ecuadors of the world does little. China causes the most distortion. Requiring reciprocal treatment from the PRC will be a good start.
And American executives might prioritize something other than shareholder value – say, America and American workers.
As for American workers … they do fine with the right leadership and opportunities.
But send our labor-union officials to China and the PRC might never recover.