THE TRADE AGENDA

By Clay Lowery & John Herrmann

As demonstrated by Congress’ recent consideration of legislation to grant the President Trade Promotion Authority (TPA), the Executive Branch’s negotiation of free trade agreements continues to be politically contentious. In the end, however, an overwhelming majority of both House and Senate Republicans supported the legislation to provide TPA to both President Obama and his successor.

Congressional approval of the TPA legislation provides an opportunity for the next Administration in January 2017, particularly if it is a Republican one with support in Congress, to pursue a robust agenda of expanding trade and investment opportunities for the United States that pursues three major objectives. The first of these objectives is to promote economic growth and American jobs (about 20 percent of American jobs are supported by trade, and trade-related jobs pay on average 18 percent more than non-trade jobs). The second is to level the playing field for American businesses, investors, workers, and farmers, as the United States is already one of the most open markets in the world. The third is to use trade and investment agreements as tangible economic tools to advance foreign policy objectives by deepening alliances, enabling the U.S. government to write the rules of the global economy and act as a counterbalance to other countries’ economic diplomacy.  

These three objectives can be achieved by working with willing partners to create enforceable rules to improve market access, protect investors, limit market-distorting government subsidies, create more open government procurement practices, improve food and product safety, and establish better standards for the treatment of workers, the environment, and intellectual property. 

Recently enacted TPA legislation provides a six-year grant of authority. The next President, therefore, will not have to spend significant political capital upfront, but will instead be able to pursue an aggressive trade and investment liberalizing agenda starting on Inauguration Day. Some of that agenda is already in train; others parts will need to be devised and launched. But in addition to discrete initiatives, it is worth noting that the day-to-day work of ensuring the proper implementation of such agreements and the enforcement of existing rules must not be ignored if the next Administration has any chance of maintaining (and, hopefully, increasing) support for a robust cross-border trade and investment agenda.

As noted, several negotiations are currently underway, and these provide a foundation for an incoming Administration to build upon. Perhaps the most significant of these is the Trans-Pacific Partnership (TPP). First launched by President George W. Bush in 2008, the TPP negotiations seek to conclude a free trade agreement involving 11 countries in Asia and Latin America that already serve as a destination for over 40 percent of total U.S. exports and 85 percent of U.S. agricultural exports. [54] As described in chapter 5.3, this agreement also places the United States much closer to the center of Asian economic issues and is a counter to China’s growing economic presence. The Obama Administration hopes to conclude the TPP negotiations within the next few months, which seems probable, and to secure Congressional approval of implementing legislation by early 2016. It is possible, however, that the TPP implementing legislation will not be approved by Congress prior to the end of President Obama's term of office.[55] In such a circumstance (and assuming the next Administration agrees with the negotiated TPP text), a top priority should be to work with Congress to implement the TPP.

Also going forward now are negotiations with the European Union (EU) on a Trans-Atlantic Trade and Investment Partnership (TTIP). EU member states represent the second largest export market for the United States, one of the largest sources of direct investment into the United States, and many of our most critical foreign policy allies in the world—for example, the United Kingdom, Germany, France, and Poland. Tariffs on goods exported between the United States and European Union are already very low, with notable exceptions in agricultural products and some industrial sectors. This means that the most significant benefits from this trade agreement will be achieved through greater regulatory cooperation. Many economists believe the quantitative impact of such an agreement would be substantial, but negotiating such an agreement between two parties with highly sophisticated regulatory regimes will be extremely challenging. Despite a plethora of public statements pledging a desire to complete the TTIP negotiations during 2016, negotiations will almost certainly carry over to the next Administration. This will provide it with an opportunity to have a substantive impact on the negotiations, including in areas such as investor protections, financial services, the internet, energy, and agriculture. [56]

Also ongoing are several negotiations underpinned by the rules and structure of the multilateral system embodied in the World Trade Organization (WTO). The most aspirational of these agreements is reinvigorating and concluding the Doha Development Round, which began in 2001 and has essentially been dormant since 2008. While there appears to be little hope in the short term for an ambitious conclusion of this negotiation, the U.S. government should remain actively engaged at the WTO given its importance throughout the entire global trading system.

Other plurilateral negotiations involving a subset of WTO member countries that are like-minded in advancing a particular trade liberalization agenda appear to have greater prospects. One is the Trade in Services Agreement (TISA). The TISA negotiations, launched in 2013, seek to eliminate barriers to trade in services. They involve 51 economies accounting for approximately 70 percent of global trade in services. The negotiations provide an important opportunity to address changes in technology and business practices that have occurred since the General Agreement on Trade in Services (GATS) was negotiated 20 years ago and in areas that play to America’s strengths: telecommunications, distribution and delivery services, and cross-border data flows that facilitate the supply of services over the internet.

Roughly 80 percent of U.S. private-sector employment is in the services sector, and more than 25 percent of U.S. employment is in business and professional services, which are the services that are considered tradable and now represent twice the percentage of manufacturing employment. The national average barrier to services trade—the equivalent of tariffs on goods—is much higher than merchandise trade as measured by the OECD and others. Breaking down these barriers and expanding opportunities for the our service sector is clearly in U.S. economic interest.   

The U.S. government should remain actively engaged at the WTO given its importance throughout the entire global trading system.

A second plurilateral negotiation concerns a potential Environmental Goods Agreement (EGA). In 2007, as part of the Doha Round negotiations, the United States and the European Union proposed to reduce and eliminate barriers to trade in environmental goods and services, including technologies such as clean coal, wind energy, and solar cells.  Total world trade in environmental goods is estimated at nearly $1 trillion annually. In 2014, 17 WTO members began a negotiation to carry forward the proposal from 2007.  These 17 countries, accounting for over 85 percent of global trade in environmental goods, are seeking to eliminate tariffs on products in such areas as renewable and clean energy generation, air pollution control, and wastewater treatment.  The next Administration can help shape this negotiation in a substantial manner starting in January 2017.

Yet another such ongoing negotiation concerns Bilateral Investment Treaties (BITs). In addition to bilateral trade agreements that include chapters to protect investors, another key tool to promote U.S. investment around the world and to attract foreign direct investment into the United States is a BIT. The most developed BIT negotiation is with China, the third-largest market in the world for U.S. exports. According to the Rhodium Group, Chinese direct investment supported 80,000 jobs in the United States in 2014.

Concluding a BIT with China would provide several benefits to U.S. investors, including: non-discriminatory treatment compared to domestic investors (national treatment) and to other foreign investors (most favored nation treatment); market access to sectors that are currently closed; the right to fair compensation in the event of a regulatory taking or expropriation; the ability to transfer capital at a market exchange rate; and international arbitration to settle disputes. A BIT negotiation with China is likely to be difficult and time consuming, which suggests that the next Administration could be handling the key concluding points with the second largest economy in the world in its first few months in office.

In addition to leveraging TPA to take advantage of the ongoing negotiations just enumerated and driving them, where needed, in a more commercially advantageous way, the next Administration should explore new opportunities to strengthen the U.S. economy, enhance U.S. commercial interests, and advance U.S. foreign policy.  

As to leveraging TPA, most of the existing negotiations mentioned above will require congressional approval of implementing legislation, which means that when the negotiations are concluded the new Administration should work with Congress through the mechanisms outlined by the recently passed TPA.

In addition, the next Administration should bring other key countries into existing negotiations that it considers in the U.S. national interest. For example, Korea has expressed interest in joining TPP after the current negotiation is completed. Korea, is the 13th largest economy in the world and the tenth largest market for U.S. exports, is a country with which the United States already has a free trade agreement. Bringing Korea into the TPP should be considered immediately. The Philippines and Taiwan have strategic importance to the United States and could also be included.

The next Administration could also work with the European Union to expand the scope of TTIP so that it includes Turkey, and, potentially, Canada and Mexico as well. Turkey is the 18th largest economy in the world, is in a Customs Union with the EU, has been one of the fastest-growing major economies in the world for the past decade, and has historically been one of the most important U.S. allies in the Near East. Nevertheless, while the United States and Turkey have a BIT from 1990, trade and investment between the two countries is disproportionately low. An important side benefit is that such a project could provide an impetus for working together on a positive agenda, thus helping overcome the deterioration in U.S.-Turkish relations over the past several years.

As far as entirely new trade initiatives are concerned, a worthy aspirational policy would be to try to improve U.S. standing in Latin America, while also expanding opportunities there for American businesses. Beginning in 2011, Chile, Colombia, Mexico, and Peru formed a Pacific Alliance to integrate their economies and facilitate trade and customs. The United States has FTAs with all of these countries and could explore opportunities to combine these agreements into a more comprehensive trade and investment agreement.

The next Administration could also work with the European Union to expand the scope of TTIP so that it includes Turkey and, potentially, Canada and Mexico.

Another area that should not be ignored is the pathetic record of the United States in considering bilateral trade and investment agreements with African countries. The United States does not have a FTA with any sub-Saharan African country and has concluded BITs that cover less than 7 percent of the region’s GDP.[57] Compare this to China, which has investment treaties covering almost 80 percent of the region’s GDP. This places U.S. investors at a competitive disadvantage and partially cedes the field to geopolitical competitors. The next Administration should explore ways to improve on this record, such as, for instance, the pursuit of BITs with any African country that is receiving assistance from the Millennium Challenge Corporation, a development finance program partially designed to attract trade and investment flows.[58]

We might also consider new bilateral trade agreements. There are six substantial countries in terms of geographic size, population, economy, and geopolitical importance with which the United States has little, if any, relationship in formal trade or investment protection: Brazil, China, India, Indonesia, Russia, and Turkey. Pursuing a free trade agreement, which typically requires TPA, with any of these countries would be very difficult for many reasons, including negotiating dynamics, economic diversity, and political considerations both here and abroad. Neither is it necessarily the case that there is no harm in trying; indeed, harm can be done by trying and failing. But there can be some value in trying as well, so the next Administration should conduct an appropriate interagency review of the prospects.

Specifically, the next Administration should work in a focused manner to develop plans for establishing more formal trade and investment mechanisms with a number of these economies, and identify which of these countries are willing to begin genuine negotiations on what will most likely be “confidence building measures” to establish the foundation for more robust trade and/or investment agreements.  

The United States only can negotiate trade and investment agreements with a willing partner, meaning that Russia is not a candidate. As noted above, the BIT negotiation process with China has made progress in the past few years. While any BIT concluded with China would not be covered under TPA (rather, the agreement must be ratified by the Senate), concluding and securing ratification of a BIT with China—as well as any additional negotiations—will be a heavy political burden for the next Administration.

India, the world’s ninth-largest economy, is a democracy and has lately become the fastest growing major economy in the world, surpassing China. It is also a highly protectionist country that has played a negative role in global trade negotiations, whether the Doha Round or the Trade Facilitation Agreement. India’s new government, led by Prime Minister Narendra Modi, is considered reformist and more business- and investor-friendly than previous Indian governments. So the United States has begun to explore negotiating a BIT with India, although it has made little progress. While such an undertaking would be complex, the importance of deepening our alliance with India may make it worthwhile.   

Another problematic partner is Brazil. Brazil is the seventh-largest economy in the world and, until the past few years, had been growing at a moderate pace for about a decade.  Brazil is also highly protectionist, has a byzantine and regressive taxation system that harms its own poorer citizens and discourages foreign investment, and has been a very difficult negotiating partner in global and regional trade arrangements. President Dilma Rouseff’s government has been statist in its ideology but has become deeply unpopular as the economy has stalled and productivity has flattened. This has led the government to pursue much more orthodox economic policies, including a change in sentiment toward the United States, accompanied by rhetoric centered upon welcoming foreign investment.

A new Administration could try to seize on this potential opportunity to work with the new Brazilian government on a bilateral tax treaty, a BIT, or even working with other Latin American countries to build on the existing Pacific Alliance.

Indonesia is the 16th largest economy in the world and has been one of the world’s fastest growing economies for the past decade. While less developed than the other economies discussed here, its large size and future potential make it an opportunity worth exploring. Indonesia is also a highly protectionist country with a strong tendency toward industrial policy, and it is somewhat arbitrary when it comes to both rule making and enforcement. Building a deeper relationship with Indonesia, including working with Indonesians on TPP accession, could be an important goal for a new Administration.

The Bush Administration pursued a robust trade and investment negotiating agenda that arguably focused more on foreign policy priorities and less on the economically most important countries (Korea is an exception). During its second term, the Obama Administration has also pursued a robust agenda that has arguably been focused on the most significant economic actors, but not as much on the most commercially important aspects of trade and investment.   

The best path for the next Administration is to devise and implement in a balanced way a trade negotiations agenda that serves both economic and political objectives. Existing negotiations and new ones, taken together, have the potential to generate substantial positive economic returns in the United States and advance U.S. national security interests at the same time. 

(45) The eleven are Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

(46) The George W. Bush Administration concluded free trade agreements with Colombia, Korea, and Panama, but was unable to secure Congressional approval of legislation to implement those agreements prior to the conclusion of the President’s term of office. The Obama Administration, after making modest changes to the agreements, worked with Congress to pass implementing legislation in 2011. Similarly, negotiations on NAFTA were concluded at the end of President George H.W. Bush’s Administration while congressional approval was secured during President Clinton’s Administration.

(56) See Chapter 7.4 for a deeper discussion about energy exports.

(57) Ben Leo, “Why can’t America do investment promotion in Africa like China (or Canada)?”, Center for Global Development, March 27, 2014.

(58) See Chapter 2.6 for a further discussion about Africa and 7.7 for a further discussion about Development Assistance.


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