After pulling out of what was poised to be a landmark trade deal with 11 countries across the Pacific rim, the Trump Administration recently offered what could be another sobering sign to anyone who still believes in the benefits of free trade. Last Friday, President Trump instructed his Secretary of Commerce to determine why the U.S. has trade deficits with other countries. Under Trump’s new executive order, the inquiry is to consist of looking for the causes of deficits, such as foreign trade barriers, bad trade agreements, inadequate U.S. enforcement, U.S. dollar/foreign currency misalignments, WTO rules that restrict U.S. policy options, foreign excess capacity, and other variables that may distort trade and investments.
There is clearly a feeling behind this initiative that unless U.S. trade with any other country is in balance, or in surplus, it is likely that the other country has some unfair trade practices, and that these require removal. If that is all that is involved, it is hardly worth the effort. The U.S. government is well aware of foreign trade barriers. On the same day that the President signed this executive order, his Office of the U.S. Trade Representative published a 492 page compendium of every known trade barrier of every foreign country with which the U.S. trades.
The look into bilateral balances could be made more useful if the focus were broader. Otherwise, this can easily turn into an exercise of blame without learning anything new.
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Looking at how other countries organize their economies can be instructive, as one study issued by the National Academies has already highlighted. The Trump Administration’s effort to take a closer at trade deficits can be an opportunity to do more than indict foreigners (even if this is in many instances deserved). It can inform U.S.-policy making by examining what other countries might be doing right.
Several countries with which the United States has major trade deficits have policies and measures that differ markedly from our own and can help explain why American goods appear to be less competitive as compared with those countries’ products than they should be. Take Germany, for example: The U.S. has an annual trade deficit of $65 billion with Germany. There are a number of German policies that may help explain why Germany exports a lot of high-end automobiles, car parts, pharmaceuticals and machinery. Some of what Germany does holds lessons for the United States:
German companies invest heavily in workforce training through apprenticeship programs. A number of U.S. companies do so as well, but this is not as deeply ingrained or broadly practiced in America as it is in Germany. Germany is also open to workers from the other 27 members of the European Union and encourages high-skilled immigration from other countries.
By contrast, the U.S. has been discussing immigration reform for many years without settling on a program that assures that immigration meets America’s economic needs as well as having humanitarian objectives. Germany seeks to assure that foreign graduates of German universities can stay and contribute to the German economy. A major complaint in the U.S. is that the country does not allow foreign graduates to work in the U.S. once they have completed their education.
In 2013, the last year for which data from the World Bank are available, Germany spent 2.83% of its GDP on research, one of the highest percentages of any country, and that has been rising over time. Germany emphasizes through its Fraunhofer Institutes collaborative programs of government, universities and industry to promote research that has commercial benefits.
While U.S. spending on research as a percentage of the nation’s economy is not less than Germany’s, the new Trump budget would reduce U.S. government spending on research and development sharply. Under the Trump administration’s latest proposal, the budget for the National Institutes of Health would be cut by about 20%, and the Advanced Energy Research Program at the Department of Energy and the Hollings Manufacturing Extension Partnership Program at the Department of Commerce would both be eliminated entirely. And those are just three examples.
So before Congress OK’s spending cuts on R&D, it would be wise to take a look at the implications of the policy would mean for the impact on America’s trade.
The Trump Administration’s look at trade ought to be broader and deeper. For example, aging American infrastructure is in desperate need of upgrading. China plans to complete construction of 30 new airports and add another 44 to bring the total number of airports in the country to around 260 by 2020. The U.S. is thinking of adding five, and is working to refurbish aging facilities. China has 12,500 miles of high speed rail lines. The U.S. can argue that it has a few hundred miles of high speed rail, but even these do not have trains operating at full capability.
Training, spending on R&D, and infrastructure, will not by themselves determine trade flows, but they are important factors and should not be ignored. That does not mean that, where there is a huge trade imbalance, as is the case with China, the Administration should or would ignore whether there are trade and investment distorting measures as well as market structures that cause not only U.S. exports to be limited, but excess capacity being created that causes dumping, displacing U.S. production in the United States, in China and in other countries. This requires a close look at what is being traded in both directions and why.
The time given for the Secretary of Commerce and the USTR to produce the report for the President on bilateral trade deficits is all too short and the focus is much too narrow.
The report should be the beginning of an inquiry about making the United States a great place from which businesses can serve global markets and employ a high-paid, high-skilled workforce. That means looking at all the causes that shape trade flows — both what other countries are doing that cannot be accepted, as well as shortcomings in U.S. domestic policies.
Alan Wolff is a senior counsel with Dentons LLP and is chairman of the National Foreign Trade Council. He has served as a senior trade negotiator in Republican and Democratic administrations.