President Obama?s failure to complete the Korea Free Trade Agreement (FTA) is good news. The pundits have opined that the president?s decision to walk away from the flawed agreement is a setback for him. They are wrong. Traditionally, American presidents have signed trade deals for systemic reasons?to advance the global trading system, even though ?domestic industry may suffer serious injury,? in the words of a diplomat during the 1950s. Now, the president is concentrating on a single figure: 9.6 percent unemployment. The IMF has recently reported that 25 percent of the new, global unemployment since the financial crisis has been in the United States. As he left for his Asian trip, Obama repeated the truth that the United States cannot continue to be the global consumer of first and last resort. He again promised to double American exports in the next five years. He has rightly concluded that the Korean FTA will not help.
There are two things wrong with the deal. The first is the auto section. Past trade treaties have ignored Korean auto barriers because of Cold War priorities. Today, the Cold War is over and the U.S. economy cannot afford such gifts. Korea has the most closed auto market in the world. Only 5 percent of the nation?s cars are foreign; the average for most auto-producing countries is 40 percent. Korea ships fifty-two cars to the United States for every U.S. car going to Korea. Generally these and other dirty secrets are not broadcast in the United States, because American companies deal with these barriers by producing, rather than selling, abroad. Korea has not allowed this with one exception. GM took over a bankrupt Korean company, Daewoo, in 2002 and produces cars under the local brand, which explains why GM has not said a word about the pact. But Ford, the only U.S. auto company that did not require bailout money, has no plant there and would love to sell some cars. Last week it placed ads in newspapers that revealed the many ways the Korean government uses its taxing and regulatory power, as well as tariffs, to harass importers and Korean buyers of imports. Ford and the UAW question the Korean government?s commitment to end all of these various nontariff barriers. On the evidence of history, they are right. It seems that these issues had the most influence on the president?s decision.
But there are other problems with the deal. The president said that the FTA ?could be worth tens of billions of dollars in increased exports and thousands of jobs for American workers.? Trade Representative Ron Kirk claimed that the deal would yield 70,000 additional jobs, omitting the increases in Korean imports to the United States. Since NAFTA, every president has promised that these deals would increase jobs when in each case the U.S. trade deficit has risen after the signing. It is not that presidents are liars, although they often fudge the truth by making jobs estimates using exports but not imports. Economists calculate the effects of dropping tariffs, but ignore the fact that these agreements are mainly about investment, not trade. They secure foreign investment for U.S. multinational corporations by setting up tribunals that bypass national judicial systems, protecting corporations from regulatory legislation and other dangers to profits. This legal protection encourages offshoring and explains why U.S. exports to the seventeen countries with which it has NAFTA-style deals have grown at half the pace of exports to nations where the United States does not have agreements. Even when trade declined because of the economic crisis, the United States had a $54 billion trade deficit in goods with the seventeen FTA partners in 2009, according to Public Citizen.
The politics of offshoring may be changing. For many years, American economists and pundits have claimed that manufacturing jobs are disposable, as the United States moved up to high technology in the 1980s, finance in the 1990s, and now knowledge in the twenty-first century. Labor has been alone, arguing that the experts were wrong. But now, 53 percent of Americans believe that FTAs have hurt the United States, up from 30 percent in 1999, with the shift mostly attributable to a change in thinking by upper-income Americans. Some businessmen are joining the outsourcing critics. Andrew Grove, the former CEO of Intel, wrote at Bloomberg that instead of promoting offshoring through trade pacts and tax policy, the government should tax the products of offshore labor and use the revenue to help other companies scale-up production at home. Grove argued that an economy that innovates but consistently exports its jobs to lower-cost places overseas will eventually lose not only its capacity for mass production but its capacity for innovation. Outsourcing jobs ?[breaks] the chain of experience that is so important in technological evolution.?
All countries impose limits on corporate strategies in the national interest. The United States needs to do the same. That will require a new industrial policy that combines tax, spending, and trade measures to promote the manufacturing the country needs to remain at the forefront of technology, reduce inequality, provide meaningful work for its citizens, and end the trade deficit. The current political chances of such a policy, unfortunately, are not so good. The Democratic losses in the Midwest leave the party rooted on the two coasts, areas more involved in trade than production. The Tea Party, like Pat Buchanan in the 1990s, is in the main against ?free trade? but would oppose the necessary complement: industrial policy. The president, as always, is critical, but has been on all sides of the question. Nevertheless, he wants to be reelected in 2012. It is hard to see how that is possible without an industrial policy that could move the unemployment numbers.