Opening Statement of Congressman Brad Sherman
Chairman, Subcommittee on Terrorism, Nonproliferation and Trade
Trade, Foreign Policy and the American Worker
March 28, 2007
The End of Balanced Trade
For the first three decades after the Second World War, the United States dominated multiple export markets. Several factors provided us with a robust competitive advantage, including: a strong industrial base and dramatic advances in technology and manufacturing techniques.[1]
During the Nixon administration, the U.S. dramatically changed its trade policy with the implementation of Fast Track. Before this, we had a rising standard of living and balanced trade.[2] It is under the trade promotion authority given by Fast Track that the United States has entered into the largest trade imbalance in our history, and last year the federal trade deficit for goods and services hit $764 billion.
Deficits of the Late 70s and Early 80s
The comparatively small trade deficits of the late 1970s grew dramatically in the early 80s, reaching a then-mammoth $145 billion.
Paul Craig Roberts, former Assistant Secretary of the Treasury for Economic Policy during the Reagan administration, credited this deficit mainly to the energy crisis and the need to import larger quantities of foreign oil. [3]
Interestingly, the Reagan administration also penalized the anti-competitive tariff rates of our trade competitors, most notably the Japanese, by raising barriers to entry. The Japanese response was clear: direct investment in the U.S. manufacturing sector in the hopes of gaining access to the American market.[4]
NAFTA
With the end of the Cold War, the world changed, and our trade policy went in a dramatic new direction.
The 1998 Fast Track re-authorization gave the administration of President George Herbert Walker Bush the authority to negotiate NAFTA.
Supporters of the NAFTA model castigated their critics as being anti-trade and overly protectionist, while defending the plan in part on a strong belief that as the United States opened its markets other countries would follow our lead.
More than a decade later, despite the best of intentions by both sides of the issue, we no longer need wonder about the impact of the NAFTA trade model. The numbers are in.
Paralleling the impact of Fast Track, the U.S. has posted a trade deficit with Canada and Mexico every year since the enactment of NAFTA. In 2006, our trade deficit with other NAFTA signatories reached $137 billion.[5]
Rising deficits are not the entire story. During what I call the "NAFTA Era" the United States lost approximately 3 million manufacturing jobs. By the end of 2006, the United States had only 14 million manufacturing jobs left.[6].
China
In the footsteps of NAFTA came the permanent normal trade relations with Communist China.
The results go far beyond a $230 billion trade deficit, the offshoring of jobs, manufacturing facilities, and entire industries.[7]
Today, there is a clear arrangement between the United States and China. China helps finance our trade deficit by buying up our Treasury bonds. And, in 2006, China's dollar reserves exceeded $1 trillion.[8]
China further pegs its currency to the dollar to artificially lower the value of the Yuan, giving them an unfair advantage in exporting even more goods to the United States, while Americans continue to spend themselves into greater foreign held debt, as they buy up products produced with cheap overseas labor.
Since 1999, we have borrowed more than $3 trillion to pay for these imported goods.[9]
In the words of the Nobel Prize winning economist, Joseph Stiglitz, "These imbalances simply can't go on forever." [10]
Exports
The U.S. trade deficit is now 6 times what it was just 20 years ago. In 2006, our imports were equal to the entire GDP of Russia and India combined.[11]
The problem becomes even more apparent when we focus on U.S. exports, particularly when compared to other developed nations.
As a percentage of GDP, Germany, Canada, France, and the UK are all exporting at a rate that crushes the United States.
Germany's exports are five times those of the U.S. as a percentage of its economy.
Canada, France, and the UK all export triple what we do, as a percentage of GDP.[12]
When we compare the United States to the European Union, the same trend emerges.
The European Union is finding new markets for its products, while, on the whole the United States is not. [13]
In the words of one Washington Times editorial - not the strictest critic of our current administration mind you - the United States, "has the export profile of a 19th century Third World economy."[14]
"No other country has the depth and breadth of our capital markets, political stability, rule of law protecting contracts and property rights, strong currency, and accumulation of scientific and technological knowledge that makes the U.S. the high tech leader.[15]"
However, our chief exports are not value-added high tech goods. They are scrap metal, waste paper, cigarettes, rice, cotton, coal, meat, wheat, gold, soybeans, and corn.[16]
The critical assumption of our current trade policy is that significant new markets are being opened up to U.S. goods and services. This is not the case.
Europe, Japan, and China all maintain stronger protectionist policies than the United States.[17]
Economic theory does not change this stark reality.
Other Free Trade Agreements
Rather than aggressively pursuing greater market access with our principal trading partners, the Bush administration has negotiated a series of small Free Trade Agreements with relatively minor economies.
We have entered into agreements with Jordan, Singapore, Chile, Australia, Morocco, Bahrain, Guatemala, El Salvador, and Honduras.[18]
None of these countries are among our top 10 export markets. [19]
In fact, the combined GDP of the four CAFTA countries that have already enacted the agreement is less than that of the town of Greenwich, Connecticut.
September 11th and the War on Terrorism
Following the terrorist attacks on September 11th, we were all told that the world had changed.
Then U.S. Trade Representative Zoellick publicly backed the use of American trade policy as a vital tool in War on Terrorism.[20]
The change that many of us hoped to see never materialized.
Rather than following the example of the Treasury Department, which did develop new tools that have made a substantial difference in efforts to economically cripple terrorist organizations, the USTR used the War on Terrorism to justify business as usual.
The world may have changed after September 11th, but the USTR did not change with it.
Instead, the Nixon Era trade model was treated as a sacred cow.
We are so afraid of disrupting this model and our precious trading relationships that our State Department has failed to sanction a single firm for violating the Iran Sanctions Act (formerly "ILSA"), despite billions of dollars in Western investment flowing into Iran. For ten years we have sacrificed our vital national interest, stopping Iran's drive for nuclear weapons and its support for terrorism, to the alter of so-called free trade.
Instead, when I open the papers, this is what I find:
This is what Tom Donohue, President of the Chamber of Commerce, had to say about Chairman Lantos' leadership on strengthening sanctions against state sponsors of terror:
"The sanctions effort is misguided. We should let natural market forces work while sending strong signals about the issue of nuclear weapons."[21]
It appears that we are living under the delusion that market forces alone will some how stop radical governments or terrorist groups from carrying out murder on an unthinkable scale. This is a delusion we can no longer ignore.
Despite honorable intentions, the current fast track model has failed on several fronts. It has failed to raise the standard of living for America's middle class; it has failed to gain the necessary market access for our exports; and it has failed to adapt itself to the new security priorities of the 21st Century.
Congress can no longer afford to abdicate its Constitutional obligation to conduct meaningful oversight and direction of our foreign trade policy, and it is my hope that members of this committee and the other members of Congress take these realities seriously and demand a radical new direction in trade policy.
[1] U.S. State Department, An Outline of the U.S. Economy Chapter 10, "Foreign Trade and Global Economic Policies," February 2001.
[2] Lori Wallach, Statement to House Ways and Means Committee Hearing on Trade and Globalization, January 30, 2007.
[3] Paul Craig Roberts, Washington Times, "Trading Away Our Living Standards," January 14, 2002.
[4] Lou Dobbs, Exporting America, p. 68-69, 2004.
[5] Department of Commerce, Office of Trade and Industry (OTII), Manufacturing and Services, International Trade Administration, U.S., accessed March 2007.
[6] L. Josh Bivens, Trade Deficits and Manufacturing Job Loss: Correlation and Causality, Economic Policy Briefing Paper 171, March 14, 2006.
[7] U.S. Census Bureau, www.census.gov, accessed March 2007.
[8] Joseph Stiglitz, New York Times. "How to Fix the Global Economy," October 3, 2006.
[9] Paul Krugman, New York Times, "Trade Deficit" April 24, 2006.
[10] Joseph Stiglitz, New York Times. "How to Fix the Global Economy," October 3, 2006.
[11] Dick K. Nanto, Congressional Research Service Memorandum, "Background for Committee Hearing on Trade, Foreign Policy and the American Worker," March 2007.
[12] CIA - The World Fact Book; Tradestats Express-National Trade Data,IMF WTO, accessed March 2007.
[13] CIA - The World Fact Book; Tradestats Express-National Trade Data,IMF WTO, accessed March 2007.
[14] Paul Craig Roberts, Washington Times, "Trading away our living standards," February 14, 2004.
[15] Paul Craig Roberts, Washington Times, "Trading away our living standards," February 14, 2004.
[16] Paul Craig Roberts, Washington Times, "Trading away our living standards," February 14, 2004.
[17] Zbignew Brezinski, New York Times, "The Wong Way to Sell Democracy to the Arab World," March 2004.
[18] Congressional Research Service, Memorandum: "Background for Committee Hearing on Trade, Foreign Policy and the American Worker," March 2007.
[19] Dick K. Nanto, Congressional Research Service Report for Congress, "U.S. International Trade: Trends and Forecasts," February 2007.
[20] Robert Zoellick, Washington Post, "Countering Terror with Trade," September 20, 2001.
[21] Ian Swanson, The Hill, "Congress tries to tighten the screws on Tehran," March 23, 2007
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