At the U.S. Chamber of Commerce yesterday the President spoke about trade:



[W]e finalized a trade agreement with South Korea that will support at least 70,000 American jobs – a deal that has unprecedented support from business and labor; Democrats and Republicans. That’s the kind of deal I’ll be looking for as we pursue trade agreements with Panama and Columbia and work to bring Russia into the international trading system.

This sounds like a free trade agenda, or at least a pro-trade agenda, which would be good from a President whose party often leans heavily toward protectionism.  The problem is that the U.S. already has trade agreements with Panama and Colombia.  The President is in reality saying that he is undoing those deals.  He also appears to be saying that “unprecedented support from … labor [and] Democrats …” is a precondition to further progress on free trade.

When President Obama took office, he found three signed Free Trade Agreements (FTAs) on his desk awaiting Congressional approval:  the [South] Korea FTA, the Colombia FTA, and the Panama FTA.

Congress must approve any trade agreement negotiated by the President (more accurately, by his U.S. Trade Representative) with another country.  Under normal legislative procedures, the implementing legislation for a trade agreement would be subject to amendments in Congress.  Since any trade agreement will make compromises that sacrifice certain geographically or economically  limited interests for a broader national benefit, it would be vulnerable to being amended in Congress after it has been negotiated.  Foreign negotiators know this.  They don’t want to negotiate with the USTR and then have their deal reopened by Congress.

The clever solution to this collective action problem is called trade promotion authority (TPA), formerly known as fast track authority.  Congress passes and the President signs a law that gives the President and his USTR authority to negotiate and sign trade deals for a certain number of years.  In this legislation, the Congress limits itself to a simple yes-or-no vote on the whole treaty.  Through this law they surrender their later rights to amend the treaty when it comes before them.  In legislative parlance, we say that the treaty gets a straight up-or-down vote in both the House and Senate.

This binary choice strengthens a U.S. President and his trade negotiator.  While they still must convince the foreign power that they can get Congress to support the agreement being negotiated, they don’t have to worry that Congress will amend the agreement.  This gives U.S. negotiators the ability to get a better deal, because their counterparts have a high degree of confidence that the U.S. team can deliver on its commitments.

The Korea, Colombia, and Panama FTAs were all negotiated under now-expired trade promotion authority that Congress gave to President Bush.  President Bush did not send any of these FTAs to Congress because Speaker Pelosi made it clear she would kill all three trade agreements, either through procedural means or by rallying the votes to defeat them.

When President Obama arrived, he said the South Korea FTA negotiated during the Bush Administration was a bad deal for the United States.  Rather than submitting it to Congress for approval, he directed his USTR Ron Kirk to renegotiate certain parts of it with the Koreans.  Those negotiations resulted in a new Korea FTA which looks a lot like the old one.

The Korea FTA is a big deal for both the U.S. and Korea.  South Korea is our seventh-largest trading partner, and this agreement would rank second only to NAFTA in economic impact on the U.S.  Almost two-thirds of U.S. agricultural exports would immediately be duty-free, and tariffs and quotas on almost all other U.S. agricultural goods would phase out over the next decade.  The treatment of U.S. beef was a hotly contested issue, as the Koreans argued that a 2003 outbreak of mad cow disease in the U.S. justified continued import barriers.  The other contentious issue was trade in autos.

The President now must deal with Republican Speaker John Boehner.  Republicans are by no means universally in favor of free trade, but the party leans more heavily in that direction than Democrats.  Free trade in the U.S. is typically enacted by a center-right coalition.  About a third of Democrats ally with >80% of Republicans to deliver the votes needed.  It is therefore easier for the President to get an FTA through with Speaker Boehner than it might have been with Speaker Pelosi.

In his State of the Union address, the President said,

This [South Korea free trade] agreement has unprecedented support from business and labor, Democrats and Republicans – and I ask this Congress to pass it as soon as possible.

This sounds great.  Other than some complaining by Senate Finance Committee Chairman Baucus over beef (and he is a critical legislative player on trade), the South Korea FTA looks like it’s in good shape.  We finally have a legislative configuration that should allow the implementing legislation to be quickly enacted.

Isn’t it great that this agreement has “unprecedented support from business and labor, Democrats and Republicans?”  The problem is that this unprecedented support, and in particular from labor unions and their allies in Congress, was not costless.  In this case, it slowed things down by two years.

We see from yesterday’s remarks that the President wants this to be the model for future trade agreements.  This gives labor unions and their Congressional allies tremendous leverage to water down or even block FTAs they don’t like.

Some business leaders at the Chamber probably smiled yesterday when they heard the President say “trade agreement … South Korea … Panama and Colombia.”  But opponents of free trade listening carefully heard the President’s hidden message:  I am reopening the agreements with Panama and Colombia, and giving you the ability to block them and other future FTAs by denying your support. If labor and Democrats oppose a future free trade deal, it won’t be “the kind of deal I’ll be looking for.”

This will certainly slow things down, and could easily result in a halt to expanded trade as labor unions and other interest groups that oppose free trade leverage the President’s reluctance to go with a center-right strategy.

The President knows that all the economic juice for the U.S. is in the Korea FTA.  FTAs with Colombia and Panama would be a big deal for those economies, but not for the U.S.  They’re just too small for it to have a measurable economic effect outside of Florida and a few other states.

Congressional Republican leaders fear that they will enact the South Korea FTA and then the President will never get around to finalizing the other two.  The President will repeatedly tout the economic benefits of the Korea FTA.  At the same time he will say he is hard at work on the other two, but never quite able to bring them to conclusion, because they lack “unprecedented support … from labor and Democrats.”  U.S. labor unions that oppose the Colombia FTA argue that the Colombian government has not done enough to crack down on violence against union activists.  Their opposition to the Panama FTA hinges on Panama’s rules for allowing unions to be formed.

If the direct economic benefits to the U.S. of the Colombia and Panama FTAs are small, why should we worry about them?

  • Colombia and Panama are free and democratic allies in Central America.  We want to promote freedom, democracy, and friendship with the U.S. throughout Central America, especially relative to that thug Chavez in Venezuela.  We do that by helping their economies grow; by promoting capitalism, free trade, freedom, and democracy; and by further strengthening our ties with them.
  • Other small countries outside of Central America will learn about the U.S. from how we interact with these two.  We should show the world that we treat all our friends well, not just the ones who can help us economically.
  • Every Free Trade Agreement is a small movement in a positive economic direction.  Economists (and I) generally prefer a few good multilateral FTAs to many smaller bilateral agreements, but I’ll take forward movement wherever we can get it, especially when protectionism is slowly growing around the world.
  • It weakens U.S. trade negotiators in future negotiations when the President (or Congress) reopens past agreements.   It should always be the case when you’re negotiating with the U.S. that a deal is a deal.

If you want to put the President’s strategy in a positive light, you would say that he has found a strategy on Korea that seems to be working.  He renegotiated that FTA and in doing so mitigated significant opposition from the left, making it highly likely that implementing legislation will be quickly enacted.  You would argue that he is now trying to replicate that model with Colombia and Panama, and will submit those for approval when they are good and ready.  His strategy is slow, you would argue, but effective.  You would admit that this strategy damages negotiations with other countries by reopening previously signed deals, but would argue that this is a small price to pay for broader Congressional support for the final deals.

If you’re a skeptic, you are nervous that the President intends to let Colombia and Panama languish after enacting Korea.  This would damage two allies in Central America.  It would undermine our ability to strengthen our ties through free trade with other countries, and it would weaken our trade negotiators who would be less able to convince their counterparts that a signed deal would be final.  It would give opponents of free trade and open investment further opportunities to slow things down and erect other protectionist barriers.

You are further worried that the President is signaling to domestic interest groups that oppose free trade that he will not move forward without them.  This will at best slow progress, and at worst it will kill the Colombia and Panama FTAs, as well as any other free trade opportunities while President Obama is in office.

Senate Minority Leader McConnell and new Senate Finance Committee Ranking Republican Orrin Hatch expressed these concerns in a letter to the President:

We appreciate your support for prompt implementation of the U.S. – South Korea Free Trade Agreement.  … We are disappointed, however, not to see the same level of commitment from your administration for trade agreements with Colombia and Panama. … We urge your support in passing these through Congress without delay.

… Colombia and Panama are key allies of the United States in Latin America, a region of particular strategic importance to our country.  Further delay in implementing these agreements risks sending the signal to other countries in Latin America that the United States is not interested in closer economic engagement in the region and is unable to follow through on our commitments to our allies.

Finally, given what we believe is broad, bipartisan support in Congress for these agreements, we would like to make clear that we see no need for further negotiations with Colombia and Panama.  As currently written, they are solid agreements which benefit our nation and our workers.  We are confident that they would receive strong support in the Senate and the House of Representatives. We urge you to immediately engage with Congress to achieve Congressional approval to get these agreements signed into law as soon as possible.

This letter reinforces the same message from Speaker Boehner, “Now more than ever, America needs strong leadership to complete and implement the three pending trade deals in tandem with one another.”

We should neither abandon our friends in Central America nor risk leaving them behind.  The President should submit and Congress should quickly pass Free Trade Agreements with South Korea and Colombia and Panama.  He should not give labor unions or anyone else the ability to block progress on free trade.  This is an area where Congressional Republicans will happily work with the President, if only he will do the same.

(photo credit: Wikipedia)