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January 1, 2011

The Season of Our Discontent

Former U.S. Trade Representative Susan Schwab says our trade policy must be more coherent if we are to remain relevant to future global commerce.

Susan C. Schwab's childhood was much like an advanced degree in international relations. As a self-described “foreign service brat,” or child of continually moving State Department employees, Schwab lived, among other places, in such outposts as Togo, Nigeria, Sierra Leone, Tunisia and Thailand.

“It gives you a sense of perspective on the world,” she says. “It was a wonderful way to grow up. I never felt as proud to be an American as when I was a child representing my country abroad. It's also really hard to demonize human beings in countries where you've interacted with individuals. You realize that they care about many of the same things that you do.”

But no Pollyanna, Schwab. As United States trade representative, a cabinet post, for President George W. Bush from June 2006 until January 2009, and before that in a long career of public service as a trade promoter and negotiator, and as a senior senatorial staff member, Schwab developed a very pragmatic view of “free trade.” To her, free trade is not a lockstep position, come what may. It's all about the lively flow of interests in which nations swap beneficial positions of advantage. Very little of it is free.

“I'm a practical trade policymaker,” she says. “I'm into leverage. We should use access to our markets to gain enhanced access to overseas markets, and we should improve those aspects of our economy that we need to improve to remain competitive. I'm a free trade activist, as distinct from a roll-over-and-let-it-happen kind of free trader. I want maximum outcomes.”

Unfortunately, maximum outcomes have been few and far between lately. Schwab suggests that the nation risks losing its way in global trade. It is squandering opportunities for increased exports because domestic political distortions have slowed, and perhaps paralyzed, progress. That wouldn't matter so much in the old, U.S.-centric global economic environment. But now, while the U.S. dithers, developing giants such as China, Brazil and the European Union are establishing alliances that may preempt the ability of U.S. manufacturers to compete in the growth areas of the world.

Schwab was born in Washington, D.C., but was taken abroad by her parents six weeks later. In her rich career, which began in 1977 as a junior negotiator on behalf of U.S. citrus and beef exports to Japan, she has led the main U.S. export promotion agency (the U.S. & Foreign Commercial Service), served as a international trade legislative assistant to Missouri Senator John Danforth, opened new markets for Motorola, Inc., as its business development director, served as dean of the University of Maryland School of Public Policy, served as CEO of the University System of Maryland Foundation, and led the nation's trade policy as the United States trade representative for George W. Bush from 2006 to 2009.

As USTR, Schwab demonstrated what a balanced view of trade looks like. On the one hand, she negotiated and/or implemented free trade agreements with South Korea, Colombia, Peru, Oman, Panama, and the Latin American nations that are part of the Central American Free Trade Agreement. She also served as the lead U.S. negotiator for the WTO Doha Round of multilateral trade talks. At the same time, Schwab filed numerous cases against unfair or illegal trade practices with the WTO, including landmark disputes with China concerning restrictions on auto parts, grants and loans to Chinese companies, tax breaks offered to Chinese exporters, intellectual property rights, distribution in China of U.S. movies, books and other publications, and access to Chinese markets for financial information services. She filed other cases against the European Union on information technology products, barriers to U.S. exports and agricultural biotechnology. She also settled multiple cases, including a long-running dispute with Canada over softwood lumber.

“We have a continuum of tools to use to try to open a foreign market, to eliminate an unfair barrier, to stop unfairly traded products, or dumped or subsidized products,” she says. “At the end of the day, if you have to retaliate against the other country, you have probably failed to gain the market access for your exporters that you want to get. You use those tools with the utmost reluctance, and you use them to gain win/win types of outcomes.”

Schwab holds a bachelor's degree in political economy from Williams College, a master's degree in development policy from Stanford University, and a Ph.D. in public administration and international business from The George Washington University. She is a director of the Boeing Company, FedEx Corporation and Caterpillar, Inc., a public policy professor at Maryland, and handles trade issues as a senior advisor to Mayer Brown LLP, a law firm. Forward spoke with her at the law firm's Washington offices.

What is your view of China and its approach to trade today? How concerned about China should we be?

The first objective of the Chinese leadership is not to take over the world. The first objective of this group of leaders, Communist Party leaders, is to stay in power. The only way to do that is to maintain political stability, and the only way to do that is to maintain economic stability.

I recall Hu Jintao (China's president) saying to President Bush that unless the Chinese economy grows at 8% a year, they cannot generate the 25 million new jobs they need to absorb the rural-to-urban migration. There's always a concern about unrest. So when you think about this manufacturing and exporting behemoth that they've created, you must remember that in many ways, they're riding the tiger. They are obviously very, very worried about what happens if growth slows.

Then look at that 1.3 billion population. They still have extreme poverty. There's a growing income inequality. You have a rapidly aging population and insufficient infrastructure. The infrastructure is not there to look after old people; they don't have a social safety net in place. They have incredible environmental problems and pollution. Frankly, if I had to choose between the problems that Chinese leaders face and the problems that our leaders face, I'd rather take on our problems any day of the week.

Are you saying that we don't understand the Chinese situation?

I think we're at a point now where we are over-hyping China's strength and under-appreciating fundamental U.S. strengths. The United States continues to be an extremely competitive manufacturer. At the moment, we are still the largest manufacturing country in the world. Our economy is far larger than theirs and even at the point where China's economy surpasses ours, on a per capita basis, their GDP is still going to be one-third of ours.

This is not to say that I condone the illegal subsidies, dumping, unfair trade practices, and I continue to be extremely concerned about the severe problems we have with protection of intellectual property, with their promotion of national “champions,” and with China's pernicious indigenous-innovation policies. We can spend hours talking about our concerns about how China's economy is managed, but it's still not in our best interests for the Chinese economy to fail. It is in our interest to make sure that China is not succeeding at the expense of the rest of the world.

So what should China be doing?

They need to do more to generate domestic demand and to be less reliant on exports. Right now, it's not happening fast enough for the rest of us. They say they intend to and seem to be moving slowly in that direction, but it's a pacing issue, among other things, and in the meantime, we have to hold our own.

This gets back to the over-hyping. We have this sense of decline and defeat in this country right now that is sort of the mirror of Chinese self-confidence and arrogance. And quite frankly, we shouldn't be as defeatist as we are. We've got problems, we've got issues, but we air them, we debate and discuss them, and we have shown ourselves capable of addressing challenges in the past. What I worry about now are self-inflicted wounds, about over-regulating the economy, about turning isolationist and protectionist, as distinct from being really smart negotiators and really effective in enforcing trade rules.

Quite frankly, I think the Chinese are doing things that are going to come back to haunt them, that will be detrimental to their economy, like holding down the value of the Renminbi (yuan). You can already see the impact of that in terms of inflation in their economy.

Given what we know about such issues as intellectual property theft, do you trust the Chinese?

One thing that I have learned is that this notion that other countries and government are coherent, cohesive and have their act together is a fallacy. There is no government that is fully coordinated and really has its act together. There was no Japan, Inc., and I don't think there is a China, Inc., no matter how hard the Chinese want to have one. There's a lot of debate going on within the Chinese government, even over the currency, and over how fast they can move from export dependence to more domestic demand.

If you look at the world as a zero sum exercise, then I think you're doomed to failure. It is the positive sum exercise that is critical. It goes back to my point about not letting another country succeed at the expense of the rest of the world.

One of the challenges we have is that our hands haven't been that clean in the last couple of years. We have lost the moral high ground. At one time we could stand up at the WTO and lecture others on trade policies. But it's a little harder to do that now. I would argue that the “Buy American” provision in the 2009 stimulus package cost significantly more jobs in the United States than it came close to creating or saving. Other countries, like China and Brazil, have used our legislation as an excuse to implement their own “Buy National” policies and they are spending far more than the U.S. on real stimulus activities. It goes to my point about shooting yourself in the foot.

Why have you opposed U.S. legislation to counter Chinese currency manipulation?

My concern has been the unilateral nature of it and the fact that the legislation wouldn't do a darn bit of good; it won't help. There are smart ways of putting pressure on other countries, and there are stupid ways of putting pressure on other countries.

Remember, the Renminbi issue is not a bilateral U.S. versus China issue. It is a China versus the rest of the world issue. But when we make a whole lot of noise about it, and Congress moves legislation, it looks like a bilateral issue, which means the rest of the world can step back and hold our coats. It also means that the individuals in the Chinese leadership who agree that the Renminbi should appreciate in value can't act because they're going to look like they're succumbing to U.S. pressure.

How would you assess the current administration's trade policy?

Sadly, there's a real split in the Democratic Party over trade policy, and we've seen that split reflected in the first two years of the Obama administration. They have not yet succeeded in reconciling campaign promises and positions on trade with the responsibilities of leadership and governing, and the very complex relationship that the administration has with organized labor. Big labor is not going to actively support any trade agreements. We saw that with the three pending free trade agreements left over from the Bush administration, even though they are so clearly tilted in favor of U.S. exports.

Positions taken by organized labor on trade agreements are contrary to the interests of the average American worker who could be working now and earning a paycheck in an export or other competitive industry. They just might not be a member of an old-line labor union. The positions unions are taking are all about self-preservation, which is understandable, but doesn't help the U.S. economy.

What are the consequences of the stalled free trade agreements?

Quite frankly, our ability to compete with China is part of this question. By sitting on our hands when it comes to the pending free trade agreements with Colombia, Panama and South Korea, and because the Doha negotiations are stalled, we are losing our ability to use such agreements to build supply chains that enable us to be more competitive. Think about it: The three FTAs that were blocked by the House Democrats in the last two years of the Bush Administration would have given U.S. firms preferential access to the markets of 100 million consumers. In all three cases, these countries have much better access to the U.S. market than we do to theirs, and the FTAs would level the playing field. I think we've hurt ourselves, and the sooner the Obama administration moves FTAs, the better.

So when it comes to the Obama administration, the jury is still out. I can't tell you exactly what the trade policy is. I applaud the national export initiative and their recent work on the Korea deal. But export promotion alone is not going to double U.S. exports.

So what will build exports?

Doubling exports is best done in an environment of global economic growth, and that goes back to the importance of not setting precedents that will permit others to deny us market access.

Where will the fastest growth take place? The answer is emerging markets. We need to make sure we have access to those markets. During the three years that we've not moved on the pending free trade agreements, other countries have been negotiating dozens and dozens of bilateral and regional free trade agreements that cut us out. So not only have we failed to continue building the trajectory of preferential market positions globally, but U.S. manufacturers in particular are increasingly facing a circumstance where their competitors and other countries are in preferential relationships that we don't have.

For example, the ASEAN (Association of Southeast Asian Nations) and China have a free trade agreement. Canada completed its free trade agreement with Colombia. U.S. exports of agricultural products to Colombia have tanked because we've lost the opportunity to have a preferential relationship there. Similarly, the EU has concluded its free trade agreement with Korea.

By virtue of not acting on these trade agreements, the administration is, ironically, forcing U.S. manufacturers to invest more overseas. And oh, by the way, it really kills small and medium-sized companies, because if you're a major multinational, you can invest behind a tariff wall. But if you're a small company, you're in trouble.

So we are losing our leadership role?

It is a real risk. We increasingly share relevance with other countries. But that doesn't mean we should sell ourselves short. In my experience, if the U.S. isn't out there leading, articulating innovative solutions and new approaches, nobody else is. It's not like China is taking over global leadership on trade from the United States, or India or anybody else. It means that there's largely a vacuum that we can't afford. But what we also can't have is the U.S. somehow thinking that we can unilaterally tell everybody else in the world what to do. We need to lead by example, stay active in negotiation of rules and vigilant in their enforcement.

Do Americans understand what's at stake in trade?

The perceptions and misperceptions out there about international trade are a real dilemma. I don't believe that most Americans are protectionists. But most Americans don't realize that we are still a competitive manufacturer. That's partly because the products that you and I see as consumers tend to have foreign labels. The products where we are incredibly competitive exporters, we don't often see. The software, the farm products, and of course, the turbines, the airplanes, the chemicals, the heavy equipment. Manufacturing exports are generating tens of thousands of jobs. So there is a mismatch between perception and reality.

The fundamental point on trade policy is that leaders need to lead. Protectionism is simply economic isolationism, and I worry about the United States turning inward. It takes leaders to step up, make the case for trade and for getting our economic house in order.