Economics

Jim Kolbe: Trade Has Brightened the Global Economy

A former GOP Congressman says U.S. exports have helped ease the effects of the recession.

May 24, 2013

| by Stefan Theil

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“To me, the evidence is very clear that trade, and especially our exports, have helped equalize and ease the effects of the recession.” — Jim Kolbe, senior fellow at the German Marshall Fund (Photo by Kathleen O’Toole)

For much of this sputtering recovery, the unfailing bright spot in America’s economy has been trade. U.S. exports of manufactured goods have seen a slow, steady, and entirely unexpected rise. Net energy imports are falling fast. Now, new trade agreements are in the works that could give the global economy another boost, argues Jim Kolbe, a former 11-term Congressman (R-Arizona), expert on trade and development, and senior fellow at the German Marshall Fund in Washington, D.C., an organization that promotes cooperation between Americans and Europeans on transatlantic and global policy issues.

Before the financial crisis, there were massive global imbalances in trade. Now, they are either shrinking or have disappeared. U.S. exports are growing. Japan’s notorious surplus is gone. Even Europe’s uncompetitive crisis countries, like Spain and Portugal, are revving up exports and eliminating trade deficits.

Trade has definitely been one of the positive pieces in the puzzle, a good indication of its role in keeping the global economy stable, and evening out some of the bumps along the way. But the focus on trade balances has been more of a distraction than anything else. People are concerned that we’re importing too much; they conclude that we’re not creating jobs at home because we’re buying things from overseas. The reality is that imports also create jobs at home, supply critical components for manufactured items, and increase our purchasing power. Those so-called imbalances are simply a way to correct capital flows. Maybe the greatest upside of these shrinking imbalances is that, psychologically, it makes it easier to gather support for new initiatives to liberalize trade.

The other surprise is that all this rapid adjustment happened without the protectionism and trade wars many of us expected in 2009.

There was a lot of subtle protectionism like procurement restrictions and subsidies that followed in the wake of the 2008-09 recession. But on balance, you’re right, it turned out to be much less than any of us expected. This happened for several reasons. First, I’d like to think we learned something from the past and the incredible damage we did to the economies of the U.S. and the world in the 1930s with protectionist measures like the Smoot-Hawley tariff and the retaliatory measures that followed in Europe and elsewhere. Second, we have institutions like the World Trade Organization in place that make it harder to violate trade agreements. Countries don’t want to be hauled before a dispute settlement process and have to defend their actions. And third, the G8 and G20 served as a strong voice warning against these kinds of measures, with countries reluctant to fall out of line. Fourth, there were organizations that actually kept track of all the protectionist measures around the world and highlighted them in quarterly reports — and again, countries don’t want to get called out on these things, and so they stayed mostly in line.

How is monetary policy impacting trade, from “quantitative easing” at the Fed to the new “Abenomics” at the Bank of Japan? Is this another version of currency wars?

We really don’t know. I thought that quantitative easing was going to lead very quickly to strong inflationary pressures, but so far I’ve been wrong. Now Japan is working to increase exports by lowering the yen. If everybody is trying to devalue their currency at the same time, one negates what the other one is doing. You can’t all do the same thing.

Is there a healthy balance between the openness that promotes economic growth and the idea that workers should be protected?

To me, the evidence is very clear that trade, and especially our exports, have helped equalize and ease the effects of the recession. It’s been so obvious to everyone that we’re seeing stronger support for trade than we’ve had in quite a while, as evidenced by the fact that the U.S. and Europe are starting trade talks. I’d even argue we should just disarm unilaterally and remove all our protections, procurement restrictions, subsidies, and all of that, and watch consumers benefit from the most open trade possible. Are there reasonable health and safety standards? Yes, of course, but the danger is that countries use those as an excuse to restrict trade.

Global attempts to liberalize trade further, like the Doha Round of world trade negotiations, seem all but dead, with too many countries and too many different interests. Are bilateral trade pacts, like the one the U.S. and E.U. are now negotiating, the way forward?

They are. I’m a strong believer in Doha, but a transatlantic agreement could actually increase the chances for a global one. An agreement between the U.S. and Europe wouldn’t be exclusionary, and once completed, other countries could sign up for it. Once you join these two behemoths together, you’ve created a single market out of such a huge part of the global economy that it would be very attractive for other countries to join. Certainly the surrounding regions like Eastern Europe and Latin America would join, I’m not so sure about China, but Japan would probably join pretty quickly.

What are the stumbling blocks?

A really interesting one involves regulation. Here are two very well developed economies that both have very high, but slightly different, environmental, health, and safety standards — inspection standards for automobiles, for example. Right now you have to add about $1,000 to the price of a car from Germany or Sweden just to pass inspection in America. One option would be to try to hammer out one harmonized standard. That would be very tough and take a long time. The other option is the idea of equivalency. We ask the Europeans to accept that our cars are well inspected and safe, and we accept that the Europeans have safe cars too, even if their standards are a little different. What reason do we have to believe Saab is not building safe cars?

What else?

Agriculture is a major stumbling block. Not just the subsidies on both sides but also European opposition to genetically modified crops is going to be a huge, huge issue. Government procurement is going to be a big issue for our side, largely because of our 50 states, each with different procurement rules. The Europeans are going to want access to our state purchasing, and they’re right that this should be made easier. Investment and financial regulations get complicated, too.

So how would you judge the chances of this actually happening?

I’m actually more optimistic than I’ve been in a long time. They would not have launched this if they hadn’t seen a good chance of wrapping it up by the end of the Obama administration. In addition, the recent naming of Michael Froman as the U.S. Trade Representative is a good sign. He has a lot invested in this agreement. So I’d expect an agreement in 2015 that could go to Congress that year, possibly in 2016.

What about Asia? With so much growth there, negotiations on transpacific trade would seem at least as important.

The Trans-Pacific Partnership talks are moving, but they’ve not gotten down to the critical issues. Bringing Mexico and now Japan into the process is going to slow this down tremendously. Japan has deep and culturally engrained issues with rice and other agricultural subsidies where it’s hard to see how they’re going to get past that. Maybe the new Abe administration is thinking about how to fight that battle, but there’s never been a Japanese leader willing to actually do it. I would not predict any quick completion of TPP. The talk about finishing it by the end of the year is wishful thinking.

What would you tell skeptical voters who have second thoughts about free trade?

These agreements will increase GDP for both sides. They’ll increase exports, increase consumer choices, and reduce the cost of buying things from overseas. If you save $1,000 on a Toyota, that’s the same as getting a $1,000 pay increase. Just think of all the benefits from prices going down in other areas, from telecommunications to airlines.

How will the rise of other economic powers like China, India, Turkey, and Brazil affect the liberal trading order?

It certainly complicates efforts to achieve multilateral trade agreements. Not so long ago, it was possible for a GATT — the predecessor to WTO — trade negotiation to be completed when the United States, Japan, Germany, the United Kingdom, and maybe one or two other players reached an agreement. Those days are gone. Today, there are a lot of players who justifiably want to play a role in trade negotiations. That’s good on the one hand, but it definitely complicates negotiations. That may be the reason why the Doha Round of talks is the first unsuccessful multilateral trade negotiation since GATT (General Agreement on Tariffs and Trade) was formed in 1947.

Jim Kolbe earned his MBA from Stanford GSB in 1967.

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