July 16, 2002

July 16, 2002 | Backgrounder on Trade, Economic Freedom

Conferees' Guide to Ensuring Real Trade Promotion Authority

Congress is currently reconciling House and Senate versions of a package of trade-related legislation that includes trade promotion authority (TPA)--the ability of the President to negotiate trade agreements and submit them to Congress for a straight up-or-down vote. TPA is an important foreign policy tool: It will enhance the credibility and influence of the United States in negotiating trade agreements that benefit American consumers and workers.

Conferees should keep in mind that the purpose of the final trade legislation is to liberalize, not protect, markets. While both the House and Senate versions of H.R. 3009 1 contain trade promotion authority, Trade Adjustment Assistance (TAA), and the Andean Trade Preference Act (ATPA), they also contain mandates that would undermine that important goal. For instance, the trade package includes protections for certain industries, additional subsidies for industries already heavily subsidized, potential limitations on health care assistance for TAA-eligible workers, and provisions that would allow Congress both to amend any agreements that relate to U.S. trade remedy laws and to revoke TPA when Members feel they have not been consulted sufficiently.

The President's ability to influence and negotiate beneficial trade agreements will require clean trade promotion authority. Encumbering TPA with protections for certain industries and provisions that allow agreements to be opened by Congress will discourage America's potential trading partners. The United States already trails far behind other countries in trade agreements, having signed only three of the 150 agreements currently in force, 2 leaving U.S. exporters at a significant competitive disadvantage.

Measures that enable Congress to open an agreement and that provide special protections for particular U.S. industries simply do not belong in a bill designed to promote free trade. Even33 though both versions of the trade bill state that "trade is critical to the economic growth and strength of the United States and to its leadership in the world," such anti-trade measures would have the opposite effect.

Why TPA is Important

The House and Senate both have passed trade bills that include trade promotion authority to enhance the Administration's ability to negotiate agreements that would reduce barriers to U.S. goods and services. These include agreements negotiated in multilateral venues, such as the World Trade Organization (WTO); bilateral agreements with countries such as Chile; and regional agreements, such as the Free Trade Area of the Americas (FTAA).

The benefits derived from reducing trade barriers are enormous. According to the Office of the U.S. Trade Representative (USTR), the two major trade agreements of the 1990s--the North American Free Trade Agreement (NAFTA) and the Uruguay Round establishing the WTO--generate annual benefits of $1,300 to $2,000 for the average family of four. 3 A University of Michigan study found that the WTO Doha Round 4 could generate an annual income gain of nearly $2,500 for the average family from a global reduction in tariffs and trade barriers. 5 Both NAFTA and the Uruguay Round included fast-track authority, which is now known as TPA.

TPA is not only important for America's families; it is important for America's farmers and manufacturers as well. One in three U.S. farm acres is planted for export, and 25 percent of gross farm income is derived from exports. America is the world's largest agricultural exporter. U.S. agricultural exports face a 62 percent average tariff rate. 6 TPA would enable the United States to negotiate lower tariffs on agricultural goods, which would greatly help U.S. farmers remain competitive in global markets.

Similarly, TPA is important for U.S. manufacturers. 7 Each time a free trade agreement is negotiated without the participation of the United States, U.S. manufacturers are put at a competitive disadvantage. In 1997, for example, Chile began to lower its tariffs on foreign manufactured goods based on agreements it negotiated with Canada, Mexico, and some South American countries. Today, countries like the United States that do not have a free trade agreement with Chile pay a uniform 8 percent tariff on all their exports to Chile; those that have secured a free trade agreement with Chile pay either no import tariffs or a reduced rate. The National Association of Manufacturers estimates that the failure of the United States to secure a free trade agreement with Chile has resulted in a loss of $800 million in exports to Chile each year. 8

Why Industry Protection is Bad Policy

Recent decisions by the U.S. government affecting trade, most notably the steel tariff and the farm bill, 9 have left a bitter taste with respect to U.S. trade policy around the world. Provisions in the current bill that protect or subsidize particular industries in the United States should be removed if America is to regain its stature and credibility on trade and advance its trade agenda globally.

A prime example is the U.S. sugar subsidy program. Rather than promote trade, this program protects domestic producers and maintains high sugar prices that must be paid by U.S. consumers. According to the U.S. Department of Agriculture, raw sugar prices in the United States are almost three times the world price. 10

The Senate bill states that, "unless action is taken to prevent circumvention, circumvention of the tariff-rate quotas will continue and will ultimately destroy United States sugar policy." 11 It requires the Secretary of Agriculture to identify "imports of articles that are circumventing tariff-rate quotas on sugars, syrup, or sugar-containing products" 12 and the President, once such items have been identified, to raise trade barriers on those products.

This is bad policy; maintaining these quotas hurts U.S. trading partners and American consumers. As a study published by the Cato Institute explains,

America's sugar quotas pose a threat to multilateral and regional trade negotiations. U.S. trading partners routinely and rightly point to quotas as being inconsistent with U.S. demands for more open markets abroad. The sugar program has become an obstacle to lowering foreign trade barriers to U.S. exports. 13

The Trade Adjustment Assistance portion of the Senate bill also mandates assistance for farmers, even though the recent farm bill 14 increases subsidies to farmers to $182 billion over 10 years. Such subsidies are non-tariff barriers that thwart trade and encourage overproduction, putting downward pressure on agricultural prices. As a result, underdeveloped countries that rely heavily on agricultural production find it difficult to compete with artificially low prices on U.S. agricultural goods. According to one recent article in The New York Times,

the United States is flooding the world market with inexpensive corn, wheat, rice and soybeans, which are sold at half what it costs to produce the grain. That leads to artificially low world prices, which in turn undercut grain produced by farmers in countries that do not give subsidies. The grain market becomes distorted, domestic markets are ruined for producers overseas and their chances of making inroads into foreign markets are reduced. 15

Moreover, the Senate bill would allow U.S. farmers to receive up to $10,000 if it could be shown that imports had "contributed importantly" to a decrease in the price of an agricultural commodity by 20 percent or more in a year. 16 The Senate bill, however, limits this benefit only to farms that have an adjusted gross income of less than $2,500,000; wealthy farmers would be eligible for this benefit. Every dollar spent on such subsidies is another dollar spent against free trade and the prospect of a better life for the world's poor.

Farming, like any other business activity, comes with unavoidable risks. Yet American farmers demand a free market when they make a profit but want any losses to be socialized. Welfare-to-work measures have ended welfare "as we know it" for most Americans; it should be ended for the American farmer as well. According to a recent article in The Wall Street Journal,

rich countries now spend $1 billion per day to subsidize their agricultural sectors. This policy succeeds in creating both more expensive food in the developed countries and poorer farmers in the developing one[s]. 17

As the world's largest agricultural exporter, the United States should be taking the lead in lifting barriers, not creating them.

Additional Concerns

Reneging on TPA?
The purpose of TPA is to grant the President clear authority to negotiate trade agreements, not to provide provisional authority that Congress could decide to take back for any reason. Including a provision in the trade bill that allows Congress to revoke TPA will leave America's potential trading partners questioning the credibility of this grant of authority.

Both versions of the trade bill now in conference require extensive consultation with Congress before and during trade negotiations, especially with respect to such politically sensitive items as textiles and apparel, agriculture goods, or U.S. trade remedy laws. Regarding agricultural trade barriers, for example, the Senate version of the trade bill would require the President to

consult with the Committee on Ways and Means and the Committee on Agriculture of the House of Representatives and the Committee on Finance and the Committee on Agriculture, Nutrition, and Forestry of the Senate [as to] whether it is appropriate for the United States to agree to further tariff reductions based on the conclusions reached in the assessment, and how all applicable negotiating objectives will be met. 18

Certainly, both President Bush and U.S. Trade Representative Robert Zoellick can be expected to recognize that communicating with Congress will be essential to ensuring the passage of any trade agreement. Yet some Members of Congress insist on including a "procedural disapproval resolution" in the trade bill to allow Congress to open an agreement rather than put it to an up-or-down vote when Members feel they have not been consulted sufficiently by the Administration. The House bill, for example, states that "the trade authorities procedures under that Act shall not apply to any implementing bill submitted with respect to such trade agreement or agreements." 19 Such a provision frustrates the intent of TPA and should not be included in the final legislation.

The Senate version of TPA includes an amendment (S. Amdt. 3382) sponsored by Larry Craig (R-ID) and Mark Dayton (D-MN) that would give Congress the right to amend any part of a trade agreement that involves U.S. trade remedy laws, such as antidumping and countervailing duty laws. Other countries view these trade remedy laws as some of the most protectionist aspects of U.S. trade policy. Including the Dayton-Craig amendment in the final trade bill would have counterproductive consequences. It would legitimize the efforts of countries to exclude their own politically sensitive subjects, such as agricultural subsidies or their own antidumping laws, from negotiations, and it would undermine both the Administration's trade agenda and its credibility in conducting trade negotiations.

Around the world, trade remedy laws are being enacted to protect industries. According to the Chicago-based law firm of Mayer, Brown, Rowe & Maw, an average of 313 antidumping cases per year were initiated between 1999 and 2001, compared with an average of 139 cases per year during the 1980s. 20 As Cato Institute trade policy analyst Dan Ikenson points out, 62 countries now have anti-dumping laws on their books, and the United States is the third largest target of antidumping actions. 21

As more countries adopt trade remedy laws and become more skilled in using antidumping laws, cases against the United States are expected to increase. Therefore, it is important that President Bush be able to negotiate agreements involving U.S. trade remedy laws that are not threatened by the prospect of vitiating congressional amendment. Without that assurance, foreign countries will be reluctant to enter into trade negotiations with the United States, and the President will be deprived of the opportunity to address the increasing use of antidumping cases against U.S. exporters.

Providing Health Care Assistance.
For the first time, the TAA provisions in the Senate and House trade bills include health care coverage assistance for displaced workers in the form of refundable tax credits. Both bills incorporate similar financing structures, but the methods for implementing these credits differ. The Senate version imposes strict limitations on recipients and states, while the House version provides a more flexible approach for recipients and states.

These and others issues will need to be resolved in ways that do not undermine the market, that maximize patient choice, and that provide flexibility for states to design affordable private purchasing options. (See text box, "The Health Care Tax Credit in the Trade Package.")

Crafting a clean version of TPA

Mounting evidence indicates that increased trade provides significant benefits to the average American family as well as to U.S. manufacturers and farmers. To increase trade, however, Congress must give President Bush clean trade promotion authority. The conference committee reconciling the two versions of the trade bill should:

  • Reject the Dayton-Craig amendment in the Senate version. It is important that President Bush have the authority to negotiate all areas of U.S. trade policy, even U.S. trade-remedy laws such as antidumping and countervailing duty laws. The Dayton-Craig amendment would give Congress the right to amend any part of a trade agreement that involves these laws, which are viewed by other countries as some of the most protectionist aspects of U.S. trade policy. Including such a measure in the final bill would both legitimize efforts by other countries to exclude their own politically sensitive subjects from negotiations and undermine the credibility of the United States.
  • Remove the "procedural disapproval resolution" in the House version. This resolution would allow Congress to amend an agreement if Members believe the President has not consulted with them sufficiently on an agreement. It is bad trade policy. Potential trading partners need the assurance that, with TPA, once an agreement is negotiated with the United States, Congress will vote either up or down on it without the possibility of amendment.
  • Eliminate special provisions for industries. Special protections for such sectors as the U.S. sugar and agricultural industries should not be included in the trade bill. These industries are not only key in many of the underdeveloped countries, but often their only likely resource for economic growth. Giving these industries special provisions in the trade bill would undermine the Administration's efforts to encourage these underdeveloped countries to lower their trade barriers and open their markets to U.S. goods.

Conclusion

President Bush's trade agenda is at a critical juncture. If the President is not able to secure trade promotion authority without the Dayton-Craig amendment and the "disapproval resolution," his trade agenda will be difficult to achieve. Including special provisions for the sugar and agricultural industries--key sectors in underdeveloped countries--would also undermine the President's efforts to advance free trade.

Increased trade with other countries is vital to American families, farmers, and manufacturers. In order to secure the benefits that trade offers, President Bush needs Congress to send him a trade bill that includes a clean version of trade promotion authority.

Sara J. Fitzgerald is a Trade Policy Analyst in the Center for International Trade and Economics, Nina Owcharenko is a Health Care Policy Analyst in Domestic Policy, and Aaron Schavey is a former Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation.

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1. The House passed H. Res. 450 on June 26, 2002, agreeing to Senate amendments to H.R. 3009 and incorporating various other trade measures, such as H.R. 3005. For the status of H.R. 3009, see http://thomas.loc.gov.

2. The North American Free Trade Agreement and bilateral agreements with Israel and Jordan.

3. Office of the U.S. Trade Representative, "Trade Promotion Authority--Overview," at http://www.ustr.gov/new/2001-12-03-tp a-overview.htm.

4. Trade negotiations launched by the WTO Doha (Qatar) Ministerial began in January 2002 and are scheduled to end by January 1, 2005.

5. Office of the U.S. Trade Representative, "Trade and American Families," at http://www.ustr.gov/new/2001-12-03-tpa-families.htm.

6. Sara J. Fitzgerald, "H.R. 3019: Undermining Trade Promotion Authority," Heritage Foundation Executive Memorandum No. 795, December 5, 2001.

7. Aaron Schavey, "How Trade Promotion Authority Bolsters the U.S. Manufacturing Industry," Heritage Foundation Backgrounder No. 1561, June 21, 2002.

8. National Association of Manufacturers, "Absence of Chilean Trade Agreement Costing U.S. Over $800 Million per Year," October 2001.

9. See, for example, Aaron Schavey, "The Ailing Steel Industry Needs Less Government Intervention, Not More," Heritage Foundation Backgrounder No. 1519, February 22, 2002, and Sara J. Fitzgerald, "$175 Billion Barrier to Trade," Heritage Foundation Web Memo, March 15, 2002.

10. U.S. Department of Agriculture, Foreign Agricultural Service, "World Sugar Situation," at http://www.fas.usda.gov/htp/sugar/2002/May/sugsit.htm.

11. H.R. 3009,Title X--Miscellaneous Provisions, Section 1002(a)(5).

12. Ibid., Section 1002(c)(A).

13. Mark Groombridge, "America's Bittersweet Sugar Policy," Cato Institute Trade Briefing Paper No. 13, December 4, 2001.

14. Public Law 107-171.

15. Elizabeth Becker, "Raising Farm Subsidies, U.S. Widens International Rift," The New York Times, June 14, 2002.

16. The Senate bill defines the term "contributed importantly" as meaning "a cause which is important but not necessarily more important than any other cause." The determination of whether imports "contributed importantly" to the decline in the price of an agriculture commodity is made by the Secretary of Agriculture. See H.R. 3009, Section 291(3)(A)(B).

17. Carl Bildt, "Want to Help Africa? Stop Farm Subsidies," The Wall Street Journal Europe, June 18, 2002.

18. H.R. 3009, Section 2104(b)(1), "Consultations and Assessment."

19. H. Res. 450, Section 2105(B)(i), "For Lack of Notice or Consultations."

20. Cliff Stevenson, "Global Trade Protection Report 2002," Mayer, Brown, Rowe and Maw, April 2002.

21. Dan Ikenson, "Dump Antidumping Regs," National Review Online, August 27, 2001.

About the Author

Sara J. Fitzgerald Policy Analyst
Center for Trade and Economics (CTE)

Nina Owcharenko Director, Center for Health Policy Studies and Preston A. Wells, Jr. Fellow
Center for Health Policy Studies

Aaron Schavey Policy Analyst
Finance and Accounting