Why We Need the Trade Promotion Authority Now

BY JARED TURKUS

The economy is finally recovering from the Great Recession. The deficit is falling at the fastest rate since WWII: it stands at $645 billion, down from $1.4 trillion in 2010. The unemployment rate was 10 percent in October 2009; as of December 2013 it has fallen to 6.7 percent. GDP grew 3.2 percent in Q4 2013 alone; in 2009, GDP contracted 2.8 percent. According to the Federal Reserve, all this has occurred while inflation remains under 2 percent. While these data do conceal long-term economic problems such as a shrinking workforce, large projected deficits beyond fiscal year 2017, and changed metrics used to calculate inflation, the data are generally indicative of recovery. However, in 2014, optimism in the rate of growth of the U.S. economy began waning. The stock market, which netted a 30 percent return in 2013 alone, began with a major selloff in the opening weeks of January due to overinflated prices that were not backed by sufficient earnings. The Dow Jones Industrial Average Index has already lost 1,000 points since the beginning of the year. The S&P 500 and NASDAQ, other major indexes reflective of investor confidence, have shown comparable losses. This selloff may be a correction in an overinflated stock market or the beginning of another recession. Regardless, President Obama has a responsibility to convince markets that he is doing everything in his power to incentivize job insourcing and economic growth.

America Is Not Competitive

In recent years, Congress has allowed the United States to lose a competitive edge to its foreign counterparts. The U.S. corporate income tax rate is 35 percent, which, as of 2014, is the highest in the world. In addition, corporations are also required to pay FICA tax, Medicare tax, state income tax, Old Age Survivor and Disability Tax, and property taxes. President Obama has proposed slashing the 35 percent rate to 28 percent and closing deductions that allow corporations to significantly reduce their tax bill. The President’s initiative is good; it would help mid-sized American companies compete in the global economy and create more jobs. Yes, companies like Apple and GE have been able to reduce their average tax bill to 12.6 percent, but firms most in need of additional capital suffer under effective rates near 50 percent. Most cannot afford to invest millions in overseas subsidiaries conveniently located in tax havens. The ones that do would be better off spending those resources on R&D and new hires to increase their profits. With a larger share of profits, these corporations would end up paying more in taxes and help reduce the deficit.

The current situation is a travesty because outsourcing will become increasingly significant with the rise of machine automated labor processing and cheaper Chinese engineering labor. Companies will not have any incentive to pay American engineers $160,000 annually when their counterparts will do the same work for a third of the price. The most recent story signaling this trend is the failure of Motorola. In 2011, Google acquired the collapsing phone maker for $12.5 billion and installed an assembly plant in Texas for its MotoX smartphones. After the MotoX and MotoG smartphones failed to gain traction against Samsung, Google announced the sale of Motorola to Chinese-based Lenovo for $2.9 billion. The 2,500 jobs the Texas factory created will likely be outsourced to China, where labor and materials are a fraction of the American cost. The evidence for the Motorola trend is in plain sight; the labor force is decreasing in part because of outsourcing. And in spite of the findings of a study from the University of California, which concluded that 14 million American white-collar jobs are vulnerable to outsourcing, Congress has failed to pass laws incentivizing insourcing.

What Is The Trade Promotion Authority?

In March 2014, the clearest answer to the United States’s competitiveness problem is the renewal of the Trade Promotion Authority (TPA). If passed, it would allow the President greater flexibility in negotiating trade agreements with foreign countries. The TPA was active from 1975 until 1994. The bill then expired, but was restored in 2002. In 2007, it expired again and now awaits a vote on renewal. Speaker of the House John Boehner and House Majority Leader Eric Cantor recently announced support for restoring this presidential power, which would allow the President to negotiate all agreements between the U.S. government and foreign entities. Under the TPA, once the President worked out the details of a trade agreement, he would send the proposal to Congress, which would either pass or reject the bill in its entirety. In other words, Congress would no longer have the power to veto sections or make amendments to trade agreements.

We Have Had More Trade Agreements With TPA

The TPA renewal is a major opportunity for the Obama Administration. It reassigns significant economic responsibility away from congressional politics and bickering. This bill will force Congress to ignore minor disagreements over tariffs and incentives to support overall free trade (Use How To Referral codes to save much better) that benefits the United States. GDP grows the more times money changes hands. Rewarding companies that invest in the United States should not be a partisan issue; it should be a national priority unimpeded by politicians seeking re-election without term limits. Conversely, the Constitution prohibits the President from running for re-election more than once. Instead of worrying about appeasing a diverse group of constituencies who may or may not support him in an election, the President would have the power and incentive to craft optimal trade agreements. During the periods of the law’s enactment, Congress passed GATT, NAFTA, AUSFTA, Morocco FTA, CAFTA-DR, USBFTA, OFTA, CTPA, U.S.-Singapore FTA, and KORUS FTA, among many other agreements that helped foster mutually beneficial trade opportunities between the United States and foreign countries.

A protectionist faction of the Democratic Party opposes renewing the TPA out of fear that it could potentially jeopardize the U.S. minimum wage level, which they believe is already too low. This instinct is correct; we should not lower our wages to compete with China and other BRIC countries. But even if Congress renews the TPA, that won’t be an issue. The United States does not need to lower wages to maintain a competitive market. Wages are only one factor among many that determine which countries get private sector investment. The United States has a unique balance of economic liberalism combined with basic government services that improve life quality for all. This balance makes it an attractive place to invest. China does not have the American network of paved roads, broadband infrastructure, free speech, clean air, and sanitary water. These luxuries combined with an executive trade authority can give the United States a distinct advantage over BRIC countries in keeping jobs and capital stateside.

Trade Agreements Decrease Trade Barriers, Increasing GDP

While laissez-faire trade is only one factor among many that contribute to economic prosperity, GDP growth was strongest during the years in which the TPA was enacted. The economy boomed from 1980-1987, 1991-2001 and from 2001 to 2006. With fewer import taxes, companies incentivize consumers to buy their product by passing tax savings onto the consumer. If people can buy more goods and services with less money, the volume of transactions will increase and boost GDP. Consumers will have more money in their pockets to spend on other goods or invest in securities that generate returns. Both options further increase the frequency of economic transactions. A business’s survival hinges upon positive, growing cash flows, which can only happen with an increase in the volume of transactions. Failure to do so will cause its shareholders to transfer their investments to more profitable ventures. To encourage that necessary volume, corporations systematically lower their product prices and introduce new products to bait consumer activity. Governments should learn from the most successful corporations and realize that private sector success in their environment is more likely with fewer taxes.

President Obama has repeatedly emphasized that he needs the powers within the TPA to negotiate the Transpacific Partnership and other upcoming trade agreements. If other governments keep lowering their corporate tax rates and offering other incentives for firms to invest in their countries, the United States will not benefit as much from these agreements; it will fall behind and more jobs will be outsourced. While the TPA is only one of many changes that can further promote free trade, it is a step in the right direction to encourage continued economic momentum.