International Trade Policy

FASKIANOS: Good afternoon fromNew York, and welcome to the CFR Academic Conference Call series. I’m Irina Faskianos, vice president for the National Program and Outreach here at CFR. Today’s call is on the record, and the audio will be available, as well as the transcript, on our website, CFR.org.

We are delighted to have Ted Alden with us today to talk about international trade policy. Mr. Alden is the Bernard L. Schwartz Senior Fellow at CFR, specializing inU.S.economic competitiveness. He’s also the director of CFR’s Renewing America publication series, and he is a contributor to CFR’s Renewing America blog. He was also the project co-director of the 2011 CFR-sponsored Independent Task Force on U.S. Trade and Investment Policy. And prior to coming to CFR, he was theWashingtonbureau chief of the Financial Times. You can follow Mr. Alden on Twitter @EdwardAlden.

Ted, thanks very much for being with us today. It would be great if you could start by giving us an overview of current trade negotiations and the state of play.

ALDEN: Great. Thanks very much, Irina. And thank you, everybody on the call. It’s great to be here.

Let me just talk briefly about the Obama administration’s agenda and where the United States stands, since the U.S. is currently in the middle of most of the big trade negotiating initiatives taking place in the world. So I actually think trade policy is one of the most interesting areas of Obama administration policy, and one that I think will be discussed for many years after.

President Obama, of course, when he was elected, was notably quite skeptical about the value of additional trade agreements. He had been a sharp critic of NAFTA when he was a senator and suggested in the 2008 campaign that he wanted to renegotiate the NAFTA, and then in his first term did very little to advanceU.S.trade policy, and in fact took a long time to put before Congress several bilateral free trade agreements withKoreaandPanamaandColombiathat had been negotiated by the Bush administration.

All of that has turned around quite dramatically in the second term of his presidency, and I’m not actually sure that I completely understand all the reasons for the turnaround but I can explain at least what has happened.

President Obama has become, in fact, a big enthusiast and cheerleader for deepening trade liberalization around the world. He asked Congress earlier this year for something called trade promotion authority—it used to be referred to as “fast-track”—which requires Congress to have an up or down vote on trade agreements that the administration brings back.

This created a huge fight within his party. Virtually all of the Democrats in Congress were opposed to giving him trade promotion authority, including the House—excuse me, the Senate Democratic leader Harry Reid. And Senator Elizabeth Warren played a very strong role in opposition. President Obama worked with the Republicans to get that legislation through the House and Senate and was quite publicly and personally committed to it in a way we haven’t seen on all that many issues.

What we now have on the table are a whole series of ambitious trade negotiations, really the biggest set of negotiations—you have to go back 20 years to when the World Trade Organization was created and the North American Free Trade Agreement negotiation withCanadaandMexico. That was the last time theU.S.has a trade policy similar ambition.

So what we’ve got now—I’ll just run through them really quickly. Of course we have the Trans-Pacific Partnership, which is a pending agreement between theU.S.andJapanand nine other Asia-Pacific countries. The administration is hoping to conclude that agreement very shortly. There’s talk possibly even about a deal as early as next month. There are a handful of difficult issues still to be resolved, but those negotiations are pretty far along.

At the same time, theU.S.andEuropeare negotiating something called the Trans-Atlantic Trade and Investment Partnership, or TTIP, which would be, in effect, a U.S.-EU free trade agreement, so bringing together the two largest trading entities in the world. Those negotiations are not as far along. They deal with a lot of difficult issues, particularly regulatory issues, the tariffs which are sort of a traditional trade barrier not that high between theU.S.andEurope.

So there are a lot of issues about how the two can try to make regulatory systems more compatible in order to increase trade. Not surprisingly, those issues are quite difficult because they touch on areas of domestic health and environment and consumer regulation. So that will be tough negotiation but it’s proceeding, you know, slowly—and possibly “surely” remains to be seen.

There are also other negotiations you don’t hear much about. There’s something called the Trade in Services Agreement, which is an international agreement—countries that do a lot of trade in services like financial services and architecture and legal services, things like that. There’s an effort to reach an agreement within the next year underTISA. There was another agreement, more or less concluded this last summer, to lower tariffs on information technology products.

So all of that is not even to talk about the multilateral trade system and what’s known as theDoharound, which has been limping along for many years now but there is a big ministerial meeting coming up inAfricain December. Actually, I was just at a speech this morning from the director-general of the WTO and there some hopes for progress there as well. So this is an extraordinarily ambitious trade agenda that President Obama has embraced. I am happy to take questions on all sorts of different aspects of it.

Let me just note that, as will—a lot of the people on the call will know, each of these negotiations brings a significant degree of controversy with it. It’s not surprising that the president has faced such a big fight within his own party. Trade issues have been contentious for years now and probably are getting more so.

So picking three, but I could come up with a bunch more: the whole question of labor and environmental standards for developing countries. The TPP includes countries likeVietnamand probablyMalaysiathat have less-than-sterling records on protection of labor rights, very low wages. There are a lot of issues around what sort of commitments those countries are going to make in terms of improving their labor rights records, and so a lot of controversy around that.

There’s the whole issue of investment and something known as investor-state dispute settlement, which are provisions in these agreements that allow companies to sue governments directly if they feel like their property rights have been violated. The European Union wants to see significant changes to this as part of the TTIP agreement. European publics are really quite up in arms about this because of a handful of very contentious cases, one in which a Swedish nuclear company sued the government of Germany over the decision by the Germans to phase out nuclear power, and other contentious cases as well.

And then, last and not least, you know, the whole question of the impact of trade agreements on theU.S.economy: whether they’ve been good for the economy on the whole; what the impact has been on workers in theUnited States; whether trade in some ways contributes to increased income inequality, which is a big issue on the agenda.

I’ve just put the finishing touches on a book draft that looks at the whole set of issues surrounding the U.S. response to global economic pressures, so I’m happy to talk about some of these issues as well.

So why don’t I stop there and open it up? I’m happy to drill down on any of these. Or if people want to talk more broadly about issues that don’t involve theUnited States, I will do my best on those as well.

FASKIANOS: Great. Thank you, Ted. Let’s open it up to questions.

OPERATOR: Thank you.

At this time we’ll open the floor for questions. (Gives queuing instructions.) Our first question comes from Matthew Schaefer with theUniversityofNebraska.

Q: But actually it’s one of our students here today in my international law class.

Q: So one concern on the TPP is the investor-state dispute settlement mechanism—that was just mentioned—for the challenges to be heard by third-party tribunals regarding certain investment activities. Do you believe that the—with the complexity of mega-regional trade deals like the TPP, that we’ll be seeing more of these cases in the future?

ALDEN: The answer is yes. So let me—let me give a really quick history on this.

So investor-state dispute settlement provisions have been around for quite a while. They’ve been part of bilateral investment treaties for many years. And the basic idea here was to try to encourage multinational companies from theUnited Statesand Europe andJapanand elsewhere to invest in developing countries. Then, often those developing countries had what were, from a Western perspective, inadequate legal systems.

And so, originally these provisions were created basically to protect companies against expropriation, against having their property nationalized because, say, you had an election that brought in a government that was committed to nationalization of particular sectors. And gradually over time these have been included in a range of free trade agreements, including, you know, the NAFTA, and in more recent bilateral trade agreements.

What’s happened is that, as is often the case, the lawyers have gotten very creative in interpreting what qualifies as an expropriation. And so you have a lot of cases being brought now that involve things we wouldn’t normally think of as expropriation but nonetheless government actions that may have harmed the interests of the company.

So, you know, a couple of the best-known ones: Philip Morris has sued the government of Australia, actually using a free-trade agreement negotiated between Australia and Singapore because Philip Morris has presence in Singapore—sued the government of Australia over a law that requires plain packaging on tobacco.

The government of Australia wants to discourage people from smoking and so all they want to have is basically plain packages with warning labels on them. And Philip Morris says, well, you know, this damages our brand. It’s going to make it harder for us to sell cigarettes so we’re going to sue you using this provision. And what happens is you have a committee of arbitrators that’s set up in Vienna to hear the cases and they can basically decide on the merits of the case.

So, you know, a lot of people said this gives corporations tremendous power to challenge government policies that may be in the public interest. And so you’re just seeing a lot more opposition to this. As I said, the Europeans have indicated that they want a complete overhaul of these provisions. There’s a lot of, sort of, details about how you set up the panel proceedings and things like that.

But I think what you’re going to see, in fact, is modifications to the investor-state dispute settlement procedure to address some of these growing concerns that the public and legislators in a lot of different countries have. But in the TPP context, it looks like the current formula is probably going to survive. It’s that late in negotiations. So I do think actually there will be a lot of cases brought under the TPP. Lawyers have just gotten very good at figuring out how to bring these and the companies seem quite eager to use this mechanism.

FASKIANOS: Great. Next question.

OPERATOR: Thank you. The next question comes from the University of Southern Mississippi.

Q: Hi, this is Todd Barry from the University of Southern Mississippi. Thank you for this great opportunity. I have three short questions.

First, with President Obama about to meet with Mr. Xi Jinping of China, what can the U.S. do to encourage Chinese consumers to purchase more U.S. goods? Second, could the U.S. share its renewable energy technology with China, not only to help environmentally but also to increase our trade? And third, why do we not have any negotiations going on with India?

ALDEN: OK, three good questions. I’ll try to answer them as succinctly as possible.

The Obama-Xi meetings. One of the things that is very concerning about China's model of development is how much it depends on exports and investment. I mean, essentially there are three components of GDP: consumer spending, exports, and investment—you know, plant equipment, the highways, infrastructure, et cetera.

The United States, about three-quarters of U.S. growth in any year comes from consumer spending. That’s three-quarters of GDP comes from consumer spending. In China it’s less than 30 percent, the rest coming from exports and investment. And there’s no other country in the world, at least no other significant country in the world—I don’t want to get called out here—no other significant country in the world that has such a small proportion of its economic growth driven by consumer spending. And there are lots of reasons for that—and people who understand the structure of the Chinese economy better than I do.

But unless the Chinese do things internally to encourage more consumer spending, less saving, less investment, less of an export orientation, it’s going to be very hard to deal with some of the trade imbalance problems. So there’s things the United States can do at the margins by, you know, trying to make sure that China follows its obligations under the WTO and isn’t discriminating against U.S. exports to China. But unless that basic orientation of the Chinese economy is changed so that more of its growth comes from consumer spending, it’s going to be really hard to deal with the huge trade imbalances that we’ve seen between the U.S. and China for so many years.

On renewable energy technology, I mean, the Chinese have actually advanced pretty far on that, and some would say in fact have borrowed U.S. technology rather liberally and have subsidized their industries quite heavily. I mean, most of the solar panels that are purchased in the United States are made in China. So China has a huge solar panel industry, in fact has been charged by some U.S.-based companies with dumping its solar panels at below cost in the United States.

But more positively, I think this has been an area of U.S.-Chinese cooperation. The two countries are working together in some important ways to try to address global warming challenges. There has been a push in China to expand the use of renewable energy. The United States is encouraging that—probably not going to result in much in the way of U.S. exports. I mean, China's orientation with respect to its energy industry and many other industries is to produce domestically for domestic consumption. So I think it’s still a good thing. I think we want China to move towards renewable energy but it isn’t necessarily going to be an enormous U.S. business opportunity.

And then finally, on India, there are—you know, there are some in the U.S. who argue for trying to do a free trade agreement with India. India is a hard trade partner. India is a more closed economy than most other large economies, very focused on domestic industry, domestic development. The European Union has been trying to negotiate a free trade agreement with India I think maybe since 2007, 2008, a long time now, and they’ve been unable to conclude that successfully.

So I think if you talk to officials in the U.S. government, while they want to encourage closer economic ties between the U.S. and India I think the idea of a U.S.-India free trade agreement is just—is a bridge too far right at the moment.

FASKIANOS: Thank you. Next question.

ALDEN: Good question. Thanks.

OPERATOR: Thank you. Our next question comes from Drake University.

Q: Could you discuss the effects of the U.S. trade deficit and also how these trade deals may or may not impact the U.S. trade deficit?

ALDEN: Good question. And I see you’re from Drake. That’s where my brother went to school.

A lot of—a lot of controversy over that. There actually is a video up on our website—and I did a meeting in the spring on exactly this topic—on trying to assess the causes and consequences of the U.S. trade deficit. There are active debates among economists over this. It’s partly, I think, a feature of trade arrangements. It’s partly just a feature of macroeconomic factors, the level of savings and investment in different economies. U.S. savings is generally fairly low, very high in countries like China, and that tends to drive the trade deficit higher.

I think if you look at the effects, I think—you know, the biggest concern for the United States is the very large trade deficit in manufactured goods. I mean, I think there was a period there for some years where you would hear that, well, manufacturing is not all that important; you know, we can become a services economy, and we’ll be the innovative place but stuff will be made everywhere else.

I think the economic consensus has increasingly moved away from that. There’s a belief that manufacturing, particularly advanced manufacturing—you know, pharmaceuticals, aerospace, high-quality steel, automobiles, information technology in all its facets—that it’s important for leading economies like the United States to have a manufacturing presence in those industries.

If you look at what cities all across the country, states all across the country are doing, they are trying to attract and encourage those industries. So I think that, you know, the worry about the very high U.S. trade deficit, it’s mostly in manufactured goods, and a lot of it in advanced manufactured goods like information technology. We run a very big trade deficit with China in advanced manufacturing. And so I think that hurts because these are good jobs, a lot of evidence they pay—they pay more than most jobs in the economy.

So the loss of manufacturing jobs is—about 5 million manufacturing jobs disappeared in the U.S. during the 2000s. That was a significant contributor to unemployment and also, I think, to wage inequality because a lot of those were sort of good jobs that were available to people with modest levels of education. And so that disappearance has a real effect. There’s concern about innovation. If you’re not making things, it’s harder to stay on the cutting edge of innovation. So you want to keep manufacturing for those reasons.

So, I mean, I think we are—we have seen, in the United States in the last few years, much more focus on the importance of manufacturing, and some trends working in the U.S.’ favor. There has been at least a small recovery in manufacturing employment in the last few years. And the United States actually, in terms of costs of business for manufacturing, is pretty well placed. The U.S. is a lower-cost environment right now than Europe or Canada or a number of other places. So I think the U.S. is fairly well placed to see some significant expansion of manufacturing.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Our next question comes from Syracuse University.

Q: Yes, hello. My name is Nicholas Southwick. I’m at the Maxwell School at Syracuse, also a dual degree with the Johns Hopkins School of Advanced International Studies. And my question is related to Canada’s role in the TPP negotiations.

They’ve faced significant criticisms over—from Australia and New Zealand over their supply chain—their supply management system concerning dairy, and they have their own objections over auto parts trade. And there’s been threats that Canada would be excluded from TPP negotiations. Do you think those are credible threats? And what do you see the future for Canada’s role in the TPP negotiations?

ALDEN: Yeah, I have heard those threats voiced. In fact, they’ve been—you know, they’ve been voiced by some fairly senior U.S. officials. I would be very surprised if Canada got excluded from the agreement. Canada has been an active participant in a whole series of trade agreements. They already have their own trade agreement with the EU, for instance. The U.S. is following Canada’s lead on that front.

But it’s a difficult time for Canada right now. As you might know, they’re in the middle of a national election, and the conservative Prime Minister Stephen Harper is in a lot of trouble if you look at the polls right now. Basically the three big parties there—the conservatives, the liberals, and the NDP—are split 30/30/30 with the rest—the Bloc Québécois in Quebec, so you have a very uncertain election outcome there. And if either the liberals or the NDP form the government, they are less enamored of the TPP than Prime Minister Harper is, so that could be a real problem.

The two issues that you raise are extremely important ones for Canada. Supply management: Canada has a—I don’t pretend to understand all its details, but it has a complex system of protection for its dairy farmers, which basically means it’s very difficult to ship milk or milk products into Canada. And so that, you know, affects closest-by, you know, dairy farmers in Vermont, for instance, who want to sell into Canada and find that very hard to do.

For New Zealand and Australia, it’s essentially about milk powders and other products that can be transported over long distances, but they can’t sell those into Canada because of Canada’s protection for dairy. It’s a long-standing policy. Basically it protects farmers in Quebec, which politically is a very sensitive region in Canada. As you know, Quebec has tried on more than one occasion to separate from Canada. There have been referenda in Quebec to consider possibly a separation.

So the Canadian government is very nervous about doing anything that upsets Quebec, even if we’re talking about, you know, a few hundred dairy farmers in Quebec. So Canada has managed to maintain the system, you know, in NAFTA. In the Uruguay round they created the WTO. But it’s clearly going to have to go if Canada wants to be part of the TPP. And there’s a lot of reluctance by the Canadians to do that, specifically—you know, particularly in the middle of a national election. So I don’t think Canada is going to do anything until after their election is finished on the 19th, and then it may depend on the outcome.

The other issue—auto parts is a big issue for Mexico as well. So, briefly, under the NAFTA there is a regional content requirement. If you produce a car in North America, in order for it to receive the tariff benefits under NAFTA at least 62.5 percent of the content of that vehicle has to come from North America—from Mexico, Canada, or the United States.

Well, as part of the TPP, Japan is pushing to lower that number significantly—I don’t how low, maybe 50 percent, maybe less—because Japan sources parts from all over Asia—you know, China and Southeast Asia—and they want to be able to assemble those parts into vehicles in Japan and then ship that under tariff preferences to the United States.

And the Mexicans and the Canadians are really resisting this because they think it’s going to do significant damage to their auto industry. And the Canadians are actually the more vulnerable of the two. Mexico is very competitive right now, Canada less so, and there’s been a lot of job loss in Canada’s auto industry so they’re very nervous about this.

So these are two extremely difficult issues, and my crystal ball says they get resolved and Canada stays in the deal, but you’re right in highlighting them as very difficult issues for Canada to navigate in participating in the TPP.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Our next question comes from Bush School of Government and Public Service.

Q: Yes, hi. My name is Stef Demmer (ph). I’m with the Bush School.

I was wondering if you’d talk a little more about your work on U.S. response to global economic pressures.

ALDEN: Yeah, I’ll give you the brief version. I just finished writing 110,000 words on it. So I won’t read that out, but that basically—you know, I’ve covered these issues for a lot of years. I was a reporter working on trade policy going back into the early ’90s. I covered NAFTA and the Uruguay round and all those negotiations. And for a long time I’ve just been puzzled by what seems to me to have been an inadequate U.S. response to growing economic competition.

I mean, the United States has gone out and negotiated all these trade agreements but done very little thinking about how to respond. So, OK, if we’re opening up trade with the rest of the world, what are our competitive industries? Where are the jobs going to come from? How are we going to try to make sure that our industries aren’t driven out of business because there’s heavy subsidies in other countries?

I mean, a classic example is European subsidies for Airbus in competition with Boeing. What are we going to do for workers and communities that are hit very hard by trade agreements, because there are losers as well as winners in trade. And so what does that mean in terms of, you know, worker adjustment programs and assistance? How are we going to deal with investment issues? I mean, mostly the United States government has been worried about encouraging investment overseas. Well, what are we going to do to attract investment to the United States?

So I, probably too ambitiously, sat down to try to write a history of this. And it’s basically the book I’ve written is a kind of economic history of the last 50 years looking at the response to these challenges. And, you know, the reality is for the most part we’ve done rather poorly. Our companies have done well. I mean, U.S. companies have been very creative. It took a while. I mean, you go back and you look at the history of the ’70s and ’80s. There was a lot of criticism over the inability of U.S. companies to respond to the economic challenge from Germany or Japan, you know, how our auto industry was getting its butt kicked by Toyota and Honda.

U.S. companies have really done a pretty good job in responding. In fact, if you look at corporate profits in recent years, they’re in record levels. But the U.S. as a business location hasn’t done nearly as well. The U.S. share of investment has declined quite significantly in the last 20 years. Our share of global exports is way down, and not just as a result of China. There are other advanced economies like Germany that have done far better.

And so the basic conclusion in my book is we really haven’t managed this transition very well. And I actually think that’s one of the reasons there’s so much controversy over trade policy. I think if you look at the polls, I don’t think Americans are sort of intuitively opposed to free trade. They recognize the advantages. They appreciate, you know, their cheap television sets coming from Asia and, you know, higher quality of a lot of consumer goods. But I just think we’ve never, as a country, had an effective strategy for trying to respond to these competitive challenges.

So I go into it in a lot of detail in my book. It’s not going to be out for a while, but it’s called “Failure to Adjust” and maybe some of you will take a look when it does come out. I appreciate it.

FASKIANOS: Our next question, please.

OPERATOR: Thank you. Our next question comes from Babson College.

Q: Hello. I’m Luis Ortiz (sp), an MBA student at Babson College.

I am from Bolivia, and I would like to ask you if the U.S. experience with Colombia could be replicated in countries dealing with drug eradication such as Bolivia and Peru, and in what ways. Thank you.

ALDEN: Say hi to my friend Shanker Singham there, by the way.

That’s a tough question. I mean, I actually—the only reason I know anything about this is I also do some work on border security-related issues, which has brought up the drug control question.

I mean, the honest answer is I just don’t know. I mean, you know, in the case ofColombiathere was an aggressive military effort by theU.S., along with the Colombian government, to try to stamp out drug production in a lot of the country. And I think to some extent, as a result, it migrated to other places.

The hope on the trade front is that through free trade arrangements you will offer alternatives for exports. And so, you know, you’ve seen the Colombian flower industry, for instance, do very well.

I mean, we also have a free trade agreement with Peru, and trade alone does not seem to have been as successful in the Peruvian context in discouraging the production of drug crops. Bolivia, of course, is not interested in doing trade arrangements in the United States, so it’s hard to imagine a kind of Colombian-type solution for Bolivia. So, you know, I guess my short answer would be no. I don’t think that that model is easily extended to other places. I mean, it’s like it’s been—it’s been difficult to do it even with respect to Mexico, which has become, you know, both a source and a transit country for drugs. And I think the U.S. efforts to work with the Mexican government to control that problem have been less successful than they were in the case of Colombia.

Thanks for the question.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Our next question comes from the University of Maryland.

Q: Hello. My question is about the TPP. What specific problems do you think are likely to come up when the TPP goes to Congress for approval?

ALDEN: I anticipate that approval from the Congress will be reasonably easy. And I’m basing this just on the history of having watched these agreements in the past, that historically the difficult vote was the vote on trade promotion authority, because to some extent that is a vote on trade in the abstract. Do you want the president to pursue trade agreements or not? And so it’s an easier no vote for a lot of members of Congress.

By the time you get a deal done, you have important countries—you know, friends, neighbors, allies. You can think in this case, you know, Japan, Canada, Mexico, Vietnam, and others who have made difficult decisions—difficult for them politically at home—in order to conclude these agreements, and much harder for Congress to say no at that point.

The specific issues I can see causing some difficulty, I think—I think drug patent provisions from both sides. I don’t know what the final outcome is going to be, but there are, you know, members of Congress who are strong allies of the pharmaceutical industry here, like Orrin Hatch, who’s the senator who chairs the Senate Finance Committee, who wanted longer patent provisions on what they call so-called bio-similar drugs. And don’t ask me to explain exactly what a bio-similar is, but it’s a sort of new class of drugs.

And so if the industry’s not happy with that, you can see Orrin Hatch causing problems. I think there will be critics on the Democratic side who are critical of the patent-related provisions making it harder for poor countries to buy or produce generic drugs at lower cost. So I think that’ll be a difficult issue.

I think the issue of labor rights, you know, where Democrats—Sander Levin in the House most importantly—who are looking very closely at the commitments that Vietnam in particular makes to allow independent trade unions and follow the International Labor Organization principles in terms of collective bargaining, association, and minimum wage and issues like that. So I think that will be an issue that’s very closely scrutinized.

Auto issues, I think, will be a difficult one; you know, the position in particular that the United Auto Workers union takes on the agreement. In the U.S. agreement with Korea, the Obama administration negotiated—renegotiated the auto provisions of that agreement. So that was a deal done during the Bush administration. It was then renegotiated under Obama to get the support of the United Auto Workers. And so if the UAW is strongly opposed, I think there are some Democrats who might otherwise support who may vote against.

But at the end of the day, I think the tough vote was the one on TPA this spring. I think the final vote on TPP will be easier in Congress.

FASKIANOS: Great. Next question.

OPERATOR: Thank you.

(Gives queueing instructions.)

Our next question comes from Middlebury Institute of International Studies.

Q: Hello?

OPERATOR: Middlebury, you may go ahead.

Thank you. Our next question comes from the University of Connecticut.

Q: Hello. My name is Charles Haylock.

My question is, if these trade agreements between the U.S. and the Asian region don’t come to full fruition due to a lack of collective action agreements, in your opinion, from a foreign diplomacy perspective, how will this affect the United States’ influence on the Asian region?

ALDEN: Sir, can you just repeat that? You’re asking what the effect would be if the agreement fails, if there’s no Trans-Pacific Partnership?

Q: Yeah, like what’s—if these agreements fail, how the United States’ influence in this region will be affected for future dealings from an international relations perspective.

ALDEN: I mean, I think it would be quite costly. We hosted a meeting here at the Council in the spring. It was an off-the-record meeting, so there’s not a video of that one, but that looked at exactly this question, what the consequences of failure would be. And a lot of folks in the room who were experts on U.S.-Asia relations and security and foreign policy—I’m more of an economics guy—but the consensus was it would be very costly for U.S. foreign policy in the Asia-Pacific.

I think partly we had—you know, we’ve had President Obama talk about a pivot to Asia. But the only real substance in the pivot to Asia is this Trans-Pacific Partnership agreement. So the deepening of economic ties is really the centerpiece of the Obama administration’s pivot to Asia. So if that falls apart, it obviously really damages a central pillar of U.S. foreign policy in the region.

I think, secondly, I think just for a lot of Asian countries I think economics is the most important foreign policy issue. And so I think failure by the United States to be able to deliver on something that has been made such a high priority by this administration would just be seen as a serious blow against U.S. influence. I think it would cause a lot of doubt in the region about U.S. commitments in other areas. You know, if the United States can’t deliver on this, will it be able to deliver on other promises?

And then I think, you know, the final concern is China, right. Of course, the whole TPP is being negotiated against the backdrop of U.S. relations with China and China’s relations with its allies in the region. Of course, President Xi Jinping is arriving in Washington later this week. And the TPP, from the U.S. perspective, comes with a kind of built-in China strategy, which is China is busy trying to negotiate its own regional trade arrangements. And the United States wants to have something else to offer.

And so if the TPP goes through, the next step is going to be we want to expand this agreement. We, the United States, want to expand this agreement to other countries in the region, including eventually China. I mean, I think Korea is probably next in line. But the idea is at some point to bring China into the agreement on terms that are favorable to the United States. Without TPP, that leverage goes away and China, I think, really has a free hand to negotiate its own regional trade arrangements. I think countries in the region will really feel compelled to participate fully in those.

So I think it’s pretty clear that a failure of TPP would be a serious blow to long-term not just economic but foreign policy and U.S. security strategy in the region.

FASKIANOS: Great. Next question.

OPERATOR: Thank you. Our next question comes from Howard University School of Law.

Q: Hello. My name is Amir Johnson.

And I’d like to know, what are your thoughts on American trade policy towards Africa, given China’s growing commercial engagement on the continent?

ALDEN: I’m struggling here for an answer, and that actually gives me my answer, which is that there just has not been much engagement by the United States on trade with Africa in recent years. I mean, the Bush administration, to its credit, negotiated the AGOA, the Africa Growth and—I mean, passed it through Congress—the Africa Growth and Opportunity Act, and then went out and recruited a number of African countries to participate.

That’s a scheme that offered special trade preferences to African nations, and I think encouragingly was kind of tied to governance benchmarks. You know, there are not many things we know about economic development, but one of the things that we know for sure is that in the absence of, you know, reasonable stable government and rule of law and property rights, it’s hard for any country to develop economically. And AGOA tried to set up some governance benchmarks along with, you know, sort of usual trade and labor rights benchmarks. And I think AGOA was very important in that regard.

But I haven’t really seen any new initiatives out of this administration to build on AGOA. I mean, AGOA was—I think I’m correct in saying was reauthorized by the Congress as part of the package of trade agreements earlier this year. So it’s still there, and I think it’s important for a number of African countries. But I haven’t seen any new trade initiatives with respect to Africa, which I do think is a mistake. I mean, you know, China is investing very heavily in African infrastructure. I think the Chinese-led Asian infrastructure bank is probably going to play more of a role as well, and the U.S. has shied away from that.

So I would like to see a more active U.S. trade policy, I mean, one that sort of came to the attention of folks like me who are not Africa specialists but just pay attention to trade. I think during the Bush administration the trade folks talked a lot about Africa because of AGOA. You’ve seen less of that during this administration, which I think is not a good sign.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Our next question comes from Georgetown University.

Q: Yes. This is Michael Czinkota of the McDonough School of Business.

We’ve had emergent in society more of a focus with regards to business on trust, reliability, and honesty. And just lately we’ve had, for example, today in the papal address of Congress the statement that business can be an honorable profession. And, of course, we’ve had the Volkswagen controversy, which highlights the gap in terms of intentions between business, government, and society in general.

Do you see these dimensions entering our trade negotiations?

ALDEN: That’s an interesting question. The part of it that I would say is most relevant to trade policy—I mean, there are—you know, there are—it’s a question I could take in a lot of different ways. I mean, there are lots of issues about, you know, corporate codes of conduct with respect to how companies operate in developing countries in terms of, you know, the wages they pay and the safety of working conditions. You know, there were a whole series of issues around the textile issue and the horrible fire in Bangladesh a year, year and a half ago. So there’s that sort of whole dimension of, you know, what are corporations doing globally to try to uphold high standards, which I think is an extremely important conversation.

The part of it that interests me the most sort of has to do with the question of obligations as such to home countries. I mean, I think the United States—the tradition of business as it’s developed is really to focus almost solely on responsibility to shareholders. And so with respect to, you know, investment decisions, companies aren’t going to worry a whole lot. You know, are we expanding in the United States? Are we creating jobs in the United States? The concern is, you know, are we doing business where the returns are best and we can maximize gains for our shareholders?

And I think that does raise troubling questions over time since corporations obviously get a lot of benefits by virtue of being domiciled in the United States. And there are questions of what are the responsibilities of those corporations to the countries in which they are headquartered?

The Harvard Business School under Michael Porter and Jan Rivkin, I think, have done the most interesting work on this front—in this front. They’ve talked about, you know, the need for business to play a role in building what they call the commons in the United States. And that’s, you know, even something like apprenticeships, making sure that you’re kind of, you know, training a workforce that has the skills that business needs in the United States, that companies are looking for U.S. suppliers as opposed to, you know, necessarily always looking for whatever the cheapest source is from wherever in the world. You’ve seen Wal-Mart, for instance, nod at this a bit with their U.S. sourcing initiative.

So I think there are a lot of interesting questions on that front, which I do think have some potential to address some of the public concerns about trade and outsourcing. So I’m—you know, I’m a big fan of Porter and Rivkin’s work on this front. And I hope that not just Harvard Business School alumni but McDonough Business School alumni too are paying attention to it. So thanks for the question.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Our next question comes from Fordham University.

Q: Good afternoon. This is Samantha Andrews from Fordham University. First, thank you for taking time to speak with us today.

How will rising tensions in the South China Sea, where over $5 trillion in trade passes annually, including more than half of the world’s trade in liquid natural gas, impact international trade relations in the future?

ALDEN: That’s a good question. And I wish I had one of my security friends in here to give you a better answer. I mean, the answer is not at all if the Chinese don’t do anything. So, you know, what the Chinese are doing is trying to establish their claim to a small number of disputed islands in the South China Sea, which, extrapolating, one can imagine the Chinese, as they build their navy, trying to establish more control over ocean-going traffic through that region, which, as you mentioned, is a very high-traffic region, very important for commerce, particularly for energy trade.

The United States has a policy of maintaining free and open ocean-going navigation. And if the Chinese were to try to do that, the U.S. would clearly challenge it. But I—you can imagine that that would be a difficult sort of confrontation.

There was actually an interesting question this week asked by Senator McCain—there was a witness who was from the Pentagon; I think it may have been from the Navy—asked, you know, when was the last time that the United States sailed—you know, had a naval ship approach within 12 miles of these disputed islands? That’s generally agreed to be territorial waters. So, you know, if you're a country that controls an island you also control the territorial waters out 12 miles from that island. And so sending a U.S. Navy ship within that zone would be a way of the United States sending a message to China that the U.S. considers those to be international waters, not territorial waters. Apparently we haven’t sent a ship through those waters since 2012. So, you know, there is concern that China’s claims over those islands are going to become a kind of reality on the ground.

But I do think it’s highly unlikely that the Chinese would want to use that to disrupt trade through that region. They are dependent, obviously, on liquid fuels coming from the Middle East. China is an extremely trade-dependent country. So I don’t see them using this as a vehicle for trying to disrupt trade in those waterways. But I guarantee there are people in the Pentagon who are much less sanguine about this than I am and who are thinking about how the United States would react if that scenario occurred.

FASKIANOS: I hope we can take a few more questions.

OPERATOR: Thank you. Our next question comes from the University of Nebraska.

Q: Hello. This is Connor Barnes.

So according to the Council of Councils 2015 report card on international cooperation, the TTP (sic) and TTIP countries account for approximately 70 percent of global trade. Since countries involved in TTP (sic) and TTIP account for about that 70 percent, to what extent will the WTO continue to be relevant if the TTP (sic)-TTIP are implemented? And then would international trade agreements continue under the WTO or would the organization be marginalized?

ALDEN: That’s a great question, and it’s one that nobody has an answer to. As I think I mentioned in the intro, I was actually at a speech this morning by Robert Acevedo, who’s the director general of the WTO. And they have a big ministerial meeting coming up in Nigeria in December. And he was pretty candid, basically saying, you know, there are no prospects at the moment for any further progress in the Doha Round. So the WTO as a sort of multilateral negotiating body seems rather moribund.

So the question is, you know, what happens then? You know, assuming both the TPP and the TTIP are concluded, what does that mean for the WTO? And the honest answer is I don’t know. And nobody knows. I think a lot of it will depend on the big emerging markets, particularly China, India, Brazil to a somewhat lesser extent, because a lot of the reason the WTO has not been able to move forward on negotiations since the Uruguay Round is that these countries are just much more powerful players.

I mean, I was there as a reporter covering the end of the Uruguay Round. And the Uruguay Round was a U.S.-EU-Japan deal, essentially, that other countries had to sign on to. That’s not the way it works anymore. And the Chinese and the Indians and the Brazilians have been reluctant to move forward. I mean, to be fair, the United States has also been reluctant to move on its agriculture subsidies, which is a real problem.

But I think it’s possible, if you have a new kind of architecture in which the TPP and the TTIP are the two kind of dominant trade blocks, that you will see China and India and Brazil get worried about that situation and say we don’t really want to be excluded from this. We want to be inside in some way. And then the question is, do they ask to join on? You know, Chinese accession to the TPP, possibly India. Or do they go back to the WTO and they say, look, we really should try to update the rules multilaterally to reflect some of what’s been done in the TPP and the TTIP? And maybe that would break the logjam in Geneva.

The interesting thing about the WTO is even though it’s not been very successful as a negotiating body, it has a binding dispute settlement procedure, which is better than what exists in any of these regional trade agreements and it is used very heavily. And so I don’t think the WTO disappears even if it’s not able to move forward on negotiations. The problem you get there is you’ve got—you know, it’s sort of like a law that gets passed that never gets updated. So effectively you’ve got WTO courts now interpreting an agreement that’s 20 years old and hasn’t been updated in 20 years.

So at some point the agreement, I think, is going to become so dated that it’s hard to resolve disputes based on those provisions. But we may be a long way from there. The number of disputes going before the WTO continues to be quite significant every year. So they’re very busy in Geneva, even if they’re not succeeding on the negotiating front.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Our next question comes from the University of Southern Mississippi.

Q: Hello. This is Todd Barry again. Thank you for taking more questions.

With the TPP, how exactly do lowering tariffs on services work? And also global trade as a share of world GDP has fallen in the past half-decade. Do you have a particular theory as to why? Is it just a pause in globalization, or do you see globalization as continuing well into the future?

ALDEN: Let me take the second one first. Yeah, there has been—there has been a significant pause. I think some of it was obviously the financial crisis and the great recession. So world trade dropped significantly after that, partly as a result of the difficulty of getting financing for trade because, you know, financial markets generally kind of seized up.

But I think, you know, what you are seeing is I do think you’re seeing a bit of retrenchment. I mean, I think some of the enormous expansion of world trade was caused by companies investing very heavily in China in particular and in the other emerging markets, and so the trade flows from those countries increasing at a very rapid pace.

I think there has been some pulling back. I think a lot of U.S. companies have found doing business—and European companies, for that matter; Japanese companies—found doing business in China more difficult than they thought it would be. I think there is some narrowing of the cost advantage.

You know, for better or worse—excuse me—for better or worse, wage growth has been anemic in the United States and wages have been growing quite rapidly in China and in a number of other developing countries. So the relative advantages of making something in China and exporting it to the United States are not as great as they were 10 or 15 years ago. So I don’t think globalization is going to start moving the other direction. But it wouldn’t surprise me if trade growth continues to be slow for some years.

I mean, on services, a lot of the negotiations are about regulations. You know, services, the issue is not tariffs per se, because you’re talking often about things that are delivered within the country, you know, for a legal servicer, architecture. You know, you may be able to export a blueprint or something like that, but a lot of the work is carried out in the country by foreign companies investing in those countries. So the issues are really about regulatory discrimination against foreign countries—or, excuse me, against foreign companies. And those are difficult issues.

It’s one of the reasons it’s been harder to move forward on services trade issues than on goods trade. Goods trade is reasonably simple, though more complicated than it used to be. But services trade, you know, it’s all about what are the laws in terms of, you know, a foreign insurance company or foreign bank doing business in your country or telecommunications. What are the rules for interconnection? What are the pricing structures? Those are all very difficult issues to negotiate, which is, I think, why services trade is moved more slowly than goods trade.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Our next question comes from Bush School of Government and Public Service.

Q: Hi. This is Charlotte from the Bush School.

I wanted to turn back to Europe and ask, with tensions increasing, especially with Russia, in the region, how do you see economic ties influencing or complicating the foreign policy options for both the United States and Western Europe?

ALDEN: I’m sorry. Could you be a little more precise? So what—I mean, there are lots of things going on in Europe right now; you know, obviously the issues in Greece with the currency and the migration crisis. What particular sort of economic impact are you thinking about?

Q: Well, I was thinking about with Russian aggression, especially with Ukraine, there are a lot of questions about whether Germany would want to act or other states would want to act, given their economic ties with Russia. So what kind of complications come from increasing economic ties, and if that ties our hands at all when it comes to foreign policy.

ALDEN: I mean, I guess I see it slightly in the other direction, which I think, you know, much as the TPP in Asia—you know, the United States wants that agreement in part to have a stronger stand against China. I think one of the reasons the United States wants TTIP with Europe is to shore up the western alliance against Russia. I mean, anything that sort of integrates the United States economically more tightly with Western Europe, I think, is good from the perspective of stiffening European resolve vis-a-vis Russia.

Now, there are discrete issues having to do with energy and the reliance of a number of Western European countries on Russian energy supplies. But, you know, there are a lot of efforts to try to lessen that dependence through—you know, through domestic sources of one sort or another.

So I—I mean, I think, by and large, in the issues with Russia, the economic factors are somewhat at the margins. But I do know that, you know, one of the reasons that the U.S. would like to have a successful TTIP concluded is as a show of solidarity vis-a-vis what Russia’s been up to in Ukraine.

FASKIANOS: Ted, I think we have time for one last question. We’ll sneak it in.

OPERATOR: Thank you. Our last question comes from the University of Maryland.

Q: Thank you. This is Mac Destler. Hi, Ted. My student, Andreas (sp)—

ALDEN: Hey, Mac. How are you?

Q: I’m fine. My student, Andreas Schwarzenberg (sp), has a small question for the final one.

Q: It’s about currency manipulation. Do you think that any meaningful or strong provisions will be included in TPP? And are trade agreements the best way to deal with this issue?

ALDEN: There’s a little question for the final question—

Q: Hey.

ALDEN: —obviously. You know, I hadn’t mentioned this, but this is one of the other issues that, of course, was very, very contentious in the fight of trade promotion authority. No, I do not think there will be significant provisions in the TPP. The administration worked to shoot down an amendment to the TPA that was offered by Senator Portman from Ohio, a former U.S. trade representative, that would have made currency a central negotiating objective that had to be included in the agreement subject to the dispute settlement provisions of that agreement. So that was not part of the instructions that the administration got from Congress.

Currency, however, is—you know, does remain in the TPA as a general negotiating objective. And my understanding—and, you know, Mac Destler may have more information on this than I do—but my understanding is the United States is trying to negotiate effectively what amounts to a sort of side agreement that the TPP countries will set up a working group of TPP members to examine currency issues, talk about currency issues, wag their fingers and agree that currency manipulation is a bad thing, but without any binding dispute resolution procedures at all.

Even at that, I would consider that a step forward. At least it puts the issue on the agenda in the trade context, which kind of leads to your other question. No, I don’t think it’s the perfect vehicle. I think, you know, the idea in the post-World War II economic architecture was that the IMF would be the responsible body. And, in fact, there’s very strong language in the IMF that’s supposed to discourage countries from manipulating their currencies to gain an export advantage. But the IMF has just proved in practice unable to come up with any effective enforcement mechanism for those provisions.

So I’m sort of at the point of thinking this is an issue that matters a lot. It maybe matters a little less here in 2015 for the United States than it did, say, back in 2005, 2006, when the Renminbi was so undervalued compared to the U.S. dollar. But we know from history that it will come back again. And so I think anything that can be done—IMF, G-20, trade agreements—to keep this issue front and center is a good thing, I think, from the U.S. perspective.

FASKIANOS: Ted, thank you very much for today’s call. I think that we—it’s clear that there’s significant interest. And we could have kept going. But Council rules are to end on time, so we will do just that. We look forward to reading your book. When it comes out we’ll have you back to do another conference call.

So—and I hope that all of you will follow Ted on Twitter @EdwardAlden, because, as you could tell from this discussion, he has a great analysis and insights to offer.

ALDEN: Thanks very much, Irina. Thanks for a lot of excellent questions. Enjoyed it.

FASKIANOS: Our next call will be on Wednesday, October 7^th, from 12:00 to 1:00 p.m. David Miliband, president and CEO of the International Rescue Committee, will discuss strategies for improving humanitarian aid. And this is keying off an article that he wrote in Foreign Affairs, as well as focusing on the migration crisis that we’re seeing overseas.

In the meantime, you can follow our academic initiative on Twitter @CFR_Academic for information on new CFR resources and upcoming events that we are hosting. We are holding a back-to-school event in Washington, D.C. next Friday that will be on climate change. So I hope that—I know a lot of you are not based in D.C., but if you have friends who are, please let them know. You could find the announcement on our website at www.CFR.org/educators. So I hope that you will take a look there.

Thank you all for your participation today, and we look forward to your continued involvement in our discussions this fall.