Symposium | Security Policy Is Economic Policy

Making Trade Address Inequality

By Jennifer Harris

Tagged Inequalitynational securitytrade

It is well established that the U.S. economy is no longer delivering gains for most Americans. Income and wealth inequality in the United States are now higher than at any point in U.S. history. Wages have decoupled from GDP growth for the past four decades. And the bottom 50 percent of income earners have seen zero gains for a generation or more.

This has provoked plenty of attention and action on the domestic policy front—mainly, but not exclusively, from Democrats and progressives. At the federal level, the past few years have seen new overtime protections, increases to the minimum wage for workers covered by federal contracts, and—the most recent Republican tax legislation notwithstanding—at least modest bipartisan agreement on expanding the child tax credit and the Earned Income Tax Credit for adults without dependent children. State and local officials from red and blue states alike are experimenting with everything from apprenticeships and worker co-ops to minimum wage increases and universal basic income. And think tanks and policymaking circles are abuzz with new ideas to address inequality, ranging from corporate profit sharing to baby bonds to a federal job guarantee.

But on the international front, the situation could not be more different. Despite organizing more and more of its domestic economic agenda around the challenges of inequality and middle-class stagnation, the Obama Administration’s international economic policy failed to reckon with these challenges almost entirely. The centerpieces of Obama’s international economic agenda were inherited from George W. Bush: trade deals with Korea, Panama, and Colombia, and the Trans-Pacific Partnership (TPP); a bilateral investment treaty with China; the ascendance of the G20 leaders’ forum. Any daylight between the two administrations was confined to the margins. It is not merely that these policies failed to respond to the central problems of the day, notably widening inequality and stagnant paychecks; it is that, in the vast majority of cases, these problems were not even considered.

If President Obama’s international economic agenda proved blind to the country’s economic challenges, he is hardly alone. In the race to succeed him, the standard-bearers of his own party proved no different: Bernie Sanders shouted down TPP to the point of caricature, stoking the trade deal into a totemic representation for all that ails us, while offering no affirmative vision for what should come in its place. After Hillary Clinton came out against TPP, she largely avoided not just discussions of the deal, but trade and indeed international economic policy writ large.

Even President Trump, who arguably owes much of his political ascent to his ability to spot this inertia of international economic policy, seems so far unable to articulate any affirmative agenda capable of shrinking inequality and improving middle-class economic fortunes. For all of his willingness to upend the status quo, so far his approach remains limited to renegotiating existing trade agreements for improbable concessions and a series of one-off deals that hardly seems to add up to any affirmative governing vision. If anything, his threats of broader tariff wars will harm the very constituencies he has vowed to help.

Looking beyond the ring of professional politics, the influencing class—corporations, lobbies, government technocrats, think tanks, academics—appears similarly distracted and reliant on old habits. Here too, the debate is dominated by trade, where skeptics, once again, simply rail against trade deals, from Nafta to TPP, without truly offering anything in their place. Trade supporters, meanwhile, spend most of their time arguing that trade isn’t the problem, pointing instead to other culprits, such as technology, and focusing on domestic harm-mitigation measures (e.g., wage insurance, trade adjustment assistance, worker training, etc.).

As a result, Americans generally, and Democrats in particular, have drifted into an economic agenda abroad that is too often divorced from their economic goals at home: Washington backs U.S. companies abroad without any similar seriousness on tackling the corporate tax havens that keep their profits abroad. Because of Solyndra, it concedes the U.S. solar industry as a cautionary tale against public investments outright, rather than a lesson in what can happen when we fail to police the unfair competition these firms face. Above all, it treats stagnating middle-class incomes and rising inequality as problems to be smoothed out through absolute gains and redistribution, neither of which have trickled down or panned out as promised.

Of course, suggesting that U.S. international economic policy should pay more attention to the country’s growing inequality or shrinking middle class assumes that it could usefully do so. Some might question whether international economic policy really matters all that much to U.S. inequality or the health of the middle class. Certainly, it matters more than in previous eras—international trade and investment now accounts for one third of U.S. GDP, up from one fifth in 1990. In some cases, the problem is one of untapped potential, or missed opportunity. Because incomes in so-called “tradeable” sectors exceed those for “non-tradeable” sectors—goods or services that are, or could be, traded internationally are considered “tradeables,” as opposed to “non-tradeable items,” like haircuts—any serious policy course for narrowing inequality should prioritize growing the tradeables column. Yet, compared with other mature economies, U.S. exports remain strikingly low as a percentage of GDP. Efforts to increase exports have been lackluster, and Washington has devoted virtually no attention toward expanding the kinds of goods traded.

In addition to missing opportunities, policymakers have also, at times, made things worse: The failure to police currency manipulation between 2000–2010 cost the United States roughly $1 trillion and several million jobs (currency manipulation occurs whenever a government artificially restricts the value of its currency relative to other currencies, thus making its exports cheaper and more attractive). Many of these jobs were middle-class manufacturing jobs, further exacerbating the middle-class squeeze. The same is true of international tax havens, where much of the current $2 trillion in missing corporate profits traces back to a 1996 rule change allowing subsidiaries of the same company to move money between them without incurring U.S. taxes. In sum, there is plenty that a better vision for international economic policy could do to shrink inequality and grow middle-class incomes.

A Middle-Class Minded International Economic Policy

All of this raises the question: What would it look like if we were to design an affirmative international economic agenda that seriously reckons—indeed begins—with domestic inequality and middle-class stagnation, placing both as first-order organizing principles rather than second-order redistribution challenges?

At a minimum, such a project would require shifting the current debate in two fundamental ways. First, although there is no shortage of debate about the merits of specific trade deals like Nafta or TPP, precious little attention is paid to how U.S. trade deals might be reimagined to solve for inequality and stagnant middle-class wages. Supporters and detractors alike simply take as given what trade deals consist of, and then argue strictly in terms of good or bad; any innovation or creative problem solving is confined to managing the domestic effects of these deals (e.g. through trade adjustment assistance), skipping over the content and design of the deals themselves.

Second, public and scholarly debates focus far too heavily on trade, ignoring other domains of international economic policy—like ensuring U.S. multinationals are not undermining the U.S. middle class, and curbing individual and corporate tax avoidance—that are as or more important to middle-class fortunes.

Translating these shifts into practice is obviously a complex task and requires specific policy solutions; I offer some potential ideas here. These ideas are merely meant as a starting point—my primary aim is to begin a conversation about what a new U.S. international economic vision ought to entail.

Moving Beyond “Trade”

For all of the rancor surrounding recent trade deals, one thing is clear: The bipartisan consensus on trade, which has been conventional wisdom for all but the left flank of the Democratic Party for more than a quarter-century, is dead. And with good reason—trade liberalization is no longer delivering the benefits it once did for the United States, especially the middle class. Any new, more progressive vision on trade cannot simply take the current narrow project of liberalizing tariffs and overt subsidies as given. It will need to insist upon remaking trade itself, learning the lessons of the past three decades.

This begins with retiring the United States’ role as the world’s consumer of last resort, thereby making it harder for other countries to pursue their own export competitiveness as a way to avoid hard choices about reforming their own domestic economies. For every country that insists on running a current account surplus, another must run a corresponding deficit—resulting in debt-financed consumption and higher unemployment. The dollar’s role as the world’s reserve currency prevents the United States from engaging in competitive devaluation, thus leaving U.S. households to fill shortfalls in demand that originate abroad.

Tax avoidance by corporations and wealthy Americans has grown to such proportions that it calls into question the basic validity of trade efficiency.

For decades, the United States has simply tolerated these costs without forcing other countries to shoulder their share of aggregate demand. Consider how in recent years Washington has lectured Japan and China on currency intervention, Panama on tax havens, and Germany on the inappropriate mix of macroeconomic policies it is forcing on the rest of Europe—only to reward Tokyo, Beijing, Panama City, and Berlin with trade and investment negotiations that do not address these problems. Getting serious about bringing other countries’ irresponsible economic policies to heel should begin with espousing a new, standing policy: Major market-opening initiatives with the United States will be reserved as a privilege extended only to those countries doing their part to achieve balanced global growth. Such a policy would be capacious enough to cover all countries that are skimming off of global demand, from Germany to China.

Second, we should rethink the contents of trade deals themselves. Liberalizing trade has always entailed winners and losers. Yet too often we overlook this fact, taking false comfort in the myth that aggregate gains can be redistributed to make everyone better off. But because such redistribution has rarely panned out as promised, the initial distribution of costs and benefits matters. In point of fact, U.S. trade policy has long favored holders of capital over labor. The standard rejoinder for how trade favors middle- and lower-income Americans—lowering prices of standard consumer goods—is hardly an answer as to why our trade policy pushes for lower priced socks, but does not police currency manipulation, which produces outsized harms for U.S. manufacturing goods. There’s a reason we bargain ruthlessly for certain banking sector regulations and not for importation of generic drugs or medical services: Because banks have political power, and medical consumers do not. Why not use trade agreements to stamp out mercantilist financial incentive packages meant to lure multinationals to a given country? Why not use an environmental chapter to hasten the development of clean energy sectors? One could imagine pursuing a course of trade policies that sought a host of efficiency gains, but doing so in a manner that also happened to close some of the exacerbating factors driving inequality in the United States.

Third, our current trading system is buckling under the weight of a host of new forces that our existing rules and institutions never contemplated—from the rise of state capitalism to a host of market distortions far more damaging and elusive than tariffs. As the WTO has largely eliminated tariff barriers between major economies, countries have turned to a host of other market distorting practices that are largely unfazed by existing rules, including currency manipulation, indigenous innovation policies (a catchall term for the host of outright requirements and softer “guidelines” that Beijing and other governments employ to reduce dependence on foreign technology), the deliberate non-enforcement of basic intellectual property rights, and abusive regulatory regimes. Akin to the way the GATT offered a global solution to the problem of tariffs, we should consider a new present-day counterpart—an agreement, binding among parties, that would seek to confront the most salient forms of protectionism skewing playing fields today.

The problem is not just about updating antiquated rules, but about how we measure and enforce them. Existing trade law is designed to prohibit specific pre-identified practices (e.g. tariffs) and requires a finding of specific injury. But today’s most harmful practices tend to be fluid and easily hidden—where one is struck down or becomes too controversial, governments can all too easily reintroduce it with only slight refinement. We need to begin shifting from a measure-based system of rules—which are difficult to prove against countries like China—toward an effects-based system, where the focus is less on the designated activity or entity, and more on the distortive effect it creates. And because we are unlikely to design rules to contemplate every distortionary attempt, we should introduce currency provisions—and potentially current account targets—within trade negotiations to act as automatic stabilizers.

Nowhere to Hide—Tackling International Tax Avoidance

It is not enough to rethink trade. We also need to de-prioritize it in favor of a host of issues that matter as much or more to middle-class fortunes. Arguably the most pressing of these is international tax avoidance. Berkeley economist Gabriel Zucman finds that U.S. corporations claim 20 percent of their profits in tax havens, a tenfold increase since the 1980s; their effective tax rate has declined from 30 to 20 percent over the last 15 years, and two-thirds of this decline can be ascribed to increased international tax avoidance. All told, this translates to roughly $2 trillion in missing corporate profits, costing America some $73 billion annually in lost revenue. For comparison, the Earned Income Tax Credit—among the country’s most effective anti-poverty programs—costs $56 billion annually.

Tax avoidance by corporations and wealthy Americans has grown to such proportions that it calls into question the basic validity of trade efficiency, the so-called “Kaldor Hicks efficiency,” which holds that all parties can gain so long as losers can be compensated. After all, it’s hard for the United States to compensate the losers from globalization if the gains aren’t captured through effective tax policy.

The problem is plain in the case of U.S. policy toward China since the 1990s. The initial logic of U.S. efforts to pry open China’s markets seemed straightforward enough: American companies would set up shop in China, manufacturing their wares for cheap export back into the U.S. market, thereby not only lowering consumer prices, but increasing U.S. corporate profits and thus corporate tax revenues. But this logic was flawed from the start—because these profits lay abroad in various tax havens, the U.S. government never had a viable means of capturing them in the first place.

The solutions are relatively straightforward. Most boil down to creating real consequences for tax havens, but no modern U.S. administration, Republican or Democrat, has prioritized doing so. Although previous administrations have threatened sanctions on tax havens, none have seriously acted on those threats. We could impose steep tariffs on tax havens, which are allowable under WTO rules. And much like the geopolitically minded sanctions Washington has levelled against North Korea and Iran, Washington could also cut off the banks of tax havens from the dollar-based payments system—effectively handing the leaders of these countries a choice: Either stop harboring tax avoiders, or stop doing business in U.S. dollars.

Such solutions hardly need to be global. Because most tax havens are too small to absorb investment, tax dodgers must invest their cash in larger markets, like the United States, Europe, and Japan. Therefore, even if just these three jurisdictions could agree to impose a tax on income flows to tax havens, tax evasion would be significantly curtailed without requiring the havens to cooperate. The Obama Administration could have pressed much harder for an agreement among G7 countries, conditioning IMF funding during the Eurozone crisis to the willingness of EU countries to sign onto such a deal (the United States maintains a veto in the IMF), and linking Japan’s financial contribution to U.S. defense costs in East Asia to Tokyo’s willingness to sign onto such a deal. The Obama Administration could also have included such a provision in the trade deals it was pushing with the EU and Japan. Given the salience of tax evasion in Germany, it may well have even helped the politics of the U.S.-EU trade deal at the time.

Forging a New Grand Bargain with Industry

For all of the focus on small and medium enterprises, America’s largest companies still dictate trends regarding employment and worker pay. U.S. multinational companies (MNCs) are also facing a treacherous terrain internationally, with resurgent state capitalism in countries like China and Russia, and neo-industrial policies virtually everywhere. There are good arguments for Washington doing more to put these companies on an even playing field internationally. Contrary to claims that U.S. commercial diplomacy amounts to “corporate welfare,” strong U.S. government support for industry remains as essential today as it was when Ronald Reagan increased public investment in R&D and forced Japan to an agreement on exchange rates, imports, and U.S. investment.

But at the moment, we have no guarantee that going to bat for U.S. companies abroad will redound to help improve inequality or stagnating wages domestically. The emerging consensus surrounding the sharp increases in inequality and flattening of wages in the United States has largely overlooked one important storyline: the undeniable role that changes to the U.S. corporate landscape have played in bringing these problems about. In fact, stagnant wages and rising inequality have substantial roots in specific changes in corporate behavior, many of which have accelerated since the financial crisis; and thanks to a variety of pressures, today’s largest firms are acting in ways that are bad not just for the country’s economic health but, often, for their own bottom line as well.

To start, fewer corporate dollars are going to workers. Since 1980, corporate profits have doubled as a percentage of GDP, rising from 6 percent to 12 percent of GDP. During the same timeframe, wages as a percentage of GDP have fallen by roughly the same 6 to 7 percent of GDP. Also since about 1980, CEO pay in American firms has risen 937 percent, compared with 10.2 percent growth in worker compensation. Companies are also underinvesting in R&D. The five-year growth rate of U.S. capital stock has dropped to the lowest level in the post-World War II era, and the average age of the capital stock is at historical peaks. Tech investment has dropped to a near-15-year low as a share of overall investment. Where is this money going, if not to pay workers or invest in capital or R&D? Increasingly, back to shareholders, it seems (when it’s not just being parked abroad). All told, seven of the 10 largest share repurchasers spent more on buybacks and dividends than their entire net income between 2003 and 2012—and analysts project that 2018 will mark another record year for buybacks.

The question, then, is how to create a new grand bargain that ensures both that Washington is doing its part to help its companies compete effectively around the world and that this support will indeed translate into less inequality and a stronger U.S. middle class?

Why do we bargain for certain banking rules and not for importation of generic drugs? Because banks have power and medical consumers do not.

One form this bargain could take is making certain benefits available only to firms that meet certain conditions—e.g., a sufficiently equitable pay ratio between top executives and other workers, fair treatment of contract workers, neutrality toward unions, profit sharing, or repatriation of profits. For instance, Washington could overhaul its approach to commercial diplomacy, advocating for U.S. companies bidding on overseas opportunities as intensely as Defense Department officials advocate for weapons sales to allies. Or, we might merge the Export-Import Bank and the Overseas Private Investment Corporation into a single entity modeled after the Development Financing Institutions (DFI’s) common throughout Europe—imbuing the new institution with new authorities, like the ability to provide higher risk loans and equity positions, and capitalizing it on par with its European counterparts (with an annual operating budget of €1.9B, Germany’s DFI dwarfs the combined budgets of Ex-Im and OPIC).

However, some kinds of assistance will be difficult to target only to firms that meet certain standards of behavior. Here, we could consider a broader sector-wide grand bargain that conditions the sectoral assistance on MNCs’ support for new legislation or regulations (e.g. penalties for firms that do not provide sufficient worker training, predictable scheduling, or paid sick and family leave; liability for contractors around wage theft, including overtime policies; raising the federal minimum wage; eliminating tax incentives for equity based compensation; closing the carried interest loophole, etc.)

A good example of such sector-wide assistance would be a new comprehensive strategy to bring Chinese economic abuses to heel—one that challenges the very foundations of China’s state capitalist economic model and its industrial policies, both in China, and increasingly, in third-party markets. Such a strategy should involve a shift toward the general principle of reciprocity. For too long, the United States has remained open to Chinese exports and investment, even as China imports little from our shores and severely restricts U.S. investment. Whereas we broadly allow Chinese investment, China evaluates all foreign investment on a case-by-case basis, and lists some 328 items, from golf courses to theme parks, that remain either heavily restricted or closed entirely to foreign investors.

This reciprocity should not merely pave the way for increased U.S. investment in China, but should ensure that U.S. and Chinese companies are competing on fair footing around the world. That means focusing less on a strict, “tit-for-tat” version of reciprocity and more on leveraging U.S. market access to address the kitchen sink of Chinese industrial policies—everything from protectionist technical standards to mandatory joint venture requirements for foreign firms to generous state financing for domestic “national champion firms” that shelter Chinese firms from competition at home and arm them with unfair advantages abroad.

Consider, for example, the doctrinal gaps surrounding U.S. sovereign immunity and foreign sovereign compulsion. Many state-supported firms in China alternate between wearing state and private hats, enabling them to engage in anti-competitive behavior without legal consequence. Although some anti-competitive behavior by state-owned enterprises (SOEs) is beginning to be regulated by trade law, and private foreign firms have long been subject to the Sherman Act, a growing breed of hybrid firms is slipping between the cracks of these two bodies of law. Often these firms evade the reach of U.S. international antitrust law by invoking sovereign immunity and foreign sovereign compulsion.

In one closely watched civil case, American purchasers of vitamin C sued four Chinese vitamin C manufacturers, offering powerful evidence that the manufacturers colluded to fix prices in the United States. The evidence was so convincing that the defendants did not contest the allegations, nor did they dispute that their actions were blatant violations of U.S. antitrust law. Instead, the Chinese manufacturers (none of which claimed official ties to the Chinese government) simply invoked the foreign sovereign compulsion doctrine, claiming that the Chinese government forcibly compelled them to price fix and arguing that this shields them from liability under U.S. antitrust laws. After a decade of litigation in U.S. courts, the Chinese firms won, the court holding that “China’s interests outweigh whatever antitrust enforcement issues the United States may have.” U.S. policymakers could demand a range of measures—including binding legislation and regulation—of firms in return for significantly more aggressive efforts to police unfair competition.


Efforts to remedy inequality and increase middle-class wages have so far been much too domestically focused; we need a more vigorous conversation about how to use international economic policy to tackle these challenges. My goal is less to advance particular proposals than to provoke this conversation.

But of course international economic policy, like all policy, is ultimately made by people. In my experience working on these issues in the Obama Administration, the officials responsible for international economic policy tended to possess professional backgrounds in finance or corporate law and held correspondingly neoliberal world views. Perhaps not coincidentally, they did not prioritize inequality and middle-class wages. Therefore, if we are going to have a new conversation about international economic policy, we may also need to begin by listening to some new voices.

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Jennifer Harris is a fellow at the Roosevelt Institute, a non-resident senior fellow at the Brookings Institution, and a lecturer at Apple University. She is currently working on a book about redirecting America’s international economic policy to address inequality and the hollowing out of the middle class.

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