Former Secretary of Commerce Mickey Kantor Defends the Record of Global Free Trade

Former Secretary of Commerce Mickey Kantor Defends the Record of Global Free Trade

Photo by Reed Hutchinson

300 million people were brought out of poverty in China and India in the last twenty years the trade expert tells UCLA undergraduates.

Undergraduates in the Spring quarter class of UCLA's new Global Studies major had the privilege of having as one of their instructors former U.S. Secretary of Commerce and U.S. Trade Representative Mickey Kantor. Kantor appeared as a guest lecturer at the June 1 session, the fourth and last of a special Global Challenges subset of the class presentations sponsored by the Ronald W. Burkle Center for International Relations.

Mickey Kantor served as U.S. Trade Representative, 1993 to 1997, and as Secretary of Commerce under Bill Clinton, 1996 to 1997. Kantor was the lead U.S. negotiator in the creation of the World Trade Organization, the North American Free Trade Agreement, and the Asian Pacific Economic Cooperation Forum. He oversaw some 200 trade agreements between the United States and other countries. Kantor served as national chairman for the Clinton-Gore campaign in 1992, and is a member of the board of several prominent corporations including Monsanto. His Global Studies lecture was chaired by Geoffrey Garrett, UCLA's vice provost for International Studies.

Mickey Kantor reminded his audience that in a globalized world the movement of goods and services -- trade -- is accompanied by the movement of capital and the movement of people as well. He said that the expansion of world trade in the past twenty years, contrary to the critics of globalization, has "brought 300 million people out of poverty" in developing countries, mainly China and India. He advocated building "a rules-based trade system" that would ensure fairness for all participants, and insisted that trade agreements will only be workable and acceptable when they include side agreements on labor standards and environmental protection, something first pioneered by the Bill Clinton administration.

Trade, Kantor said, in the last two decades "has expanded nearly exponentially or geometrically," assuming a far more prominent place in foreign policy than ever before. This, he said, is a reflection of a much more interdependent world. "When you talk about terrorism, international crime, drugs, the abuse of women, the environment, SARS, AIDS, these are all problems of globalization. It's not just about the movement of trade goods and services and the movement of capital. It really isn't."

The Decline of Sovereignty

A major implication of globalization, Kantor said, is a weakening of sovereignty. "What we are doing day after day, inexorably, is wiping out sovereignty in the world to some degree. Wiping out borders. Issues that used to be thought of as only internal to the nation have become issues that, of course, affect many nations. So therefore countries are going to have to harmonize their standards, their certifications, their testing, their various other things in order to continue to build on this global economy.

"Interdependency is here. Here is one broader statement: What we want in an age of interdependence is strong, not weak, nations. Weak nations in an interdependent world affect us all adversely. The fact we have to understand as a nation -- the United States I am talking about -- in providing leadership we want to strengthen nations, not weaken them. Not just economically but politically and strategically as well. The last thing we want is weak nations destabilizing a region or even a world. It creates a ton of problems, as we have seen today in the Middle East and other places."

Trade Isolationism Makes Things Worse

Mickey Kantor commented that in times of recession it is common for people to blame foreign goods and to turn against free trade agreements. But he insisted that this generally makes things worse rather than better. As an example he pointed to the 1930 Smoot-Hawley Tariff act passed during the Great Depression, which raised tariffs to historically high levels.

"We cut off trade, we raised our tariffs, we raised the barriers, we kept out the goods and services of other nations. And we made the Depression even worse and more difficult for people here in the United States. The Depression became worse and worse. The only way we came out of the Depression, of course, was the economic benefits, if you want to call it that, of the Second World War."

It was in the postwar period that institutions were first put in place to try to effectively regulate a reemergent world market. These included the United Nations, the General Agreement on Tariffs and Trade (GATT) of 1947, the International Monetary Fund, and the World Bank.

It took some twenty-five years for uneasiness about globalization and world trade to become prevalent among Americans. "It was in the seventies and eighties, when Japan began to buy U.S. icon buildings around the United States, buy U.S. companies, begin to impact and now to somewhat dominate the U.S. car market. U.S. citizens began to react against trade agreements."

The greater the level of trade among and between nations, Kantor said, "the more reaction you are going to get from your home political situation. Why? Because you are actually affecting the way people live." Kantor challenged the popular perception that the growth of international commercial exchanges are damaging. "We have created a higher standard of living in many places in the world. We have seen 300 million people brought out of poverty in India and China in the last few years due to the influx to a great degree of international capital and more open trade." He conceded that poverty has risen in Africa, "but the net is still a plus for what has happened in the world over the last twenty-five years."

The Bush Administration Is "Off in the Wrong Direction" on Trade

Kantor cautioned, however, that the benefits of expanded trade are not automatic. They require that we "maintain salaries, maintain the integrity of countries, maintain cultures, be sensitive to labor and the environment and other issues." And here Mickey Kantor criticized the Bush administration. "I believe the administration is off in the wrong direction on those issues. We tried in the Clinton administration to move toward something that had never been done in trade before. That is, labor and environmental agreements in trade agreements. The first ever in history were the side agreements on NAFTA. It is really important to understand it."

Expansion of trade alone "sometimes can be negative unless you build in institutions in a society that can help to maintain the kind of relationship between the economy and the politics of the country that can lead toward sane growth," Kantor said. In his view this requires protection of labor standards and the environment and working to reduce or eliminate bribery and corruption.

"Some countries have done this well. China has done it well. India has done it well. . . . Then there is the Arab world, where it has not been done so well because of the weak institutions, continual war and conflict, authoritarian governments, etc."

China and Globalization

For Mickey Kantor, China is the single most important emergent market in world trade. "China is both a great potential advantage for all of us, whether you live in the U.S. or you live anywhere else," he said. "It is also a great challenge for us to try to deal with China."

Kantor traced China's economic rise from Deng Xiaoping's new economic policy in 1978. "Tremendous amounts of international capital were knocked into China, building the basic infrastructure in the eastern part of China and down in the south, in Shenzhen and Hong Kong. China has had an inconsistent growth. You can look at central and western China, or the rustbelt of China, as they call it, in the northeast. They have tremendous problems. They have problems with their agriculture. In the agricultural sector, China is now importing huge amount of food, soybeans from Brazil and the United States and other things all over the world. The fact is, China has to reinvigorate their agricultural sector."

China also needs to expand its educational system, Kantor said. But it is nevertheless undeniable that things are "really booming from Beijing to Shenzhen. It's amazing what's happening, which has implications for all of us." In ten or twelve years, he said, "China will be the second largest economy on the face of the earth. Only the United States will have a bigger economy."

He gave some examples: "Two-thirds of microwave ovens in the world are made in China. Two-thirds of the DVD players are made in China. More than half the concrete in the world is produced in China. More than half the steel in the world is produced in China. China is the third largest user of oil and the second largest user of energy in the world."

By and large, Kantor said, China abides by the agreements it made in order to join the World Trade Organization. But there are some exceptions, and how to respond to them is a touchy issue. "Will they protect intellectual property rights? If they don't, what do you do about it? Do you take them to the WTO? What kind of price do you pay for that politically? That's the first thing you want to take into account. Then there is agriculture. There are sanitary regulations for food coming in and out of China. In order to protect their farmers from competition they have their own regulations and it drives partners in the rest of the world a little bit batty trying to deal with China."

An immediate issue, he noted, is the expiration last December of the Multi-Fiber Arrangement of 1974, which had set limits on the amount of textiles that could be exported to Europe and the United States, as an exemption from standard GATT rules. "It has just gone out of existence. Chinese textiles are swamping the U.S. market and the European market. People have lost their jobs. Companies are going out of business. Some of this was anticipated; some was not anticipated. We should have realized when we saw inventories go down in December in Europe and the United States that wholesalers were preparing to buy cheaper goods from China. So you had this huge flood and it had an enormous adverse economic impact here in the United States and in Europe, if you happened to be in the textile or apparel industries. It was a good thing in China, of course. And it has now called out the U.S. and European Community controls, called safeguard mechanisms, which China agreed to when it acceded to the WTO."

Calls for Revaluing the Renminbi

In part this growing trade dispute focuses on Chinese textiles, but an important related issue is China's undervalued currency. "The Congress of the United States is upset with China because of the huge trade surplus with the United States and because the Chinese refuse to revalue the yuan, or the Renminbi, which is their currency. Most people believe -- I believe -- the yuan or Renminbi is undervalued, which gives China a huge advantage in international trade, impacting our market and the European market in a way that is not good for or healthy in trade. It is not a natural advantage. It is an artificial advantage."

This is an example, Kantor said, of "international diplomatic and economic relations, trade, and U.S. domestic policy all coming together. So trade cannot be looked at in a vacuum. It has to be looked at as part of all the things we are trying to do, strategically, or politically, or economically. You couldn't have said this twenty years ago. Twenty years ago trade was just not that important. Today the U.S. trade representative is a vital part of U.S. foreign policy."

How NAFTA Was Won

At this point Mickey Kantor opened the floor to questions. International Institute Dean Geoffrey Garrett led off by asking "How do you square the circle between these abstract economic gains and the real experience of the people who feel they are losing out?"

Kantor responded by recalling the discussion in Bill Clinton's first campaign committee before the 1992 presidential elections on whether or not to support the pending legislation to adopt the North American Free Trade Agreement. "It was a big issue in Michigan and Ohio, as you can imagine, among industrial workers. They believed it would be Ross Perot's 'great sucking sound' of jobs going to Mexico -- which never happened at all, by the way. We had major discussions in the campaign."

Public opinion polls were running two to one against NAFTA and it was thought that supporting NAFTA would cost then-Governor Clinton Michigan and Ohio and hence the election. "We had two formulations. One was 'Yes, but,' which was to support NAFTA but with side agreements on labor and the environment. And until that time there had never been such side agreements to trade agreements ever in history. Or 'No, but,' we are against it but if we have in the future such side agreements we will support.

"He decided he could not support the No position. He had to be Yes. It would be irresponsible to be no. It would weaken Mexico. It would weaken Canada. Our economy was in bad shape at the time. . . . The fact is we still won Michigan and Ohio. Why? Because Bill Clinton convinced the people of Michigan and Ohio that NAFTA was important for their future as well as for the future of the country."

In Kantor's view, labor and environmental agreements remain essential to winning public support for trade agreements that open the U.S. market to foreign goods and services.

Are Labor and Environmental Agreements Enforceable?

A student asked Kantor if such environmental and labor clauses were really enforceable. "Some countries are dependent on cheap labor for their economies, like China. And also would environmental policy be possible, especially considering we killed the Kyoto treaty?"

Kantor replied that access to the U.S. market "is a powerful incentive." There are also trade sanctions and rulings by the ILO. "Every country in the WTO, every one, has signed to the ILO labor standards and agreed to enforce them in their society."

He expressed disappointment that the Bush administration's trade policy has not generally included labor or environmental standards. "We want to protect investment, right? We're going to protect agriculture. We're going to advance the cause of goods and services and capital. Why wouldn't we do something about labor and the environment? Is that not part of a trade agreement as well? So what we have done is to let this ideological, theological notion get in the way of seeing reality."

Even with these weaknesses in current American policy, the former Secretary of Commerce declared, "Globalization is here whether we like it or not. There are people who say that globalization is this great evil thing out there that is hurting people and so on. There is no evidence for that. Inequality and income have narrowed in the last twenty-five years since trade has been growing. It has not widened. And therefore we have less poor people in the world, we have greater income-equality in the world . . . but it ain't perfect."

What to Read to Stay Current on Trade Issues

Another student asked what he should read to stay informed about world trade issues. Mickey Kantor replied:

"I read the New York Times and then, depending on which city I am in, the Los Angeles Times or the Washington Post. Then I go to the China Daily online, the Japan Times online. I pick up the Economist. That's about all I can do in the morning before the phone starts ringing and my blackberry starts going crazy and people are sending me emails. Now, if you are really interested in trade, Inside U.S. Trade is pertinent, but you really have to be interested in trade and want to get into the details. But there is no better. When I was U.S. Trade Representative I would leave early in the morning and pick up Inside U.S. Trade. I would learn more from that then I could from the staff, and more quickly. I would learn about memos that were coming to me that I hadn't received yet. How they did this I have no idea, but it was a tremendous resource every morning.

"If it is your area, Inside U.S.-China Trade is also terrific and very good to read. The Economist is interesting. It does a very good job of covering the world. You've got to understand their point of view, though, and be careful when you look at it. I also read some blogs. There are some blogs that are very good, although I can't name them off the top of my head. There is so much more information available than there was even ten years ago."

What about CAFTA?

The next questioner asked Mickey Kantor's opinion of the pending Central America Free Trade Agreement between the United States and El Salvador, Guatemala, Honduras, Nicaragua, Costa Rica, and the Dominican Republic. He particularly asked about opposition to the proposed agreement in Costa Rica where there are calls for a public referendum on the issue.

Mickey Kantor replied: "People are threatened by change. Yet we live in a world in which the only constant is change. People are worried that their jobs will be adversely affected. In many countries in Central America, and Mexico and other countries, many people are living on the edge and people are afraid that anything that changes is likely to be negative rather than positive. A lot of people in the U.S. feel the same way. That's part of the reaction. This is happening all over the world. . . .

"People are afraid of a more liberalized economy with more open trade, less protectionism. In France there were the stringent labor standards they had in the French economy and they reacted against the American model."

In Costa Rica, Kantor continued, "the labor unions and the Catholic Church are very concerned about labor standards. Some of the governments did not implement standards and the U.S. did not insist upon it. So there is a call for a referendum or a plebiscite on whether or not to endorse this agreement. That's a great shock to everyone who is involved in the agreement because everyone thought the Central American countries were all for the agreement, but it turns out their leaders were a little bit ahead of their populations."

Why Did the United States withdraw from the Kyoto Protocol?

Another student asked Mickey Kantor "What was it about Kyoto that didn't work for the U.S.? And what could be a more realistic way to defend the environment?"

"I want to make two comments about Kyoto," Kantor responded. "One is, the first Bush administration and now the second Bush administration, unlike the Clinton administration, believe that Kyoto was unfair to the U.S. They say this is because we were having a greater burden even though we have done better than most places around the world environmentally; the Environmental Protection Agency and the Clean Air Act and so forth. So that was the general objection."

He was sharply critical of the George W. Bush government for withdrawing from the Kyoto environmental treaty. "I don't think in the globalized world we live in you can walk away from negotiating with your trading partners and all those countries in the world you are so interdependent with. When you walk away, what you do is create a sense of lack of confidence in our leadership. And the world does need U.S. leadership."

This was not an isolated incident, he noted. In addition to withdrawing from the Kyoto environmental agreement the Bush administration backed out of the Antiballistic Missile Treaty and the UN World Conference Against Racism in 2001,and the International Criminal Court. "What signal are you sending? And you unilaterally invade Iraq. What signal are you sending to the rest of the world? It's my way or the highway."

We need cooperation, Kantor argued, "in fighting terrorism, in international crime, on SARS, on AIDS, on trade agreements. The fact is we are not getting as much as we should because people have lost confidence in U.S. leadership when we walk away from these things. We can disagree. You don't just walk away from the table. You don't get parades for people who can't reach agreement. And that is exactly what we've done. We walked away, we took our ball and went home."

The Future of the Middle East

Asked to comment on the Middle East, Mickey Kantor replied:

"Well, a lot of things are going to have to happen. First there is a lot that has to happen in the Arab economies in terms of opening up, allowing imports and not controlling exports, not controlling currency, allowing more entrepreneurship, not as much government control. You've got, in almost every country, authoritarian controls. Every country except now Iraq has authoritarian governments that control their economies and that are stifling it. The Middle East, with the exception of Israel, is the one area of the world among developing nations where trade has gone down. This is a very dangerous situation. It leaves people no hope. There is lack of jobs, lack of income. There are African countries that represent this as well."

Kantor called for the development of "open societies, open economies." He added that China's economic takeoff, which still involves an authoritarian government, has taken twenty-seven years to get this far and the Arab countries have, by and large, not even started. "So we are looking at twenty-five to thirty years if we started today."

Why Does the United States Continue to Subsidize American Agriculture?

"It seems inexplicable, doesn't it?" Mickey Kantor replied to this question. "70% of the world's agricultural export subsidies are in the U.S. and the European Union. We call them crop supports. Cotton is the most egregious. It has an adverse effect upon developing countries in their ability to compete on the world market. 80% of poor people on the face of the earth live on farms or are connected to rural agriculture."

There would be an "enormous impact," Kantor said, "if we could get rid of these subsidies; and frankly, state-controlled agricultural unions in Canada and Australia as well. Why? Because it would make it fairer, it would make it possible for them to compete in the world market. More than that has to be done. We have to reduce tariffs as well. We have to open up Europe's markets."

He gave the example of cotton production in Africa. "This is a big product in Africa. But they suffer from lack of infrastructure, lack of technology, and lack of access to the world market because of these subsidies."

What Should the West Do about China's Undervalued Currency?

When asked what the United States and other Western countries should actually do to prod China to raise the exchange rate of the Renminbi, Kantor's reply was cautious. "Clearly, the yuan is undervalued. There is no doubt about that. How much is another question. You have to be careful. People who have been advocating a 40% revaluation don't understand that the Chinese banking system is still fairly weak. All of their debt is valued in yuan or Renminbi. If you revalued 40% those loans would be 40% more expensive. You would have more nonperforming loans, therefore Chinese banks would have to have greater reserves because of the high amount of nonperforming loans. When you have greater reserves you have less money to lend and then you have to cut off credit in the society. The economy stops growing as fast as it was. Then the living standard will go down instead of up. You have to be really careful of what you want."

His proposal was for a slow increase over time. At the same time, however, he pointed to an American double standard toward other trading partners whose currencies are overvalued. "South Korea and Japan have spent billions; billions in recent years buying dollars, supporting the dollar. Why? Because their own currencies are undervalued. We have said not one word to the Koreans or the Japanese. Does anybody have a guess why we haven't said a word? Because they sent troops to Iraq. It's political. So we rail at the Chinese. . . . We shouldn't be focusing only on the Chinese, we should be admonishing the Koreans and the Japanese as well. Everyone should play fair in international trade and international commerce, the movement of capital, and the value of your currency as well."

Are the Corporations Impoverishing People?

A woman took the mike next, declaring that "this country has become 'of corporations, by corporations, for corporations.' And a good portion of these corporations . . . are taking out from this country, not paying taxes, not taking care of the people. And I would like to see our country go back to being for people first and put more regulations on corporations and make them more responsible."

Kantor responded that "It is very difficult to determine what is the effect on jobs, income, standard of living. Much more than trade, of course, has an impact upon that." He repeated that between 1993 and 2001 "we saw the greatest growth in our economy, when more jobs were created than in the history of all humankind." If the claimed impact of corporate influence is to be measured through the growth of international trade, Kantor said, "it is hard to see the negative effect of trade agreements" in the last ten or fifteen years.

Do the Large U.S. Trade Deficits Lower American Living Standards?

The next question concerned the weakness of U.S. exports, the large American trade deficits, and their impact on the U.S. standard of living. Mickey Kantor was disinclined to treat the deficits as the cause of problems but rather as symptoms of other problems.

"We have a $162 billion trade deficit with China," Kantor said. "Most of that is macroeconomics. Some of it was due to intellectual property rights, agricultural imports, and the need for currency revaluation. What percentage I can't tell you. The greatest part is macroeconomics. Since the U.S. economy is stronger than its sister economies around the world we are going to suck in imports."

He pointed out that much of the loss of jobs in the U.S. export sector has been compensated by jobs in the import sector. "A lot of people are employed in companies and industries that import rather than export." He gave the examples of auto mechanics who work on Japanese or European cars, automobile salesmen, "or people who work at all kinds of outlets, including Wal Mart. The fact is that they have real jobs that depend on imports."

What you don't want, he qualified, "is unfairness in trade or the manipulation of trade through the manipulation of currencies. What you want is a rules-based trading system. You can't have a level trading system or else the developing countries couldn't compete. They have to have some advantages in trading with stronger economies."

From here Kantor took up a related question on the impact of outsourcing on the U.S. economy. A more serious long-term problem, he said, has been the decline in the American public education system, especially in math and science:

"Last year Intel held science fairs in the United States. And there were 65,000 young people who attended them. Do you know how many young people attended science fairs in China last year? How many kids showed up? About six million. Six million!"

He criticized the large-scale flight of the middle class from the public school system, the lack of qualified teachers, and the lack of "mandatory parent involvement." He concluded that the country has been coasting for decades on the generation of technicians and scientists trained under the GI Bill after the Second World War, almost all of whom are now retired or dead and who have not been fully replaced.

Published: Wednesday, June 01, 2005