The political polarization of trade this campaign season is an historical first. It’s clear that globalization has gone out of fashion. There is a real backlash against free trade. To me there is a real need to show that globalization and free trade are not just for the elites. There is a critical need for proactive policies. Here are some of my observations concerning U.S. trade policy and globalization.

• Yes, workers have been hurt by globalization. The remedy is more training programs and significant upgrading of the Trade Adjustment Assistance legislation.

• The Growth of Globalization has stalled (not reversed)  since the Great Financial Crisis of 2008. Trade has stalled at 30% of GDP (of total world economic output) per year after growing from 20% from 1992. Trade is projected to grow for 2016 at only 2.8%

• Greater assistance by public universities and other educational institutions should be encouraged and even required.

• Both state and federal officials (as well as private sector CEOs) involved with job creation and economic development must become more outspoken in defense of the benefits of trade. This includes imports as well as foreign direct investment.

• We need multiple public champions and advocacy of the benefits of increasing engagement with the global economy.

• But so far American public policy as well as corporate policy have not distributed the benefits of global trade more equitably.

• What is certainly not good public policy proposals are imposing walls around U.S. imports (tariffs or quotas), abrogating existing trade agreements, or terminating existing trade negotiations (TPP and TTIP).

• Yes, greater enforcement of trade obligations might be useful. But the U.S. has already been very forceful in WTO litigation and reorganizing federal efforts as to this function. 

• What needs to be guarded against are possible protectionist decisions of the International Trade Commission and the International Trade Administration. They along with the USTR administer a range of the trade remedy laws and market access legislation (dumping, subsidies, safeguards, and retaliation). So far to good but the underlying tendency is always present.

• Encouraging foreign direct investment into the United States is crucial. The existing CFIUS review of such investment for national security reasons has really proven to be a bar and disincentive to significant Chinese investment. This needs to be seriously looked at again.

• Energizing our participation in negotiation newer trade rules (for corruption, labor and environment, among others) and related rules (such as investment and competition rules) in the WTO is strongly suggested.

• And moving forward on negotiating or renegotiating bilateral investment treaties and tax treaties is essential to encourage more cross-border flows and to make much more equal the payment of taxes by multinationals. Reinvesting and repatriating some of this money back to the United States is obviously a welcomed outcome.

• In addition to these proposals I suggest addressing the issue of civil and criminal jurisdiction over the actions of U.S. multinationals abroad (through their affiliated subsidiaries and other entities.

• This would significantly help in administering out trade and economic regulation generally and specifically concerning a range of related areas such as human rights laws, sanctions legislation, counter-terrorism legislation and U.S. foreign policy generally.

     In conclusion. The upside of this historical political debate over trade is that is can sharpen our awareness of trade and globalization, as a good for the U.S. economy. And what now needs to be done, even if somewhat belatedly.

……”Jobs and Trade on the Campaign Trail.” New York Times (April 3, 2016).

                    ……. “US Politics and Free Trade.” Financial Times (April 8, 2016).

….. “Globalization in Reverse.” Wall Street Journal (April 4th, 2016).

…..  “Anger Over Trade is Boiling  for Voters.” New York Times (March 30, 2016).

….. “How Trade Made America Great — FedEx’s Fred Smith at Yale.” Wall Street Journal (March 26, 2016).

….. “Protectionism and Presidency.” Wall Street Journal (March 19, 2016). (Graph of Export / Imports & Trade Actions). (Graph).

     Fred Smith, CEO of FedEx, in an outstanding piece in today’s Wall Street Journal gives a ringing repudiation of  today’s trade critics. He reviews the history of world trade and global commerce from the Great Depression to today’s absurd Presidential primaries. Here are some of his highlights.

• President Roosevelt and his Secretary of State Cordell Hull vision was that liberalized global trade would lead to greater peaceful relations and international cooperation.

• Technological progress in telecommunications and transportation revolutionized global trade in the 1960s and 1970s.

• The GATT/WTO trade rounds liberalized trade through multiple trade rounds. While they did not cover sea trade or aviation historical developments occurred in those sectors including containerization and ‘Open Skies.’

• Deregulation and other developments (such as Open Skies) made for fantastic explosion of international travel that fed into even greater international trade and investment.

• The growth of computing power and informational technology have transformed much of trade and created entirely new forms of electronic commerce.

• There is an innate desire to travel and trade.

• History shows trade made easy begets more trade, more jobs and more prosperity.

     I would add that the harshness of globalization spawns harsh criticism. But better trade enforcement and upgraded trade adjustment assistance can help address many legitimate concerns. Other policies favoring innovation, skills training and sensible tax policies are part of the remedy. The remedy does not include populist inspired protectionism. But trade does beget more trade. That’s good for all of us.

….. “How Trade Made America Great.” Wall Street Journal (March 26, 2016).

      Three really important facts concerning trade surplus, direct investment and exports were discussed by the Financial Times yesterday.   They relate directly to  the hotly debated topic of  U.S. –  China trade relations and jobs.  Any lessons here for Donald Trump?

• The U.S. has not had a total trade surplus since 1975 and only a minimal one since before 1961. This is  long before China emerged as a super economy. (Chart below) And the U.S.  has had a surplus in services since 1970.

• Foreign direct investment in the U.S. and ‘reshoring‘ has created more than 250,000 new jobs in the U.S. last year (2015). (Chart below) A huge increase since 2007. Much of this has actually been because of Chinese foreign investment.

• U.S. exports to China from 2009-2014 supported over 350,000 new jobs. (Chart below) China is a gigantic domestic market for consumer and capital goods. And it’s growing.

      What’s my conclusion?

     Simple. Understanding U.S. – China trade relations is a lot more nuanced than we hear during this political season. It also involves understanding some very basic facts about global trade. The U.S is dependent on a viable and vibrant global trading system. So are American states, cities, counties and U.S. workers. Needless to say, ‘Trump the Tradester,’  who is from the greatest global city in the world and center of global commerce, is glaringly off the mark.

………….. “Donald Trump and China and US Jobs.” Financial Times (March 24, 2016).

     ‘The Donald’ aka ‘The Trade Trickster’ disparages current trade agreements, ongoing trade negotiations, globalization, US trade policy, U.S foreign policy, and US national security policy. Hope this doesn’t reflect his education at the Wharton School which he constantly reminds us of.

    I’ve written before as to his wildly delusional views on these issues. But here are some additional thoughts:

• Protectionism undermines the future growth of the U.S.
• Much of increased foreign competitiveness is due to innovation in production and smart machines.
• Protectionism is an irrelevant remedy for increased competitiveness of foreign firms.
• The real focus should be on structural upgrades in the political – economic system in the U.S. This ecosystem needs to have both greater public investment and greater private investment and innovation.
• These upgrades includes changes to trade adjustment assistance legislation, skills training, and retraining at all levels. This requires greater cooperation between governments of all levels (federal, state and local) and firms of all sizes.
• Many US multinationals are merely piling up great amounts of dollars in offshore accounts. They are not reinvesting these trillions of dollars into the US economy or workplace.
• To boot these firms don’t pay either US or foreign taxes on these funds. Some of our most highly successful firms, in particular technology and pharmaceutical firms, are guilty of this.
• Chaotic policies enunciated by Trump would call into question the role of US leadership in the global system.
• Trump’s call for renewed waterboarding and killing of families of terrorists would wreak havoc on the US military and US leadership in the world.
• It’s already clear many of our closest allies are mocking The Donald as being out-of-touch with the political and economic global system today.

My conclusion is that while Trump may know something about real estate and hotels, although even that has been called into question for a long time, the world is different from the world of real estate deals in New York or the world he grew up into in Queens in the 1950s and 1960s. Which he doesn’t seem to have transcended and to be stuck in. Not even the Wharton School could get him to understand reality and how it changes.

      For The Donald trade policy, foreign policy and national security policy are fact free zones informed only by his own inner being. This is not good for anyone not even him.

• “A Perilous Revolt Against Trade.” New York Times (March 18, 2016).

• “US Candidates’ Focus on Trade Deals is Misleading.” Financial Times (March 18, 2016).

The most recent data from CFIUS concerning Chinese investment in the U.S. discloses the following:

• China had the most “covered transactions” (mergers and direct investments) for the latest data period (2014) that is reported by CFIUS in its new annual report released in 2016 — greater than the U.K., Canada, Germany, Netherlands or Japan.

• 1/4th of all completed Chinese transactions were mergers and other acquisitions 

• There were twice as many completed transactions in 2004 than the prior year.

Simply put this data continues the narrative that Chines investment into the US. is huge and growing. This is continuing in 2016 with massive new investments as part of China’s outward investment strategy.  Chinese corporations want to diversify away from domestic investment in a slowing China. This can be seen by such investments into U.S. real estate including hotel chains and its corporations.

  I conclude from the above data that such investment, even if reviewed for national security implications, are extremely important for continuing merger deals and health of the U.S. economy. This despite the fact that there is growing popular resentment of such deals and investments. Not unlike the earlier period of Japanese investment into the U.S.

     The national security reviews or the threat of them have not slowed the investment and commercial drivers of such investment. My take is that this is good for the U.S. economy and economic development in the U.S. generally. It provides new capital and new global markets for U.S. firms.

• CFIUS Annual Report 2014 (CFIUS 2016).

• CRS Report on CFIUS (Feb. 2016).

• “Chinese Hotel Buying Spree.“ New York Times (March 15, 2016).

   Yes, Presidential trade powers are very broad. But they are delegated powers by the Congress. They are limited by the U.S. Constitution Article 1, Section 8, Clause 3. This gives exclusive authority to the Congress to regulate global trade. What Congress gives it can take back.

    In addition to the Constitution’s restriction on the Presidential powers in foreign trade, U.S. actions are also significantly limited by our membership in the World Trade Organization.

      Specifically, the WTO’s dispute resolution process is aimed at restricting unilateral trade restrictions. When such national actions are reviewed they can be found as inconsistent with our trade obligations.  If not removed multilateral trade sanctions by the WTO may be authorized and imposed by a member state who brought the action in the WTO. The U.S., as almost all other countries, have an excellent record of complying with the international review over the last 20 years.

      Here are some additional thoughts:

• But for the WTO review of protectionist measures of the last 20 years, and potential for such review, such measures would have certainly  been more extensive.  They certainly would have restricted global trade growth.

• Creating protectionist walls around trade is self-defeating.

• The growing protectionist sentiment within the U.S. and abroad is disconcerting.

• But the answer to globalization and technologically-driven trade and investment is better enmeshing  yourself in the global ecosystem. If you don’t you may never work again. This is essentially a question of developing a global mindset and relevant skills. Constant dismay and dissent is not going to help. It’s also self-defeating

• Better trade enforcement of existing rules and international obligations is part of the answer. The Congress provided for this, in part, in its recent legislation (Trade Enforcement Act 2015). This new legislation puts trade enforcement leadership squarely within the USTR. The U.S. has been very effective in bringing enforcement actions in the WTO. It has been the most aggressive.

• On the state and federal level policies should be enacted to help particularly in export promotion and increasing foreign direct investment. 90% of the world’s consumers live outside of the United States. Foreign operations in a state drives greater exports. State actions have a great influence in promoting trade and economic development. They are indispensable.

• In addition universities need to develop programs focusing on the global system and develop the mindset and skills to participate in it. This should be a top priority. This is especially true of public universities that live off state funding and are obligated to residents  and state taxpayers.

  ……. “Powerful Pair: Protectionism and the Presidency.” Wall Street Journal (March 10, 2016).

— BACK TO THE FUTURE — Herbert Hoover & Trade Wars — No Doubt About it.

In the recent report of the Dispute Resolution Body of the WTO, in its annex entitled “Overview of the State of Play,” there is a chart listing cases brought under Article 22.2 of the Dispute Settlement Understanding. It enumerates cases that resulted in WTO authorization of ‘retaliation.’ This is important and it is unfortunate this data is buried so deep.

What is shown by the data?

Out of almost 500 cases filed in the first 20 years of the WTO (1995-2015) only 10 cases resulted in authorization by the WTO of retaliation. Not very many.

Actually, it is even less than you see. One case was brought by different parties. Technically they were counted as two separate cases. In fact, they really aren’t. Another case authorization was given twice. If you combine those cases and consider them as one you have only 8 cases. What gets even more interesting is that a number of those cases where authorization was given, retaliation was never implemented.

Which countries had retaliation authorized against it? The U.S. leads with 4 such cases and the EU with 2 such cases. (Canada and Brazil with one each in the same case.)

So where does that leave us as to the question of non-compliance and retaliation of WTO decisions?

Well the answer is pretty clear. Out of 500 cases filed (request for consultations) only 8 cases resulted in authorization for retaliation. and less were even implemented. While this is not the whole story it does indicate a pretty good rate of compliance. And not unexpectedly it’s the U.S. and the EU who bore the brunt of retaliation. And in these cases it’s those two countries that requested such authorization against each other.

But this makes sense. The volume of trade between the U.S. and the EU is huge. As trade flows increase disputes increase. That’s only natural.  It is not the absence of  disputes that characterizes a legal system. But it’s the way they are resolved. The WTO has a good story to tell about resolving global trade disputes and having the offending measures lifted. In fact, an excellent story to tell.

• “20 Years of WTO Dispute Settlement.” (WTO 2015).
• “WTO Annual Report for 2015.” 93-94 (WTO 2015).
• “Overview of the State of Play.” DSB Annual Report for 2014. (2015).

Op-Ed in the Richmond Times-Dispatch (Sunday) (January 31, 2016)

CARTER AND OBAMA

   Malawer:

       By Stuart S. Malawer, JD., Ph.D. Richmond Times-Dispatch

On Jan. 21, 1981, freed hostage David Roeder arrived at Rhein-Main U.S. Air Force base in Frankfurt, Germany. Roeder was one of the 52 Americans held hostage in Iran for 444 days. The consequences of their captivity and release are still relevant today.

The transfer of $1.7 billion to Iran to secure the release of the hostages this month coincided with the implementation day of the Iranian nuclear agreement and the lifting of economic sanctions.

This raises unfortunate and lingering memories of the way President Jimmy Carter negotiated the first Iranian hostage agreement of the early 1980s. The result was the release of 52 American hostages 444 days after their capture in the American Embassy in Teheran in 1979.

This hostage situation was one of the earliest forms of state-supported terrorism in which the United States negotiated to get the hostages back. This terrorism was in clear violation of public international law and international diplomatic agreements.

In particular, the first hostage-release raised the dual questions of whether the payment for the release made diplomatic sense and whether it was lawful under U.S. and international law. These same two questions can be asked about the 2016 payment.

***

In both cases, payments by the United States in the 1980s and in 2016, were made to secure the release of hostages.

In 1979, international executive agreements were used that established arbitral proceedings in The Hague. These agreements were concluded under the president’s authority to conduct foreign affairs and to settle diplomatic claims. Such authority was upheld by the U.S. Supreme Court in Dames & Moore v. Regan in 1981.

Thus, in the early historical evolution of international terrorism, both Presidents Carter and Ronald Reagan, as well as the Supreme Court, upheld constitutional and international legal constructs that allowed this diplomatic arrangement to end the hostage crisis, but with uncertain implications for encouraging future episodes.

This was despite the fact that Article 52 of the Vienna Convention on the Law of Treaties, governing coercion and duress on a state during the treaty-making process, requires uncoerced state consent. It declares that a “treaty is void if its conclusion has been procured by the threat or use of force in violation of the principles of international law embodied in the Charter of the United Nations.”

Needless to say, attacking a U.S. embassy and holding diplomatic hostages is a grievous use of armed force against the diplomatic premises and personnel of the United States in violation of long-standing customary international law and the Vienna Convention on Diplomatic Relations.

***

In 2016, President Obama has used similar executive agreements to free the latest hostages, but no new arbitral proceedings have been authorized. In fact, the recent payment was made for the purpose of settling earlier arbitral proceedings in connection with the initial hostage release.

In 1982, I wrote in the MIT-published International Security Review:

“The Hostage Accords, their negotiation and implementation, raise questions concerning international law, constitutional law, and foreign policy. Specifically, questions arise, among others, concerning the validity of the accords under international and constitutional law, of foreign policy relating to the authority of the President, and of renouncing the Accords as a matter of foreign policy. … (T)hese three questions have not been satisfactorily assessed, let alone answered.”

The new Iranian hostage agreement raises the same questions today — some 35 years later, unfortunately.

Are we now paying the price of this Carter-Reagan model in a newer era of global relations and law in which weaker nations and ever-expanding and changing terrorist groups exercise asymmetrical power, where less powerful states and non-state actors can significantly impact more powerful states such as the United States?

Does this traditional approach to law and diplomacy, adopted again by President Obama in January of this year, now act as a form of moral hazard that further encourages even more destructive actions by state-sponsored terrorists and non-state actors?

Does this legal and diplomatic approach make for good domestic or global public policy in the 21st century? For the United States and other democratic nations?

Needless to say, the above questions, as well as more specific legal and diplomatic questions, require much further, detailed exploration.

But, at this point, my quick conclusion is the following: On balance, especially given some hindsight since the early 1980s, both hostage deals made sense in their immediate diplomatic contexts and both were lawful (under both constitutional and international law).

But both deals raise disturbing questions concerning their impact on international law and global diplomacy as we go forward in this newer era in which state-sponsored terrorism is more full-blown and in which non-state-supported terrorism is accelerating, as demonstrated by ISIS and company.

Stuart S. Malawer, J.D., Ph.D., is Distinguished Service Professor of Law and International Trade at George Mason University in Fairfax. Contact him at StuartMalawer@msn.com. His website is GlobalTradeRelations.net.

2016 Iranian Hostage Exchange for $1.7b and President Carter’s 1980 Hostage Accords — Diplomatically & Legally Correct — Maybe, But are They Good Precedent Today?

     The transfer of $1.7 billion dollars to Iran to secure the release of the Hostages this month coincided with implementation day of the nuclear agreement and lifting of economic sanctions.

      This raises the unfortunate and lingering memories of the way President Carter and then President Reagan dealt with the first Iranian Hostage agreement of  the early 1980s.  That resulted in the release of our hostages after 444 days after their capture in the American Embassy in Teheran in 1979.

     In particular, the first hostage release raised the dual questions of whether or not it made diplomatic sense and whether it was lawful, under either U.S. law or international law. These same two questions can be asked about the new 2016 payment.

     In both cases payments were made to secure the release of the hostages. In 1979-1980 international executive agreements were used which established arbitral proceedings in the Hague. They were concluded under the president’s authority to conduct foreign affairs and to settle diplomatic claims.

     In 2016 such agreements were used but no new arbitral proceedings authorized. In fact, the recent payment was made on the grounds of settling earlier arbitral proceedings going back to the initial hostage release.

     Both President Carter and Reagan as well as the Supreme Court continued to uphold the constitutional and international legal construct for this diplomatic arrangement.

     However, are we now paying the price of this model in a newer era of international relations and international law?

     Does this traditional approach to law and diplomacy, adopted again by President Obama, in January this year, now act as a means of encouraging even more such actions by all parties?

     Does this law and diplomatic approach make for good domestic or global public policy in the 21st century? For the U.S. and other nations?

     The above and more specific legal and diplomatic questions certainly are needed of further and more detailed exploration.

     But at this point my quick conclusion is the following ….. On balance, especially with some hindsight since the early 1980s, both hostage deals make diplomatic sense and both are lawful (under both Constitutional and international law). 

      But they raise disturbing questions concerning their impact on international law and global diplomacy as we go forward in this newer and full-blown era of state-sponsored terrorism and the acceleration of non-state supported terrorism (ISIS and company).