SIX

Stop the World, I Want to Get Off

Globalization and American Sovereignty

Senator Elizabeth Warren was in high dudgeon. The target of her animus was a February 2015 draft agreement for the Trans-Pacific Partnership (TPP), a proposed bloc of twelve trading nations, including the United States. Its most objectionable provision was the envisioned Investor-State Dispute Settlement (ISDS) mechanism. This mechanism would allow companies that believed they had gotten a raw deal from TPP governments to bring their complaints to an independent tribunal composed (in Warren’s view) of well-paid corporate lawyers. “Agreeing to ISDS in this enormous new treaty would tilt the playing field in the United States further in favor of big multinational corporations,” the Massachusetts Democrat complained in the Washington Post. “Worse, it would undermine U.S. sovereignty,” she continued. “This isn’t a partisan issue,” the liberal icon insisted. “Conservatives who believe in U.S. sovereignty should be outraged that ISDS would shift power from American courts, whose authority is derived from our Constitution, to unaccountable international tribunals.”1

Warren’s rare appeal across the aisle proved superfluous. Since early 2015, growing numbers of conservatives like Rep. Dana Rohrabacher of California had joined liberals like Rep. Rosa DeLauro of Connecticut in opposing the blockbuster trade pact. That was bad news for President Obama, who had counted on strong GOP legislative support for TPP, the centerpiece of his trade agenda. As Tea Party Republicans skeptical of Wall Street and international organizations began making common cause with left-wing legislators, Senate majority leader Mitch McConnell and House speaker John A. Boehner were struggling to deliver the legislative majorities the president needed to secure TPP. All this tumult clearly tickled Vermont senator Bernie Sanders, an independent who caucused with the Democrats and would soon upend that party by declaring his candidacy for its presidential nomination. As he told the New York Times, “Some of my conservative friends are worried legitimately about the issue of sovereignty.”2

Conservatives outside Congress were similarly split. The influential Club for Growth, a political action committee financed by major corporations, supported TPP. So did the Heritage Foundation, which argued that the “arbitration of freely accepted commitments … does not undermine national sovereignty.” But the libertarian Cato Institute disagreed, depicting ISDS as both an unfair giveaway to foreign companies and a tool that those companies could use to challenge U.S. regulations. Elsewhere on the right, both the Eagle Forum and TheTeaParty.net “strongly opposed” the mega-trade deal.³

TPP had turned once-predictable U.S. trade politics topsy-turvy.⁴ For several decades, Republicans had championed liberalization as an engine of growth and prosperity, the global accompaniment to deregulation and lower taxes at home; Democrats had been skeptical, warning of massive job losses and a regulatory “race to the bottom.” Democrats charged Republicans with shilling for corporate America and indifference to the plight of American workers. Republicans accused Democrats of protectionist pandering to union bosses and tree huggers. Given these dynamics, a Democratic president seeking trade promotion (or “fast-track”) authority needed to cobble together a legislative coalition reliant on GOP support to counterbalance opposition from his own party. Bill Clinton had used this approach to win passage of the North American Free Trade Agreement (NAFTA) and to secure U.S. entry into the World Trade Organization (WTO).

Believing that old rules still applied, President Obama had enlisted Republicans like Senator Orrin Hatch of Utah and Representative Paul Ryan of Wisconsin to help him secure trade promotion authority. But suddenly, outraged Tea Partiers and libertarians opposed to the ISDS risked upending his plans. Their complaint was not simply that companies could exploit binding arbitration to remedy allegedly unfair or discriminatory treatment. It was that the envisioned international panel would consist not of professional judges but independent lawyers, operating under rules established by the United Nations Commission on International Trade Law or the International Center for Settlement of Investment Disputes. “This is unconstitutional,” declared Americans for Limited Government, a conservative political action group. The resulting “trade pact … would constitute a judicial authority higher than even the U.S. Supreme Court that could overrule rulings applying U.S. law to foreign companies.”5

In fact, ISDS provisions were nothing new. The United States was already party to fifty accords containing such clauses. But TPP was the first trade megadeal to include them, and critics predicted a torrent of ISDS complaints, as it empowered 9,000 foreign-owned firms to bring cases against U.S. federal, state, and local governments. Predictably, left-leaning groups denounced the ISDS provisions as a threat to U.S. employment and public health. Public Citizen warned that TPP “would grant foreign corporations extraordinary new powers to attack the laws we rely on for a clean environment, essential services, and healthy communities.” Michael Froman, the U.S. trade representative, tried to dispel such fears. But he hurt his cause by keeping the emerging TPP text secret while consulting with U.S. corporations during its drafting.⁶

More unexpected were conservative doubts about TPP. As chapter 4 explained, right-leaning U.S. politicians and commentators have long rejected multilateral treaties in fields including human rights, the environment, and nuclear weapons as placing unacceptable constraints on the United States. But they had usually given trade agreements a pass. The TPP debate suggested that this historical era might be ending.

For progressive legislators, the growing sovereignty concerns of their GOP colleagues were a godsend; for President Obama, they were a nightmare. Most congressional Democrats already opposed TPP on the grounds that it would expose American workers to unfair competition from countries with cheap labor and inadequate human rights and environmental standards. Progressives outside government depicted TPP as a giveaway to multinational corporations. By March 2015, 150 of 188 House Democrats had signed a letter opposing “fast-track,” forcing the president to lean overwhelmingly on a fragmenting Republican caucus—which had spent six years denying him any legislative victory—to get the 218 votes he needed in the House for trade promotion authority. The bogeyman of an unaccountable international tribunal able to rule on behalf of foreign corporations against U.S. federal, state, and local governments only added to the president’s TPP woes. On May 12, 2015, the Senate handed Obama a stinging if temporary defeat, rejecting TPP by a vote of 52 to 48.⁷

The president eventually prevailed in a second Senate vote six weeks later, 60–38, after Republicans conceded to the Democrats’ demands on enhanced trade adjustment assistance for displaced U.S. workers. Public Citizen denounced the result, citing “the inexcusable and anti-democratic veil of secrecy surrounding the TPP.”8 At first glance, the outcome suggested a return to business as usual. After all, GOP senators had lined up solidly behind trade liberalization, with a healthy minority of Democrats, to get the legislation over the hump.

In fact, the subsequent 2016 presidential election campaign suggested that U.S. trade politics had changed. On the Democratic side the insurgent candidate Bernie Sanders came close to capturing the nomination, buoyed by his relentless attacks on trade liberalization. He lost but pushed the eventual nominee, Hillary Clinton, to disavow her previous support for TPP.

But the real shock was on the Republican side, where real estate magnate Donald Trump surged to the nomination on the back of antiglobalization rhetoric. Trump’s criticisms of “terrible” trade deals like NAFTA, the WTO, and TPP resonated with rank-and-file GOP voters, particularly economically vulnerable working-class whites persuaded that his protectionist policies (including punitive tariffs on Chinese goods) would revive the nation’s fortunes—and their own. Indeed, polling documented an abrupt shift in public opinion on trade. In 2009, 57 percent of Republican-leaning voters had considered trade agreements a “good thing” (31 percent thought they were “bad”). By 2016 those figures had inverted, with 61 percent now considering trade agreements “bad” and only 32 percent “good.” (Democrats’ support for trade, meanwhile, had increased from 48 percent to 58 percent.)⁹

For the first time in decades, multilateral trade pacts had become a major target of Republican opposition. Senator Jeff Sessions (R-Ala.) explained why in a November 2015 radio interview with Stephen Bannon, then head of Breitbart Media. “We shouldn’t be tying ourselves down like Gulliver in the land of Lilliputians with so many strings a guy can’t move.” That same month Bannon proposed a new approach to candidate Trump, whereby the United States would use its leverage to hammer out tough bilateral trade agreements, one deal at a time. Bannon had found his man. Throughout the 2016 campaign, Trump pledged to tear up trade deals he claimed had ravaged the U.S. economy, particularly the country’s manufacturing sector. In place of multilateral deals that constrained U.S. commercial options and influence over trade rules, Trump proposed to negotiate one-on-one arrangements with specific trading partners.

Trump’s election allowed him to advance this agenda. In his inaugural address the new president pledged to restore U.S. economic sovereignty through an unapologetic embrace of protectionism. “We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs,” he declared. “Protection will lead to great prosperity and strength.”10 One of the president’s first acts was to withdraw the United States from TPP—a decision Bannon hailed as “one of the most pivotal moments in modern American history.” The president’s bold stroke “got us out of a trade deal and let our sovereignty come back to ourselves, the people.” Henceforth the United States would experiment with “bilateral trading relationships … that will reposition America in the world as a … fair trading nation and start to bring … high-value-added manufacturing jobs back to the United States of America.”¹¹ In March 2017 the Trump administration presented Congress with its new “Trade Policy Agenda.” That strategy’s first priority was “defending our national sovereignty over trade policy”—not least against the WTO.¹²

Two months later Michael Anton, adviser for strategic planning at the National Security Council, explained the Trump administration’s thinking. “We want to put the brakes on globalization a little bit and reassert control over our country, our borders, our economic policy, our tax policy, with the recognition that, you know, the distinction of citizenship means something,” he told NPR’s Steve Inskeep. “There’s a reason why there are countries and why there are borders and why some people are citizens of one country and not citizens of another country and that citizens of one country owe obligations to fellow citizens that they don’t owe to non-citizens.” This is what it meant to finally place America first.¹³

SOVEREIGNTY AND ANXIETY IN AN AGE OF GLOBALIZATION

In endorsing protectionism, Trump broke with eight decades of U.S. commitment to trade liberalization dating back to Cordell Hull’s days as secretary of state. But his shift resonated with the public mood—namely, deepening anxiety about globalization. Many Americans, regardless of party affiliation, had come to believe that global economic integration was a sucker’s game. It had placed the country’s fate in the hands of foreigners and fickle international markets, endangering Americans’ livelihoods, security, and even identity.

A defining attribute of sovereignty is the state’s authority to determine what—as well as who—crosses its frontiers, and on what terms. All states insist on this prerogative, whatever their actual capacity to regulate and police cross-border flows. But globalization has made life harder for states. Yes, there have been previous episodes of globalization, notably at the end of the nineteenth century and the start of the twentieth. But thanks to technological change, today’s globalization is “orders of magnitude different, with vast differences in kind, and not just degree, from that of a century ago.”14

Since the 1980s, cross-border flows of money, goods, services, ideas, and people have surged, thanks to the liberalization of capital and trade and to revolutions in telecommunications and transportation (including the universal spread of the shipping container). Globalized production chains, capital markets, and commerce have generated unprecedented (if unevenly shared) wealth. Yet deeper economic integration has also tested long-standing social bargains within advanced market democracies, including those related to employment, while porous borders have sharpened domestic debates over the entry and assimilation of immigrants. The pressing question is not how to reverse globalization but how to manage it to better cope with the abrupt changes it has wrought.

Preserving a relatively open world economy will require persuading publics in the United States and elsewhere that globalization can benefit average citizens, not just the fortunate owners of capital. Rather than scapegoating globalization, as they often do, U.S. political leaders need to marshal America’s considerable sovereign powers to tame its excesses by hammering out new international rules and making domestic policy adjustments that persuade U.S. citizens that their concerns are being heard. The United States must also recalibrate the balance among sovereignty-as-autonomy, sovereignty-as-authority, and sovereignty-as-influence, making the best use of available political authorities and policy space to craft new international bargains on trade, finance, employment, and migration. This chapter focuses on sovereignty concerns related to the world economy. Chapter 7 will turn to the fraught issue of immigration.

AMERICAN SOVEREIGNTY AND THE WORLD ECONOMY

The turbulent 2016 election cycle will be remembered for many things. But the populist tsunami that swept Trump to the GOP nomination and drove Bernie Sanders’s impressive showing in the Democratic primaries reflected widespread anger that globalization was no longer working for many or even most Americans. Although the wave struck suddenly, surprising the political class, it had been building for decades, as successive U.S. administrations and Congresses failed to prepare the U.S. economy—and American workers and families—to adjust to the rigors of global economic competition.

All too often the debate over globalization had glossed over these domestic policy shortcomings, as politicians had found it easier to fault alleged external threats to U.S. “sovereignty”—including from other foreign governments, multilateral trade agreements, and intergovernmental bodies like the IMF, the World Bank, and the WTO.

The truth is that the economic insecurity and inequality that permeates contemporary American society owes less to any external commitments or constraints than to the repeated failures of U.S. elected officials of both major parties to make effective use of the sovereign powers and policy options at their disposal, such as expanded trade adjustment assistance and retraining programs, so as to make American workers, as well as firms, more competitive. As Edward Alden of the Council on Foreign Relations writes, “The problem is not globalization itself” but the “domestic political response to globalization, which in too many ways has been deeply irresponsible.”15

American anxiety about globalization is ironic, in a way, for the modern world economy is a U.S. creation. The United States spearheaded the global market liberalization of the past several decades, just as it sponsored the major multilateral institutions that govern international economic relations. And yet contemporary unease also makes sense because, in pushing for hyperglobalization, successive U.S. administrations, both Republican and Democratic, gradually unwound a political compromise that had been the heart of the post-1945 international economic order: namely, the implicit pledge that the U.S. government (like its counterparts abroad) would temper the nation’s integration into the global marketplace by pursuing domestic policies that promoted social welfare, inclusive growth, and other public policies. Rather than exercising the flexibility inherent in its sovereignty to help American workers and firms adjust to greater global competition, or negotiating and enforcing international rules to ensure a so-called level playing field, the United States became too enamored by the vision of an unfettered global market. That stance facilitated the emergence of a world economy that was too lightly regulated, overly tolerant of systemic risk, tilted toward global capital and multinational corporations, and too often inimical to the broader interests and social welfare of struggling citizens.

The roots of the current conundrum lie in part in the global victory of neoclassical economics in the early 1980s, under the political leadership of U.S. president Ronald Reagan and U.K. prime minister Margaret Thatcher. The Reagan-Thatcher revolution identified a set of policy reforms—including market liberalization, deregulation, capital mobility, and privatization—intended to eliminate obstacles to growth. This ideology came to dominate the thinking of national governments as well as the prescriptions of major international financial and economic institutions. But the mixture of policy reforms it recommended also undermined fundamental societal bargains.

The Compromise of Embedded Liberalism

The foundation of that postwar order, laid down at the Bretton Woods conference in 1944, had been what Harvard professor John Ruggie calls a “compromise of embedded liberalism.”16 This is a fancy way of saying that the major world economies, led at the time by the United States and Great Britain, had committed themselves to liberalizing postwar trade and financial relations, but on the understanding that external openness would be balanced and tempered by an allowance for state intervention in the domestic and global economy to boost employment and pursue other social welfare objectives. Their motivation was plain. With fresh memories of the Great Depression, Western governments were determined to control the terms and pace of their integration into the global economic system, rather than simply letting the free market rip. They thus insisted on retaining the leeway—the sovereign autonomy, if you will—to pursue domestic objectives like full employment, shared growth, price stability, and social security. This broad middle ground between economic nationalism and laissez-faire detachment allowed governments to manage global interdependence, so as to buffer certain sectors or cushion their citizens from being whipsawed by inevitable fluctuations in the world economy.¹⁷ This mindset shaped U.S. attitudes toward postwar international trade and monetary relations until the underlying bargain came unstuck in the last decades of the twentieth century.

The Origins of the Postwar U.S. Trade and Monetary Policy

For most of American history, U.S. national sovereignty and trade policy had gone hand in hand. The first treaty the United States signed after declaring its independence was the Treaty of Amity and Commerce with France, on February 6, 1778. The signatories pledged “the most perfect equality and reciprocity” in the treatment of one another’s imports, while noting that each remained “at liberty to make … those interior regulations which it shall find most convenient to itself.”¹⁸ In other words, external commercial openness would coexist with domestic regulatory autonomy.

Two decades later, in his farewell address, George Washington made a clear distinction between international political and economic relations. While counseling the United States to “steer clear of any permanent alliances,” he endorsed “extending our commercial relations” with other countries on the basis of nondiscrimination and reciprocity.19

Consistent with Washington’s advice, the United States over the next century and a half negotiated dozens of bilateral trade agreements with other countries based on the principles of nondiscrimination and reciprocity, while opposing mercantilist rules that denied equal treatment to U.S. exports. The nation agreed to extend bilateral tariff treaties to third nations, provided that they extend concessions to the United States equivalent to those offered by the first country. Still, this was a cumbersome way to liberalize trade, requiring interminable negotiations with many countries. Moreover, Congress controlled the setting of tariffs, which provided the primary source of federal government revenue.

A breakthrough in U.S. trade policy came in 1934, when Franklin D. Roosevelt secured passage of the Reciprocal Trade Agreements Act (RTAA). It contained two provisions that advanced the cause of global multilateral trade. First, it transferred leadership on trade liberalization to the president, who could now negotiate directly with trading partners, submitting the final package to Congress for an up-or-down vote. Second, the RTAA included automatic application of the most favored nation principle—meaning that third countries that did not discriminate against U.S. goods now enjoyed the same access.²⁰

It was in the aftermath of World War II, though, that global trade liberalization began in earnest, through successive negotiating rounds of the General Agreement on Tariffs and Trade (GATT). The GATT was actually the fallback solution for the Truman administration, which had promoted the International Trade Organization (ITO) as a standing body to advance multilateral trade. But U.S. trading partners used these negotiations to push a panoply of illiberal provisions that U.S. business interests complained could discriminate against U.S. goods and investment. The National Foreign Trade Council objected that these clauses would “transform the free enterprise system of this country into a system of planned economy … threat[ening] … the free institutions and liberties of the American people.” Equally bad, warned the U.S. Chamber of Commerce, the United States would be relegated to a “permanent minority position owing to [the ITO’s] one vote one country voting procedure,” thus “making it impossible for the United States to engage in an independent course of policy in favor of multilateral trade.”²¹ The costs for U.S. sovereign autonomy, in this view, were simply too onerous.

The death of the ITO was arguably a blessing. To be sure, the GATT contained numerous escape clauses, exceptions, and qualifications. It permitted discriminatory customs unions and tolerated imperial preferences, and it excluded entire sectors like agriculture, fisheries, services, and foreign investment. Yet, compared to the ITO, the GATT took a more pragmatic approach to trade liberalization, one sensitive to domestic political realities in trading nations. Its very informality, moreover, made it palatable to sovereignty-minded members of Congress. Between 1950 and 1995, the United States worked with partners to conclude several successive rounds of GATT negotiations, during which the volume of global exports expanded from $61.8 billion to nearly $5.18 trillion, a nearly eighty-fourfold increase.22

Alongside new rules to govern global trade, the post-1945 international economy would rest on a reformed global monetary system, underpinned by new international financial institutions—with the U.S. dollar as its centerpiece. Like the GATT, the postwar monetary order would seek to balance the need for international rules with the prerogatives of national sovereignty.

Inherent in sovereignty is the state’s authority to issue a national currency in the denomination and supply of its choice and to insist that this money circulate freely and be treated as legal tender within its territory. To symbolize this link between political authority and economic exchange, coins and (more recently) paper currency have long featured the visages of rulers, past and present. Indeed, for centuries the English applied the word “sovereign” to gold coinage, beginning with a coin that appeared in 1489 with King Henry VII sitting on a throne. (The sovereign would become the gold coin standard throughout the British Isles and the American colonies.)²³

Sovereign states, then, mint coins and print money. But they and their citizens also trade with foreigners, and such international commerce requires a way to settle accounts. This raises the question of exchange rates—or determining the par values of monies denominated in different currencies. During the heyday of the British Empire until the early 1930s, the global monetary system was based on the gold standard, with major national currencies being convertible to gold. That system broke down during the Great Depression, when it contributed to deflationary pressures that many experts believe prolonged the length and depth of the global economic crisis.

Toward the end of World War II, in August 1944, representatives of the allied nations met in New Hampshire to devise a postwar international monetary order intended to facilitate commerce while providing relief to national governments experiencing temporary balance-of-payments difficulties. The result, known as the Bretton Woods system, was founded on dollar-gold convertibility. The dollar was designated as the world’s key currency, its value pegged to gold at $35 per troy ounce. All countries agreed to make their currencies freely convertible after a postwar transition period, and to buy and sell their currencies to maintain their dollar exchange rates (par values)—with an escape clause permitting devaluations in situations of “fundamental disequilibrium.” The negotiators also created the IMF to assist countries experiencing temporary balance-of-payments difficulties and the International Bank for Reconstruction and Development (or World Bank) to furnish long-term loans, on commercial terms, to help countries meet their recovery and development objectives.

The U.S. Senate passed the Bretton Woods Agreements handily, though not without bellyaching from conservatives. Senate majority leader Robert Taft objected to devolving U.S. sovereignty to new global agencies in which the United States held a minority position and from which deficit countries could borrow freely, irrespective of their creditworthiness. To his mind, this constituted “pouring money down a rat hole.”24 The Ohio Republican rejected the proposition “that American money and American charity shall solve every problem.” Despite Taft’s misgivings, the Senate approved the accords, by a 61–16 vote, on July 18, 1945.

The Bretton Woods agreements, like the GATT, reflected a managed multilateralism that would temper market opening with ample scope for state intervention in the domestic economy. This approach treated regulation and the market not as alternatives but as complements. It recognized that the world economy would not be stable or sustainable if left in invisible hands. The global market needed rules of the road and institutions to enforce them at the international level, and it had to tolerate economic pluralism at the national level, allowing each country some maneuvering room to pursue unique policy choices tailored to national circumstances and societal values. Finally, it had to have safeguards, including provisions to protect vulnerable sectors and escape clauses in cases of fundamental disequilibrium. Such flexibility was essential to retain public support for trade liberalization—and even capitalism itself.

The Collapse of Bretton Woods and the Triumph of Neoclassical Economics

Unfortunately, the managed multilateral order created at Bretton Woods did not long endure. Its dollar exchange standard was predicated on the right of countries to exchange their dollars for gold, which the United States lacked in sufficient quantity to cover its worldwide dollar obligations. After periodic runs on the clearly overvalued dollar, the Nixon administration on August 13, 1971, abruptly closed the gold window. Less than two years later the United States and its European partners formally abandoned the fixed exchange rate system, inaugurating an era of floating exchange rates that continues to the present day.

The demise of Bretton Woods altered the balance between the state and the market, and the compromise of embedded liberalism came unglued. Taking its place would be a new model of turbocharged globalization, characterized by capital mobility, market integration, and the retreat of the state, widely regarded as an enemy of growth that had to be downsized. This economic program, which picked up global steam after the end of the Cold War, has been variously labeled “neoliberalism,” “market fundamentalism,” “neoclassical economics,” or the “Washington Consensus.” Whatever the moniker, it called on all nations to embrace lower taxes, tight fiscal policy, deregulation, liberalization, and privatization. Capital was liberated, the welfare state retreated, and organized labor continued its slow, steady decline.25

In hindsight, champions of neoliberalism exaggerated the benefits and downplayed the risks of commercial and financial globalization. This is not just the conclusion of left-wing critics. In 2016 former U.S. treasury secretary Lawrence Summers acknowledged that globalization had been oversold and prosperity too often unshared. In the same year the IMF published a self-critical report conceding that its neoliberal orthodoxy had exacerbated social inequality and dampened global growth.²⁶

For states seeking to exercise sovereign autonomy, global market integration poses a major challenge. This is particularly true for developing countries, which are apt to find their policy space constrained by financial markets and, at times, by international financial institutions. “Globalization has entailed a loss of national sovereignty,” claims Nobel laureate Joseph Stiglitz. “International organizations, imposing international agreements, have seized power. So have international capital markets, as they have been deregulated.”²⁷ As Stiglitz, himself a former chief economist for the World Bank, explains,

Countries are effectively told that if they don’t follow certain conditions, the capital markets or the IMF will refuse to lend them money. They are basically forced to give up part of their sovereignty, to let capricious capital markets, including the speculators whose only concerns are short-term rather than long-term growth of the country and the improvement of living standards, “discipline” them, telling them what they should and should not do.²⁸

Stiglitz’s critique is hyperbolic. With the exception of the weakest borrowers, state sovereignty is rarely so at bay. Still, global financial markets—and sometimes international financial institutions—do constrain policy choices, and not always to the benefit of developing countries.

Turbocharged global capitalism also magnified systemic risk within the world economy. This became clear in 2007–08, when unprecedented leverage resulted in the near implosion of the global financial system. The slow and uneven recovery from global recession, coupled with historic inequality in many economies, had by the mid-2010s exacerbated a populist backlash and stimulated demands for greater state intervention to make global economic integration subservient to national economic management (rather than vice versa).29

This was certainly true in the United States, and its resulting political implications were profound. Although the United States enjoyed decent if not robust growth from 2011 to 2016,³⁰ many U.S. workers and their families felt more vulnerable to dislocation, outsourcing, economic competition, and skill obsolescence. The political corollary to this economic malaise was a wave of angry populism on both the right and the left against a system that (in the words of both Trump and Sanders) seemed “rigged” against common people, to the benefit of corporations and well-connected elites. The crisis of globalization has become a crisis of Western democracy inasmuch as many citizens no longer believe their political system is capable of or even interested in responding to their complaints and desires. In the United States the “failure to adjust” meant that too many “Americans got left behind in the global economy.”³¹

The political consequences of this disillusionment have been dramatic. In November 2016, Donald Trump triumphed in the U.S. presidential election, riding to power in part on the backs of those who had lost out from globalization, not least downwardly mobile white men who felt abandoned and expendable in the world economy. Trump’s criticisms of “horrible” trade deals clearly resonated with anxious middle-class and blue-collar workers. In 1992 the “pitchfork populist” Patrick J. Buchanan had attracted less than 20 percent of the Republican electorate. Two dozen years later, his ideological heir was bound for the White House.³²

If this global economic turbulence had a potential silver lining, it was in affording Americans an opportunity to demand that their government make full use of its ample sovereign powers to reduce their exposure to the excesses of globalization—and to provide U.S. firms and workers with the tools they need to compete in an international marketplace. Since the 1970s, two generations of U.S. policymakers have failed to take the policy steps needed to adjust to global economic integration, including by helping losers adapt to foreign competition. Too often, “globalization”—and its associated international organizations like the IMF, World Bank, or WTO—have been convenient scapegoats for U.S. politicians on the right or the left, as they try to deflect attention from their own failures to preserve domestic social safety nets.

As a way to restore U.S. economic sovereignty, President Trump came to office promising a new approach to trade negotiations, based not on the WTO or TPP-style mega-trade deals but by using the diplomatic leverage the United States enjoyed as the world’s largest economy to strike better deals with weaker partners. The administration’s goal was “to expand trade in a way that is freer and fairer for all Americans,” the Office of the United States Trade Representative (USTR) explained. “We believe that these goals can be best accomplished by focusing on bilateral negotiations rather than multilateral negotiations—and by renegotiating and revising trade agreements when our goals are not being met.”33

While this impulse was understandable, Trump’s protectionist instincts and his threats of unilateral retaliation against trading partners risked being counterproductive if implemented. History suggests that the route to greater social welfare gains lies not in launching tit-for-tat protectionism or throwing up walls, but in working with multiple partners to recast the international trade regime to create greater opportunities for domestic interventions and adjustments, including by compensating the “losers” in globalization. There must be a middle ground, in other words, between giving free rein to international trade and finance and closing oneself off by adopting a mercantilistic stance or striking bilateral deals.

The most logical path forward would be to restore some balance among the state, the global marketplace, and the American people. As things stand today, all nations confront what the Harvard economist Dani Rodrik terms a “political trilemma.” They are able to pursue only two of the following three options simultaneously: national sovereignty, democracy, and hyperglobalization (see figure 6-1). In recent years, the United States has pursued hyperglobalization—or extreme global integration—along with a barren conception of national sovereignty, but at the expense of democratic accountability (and, of late, democratic support). Rodrik refers to this approach as the “golden straitjacket”: sovereign states have restricted democracy in the interests of market efficiency, at the long-term risk of populist reaction.

In principle there are two ways to democratize globalization. The first is to create supranational structures of global governance that are authoritative but democratically accountable, being empowered and constrained by a global citizenry. The problem with this theoretical option is that the world is too diverse—it has too many individual national political communities—for democracy to work on a global scale. It also runs roughshod over sovereignty-as-authority, making it inconceivable in a U.S. context. That leaves only a second option: “limit globalization, in the hope of building democratic legitimacy at home.”34

FIGURE 6-1. The Political Trilemma of the World Economy

Source: Adapted from Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy (New York: W. W. Norton, 2011).

Limiting globalization should not be confused with isolationism, mercantilism, or autarky. It does not imply rejecting the multilateral world economy. But it does suggest enhancing international regulation, as well as establishing employment-friendly norms and rules, so that the United States and other national governments can once again determine the pace and scope of their integration into the world economy, in accordance with the wishes of their citizens. This project would shift the world economy back toward the compromise of embedded liberalism that was at the heart of the Bretton Woods order.35

Two implications flow from this discussion. First, when it comes to managing globalization, advancing U.S. sovereignty-as-influence—in this case, fostering an open global economy—should not come at the expense of U.S. sovereignty-as-autonomy—in this case, ensuring sufficient national policy space to preserve the domestic social contract essential for democratic support for globalization. On the contrary, more effective international rules to protect citizens from dramatic global economic swings will require greater latitude for pluralism in domestic economic policy choices, rather than one-size-fits-all prescriptions. Second, the United States needs to make full use of the sovereign powers that it has available to it to help its citizens adjust to globalization. For too many decades U.S. officials paid only lip service to the need to invest in worker retraining, new infrastructure, secondary education, and unemployment insurance—all areas where the United States lags badly behind many of its peers in the wealthy democratic world.

Internationally, pressure to tame globalization will likely come not only from advanced market democracies but also from emerging countries. In its latest Global Trends report, the U.S. National Intelligence Council predicts that, over the next five years, “Great and middle powers alike will search for ways to keep the risks of global economic interdependence in check—with many tempted to exercise economic sovereignty, stepping back from global trade and finance as a way to manage risk.”36

THE WORLD TRADE ORGANIZATION: A THREAT TO U.S. SOVEREIGNTY?

Globalization, then, poses dilemmas for U.S. sovereignty-as-autonomy and sovereignty-as-influence. Does it also pose challenges to U.S. sovereignty-as-authority? For those who believe it does, including President Trump and his senior advisers, exhibit A is the World Trade Organization. Critics contend that the WTO, created by the Marrakesh Treaty of 1994, undermines the U.S. Constitution by unfairly constraining U.S. sovereign authority over American trade policy.³⁷ The WTO does indeed possess greater powers than typical international organizations, notably a binding dispute resolution mechanism and the authority, in principle, to create new trade rules over the wishes of its members. However, these incursions on U.S. sovereign authorities are limited and likely to remain so. They are also a small price to pay for the benefits of a rule-bound international trading system that allows parties to resolve their differences peaceably.

Before Trump, as chapter 4 explained, the Republican Party had traditionally worried less about the sovereignty implications of international trade agreements than those of international human rights or environmental conventions. This equanimity reflected their faith in capitalism and markets. Most U.S. conservatives thus supported the creation of the WTO, into which the former GATT system was subsumed. They remained nonchalant despite the warnings of some sovereigntist scholars that the WTO marked a small but decisive shift toward unaccountable global governance (as well as of liberals who complained that it presaged a regulatory “race to the bottom”).³⁸

Similar sovereigntist concerns had arisen earlier during bilateral negotiations of the Canada-U.S. Free Trade Agreement (CUSFTA), as well as NAFTA, which succeeded it. The biggest novelty of CUSFTA was the introduction of a new system for resolving bilateral trade disagreements, through binding arbitration rather than conventional diplomacy. Canadian negotiators had insisted on such a quasi-judicial scheme to insulate bilateral commercial disputes from the power asymmetry inherent in the U.S.-Canada relationship, and specifically to prevent the U.S. Commerce Department from unilaterally slapping “countervailing duties” on Canadian products it believed were being dumped on U.S. markets. Ultimately, the George H. W. Bush administration agreed to submit trade disagreements to a binational panel of arbitrators and even to accept its decisions as final, with no recourse to appeal or any prospect of findings being overturned by U.S. courts.

The United States subsequently agreed to incorporate the same provision into NAFTA, a trilateral agreement with Canada and Mexico. Under NAFTA’s general dispute settlement procedure, parties may refer disagreements to the good offices of the Free Trade Commission. If that consensual path fails, they may submit their dispute to a panel of five independent experts for ad hoc arbitration—the decisions of which are binding. NAFTA also provides a binational panel system to review antidumping and countervailing duties claims, with a 315-day window to make decisions. Should a ruling favor the complaining state, it is entitled to demand remedy and, if this is not forthcoming, to adopt retaliatory legislation or statutes.39

What the WTO did was extend this principle of binding arbitration to the global, multilateral level and embed it within a new framework for negotiating and enforcing international trade rules. The WTO differs from the GATT in multiple respects. Whereas the GATT was a negotiating forum with a modest secretariat, in which parties negotiated trade bargains, the WTO is a standing international organization, established by treaty and embedded in international law, that imposes formal legal obligations on its members. The GATT had permitted countries to opt out of certain provisions, whereas the WTO has an “all or nothing” aspect that requires members to buy into an entire package of agreements. Finally, their methods for resolving disputes are wholly different. Under the GATT, countries that complained about unfair treatment would seek a bilateral solution and, if dissatisfied, retaliate on a bilateral basis. In contrast, the WTO explicitly obliges all parties to submit all disputes falling under the treaty’s “covered agreements” to the compulsory jurisdiction of its binding dispute settlement understanding (DSU).

From the perspective of political realism, the U.S. decision to join the WTO is mysterious. That body of thought—the dominant academic approach to world politics—suggests that powerful states will maintain independent authority and maximal freedom to pursue their material interests. In 1994 the United States enjoyed more relative power than it had in decades, standing as the sole superpower. Why would it push for a binding dispute resolution mechanism that constrained its capacity for international action? The most compelling answer is that senior U.S. officials in the administrations of George H. W. Bush and Bill Clinton understood that this “unipolar moment” was fleeting. They recognized that the WTO would consolidate the rules of the global trading system the United States had written decades before, reducing the possibility that other major economies would promote very different goals, including greater discrimination or redistributionist schemes, in the future. The U.S. goal was to lock in a set of favorable institutional arrangements, reinforced by a binding dispute resolution mechanism.40

From its earliest days, the WTO became the target of antiglobalization critics, primarily from the progressive left, who accused it of catering to business interests at the expense of workers’ rights and the environment. Of more relevance to this book, many liberals and conservatives also accused the WTO of infringing on America’s sovereignty-as-authority.

From a constitutional perspective, the U.S. decision to join the WTO was significant in two respects. First, it raised the possibility that the WTO might impose on the United States a new trade rule that elected U.S. leaders did not support. Sensitive to this risk, Clinton administration negotiators insisted on—and secured—a very high bar for any amendments to the WTO’s legal instruments. Any amendment had to be approved by a three-fourths majority of member states. Moreover, if any member rejected the new rule, other WTO members had to muster an even higher threshold—seven-eighths of the entire WTO membership—to impose it on a recalcitrant party. These high hurdles made it extremely unlikely—though not impossible—that other states could impose a rule on the United States against its wishes.

An even greater source of sovereigntist anxiety was the WTO’s mandatory DSU. The DSU gives the WTO exclusive jurisdiction to resolve trade disputes, a competence that potentially involves a vast array of commercial policy and regulatory issues. It requires that parties first attempt to resolve their differences amicably through bilateral consultations. If the disagreement persists, the two parties must request a ruling from a panel of independent experts. If one party disagrees with that decision, it may appeal to a panel of three judges drawn from the WTO’s standing Appellate Body (AB). The AB’s decisions are “final”—and thus not subject to appeal.⁴¹

The legality and finality of AB rulings bears scant resemblance to the GATT dispute resolution process, which was based on a more traditional model of intergovernmental diplomacy and ultimately consensus among independent sovereign states. Under the GATT, all contracting parties had to agree to rulings, meaning that any single state could obstruct them, as well as block authorization of sanctions for noncompliance. By contrast, the AB panel’s rulings are binding and automatic, permitting no veto. All states must abide by them and change offending domestic statutes accordingly—or else accept the removal of trade concessions to which they are otherwise entitled. The DSU is charged with monitoring implementation of the AB’s recommendations for negotiation of compensation. In effect, the WTO has created a “supreme court of world trade disputes.” But unlike the U.S. Supreme Court, the AB is not anchored in any domestic legal system or grounded in any national constitution, meaning that its decisions lack a clear democratic basis of legitimacy. In addition, there is no democratic recourse for citizens (or firms) seeking redress against the AB’s decisions.42

American sovereignty concerns nearly derailed U.S. entry into the WTO. During 1994, opposition emerged from across the political spectrum. This diverse coalition encompassed the consumer rights advocate Ralph Nader, the populist Patrick J. Buchanan, the independent presidential candidate H. Ross Perot, and conservative southern senators such as Strom Thurmond (R-S.C.) and Jesse Helms (R-N.C.). As the New York Times explained, “All of the pact’s critics have contended that the new trade organization will effectively have the power to rule against any American laws—from environmental protections to laws against the purchase of goods made by child labor—that it judges to be a barrier to imported goods. The result, they argue, is a loss of sovereignty for the United States.”⁴³

Progressives claimed the WTO would gut important U.S. social, environmental, and other protections that American citizens supported and that their legislators had enacted into law. Nader blasted this as a threat to U.S. constitutional democracy. It “would … undermine citizen control and chill the ability of domestic democratic bodies to make decisions on a vast array of domestic policies from food safety to federal and state procurement to communications and investment policies.” Fundamental decisions affecting Americans would now take place in secret in Geneva, resulting in “a practical erosion of our domestic sovereignty through an external layer of regulatory bureaucracy that pull standards down, but not up.”⁴⁴

Nader’s resistance was predictable. More alarming for President Clinton, who backed U.S. entry, were the sovereignty concerns of Republican legislators, who also worried about the new body’s power to override U.S. trade laws. Robert Dole (R-Kans.), the incoming Senate majority leader, insisted that the administration provide “stronger assurances that WTO panels would not infringe on American sovereignty by issuing arbitrary rulings against U.S. laws.” To mollify Dole, the White House proposed that the United States create a new U.S. commission composed of five federal appellate judges, charged with reviewing the fairness of any WTO decisions against the United States. Should the commission find the WTO guilty of three unreasonable rulings, Congress could initiate moves to withdraw from the body. This new “three strikes and you’re out” rule reassured legislators that Congress would serve as the WTO’s watchdog.45

Congress never established the envisioned commission, but the GOP continued to explore the issue of potential withdrawal. The House requested a General Accounting Office (GAO) study on the impact of the DSU on trade policy and U.S. national interests. The GAO’s final report, delivered in June 2000, quieted debate. “Overall, our analysis shows that the United States has gained more than it has lost from the WTO dispute settlement system to date,” the authors concluded. “WTO cases have resulted in a substantial number of changes in foreign trade practices, while their effect on U.S. laws and regulations has been minimal.”⁴⁶ On June 21, 2000, the House handily rejected a resolution to withdraw the United States from the WTO, 365–56.⁴⁷

To avoid raising sovereignty hackles, WTO officials themselves scrupulously avoided describing the DSU as a “judicial” process, or the AB as a “court” or “tribunal.” Nevertheless, the AB quickly emerged as the most important international law tribunal. In its very first ruling, as Rabkin notes, the seven judges of the AB announced that “WTO agreements were now part of the general body of public international law and must be interpreted with reference to ‘general principles of international law.’ ” The WTO’s early ambitions elicited ire from Republicans, who charged that “the Appellate Body was exceeding its authority by ‘judicial activism’ and slanted treaty interpretation that inappropriately impinge upon the sovereignty of the United States.”⁴⁸ The WTO also mobilized leftist antiglobalization critics, most famously in 1999, when violent protestors disrupted the body’s ministerial meeting in Seattle, Washington.

At times, antiglobalization critiques of the right and left seemed to merge—nowhere more so than in the fiery rhetoric of Buchanan, in retrospect Donald Trump’s intellectual godfather. In his 1998 broadside The Great Betrayal: How American Sovereignty and Justice Are Being Sacrificed to the Gods of the Global Economy, Buchanan wrote,

Like a shipwrecked, exhausted Gulliver on the beach of Lilliput, America is to be tied down by threads, strand by strand, until it cannot move when it awakens. “Piece by piece,” our sovereignty is being surrendered. By accession to NAFTA, GATT, the UN, the WTO, the World Bank, and the IMF, America has ensnared itself in a web that restricts its freedom of action, diminishes its liberty, and siphons off its wealth.49

(Seventeen years later, as noted earlier, Alabama senator Jeff Sessions would invoke the same literary imagery in his interview with Breitbart’s Stephen Bannon.)

In the first decade of the twenty-first century, the WTO faded as a lightning rod for U.S. sovereigntists, thanks in part to the generally high quality of its quasi-judicial outputs. At the same time, the DSU demonstrated its power to force changes in U.S. trade policy. The most prominent instance was the Steel Safeguards (2003) case, in which the AB invalidated tariffs that the George W. Bush administration had imposed to limit steel imports into the United States. The New York Times described this landmark ruling in historical terms, as “the rough equivalent of Marbury vs. Madison, the 1803 decision that established the Supreme Court as the final arbiter of the Constitution, able to force Congress and the executive branch to comply with its rulings.”⁵⁰

Such comparisons alarm constitutional traditionalists like Rabkin, who believe the AB “should be taken very seriously as a threat to [American] sovereignty.” Sovereigntists worry that the WTO’s rule-making function will increasingly unfold not through multilateral negotiating rounds among sovereign states but instead via the AB’s judicial activism. Although the Marrakesh Treaty declares that the DSU mechanism must not expand or diminish obligations of WTO members, pressures and temptations will surely build for the AB to create new rules through adjudication. This risk has only risen, sovereigntists worry, given the failure to conclude the WTO’s Doha Development Round of trade talks, launched in 2001. Such a trend would only add to the WTO’s “democratic deficit,” by removing rule creation even farther from the decisions of member states that are accountable to the will of their citizens.⁵¹

Shortly after taking office, the Trump administration highlighted another sovereigntist objection to the WTO: namely, that it placed unacceptable constraints on U.S. freedom to retaliate against perceived enemies of fair trade. A case in point was China, which the president claimed had been gaming the global economy through currency manipulation. In March 2017 the administration fired a shot over the WTO’s bow, suggesting that the United States might unilaterally impose tariffs against countries it judged to have unfair trade practices. It also declared that future adverse WTO rulings would not automatically result in any change in U.S. laws and announced that it would ignore any rulings by the Appellate Body that the White House deemed to infringe on U.S. sovereignty.⁵² The stage seemed set not only for a more confrontational relationship with China and other trading partners—who might well retaliate—but indeed for a potential showdown with the WTO itself.53

Writing in the Wall Street Journal, John Bolton defended the Trump administration’s hard line, arguing that the WTO had locked the United States into an “unaccountable, legalistic morass into which free trade can all but disappear.”⁵⁴ According to this narrative, WTO membership had infringed on U.S. sovereign authority and limited U.S. sovereign autonomy, without delivering to the United States any sovereign influence.

Such sovereigntist concerns deserve to be taken seriously, but they should not be blown out of proportion. Neither should the United States overlook the potential risks of destabilizing the WTO-led trade regime. To begin with the obvious point, the WTO has not seized sovereignty from the United States. The U.S. decision to join the WTO, pursue trade liberalization within it, and accept the jurisdiction of the AB were all sovereign choices ratified by the president and the Senate as representatives of the American people. WTO agreements are legally binding on the United States because Congress has said they are. The WTO remains an intergovernmental rather than supranational body, lacking an administrative organ that can independently issue new regulations.

The point here is not that the WTO is perfect—an impossible bar for any human institution. Its rulings will not always be wise, much less advance immediate U.S. interests. The AB will sometimes get it wrong—with certain WTO rulings on tax policies being a case in point, in the view of many trade lawyers. The AB can also foreclose certain steps that the U.S. government might want to take—such as the George W. Bush limits on steel imports to protect domestic production—by labeling them non-WTO-compliant.

Even when the United States loses in the WTO, however, it still preserves its sovereign right to retain its offending trade provisions, albeit in the knowledge that its aggrieved partners are justified in taking compensatory steps in retaliation. Alternatively, it may seek a bilateral remedy to satisfy the offended party. A case in point is the AB’s finding against the United States in the Cotton case, which sided with Brazil in ruling that U.S. subsidies to domestic cotton producers were not WTO-compliant. The two countries thereupon negotiated a bilateral framework agreement that allowed the United States to maintain its discriminatory treatment while compensating Brazilian exporters.⁵⁵

The WTO is also not a panacea for all forms of unfair competition the United States confronts, with currency manipulation being one example. Still, notwithstanding the constraints and setbacks it occasionally imposes, the WTO remains in the U.S. interest, helping to stabilize expectations among trading partners and establish important standards of behavior. In choosing to join the WTO, elected U.S. officials rightly calculated that some constraints on America’s sovereign autonomy (in its trade policy space) and more modestly on its sovereign authority (including through the DSU) were acceptable prices to pay for a predictable system of international trade governed by rules that embody multilateral principles of nondiscrimination and reciprocity. In sum, what the trade expert Robert Z. Lawrence wrote a decade ago remains true today: “The [WTO] dispute settlement system reflects a delicate balance between toughness and respect for sovereignty; rather than criticizing the result, U.S. policymakers and legislators should invest more energy in defending it.”56

At the same time, the United States must remember that the global trading regime is inherently fragile. By attacking the WTO’s legitimacy in early 2017, President Trump increased the likelihood that U.S. trading partners would also play the sovereignty card, refusing to comply with AB rulings that they find inconvenient. For precisely this reason Senator Sander Levin (D-Mich.) in March 2017 cautioned the Trump administration against such a strategy. “Too often ‘sovereignty’ is used as a red herring by others to avoid changing their laws, which are blocking U.S. exports or disadvantaging U.S. workers,” Levin told Politico. “We insist on reasonable changes to other nations’ intellectual property protections, regulations that unjustifiably discriminate against U.S. products in foreign markets, and labor laws, to name just a few, and we would never accept the argument that a country in a trading arrangement with us won’t act because their sovereignty is being impinged.”⁵⁷

Were other governments to assert similar “sovereign” privileges, the result could well be a downward cycle of tit-for-tat protectionism, undermining a global institution that remains valuable to the United States.

The U.S. goal should be to formulate a national trade policy that complements, rather than shoves aside, the WTO. Within that body Washington should press for better, more comprehensive international trade rules geared toward eliminating rampant market distortions, including those “caused by government subsidies, discriminatory regulations, intellectual property theft, and location incentives” (which encourage firms to relocate). In parallel, the U.S. government should be more aggressive in enforcing its own existing trade rules by pressuring trading partners to end discrimination against U.S. exports, in accordance with WTO rules that “permit governments to ‘self-initiate’ either anti-dumping or countervailing duty cases on their own.”⁵⁸

It is true that the WTO’s membership can in principle create new trade rules that are binding on nonconsenting partners. As Rabkin observes, this is, “in effect, a delegation of treaty-making powers from the president and the Senate to a body of foreign officials.”59 At the same time, the United States is well protected against this risk, thanks to the high hurdles implied by a seven-eighths majority of member states. It is highly unlikely (though admittedly not impossible) that the United States could come out on the losing end of such a vote.

Of greater concern for sovereigntists is the prospect that the AB may gradually impinge on U.S. treaty power more indirectly, including by reinterpreting WTO agreements and obligations in more activist ways, as well as depicting WTO commitments not merely as contracts but as binding obligations of public international law.⁶⁰ To date, however, these dangers remain almost entirely hypothetical. More than twenty years after the U.S. accession to the WTO there is little evidence of such dynamics.

In the end, the United States retains an ultimate safeguard to protect its sovereign authority. Should senior U.S. officials conclude that the AB has overstepped its mandate by making decisions that violate U.S. constitutional authorities, the United States can always exercise its “exit” option, either by deciding not to comply with specific rulings or, in the extreme, by renouncing membership in the WTO and associated treaty obligations (something that candidate Trump’s campaign rhetoric suggested was a possibility).⁶¹ To be sure, the United States would incur heavy costs by invoking this ultimate safeguard. But these would likely be temporary costs of adjustment, associated with the transition to a less formal trading arrangement with other WTO members. In sum, the United States has agreed to trade off a measure of sovereignty autonomy, and a slice of sovereign authority, for greater sovereign influence over its destiny.