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Trade policy and the Obama administration.

During his primary campaign, President Obama took an aggressive stance on trade, suggesting a protectionist drift in U.S. trade policy. However, it seems more likely that policy will focus more on enforcement of existing rights than on protectionist initiatives. The major influences on trade policy are likely to be multilateral approaches to trade problems, broad foreign policy concerns, the impact of trade policy on recovery from the current recession, and global climate change initiatives. Holdover initiatives on the World Trade Organization's Doha round and bilateral agreements will be joined by-global climate change as the principal policy issues for the next few years.

Business Economics (2009) 44, 150-153.

doi:10.1057/be.2009.15

Keywords: trade policy, protectionism, Obama administration, world trade organization, bilateral agreements, global climate change

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What a difference a year makes! Last year, Senators Obama and Clinton were vying for the Democratic nomination and threatening to withdraw from the North American Free Trade Agreement (NAFTA) if the pact was not renegotiated. Their campaign debate was regarded by our trading partners as signaling a protectionist drift in U.S. trade policy. Go abroad and you will find officials still worried about the direction of U.S. policy--even though President Obama long ago dispensed with the inflammatory rhetoric and emphasized the importance of U.S. compliance with its international trade obligations.

During the campaign, the President emphasized the need to better enforce U.S. rights under existing trade laws and agreements and to strengthen NAFTA rules on labor and the environment. His views resonated with the electorate, especially with core Democratic constituencies. Union opposition to NAFTA and other trade pacts is strong and will undoubtedly intensify as the U.S. unemployment rate spikes. Clearly, the President will try to "put paid" to his campaign promises on trade. Thus, we will see more antidumping cases and World Trade Organization (WTO) litigation filed by the U.S. Trade Representative (USTR)--that always happens during periods of economic distress. And U.S. officials will push Canada and Mexico to "upgrade" NAFTA--which they appear willing to accept as long as it doesn't involve renegotiating existing obligations.

Undoubtedly, President Obama will be forced by Congress to do more. The caucus of new members of Congress elected on an explicitly antitrade liberalization platform do not fully share the views of the centrist, international-minded Obama administration. Indeed, Obama's main trade policy challenge will be working with members of his own party in Congress.

That is why the Obama administration first has to address the anxieties about globalization and trade in the American public debate that are reflected in congressional trade policy critiques before he can garner a mandate for new trade negotiations. Doing so could well smooth the path for future trade initiatives, especially if the administration strengthens unemployment insurance and pension and health-care benefits. Unlike trade policy, those issues are high priority for the Obama administration.

President Obama entered office with an ambitious domestic reform agenda that included health care, energy, and the environment. The urgent task of managing the global economic crisis has so far superseded, but has not supplanted, those plans to bolster the social safety net. To that end, the $787 billion stimulus bill in February 2009 included an extensive expansion of the trade adjustment assistance program to help displaced workers. In light of the massive economic challenges confronting the new team, which is still under-staffed due to the unwieldy nomination and congressional confirmation process, and in light of declining output and rising unemployment, the Obama administration will be hard pressed to pursue new trade initiatives anytime soon--especially since fast track trade negotiation authority, which lapsed in 2007, is unlikely to be revived in the near term, except possibly for the Doha Development Round (the current round of WTO negotiations).

Instead, the Obama administration is likely to focus more attention on enforcement of U.S. trade laws and WTO rights and give less attention to an activist negotiating agenda. USTR lawyers will be busy, but I suspect they might very well play more defense than offense. U.S. trading partners have already voiced concerns about auto bailout subsidies and Buy American requirements for government contracts and may respond by filing WTO complaints of their own. Even worse, those countries may be tempted to emulate U.S. practices rather than retaliate against them. Such a process has already started; Canada has begun to subsidize its own auto industry, and Canadian municipalities are barring procurement of U.S. products in response to the restrictions implemented by U.S. federal and state procurement officials. (1)

As White House officials already discovered in the G20 summits and in the debate over "Buy American" provisions of the U.S. economic stimulus legislation, trade needs to be part of the broader economic response to the global economic crisis. The downside risk of inaction is great. The forces of economic nationalism, propelled by rising unemployment and shrinking output, could lead to new restrictions on trade and investment that inhibit recovery today and clog the arteries of potential growth in the future.

For that reason, I believe U.S. trade initiatives going forward will be dictated by international considerations, even as Congressional Democrats continue to push narrower constituent demands for subsidies and other forms of protection. U.S. trade initiatives are likely to be shaped by

* crafting multilateral responses to the global economic crisis in cooperation with the world's major trading nations;

* foreign policy concerns, which will temper anti-China rhetoric in light of the need for cooperation with the Chinese on critical issues such as North Korea, Iran weapons proliferation, and economic recovery;

* trade implications of domestic recovery plans, such as the Buy American provisions and the auto bailouts; and

* climate change initiatives: the development of a post-Kyoto global regime in the Copenhagen talks in December 2009, cooperation with Canada and Mexico on a coordinated North American policy, and crafting of a U.S. cap-and-trade system.

1. Priorities for Trade Negotiations

What will be the U.S. priorities for trade negotiations? Overall, the agenda will be constrained in the near term because of the economic crisis. It is hard to generate political support for new trade liberalization in times of economic stress. As we have seen in recent months, it is extremely difficult even to hold the line on existing levels of market access.

As a practical matter, the administration will have its hands full in the near term with unfinished business of the Bush era--particularly the Doha Round and the free trade pacts with Colombia, South Korea, and Panama that have been signed but not yet ratified by Congress. But the Obama administration will want to put its own mark on each of these initiatives and refocus attention on issues of high priority to core Democratic constituencies, such as environmental issues in the WTO talks, auto issues with South Korea, and labor problems in Colombia.

Accelerating the Doha negotiations needs to be an important part of the overall response of the G20 nations to the global economic crisis--with the aim of deflecting new measures that distort trade and investment in the short run and preparing the final package of trade reforms for political decision in late 2010 or 2011. It is now clear that the status quo is not sustainable, and that if multilateral negotiations fail--or even continue to drift--markets will become less open to international competition, and the viability of the multilateral negotiating process, including the WTO's valuable dispute settlement mechanism, will be called into question. By grasping the leadership mantle in the WTO, U.S. officials can both pursue important economic objectives while demonstrating a renewed U.S. commitment to multilateralism.

By contrast, we will likely see a dramatic shift in the U.S. approach to bilateral FTAs. The U.S. strategy of the past decade, which has produced trade pacts with more than a dozen countries, has become politically unpopular and is unlikely to be emulated by the Obama administration. In any event, the queue of potential new FTA partners is short and comprised mostly of small trading partners with a predominantly political agenda (for example, Taiwan, Egypt, Ukraine). Instead of negotiating new bilateral FTAs, I think the Obama administration will likely give more attention to melding existing pacts in the Western Hemisphere and across the Asia-Pacific region (including talks on a Trans-Pacific Partnership launched by former USTR Susan Schwab in September 2008). In addition, the USTR may also explore prospects for targeted deals with the European Union, Brazil, Japan and other major trading partners that focus on services, energy, and the environment. But this exploration will take some time to develop and will depend importantly on what happens in the Doha Round.

The more immediate task for the Obama administration will be to find a way to implement the deals awaiting ratification, in particular the FTAs with Colombia and South Korea. For both foreign policy and national security reasons, the United States needs to ratify these pacts. It is inconceivable that the Congress would outright reject a critical U.S. regional ally, but it will take some political skill to get the Congress to say "yes." In addition, as already discussed in bilateral summits with the leaders of Mexico and Canada, President Obama will want to "upgrade" NAFTA to better meet the challenges of border security, energy security, and climate change, and to fulfill his campaign promises on labor and environment.

2. Pending FTAs

In the case of the U.S.-Colombia FTA, the opposition does not derive from the pact's provisions in the agreement--which are substantially the same as the U.S.-Peru FTA that passed Congress with a large bipartisan majority--but rather from concerns about the murder of Colombian trade union leaders and the inadequate prosecution and punishment of the perpetrators. Although the Uribe government has made substantial progress this decade in reducing the incidence of violence, Congressional leaders want a greater commitment to protecting union leaders. The Obama administration will try to work with the Uribe government to establish benchmarks for gauging the effectiveness of Colombian policies in mitigating these problems and may offer additional assistance to help them do so.

In the case of the South Korea-U.S. FTA, it has been almost two years since U.S. and Korean negotiators shook hands on the deal in Seoul. The pact was subsequently revised (to incorporate additional labor and environmental obligations per the May 2007 accord between Congressional leaders and the Bush administration) and signed in June 2007, just before the expiration of U.S. trade promotion authority. It has not yet been ratified by either legislature, though the pact has cleared the main hurdles in the Korean National Assembly. In the interim, opportunities to expand trade and investment have been lost or deferred.

President Obama and members of Congress argue that the pact's auto provisions need to be fixed. That position is contested by Korean officials, who strongly object to reopening the accord for a second time. In my view, the economic critique of the pact is flawed--but that is not the real problem. Since the summer 2008, the bottom has dropped out of the auto market in both countries: auto sales have plummeted, causing sharp declines in production and employment. Annual U.S. sales, which peaked at 17 million units a few years ago, are running at less than 10 million in 2009. Large-scale U.S. treasury loans have not saved General Motors and Chrysler from bankruptcy: GM will survive after a massive restructuring and downsizing; Chrysler's future depends on whether its executives learn Italian. The Korean auto industry also has suffered production cutbacks and layoffs, though not as severe as GM, Ford, and Chrysler.

The South Korea-U.S. FTA was crafted with a vision for the auto industry that is now outdated. U.S. and Korean companies have significant trade and investment in each other's home market. Both will thus be affected by each other's national programs to support auto production and employment. For example, the GM bail-out has implications for whether and how Korean government agencies will aid GM-Daewoo. Officials from both countries need to sit down together and assess, in light of the drastic changes now underway in the auto sector, whether the FTA addresses their core objectives for this critical sector and whether they need to update or augment the pact to address how both can work together to bolster productivity and employment in each country.

3. Global Climate Change Policies

Each FTA presents key problems and opportunities for U.S. trade policy. But perhaps the biggest challenge to the world trading system that the Obama administration will face during its term in office is how to deal with climate change policies. Pricing carbon and committing to reducing greenhouse gas (GHG) emissions will affect what we produce, how we produce it, and where we produce it. At their core, GHG mitigation policies involve charging for previously free goods--which ultimately will result in some reallocation of wealth within economies and between countries.

When carbon taxes and regulatory mandates raise the cost of producing goods, firms will come under competitive stress; their responses will be to improve productivity, relocate, halt production, and/or lobby for protection via subsidy (such as free permits) and import restrictions. These problems have already surfaced, with threats of trade protection echoing in Brussels and in Congressional debates. Now that Obama's budget has signaled a long-term commitment to a national cap-and-trade system to reduce GHG emissions, and now that a cap-and-trade bill has been drafted in the House of Representatives, we are likely to see a crush of lobbyists raising warning flags about U.S. competitiveness and petitioning for financial aid and import relief. Legislation under debate in the House already promises free allocations of emissions credits for both electric utilities and major industries.

4. Summary

In sum, fears that the Obama administration would follow the protectionist policies of its labor constituencies have not been realized. In itself, that is remarkable given the severe economic recession and sharp spike in unemployment recorded in the first half of 2009. Protectionist pressures have been relatively well managed, albeit not totally suppressed. President Obama has clearly signaled his intent to maintain U.S. leadership in the multilateral system and to work closely with the G20 nations on coordinated responses to the global economic crisis. And he has found a constructive way to introduce climate change issues into the trade negotiating agenda, which could help advance talks in both the WTO and NAFTA. That said, the hard part is turning ambition into action--and closing deals that will open trade!

REFERENCE

Hufbauer, Gary, and Schott, Jeffrey, 2009. "America's Free Trade Promises Must Be Honoured." Financial Times, May 20.

Presented at National Association for Business Economics 25th Annual Washington Economic Policy Conference. March 2, 2009.

Jeffrey J. Schott *

* Jeffrey J. Schott joined the Peterson Institute for International Economics in 1983 and is a senior fellow working on international trade policy and economic sanctions. During his tenure at the Institute, Schott has also been a visiting lecturer at Princeton University (1994) and an adjunct professor at Georgetown University (1986-88). He was a senior associate at the Carnegie Endowment for International Peace (1982-83) and an official of the U.S. Treasury Department (1974 82) in international trade and energy policy. During the Tokyo Round of multilateral trade negotiations, he was a member of the U.S. delegation that negotiated the GATT Subsidies Code. Since January 2003. he has been a member of the Trade and Environment Policy Advisory Committee of the U.S. government. He is also a member of the Advisory Committee on International Economic Policy of the U.S. Department of State. Schott holds a BA degree magna cum laude from Washington University, St. Louis (1971), and an MA degree with distinction in international relations from the School of Advanced International Studies of Johns Hopkins University (1973).

(1) Infrastructure projects funded by the $787 billion stimulus legislation passed in February 2009 are often tendered by state and local government officials, who discriminate against foreign suppliers for fear of losing the federal windfalls. Obama's pledge to comply with U.S. trade obligations has been honored in the breach. For a fuller discussion of this problem, see Hufbauer and Schott [2009].
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Title Annotation:Original Articles
Comment:Trade policy and the Obama administration.(Original Articles)
Author:Schott, Jeffrey J.
Publication:Business Economics
Geographic Code:1USA
Date:Jul 1, 2009
Words:2709
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