Views from the World
Prospects of U.S. Trade Policy
Bruce Stokes, National Journal
(Keizai Koho, June 2009 issue)

U.S. trade policy has long been a major concern in Japan, as well it might. Japan ran a $72.7 billion trade surplus with the United States in 2008 and a positive trade balance with America every year for the past generation. An open U.S. market has proven very beneficial to Japan. And in the 1980s U.S. protectionist policies-caps on auto imports, controls on imports of steel and computer chip-were directly aimed at Japan. So the anticipated trade policy of the Obama administration is keenly important to Japan?fs future wellbeing.

Despite candidate Obama?fs criticism of the North American Free Trade Agreement during the presidential campaign and the flap over a Buy America provision in the U.S. economic stimulus package enacted earlier this year, the Obama administration is pro-trade, not protectionist.

?gThe Buy America fight was instructive,?h said Frank Vargo, vice-president for international economic affairs at the National Association of Manufacturers. ?gDespite very strong support for Buy America by labor and sympathy in Congress, the White House said we have to stick by our trade agreements.?h

This does not mean that the Obama team is likely to make trade a priority. ?gTheir inclination is to let sleeping dogs lie,?h said Ed Gresser, director of the trade project at the Progressive Policy Institute. With Congressional Democrats deeply divided on the issue, the American public wary of trade and prospects slim for significant new export opportunities, not much White House leadership can be expected on trade in the next year or so.

Trade has never been popular with the American public and it is not today. Americans are divided, with 47 per cent telling pollsters that trade is a threat to the economy and 44 per cent seeing it as an opportunity, according to a Gallop survey in early February.

This division is evident in the composition of the Democratic caucus in the House of Representatives. More than four dozen new Democrats have joined the House over the last two elections and a significant proportion of them are critics of trade.

This rising Congressional skepticism has created a political dilemma for Obama administration. There is ?ga tug of war between their policy instincts and their political instincts,?h said Bill Reinsch, president of the National Foreign Trade Council. Looking at unavoidable, tough Congressional votes on domestic economic issues over the next year or so, the White House is likely to be loath to spend scarce political capital on unnecessary trade fights.

The Obama administration?fs action, or rather lack of action, on alleged Chinese currency manipulation is a case in point. China now accounts for two-thirds of the non-oil U.S. trade deficit, in part thanks to its undervalued currency. Candidate Obama criticized Beijing?fs currency ?gmanipulation?h. Many in Congress have called for action against the renminbi: a U.S. tariff or anti-subsidy duties on Chinese imports or help from the International Monetary Fund or World Trade Organization.

But the U.S. Treasury Department?fs mid-April report to Congress on international exchange rate policies found China innocent of currency manipulation. Noting that the renminbi appreciated by 16.6 percent in real effective terms between the end of June 2008 and the end of February 2009, the report praised Beijing for not engaging in ?gbeggar thy neighbor?h policies. ?gThe [renminbi] appreciated slightly against the dollar when most other emerging market and other currencies fell sharply against the dollar,?h the report concluded.

Concerned about the destabilizing effect of a trade war with China in the midst of a global recession, the Obama administration chose to focus on Beijing?fs most recent behavior, rather than the long-term weakness of its currency.

?gMake no mistake,?h said Brad Setser, a senior fellow at the U.S. Council on Foreign Relations, ?gChina?fs currency still looks undervalued. It is only a bit higher than it was in 2001 or 2002. The rise in the productivity of China?fs economy hasn?ft been mirrored by a rise in the external purchasing power of its currency. That is a big reason why China?fs current account surplus remains large.?h

While the China currency issue is defused for the moment, friction between Washington and Beijing may still emerge on a host of other trade-related issues. Candidate Obama promised tougher enforcement of U.S. trade laws and, in his early statements, the new U.S. trade representative Ron Kirk has clearly decided to strike a ?gbad cop?h image.

This may be inevitable. U.S. actions against imports invariably rise during bad economic times. U.S. unions recently filed a trade case against souring imports of Chinese-made tires. In the early part of this decade, as the U.S. economy slowed, anti-dumping actions, aimed at stopping alleged illegal selling of imports below their cost of production, jumped from 47 cases in 2000 to 75 in 2001. This case load is likely to spike again as the current recession deepens. Since such cases are brought by private business, but have to be accepted by the government, the administration will be forced to weigh the merit of each case against the negative impact it may have on the U.S. economy and the blowback it will cause from U.S. trading partners, who will undoubtedly characterize any such efforts as protectionist.

Demands for more enforcement will also be heard on Capitol Hill. Rep. Charlie Rangel, D-N.Y., chairman of the powerful House Ways and Means committee, has introduced legislation that would pressure the administration to more aggressively go after foreign non-tariff trade barriers, would make it easier to take action against Chinese subsidies and would make it more difficult for the White House to reject claims for protection against surges of Chinese imports. Sen. Max Baucus, D-Mont., chair of the Senate Finance committee, is also preparing enforcement legislation.

As Washington gets tougher on imports, it may show less interest in market opening abroad. The Doha Round of multilateral trade negotiations, the major trade issue leftover from the Bush administration, is ostensibly still an Obama administration priority. But the National Association of Manufacturers, the Coalition of Services Industries and the Farm Bureau have told the White House that the offers that were on the negotiating table in Geneva in July, 2008, when the long-running talks broke down, are not acceptable to them. And computer models suggest there is very little economic benefit to the United States in the current proposals. So reviving the Round will first require the administration to convince major trade constituencies in the United States that completing Doha is really worth the political effort.

At the same time, free trade agreements with Colombia, Panama and South Korea negotiated by the Bush administration have yet to be approved by Congress. Candidate Obama opposed all three deals.

The Korean agreement is the most troublesome for the administration because it would eliminate car and truck import duties. It will be difficult for the White Houst to argue for letting more Hyundais into the country any time soon as taxpayers are bailing out General Motors and Chrysler.

Possibly the greatest trade challenge facing the Obama White House in the short run may have to do with impending U.S. climate legislation. Later this year or early next year, Washington is expected to join Japan, the European Union and other nations in the post-Kyoto effort to reduce carbon emissions to slow global warming. But obtaining a Congressional majority for such a reversal of the Bush administration?fs denial of climate change may require tariffs or other border measures to ensure that carbon-intensive U.S. manufacturers are not disadvantaged in competing with Chinese and Indian producers, whose governments may not agree to cut carbon emissions.

Such border measures may or may not be legal under World Trade Organization rules. The European Union finessed this issue by postponing a decision on border measures, while giving away carbon emission certificates to any industries that demanded border protection. The Obama administration could similarly dodge the issue. But it would be bad climate policy and bad economics. So Congress may, at the very least, threaten border measures to try to convince China and India to commit to reducing carbon emissions.

In the end, much of the Obama trade policy may be shaped by events beyond the president?fs control. A prolonged recession will only complicate matters, distracting White House attention, fueling public demands for action against ?gunfair?h trade and heightening frictions with trading partners. But early evidence is that trade is a low White House priority.

Copyright (C) 2009 Keizai Koho Center. All rights reserved