protectionism

Throughout the course of the Bush administration, a constant irritant in the Asia/Pacific region was Bush's tendency to place antiterrorism at the top of the queue in Asia/Pacific Economic Cooperation (APEC) discussions.  Not that anti-terrorism wasn't important, but APEC was not the proper forum for that -- APEC is all about regional economic integration.  China, by wanting to talk about trade, made a lot of diplomatic headway by distinguishing itself from the United States.

I bring this up because, according to the FT's Edward Luce, it looks like the Obama administration's policy malaise on trade is not winning it any allies in East Asia: 

In a meeting with President Barack Obama last week, Lee Kuan Yew, the veteran former prime minister of Singapore, said he felt privileged to meet the US leader at a “time of renewal and change in America and during a period of transition where the world order is changing”.

At private meetings around Washington, however, Mr Lee’s message was rather more blunt.

“You guys are giving China a free run in Asia,” he told Fred Bergsten, the director of the Peterson Institute for International Economics. “The vacuum in US policy is enabling the Chinese to make the running.”

Mr Lee’s timing was apposite. On Wednesday Mr Obama leaves for Tokyo for a regional tour that will include China, South Korea and Singapore, where Mr Lee’s government is hosting a summit of the Asia Pacific Economic Co-operation (Apec) forum this weekend. Surveys in each country show that Mr Obama’s popularity has helped to restore the battered US standing in the region.

But the views of Asian governments do not always chime with those of their public. Across the region, concern is rising about the absence of US leadership on trade since Mr Obama took office. Few believe that he has the will or power to restart the Doha round of global trade talks – and he has not asked Congress for a renewal of the presi- dent’s fast-track negotiating authority.

Fewer still believe that he will be able to ratify the landmark 2007 US-South Korea free-trade agreement in the face of strong hostility in Congress....

while globalisation gets steadily less popular in the US, other parts of the world are moving ahead. South Korea recently concluded a free-trade deal with Europe. Japan is holding similar talks with the European Union. Ironically, the EU broached the talks as a way of protecting itself against the trade-diverting effects of the now moribund US-Korea deal.

US business lobby groups are hoping Mr Obama will be able to achieve some kind of a breakthrough in Seoul next week. Given that it would be futile for him to send the free-trade agreement back to Capitol Hill, any new steps would have to include a renegotiation of the deal to include better market access for US cars.

“It is really important to understand just how badly the US is screwing itself on trade,” said Mr Bergsten. “By having an inactive trade policy, others are rushing to fill the vacuum.”

For an administration that claims it wants to have better relations with its allies, Obama and his foreign policy team have been remarkably tone-deaf when it comes to trade policy. 

At every major summit meeting since he's come to office, Obama has heard complaints about the lack of U.S. leadership on the trade front.  This administration has demonstrated that it's not afraid to tackle multiple, complex challenges at the same time -- and yet they've been either mute or worse when it comes to trade. 

Barack Obama's decision to put trade policy in a lockbox and throw away the key is utterly appalling -- and, from a foreign policy perspective, completely counterproductive. 

My latest column for The National Interest Online is now available.  It takes a longer look at the implications of Obama's tire tariff decision.  The more I look at this move, the more freaked out I get.  I think I've figured out the precise contours of Obama's trade strategy -- and trade plays a very small role: 

With Obama... this dip in the protectionism pool feels like the beginning of something much greater. Many Democrats feel warm and fluffy about protectionism, as a mechanism to improve labor standards or an ironclad guarantor of union jobs. This love affair isn’t going to stop. Thea Lee, the chief economist of the AFL-CIO, told the New York Times that “the trade decision was the president’s first down payment on his promise to more effectively enforce trade laws, and it’s very much appreciated.” Unions are already demanding additional action against Chinese steel....

All presidential administrations engage in protectionism—it’s often the cost of pushing through other forms of trade liberalization. While the previous two administrations engaged in these kinds of actions, they could proudly point to ambitious agendas of trade liberalization as well. The Clinton administration sought to add contentious labor and environmental side agreements to its trade deals—but Clinton also spent political capital to get NAFTA and the Uruguay round through Congress. Bush imposed the steel tariffs—but his administration also secured the passage of (now expired) trade promotion authority, launched the Doha round, and completed major trade agreements with Australia and Central America. President Bush also rejected this action against Chinese tires on four separate occasions.

Barack Obama has no record of trade liberalization to fall back on when defending this measure. Indeed, this is the first major trade action his administration has taken. Based on the political reporting of this trade action, it seems clear that Obama will use trade policy as a sop to his base in order to keep them behind his major policy initiatives on health care, financial regulation, and environmental protection.

Obama has largely decided to become a domestic-policy president. His supporters, his base and the politicking of his underlings indicate things will only get worse. With the global economy in deep crisis, protectionism is a terrible way to build a recovery.

Go read the whole thing. 

When the Obama administraton announced the decision to slap a 35% tariff on Chinese tire imports, I was pretty sure that free traders would be incensed.  And I haven't been disappointed -- even the financial markets are freaking out over this one. 

We trade enthusiasts are an excitable lot, however, what with everything leading to the falling off of cliffs, crossroads being reached, and red zones being breached.  Seven years ago, the allegedly free-trade Bush administration imposed steel tariffs that were found to be WTO-inconsistent.  There was a lot of gnashing of teeth and wailing at the time about the end of the open economy as we knew it -- yet the world trade system proved to be pretty robust.  So maybe my trade compatriots are exaggerating things a wee bit, yes?  In all likelihood, won't this be resolved via the WTO dispute settlement mechanism about 18 months from now?

For the first eight months of the Obama administration, I've been resisting the urge to shout "protectionism" at the drop of the hat.  This time, however, there are four reasons why I'm feeling much more nervous: 

1)  This isn't your garden-variety protectionism.  Last month, Chad Bown explained the Financial Times why this decision was a very special kind of protectionism: 

[A] little-known loophole in the rules governing China’s 2001 WTO accession makes it easy for a global protectionist response to spread faster and further than that which took hold in 2002. Nowadays, once any one country imposes a China safeguard on imports, all other WTO members can immediately follow suit, without investigating whether their own industries have been injured.

So this trade dispute can metastasize more quickly than most. 

2)  Beijing is not lying down on this.  China's furious and swift reaction points to another problem:  the United States is not the only country feeling protectionist urges at the moment.  Economic nationalism in China is riding quite high at the moment, as Keith Bradsher suggests in the New York Times: 

The Chinese government’s strong countermove followed a weekend of nationalistic vitriol against the United States on Chinese Web sites in response to the tire tariff. “The U.S. is shameless!” said one posting, while another called on the Chinese government to sell all of its huge holdings of Treasury bonds....

China had initially issued a fairly formulaic criticism of the tire dispute Saturday. But rising nationalism in China is making it harder for Chinese officials to gloss over American criticism.

“All kinds of policymaking, not just trade policy, is increasingly reactive to Internet opinion,” said Victor Shih, a Northwestern University specialist in economic policy formulation.

Methinks Shih and Bradsher are exaggerating things a wee bit -- imagine for a moment if U.S. foreign policy was driven by people getting upset on the Internet -- but you get the point.   

The U.S. use of this provision is doubly troubling, because from Beijing's perspective their WTO accession negotiations were seen as a humiliating kowtow to the power of the West.  China is not going to be selling its bonds anytime soon, but Beijing has not quite mastered how to cope with these kinds of domestic pressures, so they could do something really, really stupid.

3)  Politically, Obama has boxed himself in.  As egregious as the Bush steel tariffs were, they were targeted at a sector and not a country.  Furthermore, the Bush administration responded to the hubbub very quickly by watering down the worst effect of the tariffs. 

The Obama administration's new tariff is expressly directed at China.  And I'm not saying that China is blameless here.  But because it's country-specific, the administration has less room to maneuver -- either the tariffs are applied against China or they aren't.  It can't walk this back without it looking like a flip-flop.  Which means that there's little room for concession or negotiation. 

4)  Obama's base scares me on trade.  When the Bush administration did what it did, it was fulfilling a campaign promise to the state of West Virginia steelwokers.  Fortunately, the rest of Bush's winning political coalition was not seeking trade relief.  So the protectionist instinct pretty much ended with the steel tariffs -- and everyone in the Bush administration knew that they'd be overturned by the WTO eventually. 

With the Obama administration, however, this feels like the tip of the iceberg.  Most of Obama's core constituencies want greater levels of trade protection for one reason (improving labor standards) or another (protecting union jobs).  This isn't going to stop.  "Trade enforcement" has been part and parcel of Obama's trade rhetoric since the campaign.  The idea that better trade enforcement will correct the trade deficit, however, is pure fantasy.  It belongs in the Department of Hoary Political Promises, like, "We'll balance the budget by cracking down on tax cheats!" or "By cutting taxes I can raise government revenues!"  It.  Can't.  Happen. 

If I knew this was where the Obama administration would stop with this sort of nonsense, I'd feel a bit queasy but chalk it up to routine trade politics.  When I look at Obama's base, however, quasiness starts turning into true nausea. 

Developing.... in a very, very scary way. 

UPDATE:  More from Brad DeLong, Dave Schuler, and Shadow Government's Phil Levy. 

The final G-20 communique -- get it while it's hot! -- contains the following strong statement:  "We will not repeat the historic mistakes of protectionism of previous eras." 

This is likely true, though one should never underestimate the ability of governments to devise new and unforseen ways to commit new mistakes about protectionism in the current era.* 

How could that happen?  Check out my latest column in The National Interest online to see how a world of considerably less trade is possible, even within the confines of the World Trade Organization. 

The essay is a thought experiment -- I'd put my money on it not happening.  But I can't completely dismiss this scenario out of hand. 

* Indeed, The FT's Alan Beattie and Jean Eaglesham have the best single sentence on this point of the G-20 statement:  "The commitments on protectionism in the G20 communiqué, although longer than their equivalents after November’s Group of 20 meeting, are, if anything, shorter on concrete promises."

My latest column for Newsweek International is now online, and points out the hazards of a failed G-20 summit.  The closing: 

As World Bank president Bob Zoellick recently observed, the promotion of the G20 to the global stage is an accident of history. The group had a harmless existence for close to a decade. When the crisis hit, it was the only forum around that brought together the key players in global finance.

The G20 gets a mulligan for last year's hastily arranged summit. A failure to act this time around will be far more damaging. In the absence of global cooperation, countries will go it alone, which means a ratcheting up of financial, trade and fiscal protectionism. And today's global economy already has too much in common with the 1930s. 

Perusing the draft communique printed in the FT, I'd describe it as "a failure to act" already, but let's be charitable and see what happens in London.

Meanwhile, Heather Hurlburt and I discuss all things G-20 in our latest bloggingheads diavlog.  We also share our fear of "impact" as a verb, and, oh, yes, I propose burning Heather at the stake.  All in all, a lively chat. 

Three months ago I blogged that the World Bank's growth projections for this year were too optimistic.  Let's review my reasons: 

1. Credit markets have yet to really unfreeze, because the underlying problem -- putting a price on a lot of toxic debt -- has yet to take place;
2. It's going to take some time for trust -- a vital public good -- to return to global capital markets;
3. The crisis has done nothing to unwind the global macroeconomic imbalances that contributed to the asset bubble in the first place -- if anything, the crisis has temporarily reinforced it;
4. There is a very dangerous prisoner's dilemma game brewing in the interplay of fiscal expansion and trade policy.  Unless export engines like Germany start to signal that they'll prime their pump as well, you're going to start to see some nasty protectionist attachments to any new government spending;
5. Fiscal expansions are going to take a long time to kick in, and the ones being proposed are not necessarily conducive to countercyclical boosts. 
6. Beyond the fiscal expansion, this crisis is going to result in a lot more state intervention in the economy.  Given what's happened, it would be intellectually dishonest of me not to acknowledge that some of this intervention will be necessary.  A lot of it, however, is going to be misguided and stunt long-term growth. 

I would be very surprised if global growth was not negative in 2009. 

With the very partial exception of no. 5, all of the other factors are still very, very present in the global economy.   

And, alas, it now appears that the Bank has caught up with my doom and gloom. 

Developing countries face a financing shortfall of $270-700 billion this year, as private sector creditors shun emerging markets, and only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty, the World Bank said....

The global economy is likely to shrink this year for the first time since World War Two, with growth at least 5 percentage points below potential. World Bank forecasts show that global industrial production by the middle of 2009 could be as much as 15 percent lower than levels in 2008. World trade is on track in 2009 to record its largest decline in 80 years, with the sharpest losses in East Asia.

The financial crisis will have long-term implications for developing countries. Debt issuance by high-income countries is set to increase dramatically, crowding out many developing country borrowers, both private and public. Many institutions that have provided financial intermediation for developing country clients have virtually disappeared. Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future. 

There's something else going on that should bother IR scholars.  One of the benefits of having a hegemon is supposed to be greater provision of global public goods.  According to hegemonic stability theory, if the United States is really still the hegemon, then it should be providing the following things: 

• Provisions of liquidity
• Market for distressed goods
• Long-term cunter-cyclical lending

The U.S. did all of these things during the Asian financial crisis, for example.

This time around, the U.S. grade is not as high.  There has certainly been provisions of liquidity -- though if one defines the start of this crisis as the fall o 2007, then it's not like LIBOR has fallen to pre-crisis levels.

The U.S. is not a market for distressed goods.  On the margins this is due to incipient protectionism, but mostly this is due to the U.S. economic contraction.  Indeed, this is why the recession has so deeply affected Pacific Rim exporters.

The worst grade, however, is on counter-cyclical lending.  As the New York Times' Peter Goodman writes: 

American investors are ditching foreign ventures and bringing their dollars home, entrusting them to the supposed bedrock safety of United States government bonds. And China continues to buy staggering quantities of American debt.

These actions are lifting the value of the dollar and providing the Obama administration with a crucial infusion of financing as it directs trillions of dollars toward rescuing banks and stimulating the economy, enabling the government to pay for these efforts without lifting interest rates.

And yet in a global economy crippled by a lack of confidence and capital, with lending and investment mechanisms dysfunctional from Milan to Manila, the tilt of money toward the United States appears to be exacerbating the crisis elsewhere.

The pursuit of capital suddenly seems like a zero sum game. A dollar invested by foreign central banks and investors in American government bonds is a dollar that is not available to Eastern European countries desperately seeking to refinance debt. It is a dollar that cannot reach Africa, where many countries are struggling with the loss of aid and foreign investment.

Developing.... in a very, very bad way.

Anu Bradford is hosting a blog roundtable at the University of Chicago's Law School faculty blog about the future of the World Trade Organization. 

So far, the consensus is not encouraging for fans of an open global economy:

Anu Bradford:  "Trade protectionism is on the rise but the institutional foundations of international trade deals have been shaky for several years."

Daniel Abebe:  "we should see great power competition to be increasingly focused on trade issues and, given the tentative claims here, we should see increasing gridlock in the WTO."

Greg Shaffer:  "As for the Doha Round, it looks pallid in light of the staggering financial crisis that confronts us."

Richard Steinberg:  "As a location for trade negotiation, the WTO is dead." 

Well, that is all cheery news! 

In fairness, both Shaffer and Steinberg point out that the WTO is not irrelevant, because its Dispute Settlement Understanding remains the gold standard of enforcement in economic cooperation.  That said, this is still pretty bleak.  What can the WTO do? 

Read the rest of their posts to see some of their suggestions.  Here's my modest proposal -- the WTO needs to start an ilicit nuclear weapons program. 

Think about the benefits:

1. If you thought enforcement was good now, imagine what it would look like backed up by a nuclear deterrent.  The Appellate body would become a seriously bad-ass judicial authority.
2. Trade negotiations would move from page B23 of the business section to page A1.  This would create domestic political pressures for successful negotiations. 
3. The Obama administration would immediately dispatch a high-level envoy to negotiate with the WTO.
4. Russia and China would reflexively support the WTO on various policy positions in the U.N. Security Council.
5. The WTO could likely extract a better set of lunch options for its Geneva-based personnel.  Having just been there, let's describe the current menu of choice as "underwhelming."

A nuclear-armed WTO -- good for trade and good for nonproliferation. 

A prominent institution issued the following warning about the "Buy American" provisions in the stimulus package:

History and economic theory show that in facing a financial crisis, trade protectionism is not a way out, but rather could become just the poison that worsens global economic hardships.

  Name that institution:

1. Cato Institute
2. Peterson Institute for International Economics
3. Group of Seven nations
4. World Trade Organization
5. Xinhua News Agency

Click here for the answer.

Admittedly, the title of this post gives the game away, but it nicely highlights one of the many oddities of the current crisis.