trade

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. 

A few months ago I was at a panel on the April G-20 summit, when someone asked why there was a pledge to complete the Doha round when no one expected that to happen? 

The answer given by the trade experts in the room was that, as toothless as such a statement might sound, it was worse not to say anything.  The signal of not mentioning Doha was ostensibly worse than the cynicism of claiming that two plus two equals five. 

Bear this in mind when reading the following: 

The world’s biggest economies agreed on Thursday to conclude a comprehensive trade deal in 2010, in the latest attempt to revive the stalled Doha round and give a shot in the arm to the world economy.

Rich countries gathered for the G8 summit agreed with ten other large economies – including India, China and Brazil – that trade talks must resume urgently, with a deadline set for completion next year.

The agreement in the Italian town of L’Aquila will be hailed by world leaders as a decisive moment in reviving the global economy and a statement of intent to conclude a trade round which began in Doha in 2001.

But there will be widespread cynicism over whether such commitments are credible. Every G8 summit – not to mention other international summits – ends with leaders paying lip service to finalising a trade round.

If Obama actually tries a "Nixon goes to China" moment on trade, I might be more optimistic.  But with global warming and health care on the horizon, I have zero confidence that Doha will be completed within the next eighteen months. 

While I'm on vacation at an undisclosed location, feel free to peruse my latest non-blog publication, Alphabet Soup: The Political Economy of the Great Recession (.pdf), commissioned by the Glasshouse Forum.  As they put it: 

The current global economic crisis, which began as a subprime crisis and developed into a general credit crisis, is the deepest since the Depression of the 1930’s. There are many signs that we are now facing the beginning of a structural sea change. But what will it be like?

To get a better understanding of the medium-term effects of the crisis, Glasshouse Forum asked Daniel W. Drezner, Professor of International Politics at The Fletcher School, Tufts University, and author of the Glasshouse Forum report White Whale or Red Herring? Assessing Sovereign Wealth Funds, to draft scenarios and make qualified estimates based on as much objective data and historical parallels as possible.

I'd like to stress the word "qualified." 

Read it and weep. 

 

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. 

Your humble blogger will be posting on an odd and infrequent schedule over the next few days, as my day job calls me to a conference on the WTO. 

On the way here, I read two days worth of Financial Times stories and op-eds excoriating the "Buy American" provisions contained in the House and Senate stimulus packages. [But John B. Judis says that those provisions are harmless to world trade, and they will create jobs!!--ed. No. Wrong on both counts.]

I worried that something like this was going to happen back in December, but now that it's actually happening, I'm cautiously optimistic. The extent of the global blowback, combined with the recognition that an economic recovery will require some serious policy coordination, might just be the slap of cold water to Barack Obama's belief that trade was going to be a tertiary issue during his administration. And, encouragingly, Obama has started to signal that he'll take care of it.

Maybe this is me still being an optimist, but I have to hope that this is precisely the scare that both the administration and Congress needed to realize that they can't just stuff protectionist pork into the stimulus sausage without consequence.

Readers -- am I being too optimistic?

One of the lesser tragedies of this fall's global recession is that the book I was going to write on the future of global governance is going to need some serious tweaking.  The argument I was making was predicated on the argument that global governance structure were badly outdated and in need of serious reform before the next crisis took place. Well, we're past that now.  And as this Financial Times story by Alan Beattie and Frances Williams makes clear, we're about to see what happens when shoddy governance structures are asked to do something important: 

The World Trade Organisation has dropped plans to convene ministers to push for an outline deal in the troubled global trade talks – a further blow to world leaders’ promises to combat protectionism. Pascal Lamy, WTO director-general, said a meeting, originally planned for next week, “would be running an unacceptably high risk of failure which could damage not only the round but also the WTO system”.... The outcome runs counter to promises made by leaders of the Group of 20 major economies in Washington last month, who were committed to reaching an outline deal this year and promised no new protectionist actions within 12 months. Since then at least five of the G20 – Russia, India, Indonesia, Brazil and Argentina – have announced their intention to raise import tariffs or otherwise restrict trade.... Trade experts said the episode underlined the weakness of rhetorical agreements such as the G20 statement to constrain governments faced with domestic political pressure. Douglas Irwin, trade economist at Dartmouth College in the US, said: “Such statements may sometimes act as a signal to local legislatures, but there is usually ample room for governments to renege or weasel out of their commitments.” Since the G20 meeting, Russia has announced it will increase import tariffs on cars, India has raised duties on iron, steel and soy and Indonesia has alarmed trading partners with measures to benefit local producers. Brazil and Argentina have argued for an increase in external tariffs for Mercosur, the Latin American trade bloc of which they are the two biggest members. The G20 was lauded by attendees as a landmark meeting that would put big developing countries at the heart of global policymaking. Following last month’s summit, Gordon Brown, the UK prime minister who will host the next G20 meeting, said there would definitely be a meeting of trade ministers this year. Downing Street did not return calls on Friday. The countries that have raised tariffs deny breaking the agreement. The US said on Friday that it could not be blamed for the stalemate in Doha.

Susan Aaronson has an op-ed in today's Financial Times in which she tries to argue that, of the two major party candidates, Barack Obama "has the more optimistic vision of trade."  Here's the guts of her argument: 

Mr McCain sees trade as a means to the end of economic growth and trade agreements as simply economic instruments. He has said very little about how he would use trade agreements to address negative side effects of globalisation, such as pollution. Nor has he articulated how the US can ensure that the economic growth stimulated by trade is equitable. Beyond suggesting tax breaks for business, he has not explained how the US can ensure that companies remain in the US and continue to hire US workers, rather than rely on technologies to remain productive. To bolster his freer trade bona fides, he has stated: “Only risks to the security of our vital interests or egregious offences to our most cherished political values should disqualify a nation from entering into a free trade agreement with us.” But Mr McCain’s support for freer trade has limits – especially when important constituents are adamant about trade bans. As an example, he supports continued trade sanctions against Cuba and Iran and enhanced targeted sanctions against human rights abusing nations Zimbabwe and Burma. Mr Obama, in contrast, is a trade enthusiast as well as a trade agreements reformer. He sees trade as a means to the end of enhancing human welfare. Thus, he has stated: “From financiers to factory workers, we all have a stake in each other’s success.” He recognises that Americans cannot succeed unless globalisation promotes greater access to resources and opportunities for more of the world’s people (our future growth markets). Mr Obama also believes that trade agreements are essential tools of global governance. He recognises that public concerns about trade are really concerns about inadequate governance – instances where our trade partners are unwilling or unable to adopt and enforce rules to protect workers, consumers and the environment. Demanding such standards in bilateral agreements will not alter global market conditions or empower all workers. Nonetheless, trade agreements can, if properly written, improve both the supply and demand for good governance at the national and international level. Mr Obama also has put forth a consistently positive vision of the potential of trade to promote human rights. Many human rights activists think trade with human rights abusing regimes is a form of complicity that can indirectly perpetuate wrongdoing in countries such as Sudan. But Mr Obama has openly questioned this view, asking whether the US has more or less leverage with less commerce. He has argued that cutting off trade may not be the best (or only) strategy to bring democracy to Cuba or Iran.

I'll give this effort a B- because of the difficulty of the assignment.  Quoting Obama boilerplate on globalization doesn't make him a enthusiast of freer trade.  And Obama's reluctance to deploy economic sanctions is not really connected to his trade policy, since with the exception of Cuba the United States wouldn't be trading a lot with these countries anyway.  Aaronson also elides Obama's insistence on linking trade to employment when the link is weak to nonexistent.  Now, all that said, Aaronson is correct when she says Obama does not intend to be a protectionist.  I think that's true.  My question is whether his trade policies would be protectionist in their effect.  Given that:

• Opening up NAFTA for renegotiation contains a 5% chance of a better agreement and a 95% chance of failure;
• Our trading partners are going to be, at best, reluctant to accept all of Obama's proposed governance improvements;

I just don't see his trade policies going anywhere.  Obama has a perfect vision of where he wants trade politics to go -- whether this vision falls within the set of feasible politics is another question entirely.  One last point, which I've probably made before.  Free traders like myself are not averse to seeing improvements in labor standards, environmental protection, and the like.  We just think that these policies are much more likely to occur when a country gets richer -- and, hey, what do you know, trade can facilitate that enrichment.  UPDATE:  Aaronson responds (cogently as always) in the comments; see also Donald Coffin's comment.  ANOTHER UPDATE:  Secretary of Defense Robert Gates and Colombian Secretary of Defense Juan Manuel Santos have an op-ed in the New York Times that raises an awkward question for Obama's trade enthusiasm.  After recounting Colombia's success in battling FARC, they close: 

Finally, to achieve lasting peace and stability, Colombia must have more foreign investment and free trade. Congress’s approval of the trade promotion agreement would establish a commitment to open markets that would increase growth and investment. Moreover, it would allow American products to enter Colombia duty-free. Colombia’s hard-won freedom from violence can be sustained only through economic prosperity. Together, as partners, we must see Colombia’s transformation to completion. In winning the war, we must also consolidate the peace.

Question to Barack Obama:  in what way does opposing the U.S.-Colombia free trade agreement enhance the dignity of ordinary Colombians?