How Is President Obama Likely to Deal with Trade?

31 December 2008

The new president of the United States has sent clear signals about how he intends to change American foreign policy on issues ranging from the wars in Iraq and Afghanistan to climate change and the pursuit of co-operative diplomacy in general. On trade, however, the picture is more blurry.
In their otherwise hearty endorsements of Obama's candidacy, the Financial Times and The Economist both expressed qualms about his commitment to free trade and his willingness to stand up to protectionists in his own party.
Trade emerged as a controversial issue during the unusually long US election campaign, and will remain fraught amidst fears of more job losses as a result of a severe economic recession.
As the Obama administration takes power in January, its first priority will be to right the domestic economy. A massive economic stimulus package, along with tax and healthcare reforms will be at the top of the agenda. Devoting serious time, attention and political capital to controversial trade initiatives will not.
This was underlined by the man reported to have been Obama's preferred candidate for US Trade Representative, Xavier Becerra. Explaining his decision not to join the new administration, the California representative - criticised as a ‘dyed-in-the-wool protectionist' by the Los Angeles Times - told a Spanish-language newspaper that the trade job "would not be priority No. 1, and perhaps, not even priority No. 2 or 3" for the White House.
President Obama subsequently nominated former Dallas mayor Ron Kirk - who lacks Washington credentials, but is considered ‘pro-trade' - to the top job in US trade policy. Mr Kirk is known to be sensitive to labour and environmental concerns, but Calvin Jillson, professor of political science at Southern Methodist University in Dallas, described his mayoral overseas trade missions, mainly to the Far East and Latin America, as "about the extent of his trade back-ground" in an interview with the Washington-based Bureau of National Affairs. Other pundits have cast doubts over how forcefully he is likely to support the multilateral trading regime.
Is Protectionism in the Ascendance?
Countries reliant on exports to the United States are particularly anxious to see clear signs about the direction Washington will take on trade policy.
All indications suggest that Obama and his economic advisers are by temperament supporters of open trade. In his personal writings, Obama has questioned whether effective protectionism is even possible in a US economy that is deeply integrated with the rest of the world
Obama the candidate, however, struck very different notes on trade, vowing to either renegotiate the environmental and labour standards in the North American Free Trade Agreement or to pull the US out of the accord altogether. Obama the senator voted for a subsidy-laden farm bill, and promised to maintain tariff protection and billions of dollars of support for corn-based ethanol, a biofuel of questionable environmental merit at best.
Some of this was political positioning, particularly with an eye to securing the support of anti-trade labour unions in a tight race against Hillary Clinton in the Democratic Party primaries. Once he had secured the Democratic party nomination, Obama stepped down his rhetoric on trade, even more so once the scope of the global financial crisis became apparent, and an errant remark could have roiled financial markets.
But it would be wrong to dismiss trade scepticism as a mere election-time phenomenon.
Polling data suggests that Americans' support for open trade is cooling across the political spectrum. Even in April, when economic anxiety was far below current levels, the Pew Research Center found that nearly half of US citizens (48 percent) believed that free trade agreements were ‘a bad thing' for the country. A decade ago, only 30 percent said such deals were harmful to the US economy.
It is not surprising, then, that anti-trade messages featured in many congressional election campaigns - more than ever before, according to a new study from Public Citizen, a consumer advocacy group. President Obama will have to deal with a Congress in which many from his own party were elected on platforms that included promises to protect American jobs by taking a hard line on trade.
While these views are somewhat ill-founded, they are understandable.
Fear of Losing Social Security Benefits a Factor in Mistrust
The relatively weak social safety net in the US means that workers are particularly vulnerable to losing their jobs - losing one's job might mean losing health insurance and pension benefits as well.
And while many economists say that the primary factors behind US job losses are structural trends such as mechanisation, specialisation and declining international transport and communication costs, trade and foreigners make for easier targets.
Strengthening the social safety net, particularly for health insurance, will be a key goal of the Obama administration. If successful, this effort may, over the longer term, go some way to blunt workers' suspicion of trade
Suspicion aside, what little growth the US has enjoyed as of late owed much to exports, despite the recent rise in the dollar. Government economic data shows that US exports boosted GDP by 1.1 percent in the third quarter of 2008, a period when the county's gross domestic product shrank by 0.3 percent.
New Congress May Ease Political Tension
The Democrats' victory in November will erase a reason for the US's recent political contortions over trade agreements that is quite separate from genuine anxiety about economic globalisation: the Bush administration's toxic relationship with congressional Democrats.
During the years when Republicans controlled Congress, Democratic lawmakers seethed about the White House's seeming disdain for bipartisan co-operation. Congressional Republicans were content to pass accords like the Central American Free Trade Agreement by narrow majorities drawn almost exclusively from their own ranks - alienating even Democrats who might have been inclined to support the agreements.
After taking control of Congress in 2006, the Democrats signalled that they would be open to cooperation on trade, but on their terms. These terms included greater consultation, more protections for labour and the environment, as well as access to medicine and, most notably, more enforcement of existing trade agreements, especially with China. This worked for the Peru deal, which was renegotiated and approved. The Colombia FTA however, became a pawn in a partisan political showdown (Bridges Year 12 No.3, page 16).
With his healthy majority in the popular vote, and Democrats safely in control of both the House and the Senate, Obama will be dealing with a friendly Congress, at least at first. And given that some in his own party would oppose any and all trade deals, he would presumably have to reach across the aisle if he chose to try to secure passage for pending deals with Colombia and South Korea.
Apart from the fact that trade will be low on its priority list, little is certain about how the new administration will conduct trade policy.
The Democratic Party platform for the November election called for co-operation
with other countries to successfully conclude the Doha Round in a manner "that would increase US exports, support good jobs in America, protect worker rights and the environment, benefit our businesses and our farms, strengthen the rules-based multilateral system, and advance development of the world's poorest countries." It also privileged the multilateral trading system over bilateral agreements.
But election platforms are often sacrificed to the demands of circumstance once parties take power. A Democratic Party that supports bailing out Detroit automakers may well lose some of its enthusiasm for greater WTO scrutiny of industrial subsidies, another plank in its trade platform.
Reading the Tea Leaves of the Obama Team
Trade observers have been searching for signs of a future policy direction in the track records of Obama's senior economic appointees. From adviser Larry Summers to future Treasury Secretary Timothy Geithner, they are adherents to the centrist economics favoured by Bill Clinton's administration in the 1990s, which backed both NAFTA and the Uruguay Round accords. However, some of the core principles of what was dubbed Rubinomics, after Clinton's treasury secretary, will face a tougher ride now. Obama faces the prospect of trillion-dollar deficits, not balanced budgets. Financial deregulation lies discredited. And free trade is more contentious than ever.
Those looking for farm policy reform will find mixed cause for comfort in Obama's choice for agriculture secretary, Tom Vilsack. The former Iowa governor is a biofuels enthusiast with long-standing ties to agribusiness and established farm spending patterns, but also a proponent of stronger action on climate change. He supports wind power and ‘second-generation' biofuels that do not rely on food crops, has supported conservation programmes, and is open to the idea of cutting the US' tariff on ethanol.
The Los Angeles Times called California lawmaker Xavier Becerra, whom Obama had hoped to have as his US Trade Representative  "a leader of the Democratic Party's protectionist wing," and editorialised that the rumoured presidential choice suggested that Obama's campaign rhetoric had been ‘disastrously serious'. Becerra's voting record, however, is much more complex than this would suggest. He voted for NAFTA (a vote he now claims to regret) and to normalise trade relations with China. Even after leading Democratic opposition to CAFTA, he voted for the renegotiated trade deal with Peru.
While Ron Kirk, chosen to head the Office of the US Trade Representative after Becerra declined the offer, is something of an unknown quantity, he too supported NAFTA. In early January, Obama's erstwhile nominee for Secretary of Commerce - former congressman, Energy Secretary and now governor of New Mexico Bill Richardson - stepped aside pending the outcome of an investigation into allegations that state contracts were improperly awarded to a political backer. At the time of writing, his replacement had not been announced.
Business lobbies have expressed some concern over the implications of Obama's choice of the widely respected four-term congresswoman Hilda Solis as Secretary of Labour due to her strong ties to trade-averse unions.
Nevertheless, Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, believes that fears of US retrenchment on trade are exaggerated.
He thinks it possible that Congress could grant Obama's White House short-term negotiating authority if necessary to conclude the Doha Round negotiations.
The administration will have to decide how to pursue trade policy more broadly, he suggested, motivated in part by diplomatic and security interests abroad, and fears of rising protectionism. Trade policy, however, "is not the Number 1 thing Obama was elected to do," he noted.
Trineesh Biswas is Advisor to ICTSD's Chief Executive. He wishes to thank Paige McClanahan, Editor of Bridges Weekly Trade News Digest, for her input.

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