When the new Democratic majority in Congress takes over the reins of power next month, the first order of business will be to increase the federal minimum wage. The populist message will be clear: the Democratic Party is the party of the people, and the role of government is to make sure no one is left behind.
If that message sounds familiar, it should. Under unified government since 2000, the Republicans have engineered massive increases in spending, George Bush has failed to veto any major spending bill, and too often has compromised on free-trade principles - agreeing to tariffs on steel and supporting the costly farm bill.
Both major political parties have lost sight of their roots (Democrats used to be free-traders; Republicans used to favour limited government). So what can we expect from the new Congress and from divided government with regard to trade and economic policy?
One might hope for gridlock as happened during the Clinton years. But today the stronger coalition between China hawks and protectionists, and the historically large current account deficit with China, could lead to increased calls for legislative action to address “unfair” trade practices.
In its 2006 Report to Congress, the US-China Economic and Security Review Commission concluded that China has failed to comply fully with its obligations to protect intellectual property rights and to provide market access since it joined the World Trade Organisation in December 2001. That report also cited China for undervaluing its currency and criticised Beijing for dealing with rogue states in acquiring energy assets that could pose a threat to US energy security. Some of those concerns were echoed in the US Trade Representative Report.
Among its 44 recommendations, the US-China Commission instructed Congress to treat currency manipulation as an illegal export subsidy and authorise countervailing duties (CVDs); permit the Department of Commerce to impose CVDs on China and other non-market economies to offset subsidies; and press the USTR to enforce intellectual property rights (IPRs) through the WTO.
The two reports show a growing dissatisfaction with China’s progress on its WTO commitments - a disappointment the 110th Congress will gladly embrace. Indeed, we can expect legislation designed to penalise China if it fails to reduce its large and growing trade surplus with the US by faster appreciation of the yuan/dollar rate, greater market access, and stronger protection of IPRs.
We can also expect the “trade sceptics” in the new Congress to use their voice to link trade issues with human rights, including labour rights and environmental protection. Nancy Pelosi, the new speaker of the House, has long criticised China for its human rights violations, which she should, but has played down the importance of economic freedom as a means towards political reform.
The new Congress will take a harder line towards China and is unlikely to pass trade agreements that do not give stronger protection to labour rights and the environment. Moreover, the Democratic majority has little incentive to renew the President’s trade promotion authority except with conditions that will not appeal to the White House or to prospective trade partners.