Obama and Trade: An Alarm Sounds

This article appeared in the Financial Times on January 8, 2009.
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In the Financial Times, Iargued that, unlike with Hillary Clinton, there were severalreasons why one could be optimistic that Barack Obama would followa pro-trade policy despite "prudential" protectionist talkon the primaries circuit ("Obama'sfree-trade credentials top Clinton's", March 3,2008). But the US president-elect's eloquent silence ontrade issues - and his failure to balance his protectionistappointments with powerful trade proponents - require thatwe abandon these illusions and sound an alarm.

Consider Mr Obama's support for the multilateral tradingsystem. It must be admitted that the Doha round is on hold and MrObama could not move it forward even if he so desired. A principalproblem is that its completion turns critically on the US makingfurther reductions in its distorting agricultural subsidies. Butthe issue has become even more difficult with the collapse ofcommodity prices and hence increases in support payments. Besides,history shows that the freeing of trade is nearly impossible toachieve in times of macroeconomic crisis.

But Mr Obama (unlike Gordon Brown) missed the opportunity,provided by the Group of 20's affirmation of trade'simportance, to affirm that he attaches the highest priority toclosing the Doha round and will work on this urgent task throughouthis first year.

More important, Mr Obama has missed the bus on preventing aslide back into protectionism. His pronouncements on the carbail-out disregard the lessons of the early 1930s when theSmoot-Hawley tariff was signed into law and a competitive raisingof tariff barriers ensued. We learnt then that tariffs and traderestrictions could indeed increase our national income by divertinga given amount of insufficient world demand to our markets. Butthen others could do the same to divert our demand to their goods,so that the result was reduced trade and deepened depression. Farbetter to keep markets open and increase aggregate world demand.So, the architects of the General Agreement on Tariffs and Trade(merged in 1995 into the World Trade Organisation) built into itinstitutionalised obstacles to an outbreak of mutually harmfultrade policies.

But what trade barriers did after 1930 can be done also bysubsidies. So we now have strict rules on subsidies as well. Undera 1995 WTO agreement, export subsidies and "localcontent" requirements are prohibited as directly damaging totrade and all other subsidies that are specific to companies orindustries are open to complaint; and this applies even when theyare claimed to be environmentally friendly.

There is no doubt that a bail-out just of cars, and within thatspecifically of Detroit, would qualify for countervailing actionand dispute settlement challenges. It is important therefore thatMr Obama declare unambiguously that any bail-out will beWTO-consistent, because every other country will otherwise beemboldened to follow suit. Mr Obama, who has properly denouncedunilateralism, should also not be the president who underminesrespect for the rule of law that the WTO embodies at themultilateral level.

If Mr Obama's silences on multilateral trade aredisturbing, should we be pleased by his strictures againstbilateral free-trade agreements? On closer examination, though,this is not a vote for multilateralism but just the opposite. Tounderstand this paradox, consider that labour union lobbies andtheir political friends have decided that the ideal defence againstcompetition from the poor countries is to raise their cost ofproduction by forcing their standards up, claiming that competitionwith countries with lower standards is "unfair"."Free but fair trade" becomes an exercise ininsidious protectionism that few recognise as such.

This cynical tactic can work only when the US is engaged innegotiating FTAs, typically with weak countries. It does not workfor the multilateral system where powerful, democratic countriessuch as India and Brazil reject such trade-unrelated demands. So,the "fair trade" lobbies, which Mr Obama continues toembrace, gravitate towards FTAs rather than the WTO. TheDemocrats' opposition to occasional FTAs - includingthe latest one with Colombia - reflects, then, a recurringattempt at imposing yet more draconian demands on small countriesrather than a preference for the multilateral trading system. If heis to embrace multilateralism and free trade forcefully, Mr Obamaneeds a stellar crew that will understand the protectionist natureof "fair trade" demands and dispel the unions'baseless fear that trade with poor countries harms Americanworkers' wages.

Alas, his cabinet appointments include Mrs Clinton, whose tradescepticism is badly muddled at best, as secretary of state, andHilda Solis, who reflects the anti-trade sentiments of the unionfederation, AFL-CIO, as labour secretary. His advisers includeRobert Rubin, whose credibility on policy issues is undermined byCitigroup's receipt of large bail-out funds, and LarrySummers, the brilliant former Treasury secretary whose recent FTcolumns on trade and wages suggest prudence in the currentpolitical environment. The US trade representative position wasoffered to Congressman Xavier Becerra, a trade sceptic at best, andhas now gone to Mayor Ron Kirk with credentials only as a supporterof the North American Free Trade Agreement, hardly suggesting aforceful presence in support of the open, multilateral tradingregime.