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12/23/2008

Obama has to lead the way on trade

All through the presidential election campaign, Barack Obama blew hot and cold on trade. In tones reminiscent of Bill Clinton and the New Democrats, he often spoke persuasively about embracing globalisation and welcoming international competition. The US could not prosper by hiding from the world economy, he said. Yet he was second to none among the candidates in questioning specific trade pacts. He attacked the North American Free Trade Agreement and said it should be renegotiated. He threatened companies that invest abroad rather than “keeping jobs at home”. This equivocation has carried through to his trade policy appointments.

Mr Obama’s US trade representative (his chief international negotiator) will be Ron Kirk, a former mayor of Dallas, a leading proponent of Nafta and a long-time supporter of liberal trade. His appointment disappoints the president’s supporters on the left of the party. The new labour secretary has them applauding, however: she is Hilda Solis, an ally of the unions, a leader in Congress of opposition to the Central American Free Trade Agreement and a forthright critic of orthodox liberal trade.

The new commerce secretary, announced earlier, will be Bill Richardson. Running against Mr Obama for the Democratic nomination, the former governor of New Mexico expressed qualified support for Nafta, but called for “fair trade, not just unabashed free trade”, and underlined the need to address “wage disparities” between the US and its partners. Lawrence Summers, director of the National Economic Council, will doubtless also have a say: he will be the closest thing in Mr Obama’s circle to an outright free-trader.

Together, these four cover the full range of opinion within the Democratic party (and beyond). So it will be surprising if the Obama administration manages to speak clearly on the issue. Opinion in the next Congress, with its enlarged Democratic majorities, would have shifted to a more hostile position on trade even if the economy had been healthy – which it is not. With unemployment rising, wages under pressure and no firm countervailing push from the administration, protecting jobs (or claiming to, at any rate) is likely to be a higher priority than liberal trade. The prospects for widening the opportunities for international commerce look grim.

Since this is a global recession, the danger of an upsurge in protectionist sentiment is not confined to the US. The consequences of that would be all the more threatening against a background of already shrinking output and trade flows. American leadership on the issue has never been more important.

The one encouraging point, perhaps, is that the future of liberal trade depends much less than it used to on pressing forward with ambitious trade liberalisation agreements. This is one of the key points in a brilliant short survey of trade policy by Razeen Sally of the London School of Economics and the European Centre for International Political Economy. (In Britain, it is published by the Institute of Economic Affairs, and entitled Trade Policy, New Century; in the US, the Cato Institute is the publisher and the title is New Frontiers in Free Trade.)

Mr Sally argues persuasively that the World Trade Organisation and the multilateral approach to trade liberalisation is mostly a spent force. The failure of the Doha round points up the need for “greater modesty and realism”, he says. New preferential trade agreements of the kind lately favoured by the US are not the answer either. Especially in the prevailing political climate, they will be designed in order to strike political compromises rather than free up commerce. They entrench complex patterns of discrimination among trading partners that are as much a hindrance to liberal trade as a help.

Lately, Mr Sally points out, the most successful instances of trade liberalisation in the developing world have been unilateral (as in China, for example). With time, the success of those initiatives will be the best spur to further liberalisation. The logic of multilateralism – which sees the lowering of trade barriers by poor countries as a sacrifice for which rich countries must pay compensation – has always been economically illiterate, but increasingly it is politically counterproductive as well. Developing countries object to being leaned on and the US and other rich countries lack the political capacity to offer the quid pro quo.

The great risk is that the traditional exchange-of-concessions approach might degenerate into its logical near-equivalent – an exchange of reprisals. Though one can always hope, the Obama administration is unlikely, whatever happens, to strive very hard to lower remaining US barriers to imports. The harder it pushes for “fair trade” with poorer countries, either bilaterally or through the WTO, the worse is the danger of backsliding all round. Averting a protectionist turn in US policy should be the administration’s top priority in trade. “Do no harm” and “set a good example” should be the watchwords.

This is a tougher assignment than it sounds. It requires, first, a private intellectual commitment by the new president to the case for liberal trade – and this, in view of his statements during the campaign, must be in doubt. It also requires an investment of political capital and a willingness to advocate open domestic markets as the best way to secure long-term US prosperity. The new president has plenty of capital, and if anybody can persuade the public of the virtues of liberal trade, it is Mr Obama. But this is a message that much of the country and most of his political allies are in no mood to hear.

Source: Financial Times by Clive Crook



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