The Obama administration should stop caving to protectionism.

Trading Down
The Obama administration should stop caving to protectionism.

By Duncan Currie

Barack Obama spent his presidential campaign railing against “companies that ship jobs overseas,” supporting punitive legislation aimed at China’s currency practices, vowing to “renegotiate” the North American Free Trade Agreement, and opposing trade deals with U.S. allies in Latin America and East Asia. Yet he also assured us that he understood the merits of free trade and the dangers of protectionism. So how would he govern? Thus far, Obama-administration officials have “inspired very little confidence on trade,” says Daniel Ikenson, a trade expert at the Cato Institute.
Take NAFTA (please, the Teamsters might say). The omnibus appropriations bill that Obama signed on March 11 terminated a pilot program under which Mexican long-haul trucks were allowed access to U.S. highways. The program had been in effect since 2007 and represented a fulfillment of U.S. obligations under NAFTA. The Mexican government responded swiftly, imposing new tariffs on several dozen American products.

“We consider this U.S. action to be wrong, protectionist, and a clear violation of the treaty,” Mexico’s economy secretary, Gerardo Ruiz Mateos, told reporters in Mexico City. “By deciding to protect their trucking industry, they have decided to affect other countries and the region.” As the New York Times editorial page noted, citing claims made by the Teamsters, “The truck drivers’ argument that Mexican trucks are unsafe is spurious — a flimsy cover for protectionism. Data from the Department of Transportation show that Mexican trucks and drivers operating in the United States — along the border and in the pilot program — have a better inspection record, with fewer violations, than their American counterparts.”

The Mexican-trucking spat followed the “Buy American” row. When drafting the economic-stimulus package, Democrats inserted a measure designed to aid American producers of steel, iron, and manufactured goods. When U.S. trading partners howled in protest, lawmakers added a qualifier: The “Buy American” plank had to be “applied in a manner consistent with U.S. obligations under international agreements.” But even if the clause didn’t flout World Trade Organization (WTO) rules, it still constituted protectionism. Columbia economist Jagdish Bhagwati, a senior fellow at the Council on Foreign Relations, warned that it could unleash “a WTO-consistent trade war.”

The Obama administration has sent other troubling signals on trade. During his confirmation process, Treasury Secretary Timothy Geithner told the Senate Finance Committee (in written testimony) that “President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.” In his February 24 address to a joint session of Congress, President Obama reiterated his campaign pledge that “we will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas.” (Obama’s proposed budget for fiscal year 2010 would follow through on this promise.) On March 17, as the Wall Street Journal reported, Energy Secretary Steven Chu told a House panel that “establishing a carbon tariff would help ‘level the playing field’ if other countries haven’t imposed greenhouse-gas-reduction mandates similar to the one Pres. Barack Obama plans to implement over the next couple of years.”

The Chinese in particular are deeply alarmed by the prospect of a U.S. carbon tariff. “That’s something that could really rock the boat,” says Ikenson. Meanwhile, Chinese premier Wen Jiabao drew attention for his remarks on U.S. government debt at a March 13 news conference. “We have lent a huge amount of money to the U.S.,” Wen said. “Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

For now, despite the longstanding currency feud and other economic friction, talk of a U.S.–China trade war is premature. The two countries are still highly interdependent. The Chinese government is facing soaring unemployment and major social unrest. Beijing has little to gain — and much to lose — from a nasty trade fight with the United States. It is telling that Chinese officials chose not to include a “Buy China” plank in their own economic-stimulus plan.

In general, Ikenson thinks that media coverage of recent trade squabbles has been overblown. “Countries engage in protectionism every year,” he says. The main difference now is that “we’re much more sensitive to it.” Indeed, at a time when global trade is shrinking due to the economic meltdown and comparisons to the 1930s are ubiquitous, the specter of Smoot-Hawley has made us hypersensitive to any evidence of rising protectionism. Yet as Ikenson points out, there has been unheralded progress on trade liberalization amid the crisis. For example: “At the beginning of the year, Mexico liberalized its tariff schedule dramatically.” Brazil has also slashed certain tariffs, and in late February officials from Australia, New Zealand, and the Association of Southeast Asian Nations signed a new free-trade pact.

That said, concerns about protectionism are hardly unfounded. A World Bank study published on March 2 stated that “the trend in protection is up and the full effects [of] recession have not yet been felt.” Earlier this week, the WTO predicted that global export volume would decline by roughly 9 percent in 2009, “the biggest such contraction since the Second World War,” and WTO director-general Pascal Lamy declared that “the use of protectionist measures is on the rise.”

Financial strategist David Smick, editor of The International Economy and author of the 2008 book The World Is Curved, fears that the world is “de-globalizing.” Countries such as Germany, China, and Japan were “dangerously dependent on exports,” says Smick, and their growth models are now unraveling with the collapse in demand. This will breed economic tensions. So will massive subsidies to domestic industries, such as the Detroit carmakers. As Newsweek columnist Fareed Zakaria writes, “We are in the midst of the greatest orgy of subsidization for inefficient corporations in decades.” The World Bank report says that auto subsidies “total some $48 billion worldwide.”

In such an environment, the U.S. business and political classes should be reminding Americans about the myriad benefits of free trade — specialization of production, wider consumer choice, lower prices, stronger economic growth, warmer diplomatic relations — and putting the costs in perspective. For starters, the negative effects of global trade on U.S. employment have been greatly exaggerated. “International trade directly affects only 15 percent of the U.S. workforce,” writes Robert Krol, an economist at California State University, Northridge. “Most job displacement occurs in sectors that are not engaged in global competition.” In a September 2008 paper, Krol estimates that “a 1-percentage-point gain in trade as a share of the economy raises per capita income by 1 percent. Global elimination of all barriers to trade in goods and services would raise global income by $2 trillion and U.S. income by almost $500 billion.”

Before President Obama hikes taxes on “corporations that ship our jobs overseas,” he should read a new study by economist Matthew Slaughter, a professor at Dartmouth’s Tuck School of Business who served on the Council of Economic Advisers under Pres. George W. Bush. In his report, commissioned by the Business Roundtable and the United States Council Foundation, Slaughter dispels certain popular myths about U.S. multinational corporations.

“The idea that U.S. multinationals have somehow ‘abandoned’ the United States is not supported by the facts,” he writes. “They maintain a large presence in America, both relative to the overall U.S. economy and relative to the size of their foreign affiliates.” They also “perform large shares of America’s productivity-enhancing activities — capital investment, research and development, and trade — that lead to jobs and high compensation.” Slaughter calculates that in 2006, the parent companies of U.S. multinationals “accounted for 24.9 percent of all private-sector output (measured in terms of gross domestic product)” and “19.1 percent of total private-sector payroll employment” in the United States.

President Obama should keep those figures in mind. He should also remember that free-trade agreements are a powerful tool for boosting America’s geopolitical interests and strengthening bilateral partnerships. Approving the pending trade deals with Colombia, Panama, and South Korea would enhance U.S. relations with those countries. Delaying them has hurt American credibility. The Office of the U.S. Trade Representative recently signaled that the Obama administration will take action on the Panama accord “relatively quickly” and also “establish benchmarks for progress” on Colombia and South Korea.

Let’s hope Obama follows through. During his first two months in office, the president has been “clumsy” on trade, says Ikenson, allowing protectionists on Capitol Hill to dictate the agenda. This has fueled uncertainty in the international community and provoked needless trade flaps, such as the trucking dispute with Mexico (which Obama-administration officials say they will fix). As Ikenson puts it, “The world is still waiting to hear a definite commitment from the United States.” Obama should make that commitment, sooner rather than later.

— Duncan Currie is deputy managing editor of National Review Online.