Obama and Trade: An Alarm Sounds

by Jagdish Bhagwati

Jagdish Bhagwati is a university professor, economics and law, at Columbia and a member of the CTPS Advisory Board. His latest book is Termites in the Trading System: How Preferential Agreements Undermine Free Trade (Oxford, 2008).

In the Financial Times, I argued that, unlike with Hillary Clinton, there were several reasons why one could be optimistic that Barack Obama would follow a pro-trade policy despite “prudential” protectionist talk on the primaries circuit (“Obama’s free-trade credentials top Clinton’s”, March 3, 2008). But the US president-elect’s eloquent silence on trade issues – and his failure to balance his protectionist appointments with powerful trade proponents – require that we abandon these illusions and sound an alarm.

Consider Mr Obama’s support for the multilateral trading system. It must be admitted that the Doha round is on hold and Mr Obama could not move it forward even if he so desired. A principal problem is that its completion turns critically on the US making further reductions in its distorting agricultural subsidies. But the issue has become even more difficult with the collapse of commodity prices and hence increases in support payments. Besides, history shows that the freeing of trade is nearly impossible to achieve in times of macroeconomic crisis.

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

More important, Mr Obama has missed the bus on preventing a slide back into protectionism. His pronouncements on the car bail-out disregard the lessons of the early 1930s when the Smoot-Hawley tariff was signed into law and a competitive raising of tariff barriers ensued. We learnt then that tariffs and trade restrictions could indeed increase our national income by diverting a given amount of insufficient world demand to our markets. But then others could do the same to divert our demand to their goods, so that the result was reduced trade and deepened depression. Far better 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 it institutionalised obstacles to an outbreak of mutually harmful trade policies.

But what trade barriers did after 1930 can be done also by subsidies. So we now have strict rules on subsidies as well. Under a 1995 WTO agreement, export subsidies and “local content” requirements are prohibited as directly damaging to trade and all other subsidies that are specific to companies or industries are open to complaint; and this applies even when they are claimed to be environmentally friendly.

There is no doubt that a bail-out just of cars, and within that specifically of Detroit, would qualify for countervailing action and dispute settlement challenges. It is important therefore that Mr Obama declare unambiguously that any bail-out will be WTO-consistent, because every other country will otherwise be emboldened to follow suit. Mr Obama, who has properly denounced unilateralism, should also not be the president who undermines respect for the rule of law that the WTO embodies at the multilateral level.

If Mr Obama’s silences on multilateral trade are disturbing, should we be pleased by his strictures against bilateral free-trade agreements? On closer examination, though, this is not a vote for multilateralism but just the opposite. To understand this paradox, consider that labour union lobbies and their political friends have decided that the ideal defence against competition from the poor countries is to raise their cost of production by forcing their standards up, claiming that competition with countries with lower standards is “unfair”. “Free but fair trade” becomes an exercise in insidious protectionism that few recognise as such.

This cynical tactic can work only when the US is engaged in negotiating FTAs, typically with weak countries. It does not work for the multilateral system where powerful, democratic countries such as India and Brazil reject such trade-unrelated demands. So, the “fair trade” lobbies, which Mr Obama continues to embrace, gravitate towards FTAs rather than the WTO. The Democrats’ opposition to occasional FTAs – including the latest one with Colombia – reflects, then, a recurring attempt at imposing yet more draconian demands on small countries rather than a preference for the multilateral trading system. If he is to embrace multilateralism and free trade forcefully, Mr Obama needs a stellar crew that will understand the protectionist nature of “fair trade” demands and dispel the unions’ baseless fear that trade with poor countries harms American workers’ wages.

Alas, his cabinet appointments include Mrs Clinton, whose trade scepticism is badly muddled at best, as secretary of state, and Hilda Solis, who reflects the anti-trade sentiments of the union federation, AFL-CIO, as labour secretary. His advisers include Robert Rubin, whose credibility on policy issues is undermined by Citigroup’s receipt of large bail-out funds, and Larry Summers, the brilliant former Treasury secretary whose recent FT columns on trade and wages suggest prudence in the current political environment. The US trade representative position was offered to Congressman Xavier Becerra, a trade sceptic at best, and has now gone to Mayor Ron Kirk with credentials only as a supporter of the North American Free Trade Agreement, hardly suggesting a forceful presence in support of the open, multilateral trading regime.