First 100 Days: Obama and trade

January 23, 2009

Sean West– Sean West is a Comparative Analytics analyst at the political risk consulting firm Eurasia Group. The views expressed are his own. —

Fear that President Barack Obama will backslide on America’s free trade commitments is misplaced—in fact, he may eventually expand America’s commitment to liberalization. His pledge to revisit the North American Free Trade Agreement (NAFTA) amidst an economic slump was one of his most widely discussed policy positions of the campaign season.

The economy—and, notably, unemployment—has gotten far worse since Obama derived political benefit from making the rhetorical connection between trade and job loss. Obama could use the magic policy window of his first 100 days to push through controversial but politically plausible anti-free trade measures. He will not do so—and if he does not do it now, he is unlikely to revisit it later.

If Obama is ever going to pound away at NAFTA it would in coming weeks. He is pushing this month for a comprehensive approach to saving or creating up to 4 million jobs in two years. If there was any real desire to rework NAFTA because it was thought responsible for job loss, it would make sense to address it now.

But Obama is unlikely to seek substantive change to NAFTA now or in the future because he recognizes the benefits of the agreement and knows that the U.S. has little room to maneuver in terms of renegotiation.

In fact, trying to “fix” NAFTA will more likely set off a firestorm with America’s neighbors than actually accomplish anything of substance.  Obama may be politically shrewd to have raised the issue, but he’s more pragmatic than protectionist.

The term “protectionist” is often thrown around incorrectly—and has inappropriately been attached to Obama. He is not a protectionist. Fears that he is should have been quashed with his selections of pro-market internationalists Timothy Geither, Larry Summers, and Ron Kirk for his economic and trade teams. But any one still left unconvinced should have taken solace in his recognition of the market’s “power to generate wealth and expand freedom” in his inaugural address. So rather than focus on misplaced pledges, what can be expected from Obama’s trade policy?

First, expansion of Trade Adjustment Assistance (TAA) has a good chance of being included in the final stimulus and economic recovery package. Doing so would roll service workers that lose their jobs in trade-related economic shifts into a benefit program that currently only covers manufacturing workers affected by specific trade agreements.

This move will be expensive—and the jury is still out on if such efforts are actually effective—but protecting American workers from the impact of trade adjustment is not protectionist. In fact, it is a precursor to the opposite: Even the U.S. Chamber of Commerce supports TAA expansion because it recognizes that Democrats will only consider pending trade agreements with Colombia, Panama, and South Korea if losers from trade receive adequate retraining opportunities. And unlike under the Bush Administration, when the Obama White House requests that the Democratic Congress consider trade agreements—as it will likely do once the economy begins to recover—Congress will likely give these victories to the president.

PRESSURE ON CHINA

Second, increased pressure, potentially leading to action in the next year or so, against China on its currency management and trade practices is probably in the cards. China’s currency will be particularly tricky to address. The U.S. has shied away from actually labeling China a currency manipulator in recent years—but, in his past role, Senator Obama was explicit in doing so on multiple occasions. And Geithner was even goaded into agreeing in his Senate confirmation hearing that China’s currency manipulation was a concern.

However, if the U.S. tries to initiate countervailing action or WTO legal action against China’s currency, it will set off serious tension with Beijing. But China’s own currency policy is distorting trade—so if anything pressuring China to remove the distortion is an effort to further realize free market principles.

A bill was introduced in the House last week in line with another of Obama’s campaign pledges—to step up trade agreement enforcement. Just as drivers speed much more frequently than they actually receive tickets from the police, trading nations cheat on their commitments far more than they are actually compelled to compensate for the malfeasance.

Aggressive enforcement will be billed as politically-motivated protectionism by countries like China that are on the receiving end of action. But it is exactly the opposite: Enforcement seeks to keep other nations in line with their free trade commitments and often leads to retributive action that can force to US to live up to its own trade promises.

Obama is more tentative on free trade than was his predecessor, which will limit his willingness to aggressively push trade liberalization through the Doha Round and bilateral agreements. But he will do so slowly and surely because he is not a protectionist. When he does not use the first 100 day job growth efforts to push protectionist policies like backsliding on NAFTA then it should be relatively clear that he does not intend to follow this path during his administration.

4 comments

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I don’t think the Red Chinese have to worry about US trade policy forcing them to revalue their currency. They are financing the USG…

Incompetent trade policy has turned the US into a vassal state of the Red Chinese…

Posted by RFL | Report as abusive

I agree with RFL – that’s why I only get paid in RMB now. (The Euro is so last year…)

The Chinese control us via debt. If/when they pull their funding (ie sell their dollars, to buy RMB), we will suffer horribly.

Posted by Shawn Carter | Report as abusive

Great analysis, Mr. West. I guess the first two commentors hadn’t seen Timothy Geitner’s discussing China as a currency manipulator during his confirmation hearings. Hopefully Obama can improve our trade relationships without sacrificing the value of free trade.

Posted by Ben | Report as abusive

While this is a great analysis, analytical gray matter is better spent on dissecting the proposed democratic bailout package – and I’m not talking about the gross figures but instead focusing on what each individual state or economic sector will really be getting. And then separate the substance from the “pork” and you will see that the American taxpayer is getting fleeced at the expense “larding up” the bailout relief with money that has little or no impact on relief or on the creation of new jobs.

The first week of President Obama has focused, not on the economy, NAFTA or China, but on Gitmo, Abortion, and relaxing ethics rules for a fellow Democratic Party appointment.

NAFTA and China analysis at this point in time is a waste of ink because all you are doing is attempting to decipher your crystal ball of conjecture and subjective analysis.

Posted by Don Henley | Report as abusive