Crunch time as Obama faces trade dilemma

Irwin Stelzer

Obama has so far managed to talk the talk of free trade, while walking the protectionist walk that appeals to his trade-union bankers

With all 40 of the eyes of G20 finance ministers riveted on bankers’ bonuses and exit strategies from their stimulus packages when they met in London, the issue of creeping protectionism seems to have been ignored, or at least kept out of public sight. Not a bad idea from the point of view of the world leaders due for a follow-up meeting later this month. After all, they unanimously pledged at the previous summits in Washington and London to avoid protectionist measures, then dashed home to adopt a record number of them.

Avoidance of trade talk would most especially suit the American delegation. When the leaders meet in Pittsburgh on September 24-25, the last thing President Barack Obama wants is a discussion of his position on trade. He has so far managed to talk the talk of free trade while walking the protectionist walk that appeals to his trade-union backers. He would like to keep it that way.

Unfortunately for Obama, he will have to declare himself on at least one issue immediately — he has until September 17 to decide whether to approve a US International Trade Commission (ITC) recommendation that he impose a 55% duty on low-grade car tyres from China. The ITC ruling followed a complaint by the United Steelworkers union (to which the tyre workers belong) that Chinese imports have cost them 5,000 jobs. Significantly, American tyre makers did not join in the complaint: they lose money at the low end of the tyre market, and most have simply abandoned it.

So picture this. The president overturns the ITC ruling, in which case the unions, denied what they consider the payback due for their electoral support, decide to be less enthusiastic in their support for his programmes, and his intensification of the Afghan war.

Or Obama goes along with the union request, and a few days later hosts an angry President Hu Jintao in Pittsburgh. He needs the Chinese to continue buying the IOUs he is pouring on to the market to cover the deficits he is running up, and to allow their currency to appreciate against the dollar. Hu needs export-based jobs. The Obama charm might just not be enough to send the Chinese president home in a generous mood.

Unless the American and Chinese sherpas can paper over the problem in advance of the September 17 deadline by persuading the Chinese to announce “voluntary” export restrictions, Obama will be caught between the trade unions and Hu Jintao and those world leaders convinced that a wave of protectionism would set back the recovery. Never mind American consumers, who will have to spend an extra $600m-$700m for tyres, according to Thomas Prusa, a Rutgers University economist who gave evidence at the ITC on behalf of importers.

If Obama does persuade the Chinese to avoid a confrontation, he will still have to cope with complaints from Stephen Harper, the Canadian prime minister. Some 250 Canadian firms have been in effect excluded from bidding for US infrastructure work by the “Buy American” provision of the $787 billion stimulus programme. Harper intends to use the Pittsburgh summit to remind the president that the North American Free Trade Agreement prohibits such restrictions on Canadian goods.

Obama’s plan to avoid confronting the trade issue has run into still another problem. The World Trade Organisation (WTO) has ruled that Brazil is entitled to $295m now and $150m annually because the American government has failed to eliminate subsidies to its 25,000 cotton farmers. That pittance won’t disturb a president who deals in trillions, but the WTO also ruled that Brazil’s generic drug industry can retaliate against American pharmaceutical firms by copying drugs still under patent protection.

That would please the left wing of the president’s party, convinced that drug prices in America are set at extortionate levels, but would upset the drug makers that have so far backed Obama’s healthcare reforms — and, more importantly in the long run, reduce the research and development that has produced the drugs that are keeping healthcare costs from rising even further.

Not all is bleak on the trade front. Boeing won something of a victory when the WTO ruled that EU “launch aid” for the Airbus A380 and other planes constitutes an illegal subsidy. Boeing is hoping this will weigh heavily with Pentagon contractors when they evaluate bids for a $35 billion contract for aerial refuelling tankers — a bid initially won by Airbus but overturned by government auditors for reasons unrelated to the subsidy issue.

And Hollywood is delighted the WTO ruled that the Chinese have violated their commitment to open their media markets to foreign competition. Until now, Hollywood film producers have had to distribute their goods through state-owned distributors, who siphon off most of the profits. That, says the WTO, must stop, and other distributors be allowed to compete, lowering the charges.

All of these are merely skirmishes in a much broader battle. Almost every country is seeking to export its way out of the recession. Germany is relying on its exporters to create jobs; China is depending on its export machine to keep its economy growing fast enough to create millions of jobs and avoid social unrest; Japan’s new government, no longer reflexively pro-American, also needs exports to end a decade of stagnation. But Obama, in charge of the world’s consumer-of-last-resort, has reasons to eschew that role in the future.

Some of these reasons are purely political — he needs the trade unions and a jobs recovery. Others are more fundamental — he has to cut the US trade deficit lest the value of the dollar continue its descent and add to the inflationary pressures created by his enormous deficits. And he has to persuade the Chinese to allow their undervalued currency to rise, lest the leadership of his party in Congress enact measures that will antagonise Hu and induce him to press harder to have the dollar replaced as the world’s reserve currency. Obama certainly doesn’t want that to happen on his watch.  (Irwin Stelzer, The Sunday Times) http://business.timesonline.co.uk/tol/business/columnists/article6832408.ece

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