Obama Needs To Be Bold on Trade

Op-ed in the Financial Times

June 23, 2009

President Barack Obama has let it be known that he is preparing an important speech on trade policy. It cannot come soon enough. His administration has so far been unwilling even to submit the trivial free trade agreement with Panama to Congress, let alone mount any significant initiatives to restart the momentum of global trade expansion. China's new protectionist policy on government procurement, while legal under the porous rules of the World Trade Organization (WTO), sharply raises the threat to the global trading system that he must counter.

The president has shown strong leadership in resisting protectionist actions that could thwart recovery. He tempered the strongly restrictive Buy American provisions in the original fiscal stimulus bill. He signed the protrade declaration of the Group of 20 at its London summit on April 2.

But Mr. Obama has moved only halfway on trade policy. He must now implement new US spending programs in ways that do not limit foreign participation and insist that China, by far the world's fastest-growing economy and the world's largest surplus country, do the same. Even more importantly, he must advance beyond damage avoidance to revive the global trading system.

Three factors require the administration to act. First is the need for the president to fulfill his pledge to reshape US foreign policy. Economic issues are so central to other countries that a positive trade policy will be essential to restore America's credentials as a reliable partner. New agreements with allies in Europe and Japan could produce substantial benefits without raising domestic concerns over low wages, weak labor standards, or inferior environmental protection in partner countries.

The North American Free Trade Agreement (NAFTA) could be upgraded to strengthen energy and border security, build infrastructure, and incorporate modern labor and environmental rules. A "Trans-Pacific Partnership" with vital Asian countries could help head off an Asian trade bloc. Such agreements could focus on services, where the greatest US competitive advantage lies. These foreign policy concerns require Mr. Obama to speedily implement the trade agenda he inherited from President George W. Bush, including free trade agreements with Colombia and South Korea, just as President Bill Clinton implemented the NAFTA and Uruguay round agreements inherited from his predecessor.

The president's pledge to reemphasize the traditional multilateral thrust of US foreign policy requires completion of the Doha round in the WTO. The administration should pursue market-opening initiatives in agriculture and manufacturing but insist that the services component of the talks, which has lagged behind badly, receive equal priority.

A second main pressure on Mr. Obama is global warming. The president wants the United States to reduce its own emissions of greenhouse gases and negotiate a binding international agreement on the issue. But Congress will insist that such measures protect domestic industries and it could ignite new trade conflict, as well as torpedo international climate talks, with unilateral action. Hence there must be a positive trade component to US policy on climate change, preferably through a new "Green Code" at the WTO.

Third, a promise of new trade expansion could significantly support global economic recovery. Trade has plunged by 24 percent over the past two quarters, about four times as fast as the decline of 6 percent in global output. This is unsurprising, since trade has risen about three times as fast as output over the past 50 years. But we need to make sure that trade again accelerates growth by promptly restarting the process of opening international markets.

The president faces several hurdles in reenergizing trade policy. Recession and rising unemployment always provoke calls for protectionism. Political support for globalization has declined substantially. Some of the president's allies in Congress are skeptical or even hostile towards it.

But there is also good news. The US trade deficit is declining dramatically, from more than $700 billion in 2006 to about half that this year. The United States is still at least $1,000 billion (€720 billion, £609 billion) a year richer, with particular benefits for low-income Americans owing to cheap imports, as a result of trade.

Mr. Obama's domestic program will also address the main sources of opposition to globalization: its modest but politically potent contribution to stagnant wages, worsening income distribution, and job insecurity. Healthcare reform can eliminate workers' fears of losing insurance coverage when they lose their jobs. Expansion of unemployment insurance will strengthen the safety net. Further education reform and new training programs will equip more Americans to benefit from globalization rather than feel victimized by it. Trade adjustment assistance has already been expanded dramatically.

Mr. Obama enjoys the greatest global honeymoon effect of any US leader since John F. Kennedy. But trade is one of the few areas where the world contemplates the new administration with apprehension rather than hope. The Kennedy round of multilateral liberalization in the 1960s was one of that president's signal achievements. Early revival of a positive US trade policy and an eventual Obama round could produce an equally impressive legacy for this president, with important economic and foreign policy benefits for both the United States and the world as a whole.