Multilateral free trade: The Obama letdown

Jagdish Bhagwati 09 January 2009

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In the Financial Times, (“Obama’s Free-Trade Credentials Top Clinton’s”, 3 March 2008), I had argued that, unlike with Hillary Clinton, there were several reasons why one could be optimistic that Obama would follow a pro-trade policy despite “prudential” protectionist talk on the primaries circuit. But his eloquent silence on key trade issues, and his failure to balance his protectionist appointments with powerful trade proponents that would produce a “team of rivals” require that we abandon these illusions and sound an alarm.

Consider Obama’s support for the multilateral trading system. At the outset, it must be admitted that the Doha Round is on hold, and 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 reduction 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 manage in times of macroeconomic crisis.

But Obama (unlike Prime Minister Gordon Brown, whose fulsome support for trade is in strong contrast) missed the opportunity, provided by the G20 affirmation of the importance of trade, to affirm resoundingly that he attaches the highest priority to closing the Doha Round and will work on this urgent task throughout the first year of his Administration.

More important, Obama has missed the bus on the question of preventing a slide back into protectionism. His pronouncements on the auto bailout disregard the lessons of the early 1930s when the Smoot-Hawley tariff was legislated in 1930 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 end result was reduced trade and deepened depression. Far better to keep markets open and to increase aggregate world demand instead. So, the architects of the GATT (merged in 1995 into the WTO) built into it institutionalised obstacles to such a destructive 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 the 1995 WTO Agreement on Subsidies and Countervailing Measures (SCM), while subsidies on exports and on “local-content” requirements are prohibited as directly damaging to trade, all other subsidies that are specific to firms or industries are declared actionable, and this applies even when they are claimed to be environment-friendly.

There is no doubt that a bailout just to autos, and then also to Detroit within it (in fact, even within Detroit, to two out of three firms on credit-financed sales of cars, as it happens), would qualify for attention and for countervailing action and Dispute Settlement challenges. It is important therefore that Obama declares unambiguously that any action on the bailout will be WTO-consistent. This is required because every other country, France surely among them, will otherwise be emboldened to follow suit. But 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 in unrivalled terms.

If Obama’s silences on multilateral trade are disturbing, should we be pleased by his strictures against bilateral Free Trade Agreements (FTAs)? Ironically, on closer examination, 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 (whose exports they fear) is to raise their cost of production by forcing their standards up by claiming that competition with countries with lower standards is “unfair”. “Free but Fair Trade” becomes an exercise in insidious “export protectionism” which few recognize as such; it amounts to improving your competitiveness vis-à-vis rival suppliers from abroad, not by raising trade barriers (conventional import protectionism) but by forcing up your rivals’ cost of production at source. “Fair Trade” demands for such export protectionism also work well when, as is often the case, they are additionally masked in the language of altruism: “we are doing this for your workers”!

This cynical tactic can only work when the US is engaged in negotiating FTAs typically with weak countries but does not work for the multilateral system where powerful, democratic countries such as India and Brazil reject such demands. So, the “fair trade” lobbies, which Obama continues to embrace, gravitate towards FTAs rather than the WTO. The Democrats’ opposition to occasional FTAs, including the latest one with Colombia, only reflects bullying attempts at imposing ever more draconian trade-unrelated demands, driven by different lobbies that have “captured” the politicians, on these smaller countries rather than a preference for the multilateral trading system and its chief institution, the WTO.

In fact, if he is to embrace multilateralism and free trade forcefully, Obama needs a stellar crew that will see and deplore the “fair trade” demands for the protectionism they amount to, and also dispel the fear of the unions, that trade with poor countries is harming the American workers’ wages, that drives their protectionist “fair trade” agendas.

Alas, his cabinet appointments include Hillary Clinton, whose revealed trade scepticism is badly muddled, at best, and Labour Secretary Hilda Solis, who reflects the anti-trade sentiments of the union federation AFL-CIO. His “superstar” advisers include Robert Rubin, who is crippled by his Citigroup’s receipt of large bailout funds, the brilliant former Treasury Secretary Larry Summers whose recent Financial Times columns on the issue of “trade and wages” suggest prudence in the current political environment, and the remarkable Warren Buffett, who is notorious for having proposed (Fortune, 26 October 2003) an import control regime which would “solve” the trade deficit by not permitting imports that exceed export earnings. The USTR 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 NAFTA supporter, hardly a recommendation for a forceful presence on support for the open, multilateral trading regime. A “team of rivals” indeed.

Editors’ note: An abbreviated version of this column appeared in The Financial Times on 9 January 2009.

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Topics:  International trade

Tags:  WTO, free trade, Obama, protectionism

University Professor of Economics and Law at Columbia University and Senior Fellow at the Council on Foreign Relations