The Prospects For Trade Under the Obama Administration

These are turbulent times for international trade. Trade flows themselves plunged in the wake of the global economic shock. There has been a drift in global trade policy and a bubbling up of protectionism. Such times call for a clear understanding of trade’s importance and a strong commitment to bolster the institutions of trade. Instead, the Obama administration has sought to avoid the topic.

If we measure the health of global trade by the volume of goods crossing borders, the World Trade Organization has forecast a drop of roughly 9 percent for 2009. That would mark the largest such contraction since World War II. There are a number of reasons for this. When economies suffer and demand contracts, imports fall along with the rest of consumption. But trade has been falling more precipitously. The steeper decline likely has to do with globally integrated production, which can have especially dramatic effects on trade when it unwinds.

In a Washington speech last July, top Obama economic adviser Larry Summers responded to a query about the administration’s trade policy by saying that the most effective approach to restoring trade would be to restore macroeconomic well-being. Thus, he claimed, the administration should be lauded for its approach. The implication was that the administration should be excused for its trade policy foibles, since they were of relatively minor importance. This gives the false impression that we must choose between a sound macroeconomic policy and a sound trade policy. Whether or not the Obama administration’s fiscal policies have been well-advised, Dr. Summers is correct that restored global economic health is likely to have a very positive effect on trade flows. That does not exempt the administration from judgment on its trade stance.

In fact, the administration has been very reluctant to take a position. There has been an unseemly back and forth, as U.S. Trade Representative Ron Kirk announces a trade policy or a forthcoming presidential speech on the subject, only to be countermanded by the White House. Meanwhile, important free trade agreements with Colombia, Panama and South Korea are left in purgatory. The administration has acquiesced in protectionist measures from Congress, such as the “Buy America” legislation, as well as a ban on Mexican trucks that violates U.S. commitments under the North American Free Trade Agreement. The administration most recently decided to slap new tariffs on Chinese tires, in a case that was not even supported by U.S. tire producers.

President Obama is hardly the first to feel protectionist pressures. President Bush adopted broad protection against steel imports early in his first term, but he did so in the context of a broader push for trade liberalization. While President Obama has joined in broad G-20 communiqués calling for a successful conclusion of the Doha Round, there has been no action to match the rhetoric. The administration has not even sought trade negotiating authority from the Congress. This has left global trade talks dangerously becalmed and has cast doubt on the credibility of global leaders’ pledges to battle protectionism.

Optimists, like Dani Rodrik of Harvard, retort that the spate of protectionist measures in the United States and around the world is only to be expected. Pressures to protect jobs and divert demand to home markets will increase in times of economic distress.

The problem with this argument is that the forces countering U.S. trade liberalization predate the current crisis. Democrats in Congress revoked trade promotion authority, blocked the Colombia free-trade agreement and publicly denounced NAFTA as a job-killer, even back when unemployment was closer to 5 percent. The Central American Free Trade Agreement (CAFTA, which includes the Dominican Republic) and the FTA with Peru were highly controversial, even though U.S. markets were largely open to those countries even before the agreements. This suggests an ideological opposition that may not abate as the economy improves.

Latin American leaders are cognizant of the importance of trade. In an October event at the Inter-American Development Bank, they urged the United States to push forward on a positive trade agenda. In subsequent bilateral meetings between Brazilian and U.S. trade officials, the Brazilians were left unsatisfied with the level of specificity in the U.S. stance.

To go beyond vague statements of support for open markets to real progress on a trade liberalization agenda would require a substantial degree of commitment and effort by an administration. It is not yet clear whether President Obama will heed these global calls for leadership.

Philip I. Levy is a resident scholar at the American Enterprise Institute.