Tuesday, January 5, 2010

My Sound (and Unsound) Trade Predictions for 2010

I had begun drafting a long series of blogposts grading the White House's 2009 trade policy (conclusion: a good, solid D+) but stopped because (a) the depression overwhelmed me, and (b) year-in-reviews are so last decade. (And anyway, it's too easy to be proven right when you simply review what happened last year, and where's the fun in that?)  So instead, I've decided to provide my somewhat-educated predictions for what 2010 will hold for US and global trade policy.  I've split my forecasts into three sections - (1) low-hanging fruit, (2) 50/50s, and (3) total-shots-in-the-dark - based on how obvious/difficult the prediction is.  And now that you've bookmarked this page in order to mock me in about 360 days, let's get things started.

Low Hanging Fruit

(1) The WTO's Doha Round won't collapse entirely, but it also won't be any closer to completion. 2011 will become the new target date (for whatever that's worth).  This, I think, is the easiest of all the 2010 trade predictions.  For the reasons why the Round won't be completed anytime soon, just re-read my December post-mortem here, and also keep in mind one other critical fact: even if the United States gets its act together, and even if there's a breakthrough on agriculture subsidies and industrial market access (two very big "ifs"), completion of the entire Doha Agreement - especially in the area of services and industrial market access exceptions - would still require months of intensive negotiations and technical work on individual countries' tariff schedules and services schedules.  And there's no possible way that such work is completed in 2010 barring a miracle breakthrough this winter.  None.

That said, I see three reasons why world leaders won't take my advice and put Doha entirely out of its misery: (i) they don't want to admit failure on their watch; (ii) there are probably many well-intentioned folks who honestly believe that if Doha goes down, it will take the entire multilateral trading system with it; and (iii) there are hundreds upon hundreds of international diplomats who, without Doha, would need to find another excuse to go to (or live in) Geneva.  So the Doha gravy train must continue.

(2) There will be no change to US farm and "green energy" subsidy policies.  The Obama administration has long been a supporter of US ethanol subsidies and has reiterated that stance, as well as strong support for subsidizing all other kinds of "green" stuff, in 2009.  It also has left US sugar policy untouched and refused to change US cotton subsidies, despite multiple adverse WTO rulings.  And if you know of anyone who thinks that the Democrat party will take on US agribusiness in a 2010 election year that's already shaping up to be brutal for them, well, please politely inform him or her that he/she's certifiably insane.

(3) Bilateral and regional FTAs will continue at a furious pace across the world, but (4) new US negotiations under the Trans-Pacific Partnership (TPP) Framework will be interminably slow.  My thoughts on TPP are here, and that pessimism came before we saw that the already-controversial Vietnam - a potential TPP signatory - was publicly announcing its desire to increase trade ties with, ahem, Iran.  Oops.  Worldwide, the explosion of bilateral/regional FTAs will undoubtedly continue as an insufficient surrogate for the troubled Doha Round. 

(5)  There will be no "trade war" between the United States and China.  Sure, the WTO cases, strong words, and AD/CVD actions will continue, but that's hardly a "trade war."  Indeed, given the immense size of the US-China trade relationship, these types of skirmishes will almost certainly increase in 2010, but a few billion dollars in conflict, out of several hundred billion in trade, does not a "trade war" make.  (Caveat: if the US somehow imposes carbon tariffs, or if it deems China a "currency manipulator" in Treasury's semi-annual report on the subject, all bets are off.  But I think that the chances of those things happening are very remote.)


(1) 2010 will see a significant increase in anti-subsidy actions under domestic trade laws and WTO rules.  I see two main reasons for this conclusion:
  • The massive proliferation of government subsidies in 2009 and increased tradeflows in 2010.  2009 saw unprecedented "stimulus actions" (read: massive government subsidies) in the United States and abroad, huge sums of federal money thrown at "green" projects, and bailouts of strategic sectors like the US auto industry.  China fired a warning shot this fall when it initiated separate countervailing duty (CVD) investigations of (allegedly) subsidized US exports of automobiles, chicken and steel products, and the US has targeted Chinese subsidies for a while now (at home and in the WTO).  There's no reason to expect that such actions will slow down in 2010, and other countries are similarly exposed.  Moreover, US exports have surged in 2009, and world trade overall is expected to increase in 2010.  Such increased tradeflows could intensify domestic lobbying for import protection and might provide nations with the grounds for demonstrating that subsidized exports have "injured" their domestic industries or distorted global markets.
  • US farm subsidies have not abated.  I see two reasons why WTO Members could step-up their challenges of US farm subsidy programs in 2010.  First, the 2008 Farm Bill will have been in effect for over a year, and it typically takes nations about that long to figure out how domestic subsidy programs have worked in practice and affected foreign markets.  Second, some WTO Members have withheld challenges of US subsidy programs pending the completion of the Doha Round.  Given the Round's continued stagnation, and US refusal to reform its farm programs or engage fully in Doha, 2010 might be the year that these nations finally pull the trigger.  (I'd also note that Brazil has already earned the right to retaliate against US cotton subsidies and is threatening to do so in 2010.)

(2) Congress will approve none of the pending US FTAs.  The US-Korea FTA has the least chance (read: no chance) of passage in 2010 for myriad reasons, most importantly the continued opposition to the FTA by the US auto industry - which appears, by the way, to have hired half the lobbyists in Washington - because the FTA would eliminate a 25% tariff on Korean light trucks and SUVs (although the Big Three would never admit that's their real reason for opposing, of course).

Pending FTAs with Panama and Colombia would have had a better chance of passage in 2010, but that was before (i) the health care debate got pushed into late-January 2010 (at the absolute earliest); and (ii) protectionists in the House convinced a "majority of the majority" (i.e., 129 House Democrats) to sign on to their anti-trade opus (ironically named the TRADE Act) that demands renegotiation of existing FTAs.  The TRADE Act isn't getting passed by Congress in 2010 (or ever), but it will definitely put a damper on any efforts by the White House - which is utterly unwilling to expend political capital on the FTAs as long as health care isn't finished - to push through the Colombia or Panama FTAs in the small window of time after the health care debate ends and before the election year's "silly season" begins in June (after which trade deals become untouchable in Congress).  Now, there is a chance for Congress to pass the Colombia and Panama FTAs after the November 2010 elections, but that's also small given the ample appropriations work that will likely be left to address before the December recess.

(3) Eco-protectionism will increase around the world.  I've already laid out my reasoning for why I think carbon tariffs and other forms of "green protectionism" will likely increase in the wake of the Copenhagen failure, and we've already seen some early evidence of that in the EU (see previous link).  And while Cap and Trade appears dead in the United States for 2010, there have already been some troubling signs that the United States will protect its green industries in other ways, or that US states will take eco-protectionist matters into their own hands (US Constitution be damned!).  Finally, we'll likely see more protectionist regulations - like this one in Mexico against used car imports - that use the premise of "environmentalism" or "clean energy" to restrict imports.   Oh, and did I mention all of those green subsidies and potential CVD cases against them?  Exactly.

Total Shots in the Dark

(1) The failure of Cap and Trade in the Congress will cause the EPA to begin reviewing import regulations on GHGs and GHG-intensive products.  I've laid out my case here, but this is admittedly a total guess - especially in 2010.  But if Cap and Trade is dead, and the administration needs something to brag about at the next UN climate change conference in Mexico City, then an aggressive EPA program to regulate GHG emissions might be in the works for 2010.  And if that happens, then domestic industries (and their congressional servants) will loudly demand some sort of anti-leakage measures targeting imports.  I highly doubt that border measures or other taxes on imports will be instituted in 2010, but I wouldn't be surprised at all to see the EPA begin to explore some form of import regulation. 

(2) China will not unpeg its currency vs. the US dollar (despite 12 more threatening NYT columns by Paul Krugman).    Ok, that last part is a joke - he'll probably only write five more columns.  But I digress.  On the bigger point, most currency traders are anticipating that China will unpeg its currency sometime in 2010.  I am unconvinced.  China's miraculous growth in 2009 and its 2010 forecasts are, well, a tad suspect, and I think that China will still be gun-shy about a controlled float of the RMB throughout most of 2010.  Moreover, with the White House looking to spend dollars as fast as it can print them, the fixed USD-RMB exchange rate is actually a way for China to temper US attempts to devalue the dollar (and thus China's dollar holdings).  But who knows?

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So there you have it.  Apologies for the depressing outlook; I do hope I'm wrong on many of these.  And please feel free to let me have it in the comments (or elsewhere).

[Final notes: these predictions are based on nothing more than my personal gut feelings, public reports and my own earlier analyses.  Moreover, nothing you read here should in any way be construed as legal or investment advice.  Duh.]

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