Sunday, November 4, 2012

The Last Four Years and the Next

With the election only two(!) days away and with every "pundit" with an internet connection offering his/her views on President Obama's first term, there's no better time than now to provide my opinion on the United States' trade and related policies in the Obama years.  Unfortunately, there's simply no way to sugarcoat it: the President's international economic policies have fallen short on almost every level.

This conclusion will likely come as no surprise to readers of this blog, and I'm not going to spend all night reiterating the many criticisms that I've explored here since mid-2009.  Instead, I'd like to keep this (relatively) short, so if you want more support for anything said below, feel free click the hyperlinks below at your leisure.

But before I start kvetching, let me quickly note the "good" things that the Obama administration has done since they took over US trade policy in 2009:
  • First, and most importantly, they have avoided serious backsliding into protectionism, particularly with China.  As I explained the other night, the President and his team have resisted the strong calls from their Democrat allies in Congress to label China a currency manipulator or to impose duties on Chinese imports on the basis of alleged currency manipulation.  Each of these policies is economically, legally and strategically wrongheaded, so it's good that the administration ignored them.  Moreover, they have avoided the imposition of broad-based protectionism, although they have implemented (or failed to stop Congress from implementing) many discrete anti-trade policies (discussed below).  However, as I've repeatedly explained, there is a big difference between pushing good trade policies and not destroying the economy (and US diplomatic relations) through protectionism.  In other words, "Obama 2012: Not Totally Horrible" is hardly a good campaign slogan.  We deserve - and really need - better.
  • Second, I think the administration has done a reasonably good job of using WTO dispute settlement to advance US and broader free trade interests.  They are on pretty solid ground to brag about the number of cases that they've initiated to end other WTO Members' anti-trade practices.  Dispute settlement is a legitimate and effective way to curtail foreign protectionism, and it's good that, instead of imposing unilateral measures, the administration went to the impartial WTO.  However, it's important to note that (1) three of those disputes (challenging Chinese trade remedies actions against US chicken, automobile and steel exports) are the direct result of US protectionism (China retaliated after President Obama imposed tariffs on Chinese tires); (2) the administration didn't have much of a choice: dispute settlement is what WTO Members are supposed to do when faced with foreign protectionism, and most unilateral alternatives violate global trade rules; and (3) as discussed below, the administration's stubborn non-compliance with adverse WTO rulings and continued imposition of WTO-inconsistent trade and subsidy policies has undermined the moral force of the United States' anti-protectionism efforts at the WTO.  So the disputes are good, but bad policy prevents them from being much, much better.
Unfortunately, these reasonably-good things are significantly outweighed by the following policy failings:
  • A dramatic decline in global competitiveness.  As I detailed in July, the United States has declined - in some cases significantly - in every independent study of global economic strength and competitiveness since President Obama took office.  These studies reflect a failure by the Obama administration to implement tax, trade and regulatory policies that could help US businesses and workers compete and prosper in the global economy.  Since July, the World Economic Forum's latest Global Competitiveness Index has dropped the United States another two places (now 7th, from 2nd in 2009, 4th in 2010 and 5th last year); respondents' top three problems with the US economy are inefficient government bureaucracy, tax rates and tax regulations - all things that the Obama administration could've addressed (especially when Democrats had total control of the US government in 2009-2010) but instead completely ignored.  The United States also has dropped from 10th to 12th in the Legatum Institute's Prosperity Index, with the US economy a mediocre 20th overall.  This is not good at all.
  • A dramatic decline in economic freedom.  The United States' drop in global competitiveness has - perhaps not surprisingly - coincided with a decline in economic freedom.  According to the Heritage Foundation's Index of Economic Freedom, the United States now ranks a depressing 10th in the world overall (down from 6th in 2009) and an even-more-depressing 37th in trade freedom.   The Fraser Institute's 2012 Economic Freedom of the World Report shows a similar decline, ranking the United States only the 18th(!) freest economy in the world, down from 8th in 2005.  I won't debate here whether economic freedom means economic prosperity (despite strong correlations among the two), but you can draw your own conclusions.
  • Trade policy stagnation.  As I explained last week, US trade policy has slowed to a crawl during the Obama years, and American leadership - a staple of the global trading system since the 1940s - has all but disappeared.  There is no better indicator of this stagnation than US involvement in free trade negotiations.  The President spent the first three years of his term letting the WTO's Doha Round of multilateral trade talks die on the vine and working up the "courage" to  face down his own party and submit implementing legislation for FTAs with Colombia, Panama and South Korea that had been completed and signed by President Bush in 2006-07.  And when Obama finally did get around to these deals, he made the most economically-significant one - the Korea free trade agreement - less free by raising or extending tariffs on automobiles in both the United States and Korea, and he refused to send them to Congress unless he received a billion dollar extension of the problematic Trade Adjustment Assistance worker subsidy.  (For details on the FTA debacle, go here.)  Furthermore, the only new trade negotiations that the Obama administration has formally initiated are those for the Trans-Pacific Partnership - talks that were actually started by the Bush administration, have moved interminably slowly due to US recalcitrance on various issues, and, because most TPP members are already US FTA partners, will only produce significant economic gains if other countries - like Japan or China - end up joining down the road.  Meanwhile, other countries are liberalizing at a breakneck pace (for example Canada, which has concluded nine FTAs since mid-2007 and is currently negotiating four more).
  • Rampant proliferation of trade-distorting subsidies.  Starting with the Stimulus* bill in 2009 and snowballing ever since, the dramatic expansion of federal subsidies on President Obama's watch has hurt the US economy, bred cronyism, distorted trade and investment patterns, undermined US efforts to push needed trade reforms in other areas, and raised diplomatic tensions.  Need proof?  Just read my paper or related blog posts (or take a look at Solyndra).  'Nuff said.
  • Trade remedies malfeasance.  Just as the United States has cranked-up the subsidies and screamed about Chinese subsidization, it has also employed trade remedies - particularly anti-subsidy (countervailing duty) measures - against foreign imports.  As I explain in my new paper and elsewhere, the application of CVDs can, in theory, help curtail foreign and domestic subsidies, but the administration's current anti-subsidy policies - particularly those related to China - reflect capture by domestic industries and unions, often violating US law and WTO rules and leading to taxes on US businesses and consumers that are far in excess of that needed to remedy foreign subsidization.  Meanwhile, the administration has also proposed numerous changes to US anti-dumping policies, again targeting China, that also will likely lead to more and higher duties.  And let's not forget the utter debacle that was the President's decision to impose tariffs on Chinese tires pursuant to the "special safeguard mechanism" (Section 421) of US trade law.  Thus, while support for trade remedy-based protectionism is undoubtedly a bi-partisan affliction, President Obama has proven himself to be especially ill over the last few years.
  • Discrete protectionism.  The administration hasn't totally avoided protectionism over the last few years.  Beyond the tire tariffs, we saw, among other things, bans on Chinese chicken and Mexican trucks, as well as the proliferation of "Buy American" policies.  We also saw significant increases in "regulatory protectionism," including through the Lacey Act and Dodd-Frank's conflict minerals provisions.  Most of these anti-trade actions (and many others) were the result of the administration's consistent view that trade policy is a political tool to buy votes or to secure other, more important policies, regardless of the harms imposed on US businesses and consumers.  All of these actions are deserving of scorn.
  • WTO non-compliance.  The Obama administration also has failed to comply with various adverse WTO rulings against, for example, US aircraft and cotton subsidies and several AD/CVD measures on Chinese imports.  You may remember that the cotton case is particularly galling, as the administration has agreed to pay $130 million per year to Brazilian - yes, Brazilian - cotton farmers in order to avoid formal retaliation from Brazil.  The federal government is also still paying out money - and facing retaliatory tariffs - under the Byrd Amendment, which was ruled WTO-inconsistent in 2003(!).  And we still haven't fully resolved the ongoing mess of zeroing in anti-dumping investigations.  (All that campaign bragging about WTO disputes doesn't look so hot now, eh?)
  • Trade rhetoric and advocacy.  Finally, the Obama administration has promulgated some of the most problematic rhetoric on trade and international economics of any presidential administration of the last 30 years.  Yes, President Obama and his staff occasionally speak well of free trade (typically in theory or outside of DC), and every administration unfortunately advocates "fair trade" and overemphasizes exports.  But this President and his staff have been pretty darn awful, particularly during election years, as they have vocally pushed mercantilism, attacked outsourcing, treated our trading partners as adversaries, and routinely decried foreign "cheating."  As I've repeatedly explained, the Executive Branch is politically and legally positioned to be the US government's foremost advocate for trade liberalization, and when the President shirks this duty, it can have serious repercussions at home and abroad.  And here we are.
These points make clear that "Not Totally Horrible" really is the best thing you can say about US international economic policy in the Obama years.  This is hardly a ringing endorsement, and as I noted the other night, I see very little chance that the President and his team will ditch their political cynicism and dramatically improve US trade and related policies during a second Obama term.  And since there's no chance that Gary Johnson will be the next President of the United States, that leaves Mitt Romney, who - as I explained previously - is much more likely than the current President to actively pursue trade liberalization and reassert US leadership in the global trading system.  It's by no means guaranteed, but - considering just how far US trade policy has fallen over the last few years - it simply can't get any worse.

Indeed, the President's record goes beyond the discrete trade, tax and regulatory policies outlined above; it's indicative of his administration's political worldview and why I think Obama's not deserving of another four years.  As I have repeatedly explained, a politician's - particularly the President's - views on trade and protectionism speak volumes about his or her broader political principles:
A candidate's stance on trade is predictive of whether he, once elected, will put facts and principle before politics and self-interest. Politicians who reject protectionism turn down eager corporate and union campaign donations from unseemly rent-seekers trying to thwart international competition at the expense of American families and companies.

They ignore demagogic attacks on their patriotism. And they openly support policies which, despite their overwhelming economic and historical support, are met with public hostility or disinterest and an unethical opposition willing to take full advantage thereof.

On the other hand, politicians who peddle protectionism are either ignorant of history and economics or are willing to discard their... ideals and prey on voter fears for short-term political advantage.
Viewed through this lens, the aforementioned trade policy failings look even worse, wouldn't you say?

Of course, it didn't have to be this way.  Until the middle of the last decade, American trade and global economic policy wasn't really a partisan issue - just look at Bill Clinton, who not only championed NAFTA and the WTO but also forcefully pushed for China's entry into the World Trade Organization.  And for a few fleeting moments in 2009, President Obama and his team looked to be following in Clinton's free trade footsteps.  Heck, Cato's Dan Ikenson and I even gave them a pretty detailed road map on how they could do it.  But then Obamacare happened, and Chinese tires, and Dodd-Frank, and green subsidies/protectionism, and Mexican Trucks, and "Make It in America," and Bain Capital and so on and so on.  For political gain, they willfully turned away from decades of bipartisan, pro-trade consensus; they made their choice.

And on Tuesday we get to make ours.

P.S. I honestly have no idea what will happen in this week's election; my gut says narrow - 15 electoral votes or so - Romney win, but I could easily see it going the other way.  I sincerely hope that, regardless of who wins, the next four years of international economic policy are better than the last.  This economy, and global trade policy, can use all the help they can get.

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