Will Obama Bring Back Protectionism?

Early in 2008, Democratic congressional leaders put a hold on trade deals the Bush administration had negotiated with Colombia, Panama, and South Korea. In the presidential campaign that played out the rest of the year, leading Democratic candidates and the party's ultimate winner, President-elect Barack Obama, pledged to renegotiate the North American Free Trade Agreement (NAFTA) as part of an overall bid to restore "fair trade" principles to such deals, including greater labor and environmental protections. In the electoral season's final months, the country plunged into a financial crisis, by some indications further deepening the misgivings Americans were expressing about globalization and free trade. The mood has aroused concerns among some economists about a shift toward protectionism at a time when most economists say open markets are vital for economic revival. Some analysts, however, see an opportunity for trade advances in the new administration. They note the Democratic Party's support for the Doha multilateral trade round and say the new team of political leaders might be better positioned to reform trade policy and promote free trade.

There is a long history of U.S. bipartisan cooperation on trade liberalization. U.S. policymakers forged a bipartisan consensus on expanding global trade at the end of World War II, building on the momentum of the Bretton Woods conference to form the General Agreement on Tariffs and Trade (GATT) in 1947. The GATT was inspired by a shared belief that lowering tariffs and expanding free trade worldwide would contribute to lifting millions of people out of poverty, and to instilling confidence in a free-market system based on fairness, transparency, and the rule of law. With the onset of the Cold War soon after the creation of the GATT, trade expansion's geostrategic dimension grew in importance. President John F. Kennedy linked the advancement of freedom and trade, inspiring the Kennedy Round of world trade talks, which led to significant tariff cuts and trade expansion. "A vital expanding economy in the free world is a strong counter to the threat of the world Communist movement," said Kennedy after signing the 1962 Trade Expansion Act. Two decades later, Republican President Ronald Reagan similarly connected trade to the "tides of human progress" and launched the Uruguay Round in 1986, which a later Democratic president, Bill Clinton, helped complete in 1994. The Uruguay Round established the World Trade Organization.

Trade liberalization has been embraced by many economists and policymakers through the years because it is seen as generating greater productivity and wealth through shifting labor and capital from less to more productive economic activities. It also greatly expands the amount of goods and services available to consumers. Gary Clyde Hufbauer, a senior fellow with the Washington-based Peterson Institute for International Economics, says postwar globalization has made the U.S. economy $1 trillion richer each year. But there has been growing resentment in some quarters about a failure to adequately address free trade's losers--those working in U.S. sectors, particularly in manufacturing, that have lost out to cheaper, more efficient producers abroad.

This resentment has been directed in part at the expanding number of free trade agreements (FTAs), both regional and bilateral, negotiated by the Bush administration. Some say they aided special interests at the expense of other U.S. job sectors, while others object to them in principle as distracting from the more broadly beneficial Doha trade round still under negotiation. Clinton helped shepherd NAFTA to completion and President George W. Bush has completed eleven FTAs-but the stalled action on the Colombia, Panama, and South Korea deals reflects concern among some Americans that globalization has eroded jobs and wages in the United States. Democrats, in particular, seized on this unease in the run-up to the 2008 elections. A backlash against NAFTA and other free-trade agreements featured prominently in the Democratic primary contest, especially in manufacturing states like Ohio and Pennsylvania, which have shed hundreds of thousands of jobs.

In the 2008 elections, dozens of Democrats and a handful of Republicans critical of the Bush administration's free trade policy were elected to Congress. Public Citizen's Global Trade Watch, a Washington-based organization that tracks such issues and opposes the Bush administration's trade policy, says thirty-three new "fair trade" advocates (PDF) were elected to Congress in 2008. It identifies such politicians as "committed to changing the North American Free Trade Agreement/World Trade Organization model." One of the newly elected Democratic congressmen, Larry Kissell of North Carolina, was quoted by Reuters as saying there should be a moratorium on trade deals until "we see good jobs coming back."

Some experts say the pending agreement with Colombia will mark an important litmus test for Obama. Business groups, along with editorial pages ranging from the Cleveland Plain Dealer to the Detroit News to the New York Times, have called for passage of the deal. Most have noted that the United States is already open to Colombian goods. The deal would provide an important market for U.S. manufacturers currently facing high tariffs in Colombia, at a time when competitors are poised to make their own deals with the country. Labor groups, which heavily supported Obama and other Democratic candidates, oppose the deal on the grounds that violence against labor organizers remains at an unacceptably high level. Obama cited this in his last presidential debate with Sen. John McCain (R-AZ). By contrast, Obama referred to the recent FTA with Peru as a "well-structured agreement."

Free trade agreements also face criticism from economists like CFR Senior Fellow Jagdish N. Bhagwati, who say they amount to preferential deals and undermine free-trade concepts while distracting from the more meaningful Doha round of global trade talks. But advocates like Daniella Markheim, a senior analyst in trade policy for the Heritage Foundation, point to strong results from free trade agreements. She writes that in 2007 regional and bilateral FTAs accounted for more than $1 trillion in two-way merchandise trade, or about 35 percent of U.S. trade.

Given anxiety over the economy and rhetoric from lawmakers in Washington, some trade proponents are concerned that Congress will propose legislation akin to the Smoot-Hawley Tariff Act of 1930, which increased protectionism and contributed to the Great Depression. A week after Election Day, the U.S. Commerce undersecretary of international trade, Christopher Padillo, said President-elect Obama will face "more political pressure for protectionism than any other chief executive since 1930." Mindful of such concerns, the November 15 summit of the G-20 major economic powers made an appeal for advancing the Doha round and underscored "the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty." This appeal was echoed one week later at the summit of the Asia-Pacific Economic Cooperation forum in Peru. James Bacchus, a former Democratic member of Congress and former chief judge of the World Trade Organization's appellate body, says trade liberalization offers a particularly effective economic stimulus, in addition to the spending and tax cut options before Obama at this time. "The rest of the world is waiting for Barack Obama on this issue," Bacchus says. "We're talking about tax cuts in the United States. [Trade] tariffs are a tax and [reducing these] would be immediate tax cuts for Americans and others around the world. These tax cuts would increase the volume of trade and prosperity worldwide."

Though economists tout the benefits of trade liberalization, worried policymakers around the globe have enacted stimulus plans and sought to protect fragile industries during the crisis. CFR Adjunct Senior Fellow Matthew J. Slaughter warns that one plan under consideration, a U.S. federal bailout of the Big Three U.S. automakers, could have a disastrous effect on trade. He writes in a Wall Street Journal op-ed that investment in auto production by foreign firms operating in the United States is likely to suffer if companies see the U.S. government is willing to bail out their competitors. He also says a bailout of automakers could "entrench and expand protectionist practices across the globe, and thus erode the foreign sales and competitiveness of U.S. multinationals." This was echoed by the European Union's competition commissioner, Neelie Kroes, who warned against a "subsidy race" that would only worsen economic problems globally.

But the Wall Street Journal's Gerald F. Seib says the crisis provides opportunities for Obama as well; at a time when Americans are expecting government activism on everything from health care to big infrastructure programs, a revival of trade deals could be sought as well. "One test of the Obama administration's economic philosophy is whether it is as eager to take advantage of that opening as some of the others now before it," Seib writes.

Hufbauer of the Peterson Institute says the financial crisis is "taking heat away from the trade" issue during the transition, but he doesn't anticipate any type of trade initiatives emerging from an Obama administration in its early months. "The first thing is to get out of the recession, then do something about a safety net, health insurance, Trade Adjustment Assistance for workers impacted by trade," he said. Bhagwati, speaking at New York Law School in November 2008, said: "This is not a time when we can really sell trade liberalization, in my view. A lot of people are not going to make these distinctions" between problems like lost jobs, outsourcing, and trade.

Obama will confront an American public increasingly skeptical of the benefits of globalization. Numerous polls conducted during the presidential campaign in 2008 showed that a growing number of citizens looked at free trade as a threat. The Pew Global Attitudes Project, conducted in spring 2008, found support for trade lower in the United States than any other country in the survey, with 53 percent saying it was good for the United States. A later poll in June 2008 by CNN/Opinion Research Corporation found only four in ten Americans say free trade provides an opportunity for economic growth, and 51 percent view foreign trade as a threat, up from 35 percent in 2000.

CFR's Slaughter and Yale University's Kenneth F. Scheve wrote in a 2007 Foreign Affairs article that earnings for most U.S. workers have been falling in recent years, with inequality greater than at any time in the past seventy years. Economists are divided over how much this inequality is due to globalization, but Slaughter and Scheve add: "Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor."

Democratic presidential contenders, many with free-trade records or support from trade advocates, campaigned on the dangers of free-trade deals and lack of "trickle down" wealth from these deals to the middle and working classes. Obama economic adviser Austan Goolsbee told CFR.org in a September 2008 interview that Obama supports free trade. However, he said that flawed agreements filled with loopholes and clauses for special interests have impeded broader benefits. "If you look at these free trade agreements, they're a thousand pages long and 980 pages of that are giveaways to individual companies and monopolies and very little of it looks like the economist's case for free trade," he said. The Democratic party platform approved last summer in Denver says it supports the Doha round of trade talks and that a successful agreement "would increase U.S. exports, support good jobs in America, protect worker rights and the environment, benefit our businesses and farms," among other things.

At the same time, Democrats also come under criticism for protecting special interests. The five-year, nearly $290 billion Farm Bill that passed over President Bush's objections earlier in 2008 retained a number of subsidies seen as distorting trade, and gave scant attention to calls by trading partners for reform. The Doha round, for instance, remains stalled over agriculture questions, including the support levels given by United States and European Union to their farmers.

Many economists believe a central plank in advancing trade policy is improving the way Washington deals with those buffeted by trade, something both Obama and McCain agreed on during the campaign. This will involve strengthening social safety nets such as access to health care and pensions, and improving education opportunities. Most important will be providing compensation for those sectors that are clearly losers in the short term due to trade liberalization. One approach, advanced in a 2007 Council Special Report by University of Chicago professor Robert J. LaLonde, calls for revamping current trade assistance programs by shifting resources to a displacement insurance plan, which would provide an earnings supplement for workers facing a long-term drop in wages. CFR's Slaughter and Yale's Scheve propose boosting the pay of lower-income wage earners through efforts like eliminating the payroll tax for those earning below the national median income.

As part of his plan for addressing the country's economic crisis, Obama proposes revamping the country's Trade Adjustment Assistance system by "extending it to service industries, creating flexible education accounts to help workers retrain, and providing retraining assistance for workers in sectors of the economy vulnerable to dislocation before they lose their jobs." Obama also calls for ending tax breaks for companies that move operations overseas, and providing tax credits to companies that bolster their U.S. operations and maintain "good jobs with good benefits."