Missing the slow pitch on free trade

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  • U.S. is second-to-last in developed world in trade as a % of GDP, simplification of the trade agenda would go a long way

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The U.S. is more active on trade policy than it has been in years.  President Obama is meeting with Canada and Mexico about new agreements, Congress will hold hearings on changing decades-old trade law, and the federal government will more broadly be bringing several cases before the WTO.

Yet, in constructing his global trade agenda for 2012, Obama clearly has failed to learn from the mistakes of his first three years in office. With easy gains from free trade staring him in the face, he has opted to spurn a prudent agenda in favor of a messy web of destructive litigation and bureaucracy. Given that the U.S. is second-to-last in the developed world in trade as a percentage of GDP, some simplification of the trade agenda would go a long way in unleashing American economic strength, but the president seems determined to move in the opposite direction.

One could be forgiven for thinking optimistically about President Obama's trade agenda. At the close of 2012, the president signaled a willingness to engage in the sorts of negotiations that would offer new markets and broader opportunity to American businesses. He finally sent the long-overdue free trade agreements with Colombia, Panama, and South Korea to Congress for action, heralded Russia's WTO accession, and appeared to be willing to move on the Trans-Pacific Partnership. Additionally, rumors circulated that Obama wanted to simplify the regulatory framework surrounding trade by consolidating several agencies into a single-window for import and export regulation.

But the president's rhetoric appears to be little more than a head fake meant to launch a broader, more destructive agenda. In particular, Obama has three major self-imposed problems with his trade agenda that will ensure that Americans are cut off from the benefits of freer markets. They include a destructive industrial policy that will kill competition, a stalled diplomatic trade agenda, and a bizarre, counterproductive legal fight at the WTO.

Since 95 percent of consumers live outside the United States, it is important for Americans to get goods and services easily to market. Consolidating trade agencies could be an important step in promoting larger export markets for American businesses. There is considerable evidence that the six agencies Obama would like to fold into one promote today a web of confusing, stultifying regulation. As the president is fond of pointing out, it is sheer madness that freshwater salmon trade is regulated by the Department of the Interior while the Commerce Department holds jurisdiction over saltwater salmon. Such confusion is emblematic of U.S. trade policy overall.

President Obama's agency consolidations, however, are turning out to be nothing more than an opportunity to engage in destructive industrial targeting; a tactic used to subsidize American businesses in an effort to give them a competitive leg up on their international counterparts. History should indicate that this tactic is bound to end in disaster; Obama himself should know this from his days trying to remake losers as winners - like Solyndra and General Motors. The government lacks the understanding provided by real market signals to determine which lines of investment are capable of generating profits, and thus their efforts will inevitably result in failure

Even when "profitable" projects are picked, these destructive industrial subsidies create a perverse cronyism that undermines competition. Consider that, of the Export-Import Bank's $15 million in taxpayer backed loans last year, more than two-thirds went to fund projects at Boeing, the world's largest aeronautics manufacturer. If Boeing receives government help to boost exports, small scale machine shops stand no chance in competition against them. More importantly, countries like China and Germany boost their subsidies as a result, negating the positive effect of the subsidy but rigging the system against domestic producers not in the government's good graces.

If President Obama wants to send a strong message to countries like China that anti-competitive practices will not be tolerated, he has failed to do it with current negotiations. Despite Russia's accession to the WTO, the Jackson-Vanik Amendment, a Cold War relic that prevents the normalization of trade relations between the U.S. and Russia remains in place. This bill, a violation of the WTO disciplines, remains a thorn in the side of U.S.-Russia relations, and while Obama has signaled a willingness to repeal it, he has yet to seriously push Congress to complete the repeal before Russia's membership enters into force this summer.

Additionally, the Trans-Pacific Partnership (TPP), a fair free trade agreement with nations surrounding the Pacific Rim, is languishing without a serious chance for passage. While Obama reconfirmed his commitment to passing the bill on Tuesday, the stiff concessions being demanded of benign trade partners like New Zealand do not bode well for more controversial trade partners like Vietnam. Without the TPP, the U.S. will continue to be at a competitive disadvantage in the Pacific.

In this environment, Obama is picking fights with countries like China. The WTO's dispute resolution mechanism is preparing to rule on whether China is behaving uncompetitively with respect to its rare earth metals. As the president should know from unfavorable rulings on tires, cotton, shrimp, broiler products, wind power equipment, clove cigarettes, and other goods, the WTO's trade dispute mechanism rulings rarely bolster U.S. trade prospects.

President Obama has been caught looking at pitches on trade for three years. When he finally decided to swing, he lunged outside the strike zone. The abysmal growth in U.S. trade will continue until Obama starts swinging for the fences.

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Daniel
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