Obama is upside down on trade

Obama is upside down on trade

In trying to build public support for congressional ratification of Free Trade Agreements with Colombia, Panama, and South Korea, President Obama is telling audiences that "these agreements will support tens of thousands of jobs across the country for workers making products stamped with three proud words: Made in America".

Why do presidents keep saying things like that? Do you remember when we were negotiating to bring China into the World Trade Organization (WTO) and the Clinton White House was asking Congress to grant Beijing permanent Most Favored Nation (MFN) treatment (meaning that for trade purposes we would treat China the same as our other trading partners)? At that time the United States had a modest trade deficit with China of about $10 billion. President Clinton and his top officials- U.S. Trade Representative Charlene Barshefsky, Treasury Secretary Larry Summers, National Economic Council Chief Gene Sperling, and others – assured the Congress that the proposed deal with China would dramatically reduce this deficit and create thousands of new jobs for workers who made things in America. The argument at the time was that the United States would be the big winner because it would be China that would be making most of the big tariff cuts and market opening concessions. Of course, with the United States now running a $250 billion trade deficit with China, it’s obvious that things haven’t worked out as predicted.

Nor is that surprising. Presidents Carter and Reagan predicted that the Tokyo Round of trade agreements would open foreign markets to U.S. products, reduce the U.S. trade deficit and create thousands of new American jobs. Of course, it was immediately in the wake of these agreements that the U.S. trade deficit began soaring out of control and off-shoring of production and jobs began in earnest.  President George H.W. Bush and President Clinton predicted that the Uruguay Round of trade talks and the creation of the WTO would reduce the U.S. trade deficit and create thousands of jobs, with the same results as their predecessors.

Obama is supposed to be a smart guy who reads a lot. Why hasn’t he read this history? These deals have never worked out as predicted and the new ones Obama is pushing won’t either. Of course, the Colombian and Panamanian agreements don’t matter much one way or the other because the economies of the two countries are so small. But the Korean deal will not produce thousands of new American jobs. The New York Times reports the administration as estimating that the new FTAs (but primarily the Korean FTA) will generate $12 billion of new exports of U.S. made goods plus sever billion of exports of U.S. services. What neither the administration nor the Times is reporting is that the International Trade Commission has estimated that despite this increase in U.S. exports, the overall effect of the agreements will be to increase U.S. imports by more and thus to increase, not reduce, the U.S. trade deficit. One can understand why the administration might not want to highlight that point, but it is baffling and suggestive of ideological free trade bias that the proud New York Times does not report it.

The deals won’t create the predicted jobs because they don’t deal at all with two major issues – currency manipulation and national export led growth strategies. Global tariffs are already quite low and can easily be outweighed in importance by movements in currency values. Countries like South Korea that manage and manipulate their currencies and that also use official administrative powers to accumulate trade surpluses as a matter of national security policy simply do not allow their imports to soar in uncontrolled fashion.

So Obama is embracing free trade deals and making promises that will ultimately embarrass him. At the same time, he has been responded coolly to moves in the Senate to pass legislation aimed at offsetting the negative impact on the United States of China’s currency manipulation. Yet here is a situation that is surely costing America jobs. Nobel prize winning economist Paul Krugman says China is grossly distorting world trade with its currency policy and has called for a tough response. Long time free trader and Peter G. Peterson Institute for International Economics Director Fred Bergsten calls China the most protectionist country since World War II and also calls for some administration action.

If the president wants thousands of workers churning out products stamped Made in America, he needs to stand on his feet instead of his head. He ought to forget about the free trade agreements and start doing something about the problems of currency manipulation and market distortion.