Obama flips on China and flops on NAFTA

By Phil Levy

For the second time in a week, the Obama administration has discarded a major campaign pledge on international economic policy. In its decision last week not to name China a currency manipulator, and now to forswear renegotiation of NAFTA, the administration avoided two potentially costly mistakes. In the short run, this is cause for rejoicing. In the long run, this approach may portend trouble.

There is no doubt about the original pledges. In the case of China, President Obama had been so clear as a candidate that his nominee for treasury secretary had no choice at his January confirmation hearings but to repeat the boss’s view that China was manipulating its currency.

In the case of NAFTA, Obama said in a primary debate: "I will make sure that we renegotiate… I think we should use the hammer of a potential opt-out as leverage…" He differentiated himself from his current secretary of state by arguing that he had been a consistent opponent of NAFTA while she had occasionally seemed to favor the agreement.

These vows were not trivial. Key battleground states such as Indiana, Michigan, Ohio, and Pennsylvania had suffered substantial manufacturing job losses. Rightly or wrongly, groups of voters there blamed those losses on trade with China and agreements like NAFTA. They were deeply unsatisfied with the Bush administration’s trade policy, which stopped just short of labeling China as a manipulator, and which argued that NAFTA could be improved upon, but that the agreement should not be reopened.

Obama spoke of China’s perfidious practices. He spoke of how NAFTA cost a million jobs. He promised change. And now, with no new facts to justify the switch, Obama has adopted the very positions he attacked.

Does this matter? The election is long past. Perhaps it is just naïve to think that politicians will keep their word. This is hardly the idealism that Obama ran on.

But would we really rather he stick with bad positions just for consistency’s sake? Had the Obama administration fingered China as a currency manipulator, it would have done nothing to accelerate China’s currency adjustment but would have greatly annoyed the Chinese and invited retaliation. Had the administration followed through on its commitment to renegotiate NAFTA, it would have soured relations with our two closest neighbors, with no evidence that the desired change (incorporating labor and environmental commitments into the body of the agreement) would have any real benefit. 

Put differently, though, the answer may seem less obvious: Does it matter whether a leader persuades the public of a policy’s merits? Is it a viable approach to convince the citizenry that a policy is bad, and then to pursue that very policy? It will depend on the extent to which a president can act autonomously, without relying upon either firmly-rooted public support or the support of institutions that are more sensitive to public opinion, like Congress. 

Even a purely pragmatic politician would have at least one good reason for honoring commitments: credibility is valuable. There will be times when he must woo legislators with promises. There will be occasions when foreign leaders have to decide whether the politician means what he says. It helps if they consider his word to be his bond.

So long as a majority of the public embraces Obama and holds that he can do no wrong, there will be little domestic price to pay for his reversals, and he will enjoy the benefits of pursuing policies more sensible than those he campaigned on. How will we know when trouble looms? Perhaps when members of the president’s own party begin to introduce legislation aimed at reversing his decisions. Or when other countries fail to take the president’s concerns seriously. Or when the president’s fans lose faith in his infallibility.

Once squandered, credibility can be hard to regain.