Obama at APEC: Good job, wrong strategy

Despite a bravura performance by President Obama at last weekend’s Honolulu summit meeting of the leaders of the APEC (Asia Pacific Economic Cooperation) economies, the results of his efforts are likely to be negative for the United States and perhaps also for the region.

For an organization that doesn’t even have a real name (something like Forum or Organization should follow Cooperation), travels more miles to get to more meetings than any other, and enforces its agreements on a purely "do what you can when you can" basis, APEC  — and the president — chalked up some real achievements in Honolulu. The most important was a commitment to creation of the so called Trans Pacific Partnership, a nine-country (U.S., New Zealand, Australia, Chile, Singapore, Vietnam, Brunei, Peru, Malaysia) open-ended free trade agreement that will be open to accession by new countries as they become willing and able to accept its template of conditions. This could be the first step toward a region wide free trade regime.

The president also was able to use the sub-tropical, multi-ethnic setting of Hawaii to make the point that the United States is an organic part of the Asia-Pacific region and that cooperation among the peoples and nations of the region is not only possible but far and away the best way forward. In that connection, Obama made some important and tough remarks. He noted that cooperation requires and can only work when everyone is playing by the same rules.  This remark was clearly aimed at China which the President also took to task for its currency policies. Although his administration has avoided formally labeling China a currency manipulator, Obama called it that in so many words by noting that virtually all economists agree that China is managing the exchange rate of its yuan against the dollar so as to keep the yuan substantially undervalued. He added the warning that the United States might have to take strong measures to enforce the rules.

The main message of the president and his officials was that "the United States is back in the Asia -Pacific region" after years of distraction in Iraq, Afghanistan, and the Middle East because as Obama told a group of CEOs "this is where the action is." He added that henceforth this region would have top priority for Washington.

The message was well-delivered and well-received. There is only one problem. It’s the wrong message based on the wrong assumptions and with the wrong consequences for the United States. It was also well-received for the wrong reasons.

Let’s start with that last point first. The president’s audience of Asia-Pacific leaders loved the message because it means continuation of the same U.S. policies under which they have flourished for so long. It means the U.S. security umbrella will continue to dampen intra-Asian conflicts and make Asia safe for the Asians and for those who off-shore their production to Asia. In particular, it means the United States will buffer the rest of Asia from China and that most Asians will have to spend little on their own defense. At the same time, it also reduces the potential impact on China of conflicts with Japan, Korea, and others. It also means the continuation of a half-mercantilist half-free market trading regime in which Asia pursues strategic economic development and export led growth while the United States maintains a laissez faire free market regime and remains the global buyer of last resort. What’s not to like about his Nirvana for the Asia-Pacific countries?

But what does it do for the United States? This is the same regime under which the U.S. current account deficit has become chronically large with production of tradable goods and provision of tradable services off-shored to Asia. It is the same regime under which the dollar has been managed to be chronically over-valued. It is the same regime under which America spends billions on defense in a region that poses no threat to the United States. It is a regime that may be good for global corporations by enabling them to engage in the labor arbitrage that greatly enhances their profitability, but that is killing the middle class by widening the gap between rich and poor. In short, there doesn’t seem to be a lot for America in Obama’s renewed emphasis on being "back" in the Asia -Pacific region. Being "back" in the United States might sound a lot better to Americans.

So why is the Obama administration doing this?

Because its thinking is based on the false assumptions of dying orthodoxies. Take the Trans Pacific Partnership (TPP) free trade deal it is pushing. The notion is that an ironclad free trade deal that removes tariffs and regulatory barriers will open Asian markets and provide a boost to U.S. exports and jobs. This is an illusion based on the orthodox free trade assumption that the chief barriers to trade are tariffs and regulations. They are not. Rather the barriers are currency manipulation, cartels that control distribution and the supply of materials and parts, tax and financial investment incentives, indigenous development policies, and judicial systems that favor local business. Neither the TPP nor any other of the free trade agreements deal with these kinds of barriers to any useful extent. In particular, they don’t even touch on the currency policies because those are considered a matter of finance rather than trade.

Behind this illusion are the assumptions that everyone should "play by the rules" and that if they don’t the United States will act to enforce the rules. These are false assumptions. In the first place, the rules of free trade are not all that clear. Currency manipulation is a good example. Despite the President’s comments about China, his administration has so far refused to take any formal action under either the International Monetary Fund rules or the World Trade Organization rules. There are several reasons for this, but a major one is that it’s not clear that these organizations would find that any rules are actually being violated. Americans tend to think that playing by the rules means playing the American way. But it doesn’t. Japan, South Korea, Singapore, Taiwan, Malaysia, Ireland, Germany, Switzerland, Israel, and others have long played more by mercantilist than strictly free trade rules and they have never been cited for violating any international agreements.

The final false assumption is that the United States will act to enforce the rules. It won’t. It has not acted to stop China’s currency manipulation because it fears the consequences of Chinese likely Chinese retaliation and because it wants Chinese help in other areas such as dealing with Iran and North Korea. There are always other considerations of national security or business that trump enforcing trade rules.

As I watched and listened to the president in Honolulu, I could not help but be impressed by his manner, intelligence, delivery, and mastery of the brief. He’s good. But his strategy is bad.

America needs to make wealth not war. It needs to make America its top priority region. Rather than trying to force other nations to adopt America’s way of doing things, it needs to adopt some of what they do. Instead of being back in Asia, let’s be back in America.