The Tradeoff

Free trade has been a bedrock policy of the United States under both Republican and Democratic administrations for nearly three quarters of a century. But both Barack Obama and Mitt Romney have spoken about trade in remarkably ambivalent terms over the course of the presidential campaign.

On the one hand, both candidates have talked about getting tough with U.S. trading partners and especially with China, which Romney has repeatedly promised to label a currency manipulator on his first day in office (currency manipulation is the practice of governments intervening in global currency markets to buy dollars in an effort to push the value of the dollar up and the value of their own currency down, thereby making their exports less expensive in foreign markets and their imports more expensive for their own citizens). Under international rules, labeling China a currency manipulator (which it clearly is) would lead to a formal call for the International Monetary Fund to convene formal consultations on the matter between China and the United States. But it would not trigger any specific retaliatory measure. Indeed, since consultations have already taken place in various forums, it’s not clear that Romney’s pledge would achieve any concrete result at all.

Although Obama has eschewed formal action on the currency issue, he has also adopted an aggressive posture, taking action against Chinese producers on anti-dumping and countervailing duty cases involving steel, solar panels, and tires and establishing a trade law enforcement body aimed at actively seeking out unfair trade and prosecuting it. This is a far tougher stance than either the Bill Clinton or George W. Bush administrations took.

Yet for all the tough talk and action, both candidates remain quite conventional with regard to trade. After taking a hard line on China, Romney always follows up by calling for the negotiation of more traditional free trade agreements, especially in Latin America. Obama continually promotes his program to double exports and, like Romney, champions free trade deals — particularly the Trans-Pacific Partnership now under negotiation, which the Obama administration promotes as a "21st-century" trade agreement.

None of these deals represents a material departure from the path U.S. trade policy has taken over the past 65 years. All the agreements attempt to lower tariffs, import quotas, and other formal trade restrictions. They also seek to protect intellectual property, reduce export subsidies, and ensure that foreign participants in a nation’s economy are treated more like domestic participants in terms of regulatory rulings, labor arrangements, the right of establishment, and opportunities for investment.

What they don’t do is deal with the main drivers of the chronic market distortions, trade imbalances, and capital flows that were behind the Great Global Economic Recession and Crisis of the past five years. For starters, these agreements don’t address currency issues at all — and not even Mitt Romney is proposing that they should. Yet currency misalignment is a much more important factor in trade flows than the tariff and intellectual property issues that always dominate trade talks. These so-called free trade agreements don’t tackle the investment incentives and subsidies that are often used to induce the outsourcing and offshoring of jobs, or the informal administrative guidance and pressure that many countries use to intimidate global corporations into transferring investment, technology, production, and intellectual property away from their home countries. All of these factors are much more important determinants of global trade, capital, production, and investment flows than the key items normally negotiated in conventional free trade agreements.

Since neither Obama nor Romney is proposing to change this framework in any significant way, the outcome of Tuesday’s election probably won’t matter much to trade and globalization policy.

Still, there is at least a small indication that an Obama win might produce more of a material change than a Romney victory. On occasion, the president has asked in an instinctual way why America can’t produce high-tech batteries, solar energy systems, high-speed trains, advanced lighting elements, flat panel electronic displays, and the like. He has actually promoted the development of some of these key industries in the United States. To be sure, his efforts have been small-scale, halting, and inconsistent, but he has nevertheless given the United States the kind of industrial strategy and policy that used to be standard operating practice in the United States. Romney and the Republicans, by contrast, have sharply criticized Obama’s initiatives while holding fast to the doctrine that the government should not have an industrial policy and should not even respond when countries such as China and South Korea pour money into developing key industries in which America is often the competitive leader.

Why is this difference between the two candidates significant for trade policy? Global economic trends suggest that to create jobs, the United States will have to pay more attention than in the past to reducing its trade deficit by producing more of what it consumes in the United States and importing less of what it consumes from abroad.

Ever since the outbreak of the economic crisis in 2008, the world’s leaders have been talking about the necessity of "rebalancing." It is generally agreed that the U.S. trade and current account deficits are unsustainable over the long term, just as the surpluses of Germany and Asia are unsustainable. But Asia, Europe, and much of Latin America have found it difficult to actually begin rebalancing and, in fact, have moved to maintain and even strengthen their export-led growth capabilities. With Britain and the European Union both on austerity diets, their only hope for growth is exports. While Japan is finally running sporadic trade deficits after decades of pledging to increase imports, it is desperately trying to maintain and expand exports. And China is having a hard time transitioning from export-led growth to domestic consumption-led growth. Thus, the rest of the world is aiming to create jobs and growth through exports — especially to the United States as the U.S. economy slowly accelerates while all others appear to be decelerating.

The dilemma this will pose for the next president is that devotion to orthodox, unilateral free trade, and hands-off government is likely to clash with the economic and political need to create more and better American jobs. Obama, for example may well achieve his goal of doubling exports, only to find that imports have tripled and that he remains further behind in realizing his overarching goal of increasing U.S. job and GDP growth. On top of that, the high level of U.S. government debt is already limiting the White House’s ability to revive the economy through classic stimulus policies. In this case, the only way that the United States will be able to achieve the desired growth is by importing less, supplying more of the domestic market from increased domestic production, and exporting more. To make this happen, Obama’s little experiments with expanding industrial development and proactively enforcing trade laws may provide a useful roadmap for the path he’ll need to take in the future.