Rep. Betty Sutton, a Democrat from economically depressed Northeast Ohio, has an idea that could help jump start the U.S. economy in an environmentally friendly manner. On March 17, the second-term congresswoman introduced legislation that would give consumers tax incentives ranging from $3,000 to $5,000 if they traded in their old gas guzzlers to buy new, more fuel-efficient cars. Sutton’s proposal is formally called the Consumer Assistance to Recycle and Save Act, but the lawmaker has a catchy acronym for it. “The CARS Act will achieve many goals: consumers will finally get a break to purchase more fuel-efficient vehicles; we will all benefit from a reduction of CO2; and the auto industry will get a jump start to spur sales,” Sutton said when she rolled out her proposal. Others call the idea, Cash for Clunkers.
With U.S. auto sales currently at a quarter century low, the idea of cash-for-clunkers has some important political supporters. Speaker of the House Nancy Pelosi likes the idea. Ford, Chrysler, and General Motors are backing it. GM’s chairman and CEO, Rick Wagoner, has said that Sutton’s idea could have a “huge impact.” Wagoner points to Germany, which has a similar program that is credited with helping boost auto sales there by some 15% to 25% last month (depending upon whose calculations one wishes to accept). The United Autoworkers union is also strongly behind Sutton. Sutton’s idea also seems to be generally well-received in the White House. While the Obama administration has not specifically endorsed the bill, Steven Rattner, who heads the president’s auto task force, has expressed interested in “working with Congress on a piece of legislation that would help incentivize buyers,” Michigan Republican Rep. Candice Miller has told reporters.
But there is one small problem Well, perhaps not so small. The cash-for-clunkers proposal is restricted to cars that are assembled in North America. Foreign-made imports are specifically excluded. Considering the current international political environment, where perceptions of rising U.S. protectionism are increasing, the well-intended cash-for-clunkers bill could be heading into an international legal- and economic firestorm.
When she served as U.S. trade representative from June, 2006 to January, 2009, the rap against Sue Schwab — a former foreign service officer, congressional aide, corporate consultant, and academic — was that she lacked the requisite political savvy to pry open markets for American exporters. So when President Barack Obama tapped Texas politician Ron Kirk for the job, the nomination was generally well-received. Kirk is a former mayor of Dallas whose ambition is to serve in the U.S. Senate. It’s reassuring that a man with real political smarts, a man who knows how to produce concrete results, will follow technocrat Schwab — or so the conventional wisdom has it.
But is it right?
Sue Schwab came into office with a deep appreciation of how the politics of international trade fit into the real world of diplomacy. As U.S. trade representative, technocrat Schwab had more successes than she is given credit for — notably including difficult issues involving China. As a former diplomat, Schwab understood the importance of using the right tone when addressing America’s trading partners. By contrast, neophyte Kirk seems inclined to adopt the old-style tone of Uncle Sam, the hectoring world’s trade policeman, always on the lookout to score political points against U.S. trading partners (China heads the list) whose word can’t be trusted. And on substance, Kirk has already blundered in the eyes of some foreign policy heavyweights by threatening to re-negotiate a pending trade deal with a major American ally: South Korea.
While Kirk may grow in his job — think of Robert Strauss, another politically minded Texan who performed admirably as U.S. trade representative in the 1970s — Obama’s new chief trade negotiator comes into office facing a very steep learning curve. At least, that was the thrust of concerns that were raised about Kirk last week at a well-attended conference of senior foreign-policy experts who convened at Washington’s famous Willard hotel to discuss U.S. national security strategies for Asia. One old Asia hand who was in the audience quipped that Kirk’s touting of his foreign policy credentials regarding Mexico reminds him of Alaska Gov. Sarah Palin’s deep insights into neighboring Russia.
The March 11 conference rolled out a new 82-page study of various national security concerns that will face the incoming Obama administration across the Asia-Pacific region, and also a analysis of the U.S.-South Korea alliance that ran to 88 pages. The studies were written by seasoned Asia experts who are affiliated with an array of respected think tanks: the Center for Naval Analyses, the Institute for Defense Analyses, the Institute for National Strategic Studies at the National Defense University, Pacific Forum CSIS (the Honolulu-based affiliate of the Center for Strategic and International Studies), and the Center for a New American Security.
While Kirk’s performance two days earlier at his March 9 confirmation hearing before the Senate Finance Committee went over well with the lawmakers, the foreign policy heavyweights who convened at the Willard weren’t as impressed. The main source driving the concerns that the new administration’s trade agenda could be heading into rough political waters: Kirk’s own words to explain how he intends to go about his new job.
Pascal Lamy, the director-general of the World Trade Organization, has been sounding the alarm bells as he warns that political leaders around the world should refrain from responding to the global finance crisis by enacting protectionist measures that will only cause trade flows to shrink even further. On Jan. 26, Mr. Lamy circulated to the WTO’s 153 member countries a confidential 114-page report that documented unsettling ongoing efforts by various countries to close their borders to imports. While the Europeans (with new farm subsidies for cheese and dairy products) and Americans (with various “Buy American” provisions in the $787 billion economic-stimulus package) were the focus of much of the criticism, the report also singled out such Asian protectionist offenders as India, Indonesia and South Korea. On Jan. 28 in Davos, Switzerland, Mr. Lamy buttonholed Asian leaders, including Chinese Premier Wen Jiabao, on the sidelines of the World Economic Forum. Late last month, the WTO leader flew to Asia, where he issued even more public warnings. And later this month, Mr. Lamy is planning to send another “restricted” report to WTO members, which is expected to provide further documentations of the spreading global economic nationalism.
Every important leader Mr. Lamy has spoken with has—oh-so-sincerely—agreed that the dangers of protectionism are very real. “Experience shows that in crisis it is all the more important to stick to a policy of opening up and co-operation,” Premier Wen declared in Davos on Jan. 29, one day after he huddled with Mr. Lamy. That same day at the World Economic Forum meetings, India’s trade minister, Kamal Nath, warned against “the sounds of protectionism.” It is important to “recognize that at the heart of globalization lies global competitiveness, and if governments are going to protect their noncompetitive production facilities it’s not going to be fair trade,” Mr. Nath observed. Across the region, all the top political leaders have been singing from the same free-trade song sheet. But do they mean it?
Mr. Lamy’s Jan. 26 confidential report noted that “India raised tariffs on some steel products and issued notifications restricting imports of some steel products in November 2008.” And in South Korea the WTO report observed that tariffs will triple on crude-oil imports, to 3% from 1%. Meanwhile Indonesia has issued orders specifying that “only five ports and certain international airports are to serve as entry points for certain imports, such as electronics, garments, toys, footwear, and food and beverages,” Mr. Lamy’s confidential report observed.
Asian officials, like their counterparts in Europe and the United States, all seem to think that protectionism is an evil economic practice that the other guys give in to. When India recently slapped on import curbs to keep Chinese-made toys out of the hands of Indian children, Trade Minister Nath earnestly explained that the “public interest” was at stake, and expressed pain at the suggestion that India would resort to “protectionism.” As for India’s raising tariffs on steel—competition from China is the main target—Mr. Nath claimed that China deserved the increased duties because the Middle Kingdom isn’t a real market economy. Meanwhile, while the Chinese have vigorously protested India’s protectionism, they have also been busy with new subsidies and trade barriers to protect Chinese exporters, including domestic steel producers. The Indonesians are also making moves to protect their domestic steel companies, complaining that Indonesian consumers prefer foreign steel because it is made from more advanced technology and is cheaper. Such assertions might be laughable in respected economic circles, but the top trade officials are skilled in uttering them with straight faces.
Top honors for his remarkable ability to advance a ridiculous argument should go to South Korean Agriculture Minister Chang Tae-pyong, who met with Mr. Lamy in Seoul last month. South Korea would like to be helpful in the Doha Round’s tariff- and subsidy-cutting agenda, Mr. Chang averred. But the Korean trade official added that he hoped everyone would also agree that because his country’s small rice farmers were not competitive in global markets, Korea ought to be given special exemptions on slashing tariffs on the grounds that it is an agricultural “developing nation.”
One has to marvel at the logic, if not the audacity. South Korea, with an annual per capita GDP of about $27,000 (compared to $1,500 for Bangladesh) is asking the WTO to pretend that Korea is basically a basket case. Mr. Lamy’s retort to this is not a matter of public record, but presumably the WTO head is aware that Korea is a member of the Organization for Economic Co-Operation and Development, along with other rich countries like France, Germany and the United States.
But then Japan is also asking that its uncompetitive rice farmers be treated as poor-country peasants in the Doha negotiations. In Tokyo, the definition of a free trader is anyone who would dare to be brave enough to suggest that the proper level for Japanese tariffs on imported rice should be “only” 400% and not twice that.
Another thing that Japan and Korea, along with many others, agree upon is that the “Buy American” provisions that are in U.S. President Barack Obama’s stimulus package are outrageous protectionism. Again, the hypocrisy-meter should be hitting the high decibels at this point. If Washington’s autarkic practices are deplorable, what about their Japanese and Korean copycats? Both Asian nations have also carved out special exemptions in the WTO to restrict foreigners from their governments’ major construction projects—big-ticket items including water, electricity, airports and urban transport. There is also a threshold of $22 million below which the Japanese and Koreans have the right to bar foreigners from contracts altogether. Meanwhile, other countries such as China that are now busy issuing press releases blasting the Buy American laws haven’t even been willing to sign on to the WTO’s government-procurement agreement at all—ensuring that in their own construction projects, it’s quite often a “Buy Chinese” business where foreigners are not welcome.
If there is any country where officials should recognize the vital importance of their assuming leadership by their own sound economic example, that would be the U.S., which is still the strongest economy in the world. But in Washington, the current wave of economic nationalism threatens to become a tsunami. From a free-trade perspective, the atmosphere in Rep. Nancy Pelosi’s House of Representatives is positively poisonous. Consider one “economic idea” that the venerable Rep. Charles Rangel, who chairs the powerful Ways and Means Committee with jurisdiction over trade and taxes, has come up with. Mr. Rangel is pushing a bill called the Trade Enforcement Act of 2009. “America’s trading partners don’t always live up to the commitments they make in trade agreements with the United States—and the Bush administration too often failed to insist that they do,” Mr. Rangel explained when he introduced the legislation. The measure would create an Office of Congressional Trade Enforcer, which would “investigate barriers to U.S. exports, develop complaints against foreign countries,” and pressure the Office of the U.S. Trade Representative (an arm of the White House) “to file cases” against the foreign cheaters—singling out China as a high priority for the suspicious U.S. congressional sleuths.
And while on the subject of American-style protectionism that makes no economic sense, consider the political position that the new occupant of the White House has put himself in. During last year’s presidential campaign, Barack Obama took out a radio advertisement in Milwaukee, Wisconsin, home of the iconic Harley-Davidson motorcycles, in which the Democratic candidate ridiculed Republican rival John McCain for refusing to say that there ought to be Buy American laws for motorcycles. Sounds good, especially to economically illiterate American voters. But how far would President Obama get if he hopped on one of those famous Fat Boys that didn’t have its Japanese-sourced carburetor in it? Or the tires, brakes, wheels, or the electronics that Harley-Davidson buys at the best prices and highest qualities it can find, whether domestic or foreign? Not to mention that Harley-Davidson makes significant profits from selling its Hogs around the world. Harley executives declined to be interviewed for their feelings on what would happen to their company if, say, the Chinese and Japanese refused to buy American motorcycles, in a tit-for-tat response to a Buy American favor for Harley. But they surely understand that Mr. Obama’s helpful economic advice would be ruinous.
When such absurdities are (painfully) pointed out to them, most trade officials, whether they are in Washington, New Delhi or Jakarta, say that their current protectionist moves are politically necessary and designed to do only “temporary” limited economic harm to global trade flows. The bad old days of 1930s-style rampant global protectionism, they contend, will never come back. But even if that turns out to be true, what’s going on now is very dangerous. In his January report to WTO members, Mr. Lamy cited a recent study that pointed to what would happen if all countries increased their applied tariffs to their highest legally permitted rates. If that happened, the report observed, “the average global rate of duty would double and the value of global trade would be cut by about 8%” That ought to frighten everyone.