Tar Baby

posted by
on November 27, 2012

As President Barack Obama won’t begin his second four years in the Oval Office until January 21, nobody yet— at least nobody beyond the president himself and a narrow circle of White House insiders like top economic aide Mike Froman — really knows whether the president is interested in bringing a new vision to get US trade policy moving again. He doesn’t seem to be, if a response I received from Froman’s office indicating that trade will not be one of the president’s top international economic priorities turns out to be an accurate guide. The clear impression is that Obama and his top advisors are satisfied that they have already been doing the right things on trade policy, so nothing major will change in the second term. And as I’ll report later in this article, the president’s otherwise highly successful recent trip to Southeast Asia produced more evidence of why U.S. trade policy is presently stuck on the Tar Baby that the Trans-Pacific Partnership negotiations seem to becoming for Obama.

That’s at least a skeptic’s view. But if it turns out that Obama really will be looking at what he could do to boost global trade flows, while reclaiming America’s lost high ground on important international economic issues, he won’t have to look far. On the decency side of the equation, the president might want to consider the advice that Ed Gresser has patiently offered for years. Gresser is a loyal Democrat and a widely respected trade analyst who directs the GlobalWorks Foundation’s ProgressiveEconomy project. He has become well-known for making both a moral and economic argument that high U.S. tariffs on shoes and clothing should be eliminated. Basically, Gresser reasons that those tariffs — which generally hover from perhaps 12-18 percent to more than 30 percent — are regressive taxes on America’s poorer consumers. He also points out that the tariffs constitute unnecessary trade barriers that hamper millions of women in developing countries who are trying to sew their ways out of poverty. Washington’s traditional reluctance to get rid of those cruel tariffs — in both Republican and Democratic administrations — is widely resented in the so-called Third World, and is one of the reasons why the WTO’s Doha Round of tariff-slashing has been so acrimonious.

And for a very significant international economic payoff, Obama only has to look uptown, beyond K Street to the 19th Street, N.W. offices of the international law firm, Squire Sanders. There, Shanker Singham, who heads Squire Sanders’ global market access practice, has a big idea. Beyond its purely financial rewards, Singham’s idea would truly restore America’s former claims to international economic leadership (especially in the WTO, which remains the all-important bedrock of the global trading system).

The idea is not only economically sound, it carries little real risk of a political downside. For openers, American multinationals (which are currently under the impression that, as far as this White House is concerned, they are pretty much left to fend for themselves) would find solid economic reasons to jump on the Obama bandwagon. And as for the TPP Tar Baby, Obama would be praised for backing an idea that, in terms of economic payoffs, would dwarf the TPP. In fact, it would even have a greater financial return than the WTO’s Doha Round. And unlike trade-distorting preferential deals with only a few favored (smaller) trading partners like the TPP, Singham’s suggestions are perfectly WTO-compatible.

In short, Singham proposes that the United States start building an economic coalition of like-minded economically progressive economies that already have sound anti-trust and market-oriented competition policies. Think of the likes of Sweden, Norway, the United Kingdom, Hong Kong, Australia, New Zealand, Singapore and South Korea. Maybe Mexico, Colombia and Chile, three Latin American economies that are also looking to boost their Asian-Pacific trade. The coalition could work within the World Trade Organization to promote multilateral standards of competition policies that would promote expanded global trade flows. And unlike the TPP, which is starting to have an uncomfortable Cold War-era anti-China taint, Singham notes that his proposal “wouldn’t be anti-China.” Instead, he says, “It would set a market-oriented example that Beijing would have to take note of.” So would other emerging-market economies like Brazil, Russia, and India. To be sure, these countries would not want to join in immediately — although they would be most welcome, at least in an ideal world. Such laggards when it comes to serious economic reforms in the WTO would be given powerful economic incentives to step up their games, should the United States and other major economic actors set the example by agreeing to enact truly high-standard competition reforms. China and the others would really be asked to enact competition reforms in their own self interest, not because the Americans and their coalition would be waging economic warfare against them.

Speaking of unproductive economic conflict, before turning to a summary of the key details of Singham’s suggestions, consider some fresh news from Asia that illustrates how the US trade policy has become stuck on the TPP Tar Baby. The lack of any encouraging news for Uncle Sam on the trade front marred President Obama’s otherwise triumphant Nov. 18 – 20 post-reelection swing through Southeast Asia. Everyone in the Asia-Pacific area is prepared to start negotiating trade expansion and has viable options for such — except for the United States and Russia, that is.

As AP reporters Jim Kuhnhenn and Julie Pace noted, Obama “achieved a major goal” on the diplomatic front just by showing up in Burma, Thailand, and Cambodia. “It was clearly seen in the region as a validation of Asia’s strategic importance as the U.S. refocuses its foreign policy to counter China’s clout,” the two correspondents observed. Added Tracy Quek of The Straits Times (Singapore), Obama’s “history-making visit” to the region “was a consummate display of American high-level diplomacy. Indeed, Queck’s article carried the kind of headline that must have delighted the White House spinmeisters: “A fine display of US diplomacy.” Which it was.

But all the fine meetings and fancy diplomatic talk still “might have left some wondering what the trip amounted to for US interests, since there were no big breakthroughs in knotty regional territorial issues or concrete deliverables in trade and economics,” Quek quickly added. “Indeed, the president headed home on Tuesday [Nov. 20] with seemingly few immediate or substantive rewards for deepening his strategic shift towards the Asia-Pacific in his second term.”

Ernie Bower of the influential Center for Strategic and International Studies — a man who knows Southeast Asian strategic and economic issues as well as anyone in Washington, D.C. — agreed that Obama had led “a highly effective visit” to the region. “The robust U.S. presence and relatively disciplined and quiet diplomacy looked strong relative to China’s heavy-headed pressure to convince the ASEAN chair, Cambodia, to again break up the grouping’s unity over the South China Sea dispute,” Bower wrote in a Nov. 21 article that is posted on the CSIS website. “In the end, the United States looked engaged and thoughtful, with the exception of its trade policy, and China won a Pyrrhic victory that dangerously undermined its ability to play a natural leadership role in regional organizations.” For readers interested in international economic policy, the key words in the preceding sentence were: With the exception of its trade policy.

“The awkward moments for Obama and the United States continued to revolve around trade,” Bower explained. “The president called for a meeting of the TPP member countries in Phnom Penh, but this only underlined the fact that U.S. geostrategy and trade policy do not sync — only 4 of the 10 ASEAN countries are members of the TPP.” Even with the presence of Australia and New Zealand (which hosts the next TPP negotiating round in Auckland in Dec.), Obama’s meeting included only 7 of the eleven TPP negotiating countries, as Canada, Chile, Mexico and Peru were not part of the East Asian Summit.

Meanwhile, the other Asian countries (except for Russia) that were represented in Phnom Penh launched the Regional Comprehensive Economic Partnership. The RCEP — involving ASEAN’s ten members, plus six more: Australia, New Zealand, India, Japan, South Korea, and China — makes the TPP look tiny by comparison. As Bower had predicted, two leaders who came to Phnom Penh — Obama and Russia’s Vladimir Putin — were left looking out of sync (for further background, see “Disconnect,” The Rushford Report, Nov. 13, 2012, www.rushfordreport.com). Their handlers bundled Putin and Obama “onto planes to avoid being excluded while the rest of the region kicked off a 16-member trade opening initiative that includes 3 billion people, nearly $20 trillion in GDP, and the world’s youngest and fastest growing markets,” Bower pointed out.

American corporate executives in the region are now beginning to feel left out of the proposed RCEP trade expansion, relates Murray Hiebert, a former Southeast Asian-based journalist who is now affiliated with CSIS in Washington. Hiebert was in Southeast Asia when Obama was there.

Obviously hoping to put a more favorable spin on the RCEP embarrassment, the White House released a “fact sheet” touting the launch of something called the U.S.-ASEAN Expanded Economic Engagement initiative. Dubbed the E3, the Obama spinmeisters said it “will begin with a set of concrete joint activities that will expand trade and investment” in the region. The idea is to talk about how to simplify customs procedures, increase transparency of customs officials. The E3 will also try to find ways “to guide policymakers on issues like cross-border information flows,” and spark “additional work on standards development and practices.” For readers who might want to peer through the smokescreen, there really isn’t much to see, beyond the smoke. Whatever the E3 is, it certainly constitutes no evidence of a serious US trade policy for Asia.

During Obama’s trip last week, the only real “news” of any possible TPP movement surfaced in Bangkok newspapers, which reported that Thai Prime Minister Yingluck Shinawatra would announce her country’s participation in the TPP during a joint press conference with Obama. But in their press statement issued on Nov. 18, only a very skimpy mention of Thailand’s possible future involvement in the TPP talks was mentioned — and that was buried near the bottom. The statement said that Obama had “welcomed Thailand’s interest in the” TPP, at least sometime in an unspecified future. Yingluck also told Thai reporters that the TPP didn’t even come up when she met privately with the US president.

The fact remains that neither leader has prepared the political groundwork to bring Thailand (and also Japan) into the TPP fold.

What talk there was on trade during the regional leaders’ meetings in Phnom Penh, was mostly about the potential of the 16-member Regional Comprehensive Economic Partnership. Perhaps the most telling comments that indicated the underlying TPP tensions came from New Zealand’s prime minister, John Key. New Zealand, along with Singapore, originally sparked the idea for the TPP talks. Those two countries have been the TPP’s true intellectual leaders, despite efforts by the Obama White House to claim that turf for itself. But now, the Auckland-based National Business Review has reported, the Kiwis are hedging their bets. “You never know how these things are going to play out so it is always possible that TPP falters and then RCEP becomes the significant trade agreement,” Key told reporters.

Translation: Key and all other TPP negotiating partners still want the TPP to succeed. They also know that Obama — unlike them — has nowhere else to go, with the U.S. being excluded from the RCEP. So because the the American president needs the TPP more than anyone, he has put himself in an unenviable negotiating position. In Phnom Penh, Key and other important regional politicians essentially informed Obama that when the next TPP negotiating round is held in Auckland next month, he had better step up his game.

Remember Jagdish Bhagwati’s famous metaphor for the proliferation of hundreds of trade-distorting preferential trade deals around the world, the so-called spaghetti bowl? (Others, referring particularly to Asia, call it the noodle bowl.) But whichever metaphor one prefers, the economic pasta of preferential trade is beginning to take various shapes. The RCEP looks like a Chinese dragon. The TPP is beginning to look like a Tar Baby for the White House.

While the White House spin holds up the TPP as a model for what “high standard” 21st century trade deals should look like, the reality is that U.S. trade negotiators have been singing the songs of the same old-fashioned protectionist lobbies that have resulted in America’s loss of claims to international economic leadership: sugar, textiles, steel, and the usual suspects in the U.S. farm lobby. The TPP, originally envisaged by Singapore and New Zealand as a truly high-quality modern trade accord, has become mired in American mercantilism. The man most responsible for the mess: Barack Obama.

Shanker Singham’s idea that could be a game-changer, if Obama would champion it, was published last month by the Council on Foreign Relations (www.cfr.org). In 20 pages, Singham’s “Freeing the Global Market” makes the case for moving beyond traditional trade agreements that are focused on tariff-slashing and liberalizing other barriers to global trade. “One of the most worrisome” of the challenges that the United States faces in international competition, Singham wrote, stems from “the growing use in China and other advanced developing countries of anticompetitive market distortions.” He was referring to governments — like China, India, Russia and Brazil — that “set product standards, limit entry by competitors, restrict advertising, and otherwise distort market competition in ways that benefit favored domestic firms.” Many of the bad practices are associated with state-owned enterprises, which are granted an array of special economic privileges by their home governments, even monopoly status and exemption from anti-trust laws. Again, the so-called BRIC countries — Brazil, Russia, India and China — are the first names to come up with talk turns to abusive SOEs.

The most innovative representatives of American business — think of IBM, Microsoft, GE, Google, FedEx, UPS, US health care and medical device providers, telecommunications innovators, the Silicon Valley, Boston’s Route 128, and North Carolina’s Research Triangle — are being ripped off, big time. So are their counterparts in Europe and important trading countries including Australia, Singapore, and New Zealand. According to Shanker, trillions of dollars are being sucked out of the global economy by such market-distorting, anti-competitive regulatory practices. This is why negotiating market-oriented competition reforms are so important. By contrast, the various academic guesstimates of the potential value of a successful WTO Doha Round at somewhere around “only” $500 billion annually. Even better, the negotiations could be conducted within the auspices of the WTO — where all truly important global trade liberalization should take place anyway. (China, India, Brazil and other developing countries have refused to negotiate such reforms in the Doha Round, but if the major economies set the standard, the recalcitrant Third Worlders would have to realize that such reforms would be in their own self-interests, also.)

Meanwhile, the Obama administration is pressing some market-oriented reforms in the TPP process, including (shrill) demands that Vietnam and Malaysia take steps to bring their state-owned enterprises more into a market-oriented posture. But Singham points out that even if the Vietnamese and Malaysians would agree, the TPP is a long, long way from beginning to set an economic model that the Chinese et. al. would have to respect. But a multilateral agreement between like-minded countries from Europe, Hong Kong, Singapore, Australia, New Zealand and hopefully some progressive Latin American countries like Mexico that are starting to think seriously about competition reforms could be a game changer, the Washington lawyer contends. “Negotiate a multilateral agreement, such as a WTO plurilateral agreement, with like-minded countries that accept free competition as an organizing economic principle,” Singham urged in his October CFR study.

I asked Obama’s chief White House aide for international economics, Mike Froman, if he sees merit in Singham’s CFR paper. I also asked — not for the first time — about what the White House thinks of the advice offered by Democrats like Ed Gresser on high U.S. tariffs on footwear and clothing.
Froman’s spokeswoman, Caitlin Hayden, offered the following response, which I relate in its entirety:

“We’re happy to answer questions about our policy, but I’m not going to ask Mike to react to or offer thoughts on the thinking of various lawyers and academics, etc.” In terms of the administration’s second-term “vision,” Hayden said that she “would offer two areas as priorities in our international economic engagement.” The first, she explained, was in “maintaining growth in the global economy while supporting our European allies as they navigate the crisis in the Eurozone.” The second priority would be “moving forward with our global effort — including the agreements reached in Copenhagen, Cancun, and Durban — to build a framework to combat climate change.”

“This isn’t all that we’ll work on, but these are the priorities,” Hayden added.

Nowhere in the White House response was there any mention of boosting international trade flows as an important presidential priority.