Obama's China Trade Test

The new U.S. President must resist protectionism and ease up on China during the financial slump

At his recent confirmation hearing, Tim Geithner—Barack Obama's Treasury Secretary—pulled out his saber and rattled it at China's alleged currency-manipulating ways, testimony to the stiff protectionist headwind in the U.S. right now. But the real test of whether President Obama will resist the wind or blow with it will come when he decides what to do about America's three-year-old quota against Chinese textiles that expired Dec. 31.

Protectionism is exactly the wrong remedy for a global economic slump—as the 1930 Smoot Hawley tariffs amply demonstrated. Historians widely credit the tariffs—and the global trade war they unleashed—for prolonging and deepening the Great Depression. But it is unclear to what extent Obama plans to heed that lesson, given the decidedly mixed messages he has sent on trade so far.

Obama wrote eloquently about the benefits of free trade and the futility of trying to stop the march toward globalization in The Audacity of Hope. "A tariff on imported steel may give temporary relief to U.S. steel producers," he explained, "but it will make every American manufacturer that uses steel in its products less competitive in the world market." Setting aside Geithner, Obama's economic team is decidedly pro free trade. Larry Summers, the head of the National Economic Council, was a staunch free trader during his years in the Clinton Administration, and former Dallas Mayor Ron Kirk, Obama's U.S. trade representative, has a record of strong NAFTA support.

Words vs. Deed in Trade Agreements

But even though Obama seems to understand the case for free trade in theory, there are very few trade agreements that he has found acceptable in practice. During the campaign, he repeatedly threatened to renegotiate NAFTA to force Mexico and Canada to accept stronger labor and environmental protections. He voted against CAFTA (the Central American Free Trade Agreement) to register his opposition to Bush's trade policies—even though he stressed in The Audacity of Hope that the deal posed little danger to U.S. workers since the combined size of the economies it covered was no larger than that of New Haven, Conn. And he has vociferously opposed the trade deals with South Korea and Colombia.

Nor is Geithner's little anti-China outburst at all surprising given that Obama had previously joined Sen. Charles Schumer (D-N.Y.) in condemning Beijing's efforts to boost exports by "devaluing" its currency—an issue that will come to a head this May when his Administration will have to decide whether to formally classify China as a "currency manipulator." (If Obama picks the currency fight, he must want to lose, because forcing China to bump up the value of the yuan will raise the cost of financing his trillion-dollar stimulus bill—the last thing the economy needs right now.) And he has supported Representative Charles Rangel's (D-N.Y.) request to the International Trade Commission to monitor Chinese textile imports after the current quota expired—a move calculated to pave the way for additional quotas, tariffs, or other retaliation at the first whiff of a surge.

Remarkably, such actions might not run afoul of America's World Trade Organization (WTO) obligations. That's because the U.S. arm-twisted China into unfairly accepting a "nonmarket economy" designation—which even Russia escaped—as the price of membership in the organization. This designation makes Chinese exports much more vulnerable to anti-dumping action by the U.S. In addition, Washington also obtained the right to impose "safeguards" against a range of Chinese exports without inviting retaliation. As a result, even though the textile quota was removed against other Third World countries in 2005, it was reinstated against China a few months later after U.S. garment makers complained that a surge of Chinese clothing was threatening their existence and jeopardizing U.S. jobs.

But if that was a politically powerful argument then, when the economy and jobs were growing, it will be even more so now when they are not. This is especially the case given that the Chinese government a few months ago pumped in some $10 billion to boost its sagging textile exports—its core industry. This is hardly different from the U.S. giving $17 billion to Detroit automakers to keep the domestic car industry afloat. Nevertheless, China's move has handed the U.S. textile manufacturers potent ammunition to demand countervailing measures should the ITC investigation detect an uptick in China's exports. Bruce Raynor, the general president of UNITE HERE—a labor union representing textile and hotel workers—is reportedly even demanding a new regime of "permanent safeguards" against Chinese apparel.

Avoiding a Full-Scale Trade War

While that would almost certainly violate WTO rules, there are plenty of other temporary measures—ranging from higher tariffs and a renewed quota under a different (Section 421) provision—that won't. But even if the U.S. could get away with such protectionism, it shouldn't try.

For starters, such curbs will deprive U.S. consumers of cheap goods when they are most strapped. But this won't be good for U.S. producers either because it will legitimize barriers against their goods by other countries. As it is, Indonesia is slapping restrictions on 500 products; Russia is hiking tariffs on imported cars, poultry, and pork; and Argentina and Brazil are contemplating tariffs on a host of food and clothing items. This might not escalate into a full-scale trade war of the kind the world experienced in the wake of the Smoot-Hawley Tariffs, thanks to WTO rules prohibiting the more draconian kinds of trade barriers. However, even a limited war will exacerbate the current economic slump.

It will prevent industries from clearing their growing backlogs. It will also thwart their ability to reinvent themselves by ferreting out new markets for new products. This will ultimately kill—not spur—job growth, defeating the very purpose of the barriers. When Smoot Hawley went into effect, unemployment was 7.8%—comparable to what it is now. One year later it had soared to 16.3%—and two years later 25%. There are certainly people who lose under open trade, but even more lose in a trade war. In any case, there are ways other than a zero-sum war to help them.

China, like Japan previously, has become a convenient target for protectionists. Now that Geithner has won confirmation, it is time to put the anti-China saber back in its sheath. Obama needs to unequivocally signal that the U.S. plans to stay open for business during the recession—and expects the rest of the world to do the same. Otherwise, he might well invite "Herbert Hoover time."

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