The Bush Administration doesn't often blink, but when it does, the financial markets take notice. With world equity and currency traders jittery over the prospects of a two-front trade war with China and Europe after the U.S. imposed restrictions on some Chinese textile imports, Washington abruptly changed tack. On Nov. 24, it signaled that it might be willing to comply with international demands that it drop illegal tariffs on imported steel. The switch in Washington's rhetoric sent a sigh of relief from Tokyo to Wall Street, as stocks soared and the dollar rallied.
But hold the high-fives. Trade troubles -- and the threat of stepped-up U.S. protectionism -- are far from over. Sure, the economy is clearly on the mend: On Nov. 25, the Commerce Dept. revised its estimate of third-quarter growth up to an astounding 8.2% from a previous 7.2%. Yet President Bush remains vulnerable in the upcoming campaign to Democratic attacks that his trade and economic policies have cost Americans millions of jobs.
To counter those charges and reduce political pressures, Bush has opted to employ limited protectionism. He's using small-bore measures aimed at protecting selected industries. The idea: to show U.S. workers that he cares about their plight, while taking some steam out of congressional calls for more sweeping protectionist steps. "We're looking for actions that are more symbolic than substantive," one Administration official says.
But pressure-valve protectionism requires a delicate touch. With Democratic candidates already staking out a hard-line stance on trade, it may not be easy for Bush to resist harsher actions. "It could be a very rough year for trade policy," says C. Fred Bergsten, director of the Institute for International Economics.
There's a lot at stake if the U.S. and its trading partners don't get things right. With its current-account deficit running at a record of nearly $500 billion, the U.S. needs to attract more than $1.5 billion in foreign capital each business day. Any hint that the U.S. is resorting to broad-based protectionism could disrupt those flows, tanking stocks, bonds, and the dollar. The biggest threat: an all-out trade war that clobbers corporate confidence and puts a dent in the global economy. The likelihood of friction ever getting that bad is remote, but it is not out of the question. "It is imperative that creeping protectionism be thwarted and reversed," warned federal Reserve Chairman Alan Greenspan on Nov. 20 in Washington.
The trouble is that the Administration's modest trade measures could be misinterpreted by markets as a lurch toward full-fledged protectionism. That was certainly the case with Washington's Nov. 18 decision to limit imports of Chinese-made bras, bathrobes, and fabric. While it covered less than 5% of China's soaring clothing exports to the U.S., the move fanned fears of more such steps and sent the dollar to a record low vs. the euro.
Many in the markets just don't believe in Bush's commitment to free trade. It's not hard to see why, after a series of politically expedient steps by the Administration, from the imposition of the steel tariffs in March, 2002, to the Nov. 24 preliminary ruling by the Commerce Dept. that Chinese television manufacturers are dumping sets in the U.S.
Bush's professed support for free trade will next be tested on Dec. 6. Unless he lifts the tariffs imposed on steel by then, the European Union can invoke tariffs authorized by the World Trade Organization on U.S. goods from Harley-Davidsons (HD ) to Florida oranges. All are targeted, not coincidentally, to hurt Bush's prospects in key electoral states.
The U.S. had intended to keep the tariffs in place for three years to give domestic steel producers time to restructure. But in the face of certain retaliation from the EU, the Administration may be preparing to throw in the towel. It is likely to argue that steel, after massive consolidation, is again ready to take on competition. On Nov. 24, Commerce Under Secretary Grant D. Aldonas said in Brussels that consolidation "is not done yet, but the world environment is more favorable." To remove the sting for domestic workers and producers unhappy with the decision, the Administration may detail a new "manufacturing strategy" to make it easier for steelmakers to get additional anti-dumping penalties on imports.
But even if the U.S. backs down, the steel dispute won't be the last word in transatlantic friction. Europe has warned that it will start imposing levies on U.S. goods next March if Washington fails to repeal tax subsidies for American exporters that were repeatedly ruled illegal by the WTO. With Congress and Big Business split over how to accomplish that, Washington is unlikely to comply by the March deadline.
The political pressure surrounding China trade is even more acute, because of a $130 billion bilateral deficit. "China has become the whipping boy for the whole thing," says Wilbur L. Ross Jr., chairman of both International Steel Group and textile giant Burlington Industries. That means more pressure-relief protectionism. U.S. makers of steel, furniture, hand trucks, and paint have already applied for anti-dumping duties. U.S. clothing companies are sure to seek additional quotas on surging Chinese imports as well.
So far, China's response has been measured. It postponed a buying mission headed for America's grain-and-soybean belt after the U.S. announced its decision to limit some textile imports from China. But if the U.S. ratchets up the pressure with more protectionist moves, Beijing may retaliate with higher tariffs of its own.
Avoiding major battles will require careful diplomacy. Chinese Premier Wen Jiabao will meet with Bush on Dec. 9 on trade as well as on such critical issues as North Korea's development of nuclear weapons. The visit will underscore the growing ties between America and China and the risk of harming relations with trade spats.
Bush has other trade problems, too. Global trade negotiations among the 148 nations of the WTO collapsed in September. And the Administration barely managed to avoid a similar meltdown at a Nov. 21 meeting in Miami of the 34 member nations of the Western Hemisphere.
The Bush Administration is trying to have things both ways. It wants to convince U.S. workers that it's on their side, while avoiding broad measures to help them. And it's attempting to show a free-trade face even as it indulges in protectionist maneuvers. Problem is, with the Presidential campaign already under way, the markets are having a hard time telling the difference between Bush's intentions and the real protectionism they fear.
By Paul Magnusson and Rich Miller in Washington, with Dexter Roberts in Beijing, Michael Arndt in Chicago, and Marcia Vickers in New York