Trade: Protectionist Fervor vs. Retailers' Needs

Obama has pledged to get tough with China. But he can't be too tough, or he'll alienate U.S. companies

Barack Obama talked tough on trade on the campaign trail, vowing to make Mexico adhere to higher labor standards and calling President George W. Bush a "patsy" for letting China keep its currency cheap. Rather than seeking new free-trade deals, Obama aides say, the Administration will focus on more aggressively enforcing trade rules already on the books.

Trade hawks will quickly press Obama to keep his word. With China enjoying a huge trade surplus with the U.S. at a time when the U.S. is sinking into a severe recession, protectionist fervor will be fierce. The AFL-CIO and the American Manufacturing Trade Action Coalition, whose members include U.S. textile and auto parts makers, are backing several bills floating through Congress calling for the U.S. to sharply hike duties on Chinese imports. Their argument: that Beijing unfairly subsidizes its exporters with cash grants, free loans, and an undervalued currency. Seeking "currency relief" is a top lobbying priority of AMTAC, says Auggie Tantillo, the organization's executive director.

But Obama will have to balance demands from aggrieved U.S. unions and manufacturers against the interests of American corporations from Wal-Mart and Home Depot (HD) to Hewlett-Packard (HPQ) and Caterpillar (CAT) that rely on China as a production base for consumer goods, components, and materials. "Our butts are really on the line here," says Erik Autor, international trade counsel for the National Retail Federation. "Any trade action, particularly against China, is really going to impact retailers in order to help a few U.S. manufacturers."

BUY AMERICAN?

Obama's actions against China also will be limited by rules of the World Trade Organization, which Beijing joined in 2002, and by fears of sparking a trade war with America's biggest foreign lender and the fastest-growing market for its goods and services. Say Congress passes a law hiking U.S. duties on Chinese goods in response to alleged currency manipulation, a charge Beijing denies. Many trade experts believe the WTO would side with China if it files a protest. Or China could retaliate against U.S. industries. Obama would face the tough choice of vetoing a trade bill passed by a Democratic Congress or fighting a WTO case on currency manipulation it could lose.

The Administration could enforce existing laws more aggressively. The U.S. Trade Representative Office, for instance, has been building a case against China for allegedly violating WTO rules by offering a wide range of subsidies to help domestic companies export their branded products. It will be up to the Obama Administration to pursue the case in the WTO. Incoming Trade Representative Ron Kirk could file similar complaints against Chinese industries such as steel, which U.S. manufacturers also accuse Beijing of unfairly subsidizing. And if there is a sudden, dramatic rise in imports of certain Chinese goods, the U.S. legally can slap high duties on them if American industries prove they are financially damaged. U.S. outfits have filed six such complaints since 2003, but the Bush Administration decided not to act on them.

Obama's economic stimulus plan could spur fresh trade battles. Some in Congress insist that U.S. steel, telecom equipment, and other goods be used in new, federally funded infrastructure projects including power grids and bridges. Such "Buy American" provisions could be challenged by other nations—and in Congress by U.S. companies who say the rules will only drive up prices for materials they need. "It sounds patriotic," says Lewis E. Leibowitz, general counsel for the Consuming Industries Trade Action Coalition. But Buy American "can really hurt a lot of companies."

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