The great free-trade debate

Business Times - 17 Mar 2009

The great free-trade debate

A consensus is unravelling in Washington amid a Democratic clash over policy


PUNDITS tend to describe the debate over trade policy in the Democratic Party of the United States as an ideological clash between the left-oriented protectionist wing of the party (labour unions; environmentalists; anti-globalisation activists) and its more centrist and reformist pro-free trade forces.

But, in fact, whether a Democrat politician is in favour or against an activist global trade liberalisation agenda has less to do with ideology and more to do with class. It is a classic contest between the party's yuppies and its blue collars.

The yuppies represent the economically mobile and college-educated members of the party: Professionals from the large cities, especially in the East and West Coasts, who in addition to being more liberal on socio-cultural issues, such as abortion and gay rights, were also more receptive to the economic changes brought about by the free-market revolution of the 1980s and the drive towards the globalisation in the 1990s.

After all, these are the lawyers, business executives, academic specialists and other successful professionals who had benefited from the growing integration of the US economy into the global economy.

The blue collars tend to come from struggling agricultural sector and the crumbling industrial towns in the Mideast and the South. Not having the kind of education and skills that are required if one wants to succeed in the age of globalisation, many of these blue collars have been marginalised economically and socially. The yuppies have been the driving force behind the unsuccessful presidential campaigns of Gary Hart, Bill Bradley, Michael Dukakis and Al Gore, and the successful one of Bill Clinton - politicians who were committed to neo-liberal economic policies, including an emphasis on the need to pursue free-trade policies. The blue collars backed politicians with close ties to the labour unions and a more social-democratic approach to domestic and global economic policy issues.

During the 2008 presidential Democratic primaries, the blue collars mobilised behind Hillary Clinton, who notwithstanding her yuppie roots had emerged as a beer-drinking populist and the proponent of the interest of the low-middle class and poor workers who blamed global competition from China and India for their economic woes.

The salad-eating and wine-sipping and suave Barack Obama was seen as the yuppie favourite. Mrs Clinton seemed to set the tone of the debate over trade among Democrats by calling for revisiting the North American Free Trade Agreement (Nafta) that ironically her husband had helped get approved, putting pressure on Mr Obama to follow in her footsteps on the issue in order to win the Democratic primaries.

Most insiders seemed to agree during the presidential campaign that if either was elected as president, he or she would end up rejecting a protectionist agenda and adopt a more Clintonite (that is, Bill Clinton) approach on global trade policies.

But these upbeat speculations had evolved before the great financial crisis of 2008, which ended up transforming the debate over trade policies when both the blue collars and the yuppies joined forces and co-produced a Democratic consensus that is sceptical of, if not hostile towards, the idea that liberalising global trade is in America's national interest.

The national consensus on trade policies had started to shift even before the onset of the financial crisis, as opinion polls indicated that a growing number of Americans perceived globalisation to be running contrary to their economic interests. The credit crunch, the housing crisis and the rising level of unemployment among both blue-collar and white-collar workers seemed to convince a growing number of educated professionals to join the ranks of the globalisation sceptics. This increased the political power of the protectionist forces, with leading Democratic lawmakers such as Senators Sherrod Brown (Ohio) and Jim Webb (Virginia) emerging as the most vocal anti-free trade aka 'fair trade' advocates on Capitol Hill and reducing the influence of Democratic free traders such as Senator Max Baucus.

If you talk with President Obama's aides, they will emphasise that the young, Harvard-educated lawyer from the global business capital of the Midwest, Chicago, is an internationalist who remains bullish with regard to the prospects of free trade. And he is surrounded by economic advisers like Tim Geithner, Larry Summers and Austan Goolsbee, whose commitment to free-trade principles is undiminished.

Yet since his election, President Obama has maintained a wishy-washy, neither-here-nor-there stance on global trade, and has been sending mixed messages on the issue. The most optimistic interpretation of Mr Obama's trade agenda would suggest that he has placed himself somewhere in the middle in the debate between free traders and fair traders.

Interestingly enough, Mr Obama's first choice for the position of trade representative, Xavier Becerra, a Democratic congressman from California, withdrew from consideration after telling colleagues that Mr Obama was probably going to place global trade issues on the policy back-burner.

Ron Kirk, Mr Obama's current nominee as trade representative, had a reputation of a free trader when he served as mayor of Dallas and lobbied in support for Nafta. But during his confirmation hearing in the Senate last week, he seemed to underscore Mr Obama's spiritless approach on trade.

'I believe in trade and will work to expand it, but I also know that not all Americans are winning from it and that our trading partners are not always playing by the rules,' Mr Kirk said during his testimony. 'I do not come to this job with deal fever,' he insisted. 'We're not going to do deals just for doing so.'

Hence if Mr Kirk, as expected, is confirmed as trade representative, it is clear that he will slow down the drive towards trade deals that characterised the policies of the administration of former president George W Bush and put more emphasis on promoting fair trade by highlighting the need to protect workers' rights and the environment through strict enforcement mechanisms during trade negotiations.

Indeed, Mr Kirk told lawmakers last week that the Obama administration would review the trade accords signed by the Bush administration, including those with South Korea, Colombia and Panama. Most observers believe that the chances of pressing ahead with a trade accord with Seoul is slim at a time when the US car industry is on the verge of bankruptcy and would resist any effort to open American markets to more Korean car imports.

The Obama approach on trade, while angering many free traders, makes political sense. As more blue collars and yuppies lose their jobs, houses and savings, Americans are furious with the behaviour of Wall Street and Corporate America and blame global trade for much of their misery. They are going to resist a new effort to sign trade accords with emerging economies. Moreover, Mr Obama and the Democrats are not in a position to antagonise the powerful trade unions and their allies on Capitol Hill where the anti-free trade mood is growing day by day.

Hence a groups of Democratic lawmakers has called on Mr Obama to put all planned trade negotiations on hold, while leading senators are continuing to pressure the administration to 'punish' China for its refusal to devalue its currency. At a time when the administration needs the Chinese to continue financing its expanding deficits, the last thing that Mr Obama wants to see is a new trade war with China.

From that perspective, maintaining the status quo on trade and refraining from launching new trade initiatives could help calm down the China bashers in Congress. But then Mr Obama also faces the danger that giving in to the protectionists on Capitol Hill and putting the trade agenda on hold could end up worsening global economic conditions and lowering the prospects for economic recovery.

As a recent World Bank reports suggested, global trade volumes are likely to decline this year for the first time since 1982 and there are signs of rising protectionism and economic nationalism not only in the US but also in many other industrialised nations and emerging economies.

And as any economic historian will tell you, mounting protectionism in the US and around the world in the 1930s aggravated the global economic downturn of the time and helped produce the Great Depression, which is clearly a lesson that President Obama should recall as he prepares for next month's meeting of the G-20 economies in Britain.

Thus President Obama is now facing two intertwining challenges when it comes to his global trade agenda. He needs to reactivate US role as the engine of global trade liberalisation. But that could only happen if the new president succeeds in convincing the American people that expanding global trade is in America's long-term economic interest.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


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