Obama and trade

Jan 14, 2009 Editorial

Jagdish Bhagwati is the world’s foremost academic defender of the “free trade” credo that had undergirded the globalisation phenomenon over the past four decades. Early last year, during the Democratic primaries, he weighed in with an opinion piece in the Financial Times comparing the credentials of the major candidates.
The caption said it all: “Obama’s Free-Trade Credentials Top Clinton’s”, and was very influential after it had been revealed that Obama would consider reopening the NAFTA agreement with Canada and Mexico, “to increase protection for labour and the environment”.
A year later, and after a lot of water having flowed under the economic bridge, Professor Bhagwati has reversed his view on now President-elect Obama’s free trade credentials. And in fact, just a week before the latter’s inauguration, Bhagwati has actually issued a strident warning. Obama’s “eloquent silence on key trade issues, and his failure to balance his protectionist appointments with powerful trade proponents that would produce a “team of rivals” require that we …sound an alarm.”
Because small export-driven nations such as ours are heavily dependent on a least distorted world trading system, it is important that we appreciate the position of the new leader of the largest economy in the world on the issue.
Professor Bhagwati is firstly concerned about Obama’s support for the multilateral trading system. Conceding that “The Doha Round is on hold, and Obama could not move it forward even if he so desired,” he noted that, “Its completion turns critically on the US making further reduction in its distorting agricultural subsidies.”
He claimed that Obama, “Missed the opportunity provided by the G20 (meeting of November 15 last) affirmation of the importance of trade to affirm resoundingly that he attaches the highest priority to closing the Doha Round and will work on this urgent task throughout the first year of his Administration.”
Developing countries are afraid of low-cost, subsidized U.S. farm products flooding their markets, essentially putting family farmers out of business. Until the U.S. significantly reduces these subsidies, further progress on this multi-lateral trade agreement is effectively dead in its tracks. In fact, Obama’s renewed pressure on the WTO to enforce other countries’ subsidies could then bring into question the subject of U.S. agricultural subsidies — still a sore point in the international trade community.
The failure of the Doha Round has led to a fresh wave of bilateral trade agreements between China, the Middle East, Latin America and Africa. Further U.S. protectionism at this time will only increase this activity, thus pushing the U.S. economy further out of the trade loop and further into economic decline. The significance of Mr Obama’s current fulsome support for the bailout of the US auto industry was highlighted by Dr Bhagwati. He proposed that subsidies to specific industries can play the role that trade barriers did in the 1930s to precipitate the Great Depression.
If Detroit is bailed out, as Mr Obama proposes, and violates the 1995 WTO Agreement on Subsidies and Countervailing Measures (SCM), many other countries will follow suit. Even the conservative Wall Street agreed: A bailout will likely entrench and expand protectionist practices across the globe, and thus erode the foreign sales and competitiveness of U.S. multinationals. … That would be bad for America.”
Bhagwati hopes that “Obama declares, unambiguously, that any action on the bailout will be WTO-consistent”, but under the circumstances, this eventually appears unlikely.
Even more insidious, however, is President-elect Obama’s appropriation of US labour and other protectionists’ cynical use of the term “fair trade” to block the consummation of FTA’s on the ground that labour regulations in partner countries must bring their practices “up to the US standards”.
This is just a backdoor ploy to stifle free trade, raise protectionist walls in the US, and deny poorer countries a fair shake to enter the lucrative US markets — in the name of protecting those poor workers’ rights. He also wants to pressure the World Trade Organization to enforce current agreements and stop “unfair subsidies”! “Fair trade” had originally been used to gain access for marginalised producers in poor countries, but this newspeak usage does the opposite.
We hope that Professor Bhagwati’s concerns are proven misplaced, but we should keep our powder dry.

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