From the May 22, 2009 Weekly Standard Online
May 22, 2009
by Irwin Stelzer
The bad news is that President Obama is keeping his campaign promises to raise taxes on upper-income families, borrow-and-spend, use taxpayers' money to fund the survival of auto-company dinosaurs, take over the health care system, and otherwise pursue an agenda that it is an understatement to describe as ambitious.
The good news is that President Obama is not keeping all of his campaign promises. There has been no precipitous withdrawal from Iraq, Guantánamo is likely to remain the home of terrorists for some time, the promised "transparency" is not so all-encompassing as to include pictures of the treatment accorded the bad guys we managed to capture, and we have not lurched into protectionism. It's Bush 2.0 grouse liberals, according to the Financial Times.
Recall that during his run for the White House Obama opposed the trade agreements with Korea and Colombia, accused the Bush administration of failing to deal with China's "manipulation" of its currency, threatened to use "the hammer of a potential opt-out" to force Mexico and Canada to renegotiate the North American Free Trade Agreement (NAFTA), and quickened the hearts of his trade union supporters by hinting that the era of free trade, which he said benefits multinationals but not the average working family, would end as soon as he arrived in Washington.
Campaigning is one thing; governing is another. Seated in the Oval Office, "Obama is subject to the same geopolitical imperatives as was President Bush," says Rod Hunter, who served as President Bush's Senior Director of the National Security Council and is now a colleague of mine at the Hudson Institute, a Washington think tank. It is one thing to throw raw meat to the trade union lions during a campaign, quite another to antagonize Canada, which has troops in Afghanistan to supplement our own; Mexico, which is an ally in the war on drugs and a potential source of oil supplies; South Korea, important to our efforts to contain its Northern neighbor, and other countries.
So we have the new Obama. NAFTA stays, as is; Treasury Secretary Tim Geithner, who during his confirmation hearings accused China of manipulating its currency, now says it isn't; and the President has announced "a plan of action" to obtain congressional approval for pending free trade agreements with Panama and South Korea, and is in conversations with Colombia's President, lvaro Uribe, about getting the agreement with his country through a very reluctant congress. Obama has found that he also favors " a strong market-opening agreement for agriculture, industrial goods and services through the Doha development round [of negotiations at the World Trade Organization] and through other negotiations."
Add to that the repeated statements by the President's U.S. Trade Representative Ron Kirk, who has been telling relieved business audiences that trade plays "an important role in creating and sustaining better-paying jobs here at home." Specifically, Kirk wants to expand trade with the Asia-Pacific region because "there is an extraordinary upside to us" in doing so.
"It is reassuring that President Obama's trade agenda appears to be aligning closer to those of Presidents Bush and Clinton -- and to their nine predecessors -- rather than to the protectionist positions he took on the campaign trail," Theodore Kassinger, former Deputy Commerce Secretary and now a lawyer with O'Melveny & Meyers here in Washington, tells me.
But before awarding the President the Adam Smith Award For Combating Protectionism, consider this. Obama's first priority is his domestic agenda: "reform" health care, restructure the energy industries, involve the federal government more deeply in education, fight the recession, save the auto companies, control bankers' bonuses, revise the regulatory rules that govern the financial sector, and win what is now his war in Afghanistan. Trade is lower down on the list.
Worse still, there are signs that the President is willing to allow the state politicians in charge of disbursing stimulus funds to adopt rigid "buy American" practices, even though his stimulus bill restricts such practices to those that do not violate our trade agreements or World Trade Organization rules. Local politicians know that WTO bureaucrats don't vote in their states. So the Washington Post reports, "The town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions." Towns in Ontario retaliated by barring U.S. companies from municipal projects. We might not be in a flow-blown trade war, but the number of skirmishes is increasing, and not only with Canada.
It is also clear that the President will not fight to prevent protectionist measures from creeping into apparently unrelated legislation. Banks receiving bail-out money are chafing under rules that prevent them from hiring talented foreign workers. Jamie Dimon, CEO of JPMorgan Chase, used the occasion of his company's annual shareholders' meeting to denounce these restrictions as a "complete and utter disgrace" that will inevitably invite retaliation against Americans hoping to work abroad.
And Toyota and other foreign firms that make cars here in America -- American jobs for American workers -- are in effect discriminated against by the government's decision to keep GM and Chrysler from meeting the fate to which a competitive market would consign them.
Nothing the President will do on the trade issue, either to free up the international flow of goods and services, or to tip the scales in favor of American firms, will in the end matter as much as his reckless fiscal policy. His budgets project deficits totaling close to $10 trillion by 2019 -- and that assumes that his health care plan will cost only the $635 billion "down-payment" he has put into his budget, rather than the $1.2 trillion experts are predicting. And that he will succeed in a close-to-freeze on defense spending.
That means the U.S. Treasury will be peddling billions of IOUs to investors such as China which already have trillions of that paper in their vaults and whose "appetite for American debt may be shrinking", according to The Economist. So far, so good: the recession-induced flight from risk has led overseas investors to seek a haven in dollar assets. But as the printing presses keep running overtime, and the recession eases, investors will find the mounting risk of being paid in dollars that have shriveled in value too much to bear.
Which is why the dollar hit its lowest level of the year this week, and why for a while it cost less to buy insurance against a default by hamburger-seller MacDonald's than against a default by the world's only superpower. More important, it is why China and Brazil are trying to cobble a trade deal that will allow them to bypass the dollar completely, and pay in their own currencies. This might well be the first step in China's announced intention to develop a currency to compete with the dollar as the world's reserve currency. If it pursues that goal it might bring to reality the prediction of professors Menzie Chinn and Jeffrey Frankel, of the University of Wisconsin and Harvard University, respectively.
"We find that the euro could overtake the dollar as early as 2015 . When combined with other political developments, it might even spell the end of economic and political hegemony . If the euro were to overtake the dollar in a few decades, it would be a once-in-a-century event. But it happened to the pound in the last century, so who is to say it could not happen to the dollar in this?"
So only two cheers for President Obama, less of a protectionist than the candidate bearing the same name, but nevertheless a serious threat to the dominance of the dollar in world trade, and to America in matters even more important than trade.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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