The Politics and Likely Trade Policies of the Obama Administration: The Doha Round, preferential trade agreements, and Asian regionalism

In this presentation, I should like to set forth my views and analysis on two sets of issues: (1) the politics and likely trade policies of the Obama administration and (2) options for a U.S. response to, and participation in, the Asian regional economic architecture.

The Obama Administration's outlook on trade policy

Regarding U.S. trade policy and politics, it first should be noted that trade policy has traditionally been considered an extension of foreign policy, but in truth trade policy today is intimately intertwined with domestic policy. Political scientists see trade policy as a two-level game; one level domestic and one foreign. After negotiating an agreement with foreign actors, that agreement must be sold to sometimes skeptical domestic actors. One must also take into account another aspect of trade policy that is uniquely important to the United States: under the Constitution, full authority for trade policy rests with the legislature rather than the executive branch of government.

Coming directly to the specific situation in the United States today, President Obama's Democratic Party is deeply divided on trade policy. From the mid-1990s, two-thirds of Democrats in the U.S. House of Representatives have generally opposed new free trade agreements (FTA) and granting trade promotion authority (TPA) (even to President Bill Clinton, who was the leader of their own party). In the Republican Party, elements of old-fashioned protectionism do exist, but are less significant than among their counterparts in the Democratic Party.

Bill Clinton's support for NAFTA and the conclusion of the Uruguay Round were significant because of the leadership he asserted against the anti-free trade sentiments among Democrats. After these accomplishments, however, President Clinton did not challenge the economic nationalists in the Democratic Party. As for President Bush, his Administration and the Republican Party did not deem it worth the effort to win over Democrats on trade, so many trade measures were pushed through without Democratic support. Thus President Obama has inherited, in the Democratic Party, increased skepticism toward trade and adamant opposition to further trade liberalization by key elements of the Democratic coalition--labor unions and some environmental and so-called consumer organizations, particularly those associated with Ralph Nader.

Further, as noted above regarding the U.S. unique constitutional authority over trade, President Obama has inherited heightened tension between the executive and the legislature over the direction of trade policy. When the democrats gained control of Congress in 2006, they took positions against both Bush and the executive branch. Democratic House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, were in effect the leaders of the party and this assertion of leadership in the trade policy arena continues with the arrival of a Democratic president. The Democratic Party will be looking to trade more as a way to advance domestic policy, rather than an area of foreign policy. This is compounded by the widespread belief among Democratic members of Congress that additional authority given to the executive branch in the early 1930s should now be taken back by the legislature. This stance in turn will lead to pressure to have Congress more involved in trade negotiations.

For instance, one example of this pressure has been the idea for a trade enforcement officer in the Office of the U.S. Trade Representative (USTR) to handle dumping, countervailing duties, and other trade remedies actions independent of the US Trade Representative. The effect of creating this office would be to hem the president in and vitiate his authority to make final decisions on retaliatory trade measures.

President Obama will have to react to pressures from both parties to "take back legitimate authority" from the executive on many aspects of trade policy. But his task will be complicated by the realities of election results in both the 2006 and 2008 elections. Two-thirds of newly-elected House democrats in 2006 ran on platforms with explicit anti-global themes, as did a majority of newly-elected House Democrats in 2008. This presents a problem for Speaker Pelosi since many 2006 and 2008 Democratic representatives are bound to these positions now that they have been elected. Since many of these new democratic representatives took seats in previously republican districts, the democratic leadership must focus on retaining those seats in 2010. This mix of trade politics will make things difficult for President Obama.

Finally, President Obama's views on trade are not clear. After attacks during the Democratic primaries against NAFTA and against corporations who invested outside the U.S. he has since backtracked somewhat, mollifying Mexico and Canada on NAFTA and speaking generally against increased protection during the worldwide economic crisis., However, the President's trade policy remains a mystery to trade policy analysts; and many believe that it is doubtful that he will make trade policy an important element of his administration during the first year..

Going forward, it is quite likely that foreign policy, diplomatic and security considerations will come back into play during the Obama presidency. Secretary of State Hillary Clinton seems to be moving to reassert the State Department's role in terms of economic diplomacy. The U.S.-Korea Free Trade Agreement (KORUS FTA) will most likely be passed within the next two years, but the key to its passage will be foreign policy considerations. Secretary of State Clinton seems ready to play a role in stressing to the president that it is imperative that the agreement be approved for the sake of diplomatic and security relations with South Korea, a key U.S. ally of 50 years.

In the U.S., the politics of bilateral and regional agreements are very different from the politics of the multilateral system. The successful conclusion of the Doha Round is supported in the Democratic party platform. Should the Democrats choose to make the Doha Round a priority, there would be substantial bipartisan support for it. On the other hand, there is little chance of the Doha Round concluding before the end of 2010. This is because there is still great disagreement over agriculture, manufacturing and services market access proposals. Also, the positions of U.S. interest groups and Congress hardened after negotiations failed in July 2008. Thus, the new USTR will have to be tougher than the Bush administration and demand changes in the Doha text that were not demanded before. For instance, there will have to be a commitment to negotiate over specific industrial sectors and specific service sectors. Given current economic conditions, some U.S. agricultural concessions may be taken off the table. Overall, things have become substantively more difficult.

I have argued that the World Trade Organization (WTO) should suspend negotiations until January 2010. Many trade policy analysts do not understand the negative impact the last four years of high-level officials calling for the end of the Doha Round, with little or no results, have had on the public image of trade policy. The G20 meeting in April, contrary to popular hopes and expectations, will not lead to any major breakthroughs in trade policy.

There is also a view in some U.S. trade policy circles that the Doha Round should be skipped because there are not enough issues on the table. It is believed that the only reason the U.S. should go back to negotiations is if the agenda is expanded. This policy is inadvisable as there is no easy way to end the Doha Round. Also, there is little possibility that the U.S. or the EU could simply put a new agenda forward and expect better results or that the 150-odd members of the WTO would go along.

Regional and bilateral agreements are particularly difficult because the U.S. has negotiated bilateral agreements with smaller nations that included items that are beyond those usually dealt with in trade agreements--such as labor, environment, capital controls. On many of these issues there is deep disagreement among political groups in the U.S. Further, it is not clear that large countries such as Brazil or India would agree to the same conditions that smaller countries like Peru or Colombia thought they had to accept. The main divisions will be whether bilateral trade agreements can be used to force changes in domestic laws and regulations in key areas.

It is unclear how President Obama will move forward with this issue. Most likely, the Administration has not considered issues pertaining to how FTA negotiations can be reinvigorated, like the Free Trade Area of the Americas. It may be difficult to do this while putting new items on the table like labor, environmental and other provisions.

Regional Trade Policy for East Asia.

Assuming forward movement in East Asia is possible, there are a number of options possible. The U.S. could continue on with individual FTAs. It could move beyond current FTAs and attempt to reinvigorate negotiations with Thailand and Malaysia, for example. In regards to the KORUS FTA, if the agreement is ratified by the U.S. Congress or if the EU and South Korea sign their free trade agreement, the "domino effect" will be set off. In that case, Japan will have to approach the U.S. and/or South Korea for FTA negotiations. Given this domino logic, China and Taiwan become key wildcards.

It is probably not politically possible to have an individual FTA with China. However, the U.S. should negotiate an FTA with Taiwan, regardless of China's views on the matter. One possible scenario that would unite the political left and right in the U.S. over this issue would be to bring China and Taiwan to the negotiations together, though this is unlikely to happen.

Alternatively, the Obama Administration may raise a Free Trade Area of the Asia-Pacific (FTAAP) to top priority. However, that idea may fall into the trap of being labeled utopian and not plausible at the current time. In the interim, the U.S. could press for a harmonization of existing FTAs among APEC nations, thus building a coalition of the willing within APEC. Singapore, Chile, Brunei and New Zealand (the P4) have their own FTA amongst themselves; and the Bush Administration and the Japanese government have signaled their desire to join this FTA.

Finally, the Obama Administration might just stand back--particularly if it cannot get its house in order on trade due to domestic and Democratic Party issues. In this instance, the best action for the Obama Administration to take would be to signal to U.S. allies in the region that the U.S. will not oppose the East Asian Summit or the ASEAN Plus Three. However, The US would convey to its closest allies in East Asia--Japan, Singapore, Korea--that it would expect a seat in negotiations of any serious East Asian regional FTA. In the immediate future, the P4 negotiations are scheduled to begin in March 2009, so the Obama Administration will have to make some kind of a judgment on whether to seriously request to engage in those negotiations or not (After this session, the Obama asked that the negotiations be postponed until it had its team in place and could review the issues).

Finally, in regards to any of the options set forth, foreign policy considerations are going to be increasingly important. The continued growth of China's economy, authority and soft power in the region will begin to impinge on even those elements of the Democratic Party which may be skeptical of globalization. The USTR should, ideally, be able to look to the Departments of State and Defense for support for action by the U.S. in East Asia, as Secretary of State Condoleezza Rice and Secretary of Defense Robert Gates did for the Colombia FTA.

Q: Given current economic circumstances, including unemployment that is forecast to hit 9%, do legislators want to take more protectionist moves?

Many people in the U.S. talk about China's aggressive policies. What are your thoughts on the possibilities of Chinese industrial overcapacity leading to trade frictions with the U.S., EU, or even Japan?

Claude Barfield
First, it is true that both in the U.S. and around the world there have been sporadic moves toward protectionism. The trade policy community has been very quick to point out when individual nations increase certain tariffs or otherwise take action against imports, but so far it has remained containable. The problem is that the world is still not completely through the economic crisis, so it may spiral downward later. Additionally, while the distortive effects of protectionism remain the same, there are now new and different vehicles for such distortions. Protectionism may not come from increased tariffs at the border, but could come from, for example, subsidizing automobiles and excluding plants from other countries that employ American workers, or President Sarkozy of France persuading French companies to close factories in the Czech Republic and Hungary before they close factories in France, even though this may not be economically the best decision.

As for China, the president is finding that governing is different from campaigning. The Administration is already beginning to mute the loose, anti-Chinese language of the campaign. Economists who work closely with the president know that going against China unilaterally would be a disaster for both China and the U.S. Economists are deeply divided on the impact of the Chinese currency's value, but politicians are convinced that this policy is hurting the U.S. My hope is that the Administration will be very careful and not try to do anything that would upset the economic balance between the U.S. and China. China may be labeled a currency manipulator, but Congress should not be immediately moved to turn that into a trade action. The China question also depends on whether Obama is willing to undertake such action. Currently, his willingness to stand up to the interest groups in his own party is unknown as there has yet to be a situation requiring him to do that.

Very little media coverage has been given to President Obama's recent remarks to a joint session of Congress regarding the international economic situation, trade, protection, or other related matters. President Obama missed an opportunity to give a ringing defense of freer trade and investment to help both the world and the U.S. The same can be said of the "Buy America" language used in the address. This was an opportunity to tell the world that the U.S. is open for business. One of the reasons that Asia did not swing toward protectionism in the wake of the Asian financial crisis was that the production-sharing paradigm represented a different paradigm than standard end-product trade. The private sector quietly told governments that protectionism would hurt businesses because of the fact that 40% of exports are moved between firms, allowing them to do more business.

Q: What priority will the Obama Administration put on trade policy? It seems that nominating former Dallas Mayor Ron Kirk to be the new USTR was a bad sign for trade policy.

Claude Barfield
Actually, President Obama's first choice for USTR, Representative Xavier Becerra, sent a worse signal as he had a very bad record on trade. When Representative Becerra turned down the offer for the position of USTR, he told the press that he did not believe that trade would be the first, second or third priority of the Obama Administration. Mr. Kirk, however, does not send a strong positive or negative symbol. What must be understood is that the USTR is a second- or third-order appointment. Normally, the appointment of the USTR is an afterthought that is prioritized behind other higher-level appointments by the Administration. The question comes down to how much authority Mr. Kirk will have.

However, Gary Locke's consideration for Commerce Secretary could be a very good appointment as he has a great history being the former governor of Washington, a typical West coast trade state. His governorship was defined by pressing new trade arrangements and opportunities with East Asia.

Q: To what degree will foreign and security concerns play a role in multilateral trade negotiations under the Obama Administration?

Claude Barfield
The role foreign and security policy will play in multilateral (and regional) trade negotiations will increase. What must be understood is that the Democrats have come into office attacking the unilateralism of the last eight years and calling for a more multilateral approach to foreign policy. While the Secretary of State may not be arguing on behalf of the USTR directly, there is an argument to be made for the ultimate leadership of the U.S. being in multilateral institutions. It is hard to tell how this will play out if Secretary Clinton places trade in the priorities of the State Department. Many trade positions currently taken by the USTR originated in the State Department. The question now becomes one of the inner dynamics of the State Department, and the relationship between Secretary Clinton and President Obama.

Q: With reference to South Korea, would it be possible for the U.S. and Japan to set up an FTA that excludes agriculture?

Claude Barfield
No, agriculture is a necessary step for entering into negotiations. South Korea compromised on rice to reach an agreement on the KORUS FTA, which was meaningful, but piecemeal. The same thing will have to be true with Japan. Just as South Korea partially opened its rice market, there has to be a gesture to move negotiations forward.

Q: Regarding APEC, the consecutive hosting of APEC by Singapore, Japan and the U.S. in the next three years is a good opportunity to revive APEC if there is any interest in doing so. Do you have any suggestions for the U.S. to revive APEC? Although the FTAAP was seen as a utopian goal, can these three countries get together to lay down the steps towards achieving this utopian goal?

Regarding the Japan-U.S. FTA, Singapore has FTAs with both Japan and the U.S, so with a Japan-U.S. FTA, these three countries would be enmeshed with each other, thus helping to move towards future free trade goals. What do you think of the possibility of starting discussions over a possible Japan-U.S. FTA?

Claude Barfield
It is an interesting fact that Singapore has FTAs with the U.S. and Japan, while the U.S. and Japan do not have one between themselves, but this is because Singapore did not make an issue out of agriculture. There is no getting away from agriculture when considering a Japan-U.S. FTA. This does not mean that one would expect that Japan would throw open its agricultural sector in the next 5-10 years, but there has to be some road map toward liberalization or it will not get past Congress.

Regarding APEC, there is certainly an opportunity presented to Singapore, Japan and the U.S (as APEC hosts in 2009, 2010, and 2011 respectively); and the three governments should not miss it. There is meaning behind being a lead country in APEC in a given year. It would be a shame if the Obama Administration does not work to take advantage of this combination sometime this year. While it may be late for Singapore, the leadership in Singapore can at least suggest that such planning begin. These efforts need not end up in a specific treaty, but consideration can be made for what kinds of things can be done to advance the next steps of liberalization, trade facilitation, and development under the aegis of APEC.

The U.S. must be careful due to the early voluntary sectoral liberalization plan it put forward in the 1990s that backfired. Because of this, it will be up to Japan and Singapore to take the lead. The Obama Administration may be amenable to pushing economic development issues more than the Bush Administration. The deliverables are not yet clear, but one must consider how to start thinking about, or discussing harmonizing or pulling together existing agreements within APEC. The first thing to consider would be what to start with in Singapore this year and what kind of vision will be put forward. After this, talks should be undertaken with Japan and then South Korea. This could be a great political plus for the Obama Administration. Just as President Obama is starting a reelection campaign in 2111, the U.S. will host the APEC Summit and President Obama can reap the benefits of such cooperation.

APEC advances may have a better chance of succeeding now. Two very different facts emerged since the 1990s. First, there are now over 100 FTAs that have been signed by East Asian nations since 1998. Essentially, items such as sectoral reciprocity agreements have now become the Asian way. Some of these rules are not strong, but the paradigm ("concerted unilateralism")of the 1990s is now broken. Second, ASEAN itself has moved to become a legal entity and is moving toward reciprocity-based agreements. They did fail badly this year on moving away from consensus-based actions, but there is an increasing sense of the need for enforceable obligations within ASEAN. These changes have meaning in terms of planning for the future of APEC.

Q: Regarding the tough positions taken by Congress last fall with the Doha Round negotiations, please explain the background of those positions.

On his recent visit to Washington, Prime Minister Aso asked President Obama about the Doha Round, but President Obama's response was weak. This supports pessimism toward the Obama Administration on the multilateral trade system. Who will be the most influential person in the Obama Administration to push multilateral trade?

When engaging in trade negotiations, competition policy is most important for the Japanese government. What are your thoughts on an institution for discussing a new agenda on investment and competition policy?

Claude Barfield
The OECD has done very good studies on investment, though these are very sensitive issues. There was already much bitterness in the WTO over the Singapore issues. Raising that issue again will create a very bad situation.

As for President Obama, he has said that he is in favor of a successful conclusion of the Doha Round just as other countries are, but he will probably not go beyond that statement. In the near-term, looking to the G20, the Administration will not even have a trade team in place until the end of March. While the U.S. has very good trade diplomats, they will not be able to act without a commitment from the White House.

Congress's tougher view on the Doha Round was due to the vagueness of what was being negotiated. It is very hard for any interest group to know how much of a market opening is being created in a certain clause. When negotiators left Geneva, the U.S. industry and service sectors could not see from the effects of what was discussed at the Doha Round.

Q: Regarding your proposal of a one-year suspension of formal negotiations, would that not lead to a fatal loss of momentum for the negotiations? Also, regarding the standstill pact following the suspension, do you think it will be realistic for members to agree to formal obligations that go beyond what is set out in the WTO rules?

Claude Barfield
The standstill pact suggestion is not meant to have all parties simply leave the negotiating table for a year. It would allow WTO members to observe, discuss quietly, and assess what opportunities are available. The standstill attempts to stop the erosion of credibility of the global multilateral trade regime. While this may cause difficulties for the WTO Director-General, he has a chance to be bold and lead the Secretariat to demonstrate exactly what has been accomplished and what issues are holding the negotiations back. No individual country could be expected to take on this role, so it is best done by the WTO Secretariat and the DG.