Obama’s Trade Policy Taking Shape – Part II

DURHAM, NEW HAMPSHIRE: Can the comatose Doha Round of World Trade talks be revived? The WTO "mini-ministerial" meeting held in New Delhi on September 3-4 may have given it a shot of new life, thanks to the initiative of India’s new Trade Minister, Anand Sharma, appointed by Prime Minister Manmohan Singh after his resounding electoral victory last May. It was India’s foot-dragging that had cause the collapse of last attempt to resuscitate Doha Round. All eyes will now go to the also-new American President, who has already been charged by the Wall Street Journal with "barely raising a finger to resurrect Doha." But it is now clear that without a WTO agreement the bilateral free trade area (FTA) agreements that Washington has been focused on will not free up US potential.  

The case to finally complete the Round makes special sense now because global trade is down by 9 or 10 percent, and its revival is widely seen as central to restoring global economic growth. Britain's Gordon Brown has pressed that case to Obama, reflecting the major economies' especially hard-hit exports. The US exports are off by more than 20 percent, with much worse results in Germany, Canada and especially Japan, which is down by 40 percent from last May to this year.

India's shift bears on this because Prime Minister Singh changed cabinet posts in a way that signaled a Doha opening. Freed from the need to rely on anti-trade Left parties in a coalition, Singh, the harbinger of economic liberalization in India, replaced former Commerce and Trade Minister Kamal Nath, whose unyielding and confrontational style was widely seen as a key factor in last year's Doha Round stalemate. His replacement with Sharma, although certainly no pushover, brings to the job a strongly foreign affairs background and a record as a key defender of India's nuclear power deal with the US   

Once appointed to the new post, Sharma met with America's also-new trade chief, Ambassador Ron Kirk, the EU Trade Commissioner and Secretary of State Hilary Clinton. At the G8 and G20 meetings earlier this year Singh said he expected a final worldwide agreement during 2010 and Sharma "reaffirmed our commitment to take the Doha Round to a successful conclusion," adding that "India's stand is for a rule-based trading regime." 

This places the world trade ball squarely in America's court, but much uncertainty surrounds the US posture. USTR Kirk says he will apply a "new paradigm" to trade, but Obama has so far said only that he will tighten up on "Free Trade Areas," and his long-awaited major trade speech is still waiting.

Meanwhile, the US Congress is fed up with the whole "free trade" format, and 106 House members are now on record to reconsider all FTAs. That may lead to a review of the extent to which America's FTAs have met their promised goals. They stem from Washington's frustration during the 1986-94 Uruguay Round, when it sought to remind the Europeans in particular that it might seek other partners with whom it could sign bilateral and regional Free Trade Agreements.

It was a good tactic and helped bring the completion of the Uruguay Round, but in 2001, when the Doha Round began, Robert Zoellick was the US Trade Representative and he had learned the tactical lesson all too well. The number of American FTAs accelerated on his watch, and prompted their worldwide proliferation. The WTO now records an astonishing number, almost 400, of these preferential trade pacts, and while they vary greatly in their particulars, the EU and especially China have seized on the format. 

Beijing has used them to promote its special East Asian trade arrangements which in turn has prompted many in the US to call for more. Washington already has FTAs in effect with 17 nations and three others, with Korea, Colombia and Panama, are now awaiting approval. The five most important American FTAs already in operation are with Singapore, Australia, and Chile, and with Mexico and Canada in NAFTA. Because they've been in effect for several years it's possible to see how the US has fared with its FTAs, and the record is in the accompanying chart.

The chart traces each FTA partner's import growth over the most recent five years, and shows that in every FTA partner but Chile, the growth of imports from the US  has lagged behind each partner's import growth both from the EU and its import growth overall.  

It is not only that the growth rate of American imports has lagged behind competitors. Also troubling, though with one caveat, is the dollar value of US imports in each partner's market. The caveat applies to Canada's and Mexico's US imports: America's market dominance is so large and long-standing in both markets that their slow-growing US imports will not soon change that picture.

But that is far from the case in Singapore or Australia, which in past years have been strong American markets. They will not be in the future, despite their FTAs with the US   In Singapore, recent US and EU imports have been roughly equal, at about $32 billion each. But in 2006-07 Singapore's US imports grew by just 8 percent, compared with 19 percent from the EU. The record is worse in Australia. Its US imports in 2007 were $20 billion, well below the $34 billion from the EU, a gap sure to widen because Australia's EU imports in 2006-07 grew by 25 percent and by less than 8 percent from the US  

These findings question the true value of America's "Free Trade Areas."   Some US exporters have no doubt gained. But overall, FTAs have not well served American interests and the much-ballyhooed Korea FTA ("KORUS") is no exception. Its critics complain it slights environmental and labor concerns and provides too little access for US cars and beef, but its problem is deeper and pertains to the just-ended New Delhi meeting.

The fact is that both Korea and the US would gain less from KORUS and much more from completion of the WTO Doha Round. That was the principal finding of an exhaustive study of KORUS that was the focus of a day-long meeting at which I was the Rapporteur. Robert M. Stern and Kozo Kiyota found that while the KORUS doubtless would bring advantages – mainly to Korea – a multilateral agreement would be better for both: "the effects of global free trade were calculated and shown to be far greater for Korea and the United States compared with the bilateral FTAs."

Economists have long stressed that FTAs, in reality "preferential trade agreements," are inconsistent with WTO principles and that view is widening. The current Congressional resistance to FTAs has been reinforced by the Democratic Leadership Council's call to end the policy after ratifying the three already signed. The Economist has just written that "regional trade deals are no substitute for a Doha agreement. Indeed they are its enemy."

Simultaneously, Trade Minister Sharma announced that the Doha deadlock "had been broken," hinted that bilaterals would remain "adjunct" to the multilateral main game, and set 14 September for negotiators to "restart the Doha process." Sharma's back is being covered in this by his Prime Minister, the ever-cautious Singh is not likely to have made the 2010 commitment without high confidence. The result is that Washington will be less able to blame India if the effort fails, which puts the spotlight once again on Barack Obama.