Relax, Democrats Might Not Be So Protectionist After All

Pundits worldwide suggest that Democratic control of the US Senate and House of Representatives after the November 7 election spells doom for free trade. But the Democratic Party has a tradition of economic internationalism, beginning with presidents such as Woodrow Wilson who served from 1913 to 1921. The party’s leaders have put forward a domestic agenda that aims at calming the anxiety of American citizens, according to trade policy analyst Edward Gresser. It includes an increase in the minimum wage, revising energy policy to reduce dependence on foreign oil, financing for stem-cell research, removing tax subsidies for overseas investments and restoring fiscal discipline. The party faces two major challenges: A shift in the global services economy as the internet allows employees to work from any point on the globe and China’s increasing influence over world manufacturing and commodity trade. The Democratic Party, with its wide range of views on trade, has the opportunity and the experienced players to propose innovative policies that provide long-term solutions for the US and the world. – YaleGlobal

Relax, Democrats Might Not Be So Protectionist After All

Free-trade Democrats are not necessarily an oxymoron
Edward Gresser
Tuesday, November 14, 2006
To heal a nation: Trade leadership of Democratic Congressman Charles Rangel might contain US lurch toward protectionism

WASHINGTON: Now that the Democrats are in charge of the Congress, will the US turn protectionist? That fear may be based on misreading of the party’s dominant view and its history.

Taking control of Congress 70 years ago, one of the Democratic Party’s first acts was to launch America’s modern trade policy, through the Reciprocal Trade Agreements Act of 1934. Giving up control of the US House of Representatives in the winter of 1994, the Democrats, with their last act, recalled economic internationalism inherited from presidents Woodrow Wilson and Franklin Roosevelt: approval of the agreement that created the World Trade Organization. In the spring of 2007, as the party returns to power, the summary judgment is that it will not much resemble its liberalizing ancestors. A week before the election, the august “Economist” magazine said gloomily that “a more Democratic Congress would not help the cause of fair trade”; two days after the results came in, Jacob Weisberg of “Slate” asserted flatly that free trade, like Elvis, “has left the building.”

The picture is actually more complex than these predictions suggest. The public is anxious about the evolution of the global economy. The trade-skepticism of many 2006 Democratic candidates, as well as the anti-immigration sentiments growing in the Republican Party, reflect this anxiety. But Democrats remain divided over trade. Some new members of both the House and Senate have been vivid critics, whose worries about low-wage competition ironically mirror the views of the long-forgotten Republicans driven from office in 1932. But the Democrats likely to lead the party on global-economy matters – Congressman Charles Rangel, incoming chairman of the House Ways and Means Committee, and Montana’s Max Baucus on the Finance Committee – are experienced and accomplished managers of trade and finance. Both have begun their tenure by saying they hope to restore bipartisanship to trade policy. And the party as a whole is working toward a domestic-policy program that meets the genuinely profound national challenge that makes the public anxious.

Or, to be more accurate, the two challenges: On one hand, Chinese industry is reshaping world manufacturing and commodity trade. On the other, the internet is integrating vast swathes of the world’s services economy. Both phenomena, though generally positive, make the country nervous – and for good reason.

Statistics released by the WTO last week show that China’s share of world trade – imports and exports alike – has doubled since 2001. China’s trade growth, from $500 billion in 2001 to $1.4 trillion in 2005 and perhaps $1.8 trillion this year, has acted upon the world economy like a large stone dropped into a small pond. Ripples and waves are traveling around the world, some powerful enough to overflow the banks. Commodity prices – zinc, cement, oil, wood, silver – have doubled as demand from China’s industrial belts sucks in imports from Africa, South America and Southeast Asia. American factories, facing a powerful new rival as well as a large new customer, have responded with a vast restructuring; as manufacturing production has grown by $150 billion since 2001, factories have replaced 3 million human workers with computers and robots.

Meanwhile, India’s strength in services is a harbinger of a change of equal or even larger significance. Postwar tariff cuts and container ships allowed trade in manufactured goods to soar past trade in commodities during the 1980s and 1990s. The internet, satellites, ever-more-powerful computer chips and fiber-optic cable now do the same for services – banking, telecommunications, technical support and others. As prices for phone calls and data transfer drop, trade in these fields may surpass manufacturing trade in the next decade, as the IT revolution “globalizes” huge swathes of the world’s services industries. Federal Reserve Governor Alan Blinder suggests this may triple the number of American workers competing internationally.

If sustained, the India and China booms can create a more prosperous world, and perhaps a more stable global economy. The struggles of the Muslim world – the third of the great medieval civilizations, which fell upon hard times in the 19th century just as India and China did, but has not yet recovered – show that the alternative to economic challenge is not comfort and security but threat.

But this reflection does not make change simple or painless. The rise of India and China pose searching questions – on the national level, about America’s century-old status as the world’s leading economy; on the personal scale, about suddenly intensifying job competition and an eroding safety net. A genuinely successful attempt to ease anxieties and make trade policy work can begin with bipartisanship and common ground on trade bills, but must also find domestic policies that ease these anxieties.

Different Democrats have different ideas on how to do it, of course. But the best indicator is the program the party has announced, and the people the Party has charged with implementing it.

The Democratic program for 2007 is moderate, pragmatic and focused on domestic economics. Its goals range from a minimum wage increase to revision of energy policy, financing for stem-cell research, removing tax subsidies for overseas investments and restoration of the fiscal discipline lost in 2001. These are obviously not radical or “protectionist” policies, but first steps toward larger reforms to ease personal insecurities and strengthen American competitiveness. For individuals, this would include a stronger safety net, support for health insurance and pension portability and more effective training and placement policies. For the country, the infrastructure, energy, scientific research, skilled immigration and quality-of-life policies that help sustain growth, technological progress and high-quality investment. The agenda a work in progress, but the outlines appear in the “down-payment” provided by the Democrats’ immediate agenda, and more ambitious blueprints like the reforms proposed by DLC President Bruce Reed and Rep. Rahm Emanuel in their recent book “The Plan.”

Rangel and Baucus, meanwhile, have begun their roles with bipartisan gestures, as both support the administration’s efforts to win permanent Normal Trade Relations for Vietnam this week. The administration has a chance to respond, restoring a foundation for bipartisanship on trade policy by endorsing bills they have advocated for years. Rangel hopes for a rapid extension of special textile tariff benefits for Africa and a new trade benefit program for Haiti; Baucus introduced bills in the last two Congresses to lift tariffs on goods from the major Muslim states and the least-developed countries; both want to boost exports by lifting the trade embargo on Cuba. Administration support for their agenda can be a foundation for cooperation on issues likely to arise next year, from Russia’s WTO membership to attempts to revive the WTO’s Doha Round, Chinese intellectual property piracy and the reduction of global trade and financial imbalances.

The basic elements for a cooperative and productive trade policy are therefore present, side by side with trade skepticism. The Democratic Congress will contain a variety of views on trade – some skeptical and unhappy, others looking for an updated version of the party’s traditional internationalism, both grappling with the national response to vast and irreversible changes in the global economy. At best the pundits’ picture, with its shades of dark grey and black, is premature and simplistic. It may well prove altogether mistaken.

Edward Gresser is director of the Progressive Policy Institute’s Project on Trade and Global Markets.

© 2006 Yale Center for the Study of Globalization