Trade Policy Holes

Resident Scholar Philip I. Levy
Resident Scholar
Philip I. Levy

The late economist John Maynard Keynes famously suggested that in a recession, the government might employ people to dig holes and then fill them up again. This prescription, however, was intended for idle workers, not heads of state. The Obama administration has spent its first weeks digging itself one hole after another on trade policy, then scrambling to fill them in.

First, in the confirmation hearings for Treasury Secretary Tim Geithner, the nominee had the poor judgment to repeat his boss's assertion from the campaign trail: that China manipulates its currency. The value of China's currency is not freely determined by market forces, so in that sense China does manipulate its currency, as Dan Drezner notes. And, to be fair, Secretary Geithner was stuck. Democrats had criticized the Bush Administration relentlessly for not labeling China a currency manipulator. Had Secretary Geithner provided any other answer to the question, he would have caused an uproar among Democrats.

But China cares a great deal about this. "Currency manipulation" is a loaded term in international finance. An official designation as a currency manipulator would deeply embarrass the Chinese. There is little evidence that such pressure would speed China's currency adjustment. There is a lot of evidence it will annoy the Chinese and potentially sour Sino-U.S. relations. Geithner's statement drew sharp responses from Chinese officials and academics, who spoke of protectionism and playing hardball.

The Obama administration has spent its first weeks digging itself one hole after another on trade policy, then scrambling to fill them in.

The Obama administration was quickly backpedaling. In a CNBC interview with John Harwood, Vice President Joe Biden was less definitive:

Vice Pres. BIDEN:... 'The term of ours that got everybody upset was manipulation. There's been no judgment based in the administration that there has been a manipulation because, as you know, that word triggers, within trade agreements, certain responses...'"

Harwood asked about past proposals in Congress to hit back at currency manipulation with tariffs.

Vice Pres. BIDEN: 'Well, that requires a determination that there is, quote, 'manipulation.' We've not gotten there yet.'"

The next day President Obama was on the phone with Chinese President Hu Jintao, talking about ways "to build a more positive and constructive U.S.-China relationship."

By then, though, the administration was already dealing with another trade policy hole. In the same CNBC interview, Harwood asked the vice president about the "Buy American" provisions that would direct stimulus money away from imported goods. Biden replied, "I don't view that as some of the pure free traders view it, as a harbinger of protectionism. I don't buy that at all. So I think it's legitimate to have some portions of buy American in it."

This seemed to give the Congress a green light. Whereas the House had limited its clause to iron and steel purchases, the subsequent Senate version of Buy American applied to all manufactured goods.

Many major trading partners appeared to view the measure as not just a harbinger, but as actually protectionist. There was talk of WTO cases and retaliation. The White House quickly clarified that it was not necessarily in favor of the Buy American clause. Nor was it necessarily opposed. It was thinking about it.

Five days after Vice President Biden's interview, President Obama told ABC News that it would be a mistake for the United States to break trade commitments, signal protectionism, or start trade wars. He didn't exactly say the clause should be removed and a Senate effort to do so failed.

By the time President Obama finally spoke out on Tuesday, the "Buy American" movement had gathered momentum. There is a lobbying effort to push the approach, and entrenched Congressional support. Inside U.S. Trade quoted House Transportation and Infrastructure Committee Chairman James Oberstar (D-MN) on Wednesday as saying of Buy American, "If it's not in, I'm against this package. Can I be any clearer than that? If it's not in, I'm not supporting it and I'm bringing a lot of votes with me."

Meanwhile, retaliation threats and objections have been lodged by Europe, Canada, Australia, and Japan. Coupled with the China spat, this is an impressive collection of trade frictions for an Administration that is not three weeks old.

The propensity of the new administration to dig itself holes seems to emanate from an ambivalence about the effects and desirability of trade. Without a clearer and more decisive approach, their problems seem likely to deepen.

Philip I. Levy is a resident scholar at AEI.

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