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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
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
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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