WASHINGTON AND WORLD TRADE : INTENTIONS IN TATTERS / THE FINANCIAL TIMES ANALYSIS ( A MUST READ )

October 10, 2011 11:16 pm

Washington and world trade: Intentions in tatters

By Alan Beattie

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Battles in a bitterly divided Congress are rendering US international economic policy impotent or counterproductive
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A hard rain: the American flag in shreds above the Capitol building after Washington's August buffeting by hurricane Irene. Cuts to spending on disaster relief in its wake are among austerity measures being sought by Republicans

The eurozone has been attracting plenty of opprobrium for its dysfunctional handling of the sovereign debt crisis. But as François Baroin, French finance minister, mischievously pointed out on a recent trip to Washington, the US also has problems. Whereas managing the euro requires laborious consultations with 17 national parliaments, he said, “here you seem to be having enough trouble with just one”.


This week should have been a rare triumph for White House international economic policy. After protracted squabbling with, and inside, Congress, bilateral trade deals with South Korea, Panama and Colombia negotiated four or five years ago by George W. Bush’s administration are finally coming up for ratification.



But another vote on Capitol Hill last week was potentially far more important than three bilateral trade deals, which are of minor economic significance. The Senate alarmed many supporters of free trade by pushing forward aggressive legislation to punish China for manipulating its currency.
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Those free-trade supporters, along with some of America’s trading partners, say an acrimonious atmosphere in Washington – particularly a divided and fractious Congress bickering over debt and deficits – is rendering much of US international economic policy either impotent or counterproductive at a time when the world economy needs leadership and confidence.

With eurozone policymaking also in turmoil, many emerging market economies are increasingly alarmed that the rich world is either asleep at the wheel or fighting with its co-driver. Guido Mantega, the Brazilian finance minister, recently told the Financial Times: “Most of the problems we are seeing today come from problems in reaching political solutions in Europe and America.”

Interviews with current and former administration and congressional officials suggest there are three main reasons. First, there is a poisonous cloud of suspicion around anything to do with trade, particularly trade with China. Second, fierce congressional battles over taxes and spending undercut the administration’s attempts to project a coherent economic policy abroad. Third, the raucously partisan atmosphere on Capitol Hill has held global as well as domestic policymaking hostage to point-scoring and tactical manoeuvring.

That the bilateral trade deals, formally called free trade agreements, have languished so long largely reflects the toxicity the issue has acquired. Though the administration’s own estimates suggest that the agreements will provide only a relatively minor boost to jobs and growth – Colombia and Panama are small economies, and most tariffs with South Korea are already quite low – such pacts are widely blamed by trade unions and the public for sending jobs abroad. The debate that surrounds them has become a proxy for those about globalisation, employment, inequality, and the future of the American middle class.
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Negotiating new pacts has proved difficult. For example, the US is supposed to be agreeing bilateral investment treaties with the Bric countries (Brazil, Russia, India and China) to protect the interests of US companies operating there. But first it has to finish an internal review of its Bit strategy, which has been under way for more than two years. Unions have argued that the current standard template for investment treaties, developed under the Bush administration, risks allowing foreign investors in the US to circumvent environmental and labour law.
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Indeed, opposing trade agreements and confronting China are among the highest priorities of those unions – which play a large role in financing and campaigning for Democratic candidates. Reversing the traditional pattern, whereby the Senate acts as a calming influence on the hot-headed House of Representatives, the Republican House leadership is deeply sceptical about the Democratic-controlled Senate’s push for the currency legislation. Xinhua, the official Chinese news agency, sniffily said of the bill last week: “This has become a common practice – whenever the [US] economy is slow, whenever an election is nearing, voices in the United States pressing for the rise of the renminbi are all over.”
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The number of Democratic law­makers who can be relied on to vote for trade bills and against measures such as the currency legislation has been shrinking steadily over the years, a trend strengthened by disillusionment with earlier deals, such as the North American Free Trade Agreement, launched in 1994.
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If anything, to the surprise of some, the polarisation has intensified since November’s midterm polls. The election of dozens of Tea Party Republican lawmakers, many of whom profess an America-first foreign policy that es­chews nation-building in places such as Iraq and Afghanistan, raised concern among trading partners that they would also push US economic policy towards protectionism. As it happens, Tea Party legislators strongly supported the bilateral trade agreements, the government-phobic trait in their political character winning out over the isolationist. A large majority – 67 out of 87 – of Republican congressional freshmen, including many Tea Party supporters, wrote to President Barack Obama in March urging him to submit the pacts to Congress.
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Dan Price, managing director at the Rock Creek Global Advisor consultancy, and formerly George W. Bush’s White House point man on international economics, says of the Republican intake: “They were painted as isolationists and nativists, and that has not proven to be the case.”
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Moreover, the only leading candidate for the Republican presidential nomination to oppose the currency bill is Rick Perry, the conservative Texas governor who is close to the Tea Party. The relatively centrist Mitt Romney supports currency tariffs against China. Remarkably, Jon Huntsman, former ambassador to Beijing, and usually an advocate of constructive engagement rather than confrontation with China, said he would sign the currency bill.
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Still, while the Republican law­makers’ stance is at least enabling the bilateral pacts to crawl through Congress, ideological and partisan divides are preventing coherent international economic policy from being formed on other fronts.
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One of the fiercest fights has been over fiscal policy. The protracted and heated discussions over raising the federal debt ceiling in August, which led to the first sovereign credit downgrade in US history, are likely to be repeated when the government needs fresh funding in November.
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The episode was watched with astonishment in much of the rest of the world, the US apparently bent on creating its own voluntary sovereign debt crisis to match the involuntary one in the eurozone, spreading fear and volatility through global financial markets along the way. Arvind Subramanian, a fellow at the Peterson Institute for International Economics in Washington, says: “Many people in emerging markets were asking: what the hell are you guys up to?”
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Mr Price counsels against paying excessive attention to congressional thunder and lightning. “Legislative battles can look very messy to an international audience, particularly issues like the debt ceiling, which are surrogates for wider debates,” he says. “But the rest of the world should not infer too much from them about the stance of the US administration.”
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However, the short-term fiscal austerity being preached by the Republicans – right down to trying to make compensatory cuts to the disaster relief spending after hurricane Irene in August – flatly contradicts one of the administration’s main international messages. The US has consistently argued that governments should be prepared to keep the fiscal taps open to boost demand if, as indeed seems to be coming to pass, economic growth falters.
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The Treasury has clashed over the issue with governments such as that of Germany, which prioritises public finance consolidation over short-run stimulus. Yet because of opposition in Congress to prolonging temporary tax cuts and to fresh stimulus spending, it is the US, not Germany, that is on track for one of the sharpest fiscal tightenings next year in the Group of 20 large economies – a potentially serious weakening of global demand.

Tim Geithner, Treasury secretary, last month attended a eurozone finance ministers’ meeting in Poland to offer friendly advice on how to manage a financial bail-out, based on experience with American banks. But his domestic problems gave ammunition to those who resent US lecturing. “We can always discuss with our American colleagues,” said Didier Reynders, the Belgian finance minister. “I’d like to hear how the United States will reduce its deficits.”
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Brazil’s Mr Mantega – in the past year a fierce critic of the US Federal Reserve policy of quantitative easing, which he says weakens the dollar to the detriment of trade rivals – recently said Congress bore much of the blame. Its refusal to sanction more fiscal stimulus, he argued, forced the Fed to do too much elsewhere. “Monetary policy is overextended due to the absence of fiscal policy,” he told the FT. “One without the other is like a crippled duck.”
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Bipartisan co-operation in Congress has collapsed across a range of subjects; policy towards globalisation is no exception. “We are in a situation where political dysfunction has made it difficult even to move things forward that have broad support,” says Ted Alden at the Washington-based Council on Foreign Relations, who co-wrote a recent CFR report into US international economic policy.
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He cites plans for a “start-up visa” – a bill that, if passed, would give foreign entrepreneurs a work permit in return for investing in the US. “This has broad bipartisan support, and even the labour unions are relatively comfortable with it,” Mr Alden says. But the bill is held up, he says, largely because Democrats are pitching for Latino votes by holding out for a more comprehensive immigration bill that they privately know they will not get.

Mr Geithner – a veteran of the all-powerful Treasury of Bill Clinton’s administration, which dominated the International Monetary Fund and more or less ran the global response to the Asian financial crisis – underlined last week how far US credibility had deflated. “Look at our politics today,” he told a Washington audience. “People look at us and they wonder whether they’re going to see Washington demonstrate they can do things on a scale commensurate with our challenges.”

He added: “So you have to come to these discussions with countries around the world recognising we need to do so from a position of extraordinary humility.”

It is not a posture the rest of the world is used to seeing US policymakers adopt. But as long as the politics back in Washington produces distrust and gridlock, it is one they will have to get used to in years ahead.

DEVELOPMENT FUND: Alarm at a reluctance to bolster multilateral banks


Giving money to foreigners is always likely to be one of the first things to be sacrificed when there are cuts in government spending to be made. But this year the House of Representatives appropriations committee went further than might have been expected.


The committee said it would not fund general capital increases for the World Bank and institutions including the Inter-American, African and Asian development banks that had painstakingly been negotiated by the banks’ shareholder countries.


If this threat is carried through, it will have serious consequences for the multilateral development banks, which finance their activities by borrowing commercially against their capital base. The last World Bank capital increase was two decades ago and winning agreement on a new one was being seen as a success for Robert Zoellick, its president.


An array of current and former US officials has quickly assembled to argue against the decision. But the need to appeal to US self-interest is evident, especially given the suspicion of multilateral institutions in some parts of the conservative wing of the Republican party. Accordingly, the request for funding has been couched largely in terms of protecting US security.


In a letter to Congress last month, Tim Geithner and Leon Panetta, secretaries of the Treasury and defence respectively, said: “The MDBs have been our partners in promoting security around the globe. In key frontline states vital to US national security, such as Afghanistan, the combined contributions of the World Bank and the Asian Development Bank rank among the top four donors.”


Ever-present is the threat that if US-influenced institutions do not provide money for development, geopolitical rivals will move in. A smaller share of capital contributions would mean a lower voting weight on the banks’ boards. The US losing its leading role in the Asian and African development banks, Mr Geithner and Mr Panetta wrote, “would effectively cede more influence to China in both regions”.


In Central America, the oil-funded influence-buying of Hugo Chávez, Venezuela’s president, is a main fear. Jim Kolbe, a Republican ex-congressman who chaired the House committee that financed foreign aid, says: “If we withdraw from the World Bank and the IDB we leave the space open for others – for Chávez or the Chinese or whoever.”
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Copyright The Financial Times Limited 2011.