Shadow Government is pleased to run thus post from guest-blogger, Mark Kennedy, a former member of congress and former key advisor on trade issues in the Bush Administration. He is currently Director of the Graduate School of Political management at George Washington University.
President Obama's surprise announcement in his State of the Union address that he plans to start talks on a free trade deal between the United States and the European Union could serve as a boon to the nation's economy or a bust for the nation's competitiveness. Though reaching any sort of deal will be difficult, leaders in the United States should avoid a proposal that could make American markets more like their European counterparts and should instead seek a plan that helps introduce the best of the American labor markets to the EU in order to boost growth on both sides of the Atlantic.
A successful free trade agreement (FTA) will achieve the following: expand U.S./EU trade, renew the Atlantic political/economic alliance, improve competitiveness in both markets, and set a benchmark for future trade accords.
In order to walk across the finish line together, the United States and the EU must effectively resolve their differences on two key economic policies.
The EU has several long-standing regulations preventing many U.S. agricultural products from coming to market. America has long argued that European demonization of genetically modified (GMO) crops as "Frankenfood" is not grounded in science. With the pressing need to meet the nutritional needs of a growing planet, the potential of GMO crops should not be set aside so quickly.
The United States' previous treatment of food controversies in free trade agreements can serve as a benchmark in this respect. The terms of the South Korean free trade agreement provided a timeline for when U.S. beef would gain access to Korean markets. A similar time-delayed structure with the EU would allow for officials to adjudicate the safety of American agriculture and for producers to make adjustments necessary to compete in a more open market. Allowing scare tactics to dominate what should be an economic and scientific debate is a loser for consumers on both sides of the Atlantic.
A common stumbling block for free trade agreements concern the differences between nations' labor regulations. American labor unions often balk at FTAs with the countries from the developing world because they fear that their members will be unable to compete with the emerging market's low-wage employees. This time around the shoe is on the other foot.
According to the World Economic Forum's 2012-13 Global Competitiveness Report, the United States' approach to labor flexibility is among the best in the world. EU nations tend to take a more populist and protectionist approach, which can limit productivity and harm young workers. Those protectionist policies have lead to high youth unemployment and unrest in EU nations like Greece and Spain. A final deal should recognize that and center labor arrangements around the idea that a growing economy can provide more job security than government rules.
European Commission President José Manuel Barroso warned at a press conference recently that the EU would not compromise on its "basic legislation" in trade talks.
Rather than approaching these trade discussions in a defensive posture, leaders on both sides should aggressively pursue outcomes that would be highly beneficial to their citizens and the world:
It is critical that those who support lower economic barriers stay engaged in support of a joint accord, but one that fosters openness rather than protectionism. A successful deal will expand Atlantic trade, strengthen the Atlantic alliance, improve competitiveness on both continents, and set a standard that stimulates expanded trade agreements with other regions
CHARLY TRIBALLEAU/AFP/Getty Images
I agree with my colleague Peter Feaver that the president's State of the Union address focused predominantly on domestic policy. This is unsurprising, however, given the economic and other domestic challenges faced by the United States and President Obama's preoccupation with those challenges since assuming office.
Nevertheless, I believe that the 2011 State of the Union address demonstrated an evolution in the Obama administration's foreign policy focus. The president's first State of the Union address in 2009 dealt briefly with Iraq (reaffirming the U.S. intention to depart), Afghanistan and Pakistan (announcing a review of strategy to "defeat al Qaeda and combat extremism"), and the Guantanamo Bay detention center (promising to close it). He also announced a "new era of engagement," stressing the United States' need for help in addressing the world's problems and the world's need for U.S. leadership. All in all, about 400 words were devoted to foreign policy.
The 2010 State of the Union address reprised the 2009 themes (save Gitmo), while including a fuller discussion of nuclear nonproliferation and brief references to Iran and North Korea. The discussion of Iraq and Afghanistan was also meatier. While in 2009 the president said only that he would "announce a way forward in Iraq that leaves Iraq to its people and responsibly ends [the] war," in 2010 he spoke of "partner[ing] with the Iraqi people to promote regional peace and prosperity." While in 2009 his discussion of Afghanistan was limited to mentioning the strategy review and the need to defeat al Qaeda and deny it safehavens, in 2010 he repeated those themes, but also spoke of training Afghan forces, encouraging good governance, combating corruption, and other elements of U.S. policy. And his discussion of "engagement" shifted subtly to focus more on U.S. leadership.
In 2011, these shifts continued, though the foreign policy portion of this year's State of the Union is startlingly similar -- in themes, structure, and length -- to that in 2010 speech. The 2011 version evinces a greater willingness to speak frankly about our foes: the Taliban are mentioned for the first time, and the president referred to the "Iranian Government" rather than the "Islamic Republic of Iran," the latter a phrase which in previous remarks was intended to convey respectfulness and signal our pacific intent. Other areas of the world get their first mention -- India and Brazil, for example. The president reaffirmed his support for the "democratic aspirations of all people," continuing a theme from his most recent U.N. General Assembly speech and Secretary Clinton's speech earlier this month at the Forum for the Future. Unlike in those instances, however, this time the president lent specific support to democracy activists in Tunisia. And crucially, the president strongly asserted his belief in U.S. virtues, values, and leadership, which underpin our global influence and ambitions.
So yes, the speech is short on discussion of foreign policy, contains plenty of gloss (like all State of the Union speeches), omits important issues (like long-term strategies for Iraq and Afghanistan, and Egypt and Lebanon, both gripped by crises), and falls short on defense spending. But it suggests a continued movement away from feel-good foreign-policy slogans (such as 2009's "new era of engagement") and criticism of the previous administration, toward a greater willingness to take sides, focus on vital interests rather than trendy issues, and delve into the complexities and nitty-gritty of policy.
To be sure, there is a long way to go. President Obama has yet to articulate a bold foreign policy vision, and instead continues to take an issue-by-issue approach bound together by unobjectionable, but relatively insubstantial references to "engagement." Campaign rhetoric aside, the United States has been engaged multilaterally in international affairs since at least World War II, and will be for the foreseeable future. It may be that the president believes that restoring the United States' competitive edge -- through economic growth, education, investment in R&D and infrastructure, etc. -- is itself something of a foreign-policy strategy in a globalized world. But while such measures are necessary for maintaining and enhancing U.S. prosperity and leading international role, they do not address how we utilize that role. That is the question that in my view remains unanswered, and which we see the U.S. currently shying away from in places like Egypt. It is unquestionably good that we reaffirm U.S. leadership and influence, but it is not sufficient. Eventually the president must lay out to what end and on whose behalf we will exercise our leadership and wield our influence.
TIM SLOAN/Staff, AFP/Getty Images
By Phil Levy
The Pittsburgh G-20 meetings concluded with a call for strong, sustainable, and balanced global growth. Countries were going to get their acts together, to shape up, to mend their ways. And if they don't? What if they just go with their own domestic political imperatives? Then someone will call them out, the leaders said.
But who? The International Monetary Fund, perhaps. After a meeting of finance ministers, the AP reported:
Four governments -- including the United States and China -- renewed promises to enact policies aimed at rebalancing global trade.
They said an orderly reduction in the U.S. trade deficit and trade surpluses in Asia would benefit the world by defusing protectionist trade action...
"It was agreed that a rebalancing of domestic demand growth across economies would be key to reducing imbalances...," said the statement, issued on behalf of the group by the IMF.
China pledged to take steps to increase domestic demand, deepen financial reforms and increase the flexibility of its currency, a step long demanded by the United States and other industrialized nations.
Wait! This story is from April 2007, on the eve of the global financial crisis. (Plus ça change...). That meeting followed a 2006 agreement that the IMF would adopt a new surveillance system to identify misaligned exchange rates. The surveillance program essentially came to naught. This ineffectiveness was not due to any analytical weakness on the part of the good folks at the IMF. It turned out, rather, that big countries like the United States and China dislike being publicly criticized.
Of course, smaller nations share this distaste for criticism, but they usually have no choice. The IMF has leverage when it lends money. When a nation like Hungary or Iceland finds itself in serious trouble, it must accept IMF policy prescriptions along with the cash. The bitter memories of this cash/criticism combo from the Asian financial crisis of the late 1990s help explain why Asian countries have built up such substantial piles of exchange reserves; they want to ensure they are not in that position again.
Why should the IMF or World Bank care, though? Why not just call it the way they see it and let the big countries deal with their own bruised egos? Because the big countries are the IMF and World Bank. The leaders of the bank and fund spend their days reporting to boards of executive directors, seeking the boards' approval for all they do. These institutions are not like the U.N. General Assembly -- one country, one vote -- the executive directors' votes are roughly weighted according to the economic heft of the countries they represent.
This creates a dynamic that played out this week in Istanbul, where the bank and fund are holding their fall meetings. According to the Financial Times, World Bank President Robert Zoellick asked his governing council for an infusion of $5 billion. Without it, he said,
"[A]s we start to get towards the middle of next year we are going to start to face some serious constraints and we would have to ration..." He said uncertainty over future financing capacity was already affecting bank work with developing countries.
Developing nations voiced unanimous support for a capital increase.
But developing nations are not the ones paying the bills. Zoellick faced a much more skeptical reception from the British, the French, the Japanese, and the Americans. It is the major donors to which any bank president is beholden. This dependence did not stop Zoellick from making a relatively forthright speech about global imbalances last week at the Johns Hopkins School of Advanced International Studies, but the FT pictured him yesterday with his head in his hands.
The independence deficit of the IMF and World Bank is serious, but perhaps not the most significant obstacle to achieving global rebalancing through coordinated reform. Even if Bob Zoellick launched the kind of scathing critique of which he's certainly capable, it would not suffice to bring serious cuts to U.S. federal deficits or to prompt revaluation of the Chinese currency. President Obama's political prospects depend heavily on delivering a costly expansion of health-care coverage. The Chinese leadership's legitimacy rests heavily on maintaining employment in the manufacturing sector. In each case, the domestic political stakes are far too high to be overcome by global opinion, no matter how blunt.
Change will come, of course. But it will be through average American voters worrying about borrowing from their grandchildren, or from average Chinese worried about the value of their massive dollar holdings. Right now, even if the IMF or the World Bank were to call out, those key constituencies aren't listening.
Win McNamee/Getty Images
By Phil Levy
In today's New York Times, we read this:
“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”...
“People are not stupid,” Mr. Zedillo said. “They see the huge deficit, the huge spending, and wonder what comes next.”
I erred in my earlier post on the international aspects of the stimulus bill. I was excessively optimistic. I said we might get away with lots of governments borrowing lots of money all at once for a while, since the private sector isn’t doing anything with the money at the moment. In fact, as Ernesto Zedillo goes on to note in the Times, developing countries are already finding it hard to borrow, as lenders flee to the perceived safety of the U.S. bond market. I’ll stand by my prediction that trouble would eventually come; it’s just coming sooner than I had thought.
The trouble is not restricted to the developing world. The United States just had some difficulty marketing 5-year Treasury notes and 10-year bond yields have been rising sharply. These are not the very short rates that the Fed sets; they are the longer, market-determined rates that drive borrowing costs for businesses and home-buyers. As the crisis unfolded, global investors foresaw doom and piled into U.S. government bonds as a safe haven. The result was a plunge in interest rates and upward pressure on the dollar.
In the past few weeks and particularly in the last couple days, demand for Treasuries has fallen off and interest rates have been rising. There can be many causes, but one concern is how the United States will pay for all its borrowing.
There is a substantial risk here. Bloomberg today quotes a trader from China’s biggest bank as predicting that the "rout" in the Treasury market will deepen and rates will rise. Imagine, for a moment, that he believes what he’s saying. The story notes that Treasuries have lost almost 3 percent this month. The trader thinks more losses are soon to come. Unless he or his international colleagues think the dollar will appreciate, they would be safer selling their holdings and keeping their money in another currency (even if their own bonds have very low yields). If they do all sell their Treasuries, that will drive interest rates up and the dollar down, thereby validating their decision to sell (bubbles are nasty that way). A weaker dollar might help U.S. exports, if only we weren’t launching a trade war. The higher interest rates won’t help at all in reviving the economy.
But wait, it gets worse! Cognizant of this threat from excessive borrowing, both Jeff Sachs (in his academic capacity) and Larry Summers (in his official capacity) have argued this week that the new spending means we will need tax hikes in the near future. While it is very difficult to see how spending in 2011 stimulates the economy now, it’s easy to see how raising taxes in the future could slow things in the present. From the perspective of any entrepreneur brave enough to invest and create jobs right now, high taxes could create a case of “heads, the government wins; tails, I lose.”
All of this is to say: there are some reasons besides partisan rancor why Republicans might hesitate to support the $819 billion stimulus bill.
By Phil Levy
The fiscal stimulus bill racing through the House has prompted a lot of discussion about bipartisan coordination. President Obama's efforts to engage Congressional Republicans were admirable. The exclusion of House Republicans from any role in crafting the bill was not.
Hill Republicans are not the only ones being presented with a fait accompli. So is the rest of the world. Last November, as the global crisis deepened, the G-20 leaders gathered in Washington. They vowed to work together and avoid the temptation of protectionism. These pledges started to crumble almost as soon as the leaders had unpacked their bags from the trip. A number of countries have raised tariffs and the Doha trade talks have fallen by the wayside, as Dan Drezner described.
The current U.S. stimulus package marks a new blow to international coordination. It contains explicitly protectionist language in its call to use only U.S.-made steel in infrastructure projects. This likely violates U.S. commitments under global trade agreements and will certainly be taken as a bad sign by the rest of the world. The world can deal with a protectionist India or Indonesia. The trading system will have much more trouble if the United States starts to reneg on its traditional leadership role.
One might argue that this bit of protectionism is just an unfortunate byproduct of the stimulus bill. But the central thrust of the package -- an attempt to revive U.S. economic activity through massive government borrowing and spending -- also raises global coordination concerns.
This decade has seen serious imbalances in the global economy. The United States has saved too little and consumed too much. China has saved too much and consumed too little. The United States has urged China to undertake painful adjustment, revalue its exchange rate, and shift away from its export-led growth. Treasury Secretary Geithner repeated those calls last week.
When the United States had to grapple with the pain of reduced consumption and greater savings, we balked. Or rather, we are about to balk. That's what the big fiscal stimulus bill will do. On top of trillions of dollars in deficits already planned, the stimulus bill will add almost a trillion more in the coming years. Don't think the Chinese haven't noticed.
One might ask: why coordinate a crisis response? If the whole world is slowing down, shouldn't everybody be happy whenever anyone makes a move to pep up their economy? It doesn't work quite like that. With uncoordinated fiscal stimulus, countries begin to worry that their shiny new spending will ‘leak' overseas through imports (a concern that Harvard's Dani Rodrik shares). This is a spur to protectionist impulses. Not only that, there are concerns about the entire world trying to borrow large sums at the same time. It works at the moment, when the private sector is moribund. It won't work so well when the private sector revives.
The Congressional leadership might well pause to consider some of these global ramifications, if they were not so determined to lock in spending plans for 2011 and beyond before we reach the President's Day Weekend.
By Philip Zelikow
The Republican leaders in Congress have not yet been able to offer an effective alternative to the Obama administration's fiscal stimulus package. The responses so far look like general unease about big government, mocking particular spending ideas, and calling for more tax cuts. Thus the administration's approach looks earnest and coherent, even if flawed. The Republicans are just nipping at the margins. The dogs will bark; the caravan moves on.
Republicans should do better. Their congressional leaders should develop a package that, while not endorsed by the whole caucus, might enjoy a significant and critical spectrum of support -- putting Republicans at the center. After all, experts as varied as Alice Rivlin and Jeffrey Sachs have now weighed in publicly with serious expressions of unease about the emerging package. Surely Republican leaders (acting as a kind of shadow government!) can see an opening to offer a creative, coherent alternative.
Here are some illustrative elements. Warning: Some of these are bound to make many individual Republicans unhappy, yet they add up to four messages:
1. Where the administration puts the financial crisis in second place, the Republicans will offer bipartisan answers to put the banking and housing crisis first.
2. Where the administration is acting unilaterally, belying its internationalist rhetoric, the Republicans prefer a global answer to a global crisis.
3. Where the administration is treating serious investments in our infrastructure as a form of "helicopter money," the Republicans are ready to address real needs.
4. Where the administration thinks we can borrow our way out of a debt problem, the Republicans want to restore confidence in our fiscal strength and long-term economic health.
Folks may like or dislike each of these ideas. But they sure do not fit a preconceived ideological cookbook. This is real pragmatism.
If asked how much this alternative would cost, there is an honest answer: There is no arbitrary target because the spending is not motivated by the desire to reach one. But the net spending will be much less, probably less than half as much in 2009. There will be a big federal effort to help banks that should be mostly repaid when financial paper is resold to private hands. The federal government will offset temporary state and local borrowing weakness. It will make some substantial and overdue public investments and reallocate tax incentives in a more sensible way. It will be coordinated with other major economic powers.
The net effect is show solidity, not desperation; sustainability, not a quick fix. Global, not unilateral. Those are the themes that will restore the confidence of Americans and of investors around the world. Our recovery, and our national security, may depend on it.
Shadow Government is a blog about U.S. foreign policy under the Obama administration, written by experienced policy makers from the loyal opposition and curated by Peter D. Feaver and William Inboden.