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Tuesday, Nov. 11, 2008

Protectionist sentiment to challenge Obama


Special to The Japan Times

SINGAPORE — Asian economies that have benefited from trade liberalization in recent years tend to prefer U.S. Republican administrations over Democratic ones because the former are seen as having a more consistent commitment to free trade. Now that Barack Obama is president-elect with a sizable Democratic majority in Congress, much of Asia is nervous about what this may portend for trade relations and economic growth.

During the campaign, Obama outlined policy positions that reveal serious reservations about some of the Bush administration's trade deals that are in place or pending, including the free-trade agreement with South Korea negotiated last year. It has yet to be ratified.

Unions that backed Obama during the campaign support his refrain to stop the loss of more jobs as American companies outsource services and manufacturing overseas to cut costs. With recession deepening in the United States, there is a real risk of rising protectionist sentiment as politicians reflect public discontent.

A poll in June found that more Americans think that free trade harms the U.S. economy than those who believe it plays a positive role. This is bad news for export-oriented Asia. Demand in the U.S. and Europe for Asian exports that helped draw the region out of its last major crisis in 1997-98 is not there this time. This is weighing on stocks and currencies.

Stephen Roach, Asia chairman for Morgan Stanley, has calculated that emerging Asian economies led by China are 30 percent more reliant on exports than they were a decade ago. He says exports accounted for 47 percent of GDP in Asia, excluding Japan, in 2007, an increase of 11 percentage points from the comparable figure in 1998.

As a result, China, the rising giant that many other Asian countries had hoped would act as an engine to pull the region through the storm, is slowing more quickly than expected because of weaker demand from the West. Growth in Japan, Asia's largest economy, is also being undermined by the downturn in exports.

Far from having the option of decoupling from the West, Asia is caught in the web of globalization and economic interdependence. If governments in the U.S., Europe or Asia succumb to pressure to shield their economies from foreign competition, it could trigger a tit-for-tat protectionist spiral. This is why farsighted trade leadership from the U.S., the world's biggest economy and market, is so important.

Obama says he will oppose trade agreements that undermine U.S. economic security and fight to open foreign markets to expand U.S. exports and employment. He has promised supporters he will renegotiate the North American Free Trade Agreement with Canada and Mexico, rebalance economic ties with China to reduce the huge U.S. deficit, challenge unfair trade practices through the World Trade Organization and elsewhere, and discourage U.S. companies from outsourcing work abroad to countries like India and the Philippines.

How will these objectives be achieved? Obama has a reputation for being pragmatic. If that means cutting deals acceptable to all parties, the fallout may not be serious. The pending free-trade agreement with South Korea looms as an early litmus test. Obama has called the agreement "flawed" because South Korea exports hundreds of thousands of cars to the U.S. while the U.S. sells no more than 5,000 vehicles a year in South Korea. He evidently wants more balanced trade.

Since the Asian financial crisis a decade ago, Asia has implemented wide-ranging reforms but has failed to create consumption-led economies that would have a better chance of withstanding recession in the West and of maintaining strong growth.

Among economies with complementary features, there will be a temptation on all sides to continue negotiating preferential deals on a bilateral and a plurilateral basis. But this may turn out to be an inducement to protectionism, not a bulwark against it.

The best antidote would be to reopen the stalled WTO Doha negotiations to further reduce barriers to international trade in goods, services and investment. However, such a move is unlikely until the second half of 2009, following elections in India. Objections from India contributed to the Doha deadlock.

Meanwhile, if Obama can hold the line against a surge of U.S. protectionist measures, prospects for reconvening the Doha round will be brighter.

Michael Richardson, a former Asia editor of the International Herald Tribune, is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore.


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