Free Trade

Some fear America is about to go protectionist. Others fear it won’t. Where you stand on this issue depends on where you sit. Sit in the chair of the CEO of a major exporter, and you fear protectionism and the ever-rising spiral of retaliations. Sit in the chair of the president of a trade union, and you welcome what others call protectionism and you call fair trade. Sit in the chair of a Wal-Mart customer and you fear anything that will drive up prices, putting pressure on your over-stretched budget. Sit on the sofa of an unemployed worker whose lost job is being filled by a $1-a-day Chinese worker, and protectionism is just what the nation needs—unless you just paid $69 for a made-in-China tire that cost $39 before the US imposed high tariffs on imports of these low-end tires. 

There is little question that the voice of the trade hawk is heard in the land. President Obama used his State of the Union speech to announce plans to increase the tax burden on companies that are “moving jobs and profits overseas,” and “start rewarding companies that create jobs right here in America” by lowering their taxes. He added a boast that his administration has brought trade cases against China “at nearly twice the rate as the last administration,” and a promise to create an Enforcement Task Force to ferret out violations of WTO trade rules by China. Just what the ferrets will do with their discoveries is unclear.

This is more than a broad hint to the trade unions to make some noise when China’s vice president Xi Jinping, heir apparent to the regime’s leadership, and touted as a free(ish) market sort, visits Washington on February 14. A group of top trade union leaders will announce on Tuesday a long-planned campaign to pressure Obama to bring a barrage of trade cases against China. They are emboldened not only by the President’s speech, but by a victory in a WTO case involving China’s curb on exports of some raw materials, the anger aroused by China’s imposition of almost $5 billion in annual tariffs on imports of sports utility vehicles and big cars, and by their congressional allies. “The Chinese have cheated,” says Senator Sherrod Brown, Democrat from Ohio; they are currency manipulators, charges Senator Chuck Schumer, a New York Democrat.

Throw in the fact that this is an election year, in which Republicans who normally oppose protectionist measures are reluctant to antagonize the blue-collar workers whose defection from the Democrats propelled Ronald Reagan into the White House. Mitt Romney, the Republican most likely to get his party’s nomination, promises to crack down on China on his first day in the Oval Office.

Developments underlying this lurch towards protectionism are unlikely to go away. China remains under pressure to provide millions of jobs for its increasingly urbanized work force, and is being forced to counter social unrest by raising wages. That makes its exports more expensive, and increases pressure on the regime to compensate by maintaining an undervalued currency that keeps Chinese goods cheaper in foreign markets.

The Treasury continues to duck its legal responsibility to label China a currency manipulator, avoiding the logical conclusion of its finding that the yuan is “substantially undervalued” by citing a 12% rise in the Chinese currency against the dollar in the past 18 months, and China’s promise of still more high-level meetings to discuss the matter, the latter a tactic successfully used by Iran and North Korea to persuade the Obama administration to acquiesce in the status quo in matters nuclear.

Meanwhile, an alliance of greens and the military will add to pressures to do something about China’s trade practices. The military sees the regime’s trade surpluses being converted into aircraft carriers and missile systems that threaten American interests in Asia, and the greens see its subsidization of China’s wind and solar industries as destroying American firms. Never mind that this is a case of the green pot calling the Chinese kettle black: the greens successfully lobby for subsidies for America’s producers of solar panels. The inability of several of those firms to compete with China’s entrants into the market, especially those U.S. companies in which contributors to the Obama campaign are prominent investors, is bringing into disrepute the tax payers’s subsidization of green technologies that the market deems inefficient. So, end China’s subsidies, but continue America’s, a bit of environmentalists’s hypocrisy. But let’s be fair: the greens have a point when they claim that China’s state-owned enterprises (SOEs) benefit from cheap credit, protection from imports, and all sorts of support from the government.

For a while now, Obama's been mentioning in speeches that there are free-trade agreements that need to be ratified as away to create jobs and spur growth... while blaming Republicans for the hold up.

China’s president, Hu Jintao, is about to make a state visit to Washington, hard on the heels of a statement by Liang -Guanglie, his defense minister, that “in the next five years our military will push forward preparations for military conflicts in every strategic direction.” Not quite Nikita Khrushchev’s “We will bury you,” but close enough to give President Obama good reason to reset our overall policy towards the Chinese regime, including abandoning the outdated notion that trade is only about economics.