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Foreign Policy

Obama’s Legacy and Sino-US Relations

Jan 29 , 2015

Dreams of export revival, realities of trade deficits

In his SOTU address, President Obama linked U.S. hopes for export manufacturing revival and free-trade agreements. “Our businesses export more than ever, and exporters tend to pay their workers higher wages,” he said. “But China wants to write the rules for the world’s fastest-growing region. That would put our workers and businesses at a disadvantage. Why would we let that happen? We should write those rules.”

In reality, America has had trade deficits with Asia for decades, starting with Japan, East Asian tiger economies, China and Southeast Asia. U.S. trade balance has been in the red ever since the late 1960s, and the deficits have soared since the late 1990s, especially during periods of expansion.

Nevertheless, ever since 2009, the Obama White House has been promoting U.S. export manufacturing revival. In this scenario, rising Chinese wages, higher U.S. productivity, a weaker dollar, and other factors were expected to close the cost gap between the U.S. and China for many goods consumed in North America. But the vision has not materialized.

The rise of Chinese wages is no longer as fast as it used to be half a decade ago. Chinese wage increases are not overshadowing productivity gains. The dollar is not weaker, but stronger. And while U.S. productivity looks better relative to its counterparts in Europe or Japan, it is stagnating.

President Obama introduced his National Export Initiative to double U.S. exports over half a decade in another SOTU speech in 2010. Now five years are up but the White House has not delivered. A solid increase of more than 65 percent between 2009 and 2013 is a pretty decent achievement. But as the central banks are intensifying quantitative easing in Europe and Japan, the two currencies are falling, and the dollar has strengthened.

As U.S. deficits are not about to fade away, the White House is pushing its free-trade plans more aggressively than ever before.

Inclusive trade – or currency conflicts

Historically, the Trans-Pacific Partnership (TPP) originates from a 2005 free trade agreement among Brunei, Chile, New Zealand and Singapore. Since 2010, Washington has led to talks for a significantly expanded FTA, which reflects U.S. interests in the region. The TPP aspires to be a “high-standard, broad-based regional pact” – hence the inclusion of several Asian tiger economies, ASEAN countries, Latin American nations, and the NAFTA partners (U.S., Canada, and Mexico). However, it excludes China.

Historically, it is déjà vu all over again. In the aftermath of the NAFTA in the early 1990s, Washington sought to extend that agreement with non-trade-related concessions via the Free Trade Agreement of the Americas (FTAA). The effort crumbled against Brazil’s opposition. Instead of opening South America to free trade, the FTAA split the region into two blocs, as President Lula had predicted.

A similar drama is evolving in Asia Pacific where the TTP focus is on a set of bilateral agreements to accommodate the great diversity of the putative members and on exemptions and protection of sensitive sectors – including the sheltered U.S. agricultural sectors.

The polarization between the free trade initiatives of Washington and Beijing came out in the open last November in the Asia Pacific Economic Cooperation (APEC) forum, which reflects almost 60 percent of the world economy, and nearly 50 percent of world trade. In the mid-1990s, APEC leaders opted for free trade and investment. A decade later, C. Fred Bergsten, then chief of an influential U.S. think-tank, spoke for the Free Trade Area of the Asia Pacific (FTAAP), arguing it would represent the largest single liberalization in history. Similarly, China’s view is that the FTAAP, which includes both the U.S. and China, could serve as a foundation for other regional talks. Yet, the White House has focused on the TPP for which Michael Froman, the new U.S. Trade Representative and former security expert, is seeking congressional support.

But the free-trade struggle may get even worse. Reportedly, bipartisan majorities in the Congress insist that the TPP should address the “manipulation of exchange rates,” which – so they argue – allows some countries keep to their currencies artificially weak and thus unfairly make their exports more competitive. These majorities are supported by the U.S. auto industry, the labor unions, and the steel industry.

For all practical purposes, such a unilateral currency stance would mean an aggressive containment policy against China and other emerging economies whose catch-up growth relies on competitive currencies and export-led growth. It has also the potential to split Asia in competing blocs while igniting new geopolitical friction, which would derail the dream of the “Asian Century.”

The nightmare scenarios

The White House is willing to take its chances to avoid what it perceives as a nightmare scenario. If the White House would fail to complete the TPP talks in Asia Pacific, America would again be just a bystander as trade and investment are taking off in East, Southeast and South Asia and the Pacific. In the process, President Obama’s legacy would be threatened.

In the White House, political angst has steadily increased as the U.S.-led Transatlantic Trade and Investment Partnership (TTIP) agreement has struggled against headwinds in Brussels. That’s the fear that motivates the Obama Administration: if the TTIP with the EU would fail, then surely the TPP with Asia must succeed!

The worst nightmare for the White House would be a third scenario in which it would fail to achieve both the TTIP and the TPP. In that case, one or both deals would have to be watered down so that an official agreement could be signed.

So in order to ensure President Obama’s legacy, the White House needs the TPP. In order to realize the TPP, it will also need the Trade Promotion Authority (TPA); the authority for the president to negotiate trade agreements that Congress can accept or decline but not amend or delay. To get that authority, the president seeks to unite the bipartisan majorities of Congress behind the White House – even if it means flirting with major currency friction.

The timing does not add to the credibility of the policy stance. In the coming months, U.S. recovery is anticipated to expand as the Fed is paving the way for rate hikes. This outcome rests on three rounds and $4.5 trillion of quantitative easing (QE), which Beijing and other emerging economies regard as “currency manipulation” par excellence.

In the final analysis, neither U.S. exports nor U.S. manufacturing jobs drive the American economy any longer, which is fueled mainly by consumption. The only viable way to sustain the high U.S. living standard is through innovation. And yet, while America has recovered faster from the global financial crisis than other nations, the U.S. innovation suffers from structural corrosion and global erosion.

As a result, the White House feels compelled to struggle for free-trade deals. A truly effective and inclusive agreement would very much be in the interest of both Washington and Beijing. However, no sustainable free trade agreement in Asia can exclude China, the United States, or both.

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