Wall Street Journal (9.15.09)

A Protectionist President

Like Hoover, Obama is abdicating U.S. trade leadership.

(Editorial)

President Obama traveled to Wall Street yesterday to press his case for more financial regulation, but the bigger economic issue of the day concerned other White House policies. To wit, what does it mean for the world economy if America now has its first protectionist President since Herbert Hoover?

The smell of trade war is suddenly in the air. Mr. Obama slapped a 35% tariff on Chinese tires Friday night, and China responded on the weekend by threatening to retaliate against U.S. chickens and auto parts. That followed French President Nicolas Sarkozy's demand on Thursday that Europe impose a carbon tariff on imports from countries that don't follow its cap-and-trade diktats. "We need to impose a carbon tax at [Europe's] border. I will lead that battle," he said.

Mr. Sarkozy was following U.S. Energy Secretary Steven Chu, who has endorsed a carbon tax on imports, and the U.S. House of Representatives, which passed a carbon tariff as part of its cap-and-tax bill. This in turn followed the "Buy American" provisions of the stimulus, which has incensed much of Canada; Congress's bill to ban Mexican trucks from U.S. roads in direct violation of Nafta, prompting Mexico to retaliate against U.S. farm and kitchen goods; and the must-make-cars-in-America provisions of the auto bailouts. Meanwhile, U.S. trade pacts with Colombia, Panama and South Korea languish in Congress.

Through all of this Mr. Obama has either said nothing or objected so feebly that Congress has assumed he doesn't mean it. Despite his pro-forma demurrals, Mr. Obama's actions and nonactions are telling the world that the U.S. is abandoning the global leadership on trade that Presidents of both parties have worked to maintain since the 1930s. His advisers whisper that their man is merely playing a little tactical domestic politics, but he is playing with fire, as the last 80 years of trade history should tell him.

***

The modern free-trade era began during the Great Depression, after the catastrophe of the Smoot-Hawley tariff of June 1930. Hoover also thought he was shrewdly playing tactical politics by adopting a tariff that the economist Joseph Schumpeter said was the "household remedy" of the Republican Party at the time. But the tariff ignited a beggar-thy-neighbor reaction around the world, and the flow of global goods and services collapsed.

FDR's Secretary of State Cordell Hull recognized the damage, and he began rebuilding a pro-trade consensus with a series of bilateral accords in the 1930s. In the aftermath of World War II, John Maynard Keynes, Harry Dexter White and others on both sides of the Atlantic continued this progress by negotiating the Bretton Woods currency accords and creating the Global Agreement on Tariffs and Trade.

Like Britain in the 19th century, the U.S. has been the linchpin of this liberal trading order that despite occasional setbacks has moved in the direction of lower tariffs and fewer nontariff barriers. As the world's largest economy, the U.S. has largely kept its market open, using access to U.S. consumers as a lever to open other countries to foreign goods and services. Even as Big Labor broke with this consensus, Bill Clinton continued this bipartisan tradition by supporting Nafta, and prodding Congress to ratify the World Trade Organization and most-favored nation trading status for China.

Following America's lead, countries that were once largely closed economically—especially China and India—have in turn opened up to foreign goods and services. The result has been an explosion in world trade, especially since the 1980s, as the nearby chart makes clear. This boom has coincided with rising incomes in countries connected by trade and the free flow of capital, especially in the developing world but also in America. While some U.S. jobs have vanished, new industries have emerged, and the U.S. has maintained its lead in manufacturing productivity.

***

This 80-year history of free-trade progress is now under threat from the global recession and Mr. Obama's abdication of U.S. leadership. Labor's antitrade views now dominate in the Democratic Congress and liberal think tanks. As ominous, protectionism is increasingly justified by Democratic economists on political grounds.

Paul Krugman, the chief economist for House Democrats, has endorsed a carbon tariff. And Clyde Prestowitz, who insisted in the 1980s that Japanese mercantilism would rule the world, went so far as to argue in the Financial Times last week that imposing tariffs on China would strike a blow for free trade. As economic logic, this compares to the argument that the way to reduce government health-care spending is to pass a new trillion-dollar entitlement.

President Bush and his trade negotiator Robert Zoellick also claimed that the protectionism of their 2001 steel tariffs would lead to more free-trade support, but the move merely exposed U.S. hypocrisy and undermined global trade talks. The reality is that without the U.S. leading by example, the world trading order is likely to deteriorate into every country for itself. This is especially dangerous amid a global recession in which world merchandise trade volume fell by roughly 33% from the second quarter of 2008 to June 2009. Reviving trade flows is crucial to restoring global growth.

Mr. Obama may not intend to start a trade war, but then Hoover didn't set out to pick one either. His political abdication is what made it possible, however, and trade passions once unleashed can be impossible to control. On his present course, President Obama is giving the world every reason to conclude he is a protectionist.

………………………………………………….