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Obama's Flawed Export Plan

Interviewee: Gary C. Hufbauer, Senior Fellow, Institute for International Economics
Interviewer: Roya Wolverson, Staff Writer, CFR.org
February 25, 2010

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In his 2010 State of the Union address, President Barack Obama proposed doubling U.S. exports in five years. His administration estimates this would generate two million jobs and boost economic growth. Gary Hufbauer, a former Treasury deputy assistant secretary for international trade, says although Obama's export pledge is a needed step forward, it will be politically difficult and nearly impossible to achieve in that time frame. Obama's proposal to tax multinational companies will inhibit U.S. export and job growth, Hufbauer says, and continued "Buy American" policies and other U.S. protectionist measures will lead foreign countries to "emulate and retaliate." News that global trade contracted in 2009 highlights the need for Obama's strategy to include negotiating exchange rates with Asian countries like China and Japan, Hufbauer says. Recent comments by the Obama administration to the contrary are "logical contradictions but political necessities."

What would it take for the United States to double exports in five years? Is that a realistic goal?

This is a very demanding challenge, and I'm happy president Obama has put it front and center. But I do want to underline the difficulty. I cannot find a period in history when real exports--which are adjusted for inflation--doubled in a five year period. Nominal exports, taking into account inflation, have doubled in a couple--maybe two or three--five-year periods since the end of World War II. So it's not a very frequent phenomena, and those episodes I'm referring to were times of pretty rapid inflation after the oil crisis of the 1970s. We don't have fast inflation so [nominal export growth will be] pretty close to real export growth over the next five years.

To do this will require significant policy changes. It's not possible to do it by some talk-shop campaign where you go around and lecture firms and urge them on, an approach many countries have tried with practically zero success. We're talking about a big change in the exchange rate relationship between the United States and China, but other Asian countries as well, including Japan. We would need a big ramp up in export credits. The export-import bank at one time financed about a quarter of U.S. merchandise exports; now it's down to about 3 percent. Private banks are not going to fill that space for the next three or four years because of problems of credit-worthiness bedeviling the world economy. A big tax incentive is needed for banks to loan more to finance exports.

One thing that shouldn't be done, which unfortunately is on the administration's agenda, is to whack the multinationals with new taxes on the argument that they use the tax breaks to ship jobs out of the United States. I understand the sound bite, I understand the politics, but the economics is completely wrong. U.S. companies doing business overseas are a big pull factor for U.S. exports, and taxing them is a negative factor. The very heavy kind of political effort that the president is putting into healthcare, financial regulation, and climate change has to go into exports to make this happen.

President Obama has linked export growth with job growth. What sectors would these jobs come from?

Manufactured goods are the big part, both on the export side and on the import side. In addition, we have a growing trade in services. That means everything from educational services, which means foreign students coming to the United States; tourism, foreigners coming here; Hollywood; accounting; finance.

You cannot double exports at the current exchange rates that the United States has with many countries, particularly with Asia.

If there is going to be a jobs impact, it is going to be in manufacturing first and services second. There will be an impact in agriculture, but it will be very small. Agriculture employs less than 1.5 percent of the U.S. population and exports are not a big part of that. The link between jobs and exports has an unspoken intermediate step in the president's arithmetic, and that is that there will be some narrowing of the import-export gap for the United States over this projection period. And that's a possibility if exports really double. If you cut the export-import gap by about a billion dollars, you increase United States job numbers by about eight thousand. So if we cut the trade deficit by $200 billion, which is a big number over five years, and multiply that by eight thousand, you get about 1.6 million new jobs, which is in the ballpark of what the president is talking about.

The trade deficit shrank last year by some 45 percent, but most of that came from a reduction in imports. How feasible is sharply increasing exports to close this gap versus replacing imports with domestically produced goods?

There is no way we can increase our exports if we are going for more of this "Buy American" type of policy or other restrictions on our domestic market, and there are all kinds of restrictions we can put in place. We can bring a lot of cases against China for tires and other products; we can use labeling requirements that really discriminate against imported goods, which we do already and we can do more of. We can prevent Mexican trucks from coming into the United States, and we do that and we can continue that. But I can assure you that all those policies will mean foreign countries will emulate and retaliate, and we will not sell more exports.

The only way to get to this target is to keep America's markets open, and that means doing things like going forward with the Korean, Columbian, and Panama free trade agreements and concluding the Doha Round and doing other sensible things I hope the administration is turning to, like the Trans-Pacific partnership. You have to do that and hope that foreign growth is very strong, because foreign growth is a big pull factor for U.S. exports. Exports may very well grow faster than imports if you do the things domestically that I listed above, but not because you're restricting imports.

What is the likelihood that the Obama administration will actually push the Bush administration's trade agreements with Panama, Colombia, and South Korea through Congress, considering Democrats' opposition?

We've been trying to guess that since Obama was elected. If you follow the trend of presidential pronouncements and his senior advisers' pronouncements, they're not very enthusiastic, but they are getting slowly warmer. We know healthcare is first and foremost and there is a small handful of congressmen who have threatened privately, or maybe publicly in some cases, not to vote for healthcare if the president brings forward these trade agreements. So, since the vote is going to be quite close, that has been a big stall for the trade agreements.

My hope and indeed my forecast is that once the healthcare debate is wrapped up, some of the trade agreements will come forward. I think the most likely two are the Korean agreement, which doesn't have the ideological opposition that Colombia seems to have attracted, and, quite important, the Doha Round might get some new energy from the United States. The administration has indicated it wants to go ahead with the Trans-Pacific partnership, which could be a pretty big deal in several years' time. I don't think [the Colombia and Panama agreements] will be brought forward by the administration until after the 2010 congressional elections.

What effect will Latin American leaders' decision to form their own trade block without the United States or Canada have on the U.S. export push?

The United States has basically excluded itself from a lot of trade agreements, and Brazil clearly wants to go forward with a trade block in South America without U.S. participation. I don't think it will be terribly harmful for U.S. exports, but it will be somewhat harmful and will newly challenge U.S. trade diplomats and other diplomats to find other avenues, including the Doha Rounds, to liberalize trade with South America. We have an agreement with Chile and one with Peru, and hopefully we'll have one with Colombia soon, but we have nothing in sight for Brazil, which is a big country. The other part of the world where trade agreements are likely to have some diversionary effect on U.S. exports is Asia. And that probably has much bigger potential than South America. But again, apart from the Trans-Pacific partnership, which is very nascent, the United States is not very active in the Asian trade picture. We're very active as investors and exporters and importers, but not in a trade policy which is forward looking.

Commerce Secretary Gary Locke said that this goal of doubling exports would be pursued without regard to the value of the yuan or the dollar. Can Obama achieve his goal without this?

The perception abroad is that the United States is not coming to the party with a zero-protectionism base, that we have done quite a bit.

It is regarded as a no-no for any administration to talk about anything which makes the dollar more competitive or "weaker." That enflames the editorial writers in the Wall Street Journal, gets all Wall Streeters excited, and is bad for the bond markets. There's a second no-no, which is that the commerce secretary is not supposed to talk about exchange rates. The only cabinet official who is supposed to talk about exchange rates is the Treasury secretary. That's a big turf issue which goes back to my time in government and before. Locke was brief. He said the right thing given his position.

From an analytic standpoint, it makes absolutely no sense. You cannot double exports at the current exchange rates that the United States has with many countries, particularly with Asia. It's one of those logical contradictions but political necessities we hear from time to time.

Some economists have praised the Obama administration for not erecting trade barriers in response to the economic crisis. What is the perception of our trade policies abroad, and how do U.S. policies compare to protectionist measures globally?

When you're abroad, the United States is severely criticized, overly criticized relative to what we have done. The things that aggravate people: first and foremost is "Buy American," implemented in the stimulus. The United States at one time had a measure in the TARP [Troubled Asset Relief Program] legislation that a firm which receives TARP money cannot hire H1B [a visa allowing U.S. employers to temporarily hire foreign workers in specialty occupations] people from abroad unless it does a very long and lengthy search of possible employees in the United States. This affected very few potential foreign employees, but it got a lot of attention.

The United States has essentially nationalized General Motors. And--Chrysler the same--they're getting preferences by comparison to foreign auto suppliers, and that's noticed abroad. We have coming down the track climate change legislation, which for the moment is stalled. We also have energy efficiency legislation, which for the moment is stalled, and both of those legislative packages have preferences for U.S. firms in various way. And that gets a lot notice abroad, but the fact of the matter is that the perception abroad is that the United States is not coming to the party with a zero protectionism base, that we have done quite a bit. Now, have other countries done quite a bit? Oh indeed they have.

In fact, when you look at the world picture of trade measures, the G20 countries collectively have indulged in about three hundred protectionist episodes since the crisis began in 2008. All of the episodes already distort trade, or threaten to distort trade in the near future, but most of them are allowed by the WTO rule book. Collectively the protectionist episodes do not account for a large fraction of the drop in trade--the main culprit is plunging world demand in 2008 and 2009--but they do create a sour atmosphere for trade liberalization moving forward. That's most unfortunate, because policy liberalization over the past thirty years has been largely responsible for the fact that trade has grown much faster than world GDP, and thereby has provided one of the strongest engines for continued improvement in living standards in a great many countries.

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