Foreign Policy and the 2010 Midterm Elections: Trade

With U.S. economic recovery still slow, trade policy looms as a factor in the congressional midterm races. This Backgrounder explores the consequences for trade based on the outcome of the Democratic-Republican electoral struggle.

September 23, 2010

Current political and economic issues succinctly explained.

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Editor’s Note: This is part of a series on the foreign policy implications of the 2010 midterm elections.

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Amid high unemployment, slow U.S. growth, and a rising U.S. trade deficit, trade policy has emerged as an important campaign issue in the 2010 congressional midterm elections. The Democratic majority and Republican minority in Congress have criticized the Obama administration’s trade policies for failing to spur U.S. job growth and business expansion. Republicans and business groups argue Obama’s failure to advance major trade deals since his election--including those negotiated but not ratified under George W. Bush--leaves the United States lagging other developed countries. Many Democrats and labor unions, meanwhile, oppose these pending deals because of what they say are unfair advantages for foreign firms and failure to protect U.S. and foreign workers. The Obama administration is under pressure from both parties to do more to rebalance the U.S.-China trade relationship, which critics say is inhibiting U.S. export growth and domestic hiring. Both parties are hoping to rally their base and independent voters around these issues to help gain congressional seats on November 2.

A Shift in Trade Winds?

Some analysts say Obama’s best hope for getting free trade deals approved by Congress is for Republican lawmakers to pick up seats in midterm elections (WashTimes). CFR Senior Fellow Jagdish Bhagwati, for instance, says the last U.S. election brought to power a number of Democratic members of Congress who remain "indebted to trade-fearing unions, thus constraining the pro-trade President Barack Obama."

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Many Democratic candidates have run on strong anti-free trade platforms, opposing Republicans’ liberalized approach to economic relations with China, South Korea, and other countries associated with U.S. job losses.

Many Democratic candidates have run on (WSJ) strong anti-free trade platforms, opposing Republicans’ liberalized approach to economic relations with China, South Korea, and other countries associated with U.S. job losses. The shift comes as more Americans associate their frustrations about the economy with free trade pacts. Fifty-three percent of respondants in a recent Wall Street Journal/NBC News poll said free trade agreements have hurt the United States, up from 46 percent three years ago and 32 percent in 1999.

Representative Tom Perriello (D-VA) criticized his Republican opponent with ads depicting a U.S. businessman standing before an Asian factory (WSJ), thanking Republican challenger, state Senator Robert Hurt, for "protecting the tax loophole that gives a company like ours a kickback for sending jobs overseas." Democratic candidates in Ohio, Wisconsin, Nevada, Indiana, New York, and California have launched similar ads. In response, Republican candidates--heavily funded by business groups (TheHill) including the U.S. Chamber of Commerce--have countered that Democrats’ poor economic policymaking (on taxes, trade, and debt) have worsened the dreary jobs climate. These lawmakers argue that trade deals create U.S. jobs by benefitting U.S. multinational corporations like John Deere and Caterpillar, which operate in states like Illinois, New York, and Iowa. This CFR Backgrounder examines the much-debated relationship between tax advantages for U.S. multinationals, trade, and job growth.

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CFR Director of Studies Jim Lindsay says the midterm elections are not likely to move the trade agenda forward because "Democrats don’t want to vote on free trade agreements, and it’s not clear that a lot of Republicans want to vote on free trade agreements either because it divides their constituents as well." This division stems partly from the rising Republican "tea party" movement, which remains ambivalent on trade issues. The U.S. Business and Industry Council’s Alan Tonelson says trade protectionist measures fit (WashTimes) the tea party’s overall agenda, since expanded international trade has exacerbated U.S. debt, contributed to the financial crisis, and fed foreign military budgets that threaten U.S. liberties.

Debating Obama’s Record

The U.S. trade deficit rose nearly 13 percent to $123.3 billion in the second quarter of 2010, its fourth consecutive quarterly increase since 2009. The trend has increased pressure on the White House (CSMonitor) to show it is working to help U.S. companies increase exports and boost U.S. hiring.

In his 2010 State of the Union address, Obama pledged to double exports in five years. Some Republican and Democratic lawmakers have criticized the plan, which includes creating an export promotion cabinet within the government, an export council staffed with private sector advisers, and better governmental promotion of small and medium-sized businesses. Attracting special attention is Obama’s pledge to enact existing free trade legislation with South Korea, Colombia, and Panama, which business groups strongly support and labor unions staunchly oppose. U.S. Chamber of Commerce senior director Christopher Wenk says Obama’s slowness on the South Korea pact has caused U.S. meat and dairy imports in South Korea to plunge. The United States stands to lose $35 billion in exports to the world and as many as 345,000 jobs if it fails to implement the agreement with South Korea, the group has said. The U.S. International Trade Commission says the United States has also lost ground on agricultural exports to Colombia in the past several years as the trade deal has languished.

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U.S. trade officials have defended Obama’s trade progress, announcing in September (DowJones) that U.S. exports were on track to double in five years in line with Obama’s goals, with exports up 17.9 percent as of July. Obama also set a deadline to complete (Bloomberg) the South Korea deal at the July G20 meeting in Toronto. Progress has been slower on the Colombia and Panama trade pacts, due to ongoing negotiations over labor and tax measures.

Protectionist Signals and China

China’s currency policy features prominently in Democratic and Republican midterm campaign agendas because of growing voter frustration about the economy and unemployment. Both parties want to see the Obama administration persuade China to allow its currency to appreciate faster. Since Beijing announced its intent (Bloomberg) to let the yuan appreciate in June 2010, the currency’s value has increased by less than 1 percent, while China’s trade surplus has expanded.

Revaluing China’s currency "would likely result only in a modest decrease in the current trade deficit" between the United States and China. --American Chamber of Commerce in China

Midterm election pressures are accelerating the pace of a bipartisan House bill to punish Chinese imports (WSJ) that benefit from an undervalued Chinese yuan with tariffs. Representative Tim Ryan (D-OH), the bill’s lead sponsor, said the bill (TheHill) would be "tremendously helpful" to rallying the Democratic Party’s base and independent voters in the fall, particularly in the Rust Belt (a swath of states in the Northeast and Midwest including Pennsylvania, Ohio, Indiana, and Michigan), where the manufacturing sector has lost jobs to Chinese outsourcing. Ryan and co-sponsor Tim Murphy (R-PA), sent a letter backed by one hundred lawmakers urging a vote on the bill, which would allow the Commerce Department to consider currency manipulation in calculating countervailing and antidumping duties on imports from countries manipulating their currencies to depress export costs. But business groups strongly oppose the bill. Industry representatives--including the U.S. Chamber of Commerce, the Business Roundtable, the Financial Services Forum, and the Coalition of Services Industries--sent a letter to leaders of the House Ways and Means Committee urging them against supporting the legislation.

In a 2010 White Paper on doing business in China, the American Chamber of Commerce in China said it was "concerned that the United States is placing disproportionate emphasis on [yuan] valuation." Revaluing China’s currency "would likely result only in a modest decrease in the current trade deficit" between the United States and China, whereas "focusing on other price distortions, such as factor pricing [the cost of labor or resources] in China, would possibly result in greater adjustments."

The White House is hoping for a moderate approach. The Obama administration wants to hold off the Ryan-Murphy bill and similar legislation in the Senate due to concerns it would compromise the administration’s long-term economic ties with China. Treasury Secretary Timothy Geithner appeared before panels in the House and Senate in September 2010 calling for faster yuan appreciation while defending the administration’s diplomacy. CFR Adjunct Senior Fellow Steve Dunaway says Geithner’s remarks indicated a desire not "to pour gasoline on the fire that has been lit under a growing number of members of Congress." Similarly, the American Enterprise Institute’s Philip Levy says National Economic Council head Larry Summers’ September 2010 visit to China was not intended to get tougher with China but instead to reassure a U.S. domestic audience it is focused on boosting job creation ahead of midterm elections.

Still, the Obama administration may be forced to make bolder moves. In September, the United Steelworkers filed a petition (WSJ) with the U.S. Trade Representative alleging that China unfairly subsidizes and protects its green-tech industries, harming U.S. companies and workers. The deadline by which the U.S. government must decide whether to pursue the case (which would involve taking China to court at the WTO) comes just before midterm elections, which could irritate Democratic constituents if the administration rejects the petition. If it goes forward, it could upset the administration’s approach with China.

Obama has also been criticized by Republican free trade advocates for several protectionist moves against China, including placing anti-dumping duties on Chinese tire imports. In a recent Financial Times article, Undersecretary of International Trade for the Commerce Department Francisco Sanchez defended these moves, saying the products are low-margin industrial components, for which the United States is losing competitiveness against many countries. These defense protectionisms over the past several months cover less than 3 percent of U.S. trade with China, he said, leading trade analyst Gary Horlick to conclude that such debates are soaking up undue time and political capital on trade policies that are "irrelevant to most American companies."

South Korea Deal: Promise and Perils

Worth nearly $68 billion in two-way trade, the U.S.-South Korea trade deal would be the largest U.S. free-trade pact (Bloomberg) since NAFTA in 1994 and would help Obama toward his pledge to double exports in five years. But there are many roadblocks. In a July 2010 letter to President Obama, House Democrats called the agreement "another NAFTA-style FTA that we simply cannot support in its current form," which it argued would undermine the U.S. manufacturing base. U.S. auto industry supporters, including Ford Motor and the United Auto Workers, oppose phasing out the existing 25 percent tariff on Korean pickup truck imports to the United States, because of the potential damage to U.S. jobs. Ford also considers the tariff an important bargaining chip to negotiating opening the Korean market to U.S.-branded vehicles, which they say are blocked by taxes, customs, regulatory standards that discourage foreign competition. U.S. auto manufacturers also want the agreement to address South Korea’s strict vehicle standards, which they say inhibit U.S. imports and jeopardize U.S. jobs by eliminating import duties on Korean pickup trucks. To pass the legislation, Obama would also need to win support (Bloomberg) from House Ways and Means Chairman Sander Levin (D-MI), whose Detroit district employs thousands of autoworkers.

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Defense protectionisms over the past several months cover less than 3 percent of U.S. trade with China --U.S. Commerce Dept. official Francisco Sanchez

Republican-backed U.S. beef producers, which hold 30 percent of Korea’s beef import market, want the deal to lift South Korea’s restrictions on beef shipments, after Seoul restricted imports (Yonhap) of U.S. beef over fears of mad cow disease. The National Cattlemen’s Beef Association has said eliminating Seoul’s 40 percent tariff could create (WashTimes) a $1 billion beef market for U.S. producers.

Panama and Colombia

The Panama and Colombia free trade agreements have featured in both parties’ campaigns, especially in states like Florida, which expect the pacts (MiamiHerald) to boost local job creation.

Business leaders meanwhile have criticized Obama for not signaling a move to enact the Colombia and Panama deals. Jim McNerney, chairman and chief executive of Boeing and head of Obama’s export council, said in September 2010 that U.S. companies (Reuters) were desperate for the deals to go through and cited six hundred free trade agreements being worked on elsewhere around the world, whereas "the U.S. is focused on single digits." On September 16, 2010, Commerce Secretary Gary Locke said the president supported moving forward on deals with these countries, but stressed that more work was needed to shore up bipartisan support. Democratic lawmakers have also urged the administration to address what they say are Panama’s tax evasion, money laundering, labor, and justice problems before completing a deal. There is similar pushback to enacting the Colombia deal (CSMonitor). Democrats and human rights advocates have criticized the Colombia government’s efforts to stop violence against labor leaders and human rights defenders.


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