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February 6, 2009
Exclusive: Obama Blinks on Trade Challenge
Many have wondered what would be President Barack Obama’s first direct foreign policy challenge, and how he would react to it. Would the confrontation be with Iran or North Korea? China or Russia? No, it was the European Union that called out the new American president. Obama folded his hand without even looking at his cards, showing the jitters of a novice in the face of the EU bluff.
The issue was “Buy America” language in the stimulus package passed by the U.S. House and expanded in the Senate to cover all “manufactured goods” bought by taxpayers. The EU threatened to retaliate in letters sent to Congressional leaders, and to Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton. The next day, President Obama responded. “I agree [with the EU] that we can’t send a protectionist message,” he said in an interview with Fox News, “I want to see what kind of language we can work on this issue. I think it would be a mistake…for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade.”
Obama’s distinction between “looking after ourselves” and “world trade” was revealing as to his priorities. It was also a reversal of his promise during the campaign to “create jobs that could not be outsourced.” The United States has been heavily subsidizing the rest of the world with a trade deficit that has sent over $4 trillion overseas to sustain foreign economies during the 2001-2007 period. Now that the American economy is in a deep recession, Obama is being told that he cannot focus on reviving his own country’s fortunes, but must continue to support the same patterns of foreign trade that helped undermine American prosperity.
It is vital and impeccable economic logic to include “Buy America” directives in the stimulus package. The whole rationale for spending $820 billion is to generate economic activity in the United States to end the recession, renew production, and put people back to work. Money that leaks – or pours, out of the U.S. economy weakens the nation’s recovery.
The misdirection of funds overseas was one of the reasons the recovery from the much milder 2000 recession was so slow despite the Bush administration’s strong actions to cut taxes and interest rates. As Business Week noted in April 2003, “the fiscal and monetary stimulus of the past two years has helped global producers as much as U.S. companies.” Business Week returned to this problem with its December 8, 2008 cover story by chief economist Michael Mandel who stated, “The financial crisis was caused, in large part, by U.S. consumers borrowing trillions of dollars from the rest of the world to buy imported cars, clothes, and gasoline, even as jobs slipped overseas. As long as the U.S. is running a big trade deficit and borrowing from abroad, a fundamental cause of the crisis remains.”
The EU, as well as many other countries (especially China), have benefitted from the global financial and trade imbalances that have given them trade surpluses to expand production and create jobs. The EU has threatened to take the issue of “Buy America” to the World Trade Organization, hoping for a ruling that would declare American law to be “illegal” and substituting the self-serving opinion of foreign judges for the deliberations of the elected representatives of the American people.
When the WTO was being created during the Clinton Administration, I was a staffer on the House Republican Research Committee. I wrote and circulated a paper warning against the surrender of national sovereignty that would result from changing the international trading system into a supranational arbitration court. I was called into Rep. Newt Gingrich’s office and told this was a false concern. The U.S. was too powerful to be threatened. I was assured that if the WTO did anything harmful to our economy, we could just ignore it. Unfortunately, American leaders have chosen not to use their power to protect their independence. Too often, threats of WTO intervention have caused U.S. legislators to rewrite bills before they were even tested. Obama has been stampeded into doing the same. President George W. Bush said of the UN in his 2004 State of The Union Address, “America will never seek a permission slip to defend the security of our people.” The same determination should be shown in defense of the economy upon which our people depend for their livelihoods.
After Obama’s statement, an amendment was offered in the Senate to strip the “Buy America” provisions from the bill. It failed 31-65, but compromise language was added saying that the provisions, “shall be applied in a manner consistent with United States obligations under international agreements." The EU would try to use the Agreement on Government Procurement (GPA) signed like the WTO in 1994. Under it, governments are to treat its own citizens and foreigners alike when awarding contracts. The GPA has never been a popular covenant. Only 39 nations have signed it, and 27 of them are members of the EU. China has not signed, which means “Buy America” can be applied without question against Chinese goods and services. Given that the trade deficit with China is the number one problem in the U.S. accounts, it is vital that policy seeks to reduce, not expand, the red ink.
The attempt to improve the “transparency” of government procurement during the Doha Round of global trade talks failed even before the overall negotiations broke down last summer. The issue was dropped in 2004 from the Doha agenda. According to the U.S. Trade Representative, “a number of WTO Members remained concerned that a transparency agreement could lead to market access commitments.” It is routine for governments, including those in Europe, to direct spending towards domestic suppliers. When the EU signed the GPA, it excluded from coverage contracts awarded by federal and local governments in connection with water, energy, transportation and telecommunications projects. So the EU’s hands are not clean when complaining about “protectionism” elsewhere.
While the current stimulus bill was being debated in the House, I was in Ankara, Turkey to speak at an international trade conference. The subject of the meeting was how foreign governments manage their public spending to ensure maximum return to their domestic economies. Most of the participants were government officials, swapping ideas on how better to exploit trade with the United States to bolster their own economic nationalism.
The topic was the procurement of military equipment. The U.S. is the world’s largest exporter of defense products, as it has demonstrated the ability to project power in ways other countries cannot even imagine. The Pentagon spends four times as much on research and development as all of the European Union combined. America’s comparative advantage in the arms trade is one of the few bright spots in its international accounts. Yet, when foreign governments buy U.S. systems, they demand offsets so that America does not realize the full benefits of the export, and the buyer recaptures the value of the contract with work directed to their home economy.
The offsets demanded by foreign governments include co-production of the purchased equipment, licensed or subcontracted production of parts for the procured product, technology transfers, counter-trade, mandated investment in local firms, and help in exporting domestic products. The Commerce Department reports to Congress each year on the offsets demanded of U.S. firms exporting military products. According to the December, 2008 report, for the period 1993-2007, offsets averaged 72% of the sale price. The 2008 report did not show as detailed a breakdown by country as past reports, but the 2007 report found that in Europe, offsets often totaled 100% of the export price, and sometimes exceeded the full cost of the original contract. Almost two-thirds of the offsets demanded are for commercial products, not military development, thus violating the spirit, if not the letter, of the GPA.
It was clear in Ankara that a major objective of foreign government policy is to gain American technology to improve overseas production of exports, including in competition with U.S.-made products. Martin Sticha of the Czech Ministry of Industry and Trade talked of “causality,” a policy to generate economic activity in his country that would not have otherwise taken place in the market. Peter Taal of the European Defense Agency said the EU seeks “less dependence on non-European sources for key defense technologies” while “working to strengthen the European Industrial and Technological Base.”
It is time for American leaders to take these issues as seriously as do our overseas rivals and place the prosperity of the United States first on their agenda. The American economy must be protected from foreign threats.
FamilySecurityMatters.org Contributing Editor William R. Hawkins is a consultant specializing in international economic and national security issues. E-mail him at HawkinsUSA@aol.com.
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