Bar­rack­ing Obama be­gins

New US Pres­i­dent faces con­fronta­tions with China and WTO

Finweek English Edition - - Companies & Markets -

PRES­I­DENT BARACK OBAMA is al­ready well in­volved in his first two ma­jor in­ter­na­tional con­fronta­tions. Those are re­spec­tively with China and with the World Trade Or­gan­i­sa­tion. Both clashes were ef­fec­tively in­evitable. They re­late pri­mar­ily to the strongly pro­tec­tion­ist views that have in­creas­ingly over­taken the Demo­cratic Party in the United States.

How­ever, his­tory may well de­cide Obama’s big­gest early pol­icy fail­ing was taken when he was still pres­i­dent-elect, be­fore he had taken over from Ge­orge W Bush. That re­lates to the de­ci­sion – bit­terly but ul­ti­mately for­lornly op­posed by most Repub­li­cans – to pro­vide mas­sive bail-out as­sis­tance to the mo­tor in­dus­try in the US.

I noted (27 Novem­ber 2008): “The in­com­ing Obama ad­min­is­tra­tion could quickly find it­self caught up in a big bat­tle with the WTO.” So it has proved.

Grainne Gilmore, eco­nomics cor­re­spon­dent of The Times of Lon­don, re­ported on 28 Jan­uary: “The head of the WTO – Pas­cal Lamy – warned the pack­age of bailout mea­sures de­signed to help de­vel­oped coun­tries through the eco­nomic down­turn could harm de­vel­op­ing na­tions.” He re­ported that “pro­tec­tion­ism as a go-it-alone so­lu­tion doesn’t work”.

Lamy said there had been no dra­matic signs of resur­gent pro­tec­tion­ism yet – a scary re­minder it was just such ac­tions that so se­verely ag­gra­vated the post-1929 Great De­pres­sion. But he added there had been “small waves” as gov­ern­ments tried to boost eco­nomic ac­tiv­ity through na­tional bail-out pro­grammes.

Lamy re­ported: “Bail-outs run the risk of putting de­vel­op­ing coun­tries at a dis­ad­van­tage. There are planes that won’t fly, ships that won’t sail, cars that won’t be sold. Look at this from the side of the de­vel­op­ing coun­tries that by def­i­ni­tion can’t af­ford big bail-out pack­ages. Let’s not make the sys­tem more de­vel­op­ment-averse.”

Obama’s huge state sup­port for the US au­to­mo­tive in­dus­try has trig­gered ve­hi­cleaid pack­ages in Ger­many, France, Bri­tain, Swe­den, South Korea and China, among oth­ers.

An­gel Gur­ria, sec­re­tary-gen­eral of the Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment (OECD) pleads: “Gov­ern­ments must not be lured into rid­ing to the res­cue of ev­ery na­tional firm or in­ter­est. We’ll only make the cri­sis worse if we suc­cumb to the lure of pro­tec­tion­ism and petty na­tion­al­ism.”

Well, that’s as may be. But once Obama let the ge­nie out of the auto box he cre­ated a pos­si­bly in­su­per­a­ble prob­lem.

Then we move to Obama’s other ma­jor eco­nomic fight. That’s with China, tech­ni­cally over its al­leged pol­icy of “ma­nip­u­lat­ing” the ex­change rate of its cur­rency, the yuan, to keep it ar­ti­fi­cially cheap. I have no doubt China does in­deed pur­sue such a pol­icy. It’s in line with a long-term, gen­eral Asian view that rapid eco­nomic growth must be un­der­pinned by a crit­i­cal ex­port-led fac­tor. That has its ori­gins in the ex­traor­di­nary suc­cess that Ja­pan en­joyed from the mid-Fifties to the late Eight­ies.

The open­ing shots in the threat­ened head-on con­fronta­tion be­tween the US and China were fired by new Trea­sury Sec­re­tary Tim Gei­th­ner in some writ­ten re­sponses to the Se­nate “con­fir­ma­tion hear­ings” of his ap­point­ment.

The Econ­o­mist (24 Jan­uary) noted: “Gei­th­ner promised that the Obama team would push ‘ag­gres­sively’ for Bei­jing to change its poli­cies. The sharp tone and use of the legally loaded term ‘cur­rency ma­nip­u­la­tion’ ric­o­cheted through fi­nan­cial mar­kets as in­vestors shud­dered at the prospect of a Sino-Amer­i­can spat in the mid­dle of a global slump.”

I cer­tainly don’t dis­pute China has in­deed long been a se­rial of­fender so far as ar­ti­fi­cially hold­ing down the for­eign ex­change value of the yuan for colos­sal ex­port-pro­mo­tion pur­poses. That’s why I’ve al­ways thought claims that the US should be “grate­ful” to China for sup­port­ing its dol­lar are lu­di­crous.

China wasn’t looking to do the US any favours – any more than Ja­pan and West Ger­many were decades back when they, in par­tic­u­lar, per­sis­tently aimed for an un­der­val­ued cur­rency to pro­mote their ex­ports and never mind any­one else.

The Repub­li­cans un­der Bush un­der­stood that. But they were anx­ious to avoid ex­ac­er­bat­ing global eco­nomic ten­sions – yes, re­ceived wis­dom is that Bush was uni­lat­er­al­ist while Obama is mul­ti­lat­er­al­ist – while the New Demo­crat or­der ap­pears far more con­fronta­tional, about eco­nomic is­sues at least.

The Econ­o­mist urges: “The ba­sic eco­nomic anal­y­sis of the Obama team – that a stronger yuan, on a trade-weighted ba­sis, is nec­es­sary to re­bal­ance China’s econ­omy away from ex­ports – is surely right.” How­ever, the pub­li­ca­tion adds, cru­cially: “The world’s im­me­di­ate prob­lem is a dra­matic short­fall in de­mand across the globe. That will not be righted by ex­change-rate shifts.

“Over the short term the out­look for the world econ­omy de­pends on whether gov­ern­ments’ stim­u­lus pack­ages are suc­cess­ful. Right now, team Obama would do bet­ter to fo­cus on the scale, na­ture and speed of Bei­jing’s stim­u­lus mea­sures rather than rant about the cur­rency.”

Obama hopes greatly to im­prove US-Iran re­la­tions. Fine. But he must also avoid greatly wors­en­ing links be­tween the world’s two most im­por­tant economies – the US and China.

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