The Hindu Business Line : Expectations from the Obama administration

With the global growth pole shifting to the Asia-Pacific region, the Obama administration could very well engage in more trade agreements with key Asian countries to minimise economic shocks at home.

Suparna Karmakar

It appears that the world is waiting for directions from the soon-to-be-sworn-in Obama administration in all matters — economic, financial and even trade, notwithstanding the US President-elect’s stated conservatism on trade issues. For little else seems to explain the sudden lull in activities on the trade negotiation front, both at multilateral and regional/bilateral levels.

It could be argued that the current dire economic conditions, the world over, have weakened trade prospects, and global leaders have more urgent matters to attend to, namely calibrating the impact of the ongoing recession. But given the nascent signs of emerging trade protectionism and the fact that ensuring open commercial regimes are crucial to diffusing the impact of the current slowdown, the sudden silence of world leaders in furthering the cause of trade liberalisation is surprising.

Uncharacteristic silence

Even more so, because, after the November 2008 Declaration of G-20 leaders to speed up efforts to conclude the Doha Round, and the decision for the leaders to meet again in April 2009 to take stock of the progress, it would have been natural for the big-wigs at the Centre William Rappard to begin forays to get Members to reconvene at the soonest to take the Doha talks forward, preferably in January. Hence, this rather uncharacteristic silence from the WTO headquarters also lends credence to our postulate.

What, then, is the expectation from the new Democratic regime in the US? Traditionally, Democratic governments in the world’s largest economy have been trade-conservative, in spite of the fact that it was under a Democratic government that the WTO’s original tariff reduction protocol — the GATT — was passed, and again it was under a Democratic President that NAFTA was passed.

Also, Democratic governments have traditionally been conservative when it comes to their relations with India. But, this time around, it may be difficult to predict which way the wind will blow, though there are some ‘known-knowns, to use a Bush euphemism.

Re-stabilise the economy

The most important being that President Obama’s priority will certainly be to re-stabilise the US economy, which will be manifest in the (now confirmed) forthcoming fiscal stimulus packages.

From media reports, it is clear that the new government’s (unlike the last one) focus is on domestic infrastructure development, domestic ‘green-job’ creation (through promotion of green energy and efforts to combat economic challenges of climate change), and middle-class tax cuts.

None of these is expected to have any direct impact on the Indian economy. The impact is likely to come via:

improved economic conditions in the US, which will boost consumer demand for imported goods; and

US stimulus to stabilise the financial system and domestic investments through the proposed progressive measure of offering tax-credit to companies that invest in and generate more domestic jobs. This may disincentivise outsourcing.

Limited gains

However, contrary to the dire consequences of the above which analysts have predicted, this may not be as damning as it sounds. For one, current economic conditions are unlikely to spur state actions, as in the 1930s or even the 1980s.

For, valuable lessons have been learnt about the limited gains that such protectionist measures generate over the medium term; the 1980s bailout by President Reagan to US auto-majors by legislating voluntary export restrictions on Japanese cars did not help increase the competitiveness of the American automobile industry in the medium or long run.

Pacts with Asian countries

Furthermore, it appears that the present economic condition and the weakened financial resource mobilisation ability will call for enhanced engagement in both trade and financial matters with the emerging economies in Asia.

It is undeniable that not only has the global growth pole shifted in recent years to the Asia-Pacific region, it is these countries that currently hold huge current account surpluses, resources that could be imaginatively mobilised to shore up the tottering global economy.

The Obama administration, therefore, could very well engage in more trade/economic agreements with key Asian countries, to minimise the economic shocks at home.

Arguments have been made that the dollar’s recent strength will push the US to counter the Chinese-managed exchange rate policies, so as to change the competitiveness back in favour of the US producers.

However, recent pressure tactics on China to allow the yuan to float has not only been largely ineffective, but after the onset of the financial crisis, China has, in fact, begun exploring the possibility of using yuan for some of its international trade transactions. A move such as this from a large economy (China has recently pipped Germany to become the world’s third largest economy) and a major trading power will further reduce the manoeuvrability of the US to use coercive powers.

Inducing Restructuring

The incoming US administration is, therefore, more likely to use regulations and national legislation such that the economy is restructured to make production systems more efficient and competitive and generate employment in a sustained manner; and the bail-outs can be used as a precondition to induce such restructuring.

To that end, the US economy would be better served if its foreign policy adopts a co-operative and liberal attitude vis-À-vis the high-growth economies of the world rather than a belligerent and recalcitrant stance. And if such sanity does prevail, there is hope for the global trading regime and the world economy at large.

(The author is a Visiting Research Fellow with the Institute of South Asian Studies, National University of Singapore. The views are personal. blfeedback@thehindu.co.in)

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