Saturday, April 14, 2007

A High-Risk, Two-Faced Trade Policy

George W. Bush, champion of free trade, was at his proselytizing best recently at the U.N.'s economic development conference in Monterrey, Mexico. "Trade helped nations as diverse as South Korea and Chile and China to replace despair with opportunity for millions of their citizens," the President told the assembled heads of state and diplomats on Mar. 21. "Trade brings new technology, new ideas, and new habits, and trade brings expectations of freedom.... By one estimate, a new global trade pact could lift 300 million lives out of poverty. When trade advances, there's no question but the fact that poverty retreats."

High ideals -- and lofty rhetoric. Clearly, Bush can be both passionate and evangelical about the need to lower trade barriers and pry open world markets. He is, like many traditional Republicans, an avowed free trader. That's why it's so jarring that his Administration has embarked on a confrontational strategy when it comes to many of America's leading trading partners.

In the past month, the White House has slapped new tariffs on lumber imports from Canada -- causing a spike in lumber prices paid by U.S. consumers. It levied huge tariffs on steel imports from nations as diverse as Russia and Korea -- the latter the very country often cited by Bush as a free-trade success story. And the U.S. Transportation Dept. has created new paperwork headaches for Japanese airlines in return for actions in Tokyo that angered American cargo companies.

BATTLEGROUND STATES. The backlash against American business already has begun: The European Commission on Mar. 22 drew up a hit list of products it might target for retaliation. On the Europeans list: textiles, steel, and citrus fruit. And that could mean trouble in states associated with those industries, including Pennsylvania, Ohio, West Virginia, North Carolina, South Carolina, Georgia, and Florida -- all key battlegrounds for Bush in 2004.

You'll recall that the President, in a desperate bid to win House passage of trade-liberalization legislation, cut a deal with textile-state lawmakers to protect jobs in their districts by blocking certain foreign textile imports. The gambit worked, at least in the short run. Bush's "Trade Promotion Authority Bill," which would allow the President to negotiate "fast-track" trade pacts without congressional amendments, passed the House by a single vote. Now it awaits Senate action. But the House battle set the stage for what seems to many to be a schizophrenic trade policy.

What's this all about? At its heart, it's about votes. On the one hand, Bush tells the tech industry, farmers, and workers in export industries that he believes in free trade. But he tells union workers, whose support the Republican Party covets, that he will fight for their jobs against unfair foreign competition.

REAGAN'S SCRIPT. This protectionist stance could well end up protecting him politically in key swing states such as Oregon, Pennsylvania, Ohio, Michigan, West Virginia, Kentucky, Tennessee, North Carolina, and Georgia. That's one reason for the President's go-slow approach on what was expected to be a top policy priority for 2002: a Western Hemispheric trade pact.

In many ways, Bush is following the script of another Republican free trader, Ronald Reagan. The ever-optimistic Reagan loved to extol the virtues of free trade as he made his Cold War pitch for the capitalist way. But he also knew how to play the role of tough guy. Often working in concert with two powerful senators -- Democrat Lloyd Bentsen of Texas and Republican John Danforth of Missouri -- Reagan used the leverage available to him to push Japan and Europe to lower barriers to American goods and services. And he did it all without provoking anti-American retaliation.

The cowboy act on trade paid off for Reagan. Not only did he win concessions from the Japanese but he also won the loyalty of millions of blue-collar voters, dubbed "Reagan Democrats," many of whom for the first time saw the GOP as the party of the working class.

FINANCIAL FLEXING. The current President needs to realize that, like Reagan, he's in a high-stakes game. By ratcheting up the rhetoric in disputes with Europe, Asia, Canada, and Russia, Bush is risking an all-out trade war that could hurt both consumers and American businesses. Consumers could face higher prices and spot shortages of imported products, and U.S. companies could face shrinking international markets and retaliatory trade barriers.

Times have changed since the 1980s. Despite working with Bush in the war on terrorism, many European leaders are chafing at U.S. economic dominance and want to flex the financial muscles of the newly minted euro zone. And Japanese politicians, facing a seemingly endless recession, see populist appeal in confronting Uncle Sam on issues of American protectionism.

For Bush, there's no substitute for victory. He reveres Reagan and has clearly taken a page from the Gipper's old playbook on trade policy. But he must show market-opening results on everything from bananas to banking. Because, if he doesn't, America could lose, big-time. And the world economy could be the biggest loser.

Dunham is a White House correspondent for BusinessWeek's Washington bureau. Follow his views every Monday in Washington Watch, only on BusinessWeek Online
Edited by Douglas Harbrecht