Fiscal Follies and International Trade

Posted on February 6, 2014 by


William Galston published an opinion piece in Tuesday’s Wall Street Journal titled: Obama’s Moment of Truth on Trade. In the editorial Galston compares Obama’s trade statement in his recent State of the Union address to Bill Clinton’s battle to pass NAFTA in 1993. Clinton faced significant political opposition within his own party, but stood tall for the principles of free trade. NAFTA passed. According to Galston this was Clinton’s defining moment on trade. President Obama is finding opposition within his own party from Harry Reid and others. Is this President Obama’s defining moment when it comes to trade policy? Galston thinks so. And it may very well be.

However the situation today is much different than it was in the early 1990s. A report issued by the Peterson Institute for the International Economics on Wednesday shows just how different the environment is. The report is a string of short essays analyzing the effects of our Congress’s inability to pass budget legislation in recent years. I’d like to quote from the introductory essay by Institute President Adam S. Posen. Posen indicates how our fiscal problems are affecting the ability of Obama to negotiate trade pacts.

The most overlooked and perhaps most lasting harmful effect of the fiscal follies will be the severely diminished ability of the United States to conclude international economic negotiations. For the most part, the US government have historically gone into economic discussions, whether trade negotiations, G-7 or G-20 summits, or International Monetary Fund (IMF) debt program discussions, with three strong cards: the ability to set the initial agenda; the financial strength to hold the line when there were disputes; and the credible tactic of demanding a good deal lest Congress object. All that leverage is now diminished. At the IMF–World Bank and G-7 meetings in October 2013, the first agenda item was criticism of the United States (deservedly). Nothing else got tackled. The Obama  administration’s ambitious trade opening agenda of concluding Trans-Pacific and Trans-Atlantic partnerships is stalled because of negotiating partners (rightly) doubting the ability of the US government to win congressional approval.

If this is Obama’s moment of truth with respect to trade policy it’s very likely that our current president’s economic legacy is going to be tarnished (not that Obama’s economic image needed any additional blotches for a truly sullied aura). Free trade between individuals, businesses, and nations is the foundation of economic growth. Our mismanaged budgetary escapades at the federal level are not going away and have definitive consequences for both the perpetrators (President Obama and Congress) and the victims.