We’ve been getting some mixed signals from the Obama administration so far regarding trade. During his confirmation hearings, Geithner branded China a currency manipulator, to everyone’s delight except China. Then he reassured the G7 that the U.S. was committed to avoiding a return to protectionism. Then the “buy American” provision is included in the first pass of the stimulus package, only to be watered down with a clause about complying with our trade obligations after howls of protest from Canada and Europe.
More recently, during his visit to Canada, Obama reassured the Canadians about trade with the U.S. (as well he should), while discussing with president Harper ideas about revising NAFTA to include environmental and labor protections, which would seem to be aimed more at Mexico than Canada, which is where the real problem lies.
What’s going on here? Is the administration committed to reducing and eliminating the trade deficit, or isn’t it? Without going into too much detail, during a meeting with a U.S. congressman this week (during which I presented him with a copy of Five Short Blasts), I got the impression that the administration, including the Federal Reserve, understands very well that the trade deficit is the single greatest threat to our economy. Since there was no press present, the congressman may have felt more at ease in sharing things told him in confidence, so I won’t elaborate. And I may be reading way too much into it, but I left with the impression that this issue is going to be addressed.
Is it possible that the administration is maintaining a public posture of disavowing protectionism to prevent stirring up fear and anger in the global community while quietly implementing policy, in whatever form it might take, that will reverse our trade imbalance?
Here’s another example. Buried in this linked article about Paul Volcker’s comments at a luncheon with economists is this Volcker quote:
The current crisis had its beginning in global imbalances like a lack of savings in the United States, but policy-makers around the world were too reticent to take action until it was too late, Volcker said.
When he speaks of “global imbalances” and the “lack of savings in the United States,” isn’t he really talking about the trade deficit without actually saying it? The cause and effect relationship between the trade deficit and our lack of savings is widely understood. And, in using the lack of savings as an example of global imbalances (by his use of the word “like”) he’s implying that there are others, and everyone knows that trade is the worst global imbalance of all.
Time will tell. If this is the approach, I think the administration will eventually discover that the trade deficit simply won’t respond to measures small enough to fly under the radar. I predicted that the administration would take such an approach, essentially trying harder at the failed approaches of the past until, hopefully, it realizes that a more direct approach, like a return to tariffs, is the only way to get the job done.
But, for now, I’m taking some comfort in signs that it at least the administration recognizes the problem.