Bush Viewed as Racing Clock as He Tries to Solve Nation’s Massive Trade Problems
Almost as soon as he takes office, George Bush will have to begin dealing with the dark side of Ronald Reagan’s international economic legacy--the outsized U.S. trade deficit and the erosion of America’s long-standing economic dominance among the Western allies.
The prosperity at home during the Reagan years--low unemployment, much-reduced inflation and a record-long economic expansion--helped Bush win the presidential election this month. But analysts say that those gains have been achieved at the expense of huge trade deficits and a mountain of debt.
Under Reagan, the United States became the world’s largest international debtor, while Japan and West Germany amassed huge surpluses. And, already, those nations are visibly more willing to challenge U.S. dominance on a host of important economic issues, including trade relations and the transfer of militarily sensitive technology to the Soviet Union.
As Harvard historian Benjamin M. Friedman warns: “World history shows that debtor countries don’t call the tune the way a creditor country does.”
Bush, as a longtime internationalist, is expected to look at these issues through the Reagan Administration’s free-trade prism, although his approach may be less ideological. The men he has placed in key international economic posts--James A. Baker III as secretary of state and Nicholas F. Brady as Treasury secretary--essentially are pragmatists, likely to negotiate rather than turn to more protectionist measures.
Like it or not, many analysts believe, the new Administration will quickly find itself in a race against the clock as it formulates trade relations with the rest of the world. Events are pressing in from a variety of directions:
--Bush will have to decide almost immediately whether to renew Reagan’s efforts to reinvigorate the multilateral trading system by reviving the flagging global trade liberalization talks now under way in Geneva. The trade ministers of 96 nations will meet in Montreal next month to set the agenda and timetable for the next two years of talks.
Canada Pact Imperiled
--Canada may reject the new U.S.-Canada Free Trade Agreement, a centerpiece of current U.S. trade policy. The Canadian Parliament almost surely will reject the accord unless the Conservative Party of incumbent Prime Minister Brian Mulroney wins an outright majority--an unlikely outcome--in the Nov. 21 national election.
--Bush will have to decide soon how to administer the new omnibus trade act that Congress passed this year--whether to get tough with Japan and other U.S. trading partners in prodding them to reduce their trade surpluses. The new law sets April 1 as the deadline for singling out targets for possible trade retaliation.
Faced with the need for urgent action, Bush will find his options sharply limited by changing economic and political conditions.
Unlike Reagan, when he tried to reduce the trade deficit in 1985, Bush will not be able to rely on pushing the dollar down as a technique for making U.S. goods cheaper abroad and imports more expensive for American consumers.
The dollar has already fallen 44% from its 1985 high. If it gets much weaker, overseas demand for U.S. goods will increase more rapidly than U.S. factories can meet it. That, and the higher import prices that a falling dollar would bring, would send prices soaring here at home.
Moreover, Bush is likely to find himself increasingly squeezed between mounting economic nationalism at home and America’s growing economic dependence on the rest of the world. Although Americans rail against increasing foreign purchases of U.S. companies and real estate, the United States needs foreign investment to help manage its debt burden. If Japan stopped buying U.S. Treasury bills--or even slowed down--interest rates here would shoot up.
Similarly, as public pressure increases for retaliation against South Korea and Taiwan for refusing to change their trade policies, aggressive U.S. efforts have already sparked an ugly backlash of anti-Americanism in those countries.
And, finally, given the weaknesses inherent in its still-massive trade deficit and its status as a debtor nation, the United States can no longer simply demand to have its way on international economic issues.
The “good old days” are over, says Alan J. Stoga, an analyst for Kissinger Associates, a New York consulting firm. “Regardless of what we do about our underlying problems,” he said, “we’re going to have to manage in a more collegial way.”
In particular, that means the Bush Administration will not be able to ignore pressure from overseas to reduce the U.S. budget deficit. U.S. trading partners insist that the massive budget deficit is the root cause of the imbalances in the world economy that have left the United States on the short end of the trade ledger.
“What’s most important here is that we put our own house in order,” said William E. Brock III, a former U.S. trade representative. “How do we lead others if we’re not willing to do what we say ourselves?”
Like U.S. trading partners, the financial markets are looking for signals that the new President will be serious about the budget deficit. Investors who doubt Bush’s resolve have already pushed down the value of the dollar, in the belief that foreigners will quit investing in the United States if the deficit remains high.
“The precarious international economic and financial position of the United States represents the most serious threat to the country’s continued economic expansion and financial stability,” asserted C. Fred Bergsten, director of the Washington-based Institute for International Economics. “If action is not taken by Easter, you face a grave risk of a financial crisis.”
Some fear that the nation already may have waited too long for the corrective medicine to work fully.
“It is our judgment that the world economy is poised between integration and disintegration,” William Eberle and Richard Gardner, co-chairmen of a blue-ribbon Aspen Institute panel, wrote in a 31-page letter to the President-elect earlier this month. “If we dither, if we succumb to politics-as-usual, we court catastrophe.”
To be sure, the new Administration will have some respite on one score. For once, Congress won’t be threatening to pass a protectionist trade bill.
After three years of wrangling and a 1,100-page measure enacted last summer, the lawmakers are not eager to become embroiled in new legislation. “They want trade on automatic pilot,” says Harald B. Malmgren, a Washington-based trade consultant. “If there’s any problem to be dealt with, they want the new President to take the heat.”
Still, both Democratic and Republican lawmakers will be peppering the new Administration with narrow interest issues. Prominent among them will be steel: The industry wants Bush to renew the existing global steel import quotas next spring.
And the Administration will be deluged with petitions from American industries for new import quotas against foreign products. The trade law Congress passed last year makes it easier for U.S. firms to file such petitions and more difficult for the Administration to reject them. Trade lawyers here already are gearing up for the big rush.
What makes all this even more difficult is that virtually all these issues are interrelated and cannot be decided alone.
The multinational trade negotiations in Geneva, for example, are intertwined with a broad range of trade and economic issues. The talks’ success--or failure--will have enormous repercussions.
At best, next month’s agenda-setting meeting in Montreal is likely to keep the negotiations going--but just barely. At worst, it could end in a blowup that would scuttle the talks and risk splintering the global trading system into competing regional trading blocs in North America, Europe and Asia.
Such regional blocs would “sharply impede world trade and stifle global economic growth,” Malmgren said. “One reason the world economy has done so well since the end of World War II is that the trading system has been a multilateral one, where everyone could take part.”
Under those circumstances, trade protectionism would almost surely erupt around the globe. Stabilizing the dollar’s value would become almost impossible.
Protectionism and instability are not what the new Administration is seeking.
Bush’s election showed that “the American voters wanted continuity” with the Reagan Administration’s policies, said Robert D. Hormats, a former international economic policy-maker at the State Department. “But I don’t think continuity alone will get us through the next four years.”
