Economic Stimulus Plan Must Incorporate International Trade

With M. Smith. Originally published in the Korea Times, January 19, 2009. Used with permission of Michael R. Czinkota and the Korea Times.

President-elect Obama is defining his economic stimulus plan. Nations around the world attempt to stabilize their economies as well. Typically, each nation’s emphasis rests with domestic issues. Though politically understandable (GM is more important to the U.S. than Toyota), a successful plan must reflect the powerful influence of international trade on the national economy. In the U.S., for example, trade related activities comprise more than 25 percent of its economic activities—which is more than the housing and banking sectors combined. Trade also accounted for the entire U.S. economic growth in the past year. Trade issues definitely qualify for top priority, but seem to be neglected so far.

The world depends on continuity in trade. The global economic outlook, competition and consumer choice are shaped by trade flows and currency values. Competitive devaluations, for example, provide unfair advantages to exporters. For many nations, the promotion of exports must have a central place in their economic recovery package.

In the U.S., the national debate about economic recovery includes many lessons from the Great Depression. The clearest of these is to avoid the protectionism of the Smoot Hawley tariffs that turned a market crash in the U.S. into a global Great Depression.

Global leaders give lip service to this conventional wisdom but there is a gap between co-mmuniqué language and on-the-ground practices. Indonesia and Russia have already begun to raise their protection of domestic industries—to the detriment of global trade. The Doha Round of international trade negotiations continues to be stalled—even though eight years of negotiations have placed great benefits within reach.

The U.S. experiences some difficulties in its global position, but around the world there is hope, expectation and willingness for a re-emergence of U.S. leadership. There is growing concern among U.S. trading partners that the new Congress and Administration might introduce a new era of U.S. protectionism. Global markets are parsing any announcement for signs of what the Obama Administration will mean for them.

The world economies are intertwined. Any stimulus measure of one nation is likely to rapidly affect others and trigger responses. Economic activity is highly concentrated among a few players. The United States, European Union, Japan, China, and Canada account for more than 75 percent of the world’s economy. A good domestic stimulus should not become an international distortion. Subsidies paid to farmers in one country, for example, can affect dairy related industries around the world. Once introduced, protectionism can quickly become contagious and be emulated around the world.

The economic recovery plan is both an opportunity to send a signal to markets about what they can expect in terms of U.S. trade, and a chance to provide the benefits of U.S. leadership on the global stage. Discussions of U.S. economic improvements must include a focus on global recovery. Countries must be able and willing to buy each other’s goods—in an increasing quantity—if world economies are to blossom.

Here are some recommendations:

• Countries need to make unambiguous, consistent, and clear statements that industry bailout packages will not include protectionist measures. In the U.S., the newly appointed performance czar should assess economic stimulus measures by the U.S. and its trading partners for any inappropriate subsidies of exports or discrimination against imports.
• We need a renewed commitment to the World Trade Organization and its stalled Doha Round of trade negotiations. Rules need to be consistent and strong. The key players in world trade need to re-energize the negotiations by making major commitments and taking “early harvest” of potential agreements on a plurilateral basis. One first step could be the elimination of tariffs on environmental goods and services.
• The U.S. must lead its economic partners on the basis of trust and fair play, applied to trade and investment rules as well as to currency values. We’re in this together. The sound implementation of policy objectives—be they health care, education, retirement—require a sound economy which depends on global collaboration on trade.

Trade success can provide the momentum which keeps economies from stalling out before the stimulus can kick in. Trade issues must move up to the front burner.