Obama's 'Buy America' platform - protectionist or isolationist?

Now the euro-phoria over the historic election of Barack Obama is fading, analysts in the UK are starting to worry about one key aspect of a Democratic presidency. Obama’s campaign promised a number of measures designed to protect American jobs and companies from overseas competition.

These measures include renegotiating the North American Free Trade Agreement (NAFTA), penalising companies that outsource jobs while rewarding those that do not, and toughening up labour and environmental standards in trade deals.

Some liken the protectionist package to the Smoot-Hawley Tariff Act of 1930 that triggered a slump in US-European trade which, in turn, led to the Great Depression. With the world set to grow by just 2.2% next year (according to the International Monetary Fund), the weakest figure since 1991, analysts say a trade war could not come at a worse time.

Fighting protectionism
The British government, a consistent advocate of free trade, has made its stance clear. Speaking the day after Obama’s victory, Lord Mandelson, the business secretary and former chief European trade negotiator, warned of protectionist forces in the US.

“We need to work with Barack Obama to defeat those forces inside America that will try to hold him back,” he said. “These include isolationists and protectionists. On Capitol Hill, these forces are strongly featured in the Democratic Party itself ­ stronger still after some of Tuesday’s victories.”

Many in Europe see protectionism from Congress as a greater threat than from the White House. Richard Baldwin, professor of international economics at the Graduate Institute in Geneva, sees Obama’s platform as “no more than empty promises ­ – or threats depending upon your perspective. Many presidential candidates promise one thing and do another,” he says. “Clinton talked protectionist, but passed NAFTA.”

Gary Campkin, head of the international group at the CBI, the UK employers’ group, agrees that much of the talk was electoral rhetoric. “Nevertheless, British business should make clear to Obama that he must resist any calls for greater protectionism or isolation. On the surface it might seem seductive but fundamentally it is wrong,” he says.

“The idea that US jobs or economy can be protected by things like tariffs or ‘Buy America’ or blocking foreign ownership of companies does not work and would be detrimental to the US and the global economy at such a crucial time of this particular crisis.”

Iain MacVay, a trade lawyer at Steptoe & Johnson in London, is confident that the Democrats will not want to be seen as obstructionist at a time of international anxiety. “Lots of calm heads within the party will resist isolationist or overly populist actions,” he says.

Professor Baldwin says trade has been positive for the US and is now essential for surviving recession. “Given the internationalisation of supply chains in manufacturing, the US cannot be a world-class exporter unless US firms have access to the best value-for-money parts and components,” he says. “On the consumer side, protection means fewer presents under the Christmas tree.”

So what should Obama and his new Treasury Secretary do to resolve the tensions between the need for economic recovery and pressure for protectionism? MacVay suggests Obama “takes it easy” on trade negotiations, while making progress on an international economic agenda of regulatory dialogue, investment treaties and other lower profile steps that could support confidence building in the international economy. “I don’t think Obama will follow a protectionist policy, but he probably won’t loudly embrace rapid liberalisation,” he says.

Drum roll
Of course, the US is not the only country to have banged the protectionist drum. France and Germany have spoken of raising barriers to entry for sovereign wealth funds.

Campkin says an inward and introspective Europe would be as bad as an introspective America. “We must make sure Europe does not do anything that would generate a ‘tit-for-tat’ response,” he says.

The long-term issue for world trade is what happens to the faltering negotiations towards a world trade deal, known as the Doha round from the Gulf city where they were launched seven years ago. A July summit of ministers aimed at striking an outline deal ahead of the US presidential election collapsed over poorer countries’ demand for cuts in subsidies paid to farmers by rich nations, which, in turn, wanted greater access to world markets.

Campkin believes there is still hope the World Trade Organisation, which oversees the talks, can get countries to agree an outline deal that can be backed by the Obama administration. “Otherwise, I fear that a new US administration and new European Commission won’t pick up this challenge for another 18 months to two years by which time a lot of the progress will, quite frankly, have been discarded and we will be back to ground zero.”