"Vandalism" screams the cover of The Economist, depicting President Obama leaving an ice pick in the tire of free trade. (No racial overtones there; after all, as the president explained, he was black before he was elected.)
When the president imposed tariffs on Chinese tire imports, following the ruling of the independent International Trade Commission, the free trade establishment went ballistic. Former Chase CEO David Rockefeller took to the op-ed pages to warn of the threat of surrendering to the protectionist instincts of Obama’s union allies. Editorialists from The Washington Post to The New York Times sternly rebuked the president for deviating from the free-trade gospel. Surely, the heavens will tremble; trade wars impend; the apocalypse of Depression-era Smoot-Hawley tariffs are about to descend upon us.
Nonsense. Obama isn’t descending into the old trade debate. Remarkably, he has added another explosive issue to his already crowded agenda: that of transforming America’s global economic strategy. At the G-20 meetings in Pittsburgh, he succeeded in gaining international approval—including that of the Chinese—for a continuing review of the unsustainable imbalances in the global economy. The decision on Chinese tires may just be the president suggesting that he may put some teeth into digesting that change.
As it is in health care, climate change and financial reform, the challenge is inescapable. America can’t go back to borrowing $2 billion a day from abroad to act as the world’s consumer. Americans can’t go back to spending more than they make, maxing out credit cards and treating their homes as an ATM machine. Those days are over.
That means, as the president has said, the U.S. must spend less and invest more. We must produce more at home and export more. If that is the case, then inevitably the surplus countries, the mercantilist nations that have used export-led growth to drive their economies—China, Germany, Japan and others—also have to change course. They have to save less and spend more, import more and export less. If they don’t generate increased demand while the U.S. cuts back, then the recession will return with a vengeance. This entails wrenching changes in public policy and private attitudes. But what’s clear is that the old imbalances were and are a constant peril, supplying the kerosene for the contagion that laid waste to the global economy.
At Pittsburgh, President Obama insisted that the leaders of the world’s major economies make this a centerpiece of their agenda. He exacted an agreement—despite the stated skepticism of Germany’s Chancellor Angela Merkel and China’s leaders—on a framework for "strong, sustainable and balanced growth." The G-20 countries agreed to set priorities, report annually on their own domestic policies, and monitor one another, with the IMF serving as an independent goad.
Cynics dismissed the agreement as toothless. There’s no enforcement mechanism except naming and shaming (which hasn’t exactly proved effective in dealing with China). The IMF has been warning about these imbalances for years to no effect. China and Germany vigorously resist any external questioning of their national economic policies. Merkel dismissed global imbalances as an "ersatz" issue. Tu Jianhua, director general for international trade in the Chinese commerce ministry, tweaked the West, noting that "I’m not sure that one country’s leader calling another to import more represents market practices." The G-20 couldn’t even get a murmur concerning currency manipulation (a central Chinese strategy) in the document.
The cynicism may be deserved. But here’s where the Obama decision on tire tariffs has bite. As the free-trade zealots admit, tire imports barely register on U.S.-China trade accounts. The decision is important for its symbolism, not its substance. That’s why the free-trade lobby howls about protectionism.
But the president may well have moved beyond the screamers to an adult discussion. He’s telling the Chinese that these staggering imbalances can’t continue. We should both adjust, preferably in a coordinated fashion. But the U.S. is serious about changing the game. If we can’t do that cooperatively, then we’ll find a way to do it independently.
Now, this is a dance that makes the tango look demure. The U.S. is the world’s largest debtor. We’re telling our leading banker that we’re changing our wastrel ways, so they’ll need to find a different way to prosper. But the U.S. is hardly in a position to dictate policy to the Chinese. They’ve already sent tremors through the bond market by raising doubts about our finances.
Will Obama succeed? It’s hard to know, for this transformation will require major reconstructive surgery to economies at home and abroad, compared to which health care reform is a mere face-lift. In the short term, consumers, sobered by their losses in the Great Recession, are tightening their belts on their own. Savings by U.S. households have soared to four times the rate of 2008 before the financial collapse. Chinese exports are down 23 percent from last August. But once the economy recovers and people go back to work, Americans may well go back to borrowing and spending. And we know that Wall Street has already reopened the casino.
One thing is clear. As in health care, energy, and financial reform, Obama has once more addressed an inescapable challenge that his predecessors ignored. He has once more aroused the ire of one of the most powerful lobbies—in this case, the global corporations and the free-trade zealots that have dug this country into a deep hole. Once more, he has done so cautiously, in small steps, ready to compromise, hoping not to offend. Once more, he’s invited Americans—and the world—into an adult conversation about what is to be done. And once more, he’s likely to be greeted by hysteria and insult, graphically illustrated by The Economist’s disreputable cover.