Can Trade Save Obama?

Exports are the best thing going for America right now. So why is the president so timid?

Europe's seemingly never-ending crisis is bound to hijack this week's G-20 Summit in Cannes, which begins on Thursday. As a source of global economic havoc, Europe's problems are the G-20's problems. That's just fine with many G-20 economies, as Europe's woes cast them as white knights capable of rescuing the Old Continent with their mass reserves -- and deflects attention from uncomfortable issues such as currency manipulation. But the crisis threatens to divert the G-20's attention from the day after -- and the urgent challenge of ensuring sustained global growth. And that still requires global rebalancing.

Unlike the bullish forecasts of some analysts in the wake of the 2008-09 global financial crisis, emerging markets such as Brazil and China have not created a new global "supercycle" of widespread growth and prosperity. Instead of "decoupling" from the advanced economies, they too have proven hostage to the transatlantic economic morass, as exports slow and markets rumble. Yet emerging economies also now hold the keys to a better world. Armed with capital, they could help bail out Europe; by stimulating domestic demand, they could catalyze export-led growth in the United States.

If there is a silver bullet for U.S. recovery, it is exports. It was U.S. manufacture exports that paved the way to the 2.5 percent U.S. gross domestic product (GDP) growth in the most recent quarter; without exports, the U.S. economy  would have expanded by a negligible 0.2 percent instead of the estimated 2 percent in the first quarter. Exports generate jobs: A 10 percent increase in export sales produces a 7 percent increase in employment, according to labor economist Lori Kletzer -- double the 3.5 percent that a 10 percent increase in domestic sales produce. And exports help cut America's trade deficit, allaying protectionist calls for tariffs on foreign products.

In the coupled world economy, a vigorous America propels global growth. Reviving U.S. exports would also resolve a perilous paradox: The globalized world economy the United States has assiduously built in the past six decades is now viewed as a menace in America itself. Cheap imports are seen to have failed the American worker; globalization is blamed for blunting Washington's fiscal and monetary levers. Such fears are jet fuel for growing American isolationism -- when the absence of alternative leaders demands renewed American stewardship.

In a world where almost 80 percent of global consumption comes from outside U.S. borders and exports make up only 13 percent of U.S. GDP, far below the levels of such seasoned traders as Germany or Japan, American exports have room to expand. But expansion is easier said than done: Washington's calls (particularly for China) to increase domestic consumption, tighten intellectual property protections, and cease currency manipulation are falling on deaf ears. Even the carrots and sticks that persuaded cantankerous Japanese policymakers in the 1980s -- security guarantees and threats of sanctions -- would not sway Beijing. And without enforcement mechanisms to make G-20 members swallow the medicine they prescribe themselves -- macroeconomic and trade policies that would deliver a more balanced world economy -- the U.S.-sponsored G-20 rebalancing agenda is toothless.

Meanwhile, the Obama administration's plans to promote exports consist of much talk but little action. The best President Obama has mustered toward his goal of doubling U.S. exports -- the passage of trade deals negotiated by the Bush administration with Colombia, Panama, and South Korea -- promises welcome yet limited export gains. And congressional Democrats' call for tariffs against China in retaliation for its currency manipulation risks 1930s-style global trade wars.

A fresh approach is needed, one aimed at opening new markets and building external pressure on Beijing to change its ways. The Trans-Pacific Partnership (TPP) that Washington is pursuing with eight small Asia-Pacific markets, four of which have already signed free-trade agreements with the United States, needs Japan and South Korea as well as the largest Association of South East Asian Nations (ASEAN) as members if it is to deliver trade gains and strategic leverage vis-à-vis China. The president's personal involvement would make a difference. Trade deals with Brazil, the world's sixth largest economy, and India, the billion-consumer ally that feels shunned by Washington's Sino-centricism and is in trade talks with Europe, would be similar game changers.

With most nations queasy about Beijing's trade policies, Washington can use China's unpopularity to its advantage by convincing others to take the high ground and invest in the rules-based international economic order, from firmer investor and intellectual property protections to averting the siren calls of capital controls and currency wars, the handmaidens of trade protectionism.

There is high ground to be claimed back home as well: Cuts in wasteful U.S. farm subsidies could jumpstart the dormant Doha Round and rescue the U.S.-built global trading system from terminal damage. The focus also needs to move from inside-the-Beltway streamlining of the 16-agency trade bureaucracy to America's small and mid-size enterprises (SMEs). Unlike large multinationals that by now can puff up the export pie only at the margins, SMEs are an army of exporters-in-waiting. They are also engines of jobs: Two out of three new American jobs are created by companies younger than five years old. Thus far, only 3 percent of America's 30 million SMEs export, and 1 percent, or 280,000, make up 80 percent of all SME exports -- and most sell to just one or two markets.

Yet it is SMEs that also face the greatest obstacles, from counsel to capital, to go global. Such measures as greater resources from the U.S. Commercial Service that finds partners for U.S. companies abroad and stronger incentives for trade-finance lenders to cater to small business are needed to fire up these latent exporters. Even in an election year, boosting small-business exports makes for a bipartisan plank.

As all countries look to increase exports to spur growth, currency wars and protectionist posturing will likely continue. The way out is neither quick nor easy. At the end of the day, East Asia must give some on currencies and consumption. But instead of waiting for others to come around, Washington must reclaim its trade agenda -- and accelerate America's transformation from a continental to a global economy, one that, rather than reverting from the world it created, now reaps its promise.



Deal Breaker

How badly did Europe just bungle its best shot yet at avoiding economic catastrophe?

It all sounded so promising. In the early morning hours on Oct. 27, German Chancellor Angela Merkel and French President Nicolas Sarkozy emerged from a day of edge-of-their-seats negotiations and announced a historic plan to pull the continent's economy back from the brink of disaster.

The agreement, acceded to by European governments and the Institute of International Finance, had three parts. Investors -- mostly European banks -- would write off half of the face value of the Greek bonds they held, a particularly toxic ingredient in Europe's debt crisis. The banks would raise capital to the tune of 100 billion euros, removing some of the uncertainty over the shaky sovereign government debt on their books. And the European Financial Stability Facility (EFSF) -- the continent's 625 billion-euro bailout fund -- would be bolstered to 1 trillion euros in order to protect other vulnerable economies from imploding the way Greece's had. The politicians involved patted themselves on the back, and stock exchanges on three continents sharply rallied on the news of a deal, with some European bank stocks leaping by as much as 25 percent in a single day.

Unfortunately, it didn't take long for the expectations from last week's summit to come crashing down to Earth, and loudly. Putting the pieces back together will not be easy. And the implications are consequential -- not least for the upcoming G-20 meeting, the agenda for which will likely be hijacked by Europe's renewed turmoil.

The markets' initial euphoric reaction was based on a twofold hope. The first was that Europe would quickly translate the agreements into specific and lasting measures. The second was that Europe would address two big issues that were not on the summit's agenda and needed to be: the restoration of economic growth and the strengthening of the institutional underpinnings of the eurozone.

Investors were giving policymakers the benefit of the doubt -- and as it turns out, it only took a few days for markets to realize that, once again, they had placed too much faith in leaders' ability to follow through in a decisive manner. The result has been significant market turmoil as three developments essentially unraveled the summit's achievements.

First, in a surprise move, Greek Prime Minister George Papandreou announced he would hold a national referendum to seek broad-based popular support for the measures agreed upon last week. This baffled other European leaders, who were under the impression that Papandreou and his government had already signed off decisively on the deal. It also cast major uncertainties over the willingness of the European Union and the International Monetary Fund (let alone countries like China) to lend to Greece ahead of the referendum -- which is still pending a vote in Greece' parliament -- thereby increasing the risk that the country could run out of money this month to pay some bills.

Second, some banks that hold Greek debt started expressing reservations about the agreed-upon 50 percent debt reduction -- a haircut they had initially hoped to keep to 21 percent. This puts back on the table the threat of a very chaotic and disruptive Greek default. It also places a question mark on the robustness of the cooperative public-private approach that is central to solving Europe's crisis -- and the banks' reluctance has only increased since Papandreou's announcement of the referendum.

Third, the European Central Bank (ECB) has proved less than fully effective in stabilizing the interest rates on debt issued by other European economies, particularly that of Italy. Despite purchases by the ECB, the interest rate on Italian 10-year bonds has broken above 6 percent, more than double the level considered safe. The spread between the rates on Italian and German bonds -- a market measure of credit risk -- reached a new eurozone record. While it is not clear whether it is an issue of willingness or ability on the part of the ECB to stabilize markets, the disappointment has added to market jitters.

Markets have predictably plummeted today, and European leaders must again scramble to put the pieces back together. In the process, they will try to catch up, or at least avoid falling further behind, in a crisis that is spreading well beyond the original confines of peripheral countries' sovereign debt problems. The banking sector is now contaminated, and there are growing concerns about the impact on core countries, including France's ability to retain its AAA rating.

No wonder there is tremendous pressure on Papandreou to reverse his referendum gamble -- and this pressure is coming from both inside and outside Greece. Meanwhile, banks are being reminded that the alternative to the 50 percent debt reduction is an even more drastic loss of value. And I suspect that the ECB is hearing calls to be more forceful in its efforts to stabilize markets.

These issues will undoubtedly feature prominently at the G-20 Summit in Cannes this week. Unfortunately, they will crowd out the type of deliberations needed on other topics that are also of central importance to the wellbeing of the global economy. Leaders who are preoccupied with the sovereign debt crisis are almost certain to once again fail to formulate a much-needed global employment and growth pact. They also may fail to address the historic developments in North Africa and the Middle East -- where some economies need support as desperately as Europe's vulnerable economies -- that have occurred since the last G-20 meeting, to say nothing of the still-pressing issue of climate change.

Only last week, the hope was that after endorsing the outcome of the European summit, members of the G-20 would agree to supportive measures and also address the other big issues ailing the global economy. Expectations are now quickly ratcheting down, with the greatest optimists limiting their hopes to a new emergency Band-Aid for Europe. In the process, the outlook for global growth and jobs dims a little more.