US President George W. Bush (L) greets Chinese President Hu Jintao (R) on the North Portico of the White House in Washington, DC, prior to a dinner with leaders attending the Summit on Financial Markets November 14, 2008. JIM WATSON/AFP/Getty Images
Throughout her two-and-a-half-year tenure as U.S. Trade Representative, Susan C. Schwab absorbed shots from Democrats who believed she spent too much time futilely trying to negotiate new free-trade agreements while not aggressively enforcing existing rules. Under Schwab's watch, efforts to revive a new round of global trade talks failed, free-trade pacts struck with Colombia and South Korea stalled in Congress, and America's trade deficit—especially with China—soared to record heights.
Now Schwab, who is returning to academic life at the University of Maryland, has some advice for the new Obama Administration. In a nutshell: Keep up the momentum on free-trade deals. Pick your fights with Beijing carefully. And spend a lot of time on Capitol Hill to make sure Congress doesn't do anything crazy. Given the growing frustration in Congress as the U.S. slides deeper into recession, she warned that the risk of unwise U.S. moves on trade will grow. "Depending on what policies the Administration takes," Schwab says, "it could get pretty rocky."
New Deals Urged
As a candidate, Obama criticized the North America Free Trade Agreement and proposed a deal that would have lowered barriers with Colombia. And with public sentiment now strongly against free-trade deals, Obama's transition team has suggested that new treaties won't be a high priority. That would be a big mistake, Schwab warns. "The key question is whether this Administration will have a proactive trade policy that goes beyond an enforcement agenda," she says. "If you don't move ahead with trade liberalization, you are moving backwards."
The reason, she argues, is that dozens of other nations are striking trade agreements among themselves. For example, China, Japan, South Korea, Singapore, and other countries are exploring an Asian free-trade agreement. If the U.S. sits on the sidelines, American exporters of goods and services could be left at a competitive disadvantage in crucial markets. Schwab also contends new trade deals are a good way to boost U.S. industry. Because America's markets already are far more open to imports than those of nations such as Colombia, the U.S. would be the biggest winner. "If you are looking for means to stimulate the economy, it is hard to imagine a more effective way than by winning more market access," she says.
American unions and many U.S. manufacturers disagree. They want Obama to put a much higher priority on cracking down on unfair trade practices, especially by China. Trade hawks accuse Beijing of massively subsidizing exporters by keeping China's currency artificially low against the dollar, furnishing them with cheap credit and energy, tolerating labor abuses, and ignoring environmental problems. They also note that piracy of U.S. software, movies, and music remains rampant. While the Bush Administration has tried to resolve most trade disputes with China through diplomacy, critics say this strategy has achieved little and are supporting bills in Congress to penalize Chinese imports with high duties to compensate for alleged tariffs.
However, Schwab defends her record. "I think our strategy with China was right on target," she says, noting that the Bush Administration filed seven cases against China in the World Trade Organization. They included complaints that China had violated its WTO commitments by giving tax breaks to semiconductor makers, not protecting intellectual property, favoring the use of domestically produced auto parts in cars assembled in China, and inhibiting access of U.S. companies to its financial-services market. Most recently, Schwab on Dec. 19 filed a WTO complaint accusing China of illegal subsidies to domestic companies that export their branded products. In most of the cases, Beijing eventually agreed to alter its policies to address American complaints before the WTO ruled, although China is challenging the complaint on auto parts and may dispute the claims on subsidies of branded products.
The fact that China is fighting the U.S. in the WTO is actually a sign of progress, as far as Schwab sees it, because it means Beijing is starting to respect the value of a rule of law when it comes to trade. "It has been an interesting evolution," Schwab says. "Initially, [China's] reaction was very negative and antagonistic. But now they seem to realize that they benefit from a rules-based system." Rather than viewing WTO petitions mainly as political affronts, China is starting to view litigation as a means of defending itself from protectionist actions by trade partners. "If China were not a member of the WTO, you can just imagine what would be happening now to its market access around the world," Schwab says.
Pick Your Fights
Obama aides have suggested his Administration will be much more aggressive in fighting trade abuses by China. Critics note that Schwab did not act on six petitions filed by U.S. industries since 2003 complaining that they were damaged by sudden surges of imported Chinese products such as brake drums and wire coat hangers. Under WTO rules, the U.S. can impose higher duties in such cases if U.S. industries are damaged. U.S. manufacturers and unions also have called on the U.S. to take China to the WTO over alleged currency manipulation. Schwab declined to discuss the currency issue or why her office did not take up the import surge cases.
But in general, Schwab says the Bush Administration took on all of the enforcement cases it believed were backed by rock-solid evidence. "A lot of politicians would like to believe you can resolve all of your trade problems through enforcement actions," Schwab says. "The truth is that there is not a lot of low-hanging fruit." The Administration acted on almost every allegation of Chinese dumping, or selling at below-market prices, when U.S. industries presented compelling cases, she said. The U.S. assessed punitive duties against Chinese exporters of everything from TVs to steel pipes.
The same goes for cases the USTR brought against China in the WTO. The risks of filing a case and losing in the WTO's dispute-settlement system are substantial. For one, the other could nation could use that ruling as a justification for continuing a bad trade practice, making it more difficult to resolve a dispute diplomatically. Also, the U.S. could lose goodwill in the WTO by "overwhelming the dispute-resolution system" with weak cases, she said.
Advising Congress on Trade Rules
Of course, the Obama Administration could certainly test the WTO by filing more difficult cases against China. "A lot depends on whether they will be willing to take higher risks than we were," Schwab says.
One big challenge for Ron Kirk, Obama's nominee to succeed Schwab as USTR, is to keep close tabs on Capitol Hill. While she was in office, Schwab says, she spent a lot of time urging lawmakers about potential provisions in legislation that may run afoul of world trade rules. With both houses of Congress now firmly under the control of Democrats, Kirk will have to be ready to oppose protectionism measures by his own party. For example, many in Congress are clamoring for "buy American" provisions, requiring that federal contracts for equipment and materials used in roads, bridges, energy projects, and other programs as part of Obama's economic stimulus package be given to U.S. companies. "There is growing concern over what kind of protectionist riders Congress may want to put on these provisions. Some are consistent with WTO rules, some are not," Schwab says. "An obvious question is whether the new Administration will go to the Hill as much as we did when we saw riders that were inconsistent with the WTO."
Engardio is an international senior writer for BusinessWeek .