This is the second in a series of articles running up to the November election that examine the various economic and fiscal proposals of the two candidates for president: Democratic Sen. Barack Obama and Republican Sen. John McCain.
While it is not a hot-button issue like the war in Iraq or energy prices, John McCain and Barack Obama have clear differences on global trade that may transcend economics to reflect the candidates’ attitudes about foreign relations more broadly, Wharton faculty say.
The candidates generally fall along predictable party lines when it comes to trade. Republican John McCain is a champion of free trade and would support additional multilateral trade pacts. Democrat Barack Obama is more cautious, urging a reexamination of trade agreements and their impact on the environment and U.S. workers.
According to Wharton legal studies professor Philip Nichols, Obama’s threats to withdraw from the North American Free Trade Agreement (NAFTA) with Mexico and Canada could pose serious problems for U.S. relations with its closest allies. McCain, on the other hand, is a vigorous supporter of free trade who has also argued that trade pacts with the Middle East would be a tool for lasting peace. “On the surface, it looks like McCain is the obvious pro-trade candidate and Obama is the obvious anti-globalization candidate,” he says.
The presidential debate over free trade in the current global context is not that simple, he argues. Indeed, the world has entered a post Cold War era in which complex relations between large, new players — such as the European Union, East Asia and emerging economies including Brazil, India and China — are replacing alliances forged in the old world order that pit the U.S. and its supporters against the Soviet Union and its allies.
McCain and his advisors come from this Cold War way of thinking and might not be open to new global structures that would in any way diminish U.S. clout, Nichols suggests. “Obama and his advisors — even though they’re not really that smart on trade — come from a new era and a new way of thinking. This is important because the U.S. is now possibly one of the least respected nations in the world. We’ve done our best to offend just about anybody who wants to be our friend and a lot of McCain’s advisors were involved in that. There’s no clear indication that McCain is interested in deviating from the policies of the last eight years.”
Obama, he says, “for better or worse” is respected around the world and could build on that goodwill to create new economic and geopolitical alignments that suit the new world order and would result in sustainable economic and security gains. “He’s an inspiring guy to people around the world and he could move us away from Cold War thinking. Obama might represent a way of getting us into new ways of thinking about trade.”
Nonetheless, Nichols is critical of Obama’s threats to reopen NAFTA, although he says the Illinois Senator may only have been “posturing” during the primary. “He’s been fairly consistent even as a Senator in criticizing NAFTA in particular,” Nichols says of Obama. “NAFTA is flawed. It should be an even broader agreement, but threatening to withdraw from NAFTA is nonsense. We’ve got to rebuild relations with our closest neighbors, not bludgeon them.”
In his time in the Senate, McCain has consistently supported free trade agreements, including NAFTA, which was a centerpiece of Democrat Bill Clinton’s presidency. Meanwhile, Obama voted against the Dominican Republic-Central American Free Trade Agreement, but did support a free trade agreement with Oman, and has voiced opposition to pending deals with Korea and Colombia. Both candidates have said they would overhaul U.S. job training and assistance to help workers who lose jobs due to foreign trade.
NAFTA and EU: Different Approaches
Wharton adjunct Gerald McDermott, who is a professor of international business at the University of South Carolina’s Moore School of Business, also points to the broader impact of trade on international relations as a key factor in the debate. McDermott has conducted research on the development of political, economic and social institutions connected to NAFTA and to trade agreements required for countries to gain entrance to the European Union. His work shows that the European system has been more successful than NAFTA in using trade to foster stable, continued economic growth among member nations because it requires the development of new institutions that touch on 31 areas of policy — including environmental protection, capital markets regulation and food safety.
“NAFTA is stagnating tremendously because there is no movement on institutional development as a whole and institutional integration of the countries involved,” says McDermott. “That is a serious problem. The U.S. sees trade as separate from internal aspects of our political economy and trade as very separate from politics or geopolitics.”
The European Union requires new member countries to start building the institutional foundations to sustain economic development before it allows them into its trading sphere. “The EU project is largely a political project and a benefit of that is economic expansion,” notes McDermott. “When it comes to NAFTA, there is nothing about capacity building. There’s very little about institutional integration or coordination.”
McDermott says there is little evidence that McCain is thinking about trade in these broader terms, while the Obama campaign – with its concerns about environmental and labor standards — indicates an openness to connect political systems to trade. However, whether that is just to score political points in hard-hit manufacturing states or to legitimately support strong economic institutions in developing trade partners remains to be seen.
“There are signs from Obama’s camp that they are definitely more aware of the geopolitical issues of trade, and there are some very serious people linked to the campaign thinking about becoming proactive and taking the initiative in Latin America and Southeast Asia,” says McDermott. “There’s no indication that the McCain camp sees it in an integrated way. They see a thing called ‘trade’ and they like it. Then there’s another thing called ‘security’ and that’s the priority.”
According to McDermott, one reason worldwide markets are in decline is that for the past eight years, the United States has stepped back from taking a leadership role in global economic integration. As a result, multinationals, investment banks and financial traders have been plagued with uncertainty. “That creates a great deal of pessimism as well as volatility. The world isn’t waiting for us to play the role of lender of last resort, but it expects the U.S. — as the largest economy — to take a leading role in the way markets are evolving. With NAFTA and at the World Trade Organization, there hasn’t been any leadership because in this last administration international affairs were framed strictly in a military sense.”
After decades of trade liberalization following the end of World War II, this year’s presidential election comes at a time of uncertainly in global trade regimes due to the collapse in July of the Doha round of the World Trade Organization. Proposed U.S. agreements with Korea and Colombia have also faltered in Congress.
Wharton business and public policy professor Howard Pack suggests that the Doha round broke down over disagreements about agricultural trade, although deeper issues related to the desire of China, Brazil and India to assert their rising economic status also played a part.
The dispute centered on agricultural policy, which is a greater concern for Europe than the United States, according to Pack. The U.S. was not willing to turn its back on its staunch North American Treaty Organization (NATO) allies in Europe to force them to open up agricultural markets to the degree Brazil and its allies wanted.
Pack says any effort to link trade to environmental or labor conditions is a new form of protectionism that is supported by organized labor. “From the point of view of union members in the United States, they want [trading partners to have] the same labor and environmental standards as the U.S. … but that would preclude basic international trade.”
A Focus on Lost U.S. Jobs
While candidates often focus on job losses in the debate over free trade, Pack says liberalization typically benefits consumers and the overall economy through lower prices on imported goods. But the people who lose their jobs due to new competition from abroad feel the impact directly and are likely to translate that to politics. People who benefit through new import-related jobs or expanded purchasing power are less likely to make global trade a top priority when they step into the voting booth. The best outcome would be a continuation of free trade and policies — such as generous retraining and relocation grants — to help those who are dislocated, says Pack. “My sense is, as the campaign develops, trade will be a very minor issue on the economic side compared to energy and questions about the financial meltdown.”
McCain has the same free trade agenda as Clinton and President George W. Bush, according to Pack, who says that ultimately Obama is likely to take the same positions. “This is a campaign; what they do in office may be much different. But I’m not absolutely positive.”
For the duration of the campaign, neither side is likely to articulate a fully detailed trade agenda because trade is consistently a dangerous political minefield, says Wharton management professor Heather Berry. The details of global trade regimes are arcane, complicated and easily misunderstood by even astute voters, she says. Most candidates tend to skirt the topic as much as possible to avoid offending voters on either side of the issue given that their positions are difficult to communicate through media sound-bites.
“Trade is an interesting issue because neither party is either completely for it or against it. It’s not easy to use it to your benefit and it can easily get you in trouble because it is always a complex [subject],” says Berry. “In an election year, people tend not to offer more specifics after the primary.” She notes that during Obama’s primary campaign against Sen. Hillary Clinton, the two Democrats would shift their emphasis on the subject depending on whether they were in a state sensitive to job losses, such as Ohio. That pattern, Berry suggests, may resurface in the general election campaign.
Regardless of the level of detail candidates lay out, voters can develop a framework for evaluating trade-related issues by looking to objective studies about the impact of trade, Berry says. A clear understanding of the problem is crucial to evaluate whether the candidates’ proposed solutions are likely to have any impact. “If job loss is the issue, is it a result of NAFTA or is it a result of technological advances or slower economic growth?” Berry asks. “What is the trade issue? What is the proposed solution? What are the alternatives? Voters and candidates should rely on careful analyses of the impact of trade before considering whether to alter existing trade agreements.”
In addition, Berry says, voters should consider the potential fall-out from altering trade agreements. While one participant may want to reopen an agreement, once the pact is under negotiation again, it becomes a two-way street and partners may demand changes that will damage the originally disgruntled nation’s position. “Once you decide to renegotiate, you are also opening up the agreement to whatever issues your trading parters have,” she warns. “Opening it up can put into danger some of the gains that have been made.”