Obama's Asia frustrations raise protectionist risks

The risks of a wave of protectionist sentiment on Capitol Hill just got higher after President Barack Obama struggled to win over wary leaders of export-driven Asian economies.

Obama's message to trade surplus nations during his 10-day swing through Asia was unwavering: the path to global prosperity is not "simply paved with exports to America."

But if he was heard, he is not being heeded.

"The failure of movement of the Chinese does not bode well for heading off new trade restrictions (in Congress)," said Fred Bergsten, director of the Peterson Institute for International Economics in Washington.

"If we can't get the two sides to tango, this is going to cause continued problems for world growth and potential future crises, and in the short run for potential protectionist outbreaks."

Even before last week's G20 summit, China and Germany had quashed Washington's proposal to set numerical targets for current account imbalances that risk destabilizing the global economy. When the leaders of the group -- whose economies account for more than 80 percent of global output -- met in Seoul, there was no agreement even on how to identify such imbalances.

Chinese President Hu Jintao told an Asia-Pacific summit in Japan on Sunday that the global recovery is neither well established nor balanced and that protectionism is on the rise.

But there was no sense that Beijing sees eye to eye with Washington on how to go about achieving the rebalancing needed to avert the risk of a trade war.

China cried foul over the Federal Reserve's easy money steps to boost the U.S. economy and ruled out a sharp rise in the yuan, which would suck in imports and boost domestic demand.

U.S. lawmakers assert that China keeps its currency undervalued by as much as 40 percent, giving its manufacturers an unfair advantage against imports and making Chinese exports cheaper. Bergsten's institute reckons the yuan is 17 percent undervalued against a basket of currencies.

Unbridged Rifts, Domestic Pressure

In short, Obama returned to Washington on Sunday with little to show voters who, angry about high unemployment, handed control of the House of Representatives back to Republicans on November 2 after an election campaign marked by anger over China and the loss of U.S. jobs to cheap imports.

The president failed to clinch even a bilateral victory on the sidelines of the G20 summit: the conclusion of a long-stalled free trade pact with South Korea. The U.S. Chamber of Commerce has warned that 340,000 U.S. jobs are at risk if the pact falls through.

"It is hard to imagine how the summit could have gone any worse for the U.S. Treasury and the president," said Simon Johnson, a former IMF chief economist.

"The Chinese are digging in hard on their exchange rate; this is headed toward a mutually destructive trade war."

So far predictions of a descent into a 1930s-style tariff barrier war have been proved wrong. And the rhetoric is pulling the other way: the communiques of both the G20 and APEC summits resounded with pledges to refrain from competitive devaluations, maintain open markets and fight protectionism.

However, it may be too early to sigh in relief. The summiteers parted with rifts unbridged and Obama returns home to pressure from voters to do something about a stubbornly sluggish economy.

"This strong language is reassuring, but does not preclude a trade war from breaking out if the U.S. economy in particular remains weak and China moves too slowly," said Julian Jessop, chief international economist for Global Economics.

A new Congress takes charge in January, with trade sanctions against China already passed by the House of Representatives and waiting for approval in the Senate.

The new Congress will include a number of freshly elected conservative Tea Party members who may not share the Republican Party's traditional enthusiasm for trade, promoting isolationist sentiment that is normally kept on the fringe of U.S. politics.

"The shift in the balance of power (in Congress) is likely to cause a more protectionist approach to foreign economic policy," said Tony Twine, senior economist at research group Econometrix.

[Source: By Alister Bull, Reuters, Yokohama, Japan, 14Nov10]

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