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The New (Democratic) Congress and Trade: A Challenge to Trade Liberalization
By Russell Smith, Willkie Farr & Gallagher LLP
WASHINGTON, DC (KWR) December 26, 2006 -- The coming Democratic takeover of the House and Senate throws a formidable monkey wrench into President Bush’s overall policy agenda, and nowhere with more potential for problems than in the area of international trade. Bush is not going to shrink from being an activist president, and like Bill Clinton after the 1994 Republican election victory, he firmly believes he is “still relevant.” But this position only increases the potential either for frustration or for confrontation over a range of key trade issues during 2007 and 2008.
It has already been widely reported that there is a heightened level of skepticism among newly-elected House Democrats about the effects of globalization that will make it difficult to reach a consensus on trade. Indeed, most of the newly-elected Democrats spoke negatively about trade reform in their campaigns and 16 of those Democrats will be replacing Republicans that often voted in favor of trade bills. These new members join a group of veteran Democrats who have long opposed most trade initiatives to form a potentially strong anti-trade voting bloc. They have already made their views known in an internal briefing session at which they attacked former Treasury Secretary Robert Rubin when he cautioned against taking actions that would restrict the free flow of trade and investment into the United States.
The new Chairman of the House Ways and Means Committee, Rep. Charles Rangel (D-New York) has pledged to work with Republicans to make progress on trade priorities and has proposed to invite Members of Congress on an informal retreat with U.S. Trade Representative Susan Schwab and Treasury Secretary Henry Paulson to discuss trade issues. But Rangel has also stressed the importance of environmental and labor standards in negotiating trade agreements and will probably insist on attaching such standards to any legislation to implement bilateral agreements. In addition, Rangel has signaled a tougher stance on trade with China at a time when the American public is growing increasingly anxious about the threat of competition from abroad.
Rep. Sander Levin (D-Michigan) will be the new Chairman of the Ways and Means Subcommittee on Trade. Levin has promised “vigorous oversight hearings” on U.S.-China trade, including China’s currency manipulation. Levin has also led efforts to pressure President Bush with respect to assistance to the U.S. Big 3 auto companies, again including addressing their claims that the Japanese government has through explicit intervention and implicit “verbal jawboning” kept the yen artificially weak. This alleged yen manipulation, according to the Big 3 and Levin, has resulted in a substantial per-car “subsidy” that has enabled the Japanese auto companies to gain an “unfair” competitive advantage over General Motors, Ford, and Chrysler. So far, the Bush Administration has rejected these claims, but it seems clear that they will be pressed far more aggressively in the new Congress.
On the Senate side, Sen. Max Baucus (D-Montana) will assume the chairmanship of the Senate Finance Committee from Senator Charles Grassley (R-Iowa). Baucus has worked in a bipartisan fashion with Grassley during the 109th Congress, such that many experts are predicting only a “muted” effect when power shifts from Grassley to Baucus. Several new members, with diverse views on trade issues, will join the committee.
Senator Baucus has favored free trade agreements with commercially-meaningful FTA partners that other Democrats have criticized. Baucus is a strong advocate of a U.S.-Korea free trade agreement (KORUS-FTA), and helped launch the negotiations in February, 2006. More recently, Baucus has promoted the idea of a U.S.-Japan bilateral services agreement.
Baucus has also introduced bills on currency and trade enforcement, making it likely that these issues will be revisited when he becomes chairman of the Finance Committee. In September, Baucus joined Senators Grassley, Schumer (D-New York) and Graham (R-South Carolina) to announce they will work together on a WTO-consistent bill that will address their concerns over China and other countries that might have “misaligned” currencies. In addition, Baucus has in the past pressed legislation that would create high level positions within USTR to focus on the enforcement of existing trade pacts. He has proposed to elevate the USTR General Counsel to a Senate-confirmed position with statutory authority to investigate and resolve trade enforcement cases.
The 110th Congress may have the opportunity to consider the Korea and Malaysia FTAs. The primary hurdle for these negotiations is completing them before the expiration of Trade Promotion Authority (TPA). That date is effectively March 30, which is the deadline for submitting an agreement before TPA expires on June 30. There is a small chance Congress may also consider a Doha Round agreement, though because of the current impasse among WTO members, it seems more probable that the negotiations will continue for several years.
The APEC leaders, at their Hanoi Summit, indicated their willingness to make concessions to achieve success in the Round, but qualified the offer with a demand that other factions must do the same. This statement was, of course, directed at the European Union, India, Brazil, and their various allies who are making statement that are just as determined and just as self-serving.
These major players all now recognize that if there is to be some progress, which is unlikely, it will have to emerge from a return to the old, and supposedly rejected strategy of “backroom” negotiations between a very small group of key nations. Everyone seems to want to seek some acceptable compromise that will bring the Round to at least a level of accomplishment that holds some promise for benefits in the future. With the clear emergence of a strong protectionist leaning in the recent U.S. elections, the fear is that open trade will not only not move forward, but that nations will begin to erect new and highly counterproductive barriers that perpetuate poverty and political divisions, inhibit investment, and depress global economic performance.
Despite these very real and well understood risks to the world trading system, Bush, Baucus and Rangel will all face strong resistance from elements in both parties if the Bush Administration seeks TPA renewal in the next Congress. Many Republicans believe they lost some election races to Democrats because voters were insecure about whether globalization and free trade were not ultimately costing U.S. jobs rather than creating a stronger U.S. economy. Democrats seek stronger language on labor and environmental protections to be included in future FTAs. Even if these elements are included, TPA extension is not going to be an easy task. From a political standpoint, it is not likely that Democrats will want to give Bush TPA even under revised terms. If the WTO Doha talks are not near a conclusion by the expiration of TPA on June 30, 2007—a prospect that at this point seems very unlikely—many Members of Congress will see little or no reason to extend the authority.
A Democratic Congress will place increasing pressure on the Bush Administration to “get tough” with China on both currency and specific trade issues. The most immediate ones will be Intellectual Property Rights, and the current auto parts dispute in the WTO. The Democrats are willing to give Treasury Secretary Paulson some time to try to use his relationships with Chinese leadership to get results in these areas, but expectations are low, mistrust of China is high, and Democratic and Republican patience will run out well before then end of 2007. This is especially true of the currency situation, although that does not necessarily mean that Democrats expect or want a dramatic and sudden revaluation, but at least some recognition that the renminbi is undervalued.
One thing Congress will agree on will be a very, very generous farm bill. Democrats, having concluded that Doha is dead, will go all out to enrich farm support as much as they can, and the Administration and most of the Republicans will go along to a great extent. In this area, the willingness to ignore the complaints of the Cairns group and the developing world seems to be both bi-partisan and strong. This is especially true because the U.S. will be going through yet another crucial election in 2008, where both sides will be cultivating voters in Iowa and other farm states who switched from voting Republican to voting Democratic in November 2006.
Even this brief analysis indicates the extent to which the traditional political coalition supporting open trade has disappeared in Washington, and how the cumulative result of that political change is likely to be manifest in a lack of action, or negative action, by the 110th Congress.