Who's afraid of protectionism?

With the US Presidential election just a week away and the race between George W Bush and John Kerry a dead heat, many Indians are probably wondering about the impact of a Kerry Presidency on Indo-American economic relations.

Given the rancorous debate over outsourcing and rise in protectionism, Indians have a right to be concerned about the direction of US trade policy.

Fortunately, even a victory by the Senator from Massachusetts is unlikely to diminish US trade and investment with India in the coming years.

It is easy to see why there has been growing pockets of protectionist sentiment among the American electorate in recent years. Barring some unusual revisions, President Bush will be the first president since Herbert Hoover to preside over a net loss of jobs during his administration.

After resuscitating in the spring, employment growth has languished again, with many discouraged workers dropping out of the labour force. The hemorrhaging in manufacturing employment has been particularly acute, with almost 3 million jobs lost since the 2001 recession.

At 5 per cent of GDP, the US current account deficit has reached levels once thought unattainable only a few years ago.

Taking advantage of this rough patch, some Democrats are using a unique tactic to discourage free trade by preaching that its benefits are being undermined by structural changes in the global economy.

Traditionally insulated from international competition, technological advances have exposed the US service sector to outsourcing on a global scale.

Approximately 90 per cent of the value of services is now produced within the providing firm. This figure is estimated to drop to 60 per cent within 10 years.

Not surprisingly, some Democrats see this trend as ominous for the US economy under the belief that the job losses would be concentrated in high paying fields such as medicine, management and consulting.

During his fight for the Democratic nomination, Senator Kerry participated in the assault on free trade by calling American business executives "Benedict Arnold CEOs" for moving some of their operations overseas.

Kerry has vowed to slow outsourcing by imposing new regulations on US companies and restricting government contracts to companies that promise to perform all the work in the US.

He has also promised to use labour and environmental standards with developing countries on future trade agreements, a euphemism for inhibiting trade with poor nations. This message has resonated in some of the key battleground states such as Ohio, Pennsylvania and Michigan.

Whether this protectionist sentiment becomes reality is critical for India. The US is by far India's largest trading partner. Bilateral trade in 2003 was $18.1 billion and is expected to reach $20 billion in 2004.

The US is also India's largest investor, with US direct investment hitting $3.7 billion in 2003. US investments in India's rapidly growing software sector is boosting service exports and modernising India's economy.

Revenues from the IT industry are expected to exceed $20 billion in 2004-05. India's goal of rapidly increasing its share of world exports (currently 0.8 per cent) is unlikely with future US restrictions on trade and investment in India.

Fortunately for India and the global trading system, new barriers to the free movement of goods, services and capital are unlikely to occur regardless of the election outcome. There are five reasons why.

First, Kerry has compiled an impressive record of support for free trade while serving in the US Senate. He voted in favour of every major trade Bill to come before Congress: the Uruguay Round Agreements Act, the North American Free Trade Agreement, normal trade relations with China, more generous market access for imports from Africa and the Caribbean, and trade promotion authority for Presidents Clinton and Bush.

He was one of a minority of his party in the Senate to reject steel quotas in 1999. While his trade record has some blemishes (he voted for the huge farm subsidy Bill in 2002), he has been particular pro-trade for a Democrat.

Second, the Democratic Party is dominated by constituencies that traditionally oppose free trade (that is, organised labour and environmentalists).

Getting the party's nomination necessitates pandering to these special interest groups. Bill Clinton, also a pro-trade Democrat, made similar promises to organise labour before getting nominated and then led the push for the North American Free Trade Agreement (Nafta) accord.

Third, the Congress is likely to remain in Republican control and will probably block any sharp turns toward protectionism by a Democratic administration.

Organised labour's attempts to "collect" after a Kerry victory is likely to be thwarted by a Congress dominated by free-traders.

Fourth, record US corporate profits will likely produce stronger hiring in the coming quarters. Outsource bashing has already tempered somewhat given the modest recovery in employment over the past year. Healthy and sustained employment growth will muzzle trade foes similar to the US jobs expansion of the mid-1990s.

And last, turning protectionist would send the wrong message to critical allies at precisely the wrong time. With the US seeking increased cooperation in the war on terrorism, erecting barriers to trade and investment would hinder our efforts at bringing emerging markets like India into the global community.

In May, India's national election results might have stunned the world but its slow march toward economic liberalisation has not been reversed. November's American election results will likely do the same.

The writer is chief economist -- Keystone Business Intelligence India.

Powered by