IBC's Washington Trade Update

AUGUST 2010

THE ECONOMY SLOWS AS ELECTIONS APPROACH

THE FEARED STALL IN THE U.S. ECONOMIC RECOVERY MATERIALIZED over the past month.  It happened just in time to intersect the onset of the campaign season, when candidates spend the August recess meeting with constituents back home and return to Washington for a few weeks of legislative work geared toward the November 2 elections.  With voters’ attention now riveted on the frail economy and dim employment picture, politicians are honing their proposals and messages to mesh with these concerns.  These proposals are being put in legislative form, and though time is likely too short for major economic measures to be enacted this fall, some may see action in a possible post-election lame-duck session, and in the next Congress.  This WIBR will review the disquieting recent economic indicators and look at what the political parties are putting on the table in response.

THE ECONOMY:  EVERYONE IS UNEASY FOR A REASON – The end-July report that U.S. GDP growth rate slipped to 2.4% in the second quarter, with most of the slowdown coming in June, signaled the end of what had been a strong rebound from the depths of recession.  Moreover, recent revisions show that the recession itself was a bit deeper than had been thought, and consumer spending weaker than thought. Projections posit a further slowing of the growth rate in the second half of the year, but the rate still is expected to be positive.

The picture was confirmed by the Federal Reserve Board.  Following its August 10 meeting, the Federal Open Market Committee stated, “The pace of economic recovery is likely to be more modest in the near term than had been anticipated” and the Fed will therefore “keep constant” its “holdings of securities at their current level” (reinvesting the repayment from Fed-held mortgage-backed securities in U.S. Treasuries), while also keeping the federal funds rate “exceptionally low” for an “extended period.”

“Recovery Summer”?  A “Considerable Way to Go”:  The gloomy picture, undercutting the White House’s premise of a “Recovery Summer,” was further darkened by the August 6 release of the July employment report.  The unemployment rate remained at 9.5% – due in good part to the unemployed withdrawing from the job search, not finding work, as 131,000 jobs disappeared.  The private sector added only 71,000 jobs, a much weaker pace than earlier in the year (and below the level needed to keep up with new labor-force entrants), while June’s job-loss figure was revised up sharply to 221,000.  As Fed Chairman Ben Bernanke warned in early August, the economy has a “considerable way to go” before it reaches full recovery.

News on the trade deficit was also disappointing.  The U.S. deficit grew to $49.9 billion in May, an unexpected increase reflecting a $2.0 billion drop in exports and a $5.9 billion increase in imports.

With the economy’s swoon dominating voters’ attentions, both political parties are scrambling to put together a set of economic policy proposals that will appear credible to the electorate.  The Democrats are centering their package around government actions to boost manufacturing and more government stimulus;  the Republicans in early August promised to come up with a package focused on government spending constraint and tax cuts, but have yet to present a fleshed-out plan.  Later this year – but that will be after the elections – both parties will have to react to the recommendations of the President’s Deficit Reduction Commission, due to report on December 1 with a plan likely to include tax hikes and spending cuts that Congress will be asked to vote on without changes.

DEMOCRATS WANT TO “MAKE IT IN AMERICA” – The Obama Administration and congressional Democrats are seen as susceptible to political blame for both the economic slowdown – now ongoing on their watch – and for spending so much effort “elsewhere”, in particular on healthcare reform.  The Democrats are working to escape this vulnerability by focusing on measures to boost the manufacturing base.  Both parties are crafting their campaigns around how the government can encourage the private sector and thus jobs-creation.  The underlying philosophies differ, along the traditional party divide:  the Democrats want the government to play an active role in encouraging, stimulating, and protecting manufacturing (paid for through taxes and deficit spending) while Republicans want the government to get out of the way and cut taxes and regulations.

In late July the House Democratic leadership unveiled a new initiative: “Make It In America.”  This legislative package aims to shore up support among voters uneasy about deficit spending, unsure about new regulatory initiatives (such as carbon cap+trade, now probably off the calendar for this Congress even if an energy bill comes up, and aspects of the enacted healthcare and financial reform bills), and eager for the government to help business.  The initiative was reportedly motivated by an opinion poll revealing anxiety over deterioration of the manufacturing base, as well as by the Democratic win in a Pennsylvania special election in which the victor campaigned hard against a tax break for companies that send jobs abroad.

The Democrats used the closing of this tax “loophole” pertaining to foreign tax credits which, the President said, encourages “corporations to ship American jobs overseas,” to raise $9.6 billion to fund part of a $26 billion bill giving emergency aid to states, largely to pay teachers and Medicaid expenses.  This bill, which moved in the Senate in early August after two Republicans supported it, was approved by the House on a largely party-line vote in a special August 10 session.  Though it is not itself part of “Make It In America”, the provision against off-shoring of jobs is expected to figure prominently in Democrats’ promotion of their initiative as they put Republicans on the defensive for opposing it.  Major business organizations, in a joint letter to Congress, warned the tax change will discourage business investment and job creation in the U.S.

While “Make It In America” comprises many individual bills, much of what these contain is rhetorical or requires new reports and commissions rather than concrete actions.  The bills appear to be popular among Democratic House members, but most are not likely to pass the Senate, because of time constraints and some centrist opposition.   The President is on board, delivering speeches on the same theme.  U.S. Trade Representative Ron Kirk is too, stressing the role of trade policy in promoting domestic workers and manufacturing.

Tough-on-Trade Rhetoric No Surprise in Election Year:  The title of the initiative raises criticism that it will be seen as having a “protectionist” cast. House Speaker Nancy Pelosi said of it, “Democrats are fighting to restore the words ‘made in America’ to the center of our economic success.”  Rep. Dan Lipinski (D-IL) declared, “We must take action to support domestic manufacturing and end the outsourcing of American jobs.”  And House Majority Leader Steny Hoyer (D-MD) cited as part of the “impulse” behind the initiative “helping to level the playing field for American companies.”  Given the political appeal of protectionism – and given that tough trade stances were one of the most effective positions used against Republicans in the 2006 and 2008 election cycles – harsh language on trade is likely to be prominent in the political environment leading up to November.  However, most of the Democrats’ proposals do not include overtly protectionist measures.  Nonetheless, depending on how the government assistance to manufacturing included in some of these bills is implemented, it could be WTO-challengeable as violating rules on subsidies or national treatment.

The Manufacturing Package:  Before the recess, the House and Senate passed the U.S. Manufacturing Enhancement Act, which temporarily lowers duties paid on manufacturing inputs and other products not made in the U.S.  The Democrats characterized this non-controversial bill as the first installment of the “Make It In America” initiative.  In late July the House approved several more initiative components.  It passed (379-38) the National Manufacturing Strategy Act, requiring the President to present a manufacturing strategy every four years, to be crafted by a new National Manufacturing Strategy Board.  The Clean Energy Technology & Manufacturing and Export Assistance Act passed by voice vote; it is aimed at getting information and resources to “clean-tech” companies to help them compete domestically and in export markets. The End the Trade Deficit Act also passed by voice vote.  It requires creating an Emergency Commission to End the Trade Deficit, tasked with examining causes of the deficit, focused on foreign currency and trade practices, and to consider ways reduce it, including development of a plan to eliminate the merchandise trade deficit by 2019.  The legislation lists specific issues for commission consideration, including currency policies, foreign government purchases of U.S. owned assets and the impact of tariff and non-tariff barriers. A controversial provision that would have barred the submission to Congress of any trade agreements until the panel’s work was concluded and considered by Congress was dropped before passage.  Other manufacturing-linked measures approved by the house before recess include a bill to facilitate patent applications and the SECTORS Act, promoting worker-training in new technologies.

Also on the Economic Legislative Agenda:  On a measure separate from the manufacturing package but also focused on the economy, just before adjourning Democrats were unable to get a Senate vote on a bill to create a $30 billion fund to spur community bank lending to small businesses and provide some small-business tax breaks.  Republicans blocked the vote when the leadership refused to let them raise amendments.  The President himself blasted the Republicans for killing the measure (which is generally supported by both parties and by business), but Republican leaders shot back that the measure wasn’t a priority for the Democrats until they saw it would be popular on the campaign trail.  It will be pursued after the recess.

Other pending commercial legislation includes the array of bills targeted (whether by name or not) at China for currency undervaluation.  The Administration is under strong bipartisan pressure to take stronger trade action against Beijing.  In an early August letter, a group of senators led by Charles Schumer (D-NY) wrote the President, “We are gravely concerned by the Administration’s failure to address China’s currency practices and other predatory actions.”  Still, despite a lot of verbal support, none of these measures is likely to be enacted, though it is possible that one may move to a floor vote. Some promoters of these bills are likely to try to portray them as part of the “Make It In America” initiative, but they are opposed by the Administration. The House Democratic leadership has refused to commit to seeking a vote on any of them.

The most controversial economic issue before Congress remains what will happen to the expiring Bush tax cuts enacted in 2001 and 2003.  Taxes on wages, dividends and capital gains and the estate tax are set to jump at the end of this year.  Democrats support maintaining most of these, but the President and Democratic leadership oppose continuing the reduced rate on annual incomes over $250,000.  They call these tax cuts “for the rich.”  Republicans counter that the $250,000 figure encompasses many small businesses, and that expiration of the tax cuts would stifle new jobs-creation and contribute to the atmosphere of uncertainty and worry that is undercutting the economic recovery.  While most Democrats favor maintaining the middle class tax cuts, there is disagreement over whether these should be extended temporarily or made permanent.  The tax-cut expiration controversy will carry into the fall campaign.  It is unclear when a vote might occur, perhaps not until the possible lame-duck session, or in the next Congress when action on them will no doubt be influenced by the results of the Deficit Reduction Commission – and of course by the results of the elections.

REPUBLICAN PACKAGE NOT SET – Republicans have yet to unveil a comprehensive economic package.  They are anticipating major electoral gains putting them in position to exert much more legislative influence next year.  For them, renewal of the full Bush-era tax cuts is a focal point, and they favor broader tax reform including a corporate tax rate cut, easing regulations, and cutting government spending.  Rep. Paul Ryan (R-WI) has offered his "Ryan Roadmap,” an aggressive market-oriented plan of tax-code and entitlement reform and spending cuts, which he called "a comprehensive alternative to the heavily government-centered ideology now prevailing in Washington.”  It has incited a lot of pundit chatter but is far from having an official Republican imprimatur.  Any official Republican package is likely to be less ambitious.

One important Republican-backed move that has support from many Democrats, as well as business and agriculture organizations, is enactment of the Free Trade Agreements pending with South Korea, Colombia, and Panama.  Approval of these pacts will be part of any Republican package, but is not in the Democrats’ “Make It” initiative, as the FTAs provoke too much hostility within the Democratic Party and among its supporters.  In fact, the White House is under pressure to back away from its recent commitment to work to move the agreements next year.  In late July 109 House Democrats sent the President a letter expressing concern about his plan to submit the South Korea deal to Congress early next year, insisting it should be made more favorable to the U.S. in areas beyond just the auto and beef sectors that the Administration is focusing on.  Despite this, President Obama has indicated to his trade team that the KORUS FTA is “priority number one” among the three pending FTAs.

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International Business Government Counselors, Inc. (IBC) is one of the most experienced and prominent international government relations firms in the United States. Clients include major North American, Asian and European multinational companies. For more information, contact James D. Regan, Senior Vice President, jregan@ibgc.com