IBC's Washington Trade Update

February 2010

AN ANXIOUS YEAR AHEAD

THE SECOND YEAR OF THE OBAMA PRESIDENCY and the 111^th Congress opened amid growing anxiety over the direction of the country and uncertainty over Washington’s agenda in the coming election-entangled months.  With the electorate appearing dissatisfied with the White House and the Congress, the Democrats and the Republicans, and politicians unsure how to respond to this discontent, there is clarity on this:  unemployment and government deficits top the list of popular worries.  Unfortunately for Washington decision-makers, the remedies for one could exacerbate the other.  Moreover, along with these popular priorities, the Obama Administration remains publicly committed to acting on other issues on which success evaded it last year: healthcare reform, climate change, and financial regulatory reform.  Further complicating this difficult political and policy environment are world events that threaten to ensnare Washington in new crises, strategic and financial.  As on the domestic front, the public appears to have growing qualms about how the government will manage the impact of potentially perilous developments abroad.  This WIBR will survey this bumpy and uncertain terrain.

WASHINGTON:  IN THE GRIP OF POLITICAL TURMOIL – The victory of Republican Senator Scott Brown in the January special election in Massachusetts erased the Democrats’ 60-vote filibuster-proof supermajority in the Senate, (they will need at least some Republican support to pass most legislation), and it chilled Democratic politicians from all but the safest Congressional districts.  Even the efforts of President Obama himself failed to save Brown’s opponent. Observers generally see the electorate in this usually reliably “liberal” state as having voted against increased government spending and healthcare reform. As a result, fissures already present in the Democratic Party have widened.  Vulnerable Democrats who were voted in on a backlash against the previous Administration (in 2006) and on President Barack Obama’s coattails (in 2008), or who have been in power longer but represent Republican-leaning districts, are seeking distance from the Democratic leadership and are struggling to find safe ground on the rapidly shifting political sands.  Obama is responding to the changed political circumstances by reaching out publicly to wary Republicans.  However, such outreach, whether by the President or Democrats in Congress, could threaten to alienate left-leaning members of their party, further splintering the Democratic caucus.  The Administration and White House, too, are now showing splits between those who want to win some accomplishments by compromising with Republicans and those who would stick with a more ambitious agenda that may be both out of reach and politically frightening to vulnerable Democrats.

The Republicans are similarly beset.  While their prospects for the November elections are looking bright, internally the party has cracks evident in the rising number of primary challenges to incumbents and the attraction of the conservative/populist anti-big-government “tea party” movement that is emerging outside of the party structure.  These realities portend a congressional year of partisan jockeying and difficulty in passing substantive legislation.  Washington’s churning political waters and the country’s political mood even reached across the ocean to this year’s late-January World Economic Forum gathering in Davos, where participants reported that a hot topic of informal chatter was the potential for “political instability” in the United States.

Mixed Message – More Debt, More Restraint:  One bill that did pass in early February was the must-have increase in the federal debt ceiling to $14.3 trillion, needed to allow continued government borrowing.  Congress sweetened this always unpopular medicine by including a pay-as-you-go rule, a provision Congress enacts periodically that requires savings or revenue-generating offsets for spending increases.  Pay-go appeals to the majority of voters concerned with the rising federal deficit (projected to hit $1.56 trillion this fiscal year, 10.6% of GDP), though it is laden with loopholes and will likely have limited impact.  Every Republican voted no, charging it will motivate new taxes, not spending restraint.  The President disagrees, however, and touted pay-go in his weekly radio address, along with his proposal for “a bipartisan Fiscal Commission to provide recommendations for long-term deficit reduction.” Still, he didn’t mention the debt ceiling hike, showing sensitivity to the popular anti-government-spending mood.

Bernanke Takes Some Heat:  Also revealing of rising populism was the opposition to the reappointment of Federal Reserve Chairman Ben Bernanke.  His late-January Senate confirmation was more controversial than earlier anticipated as Democrats on their party’s left and Republicans on their party’s right joined to vote against him. He was eventually confirmed by an unusually “bipartisan” 70-30 vote.  Fears that the Fed would become politicized and too reactive to congressional pressure were alleviated by his reconfirmation – though not entirely, given that the battle led to scrutiny and criticism of the Fed that in itself could open the door to political pressure and may also undercut Fed efforts to gain more authority over bank regulation.  Few envy Bernanke’s main task ahead.  As he noted in February congressional testimony, the Fed is preparing to exit extraordinary rescue programs it set in place to assure liquidity to the credit markets during the height of the financial crisis.  That’s not particularly controversial, but more dicey will be the Fed’s responsibility for choosing the timing – not soon, but as he said, “in due course… as the expansion matures” – for commencement of monetary tightening “to prevent the development of inflationary pressures.”  Attempting to do so at any point in a “jobless recovery” could really test the Fed’s independence.

Congressional Priorities – Jobs, Jobs, Jobs:  Mid-February maneuvering around jobs legislation reveals how complicated the policy environment has become.  Senate Finance Committee Chairman Max Baucus (D-MT) and ranking Republican Charles Grassley (R-IA), with White House endorsement, reached agreement on a bipartisan jobs bill with a $85 billion price-tag, only to see Senate Majority Leader Harry Reid (D-NV) reject it in favor of his own formulation costing $15 billion.  Some Democrats oppose the Baucus-Grassley legislation as encompassing too many concessions to Republicans and prefer to frame the jobs effort in a way that would force Republicans to take a stand on a series of smaller jobs bills (starting with Reid’s $15 billion package which is centered about tax breaks for hiring new workers) that each contain some things their constituents favor along with many Democratic initiatives that Republicans oppose on principle.  Other Democrats believe the jobs situation requires something much more ambitious, along the lines of the $150 billion bill passed by the House in December.  And other Democrats, heeding the Brown victory in Massachusetts, may oppose any legislation that appears to be a vehicle for major new spending projects.  The Senate will sort this out in late February, but the divided Democrats have to worry that they may fail to muster the 60 votes needed to move legislation the President called for in his January 27 State of the Union address:  “I want a jobs bill on my desk without delay.”

With unemployment now at an official 9.7%, the White House is projecting little relief for this year.  Into the indefinite future, there are reasons to expect continued political turbulence over the jobs issue as there are structural reasons why it may be hard indeed to generate more jobs.  Much employment during the past two decades was tied to the bubble aspects of the economy – real estate, financial services, retail propped up by consumer spending based on easy credit.  The collapse of these conditions means that jobs will likely lag a recovery in GDP.

White House Priorities – Healthcare Reform…:  The President has declared jobs-creation his top concern this year, but he is continuing to pursue his first-year priorities. Lacking a Senate supermajority, the Democrats can only get a health care overhaul bill through either by winning at least minimal Republican support to achieve 60 votes or by using reconciliation, meaning that components of the package that have a direct budgetary impact can pass under budget rules that don’t allow a filibuster and thus require only a simple majority.  The former approach is being pursued by the White House.  The Administration has invited Republican congressional leaders to join Democratic counterparts at a “summit” on February 25 to share ideas on what might be in a bipartisan bill.  The Republicans fear being boxed in, and how this situation might develop remains unclear. Other Democrats are promoting the reconciliation path.  However, not only would that approach entail delicate maneuvering between the House and Senate (which passed two differing versions of the legislation last year), but it would appear to be a highly partisan move that could harm vulnerable Democrats.

…Climate Change/Energy:  At least as questionable is whether any significant legislation addressing climate change and carbon emissions might move this year – another lingering presidential priority.  The betting remains that it won’t, with global warming off the radar screen of public concern and seemingly under more question, and no appetite in Washington for putting new burdens on business in the current economic environment.  In early February, the President signaled he would accept a bill focused on energy development and production without the emissions cap+trade provision central to the legislation passed by the House last summer.  Such a move, while having more chance of success, would put him at odds with many Democrats, including Reid, who has been promoting a bill centered about cap+trade and a renewable electricity standard.  The fallback for environmental activists would be implementation of the Environmental Protection Agency’s new rules controlling greenhouse gases including carbon dioxide – a move that, like a cap+trade bill, could prove highly negative to the political fortunes of quite a few congressional Democrats, especially from heavy industry and coal states.

…And Financial Regulation:  Another leftover priority, financial regulatory reform legislation (which, like healthcare and cap+trade, passed the House in 2009), also faces an uncertain future in the Senate.  Efforts to involve at least some Republicans have to deal with disagreement over the proposal to create a Consumer Financial Protection Agency as an independent authority to protect consumers from abusive lending practices.  The House bill included the new agency and is strongly supported by the White House, but Republicans fear regulatory overreach.  A Senate bill could yet emerge that includes a watered down consumer protection body housed within an existing regulatory agency.  There are many Republicans as well as Democrats who believe the financial regulatory system needs refurbishing to allow government to constrain the sort of risky behavior that led to last year’s financial crisis and messy aftermath.  Yet the politically-charged Washington atmosphere may not allow such reform this year.

LOOKING ABROAD – TENSION, UNCERTAINTY… China:  Washington’s relations with China are seeing increased strain, as the Administration has taken a tough stand on Internet freedom. Washington and Beijing have long been stepping up trade actions against each other through domestic unfair trade laws and WTO complaints.  But things ratcheted up following the mid-January cyber-hit on Google that the company said originated “from China.”  The attack involved hacking of Google infrastructure and the theft of emails of Chinese dissidents, bringing to the fore the interlinked issues of cyber-security and cyber-freedom.  In response, Google vowed to end voluntary censorship of its China website, and Secretary of State Hillary Clinton made a forceful statement designating Internet freedom an American value.  Obama himself vowed to “press this issue aggressively” with China. Beijing’s response:  It would not accept foreign interference.  Denying involvement in the Google attack, it said it reserves the right to censor online activity, consistent, it claims, with WTO rules allowing restriction of foreign services for preservation of public morals.  The U.S. government is reportedly considering filing a WTO complaint nonetheless.  The heightened concern over China-based cyber attacks may also lead to heightened scrutiny of Chinese investment in U.S. high-tech industries over apprehension that access to private or government technology could facilitate electronic spying or sabotage.  Washington’s Internet freedom campaign was launched when relations were already inflamed by U.S. arms sales to Taiwan and the anticipated Obama meeting with the Dalai Lama, and it is unclear how the situation will develop.  The campaign may be popular in the U.S., but could result in a souring of relations with China.

On one important point of continuing bilateral tension, however – the yuan exchange rate – the President signaled in February that he is not seeking confrontation with China.  He told Bloomberg News that his goal over “the next year is for China to recognize that it is also in their interest to allow their currency to appreciate because, frankly, they have got a potentially overheating economy.”  Importantly, these comments suggest that the White House is not preparing to declare China a currency manipulator or otherwise intensify the dispute.  Moreover, since yuan appreciation would devalue U.S. assets held by the Chinese, it is a potentially risky demand.  No one seriously thinks Beijing would dump its dollar holdings given the harm that would do to its own economy.  On the other hand, the Chinese press did publish an interview with senior military officers who called for Beijing to do just that to punish Washington for arming Taiwan. “Our retaliation,” said one, “should not be restricted to merely military matters… we could sanction them using economic means, such as dumping some U.S. government bonds.”

… and Europe:  The White House revealed in early February that the President will not attend the planned May U.S.-EU Summit, a move that caused consternation in Europe as it appeared to signal a downgrading of trans-Atlantic ties.  While the Administration’s prioritization of relations with Asia and with the emerging developing countries – and of the Group of 20 over the Europe-heavy G8 – has long been clear, the announcement comes at a time when the EU may be about to burst back onto center stage as the Greek debt crisis threatens the Eurozone, roils international currency markets, and in a worst-case scenario could even destabilize the fledgling global recovery.
 

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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