Guest blog: Good outcome for a bad deal

Napoleon always said he liked lucky generals. He would have loved Barack Obama. The president is so lucky that he now has the South Koreans doing the dirty work of saving him from committing political suicide by signing a Free Trade Agreement (FTA) that would likely further increase both the U.S. trade deficit and the U.S. unemployment rate.

Reports from Seoul yesterday said the deal was essentially done and that Obama and South Korean President Lee Myung-bak would meet their self-imposed deadline by inking the deal today (Thursday). But no, the Koreans, who have been relentlessly promoting this deal as essential to both Korea's future economic well-being and its national security, suddenly said they couldn't agree to a small increase in imports of U.S. beef or a slight relaxation of emissions rules for imports of small numbers of foreign auto imports.

Since, like China, South Korea already manipulates its currency and imposes a myriad of subtle bureaucratic regulations and informal agreements that make the Korean market one of the most closed in the world, one might wonder why Seoul couldn't agree to these two U.S. requests which would in no way result in any significant increase in Korean imports from the United States. But Obama should really thank his lucky stars for South Korea's economic paranoia because it may save him from his administration's own worst instincts.

I know we're all supposed to be free traders and that opposition to anything labeled free trade is strictly taboo. But really, does anyone truly believe that we have anything like free trade with South Korea? This is a country that, as a matter of policy encourages the infringement of foreign intellectual property, and whose courts routinely annul the Korean patents of foreign based companies.

Yes, the proposed deal would significantly reduce Korean tariffs and facilitate foreign investment in Korea and contains strong language on the protection of intellectual property. But if the courts won't enforce the language what is the point? And tariffs are not the real barriers to foreign penetration of the Korean market, especially since the Korean government can and does manipulate its currency to offset the effect of any tariff reductions. As for facilitating foreign investment in Korea, why do we especially want to do that when we need investment in the United States? Moreover, the proposed deal on investment as presently constituted actually allows the U.S. branches of Korean companies to take disputes over U.S. regulatory rulings and impacts out of the American legal system by appealing to the World Bank and the International Court.

Isn't that something? The United States has consistently refused to join the International Criminal Court on grounds of protecting national sovereignty, but was just on the verge of signing a trade deal that would enable foreign companies to evade the sovereignty of the U.S. legal system in certain disputes. I wonder if the Republicans who have been promoting the deal understand that.

But sovereignty is not really the main point; that would be jobs. Here, the deal fails utterly. Of course, there are lots of studies by the various think tanks around Washington. Not surprisingly they only prove that while figures don't lie, liars figure.

If you are for the deal, you can easily find a computer model that will confirm your view and vice versa. So let me put it in the words of one of the Korean negotiators whom I know and to whom I posed the question of whether, honestly between friends, he thought the deal would significantly increase U.S. exports to Korea or U.S. employment. His answer was an immediate "no." And no one who knows anything about doing business in Korea believes otherwise.

So let's hope Obama's lucky streak keeps holding, at least until he gets out of South Korea.

Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.



Guest blog: More pain ahead for Obama at G-20

As the G-20 talks get underway, we're thrilled to have Clyde Prestowitz guest-blogging for us over the next few days. Clyde is the president of the Economic Strategy Institute here in D.C. He served as counselor to the secretary of Commerce during the Reagan administration and as vice chairman of the President's Committee on Trade and Investment in the Pacific.

Be sure to check out his most recent book, The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era as well as his piece, Lie of the Tiger, from the November print issue of FP. -JK


First, Barack Obama was shellacked in last week's congressional elections. Then, the U.S. president was garlanded in India and Indonesia. Now he's in Korea, where he's about to be waterboarded by the G-20.

Oh sure, the G-20 will come up with some paper-over language that will allow everyone to sign on to some vague agreement that it might be a good idea to achieve global rebalancing at some undetermined time in the next century. But this is just what the Japanese would call tatemae -- the packaging or superficial appearance of things. The honne -- the truth or actuality -- is that whether he knows it or not, the U.S. president has arrived in Seoul to preside over the end of the Flat World.

In fact, the Obama administration is demonstrating a lot of schizophrenia about this. In India, Obama couldn't stop spouting the conventional wisdom about how international trade is always a win-win proposition and how those who express concern about the offshoring of U.S. services jobs to India are just bad old protectionists.

At the same time, however, Treasury Secretary Tim Geithner is calling for some kind of deal for the G-20 governments to take concrete actions to reduce their trade surpluses or deficits. To be sure, Geithner has quickly backpedaled from his original proposal that governments would set hard numerical targets for the allowable limits of surpluses and deficits at 4 percent of GDP. His first fallback position was that the numbers would be only voluntary targets or reference points. When that elicited a new round of incoming fire he retreated further to the current proposal for agreement that each country will take the measures it thinks necessary to reduce excessive surpluses and deficits. Hardly much of a deal at all.

Yet even this is a revolution. No matter how watered down, Geithner's proposal is a call for managed trade. It is an implicit admission that contrary to 50 years of the preaching of economists, trade deficits matter. Even bilateral trade deficits can matter if they are big enough because they distort capital flows and exacerbate unemployment in the deficit countries. Further, it is an admission that unfettered, laissez-faire free trade is not self-adjusting and therefore not really win-win.

This implicit admission by Geithner has been manifested even more strongly (but still implicitly) by some of our leading free-trade economists and pundits. Thus, Paul Krugman, a Nobel Prize winner and long a champion of conventional free trade has called for tariffs on imports from China. So has Washington Post columnist and eternal free trader Robert Samuelson, and even the Financial Times' economics columnist Martin Wolf has suggested that some offsetting response to China's currency manipulation might be necessary.

But Obama isn't going to get agreement to any of that in Seoul. None of the other countries want to face the fact that the United States cannot be Uncle Sugar and the buyer of last resort forever. In fact, Obama has asked both the Germans and the Chinese to help out a bit by consuming more and exporting less. The Germans told him bluntly to get lost and the Chinese told him somewhat more politely to get lost. So the honne is that the Germans, because they're Germans, and the rest of Europe, because it is in terrible financial shape and can't borrow any more, are bent on creating jobs by dint of export-led growth. Essentially, they are saying they are going to create jobs by taking U.S. jobs. The Asians are saying and doing the same thing. Neither Asia nor Europe is likely to take steps that will achieve significant rebalancing in any reasonable period of time. That, of course, means no new jobs for Americans.

The big question is whether or not Obama will respond to that refusal by taxing foreign capital inflows, imposing countervailing duties on subsidized imports, matching the tax holidays and other investment incentives used by China and others to induce off-shoring of U.S. production, and challenging the mercantilist practices of many Asian countries in the World Trade Organization (WTO). These are all measures that he could take himself in an effort unilaterally to reduce the U.S. trade and current account balances and thereby create jobs for Americans.

If he does, he is sure to be harshly criticized by the apostles of the conventional wisdom. But if he doesn't he is sure to be toast in two years.

TIM SLOAN/AFP/Getty Images