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Trade Policy Forecast

The dynamic between the Administration and Congress will obviously completely change after January 20th with a unified government and we should be careful not to predict future action based on behavior of the recent past.

The Democratic caucus in the House is very diverse and Speaker Pelosi has been tough but pragmatic about how far to push them on trade in the past year. That coupled with elections and the incredible lack of trust between Congress and the Bush Administration all combined to give us the time out on trade that we've experienced in 2008.

What we're likely to see in the first six months of 2009 is an internal discussion between the Administration and those in Congress, including trade skeptics and those that are anti-trade. Skepticism is not anti-trade or protectionist and that is an important distinction to keep in mind, with the pure anti-trade wing of the Democratic caucus still in a relatively small minority. There is likely to be a review of existing trade agreements to develop enforcement or compliance agenda for what is already in place. This will include a thorough review of NAFTA, to begin a more comprehensive discussion with NAFTA partners on what might be accomplished without reopening the agreement. There is also likely to be a review of the model FTA with an eye toward revising aspects of it, especially labor and environment provisions.

While a multilateral trade agenda is more easily pursued by a Democratic Administration and Congress than bilateral FTA’s, trade preference programs are also traditionally not as controversial.

The primary trade preference programs such as the Generalized System of Preferences (GSP) and the Andean trade preferences are up for renewal again this year as the can was kicked down the road on any significant reform in this current session of Congress (AGOA however has been renewed until 2015). Rep. Jim McDermott of Washington will likely again introduce his preference reform legislation (New Partnership for Development Act), originally introduced in the Fall of 2007 with Rep. Phil English. The piece has a strong capacity building component to it and that aspect will possibly get more attention than trying to increase labor commitments as eligibility criteria. Because the preference programs as a whole are geared to poverty reduction, there may be more room for compromise on labor than with any bilateral agreements. Mr. McDermott’s staff has also been diligent in seeking out a wide range of views and finding bipartisan common ground. GSP however is likely to face an uphill battle with Senate Finance ranking Republican Senator Charles Grassley as he seeks to significantly reduce the benefits of middle income countries such as Brazil and India.

A promising departure from the traditional U.S. bilateral FTA formula is the recent work of USTR on joining the framework of discussions for the existing P-4 agreement signed by Chile, New Zealand, Brunei and Singapore. Those countries have signed an agreement but are still negotiating the investment and financial services chapters. The U.S. joined ongoing negotiations for those chapters, and in September, announced that the four nations have opened the broader agreement for U.S. to enter negotiation on what has been renamed the Trans-Pacific Strategic Economic Partnership Agreement or TPP. All chapters of the original P-4 text may now be on the table for review and subsequently, Peru and Australia have announced they will also join the first round of negotiations in March, with the possibility that Vietnam will also participate in some capacity.

This regional architecture, different in formula from either the purely regional efforts such as the ill fated Free Trade Agreement of the Americas or the hub and spoke series of bilaterals that form the Dominican Republic-Central America Free Trade Agreement, could well signal a new way forward for this Administration to engage in the negotiation of high standard meaningful trade liberalization while working through the baggage of opposition that exists with the three FTA’s still in the pipeline of Congressional approval: Colombia, Panama and Korea.

I unfortunately do not see new bilateral negotiations beginning in the next year. While the Administration and Congress work through the disposition of the existing three bilaterals and develop a way forward on the Doha Round the focus I believe will be to re-engineer the rules by which we engage bilaterally. The pace of that discussion may be influenced to a large degree by the success or lack of it in the Doha Round. However, when we decide to re-engage on FTA’s, there will be, I believe closer consultation with Congress on choosing the partners, with the focus on countries with the greatest commercial significance and the best potential for expanding trade and job creation in the U.S.

A question more than a prediction will be whether or not this Administration, responding to pressure that the rest of the world is racking up bilateral trade agreements while the U.S. is stalled, begins to respond by either challenging some of those agreements because they omit large sectors and do not meet the WTO criteria of “substantially all trade” or begins to consider doing the same, looking at opportunities to negotiate sectoral or less than comprehensive agreements.

Legislatively, the trade agenda will become much more a component of a broader worker focused competitiveness agenda, and the first step will likely be the completion of a new Trade Adjustment Assistance bill, building on the work that went on this summer, led by Senate Finance Chairman Baucus and working with the bill the House already passed, to provide an overhaul of Trade Adjustment Assistance.  The program’s continued funding was included in the current Continuing Resolution, which expires in March, 2009, and it is likely to be resolved before that expiration date.

Of the three FTA’s in the pipeline, Panama may be the first to be acted on by Congress, hopefully in the first six months. Colombia will likely be reintroduced and passed this year after some additional commitment or measurable milestone on labor union violence is negotiated with the new Administration. Korea is less easily predicted given the current state of the U.S. auto industry. Assuming the rescue plans gel, the new Administration is likely to put forward some proposal on autos to the Koreans, perhaps modeled on earlier suggestions by Rep. Sander Levin, which will effectively put the ball back in the Koreans’ court. The risk is that the most commercially significant and valuable of all the recent FTA’s may be the least likely to come to fruition in 2009 without strong and steady pressure on both the Administration and Congress to act.

There is an argument that the economic crisis and other longstanding issues such as healthcare reform will leave little time or energy to focus on trade. I do not see this as a valid concern with the Administration and USTR, but does have validity when looking at resources and the calendar for the trade committees of jurisdictions, since they will be heavily involved in healthcare and tax policy issues. While there is reason for optimism that a completely Democratic government will develop a positive trade agenda, much more engagement by the business community on all fronts, with tangible and workable ideas is needed now more than ever.