WASHINGTON, Nov. 24 (UPI) -- President Bush's doctrine of pre-emption not only applies to terrorists, but, as the world was reminded last week, to international trade. Will the emerging brush fire over textiles, and the ongoing one over steel, and the related decline of the "strong dollar," erupt into a full-fledged war?
It's highly unlikely, which is why the smart money remains bullish on the U.S. and Asia. But it's now more possible than at any time since 1986-87 -- which is why there's reason for concern, and opportunities on the short side within selected sectors.
Though few analysts noted it, the rumbling protectionist guns of November were arguably the single biggest factor in this month's severe slump in Asian stock market prices.
With its mouth, and in macro terms, the Administration continues to talk softly and in free-trade tones, as in encouraging a Free Trade of the Americas Agreement last week in Miami. In its micro actions, however, the Administration is playing a global (and unilateralist) policeman's role, applying penalties that now apply to virtually all of our twenty largest trading partners -- in most cases, to some of their leading exports to the U.S., and in many, such as Canadian lumber, natural gas, and farm products, to several of their largest exports.
The anti-China sanctions, which "Bottom Line" has warned of repeatedly in general, but didn't catch wind of in particular, come in a month during which the Administration was simultaneously beginning to make the case for a proposed free-trade agreement with China.
It's not philosophically inconsistent, necessarily, to try to enforce fair trade rules already in place, on the one hand, while arguing for more generous rules for everyone to play by on the other. The matter is problematic for the United States, however, for two reasons:
1. What "Shaq" O'Neal is to a pickup basketball game down in Southeast Washington, DC, the U.S. is to choosing up sides and setting rules for global trade. Most global free trade agreements -- the Clayton GATT in 1947; the Kennedy GATT round of the 1960s; the North American Free Trade Agreement initiated under President George Bush Sr. and the Clinton World Trade Organization triumph of 1994-1995 -- came about after and during a period of U.S. unilateral concessions.
In general, the U.S. has to do this because as the strongest player, it needs to coax the other players into even taking part in the game. Yes, if the other players don't like it, they can go home. That leaves the U.S. standing on the court with no one to play with.
2. The Bush Administration has already ruffled many international feathers, to say the least, with unilateral decisions to block the Kyoto global warming treaty, deploy strategic defenses, and make war on Iraq, to name just a few; we face further such tough decisions over Korea, Iran, Syria, and other rogue nations.
The point here isn't whether these were good or bad policies. The point is, you can win fights on all sorts of issues all the world; but to be fighting almost the whole world, on every issue from trade to the environment to Iraq may prove difficult even for George Bush. The Bush Administration -- of necessity -- has picked some important fights on other issues. It may be that if it wants to avoid a trade war, it needs to emphasize the "speak softly" part of Teddy Roosevelt's doctrine, and avoid use of the big stick.
In addition to the above, of course, the U.S. is not necessarily enforcing fair trade in all of its actions. The Bush Administration made its case on steel curbs before the WTO and was ruled to be in the wrong.
It was symbolically correct that Bush was on his way to Great Britain as this decision came down. Even Tony Blair, one of his strongest allies, seemed a little exasperated when Bush declined to signal during the trip that he will eventually accede to the ruling.
Officials in the U.S. Trade Representative's office are already working on alternative methods to achieve the same result as the current steel curbs, such as a reformulated way of deciding how quotas and tariffs apply. "If nothing else," Bush strategist Karl Rove reportedly bragged to a visitor last fall when the question of the WTO case came up, "we'll be able to gain another year or two while they (Europe and Asian steel producers) have to get a new case going."
In effect, the Bush trade policy announces that the U.S. will set the rules, or you can go home. As well, the U.S. will be the cop for enforcing them. This cop feels free to break the law himself, as Bush-era increases in agriculture policies clearly do. And, if someone surmounts all these difficulties and wins a case against the cop in court -- as the opponents of our steel curbs did before the WTO -- the U.S. world policeman will feel free to ignore the judge to boot.
Indeed, although the Chinese textile penalties were the "new" pre-emptive attack of recent weeks, it's arguable that the U.S. attitude after losing the steel case has done even more damage to world markets. It suggests the Bush Administration will not merely act unilaterally at the start, but that if it loses, it will go into the hills and keep fighting.
The doctrine is not just one of pre-emption and surprise attack, but of determined guerilla warfare even when early efforts fail. On steel, Bush's first instinct was to emulate his archenemies Bin Laden and Hussein, hiding out in the hills even when the forces of the law -- in this case, the WTO -- call him to account.
Whether the U.S. is right or wrong in all these matters, it's easy to understand why global investors, including U.S. ones, voted with their feet to get out of global equities in early November. Investors don't mind leadership, even unilateralism, from a U.S. president: Witness the strong rally after successful prosecution of the war in Iraq this April. But the degree of brinksmanship and determination, the risks Bush seems willing to take in dealing with peaceful allies over trade -- this is a much more daunting prospect.
THE BOTTOM LINE
U.S. steel producers should take a hit in the short run from Asian and European retaliation, and, in the medium term, will be harmed by the Bush Administration's eventual reversal of the steel curbs, and in, in 2004, a rising dollar. "Bottom line" is short the U.S. producers and scrap metal suppliers as well. Furniture makers, likewise, will suffer from "asymmetrical" retaliation from Asia aimed at the American textile region, the South, and are already suffering on the cost side from the exclusion of lower-cost Canadian lumber.
The odds are good, especially given current monetary and fiscal stimulus in the United States, that for the global economy, this is not the fall of 1987, but the late summer of 1998. In that third quarter, a president who seemed weaker than he was, Bill Clinton, ran into not only domestic problems, but a whole stallout of his international trade agenda, in particular, over the recapitalization of the International Monetary Fund. Predictably, global markets corrected mildly, before resuming their climb to the bull-market peaks of early 2000.
Bush has more important battles to fight, as in Iran's harboring of Al Qaeda, not to mention its efforts, and those of Syria and Korea, to produce, stockpile, and make available weapons of mass destruction. Look for the steel curbs to come down in the coming weeks, after one last effort perhaps to preserve them for public consumption, and a negotiated truce over textiles with the Chinese, whose help the Administration will need in dealing with the North Koreans.
