The new American government under President Barrack Obama is not the
biggest cheerleader for free trade. With its own domestic economy
entering this steep downturn, talks of protectionism in one form or
another have been voiced every now and then. Catchy buzzwords like “Buy
America” are gaining traction. The temptation to turn inwards, driven
by the obligation to votes is growing stronger.

America’s trade partners and goods suppliers are looking with
growing concern at the spectre of protectionism raised by the new
government. The pall is cast not only on low-cost manufacturers in Asia
Pacific, the chill is also being felt in America’s own backyard, when a
recent annual report by the White House to the US Congress suggested
“improvements” to the North American Free Trade Agreement. Protection
is also happening in other forms: financial institutions, like Bank of
America, have withdrawn job offers for non-Americans.

The reluctance to promote free trade, seen as a main source of
economic woes facing Main Street America, is understandable:
unemployment is expected to edge higher to peak eventually at 9.5%; the
US economy is expected to sink by up to 6% this year, and the recession
is likely to last until the second half next year, said Joel Stern,
Chairman & CEO of Stern Stewart & Co, in a recent seminar,
organised by the Singapore Management University’s (SMU) International
Trading Institute.

“I am not at all optimistic, the last time I felt this way was when
(Jimmy) Carter was the president (in 1976). An advice I got as a young
man, ‘don’t forecast bad news, if you get it wrong, people will let you
forget it; if you get it right, people will blame you’,” said Stern,
who will be teaching a class on “Theory and Policy of Modern Finance”
at this year’s SMU MBA programme. Without hesitation, “bad” and
“serious” were some of the words he used to describe the current crisis.

Difficult Decisions

“Obama is well meaning and compassionate, but he should not make the
same mistake like (former President George) Bush Senior of extending
unemployment insurance. By doing so, the unemployment situation is
likely to take longer to work through,” said Stern, referring to one of
the key labour market policies that the US government wants to enhance.

There are also strong doubts over Obama’s choice of officials
holding key economic appointments. “The people Mr Obama brought in are
the ones who caused all the problems,” said Jim Rogers, a high-profile
American investor now based in Singapore, at the same seminar. “We have
a new Treasury Secretary (Timothy Geithner) who was head of the New
York Federal Reserve Bank for the last several years and the New York
Fed was supposed to be supervising Wall Street and all those banks, and
this was supposed to be the man who seeks to save us,” said Rogers.
“Woe is me, woe is us; it’s going to be bad in the US for some time to

To be sure, Stern and Rogers are not the only market commentators
who disagree with the Obama administration. In a survey of 49
economists done by Wall Street Journal published on March 12,
the majority of them are dissatisfied with the progress of economic
policies put in place by this government. Their main grouse is on the
delay in enacting key parts of the rescue plans for the banks.
President Obama scored an average of 59 out of 100 in the poll, while
Geithner, the Treasury Secretary, was given an average rating of 51

While cooler, rational and non-partisan heads will continue to argue
for free trade, America’s economic managers have their hands full. The
backing of free trade is but just one of the issues they have to deal
with. For example, the core of the financial system -– the banks, are
seeing no end to the severe pressure caused first by toxic debt, then
the credit crunch, and now, a worsening economy. They need to raise
more money, despite the billions already pumped in by taxpayers, said
Rogers, who, along with many others, took issue with the allocation of
public funds. “The government is taking assets from competent people
and giving them to incompetent people. They say (the banks) should be
allowed to fail (or) we are going to have a bad year or two; we already
have a bad a year or two,” he added.

Rogers believes there are greater fundamental issues at hand.
Whether or not governmental assistance is given to the weakened
financial institutions, there stands a chance that these institutions
may not recover quickly enough to stem larger economic woes. He cites
the longstanding inertia experienced by the Japanese banks that somehow
have never managed to return to the heydays of the 1980s. The
continuing weakness in the banking and financial industry has resulted
in fear that some American banks might be nationalised -- a hitherto
unthinkable development in a free market capitalist system. But, to
Rogers, “there’s nothing ideological or not but just what works and
what won’t. The key issues, the shortage of capital, they are going to
get worse.”

Re-thinking Asia

Meanwhile, governments in Asia are also shoring up their own
economies with rescue plans of one kind or another. “Many countries
have implemented stimulus packages but I am somewhat sceptical about
spending on infrastructural projects,” said Tai Hui, Standard Chartered
Bank’s regional economist, at the same seminar. “These are good for the
medium to long term, but I don’t think they will be in time to address
the immediate challenges,” he said. Putting a positive spin, Hui adds,
“The good news is; this will be a catalyst to rethink how Asia works.”

Talks of Asian economies decoupling from the developed markets have
all but died down. Until recently, China has been viewed as a growth
engine for the rest of Asia, but the country’s own economic woes show
very clearly that it is still far from being an end-market by itself.
Hui believes this is the time for Asian economies to evaluate its
dependency on China and India. “This is an opportunity to re-engineer
that kind of trade model, but of course, we need China and India to be
consuming more and saving less. Hopefully, over the next 8 to 10 years,
intra-region trade will be even stronger. I think Singapore is in a
very strong position because of all the free trade agreements signed
with emerging markets,” he added, emphasising that intra-region trade
is emerging to be the way forward.

Politics and Protectionism

Still, there is no running away from the fact that Asia’s economic
fortunes, at least for the foreseeable future, are tied closely to
America. Right now, the US government is more concerned with saving its
own sinking economy than worrying about other emerging economies.

“Mr Obama is a protectionist, and so is Hillary Clinton, and Mr
Obama is going to come out and lash out against the financiers because
he doesn’t know what is going on. He is going to blame it on
foreigners,” said Rogers. To underscore the inane quality of the blame
game, he explained, “Every politician, whenever they’ve got problems,
they always blame two groups of people: they always blame foreigners -
because foreigners don’t vote. Foreigners have different religions,
different languages, different skin colours, so it is very easy to
attack foreigners, not just in America, but everywhere. And politicians
have also always blamed financiers; everybody hates banks, so it’s

From Rogers’ point of view, protectionism is not only a growing
global concern; it is a mistake that should not be made again. “In the
1930s protectionism resulted in the Great Depression. Maybe they (the
Obama government) will catch on when things start collapsing.
Protectionism is raising its ugly head all over the world. In Brussels
right now, there’s a whole group that does nothing but follow the rise
of protectionism,” Rogers said, adding that “It’s going to get much
worse before it gets better.”

Stern, on the other hand, predicts that domestic political pressures
will soon convince the Democratic Obama government to change tack.
Specifically, the US Senate, currently controlled by the Democrats,
will be up for elections in 2010. Worsening economic problems might
cause Obama’s party to lose their current majority. “Raising that
unemployment insurance may just be the killer, not because it is bad
for the people but it makes the (unemployment) numbers look bad. If
that happens, if he does lose control of the Senate at that time and
loses a great deal of his majority in the House, I promise you, he will
become much more like a free enterpriser in the last two years of his
administration. This is because he does want to be re-elected. First
thing every politician wants after he is elected is to get re-elected,”
said Stern.

End of the day, the issue of free trade is something that does not
need much advocacy in this part of the world. Asian economies have
already demonstrated why free trade is beneficial. “Why is Singapore so
successful? It is because of free trade. Hong Kong has been so
successful because of free trade,” said Stern. According to Stern,
China’s economic “miracle” today can, to a certain extent, be
attributed to Merton Miller, a Nobel economics laureate and long-time
faculty with Chicago’s Graduate School of Business. “Back in the 1980s,
Miller advised Deng Xiaoping to allow market forces to operate, start
the free market experiment somewhere, and then let it pervade
throughout the country. In essence, China was allowing a free trade
policy within itself,” he said.

“The Chinese followed a free trade policy inside China; Singapore
followed it everywhere; Hong Kong, everywhere. India essentially became
successful because it abandoned many of its impediments. They permitted
the markets to function properly. In most parts of the world,
especially here, we don’t need a lesson on what free trade is all
about,” said Stern.