TONELSON: Deference to WTO hurts U.S.

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By Alan Tonelson

ANALYSIS/OPINION:

Neither President Obama nor congressional leaders want to hear this, especially just before the Pittsburgh global economic summit, but U.S. economic recovery and renewed global economic health are facing a big new obstacle: the World Trade Organization.

The organization was sold to Americans as an impartial global trade court. But quite naturally, it has usually advanced the top priority of the 150-odd other members - growing by exporting to the U.S. For years, the WTO helped fuel the global imbalances ultimately responsible for the economic crisis. Today, it's blocking the only hope for genuine global recovery - enough sound U.S. growth to slash America's debts and rebalance a still-lopsided world economy.

The "Cash for Clunkers" bill is a prime example. Like other stimulus programs, the measure reflected long-standing Keynesian orthodoxy that boosting spending is the best way to revive production and, therefore, real growth in a weak economy. But nowadays, this theory suffers a major flaw. With so much of the U.S. economy overrun by imports, much American spending leaks overseas - and stimulates foreign growth and job creation.

The Clunkers bill originally applied only to U.S.-made vehicles - despite the high foreign-parts content of cars and light trucks made domestically by U.S. and foreign-owned automakers. But at least the idea was right. Unfortunately, even this threadbare "Buy American" requirement was removed, because it clearly violated WTO rules by discriminating against imports. Therefore, despite emergency conditions, pleasing a deeply flawed international organization mattered more to lawmakers than promoting concrete American interests.

So Cash for Clunkers inevitably turned into Cash for Imports. The latest monthly figures, for August, show that 1.26 million cars and light trucks were sold in the U.S. - up 26.45 percent from July, when sales in turn were up from June levels. But nearly 60 percent of the vehicles sold by both U.S. and foreign-owned automakers in August were made overseas, by foreign workers. Worse, American taxpayers subsidized their purchase. The latest U.S. trade data support these conclusions: May-July vehicle imports were up 34.29 percent.

And these new vehicles, whether U.S. or foreign brand, were increasingly foreign-made. From Clunkers' introduction in March (to widespread expectations of passage) through August, American vehicle production surged 30.41 percent. But auto-parts production, which still provides nearly 80 percent of U.S. automotive-related jobs, increased only 1.06 percent.

Largely as a result, since Clunkers debuted, the U.S. trade deficit in vehicles has jumped 56.10 percent, and the parts deficit rose by 16.23 percent. Thus, this WTO-compliant legislation pushed the nation deeper into debt, and further from real recovery.

Conversely, the original Clunkers bill could have supercharged genuine growth and private-sector job creation, not simply spending and borrowing. According to the latest data, had U.S. auto imports in 2006 remained at their 1997 levels, U.S. passenger car output would have been nearly 67 percent - or $59 billion - higher than the actual figure. Had the 2006 import share of the U.S. auto market simply stayed at 1997's 50.43 percent level, and not increased to 71 percent, output that year would still have been nearly more than 45 percent - $40 billion - higher.

Yet despite this record, similar measures for two other import-swamped industries are on the horizon that lack Buy American-type provisions for the same WTO-related reasons.

In November, Washington will start spending $300 million on consumer rebates for energy-efficient home appliances. Although the markets are much smaller, debts and deficits should rise nonetheless. After all, from 1997 through 2006, import penetration for miscellaneous major appliances nearly doubled, to nearly 30 percent. For household refrigerators and freezers, and laundry equipment, it roughly tripled, to some 36 percent and 29 percent, respectively. And any consumer knows that these rates have risen since.

In July, two House members from Georgia proposed tax credits of up to $2,000 for purchases of certain home furnishings, furniture, and building materials. Democrat Hank Johnson and Republican Nathan Deal call their bill the Home Improvements Revitalize the Economy (HIRE) Act. But without Buy American provisions, most hiring could take place abroad.

After all, except for some building materials, these sectors have generally seen high and/or soaring rates of import penetration. Unsurprisingly, imports now dominate U.S. markets for curtains, drapes, bed linens, towels and most furniture categories. But by 2006, industries such as hardwood veneer and plywood, engineered wood products, ceramic tiles, and lighting fixtures were in the same fix.

As the stimulus bill showed, domestic preferences for government purchases can and should be part of all such industry-specific recovery proposals. But despite skyrocketing federal spending, the private sector still makes up 80 percent of the nation's economy. That means no recovery unless American leaders start putting their country's pressing needs, and the world's, ahead of blind counterproductive deference to the WTO.

• Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose 1,900 members are mainly small- and medium-sized domestic manufacturers. The author of "The Race to the Bottom," Mr. Tonelson also is a contributor to the council's Web site, www.AmericanEconomicAlert.org.