Economic Stimulus Plans Must Incorporate International Trade

Michael R. Czinkota

Michael R. Czinkota and Maureen R. Smith

The Obama administration is defining its economic stimulus plan. Nations around the world are attempting to stabilize their economies as well. Typically, each nation's emphasis rests on domestic issues.

Though politically understandable (GM is more important to the U.S. than Toyota), a successful plan must reflect the powerful influence of international trade on the national economy.

In the United States, for example, trade related activities comprise more than 25 percent of its economic activities ― which is more than the housing and banking sectors combined. Trade also accounted for all U.S. economic growth in the past year. Trade issues definitely qualify as top priority, but they seem to be neglected so far.

The world depends on continuity in trade. The global economic outlook, competition and consumer choice are shaped by trade flows and currency values. Competitive devaluations, for example, provide unfair advantages to exporters. For many nations, the promotion of exports must have a central place in their economic recovery package.

In the U.S., the national debate about economic recovery includes many lessons from the Great Depression. The clearest of these is to avoid the protectionism of the Smoot Hawley tariffs that turned a market crash in the United States into a global Great Depression.

Global leaders pay lip service to this conventional wisdom but there is a gap between the language of communique and on-the-ground practices. Indonesia and Russia have already begun raising their protection of domestic industries ― to the detriment of global trade.

The Doha Round of international trade negotiations continues to be stalled ― even though eight years of negotiations have placed great benefits within reach.

The United States experiences some difficulties in its global position, but around the world there is hope, expectation and willingness for a re-emergence of U.S. leadership.

There is growing concern among U.S. trading partners that the new Congress and administration might introduce a new era of U.S. protectionism. Global markets are parsing any announcement for signs of what the Obama administration will mean for them.

The world economies are intertwined. Any stimulus measure of one nation is likely to rapidly affect others and trigger responses. Economic activity is highly concentrated among a few players. The United States, the European Union, Japan, China and Canada account for more than 75 percent of the world's economy.

A good domestic stimulus should not become an international distortion. Subsidies paid to farmers in one country, for example, can affect dairy-related industries around the world. Once introduced, protectionism can quickly become contagious and be emulated around the world.

An economic recovery plan is an opportunity to send a signal to markets about what they can expect in terms of trade. For the United States, it is also a chance to provide new leadership on the global stage, which must include a focus on global recovery. Countries need to be able and willing to buy each other's goods ― in an increasing quantity ― if world economies are to blossom.

Here are some recommendations:

• Countries need to make unambiguous, consistent and clear statements that industry bailout packages will not include protectionist measures.

• There needs to be a government effort to assess domestic and international economic stimulus measures for any inappropriate subsidies of exports or discrimination against imports. The World Trade Organization or the Organization for Economic Cooperation and Development (OECD) might be good organizations to take on such a mission.

• There needs to be a renewed commitment to the stalled Doha Round of trade negotiations. Rules need to be consistent and strong. The key players in world trade need to re-energize the negotiations by making major commitments and taking ``early harvest" of potential agreements on a multilateral basis. One first step could be the elimination of tariffs on environmental goods and services.

• The U.S. must lead its economic partners on the basis of trust and fair play, applied to trade and investment rules as well as to currency values. We're in this together. The sound implementation of policy objectives ― whether they are health care, education or retirement ― require a sound economy, which depends on global collaboration on trade.

Trade success can provide the momentum that keeps economies from stalling out before any stimulus can kick in. Trade issues must move up to the front burner.

Michael Czinkota is a professor of international business and marketing at Georgetown University and the University of Birmingham (U.K.). Maureen Smith is senior vice president at Jefferson Waterman International in Washington, D.C.