The Democrats and the Republicans will be crossing swords once again this year. With its foreseeable impact on economic activity, the November presidential election will set the tone and dictate the calendar of events, as long as a major national crisis doesn't come along to steal the spotlight. Election imperatives south of the border will likely create distortions in the monetary policy of the US Federal Reserve, exchange rates and trade relations between the US and its partners.
We were given a taste of these distortions in 2003. Escalating protectionism and tax incentives were the order of the day as the Bush administration worried about the sluggish economic recovery and lackluster job creation. A real turnaround was only effected in the third quarter, which showed staggering growth figures fuelled by significant tax cuts, but which also signalled the return of budgetary deficits and unprecedented consumer debt, helping keep interest rates at their lowest level in 40 years. Skepticism about the duration of this sudden growth led economists to construct scenarios predicting an equally rapid slowdown.
However, the arsenal of measures deployed was not enough to ensure victory, especially considering that in 2003 the US recorded its longest period of negative job growth since the 1930s. Despite its official discourse to the contrary, the White House has had to abandon the strong dollar policy that was its hallmark and allow the greenback to slide, a move saluted by the manufacluring sector. From 2001 to 2003, this sector, which is generally characterized by strong employment performance, lost nearly three million jobs and is grappling with a long-standing recession.
The United States even went so far as to pressure China to stop pegging its currency on the US dollar and let the yuan float freely. The government's objective was to ease its record and growing trade deficit with China and to defend US jobs, which are increasingly being exported to Asia. However, the US was forgetting that China is currently the third-largest investor in US bonds.
As all of these measures failed to do the trick, the government implemented more rigid trade protectionism toward China and the European Union. The land of Uncle Sam locked horns with foreign governments in many industries, including lumber, agriculture, steel and textiles. Of course, these retortion measures could become a double-edged sword for the economy, which is protecting certain jobs and industries while sacrificing others. The government is counting on the job losses to be spread out and the gains to be concentrated in more circumscribed electoral constituencies.
It is therefore not surprising that the US showed little enthusiasm for successfully negotiating the major trade agreements on the agenda in 2003. Instead, US authorities decided to be more vociferous about how they preferred to ratify bilateral agreements rather than multilateral agreements placed under the auspices of the WTO or intended to create a free-trade zone in the Americas.
In an election setting, this position seems more profitable in political terms. And let's not forget that the ideology underlying bilateral agreements can also be protectionist-oriented since these agreements are more targeted. The increasing focus on a return to bilateral agreements stems from a rising resentment toward unbridled globalization and the extensive opening up of borders, which has prompted companies to favour productivity gains over creating new jobs. In addition, because of China's growing strength in manufacturing and India's rise in the service sector, large swatches of the economy not as yet been exposed to competition from developing countries are suddenly facing this new reality.
Wal-Mart, for example, is the fifth-largest importer of Chinese-made products in the world. Outsourcing in the technology sector has led to thousands of jobs being transferred to India and will threaten the jobs of 14 million Americans over time; there are currently 10 million illegal workers in the US. And these are just some of the specters that can easily be exploited for electoral purposes. It's a safe bet that the presidential election will have a significant impact on the economic agenda in 2004. On the positive side, the election will likely defer any significant rise in interest rates, delay a much feared slowdown of the economy and prevent the escalation of trade conflicts among major countries. If all this comes to pass, what should we be worrying about for 2005?
[Sidebar]
It's a safe bet that the presidential election will have a major impact on the economic agenda
[Author Affiliation]
Gerard Beruhe is editor of the Economie et finance section of Le Devoir in Montreal
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