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Published November 13, 2008

Asia awaits advent of Obamanomics

New US president's policies will probably be a mixed bag for the region - some with positive effects, some negative

By M SHAHIDUL ISLAM


WITH Barack Obama's victory and the Democrats controlling both chambers of the legislature, the United States is poised for changes in its economic policies, both at home and abroad.

As Asia emerges as the epicentre of global economic growth, it has been accused of causing economic strains in the US (job losses, financial imbalances, etc). One can therefore expect to see changes in US trade and economic policies towards Asia.

What is President-elect Obama's likely stance on trade, environment and energy that have cross-border implications? Traditionally, the Democrats have been less liberal than the Republicans on economic issues. The current financial crisis and the burgeoning US trade imbalances could prompt the Democrats to curtail the absolute role of laissez-faire.

Mr Obama believes in the market economy but he also understands that there are certain things the market cannot automatically do. As a local boy and part-time academic at the University of Chicago, he may have been influenced to some extent by the famous Chicago School's economic philosophy. However, his dealings with the common folks who face the reality outside the economics classroom could have also significantly shaped his economic thinking. Income inequality and climate change are the two examples that, according to Mr Obama, signify the limitations of a laissez-faire economy.

In Barack Obama's opinion, former president Ronald Reagan's trickle-down policies do not work on the ground. He has shown great concern for the growing inequality in the United States and elsewhere in the world. Indeed, on the campaign trail, Mr Obama was branded a 'socialist' by his opponents, thanks to his 'progressive tax' and redistribution policies. He also wants to protect American jobs and intends to make a new case on trade pacts, which he thinks have caused job losses in America.

The crisis on Wall Street and Main Street may significantly affect the Obama administration's economic policies. On many economic issues that have cross-border implications, such as multilateral trade negotiations, or global public good issues such as climate change, the new administration is expected to seek a multilateral stance, unlike the current Bush administration. Moreover, Mr Obama is aware that there are high expectations of his team, both at home and abroad. These factors, among others, could also shape his economic policies.

Although Mr Obama has yet to formally announce his economic policies, his campaign trail and philosophy indicate that the days of 'Reaganomics' (less regulation, tax cuts and unregulated free markets) are over. We could see the dawn of 'Obamanomics' - more taxes on the rich, expansionary fiscal policy, more regulations, a bigger role for the government, and a balance between free-market forces and the rising spectre of protectionism in the US.

One of the key issues between the US and Asia is the matter of global financial imbalances caused by American consumption, which is greater than the country's production, and Asia's exports to the United States, coupled with Asian thrift. The new government may seek a systemic solution to overcome this disjuncture.

Initially, it may take a softer stance with China and other East Asian countries, for example, seeking negotiations, as well as to convince these countries that it is both in Asia's and the United States' interest to correct the imbalances.

Mr Obama's corporate tax policies propose the end of tax cuts for companies that ship jobs overseas; and the use of the money to cut taxes for small businesses and companies that create jobs in the United States. In the recent past, the US economy has witnessed a 'jobless growth', which basically means that the economy grew, without creating new jobs. The US economy lost nearly 1.2 million jobs in the first 10 months of this year - including 240,000 jobs in October alone, as a result of the financial crisis.

On trade issues, Mr Obama has promised American voters that he will ensure that trade works for American workers by opening up foreign markets to US goods and maintaining strong labour and environmental standards. Many Chinese products such as toys and food items may face stringent entry barriers into the US market. Mr Obama has also proposed to raise duties on Chinese imports to offset the undervalued Chinese currency and dumping of goods as well as to take measures against China's violation of intellectual property rights.

He also wants to review the North American Free Trade Agreement (Nafta) and other free-trade agreements, including the United States-South Korea Free Trade Agreement. Many other Asian economies will face similar barriers, if the new government strictly applies labour and environmental standards. The outsourcing industries in India, the Philippines and some other Asian countries may be adversely affected by Mr Obama's corporate tax policies.

However, the new president's energy, environment and climate change policies could affect Asians positively. In order to decrease US reliance on foreign oil, which has both economic and geopolitical implications for the world's top energy consumer, Mr Obama favours the development of renewable energy. He seeks energy independence by creating thousands of 'green' jobs in the field of renewable energy.

He now also favours limited offshore drilling. He also intends to implement an economy-wide cap-and-trade programme to reduce greenhouse gas emissions. He believes that five million new jobs can be created by investing US$150 billion over the next 10 years to catalyse private efforts to build a clean energy future.

Moreover, the Democrats place great importance on climate change issues. The new administration is expected to work with Europe, China, India and other key emitters of greenhouse gases on the Kyoto Protocol and other environmental treaties. However, it remains to be seen how the Obama team redesigns its environment and energy policies vis-Ã -vis the country's economic growth.

Although all these policies will take some time to have an impact, they are expected to have a positive effect on Asia, with the region being a net oil importer and highly vulnerable to energy price hikes and global warming.

Mr Obama's engagement with Asia, particularly on trade issues, will not be trouble-free, and China may face the brunt of stringent US trade-related policies such as labour and environmental standards, intellectual property rights and other non-tariff barriers. However, Mr Obama's potential multilateral approach on the World Trade Organization-led trade negotiations or global climate deal may help solve some key outstanding issues where Asia has a significant stake.

Mr Obama's aims to reduce US reliance on foreign oil and development of an alternative energy market could ease energy prices, minimise geopolitical tensions and have a technological spillover effect all across the world.

While the Obama administration prepares to takes office in Washington, DC in January, Asia waits anxiously, with hope and some trepidation, for the implementation of 'Obamanomics'.

The writer is a research associate at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore