SpirE-Journal 2008 Q4

The Obama Administration — Bringing change to business & what it means for Asia

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The Obama Administration — Bringing change to business & what it means for Asia

Barack Obama’s campaign used the theme of “Change” to win the Presidency. While most analysts say he is unlikely to change US policy towards Asia dramatically, some Asian companies are uneasy over Obama’s trade stance, which they say spells a move towards “protectionism.” At the same time, President-elect Obama has promised fiscal stimulus programs that may hold the key to the world’s recovery from the worst downturn since the Great Depression. Should Asia be worried or hopeful about the incoming Obama administration?

A new era

Barack Obama’s historic win in the United States’ (US) presidential election has much of the world celebrating. Asian leaders, in particular, welcomed Obama as the next president of the US. During his campaign, Obama exhibited a more multilateralist approach to foreign policy issues, as reflected in his opposition to the Iraq War, which has been deemed by critics to be a “war of choice” executed outside of the auspices of the UN Security Council.

Australian Prime Minister Kevin Rudd said that Obama’s victory represented a message of hope not just for America, but for the rest of the world as well. His optimism that Obama’s victory would help solve pressing global problems was shared by other leaders in the Asia-Pacific region. The South Korean president’s office issued a statement saying Obama’s vision of change and hope was shared by its own President Lee Myung-bak. Meanwhile Indonesian President Susilo Bambang Yudhoyono expressed on behalf of his nation the hope that “the US can take concrete measures to settle the global economic crisis and the
financial crisis in the United States.

The confidence shown by regional political leaders was shared by the main money markets. Many regional stock markets rose sharply on the news: Japan’s Nikkei 225 index closed 4.4 percent up, Hong Kong’s Hang Seng rose 3.2 percent and Singapore’s STI index added 2.6 percent.

Indeed, Obama has made history as the first member of an ethnic minority to be elected head of state of any major democracy in the West – an event of huge symbolic significance. And Asia seems to be looking to this watershed to foster greater engagement of the US with (culturally diverse) Asia in diplomatic dialogue.

Obama’s Asia agenda

Obama’s inauguration does not take place until late January, but the incoming president is already setting the economic agenda for 2009 and beyond. Foreign relations and domestic economic policy have been declared by Obama as the topmost items in his administration’s agenda of change, but with the US economy now in recession, Obama will focus first and foremost on bread-andbutter issues back home, at least in the early part of his presidency, before turning his attention abroad.

So what will the Obama administration mean for Asia? Of course, it is the prerogative of the new president – and especially one from a different party – to change his predecessor’s course. But Obama’s overall approach to Asia is unlikely to deviate too far from the current track.

There is unlikely to be any lurch towards Asia in US foreign policy. Obama’s speeches on foreign affairs have heavily centered on the Middle East, Russia and Africa, rather than the world’s most populous continent, even though he is keen to maintain strong ties with existing Asian allies. However, analysts have said that US-Southeast Asia ties could see significant expansion, as his advisors favor his participation in a key East Asian summit organized by the Association of Southeast Asian Nations, as well as the expansion of US alliances in the region.

For certain, Obama’s main Asia agenda will revolve around two things: reinforcing alliances in support of the “war on terror” and, of particular interest to the business world, reviewing trade measures with a view to protecting the interests of American jobs.

Negotiating for America

Despite the elation experienced by political leaders over Obama’s win, Asian companies are uneasy over his trade stance, and with good reason. Some economists predict that an Obama presidency will lean heavily towards protecting American jobs in trade agreements, especially after the heated rhetoric over the damage done by FTAs like NAFTA during the Democratic primary campaign.

On the campaign trail, Obama had repeatedly emphasized the imbalance in free trade agreements (FTAs) and indicated that change was in the air. There were repeated references to FTAs leading to the export of jobs to less developed countries. In a letter to the US National Council of Textile Organizations, Obama pledged to undertake “strong enforcement” of trade remedy laws, which can include added tariffs on imports that are deemed to hurt American businesses. He has also stated that he would discourage US companies from “shipping jobs overseas” by taking away tax breaks.

This is a cause for concern particularly to India, home to the one of the world’s largest business process outsourcing (BPO) industries. The BPO sector in India was projected to have provided USD7.2 billion worth of services in 2006. The domestic BPO market, catalyzed by demand from the telecommunications and financial services segments, matched the growth of BPO exports. The global BPO Industry is estimated to be worth almost USD150 billion, of which the offshore BPO sector takes up 10 percent. India thus has some 5 percent share of the total Industry, but a commanding 63 percent share of the offshore component.

Obama has also publicly opined that some of the current FTAs are “bad for American workers”. Countries like South Korea and Cambodia are concerned about the ramifications of statements such as these.

South Korean automakers, for example, sold over 772,482 vehicles in the US in 2007, compared to the 6,235 that the US sold in South Korea4, a figure that Obama believes resulted from a centralized regulatory and tax structure in South Korea that discriminates against US cars. And Cambodia relies heavily on the US market for their textile exports, a pillar of the nation’s economy.

Protectionism by developed countries is widely agreed to be a threat to global economic health. It threatens to induce a spiral of retaliation and worsening protectionism world-wide, hearkening back to the era of hostile, closed trade blocs in the 1930s that preceded the second World War.

In practice, though, Democrats tend to refrain from protectionist policies when in office, despite their campaign promises. Bill Clinton, for instance, campaigned against the North American Free Trade Agreement (NAFTA) and frowned upon giving China Most Favoured Nation (MFN) status during the campaign of 1992. His position changed after he was elected President. Not only did he push for the passage of NAFTA through Congress, President Clinton renewed China’s MFN privileges by pushing through Congress US-China PNTR (permanent normal trade relations) – seen as a means of opening and reforming China’s markets and a way, as he put it, of holding China to the rules of global trade.

In fact, a look at trends in trade negotiations over the past 20 years suggests that protectionism tends to emanate more from Congress than the Presidency. US Presidents tend to take a pragmatic stance towards freeing up international trade, understanding the need to avoid trade retaliation from other countries and the benefits conferred on the US economy by cheap imports as offsetting the short-term job losses caused in some sectors. The House of Representatives, on the other hand, is re-elected every two years and is hence more sensitive to public pressure, particularly in districts with large concentrations of manufacturing such as in parts of Michigan. And the House has the ability to delay or block the ratification of FTAs.

However with the Democrats commanding large majorities in both the House and Senate and with a popular new President who will likely rally his party’s legislators in favour of a Clintonite approach to international trade issues, it is unlikely that the US will see a resurgence of protectionism.

China is a good case in point. Obama considers China a competitor, despite acknowledging the importance of Sino-American trade, and takes a dim view of made-in-China products. And he has warned that he is ready to take action to ensure China plays by the rules of international trade.

China, though, is hardly perturbed. The country has risen to become one of the world’s biggest economic powers and is more internationally-integrated than ever. China is also aware of its importance to the US in solving a host of noneconomic issues such as climate change and North Korea’s nuclear ambitions.

As Shen Dingli, director of the Center for American Studies at Fudan University in Shanghai, tells Bloomberg: “Even in the worst case, [Obama] would not launch a trade war [with China]. That’s the bottom line. He would threaten, but not implement.”

Moreover, China has replaced the US as the biggest trading partner of almost all Asian countries, including ASEAN, South Korea and Japan. At the current rate, China will replace the US as India’s largest trading partner by the end of the decade.

However the US remains the centre of the global economy. The dollar is still the base currency in which commodities are priced, and hence the benchmark against which all other currencies are valued. Decoupling has been far from complete and the global economy stays vulnerable to developments in the US.

How then will the US economy under the president-elect’s supervision affect business in Asia?

Fiscal resuscitations

Obama is on a mission to lead the biggest government infrastructure investment program since the 1950s when the interstate highways were built, in a bid to jump-start the American economy.

Obama has not specified a price tag for his proposal but congressional leaders have thrown out numbers as high as USD500 billion while Obama aides have opined that this could go up to US$700 billion. Given the deepening scale of the crisis, the final figure could reach or exceed US$ 1 trillion. Obama’s proposal, called “Rebuild America”, aims to fix roads, bridges, airports, railways, transit systems, wastewater treatment facilities, and the like . It would cover 100 percent of the cost of projects, including resurfacing highways, repairing runways, cleaning up brownfields… and even sprucing up the National Zoo in Washington!

With such a grand plan, many investors look forward to the attendant opportunities. Infrastructure-focused Engineering, Procurement and Construction (EPC) firms may be the next big stocks in 2009, including firms dealing in commodities, construction companies and specialty builders.

As Asia is home to many leading construction-related firms in the areas of project design, management, environmental controls, safety and construction quality8, as well as many suppliers of building systems, the region may enjoy a slice of Obama’s fiscal pie. For example, many of the world’s leading suppliers of cutting edge building management systems, digital close-circuit TV (CCTV) and largescale heating/ventilation/air-conditioning (HVAC) are Japanese and Korean firms manufacturing critical components in China and other Asian locations.

This intended expenditure comes at a much-needed time for Asia. In this recessionary climate, Asian countries are suffering from an export and tourism slowdown, as well as weak consumer and business confidence. Asia’s companies are also being choked by the global credit squeeze. This is a critical challenge when one recalls that much of global economic growth was catalyzed by the strength of US consumer spending in the late 1990s and the 2003-2007 period.

Malaysia’s foreign trade, for example, is double the value of its GDP and the downturn is depressing its exports. Japan, Hong Kong and Singapore, Asia’s key financial centers, are in recession. China’s economy is slowing much more sharply than expected, with the 12-month growth figure for industrial production reduced to half of what it was in the past year. And even though India is the major Asian economy least dependent on exports (at only 22 per cent of its GDP compared with a regional average of over 50 per cent), domestic spending is weakening and pulling the economy down with it.

Several Asian governments have launched multi-billion dollar plans to help their economies in the face of weakening domestic and export demand:

Chinese officials are concerned that growth will fall well short of the 8 percent pace that Beijing considers necessary to create enough new jobs to absorb the millions of people entering the workforce each year, raising concerns about social stability. The government last month unveiled a 4 trillion yuan (USD586 billion) fiscal stimulus package. The central bank has sharply cut interest rates. And the cabinet recently announced plans to make financing more readily available to firms.
India’s Prime Minister Manmohan Singh plans to spend an extra 200 billion rupees (USD4 billion) to support an economy buffeted by recession and the Mumbai terrorist attacks, following interest-rate cuts announced recently. The government will spend a total of 3 trillion rupees, of which 7 percent is designated as new spending, in the remaining four months of the financial year.
Malaysia’s near USD2 billion fiscal stimulus package will start to boost the economy from the first quarter of next year.11 Much of this injection will take the form of construction of low-cost public housing.
This year, Thailand’s government has launched two main packages of tax cuts, credits, cheap utilities and handouts worth a total of about 90 billion baht (USD2.6 billion) to revive economic growth. The packages compared with a gross domestic product of USD246 billion in 2007, amounting to around 1.1 percent of GDP. Most recently (26 Dec 08) the newly installed government of Prime Minister Abhisit Vejjajiva announced a further US$8.7 billion fiscal stimulus package to cushion declines in tourism and exports.

Comparing the various stimulus packages, it is clear that only that of the US and China are of a scale that could make a dent on the current weakness in global aggregate demand. And since much of the Chinese stimulus is reportedly a “repackaging” of previously scheduled government spending, much hinges on the US fiscal stimulus that the incoming Obama administration will execute after Jan 09. Not only will it create business opportunities for construction-related firms in Asia. It also holds out the prospect of reviving overall US demand, returning the global economy to health and restoring the crucial flows of export demand, tourism and FDI that Asia needs.

Aside from infrastructure development, the sector which will be central to Obama’s efforts at fiscal stimulus in 2009 will be environmental technology.

Down to Green business

The new administration of President-elect Obama will be guided by more than just economic concerns. Traditional center-left priorities such as social justice and environmental sustainability will figure strongly. In the words of one commentator: “Business would have a seat at the table, but business wouldn’t be able to buy all the chairs”. Obama’s would be a pragmatic, center-left administration but his victory has profound implications for environmental policy, and hence for global business.

Most notably, companies wishing to do business in or with America, meaning all leading global firms, will have to live up to new worker, human rights and environmental responsibilities in exchange for American market access. This policy direction would affect the operations of US companies in Asia, as well as the global operations of major Asian-bases firms.

Hailed as potentially the “Greenest President” in US history, an Obama administration would be a great boon to the environmental technology industry but pose challenges to utilities, transport and energy firms if the new president makes good on campaign promises to put caps on emissions.

To achieve these goals, President-elect Obama has assembled a widely admired “Green Dream Team”, comprising the likes of:

Carol Browner, who ran President Bill Clinton’s Environmental Protection Agency and is no stranger to political combat
Steven Chu, a physicist who shared a Nobel Prize in 1997 and was the director of the Lawrence Berkeley National Laboratory
Lisa Jackson, until recently New Jersey’s top environmental officer

They hold essential posts and appear unafraid to use the pricing power of the market or the financial power of government to address threats facing the planet.

Emissions controls

The incoming Obama administration is likely to introduce a “cap and trade” scheme whereby carbon emissions from companies are legally capped, with firms entitled to buy the rights to make further emissions beyond the capped lev

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