The oil and gas industry should chill at the election-year romance between US politics and agriculture. The fevered waltz of these two lovers threatens global economic recovery and, by association, market growth for oil and natural gas.
US President George W. Bush has cashed in his free-trade credibility for farm-state support of Republican congressional candidates in elections next November. This month he signed a farm bill doling out new subsidies worth $83 billion over 10 years. The move confirms a protectionist turn that began in March, when he signed tariffs as high as 30% on imported steel.
More protectionism is possible. Senate energy legislation, awaiting reconciliation with a House bill, contains subsidies for a gas pipeline through Alaska and explicit prohibitions against a Canadian alternative. It also mandates sale of fuel ethanol, which along with a large tax credit enjoys protection against foreign supply.
US brush-off
In the US, this veer away from free trade is being brushed off as election-year mischief. Countries elsewhere take it much more seriously, as they should. The European Union, China, and Japan have protested to the World Trade Organization. The EU and Japan threaten to impose retaliatory tariffs.
The oil and gas industry must hope the response goes no further than this. If US trading partners begin closing their own markets in retaliation, the global economy will suffer.
Even if a trade war doesn't materialize, pro- gress toward trade freedom has stalled. US leadership, crucial to revival of trade negotiations in Doha last December, is now suspect. The Bush administration must not squander any more of its free-trade legitimacy by denying the hazard it has created. For political reasons clear to everyone in the world, it chose protectionism over trade. It thus placed global prosperity at risk.
The steel tariff might have passed by as a politically motivated compromise-irritating to the rest of the world but perhaps necessary. The new farm bill leaves no room for political sympathy. By raising government farm spending over 10 years to $190 billion, it annihilates the 1996 Freedom to Farm bill. The earlier law, designed to wean subsidized agriculture off public money, was supposed to set an example for European governments. Now Europe has a new excuse to leave longstanding farm protections in place. And a shining triumph of Doha-attention to agricultural protectionism-crumbles.
Sacrifice of so much accomplishment to domestic politics shows the intensity of Bush's desire to defend the House against Democratic control and maybe win back the Senate for Republicans. He knows he won't lose the support of Republicans opposed to his trade compromises. But three large questions loom over his political calculation.
The first has to do with the political compulsion to divert wealth to farm states. When will it ever be enough? Even after passing a fiscally irresponsible farm bill, lawmakers act eager to pass energy legislation now that it contains market guarantees for grain-based ethanol-which Bush says he supports. What will agriculture need next?
Another question is whether Bush can win reelection in 2004 after exercising so much desperation this year. If his protectionist lunges do precipitate a trade war, there will be a recession, which will dissipate the support he enjoys for leading the war against terrorism. And the federal budget by then will be showing the effects of a spending splurge of which the farm bill is part. Democrats stand ready to blame any fiscal deterioration on Bush's cut in income-tax rates.
Third question
This raises the third question: Will peremptory protectionism help Bush and his party beat Democrats even this year? Maybe not. In raw political fights, Democrats usually outslug Republicans. Triumph for Republicans comes from assertion of simple belief in concert with general US conservatism. With most Republicans now acting timid about their principles, this year's election shapes up as a slugfest favoring the opposition party.
The damage is done. Future trade liberalization and global economic growth face new doubt. The US has lost international credibility. And agriculture has reassumed its role as the insatiable monster of American politics. Whichever party prevails in November, the election will have left an economic and geopolitical mess that will take time and attention to clean up.
