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It’s time to focus on free trade

June 7, 2011, 4:30 PM UTC

James A. Baker III knows something about running a White House in the midst of a grueling recession, with voters on the verge of casting a thumbs up or down on the boss’s second term. Baker was chief of staff to President Reagan in the early 1980s, when economic engines revved in time for the memorable “morning again in America” re-elect, and again (without the happy-morning ending) to George H.W. Bush in the early 1990s.

So what’s this veteran political seer’s advice to President Obama, the economy stuttering and 2012 election on the horizon? “They ought to embrace revenue-neutral tax reform the way Reagan did in 1986,” he told me recently from his Houston law office of Baker Botts. Second on the Baker agenda: Promote free trade.

It’s remarkable how both those prescriptions — produce a tax system that reduces the cost of investing here while helping American industry to engage, not shun, global markets — track with what business leaders repeatedly say is needed to crank up a stuttering economy. It’s a message President Obama doesn’t seem to want to hear.

Just to recap last week’s bleak news: The unemployment rate ticked up to 9.1%, compared to 7.6% when Obama took office; housing prices fell to their lowest since 2002; factory output and car sales slipped; and the Dow fell for the fifth consecutive week. These signals that the economy has stalled threaten the Federal Reserve’s prediction of 3.3% GDP growth for the year.

The prevailing media view on all this bad news can be summed up in this declaration by the Washington Post: “The economy is faltering, and Washington is running out of ways to get it back on track.” So far, the federal government’s intervention tools have included $862 billion in stimulus spending, the Federal Reserve’s $1.25 trillion quantitative easing program, $200 billion in bank rescue funds, $2 billion for “cash for clunkers,” $50 billion in mortgage support to struggling homeowners, $182 billion to prevent the collapse of AIG (AIG), as much as $363 billion to rescue Fannie Mae and Freddie Mac, $62 billion to rescue GM (GM) and Chrysler.

These are expensive tools — and one can argue the individual merits or need of any single one. But it’s hard to look at today’s economy and declare victory.

Talk to business leaders — the people who actually hire people — and you don’t hear worries that Washington is running out of tools. What you hear, pretty consistently, is that this White House stubbornly insists on reaching for the same wrong toolbox.

A bruised and battered U.S. consumer isn’t going to drag us out of this one, and no amount of federal spending or patchwork supports to keep them in homes that keep plummeting in value is going to change that. The consumers we need are overseas — where markets are growing.

“Overseas markets are ripe for American products,” says Jay Timmons, CEO of the National Association of Manufacturers, who likes to repeat the mantra that 95% of customers are abroad.

The administration has given lip service to the importance of this fact — the President says he wants to double exports. But the only three free trade agreements now before Congress — with South Korea, Colombia, and Panama — have yet to move forward, trapped in negotiations over spending more money on trade adjustment assistance. According to the U.S. International Trade Commission, the South Korea deal alone would result in an estimated net increase in American exports of up to $4 billion in its first decade. No magic bullet, but nothing to sneeze at either.

Meanwhile, economies around the globe are forging deals with each other. As Timmons notes: “There are 120 free trade agreements being negotiated. We’re party to one. We’re getting our clocks cleaned.”

The other message business leaders consistently offer is that the U.S. needs to be a more attractive place to invest capital, a cost-effective alternative to investing overseas that offers the bonus of legal protection on things like intellectual property. But NAM has calculated that — excluding labor but including costs such as taxes, energy and regulatory compliance — it is nearly 18% more expensive manufacturers to operate here than in nine major industrial countries including Germany, Japan, Canada, Mexico, and China.

Timmons is especially worried about competition from Canada, which has lowered its corporate tax rate to 16.5%.

At 35%, the U.S. corporate income tax rate is second only to Japan as the highest in the world. While loopholes enable savvy companies to pay a lot less, the effective tax rate is still among the highest, according to an April study commissioned by the Business Roundtable.

Obama advisers have repeatedly said they are open to the idea of lowering the rate while closing loopholes. As Baker notes, it’s a win-win politically: “Republicans like lower rates and Democrats like closing loopholes.” But, as on free trade, there has been no movement.

After his “shellacking” at the polls last November, Obama declared that he was opening a new chapter with business, appointing JPMorgan (JPM) executive Bill Daley as his chief of staff and launching a review of burdensome regulations. He also tapped General Electric (GE) CEO Jeffrey Immelt and other top CEOs for his advisory council on job creation.

The President has made much ado about putting business leaders on his advisory councils in past years. It will be interesting to see if this season’s bleak economic news will make him want to listen this time around.