A few interesting developments over the last week that support some of my earlier musings:
Guess who's slowing progress on a $35 trillion(!) NAFTA-EU Trade Deal? That's right, the United States: "'The U.S. will lose its leadership position in trade unless it comes up with a new strategy,' says Steven Schrage, a specialist in international business at the Center for Strategic and International Studies (CSIS) in Washington. 'It makes sense to integrate NAFTA with the EU.'... [But] a NAFTA-EU trade deal will likely be met with stiff opposition. 'It will be a difficult sell in the U.S.,' says senior economist Many Grauman with CIBC World Markets in Toronto.... 'The ball is in the Obama administration's court,' says Schrage. 'If they want this to happen, they can move rapidly.'... Failure of the WTO provides an added incentive for the West to forge closer economic ties. However with protectionist sentiment in the U.S. gaining momentum, helped in part by President Obama's controversial Buy-American position, getting the world's biggest economy to expand its free-trade frontier could be an uphill battle. At least for the near term." All of this sounds eerily, and depressingly, familiar, doesn't it?
The United States gets the ol' Brazilian blowoff in its bilateral WTO negotiations: "Brazil has informed that it cannot accept Washington’s requests made during a bilateral meeting in Paris last month.... Though there was enhanced engagement at the bilateral meeting with the US, Brazil said it did not know the core demands of the US. Brazilian envoy Roberto Azevedo said Brasilia also presented some requests to its American counterpart but the reply was negative, maintaining that they were not provided with any reasons. He said there was only a glimmer of hope, suggesting that Brazil would not disengage. He also suggested there was a clear disconnect between political statements and the actual negotiations, trade envoys said." What a totally unsurprising development.
Arguments in favor of artificially weakening the dollar are, well, weak. Cato's Dan Griswold broadens my earlier questions for those misguided (or ill-intentioned) souls who are desperately clamoring for action to weaken the dollar vs. the Chinese RMB. This time, he looks at the oft-neglected impact on US consumers: "[I]t is American consumers who pay the biggest price when the dollars we earn buy less on global markets. We are paying more for oil, which not coincidentally has zoomed toward $80 as the dollar flounders. A weaker dollar means higher prices than we would pay otherwise for a range of goods, from imported shoes and clothing to food, that loom large in the budgets of American families struggling to make ends meet in this difficult economy."
I fear I'm sounding like a broken record, but this is one song that deserves to be played until your ears bleed. Once again proving that Americans buy stuff with a finite supply of money (as opposed to an endless supply of magic beans and pixie dust), consumer spending dropped dramatically upon the conclusion of the "successful beyond anyone's wildest dreams" Cash for Clunkers program. Here's MarketWatch on Friday with the disheartening-yet-totally-expected news:
U.S. consumer spending fell sharply in September after the government's cash-for-clunkers program expired, while after-tax incomes dropped for the fourth month in a row, the Commerce Department estimated Friday.
On a real (inflation-adjusted) basis, consumer spending sank a seasonally adjusted 0.6% in September, a reversal from the 1% gain seen during in August, the government's data showed. It was the largest decline in spending since December.
Real disposable incomes after taxes also fell, off a seasonally adjusted 0.1% to mark the fourth consecutive decline.
Despite overall growth in the economy in the third quarter, incomes aren't growing and jobs are still being lost at a rapid pace.
"The labor market remains challenging and until we see real improvement, sustained wage gains will be elusive," wrote Adam York, economist with Wells Fargo Securities....
Sluggish income growth is a major challenge for consumers in the fourth quarter, said Lori Helwing, economist for Bank of America's Merrill Lynch. She expects consumer spending to grow at an annualized pace of just 0.5% in the quarter, a big downshift after a 3.4% pop in the third quarter.
Meanwhile, the Commerce Department said current-dollar (not inflation-adjusted), spending dropped 0.5% in September after a 1.4% gain in August. Current-dollar incomes were flat, coming down from a 0.1% gain in August.
Economists surveyed by MarketWatch had been looking for nominal spending to fall 0.4% and for incomes to ease 0.1%....
The decline in September spending was largely due to the end of the government's subsidy program for autos.
Real spending on durable goods, including autos, fell 7.2% in September, pivoting off a 6.7% increase seen in August. Still, the level of spending on durable goods in September was higher than in July.
Real spending on nondurable goods rose 0.5%, on the heels of a 0.9% gain in August. Spending on goods excluding autos was "solid," according to Morgan Stanley economist David Greenlaw, who projects spending will rise about 2% on an annualized basis in the fourth quarter.
Totally and utterly unsurprising. I just hope that the White House won't now attack the Commerce Department for this unapproved bad news. (Edmunds fired back today at the White House, btw.)
Well, well, well. I guess the Democratic Congressional Campaign Committee (DCCC) has decided that surging Independent Doug Hoffman is such a big threat in next week's NY-23 special elections, that it's time to resort to a classic Democrat dirty trick and label him - GASP! - a free trader.
Here's the DCCC's disgraceful commercial (h/t HotAir):
I haven't donated to Doug Hoffman's campaign, but I certainly enjoy his independent, upstart fiscal conservatism and wish him the best in next week's special election. But even if I didn't, this DCCC commercial is so chock-full of knowingly false statements - and so indicative of your typical DCCC/DNC protectionist fearmongering (see, e.g., here and here) - that it demands a complete and total takedown. So let's do just that, line-by-lying-line:
ALLEGATION (1) "Millionaire Doug Hoffman's policies would send more jobs here to these countries [Graphic: map of India and China]. Hoffman wants to keep tax breaks for companies that want to ship our jobs overseas."
FACTS: First, the idea that hordes of American jobs are being outsourced to China or India is a complete economic fiction. As Cato's Dan Griswold explains:
There is no evidence that expanding employment at U.S.- owned affiliates comes at the expense of overall employment by parent companies back home in the United States. In fact, the evidence and experience of U.S. multinational companies points in the opposite direction: foreign and domestic operations tend to compliment each other and expand together. ...
The fear of manufacturing jobs being shipped to China and Mexico is not supported by the evidence. While U.S. factories were famously shedding those 3 million net jobs between 2000 and 2006, U.S.-owned manufacturing affiliates abroad increased their employment by a modest 128,000 jobs.
Second, what about those evil "tax breaks"? Turns out they actually increase American jobs. Here's Griswold again:
Politicians are not usually specific about exactly what "tax breaks" they want to repeal. The biggest tax exemption for U.S. companies that invest abroad is the deferral of tax payments for "active" income. U.S. corporations are generally liable for tax on their worldwide income, whether it is earned in the United States or abroad. But the relatively high U.S. corporate tax rate is not applied to income earned abroad that is reinvested abroad in productive operations. U.S. multinationals are taxed on foreign income only when they repatriate the earnings to the United States. Not surprisingly, the deferral of active income gives U.S. companies a powerful incentive to reinvest abroad what they earn abroad, but this is hardly an incentive to "ship jobs overseas."
Such deferral may sound like an unjustified tax break to some, but every major industrial country offers at least as favorable treatment of foreign income to their multinational corporations. Indeed, numerous major countries exempt their companies from paying any tax on their foreign business operations. Foreign governments seem to more readily grasp the fact that when corporations have healthy and expanding foreign operations it is good for the parent company and its workers back home.
If President Obama and other leaders in Washington want to encourage more investment in the United States, they should lower the U.S. corporate tax rate, not seek to extend the high U.S. rate to the overseas activities of U.S. companies. Extending high U.S. tax rates to U.S.-owned affiliates abroad would put U.S. companies at a competitive disadvantage as they try to compete to sell their goods and services abroad. Their French and German competitors in third-country markets would continue to pay the lower corporate tax rates applied by the host country, while U.S. companies would be burdened with paying the higher U.S. rate. The result of repealing tax breaks on foreign earnings would be less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.
Politicians who disparage investment in foreign operations are wedded to an outdated and misguided economic model that glorifies domestic production for export above all other ways for Americans to engage in the global economy. They would deny Americans access to hundreds of millions of foreign customers and access to lower-cost inputs through global supply chains. In short, they would cripple American companies and their American workers as they try to compete in global markets.
Amen and hallelujah!
Third (and economics aside), let's take a practical look at the idea of "ending tax breaks for American companies that ship jobs overseas." How exactly would this policy work? For example, if Boeing fired six people in Washington State and then hired six people in Germany for completely unrelated reasons, would that be "shipping jobs overseas" and cost Boeing billions in taxes? Who would decide? Where's the line? For the DCCC's mythological policy to work, wouldn't the US Government basically need to examine - and judge! - every foreign and domestic employment decision of every company in the country? Wow, that sounds both fantastic and totally doable! Sign me up!
(Oh, and I love that "millionaire" is now a DCCC insult. Speaks volumes that a self-made millionaire CPA is a Democrat bogeyman, doesn't it? But I digress.)
ALLEGATION (2) "New York has lost 50,000 jobs due to bad trade deals." [Source: Economic Policy Institute, 2005]
FACTS: As far as I'm aware, there is only one "think tank" on the planet - the union-funded Economic Policy Institute - that blames FTAs like NAFTA for US job losses and counts the jobs lost. And like clockwork, the EPI's work is cited in the DCCC's commercial (as it always is in fear-mongering protectionist hit-pieces). The problem is that the EPI's numbers are nonsensical, and their basic methodology - simplistically tying the US trade deficit to US job losses - has been routinely debunked for almost a decade.
On the latter point, Cato's Griswold (in, among others, 2000, 2001, 2003, 2005, and again in 2007 (PDF)), AEI's Phil Levy (here), the US Chamber of Commerce (here), FactCheck.org (here) and even your humble correspondent (here, with Cato's Dan Ikenson) have completely destroyed EPI's methodology. The basic arguments from Griswold:
To determine the number of jobs or potential jobs "eliminated" by the trade deficit, the EPI model compares actual U.S. employment to what it would supposedly be if the U.S. trade deficit were zero and the economy's overall growth rate unchanged. Fewer imported cars, steel slabs, shoes, toys, shirts, and other goods are then translated into more domestic production of those items and hence more jobs if exports equaled imports. In other words, every widget not imported translates into a widget produced at home and more widget workers employed. Within this model, the rising imports and trade deficits of recent years can only be bad news for output and employment. ...
The attempt to blame trade deficits for a loss of jobs founders in theory and in practice. First, the model ignores the role of international investment flows. The flip side of America's trade deficit is the net inflow of foreign investment. The extra $435 billion that Americans spent on imports over and above exports last year was not stuffed into mattresses overseas. Those dollars quickly returned to the United States to buy U.S. assets, such as stocks, bank deposits, commercial and Treasury bonds, or as direct investment in factories and real estate. A principal reason why the United States runs a trade deficit with the rest of the world year after year is that foreign savers continue to find the U.S. economy an attractive place to invest. The EPI model ignores the growth and jobs created by the offsetting inflow of net foreign investment into the U.S. economy that the trade deficit accommodates. That net surplus of investment capital buys new machinery, expands productive capacity, funds new research and development, and keeps interest rates lower than they would otherwise be. EPI counts the jobs supposedly lost when we import cars but ignores the jobs created when BMW or Toyota builds an automobile factory in the United States that employs thousands of Americans in good-paying jobs. So it is the critics of trade who are guilty of counting the withdrawals but not the deposits in our national balance of payments account.
Second, the central assumption of the EPI model--that rising imports directly displace domestic output--collides headlong with empirical reality. In fact, imports and domestic output typically rise together in response to rising domestic demand. During much of the 1990s, when imports and trade deficits were both rising rapidly, so too was domestic employment and manufacturing output. Between 1994 and 2000, when deficits supposedly claimed a "heavy toll" on U.S. employment, civilian employment in the U.S. economy rose by a net 12 million and the unemployment rate fell from 6.1 percent to 4.0 percent. During that same period, U.S. manufacturing output rose by 40 percent even though the volume of imported manufactured goods doubled. Manufacturing took a nosedive in 2001-2002, but rising imports were not the culprit. While manufacturing output was falling 4.1 percent in 2001 from the year before, real imports of manufactured goods were falling 5.4 percent after four straight years of double-digit increases....
If the trade critics were right, the recent plunge in import growth should have stimulated an increase in domestic output as U.S. factories sought to fill the gap left by the missing imports. According to the EPI model, in other words, the relation should be negative and the trend line should slope downward and not upward. Once again, reality intrudes on the protectionist story. There is no basis, in theory or experience, for the persistent allegation that trade deficits, and more specifically imports, mean fewer jobs in the U.S. economy. The reality is more nearly the opposite. As a reflection of continued domestic demand and the desire of foreign investors to acquire U.S. assets, large trade deficits are typically associated with more output and more jobs. In America today, trade and prosperity are a package deal. The more we trade, the more we prosper, and the more we prosper, the more we trade. By seeking to curb imports of manufactured goods, opponents of trade will only undermine the ability of the U.S. economy to expand output and create jobs.
On my first point (that EPI's numbers defy common sense), just step back and think about EPI's "analysis" for a second. Without counting a single actual job, the EPI study cited in the DCCC commercial showed that by 2005 NAFTA alone had cost the state of New York exactly 51,582 jobs. Not 51,583 or 51,581. Nope. Exactly 51,582 jobs. Eureka! In all seriousness, this kind of pseudo-economics is so ridiculous that it should be rejected on its face, and because most sane people probably would reject their argument if the exact number were used, the DCCC commercial said "50,000 jobs," rather than "51,582 jobs." It sounds more plausible that way, you see? Unfortunately, as the analysis above makes clear, it ain't.
ALLEGATION (3) "Yet Hoffman's biggest backers want more unfair trade deals." [Source: Club for Growth Press Release, 9/28/09].
FACTS: It is true that the Club for Growth vigorously supports Doug Hoffman. And it's also true that the Club is a vigorous supporter of all forms of trade liberalization - including free trade agreements. And why shouldn't they be? Free trade has lifted millions upon millions of people out of abject poverty. It's an economic principle upon which almost every economist on the planet can agree (and that's saying something!). It lowers prices for American families and costs for American businesses (over 50% of all imports are capital goods and equipment, afterall); it provides new markets for American products; and, perhaps most importantly, it is a a critical component of every individual's fundamental right to engage in mutually beneficial transactions with whomever he or she chooses, regardless of the country or countries involved in the transaction. Indeed, even the founding fathers recognized free trade's immense intrinsic value, and understood that protectionism would destroy the union (hence, the Constitution's commerce clause).
Now, grizzled campaign veterans (including, unfortunately, a few that I worked with in 2008) would cite poll after poll to advise that Hoffman and other free trade candidates should avoid the DCCC ad and its ilk because that's just "smart politics." I'd counter that it's only "smart" because conservative (typically GOP) candidates and their handlers let it be. On this issue - and more than almost any other - the "truth" is on the good guys' side, and there's almost no debate that free trade is a very good thing for America. Yet one (wrong) side is playing to people's fears and is literally lying to them, to their extreme detriment, and the other (right) side is staying silent because the issue doesn't poll very well. But if free trade candidates (and elected officials) never attack their opponents' misleading fearmongering, those silly polls will never change, and the painful cycle will continue on and on (and on and on and...). Isn't it about time that free traders - I dunno, maybe "real conservatives" like Doug Hoffman (or libertarians!) - stood up and said "enough!"?
Today's headlines provide a simple lesson on how the United States should - and should not - handle bilateral trade conflicts with the People's Republic of China. First comes the good news, courtesy of Reuters, that the United States and China have negotiated an end to the latter's silly ban on US pork products:
China pledged to lift its ban on U.S. pork on Thursday and the United States took a step toward easing restrictions on chicken imports as the two superpowers agreed to tackle a series of trade irritants.
The flurry of trade accords between China and America comes ahead of President Barack Obama's visit to China in mid-November to reach agreements on currency, the environment and trade with its second-largest trading partner and the largest foreign holder of its government debt.
China's promise on pork sent U.S. hog futures higher on Thursday and also lifted the stock of Smithfield Foods Inc (SFD.N), the largest U.S. hog and pork producer.
"We're going to work through whatever details remain to try to get this done as expeditiously as possible," U.S. Agriculture Secretary Tom Vilsack told Reuters during a telephone interview from Hangzhou, where the countries held trade talks.
China is a top buyer of U.S. meat, chicken, soybeans and other products, purchasing $560 million worth of pork in 2008. China imposed the ban on U.S. pork five months ago following the outbreak of the H1N1 flu virus, also known as swine flu. The disease cannot be caught by eating pork.
China's Agriculture Minister Sun Zhengcai did not say when he would announce a formal end to the pork ban.
"He didn't put a specific timeline on it, but as you know President Obama is coming to China in a couple of weeks, and I don't know whether that is part of their calculation or not," Vilsack said.
China's willingness to lift its pork ban was not related to the recent move by Congress to end its ban on imports of Chinese poultry products, Vilsack said.
"I asked Minister Sun that specific question, and he was very emphatic in indicating that there's no connection," he said.
But Vilsack said his department will soon begin the process to review China's food safety laws and poultry plants with an eye to allowing U.S. imports of poultry meat....
The bilateral agreement came as part of the 20th US-China Joint Commission on Commerce and Trade (JCCT) - a periodic, high-level meeting between the two countries' top trade and commercial officials. And it's a crystal clear example of what the United States can accomplish when it quietly negotiates with China on basic bilateral trade irritants. Indeed, according to China's CCTV, a total of 11 agreements were reached during the two-day JCCT summit in Hangzhou. Another Reuters story points has the details of a few of those agreements:
Importantly for U.S. businesses, China agreed to treat products of U.S.-China joint ventures as local products in government procurement tenders, and would submit a revised offer to join the World Trade Organisation's government procurement agreement by 2010, U.S. Trade Representative Ron Kirk said.
China will remove its local content requirement in tenders for wind power equipment, Zhang Guobao, head of the National Energy Administration, said.
These are also quality agreements (assuming of course, that the Chinese follow through). Kudos to the participants, including USTR Kirk, Commerce Secretary Locke and Agriculture Secretary Vilsack, for their good work.
Unfortunately, today also provided a stark contrast to the JCCT pleasantries and an equally clear lesson on what happens when US politicians forego quiet diplomacy and start with the chest-thumping. Here's the AP with the latest:
China has told the U.S. that it will take steps that could lead to higher tariffs on imports of autos made by GM, Chrysler and Ford.
Steve Collins, president of industry trade group the American Automotive Policy Council, said Wednesday that U.S. officials have told the three Detroit automakers that China is expected to begin an investigation under anti-dumping [me: and apparently anti-subsidy] laws into their business practices as soon as next week.
If the investigation concludes that the companies receive government subsidies, or sell products in China at below-market prices, China could slap tariffs on U.S. auto imports.
The move is the latest trade dispute between the two countries, which are already fighting over steel pipes, chicken products, and pirated movies and music. The trade spats worsened after the Obama administration last month announced up to 35 percent duties on Chinese-made tires, to be imposed for the next three years....
GM and Chrysler have received billions of dollars in aid from the government's $700 billion bailout fund, though Ford has not....
Total auto sales in China so far this year have surpassed those in the U.S., giving China a wide lead over the U.S. as the world's top auto market. Through September, 9.66 million vehicles were sold in China, up 34 percent from the same period last year.
During the same time, U.S. sales plunged 27 percent to 7.8 million units, according to Autodata Corp., a research firm.
Sales in China are expected to continue climbing to 12.6 million units in 2009, while analysts say U.S. light vehicle sales for the year will wind up around the 10.5 million level.
As the AP story indicates (and as I've discussed previously), the autos case and a far bigger case against US Chicken parts were filed immediately after the President's decision to impose prohibitive tariffs on US tires under Section 421 of US Trade Law. Both cases demonstrate how China reacts when US politicians decide to "get tough" and pursue direct, unilateral trade actions against the PRC in order to change Chinese behavior. (Hint: they don't like it.)
Now, the AP article correctly points out that the Chinese market - while quite important to the future of US automakers - does not import many (only about 9000 in 2009) "Big 3" cars because the American automakers mostly sell their Chinese-made cars in China (a common phenomenon for a lot of allegedly "offshored" US products, by the way). On the other hand, the autos case could still be important for two reasons: (1) once anti-dumping or countervailing duty (CVD) orders are in place, they tend to stick around for a long, long time, so any resulting tariffs could (if high enough) prevent the Big 3 from shifting business strategies and shipping more US-made cars to China if/when market dynamics change; and (2) the case could lead to "copycat" CVD cases against bigger US exporters that receive government funds (including loans, tax breaks, etc.) if the Chinese investigations find that broad-based government subsidy programs like the TARP, the Stimulus*, or any other major bailout are illegal. (Indeed, this copycat strategy occurred when the United States reversed its longstanding policy and began conducting CVD investigations of Chinese imports in 2006 - the many subsequent cases routinely targeted the same Chinese subsidy programs alleged in the original case.) So while small in value, the autos case could have significant implications down the road, as could the Chicken subsidies case.
The pork and autos examples clearly demonstrate that there's a right way and a wrong way to get China to liberalize its markets and obey international trading rules. The right way is quiet bilateral diplomacy and, where that fails, multilateral dispute settlement at the WTO. It produces results (and the recent US wins at the WTO are also testament to this fact). The wrong way is direct unilateral potshots like the Section 421 decision or long-threatened tariffs attacking China's alleged currency manipulation. That path leads only to Chinese retaliation and further pain for US exporters and consumers. In other words, it's stupid.
Fortunately, it looks like the Obama Administration might be figuring this dynamic out, albeit slowly and clumsily. According to another report on the JCCT summit, USTR Kirk suggested that the bilateral summit occur twice a year. If true, that's a very good sign that US-China trade relations are once again headed in the right direction.
Contrary to popular belief, the United States actually has developed a formal negotiating strategy as part of the WTO's Doha Round of multilateral trade negotiations. It has not, however, made this double-super-top-secret strategy public. Instead, I've intensely analyzed almost 9 whole months of data and have employed my unparalleled* powers of deduction to systematically determine the Obama administration's grand WTO battleplan. And I'm providing it today to you, my dear reader(s), free of charge. So here you go:
Step One: Disavow any and all prior US negotiating commitments. In the dark, pre-hopenchange days of July 2008 (and without Trade Promotion Authority), the US delivered its most ambitious negotiating proposal as part of the WTO's Geneva "Mini-ministerial." The deal worked from the United States' December 2005 negotiating proposal and offered steep cuts in agricultural subsidies and increased visas for temporary workers. And it almost led to a final Doha agreement. (Hopes for a deal collapsed at the last minute when parties could not agree on smaller issues like agricultural safeguards). Since the inauguration, however, the Obama administration has steadfastly refused to accept any of the Bush administration's WTO offers or commitments. As USTR Ron Kirk said back in May, "We are suggesting that we have to be open to all possibilities." 'Nuff said.
Step Two: Express vague support for the Doha Round while hinting at the need for changes before you could commit to a final agreement.Over and over and over again.
Step Three: Do nothing! (...while saying you're "reviewing" existing US trade policy and will issue a revised, formal Doha position any day now.)
Step Four: Make loud public demands of your trading partners. See, e.g., the United States' very public demands over the last month on "sectoral" tariff elimination agreements and intensified services negotiations.
Step Five: Privately backtrack from previous commitments. According to Bridges, US negotiators have quietly sought more import protection for American farm products during small group meetings at the WTO. In particular, USTR wants the United States to be allowed to designate an additional 2 percent of agricultural tariff lines as "sensitive" and thus not subject to the overall tariff reduction commitments set pursuant to an eventual Doha Round agriculture agreement. (As Bridges points out - and needless to say - other WTO Members were not amused by the US suggestion, especially considering steps 1-4 above.)
Step Six: ???
Step Seven: Profit!
Unfortunately, Step Six appears to be the real sticking point (see below), and I haven't quite figured it out yet. I think it involves magic beans, unicorns or significant hopechangification - maybe all three. But fortunately, what this "strategy" lacks in realism, it has more than made up for in hilarious, nonsensical diplo-speak from some of America's trading partners. For example, Reuters reports on EU Trade Commissioner Catherine Ashton's bizarre non-response on Monday when asked directly about the United States' commitment to the Doha Round:
A top European Union official said Monday she believed President Barack Obama was serious about reaching a deal in long-running world trade talks, but the time has come for all countries to show their cards.
"I think first of all this administration is committed to open trade. It is committed to trying to resolve the Doha round," EU Trade Commissioner Catherine Ashton said at the Paul H. Nitze School of Advanced International Studies.
"I'd like also to say, but I'm not certain, that we'll see significant breakthroughs in the next few weeks and months. But I do think there's no question in my mind that the energy and commitment of the new USTR (U.S. Trade Representative Ron Kirk) is absolutely there," Ashton said when asked if she had a clear picture of the Obama administration's trade policy.
To recap: Ashton is confident in US commitment to Doha, but the time has come for, ahem, "all countries" (hint, hint!) to show their cards. And when asked if she had a "clear picture" of the United States' trade policy, Ashton responded by changing the subject, noting USTR Kirk's energy, and boldly proclaiming that she kinda, sorta maybe thinks that there might possibly be a "significant breakthrough" in the next few "weeks and months."
Seriously, what the... ???
Baroness Ashton's kind-yet-incoherent words aside, other WTO Members and WTO officials are rather peeved with the United States' current negotiating plans. The same Reuters article noted that "Many WTO members believe the blockage in the [Doha] talks comes from Washington, where trade has taken a back seat to issues such as economic stimulus, healthcare, the war in Afghanistan and financial regulatory reform." Indeed. And according to Bridges, WTO Director General Pascal Lamy has expressed doubts that the current pace of negotiations would lead to a 2010 conclusion of the Round, and delegates from Brazil, Argentina, Tanzania, China, Switzerland, Turkey, and Taiwan also expressed far more extreme - and pointed - frustration with the state of the negotiations.
Yet despite Ashton's thinly-veiled hopes and all of the public and private grousing over the new US "strategy" at the WTO, the White House does not appear to be changing things any time soon. Here's Reuters one last time:
A U.S. trade official who attended the SAIS event with Ashton and Swedish Trade Minister Ewa Bjorling said the Obama administration "clearly ... has been conducting a broader review of U.S. trade policy."
But there seems to be a mistaken impression "that this review would conclude with a nice leather-bound volume, which would be the Holy Bible of the Obama administration's trade policy and make everything perfectly clear," said the official, who asked not to be identified.
Obama has made a number of choices that already define his trade policy, such as a decision to keep "the shoulder to the wheel" on Doha and to build support at home by increasing enforcement of trade pacts, the official said.
But Obama and U.S. Trade Representative Ron Kirk also have been clear "the biggest mistake we could make is to come back with a Doha agreement that would be rejected politically by the U.S. Congress," the official said.
So the current US strategy of "review, delay, demand and backtrack" is producing (at best) confusion and (at worst) serious doubts that the entire Doha Round can be completed according to the current amorphous negotiating format - a format necessitated by the United States' strategy! And even America's closest allies are calling on it to make some real commitments and to finally "put its Doha cards on the table." Yet the United States' immediate response is to repeat the same old tired cliches and mock its detractors with bizarre, ill-informed retorts about leather-bound trade bibles.
Impasse resolved! Huzzah!
In all seriousness, maybe this anonymous "US trade official" wasn't appointed yet when USTR repeatedly stated that it would complete a formal review of US trade policy and would enunciate the new US "policy framework" at some point (supposedly this fall at the latest). Or maybe he/she doesn't understand how formal trade negotiations are conducted at the WTO, and that other WTO Members simply refuse enter into substantive trade negotiations with the United States until it has formally provided its negotiators with a negotiating mandate that states clearly where the US stands on the current WTO negotiating texts and its previous offers. Or maybe he/she does know all of this and is just stonewalling, albeit poorly, until ObamaCare, Cap-and-Trade, Afghanistan, and whatever else is "resolved," and the Obama administration can finally feel like it's in a sufficiently comfortable political place to put some real skin in the WTO game.
Maybe.
Well, whatever their reasons, the Obama administration's current "strategy" is proving to be an abject failure. WTO Members are no longer listening to American demands. They are openly grousing about the US failure to commit. The Doha Round is once again on the brink of collapse, and bilateral and regional FTA activity has exploded as nations search to expand trade by other, admittedly less ideal, means. So if the White House really is going to stick to this strategy - if these are the United States "cards" and nothing changes before (or after) the December 2009 WTO ministerial in Geneva - Doha is doomed.
And anonymous US snark and derision is certainly not going to save it.
I'm taking a much-deserved vaction until next tuesday, so I probably won't be blogging much between now and then. Maybe a random post should the weather turn sour, but that's about it.
But for the six of you who enjoy my daily musings (thanks!), don't fret: I'll be back blogging away next week.
The latest news on carbon tariffs ranges from the entirely predictable to the quite interesting. First up is the unsurprising news that the Obama administration is publicly waffling on carbon tariffs, neither supporting nor denouncing them (shocking, I know!). Reuters has the news:
The United States should focus on cutting its own greenhouse gases and developing clean energy technologies before slapping tariffs on energy-intensive goods from developing countries like China and India, Energy Secretary Steven Chu said on Tuesday.
President Barack Obama has made climate legislation one of his top priorities and supports regulating gases such as carbon dioxide blamed for warming the planet with a cap and trade market on emissions.
U.S. lawmakers, now wrestling with competing climate change legislation in Congress, would support such a market if it includes border fees on carbon intensive goods imported from developing nations should those nations not take action to reduce their own carbon emissions.
But the carbon tariffs could be a headache for the U.S. government to administer and it's uncertain that they would be allowed by global trade rules.
"You don't have to talk about tariffs yet," Chu told the Reuters Washington Summit. "Let's figure out what the U.S. can and must do" to reduce greenhouse gas emissions.
Carbon tariffs have been backed by several U.S. senators, especially from manufacturing states hit by high unemployment.
A plan for how the fees would work was included in the climate bill narrowly passed by the House of Representatives in June that promised to reduce U.S. emissions 17 percent from 2005 levels by 2020.
Under that bill, tariffs on imports of goods like steel, glass, cement and chemicals from China, India and other countries would be triggered in the middle of the next decade if the developing countries did not act on climate.
Several senators have supported such border fees as a guarantee their homes states would not lose jobs and business to cheap imported goods.
To start off immediately considering tariffs "does no one good," Chu, a Nobel Prize-winning physicist said at the summit being held at the Reuters office in Washington on Oct 19-21.
I must give the administration credit for consistency: the White House's aversion to confrontation on carbon tariffs is perfectly in keeping with President's whole "voting present" strategy on the really tough issues. But I'd beg to differ with Secretary Chu on the idea that resolving the US debate on carbon tariffs would "do no one good." Considering that an increasingly large share of the developed and developing world opposes carbon tariffs, a strong US statement against them would do the world a lot of good. Now, it might not do the White House - trying to pass ObamaCare and Cap-and-Trade with a flimsy "coalition of the willing" that includes about twelve US senators who strongly support carbon tariffs - any good, but that's a hardly "everyone," now is it? (And let's not forget that Secretary Chu used to be a strong supporter of Carbon tariffs - you know, waaayyy back in March 2009.)
Moving on, BNA (subscription) reports that Senator Ben Cardin (D-MD) has taken courage to new levels, coming out in support of carbon tariffs, but not wanting them included in the Senate's climate change legislation. Instead, Cardin wants the whole world to jump on the carbon tariffs bandwagon, baby:
A border tariff system to protect nations that adopt carbon caps from unfair trade competition from nations that do not should be negotiated as part of a global climate agreement in December, providing international resolution to a climate change issue that has divided the U.S. Senate, Sen. Ben Cardin (D-Md.) said Oct. 20.
International climate negotiators, who will meet in Copenhagen, Denmark, Dec. 7-18 in hopes of hammering out a new global climate deal among developed and developing nations, “should establish what every country's responsibility should be” to curb greenhouse gas emissions as well as consequences for those that fail to act, he said.
A new “border adjustment regime” launched under a climate agreement would eliminate the need to include U.S. border tariffs in Senate climate change legislation, Cardin said at a climate forum held by Roll Call and Congressional Quarterly....
Cardin, a member of the Senate Environment and Public Works Committee, which is slated to take up climate change legislation in November, said he recently urged the Obama administration's lead climate negotiator, Todd Stern, to push for establishment of a “working committee” at the Copenhagen talks to take up the border tariff issue.
“If a country does not meet its international responsibility … then their products that enter the marketplace would be subject to a tariff” on imports specifically authorized under the international climate agreement, Cardin said.
Opponents argue that border tariffs placed on such imports would violate free trade provisions enforced by the World Trade Organization and trigger retaliatory sanctions. But such carbon tariffs have strong support from Midwestern and coal-state Democrats in the Senate, who together form a key bloc that could decide the fate of climate legislation.
Introduced Sept. 30 by Sens. John Kerry (D-Mass.) and Barbara Boxer (D-Calif.), the Senate bill (S. 1733) would establish an allowance trading system to cut emissions at U.S. power plants and other operations 20 percent by 2020 from 2005 levels.
The Senate bill must be cleared by multiple committees before it can be brought to the floor, where passage is far from assured; the House passed a similar bill in June (H.R. 2454)....
The Kerry-Boxer Clean Energy Jobs and American Power Act does not include specific border tariff provisions but has placeholder language that could enable members to reach a compromise on the issue. The bill calls for a “border measure that is consistent with our international obligations and designed to work in conjunction with provisions” that will likely set aside free emissions allowances to help protect trade-sensitive industries, according to the provision....
Cardin said an international consensus on border tariffs would respond to concerns that imposing mandatory caps on U.S. emissions would lead to emissions “leakage”—the incentive for U.S. manufacturers to relocate to China and other fast-developing nations that fail to take comparable action on emissions.
“It also removes a major political hurdle to getting climate change [legislation] passed in the United States,” Cardin said.
According to the Cato Institute's congressional free trade ratings, Cardin is not a hardcore protectionist, so his "novel" support for carbon tariffs likely isn't indicative of a secret, insidious desire to inhibit global trade. Instead, Cardin's closing statement in the BNA piece probably represents his underlying motivations best: he's just looking for a way to purge the carbon tariffs debate from the Senate, where it legitimately threatens to divide Democrats and submarine the current legislation altogether (one can only hope!). Unfortunately for the good Senator, given the strong public opposition of so many countries (again, from both the developed and developing world) to carbon tariffs, Cardin's "multilateral protectionism" approach appears highly, highly unlikely to go anywhere at Copenhagen or anywhere else. That said, it'll be interesting to see if the White House takes Cardin's "carbon tariff working committee" suggestion seriously.
Last comes (in my humble opinion) the week's most interesting news on the carbon tariffs front. A new scholarly article in the Global Trade and Customs Journal [caution: slow-loading link] by Dr. Reinhard Quick of Saarland University, "Border Tax Adjustment to Combat Carbon Leakage: A Myth" demonstrates that carbon tariffs won't actually counteract "carbon leakage" (i.e., the loss of domestic manufacturing shipments and employment to competitor countries that have less stringent climate change policies) or climate change. Instead, it's just protectionism, plain and simple. The full piece is available by subscription only, but here's the synopsis:
Discussions about unilateral trade measures as a means to combat climate change have become quite fashionable notwithstanding warnings against unilateralism and protectionism from the leaders of G-8 and G-20 in times of an economic crisis. A system of ‘border tax adjustment’ on imports is suggested in order to countervail the cost of domestic emission trading systems. The proponents argue that without such measures, a country having adopted an emission trading system would not only lose economically but also environmentally. The standard reason given to justify this argument is the notion of carbon leakage, namely, the danger that energy-intensive production would move from countries with domestic policies to reduce greenhouse gas emissions based on a carbon price for emitters to regions that do not have a binding and costly regulatory CO2 regime. Recently, the discussions have been fueled by the Waxman/Markey Bill, adopted on 26 June 2009 by the House of Representatives and by a French non-paper, presented at the informal EU Environment Council held in July 2009. These two initiatives aim to establish, in the context of a domestic emission trading system, a system of ‘border tax adjustment’ against some imports from some countries, namely, those that are seen as not contributing enough in the fight against climate change. The revised European ETS Directive does not provide for border measures. It instructs the European Commission to submit a report to the Council and the European Parliament no later than 30 June 2010 assessing whether energy-intensive sectors are exposed to a significant risk of carbon leakage and explicitly outlines the inclusion of imports in the European Union’s ETS system as one of several actions. The joint WTO-UNEP paper on trade and climate change has been widely regarded as a justification from a legal point of view of such measures. While there are many proponents for such measures, there remains a considerable amount of skepticism; politicians, business organizations, and scholars have warned against such an approach. The following short note will discuss the feasibility of ‘border tax adjustment’ in relation to domestic climate change legislation as well as some WTO legal aspects along the following questions: (1) Are there target countries for border measures? (2) Would border measures help to combat climate change and could they be administered without too much bureaucracy? (3) How should border measures be qualified under General Agreement on Tariffs and Trade (GATT)?
The whole article is worth reading, but for our purposes, Question 2 seems to be the most novel and important one. On it Dr. Quick concludes: "It is a myth to believe that unilateral border measures will solve the problem of carbon leakage." Dr. Quick then goes on to add that, assuming some sort of global agreement is ratified, "[t]hinking that a country complying with its international obligations could be subject to border measures only because another country does not consider such international commitment sufficient is 'naked' protectionism." Finally, he says that "[b]order measures do not benefit the climate but the domestic budget. They are difficult to calculate and easily circumvented. It is a myth to believe that only US or European installations produce in a climate efficient way as far as greenhouse gas emissions are concerned."
Amen, Doctor. Amen.
So to close this immeasurably long blogpost, let's update the ol' carbon tariffs scorecard:
A quick question to you Section 421 apologists who swore up and down that the President's decision to impose prohibitive tariffs on Chinese tires was magically going to restore professional protectionists' faith in the overwhelming benefits of globalization:
Public Citizen, the Citizens Trade Campaign, and the United Steelworkers Union Oct. 19 launched a campaign to “turn around” the World Trade Organization, in an effort to change the administration's path on the WTO.
The Obama administration will be facing a political decision point on Doha Round negotiations, with a smaller negotiating meeting starting Nov. 28 and a full WTO ministerial in Geneva scheduled for Nov. 30-Dec. 2, Lori Wallach , director of Public Citizen's Global Trade Watch, said....
She said the current U.S. agenda on the Doha Round and WTO remained the Bush administration's agenda, and that multinational corporations were seeking to push an expansion of the WTO through the Doha Round to the detriment of the general public.
As part of the campaign, the coalition has an online petition, addressed to President Obama, that says: “Time is overdue to turnaround the WTO. We supported your campaign commitments to create a new trade policy that works for all of us, not just the special interests. That is why we are calling on you to replace Bush's more-of-the-same WTO expansion agenda. We're ready to fight for a WTO turnaround plan we hope you will lead.”...
Leo Gerard, president of United Steelworkers Union, endorsed the Trade, Reform, Accountability, Development, and Employment Act or TRADE Act (H.R. 3012) introduced by Rep. Mike Michaud (D-Maine), which would expand congressional oversight, replace trade promotion authority, and analyze existing trade deals to amend those deals to address who has benefitted and who has been left behind, and what it is that the WTO does and doesn't do.
Gerard said he was pleased that the Obama administration had enforced the rules in the Section 421 case imposing a safeguard on tire imports from China, but said the Steelworkers did not have other Section 421 safeguard cases to file at the moment.
Andy Gussert, director at the Citizens Trade Campaign, rejected any attempt by the Obama administration to move pending free trade agreements with Panama, Colombia, and Korea through Congress. He said there was no political will to do the FTAs, and that they needed to be renegotiated.
Gerard said that no “cosmetic” changes would render the agreements acceptable to the U.S. Steelworkers, Public Citizen, and the Citizens Trade Campaign. He said there was no way to solve the problems in the agreements, citing violence against labor unionists in Colombia, tax havens in Panama, and problems with autos trade in the South Korean FTA.
Gerard's statement re: not bringing any more 421 cases is interesting, and while I'm suspicious, I'd be quite happy to be proven wrong on that prediction. But I digress. The point of this post was to, once again, point out the awfully bad strategy that is placating professional protectionists like Public Citizen and the USW in order to advance a free trade agenda. Now, about a month after the President's 421 decision, after his refusal to repeal or resolve the Buy American and Mexican trucking disputes, and after his shelving of pending FTAs and the the United States' negotiating mandate in the WTO's Doha Round, the anti-traders are demanding no less than the complete dissolution of modern US trade policy. (Is that all?!?!)
So one more time (in bold!) for those of you who missed it: the "anti-trade crowd" is called the ANTI-TRADE crowd for a reason, and no amount of kowtowing is going to change that. Ever.
One of the main reasons that I and many other free traders opposed the President's politically-motivated decision to impose tariffs on Chinese tires under Section 421 of US Trade law was the immense likelihood that stopping Chinese imports would just increase other countries' US market shares, rather than significantly improving domestic tire production. As I noted at the time, tire producers in Mexico, South Korea, Indonesia and elsewhere "gotta be quietly dancing in their offices because China - their main competitor for US market share - is now hobbled." In fact, shortly after the Section 421 decision, USTR Ron Kirk had a rare moment of candor in Brazil when he basically admitted the same thing: "In the short-term [the tire restriction] could mean that we buy a lot more tires from Brazil." (So much for assisting US tire manufacturers and workers, huh?)
Anyway, from today's Economic Times (India) comes further proof of the inevitable trade diversion that occurs when you ban China's (or any single country's) imports:
The US government’s move to levy anti-dumping duty on Chinese steel pipes has provided Indian manufacturers an opportunity to increase exports to the US. India’s steel pipe makers such as Maharashtra Seamless, Jindal Saw and Indian Seamless Metal Tubes are all set to more than double their exports to the US.
The US recently imposed preliminary import duties ranging from 10.9% -30.7% on steel pipes, used to deliver oil and gas, from China in order to protect the domestic pipe making industry from low-priced imports. As per industry estimates, China exported 1.9 million tonnes of steel pipes to the US last year....
Maharashtra Seamless produces 2 lakh tonne of seamless and electric resistance welded (ERW) pipes annually. Its exports to the US stood at 20,000 last year, which is expected to go up to 70,000 tonnes this year. India’s seamless, spiral and ERW pipe making capacity is close to 5 million tonnes currently....
Jindal Saw has saw and seamless pipe manufacturing facilities in India with a total production capacity of 1.6 million tonne. The company also has double joint and coating facilities in North America. It exported 7-10% of the total produce to North America last year and is expected to increase exports to 15-20% in the coming months.
So there you go: imposing tariffs on Chinese pipe imports ends up increasing Indian imports of the same product. It's like a big, global game of whack-a-mole!
As I've noted previously, such trade diversion is part of a larger phenomenon regarding China's role in the global economy - that its producers historically have taken market share away from other foreign (mostly Southeast Asian) exporters rather than American manufacturers. As such, it's completely expected that Indian and other foreign producers should rejoice every time a domestic industry or union files a request for protection from Chinese imports alone. Their exports increase. Good for them.
The only problem, of course, is that the point of bilateral protectionism is not to improve other foreign producers' shipments to the US, and domestic prices inevitably rise due to the removal of a low-cost supplier from the market (and increased transaction costs as importers hunt for new overseas supply).
So American production doesn't increase, yet US prices do. Awesome.
