Selling Trade, Ctd.

As if on cue, Michigan Governor Jennifer Granholm went on CNN this morning to discuss President Obama's new trade initiative and to explain away her administration's dreadful, job-killing policies by - you guessed it - scapegoating free trade (start at about 1:00):



In her attempts to blame Michigan's record unemployment on free trade, Granholm hits on many of the standard protectionist myths: (1) we don't manufacture anything anymore; (2) manufacturing job losses are due to import competition; (3) our trade agreements are unfair and unbalanced, and (4) our trading partners cheat. The only thing she didn't do was rail against the trade deficit (but maybe that's in the director's cut). Of course, one must wonder why a state like Texas didn't get hammered by the same "awful" trade policies, but that's a blog post for another time.

For now, let's focus on President Obama's new plan to sell free trade across America by focusing on increased exports and enforcement, while completely ignoring imports and the true state of US manufacturing and manufacturing employment.  How exactly will that strategy silence Granholm and her fellow protectionists when it implicitly reinforces the very myths that they recklessly perpetuate?  And what will happen if/when the US trade deficit - showing that we import more than we export - doesn't magically disappear?

(Answers: it won't, and it'll make things worse.)

POTUS' Trade Pitch Misses the Plate

Speaking to House Republicans during their annual retreat (in sunny Baltimore!), President Obama spoke publicly and off-script about his plans for the future of US trade policy (starts at about 4:20):



At this point, it's utterly unsurprising that Obama's remarks evince a wholly mercantilist outlook - exports are what's good about trade, and imports are the bad thing that we must reluctantly accept in order to secure new markets for US goods and services.  Of course, as readers of this blog (and anyone who's taken a basic macro-econ class in the last, say, 75 years) know, mercantilist trade policy is nonsense.  Indeed, I think Adam Smith settled this debate a few hundred years ago, but even if he didn't, Japan's years of economic stagnation and ever-present trade surpluses should do the trick.

There are plenty of smart people in the White House who of course know these facts, but it's clear that they have ceded their knowledge of rudimentary economics to the in-house politicos who think that the only way to "sell trade" is to (i) focus on exports; (ii) explain how the rest of the world is illegally blocking those exports; and (iii) never, ever mention imports.  And the President - not really versed in any of this econ stuff and most definitely not a reader of this blog - is dutifully carrying out that messaging strategy.

But is Obama's sales pitch effective?  Can he really "sell trade" by focusing on the things he laid out in his talk with the House GOP?  Let's review a few of his comments to find out, shall we?

Obama states that "the suspicion about trade agreements is that they're all one way."  Ok, that's true, but what's feeding that suspicion is not the FTAs themselves, or most Americans' real-world experiences with imports and free trade, but rather political demagoguery and media misreporting on imports, the trade deficit  and the state of US manufacturing. (See discussion here.)  Until these myths are corrected - until the American people understand that imports are good for US businesses and consumers, that US manufacturing output is still the world's largest, and that the US trade balance is not some "free trade scorecard" - any attempt to sell free trade through an exports-only focus will actually enhance Americans' suspicions, rather than alleviate them.  Americans simply will look at the trade deficit (which the US has held since the 1960s, so it's not like it's going away anytime soon) and think that we're "losing" at trade, and that our supposedly "reciprocal" FTAs stink.  Why?  Because the President told them that exports are the only thing that matter, and that the only reason that American companies aren't exporting more is because our trading partners are cheating by illegally denying US companies access to their markets (more on that below).

This is also the problem inherent in the President's attempts to build confidence that "trade is going to be reciprocal, that it's not just going to be a one-way street."  "Reciprocity" in a trade agreement implies that FTAs are "win-lose" endeavors.  We "win" by getting new export markets and "lose" by opening up our own.  And we need a balance between winning and losing for the FTA to be "fair."  Of course, nothing could be further from the truth - domestic liberalization is as big a "win" for the US economy, as is foreign market access for US exports.  And in a world of global supply chains, internet sales and lightning fast logistics, bilateral trade balances are increasingly meaningless (more on that here).  Yet through a demand for "reciprocity" and "balance" with our trading partners, bilateral trade balances ridiculously become "free trade report cards" - if, for example, a trade balance with an FTA partner doesn't result in total parity or a US trade surplus, then the American people will think that the FTA caused us to "lose" more than we "won."  And not only is that wrong, but it also guarantees that US support for free trade continues to stink.

Finally, the President's focus on increased enforcement reinforces two huge myths about global trade policy: (i) it's currently the Wild West out there, and (ii) our trading partners are cheating with impunity.  In closing his remarks, President Obama says that he supports trade, but that "it's gonna have to be trade that combines with an enforcement mechanism as well as just opening up our markets."  This is wrong in two key ways.  First, it clearly implies that there are no "enforcement mechanisms" in place right now, despite the fact that we have domestic "unfair trade" laws (antidumping, countervailing duty, safeguards, etc.), WTO dispute settlement procedures, and even bilateral dispute mechanisms in all of our FTAs.  Second, it implies that we're currently not enforcing the rules that are in place, when in reality there are literally hundreds of duties in force against "unfairly traded" foreign imports as a result of our domestic trade laws, and the US has successfully litigated or otherwise resolved dozens of cases at the WTO.

The President's statement also implies that our trading partners are cheaters, and that the only reason we're not exporting more is because they're illegally denying US exports access to their markets.  Yet while it's undeniable that some countries are engaging in illegal behavior, the reality is that such chicanery affects a tiny fraction of overall global tradeflows.  In our 2009 paper, Dan Ikenson and I calculated that the combined trade volumes affected by the current US anti-subsidy cases against China represented less than one percent of the entire US-China trade deficit.  So while "China cheats" made for a great soundbite, it certainly wasn't the driving force behind the bilateral trade relationship.  The same holds true for other markets - cheating simply doesn't define or drive global trade.

Because of this reality, relying on "enforcement" to sell free trade to the American people is a very, very bad idea.  Beyond the distressing fact that increased enforcement actions will antagonize trading partners (we're no market access angels, you know) and likely close markets rather than open them (retaliatory sanctions are often the end-result of unfair trade cases or WTO disputes), more cases and more "mechanisms" simply can't have a big effect on global trade balances.  So even if our trade deficits shrink a little because of heightened enforcement (unlikely), Americans will believe that our trading partners are still cheating (and that the United States stinks at enforcement) because the deficits won't have disappeared entirely, and because they've been told that cheating is the root cause of those deficits (and, of course, that those deficits are bad).

So we'll have increased trade tensions, decreased tradeflows, and maintained or even emboldened a still-suspicious electorate. A protectionist trifecta!

So where does this all leave us?  Well, I'm not going to indulge in any silly conspiracy theories implying that all of these missteps are the President's sneaky intent - I simply don't believe that the White House has developed a "free trade strategy" for the secret purpose of actually undermining free trade.  However, I think the above analysis makes it abundantly clear that the White House's politically-driven decision to sell trade through a focus on exports and enforcement is doomed to fail because it reinforces, rather than resolves, Americans' misconceptions about free trade and FTAs.

Unfortunately, I don't think that this strategy is going to change anytime soon.

South Africa, Egypt: Time to Move On Without the USA

I guess President Obama's lukewarm SOTU "support" for the WTO's Doha Round didn't cause any leg-tingles in Pretoria:

The United States is not ready to conclude a world trade deal this year because of domestic politics, so industrialised countries should consider a special trade package for the poorest nations, South Africa's trade minister said on Friday.

"All the indications are that it's an incredibly controversial matter in the U.S. Congress and I don't think they have yet defined a sustainable approach to conclude the round," Rob Davies told Reuters at the World Economic Forum in Davos....

Davies said South Africa and some other countries wanted the World Trade Organisation to consider a partial agreement or "early harvest" that would bring forward benefits to the least developed nations by scrapping export subsidies on agricultural goods and on cotton.

While other nations accepted WTO compromise documents that have been worked out over nearly a decade of the so-called Doha Development Round of trade talks, the United States was unwilling to negotiate on that basis, he said.

"One of the bigger trading partners in the world is not indicating that it's willing to engage on the processes of these texts. It wants substantial revisions but hasn't developed any great clarity," Davies said.

"The pace in incredibly slow," he said.

Egyptian Trade Minister Rachid Mohamed Rachid also said earlier this week he did not believe the United States was willing to conclude a global trade pact this year despite a pledge by G20 leaders including President Barack Obama last September

High unemployment rates in the United States and Europe would make governments afraid to open up global trade more for the benefit of developing nations, he said.

As readers of this blog already know, this type of international grousing about US inaction at Doha is nothing new, and it's entirely justified.  But I must admit that I'm a tad suspicious of South Africa's intentions here, considering that it just recently joined 21 other developing countries in completing and signing a regional trade agreement - begun long before Obama took office and the US started stalling on trade - that severely undermines the signatories' incentive to finish the Doha Round (more on that here). 

So although Davies' comments about the United States are undoubtedly correct, his concern for the Doha Round's survival might be a tad overstated, and it could just be an easy excuse for his country's decision to disengage from Doha and go in another direction.

Clueless: Sarkozy Calls Free Trade "Immoral"

Perhaps not content to impose his protectionist worldview on only his own people, French President Nicolas Sarkozy yesterday called on the rest of the world to reject"rethink" globalization and free trade:

French President Nicolas Sarkozy has called for a fundamental rethink of capitalism in the aftermath of the financial crisis.

"We need deep profound change," he said in his keynote speech at the World Economic Forum in Davos.

His comments came as bankers and regulators clashed over proposals to break up banks that threaten the whole financial system.

Mr Sarkozy said he wished to restore a "moral dimension" to free trade.

"Were we not to change, we would be showing tremendous irresponsibility," he told the bankers and politicians that gather annually in the Swiss alpine resort....

Mr Sarkozy told the delegation - to scattered applause - that governments and companies in the world economy could not pretend it was business as usual.

"We are not asking ourselves what we will replace capitalism with, but what kind of capitalism we want?" he said.

"We must re-engineer capitalism to restore its moral dimension, its conscience," he said. "By placing free trade above all else, what we have is a weakening of democracy."...

That "scattered applause" line is classic - yes, I'm sure that there were tons of well-educated international financiers who were just psyched to hear the President of France badmouth free trade. But seriously, I normally wouldn't even bother to refute nonsense like this, but I will today because the morality of free trade versus protectionism is a point that I don't think I've addressed here yet, and I actually have some great (if I do say so myself) stock text available on the subject.  So it's only a cut-and-paste away:

The most principled case for free trade is a moral case. It is rooted in some of the very ideals upon which the United States was founded: the pursuit of life, liberty, and happiness, and the rule of law. Every American should be free to transact with whomever he wishes to transact, regardless of the nationality or location of the other party. Voluntary exchange is inherently fair, benefits both parties, and allocates scarce resources more efficiently than a system under which government dictates or limits choices. Individuals deciding for themselves how and with whom to conduct commerce will advance their own well-being, and thus the nation’s, far more efficiently than would some centralized authority that tries to influence private decisions by tipping the scales.

Furthermore, government intervention in voluntary economic exchange on behalf of some citizens at the expense of others is inherently unfair, inefficient, and subverts the rule of law. Instead of individuals seeking to optimize their conditions subject to the rules, they are incentivized to divert resources from productive endeavors to changing the rules to their advantage through politics and backroom dealmaking.

Alas, this very sound and simple justification for free trade has been distorted over the years by groups seeking to tip the scales in their favor. They mischaracterize trade in the ancient but false dichotomy of the haves versus the have-nots. Evil corporations, they say, benefit from trade while regular people suffer its wrath. The public is told that companies like Wal-Mart profit from trade, but that the vast benefits afforded Americans who shop at Wal-Mart—benefits like more-affordable clothing, food, and other everyday products—count for nothing. The public is told that trade enriches the Chinese government, but that the benefits to U.S. manufacturers and their workers from record export sales to Chinese customers over the past few years are meaningless. In the political realm, trade is never about individuals acting in their own best interest by transacting with whom they choose to transact. Instead, trade is a zero-sum game featuring the collective “Us” versus the collective “Them,” and “they” are gunning for “our” jobs and wealth using underhanded tactics.

Of course the prescribed “elixir” of limiting or regulating trade invariably benefits those who speak the loudest against free trade. Trade barriers are no different from earmarks. Trade barriers are like pork projects. Trade barriers are akin to the auto bailout. In all three cases, special interests persuade rulemakers that their circumstances justify expropriation of other people’s resources to subsidize their own endeavors. Each is an affront to the rudimentary concept of fairness, individual liberty, and the rule of law.

Yeah, I think that just about sums it up, don't you?

Revealing Trade Stat(s) of the Day

Last week, the Heritage Foundation released its always-entertaining Index of Economic Freedom, and the big news was that the United States dropped one spot in the annual rankings - from 7th to 8th - thus becoming less free than our kinda-socialist neighbors to the north, Canada.  (Somewhere Bob and Doug McKenzie are taunting us.)  But if you dig through the data a bit, you'll see something equally (more?) interesting/depressing: the United States dropped dramatically in the ratings on "trade freedom."  According to the Index's searchable database, the US was the world's 13th "freest trader" in 2009 to the 38th freest trader in 2010 - behind such notable free trade leaders as Namibia and Malta. 

Now, this revelation is not rock-solid proof that President Obama is a stark-raving protectionist.  In fact, the United States' raw free trade score actually increased from 86.8 to 86.9 (whoopee!).  But instead, the relative decline in US ranking perfectly supports analysis here and elsewhere that the United States is standing still on trade, while the rest of the world races to liberalize.  While such stagnation is certainly not as bad as outright trade hostility, it's still nothing to be proud of - especially for a country once considered to be the "world's free trade leader."

And I'd say it's about time we dropped that title, wouldn't you?

(H/T Andy Roth)

State of the Union: Trade

President Obama devoted two paragraphs to US trade policy in his State of the Union address tonight:

[W]e need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we’re launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.

We have to seek new markets aggressively, just as our competitors are. If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores. But realizing those benefits also means enforcing those agreements so our trading partners play by the rules. And that’s why we will continue to shape a Doha trade agreement that opens global markets, and why we will strengthen our trade relations in Asia and with key partners like South Korea, Panama, and Colombia.

I've already stated my many concerns re: a recovery strategy based on manufacturing exports, and while I certainly give the President credit for sounding kinda supportive of the pending FTAs and the WTO's Doha Round, his craptastic 2009 efforts in these areas (and others!) belie any new and real commitment to their success.  I'd be thrilled to see his 2010 agenda prove me wrong, but considering that President Obama's 2009 trade agenda also expressed support for pending FTAs and the Doha Round, I'd say that a hefty dose of skepticism is warranted.

More broadly, the President's words revealed an unflinchingly mercantilist worldview - exports are good, imports are bad, full stop - but this archaic, self-defeating outlook is also nothing new, so it's not like tonight's speech gave me any reason to get all worked up on a school night.  (He also repeated the tiresome pablum about ending tax breaks for "companies that ship our jobs overseas," and that's similarly out of touch with economic reality.)

In sum: same old, same old.  My 2010 predictions remain unchanged.

Explaining the iPad's "Stunning" Price

After months of intense nerd-blog speculation, Apple's Steve Jobs today unveiled his company's latest gadget, the iPad:

Steve Jobs took the stage Wednesday to sell the world on one of his biggest gambles since returning to Apple Inc. nearly 15 years ago: a multimedia tablet-style computer called the iPad.

The 9.7-inch touch-screen iPad, which will let users play games, check email, and read books, presents a major challenge to the media, publishing and wireless industries. For Mr. Jobs, it is an attempt to convince consumers they need yet another gadget—one between their mobile phones and laptop computers.

The iPad is basically an iPhone with a bigger, badder HD screen and e-reader capability, but other than its (admittedly high) "cool factor," the gadget wasn't received as that revolutionary.

Well, that's until Jobs unveiled the ridiculously low price:

Yes, Apple's iPad is revolutionary–but mainly because it's cheap.

By offering the tablet computer for as low as $499, Apple has found a way to meet demand for low-priced laptops without a radical price cut on its Mac line. Yet its cheaper computer not only has all the utilitarian functions of a laptop, such as word processing and email, but enhanced entertainment capabilities as well. And it can run iPhone mobile applications.

The highest priced iPad will be only about $800, and that's pretty amazing.  How amazing, you ask?  Well, according to one tech investment website, the iPad's price announcement caused Apple's stock to stage a serious midday turnaround:

Strangely, during the course of the much-anticipated event, Apple’s stock went down, as observed by many. And then, Apple finally got around to talking about pricing.

Chief executive Steve Jobs took the stage, and wowed the crowd (and the world) by saying that the starting price for the iPad was a stunning $499.

Guess what happened next?

At the time of this writing, the stock spiked +3.61.

We wouldn’t be surprised to see it hit an all-time high today.

Jobs' price announcement happened around 2:20p EST, and look what happened immediately after that:

Pretty cool, huh?  Now, how do you think that Apple got the iPad's base price to be about half of its cheapest Mac laptop?  Well, assuming the iPad's anything like its little cousin the iPod, the answer is simple: free trade.  As Dan Ikenson and I discussed in our 2009 study (PDF):

A 2007 study published by the University of California–Irvine sought to determine “who captures value in a global innovation system” by disaggregating the components contained in an Apple iPod and determining the companies and countries involved in manufacturing a unit in China. The authors found that the components were produced in the United States, Japan, Singapore, Taiwan, Korea, and China by companies headquartered in the United States, Japan, Taiwan, and Korea. The total cost of producing the iPod (components plus labor) was estimated to be about $144. Most of the profits on the constituent components accrue to Japanese companies, who produce the most important and most expensive parts. Two U.S. and some other foreign components’ producers all capture small shares of the value. But the lion’s share of value accrues to Apple since iPods retail for $299 and the cost of production is $144 (at the time this article was written)....

Without access to assembly operations in lower-cost countries, the mass production and proliferation of iPods and similar devices likely would not have been possible. Instead of $299, iPods would cost perhaps $500 or more if they had to be produced entirely in the United States. At that price point, it is unlikely that sales of iPods would ever have been as successful as they have been, and the need for all of those American jobs in engineering, logistics, transportation, advertising, web design, and retailing might never have materialized.

(This awesome video by ReasonTV makes a similar - yet bikini-clad - argument.)

Now, a full "teardown" of the iPad isn't available yet (of course) and won't be for a while, but based on the limited information that I could find, it appears that Apple's iPad emerged from much the same global sourcing and development strategy as the ubiquitous iPod.  Taiwanese manufacturers produced the iPad's batteries, display panels and other guts (note: not a technical term).  A US semiconductor design firm, PA Semi (purchased by Apple in 2008) designed the iPad's revolutionary A4 processor, and had it manufactured (or "fabbed," as the techies say) in either Korea or Texas (nobody's quite sure of that yet).  Korean manufacturers are also rumored to have produced a few other component parts, and all of them were assembled in China.

So again we see the same Apple recipe: (i) research, development, design, marketing and some manufacturing in the United States; (ii) component production in Taiwan and other foreign countries; (iii) and final assembly in China.

The result?  A hyper-competitively priced product that's destined to excite consumers and further enrich Apple, its American employees, and, as today's stock boost makes quite clear, its many happy shareholders.

Lawmakers Urge Review of Tire Tariffs, But Why Stop There?

From today's headlines comes welcome news that two US congressmen - one Republican and one Democrat - have called upon the Obama administration to analyze the effects of President Obama's bad decision to slap prohibitive tariffs on imports of Chinese tires under Section 421 of US Trade Law:

In a letter to U.S. Trade Representative (USTR) Ron Kirk, two congressmen demanded that the Obama administration establish a comprehensive system of monitoring the economic effects of the special tariffs on Chinese passenger and light truck tires levied last Sept. 11.

“It is…essential that the ITC (International Trade Commission) and the administration monitor the effects of the tariff not only on the domestic tire producers, but also on other domestic sectors, including distribution and retail, and on consumers,” said Reps. Dan Boren, D-Okla., and Kevin Brady, R-Texas, in their Jan. 21 letter to Mr. Kirk.

The congressmen said they had not heard of any jobs created by the tariffs, which amount to 35 percent in their first year on top of the normal 4-percent tariffs on tire imports from China. But they had heard of significant increases on tire prices as well as job losses in the tire distribution and retail sectors, they said.

Whatever system the administration puts in place to monitor the effects of the tire tariffs must consider not only employment at U.S. tire manufacturing plants, but also such items as retail price trends for domestic and foreign tires; changes in tire imports from countries other than China; and changes in tire retail and distribution employment, the congressmen said.

In a press release, the Tire Industry Association (TIA)—which opposes the tariffs—praised the Boren-Brady letter.

This is the first time the U.S. has implemented a trade remedy under Section 421 of the Trade Act, said Paul Fiore, TIA director of government and business affairs. “The United Steelworkers (USW) made some very far-reaching claims concerning this tariff, and the Office of the USTR should be diligent in setting up a comprehensive, verifiable system for quantifying the effects of this tariff,” Mr. Fiore said....

I've already documented most of the harmful unintended consequences of the Section 421 decision - namely, higher prices, supply shortages, trade diversion and no increased domestic production or employment - so an official government report on the subject would be an awesome rebuke of the President's tire protectionism.  It's also really great to see government officials - in both parties, no less! - raise such rarely-considered issues with the White House.

But why stop with just the Section 421 decision?

As I've noted before, US trade policy is chock-full of high tariffs and quotas imposed on everyday necessities like food, clothing and shelter in order to line the pockets of politically-connected domestic industries.  And the United States International Trade Commission (ITC) has already shown that these "tariff peaks" and other barriers dramatically increase domestic prices and thus act as a hidden tax that disproportionately harms lower-income American families.  Moreover, there are literally hundreds of different anti-dumping duties and countervailing duties on a wide range of products, thus raising domestic prices in order to assist the insular US industries that petitioned for import protection.  All of these tariffs and duties remain in place, yet never once has anyone in the Government examined their effects on third-country imports or on American consumers, importers, retailers, downstream users and their employees.  The "Brady-Boren" report would do just that for the US tire market, and it thus would shed some much-needed light on protectionism's unreported victims.

As Dan Ikenson and I explained in a paper last year, this kind of transparency is absolutely critical to countering the protectionist myths that permeate today's trade debate:

President Obama should announce something like a “Trade Transparency Initiative,” with the goal of publishing independent findings about the effects of trade and trade barriers on the U.S. economy and its constituent elements without political interference.... The ITC, or some other agency that is sufficiently shielded from political influence, should be allowed to fulfill its statutory authority to conduct independent research and publish findings on matters related to trade, and the public should be directed to those findings as objective sources of analysis.  An independent process like that—which is properly publicized by a president promoting change—would probably help disentangle trade from the truth-suppressing effects of politics and help fulfill the president’s goal of having a more transparent and open government.

Perhaps the Obama administration’s first study under the Trade Transparency Initiative should focus on the U.S. Tariff Schedule. The report would likely reveal that U.S. tariffs are highest on shoes, clothing, clothing inputs (like fabric, yarn, and cotton), food (including fruits and vegetables), and food ingredients (like sugar, wheat, and soybean). In conjunction with trade remedy duties on imported steel, lumber, and cement, U.S. tariffs and quotas on food and clothing ensure that the prices of life’s most basic necessities (food, clothing, and shelter) are artificially inflated by government policies. And since lower-income Americans spend a higher proportion of their budgets on life’s necessities, these trade policies amount to the kind of regressive tax that Democrats profess to abhor....

The unbiased empirical results of the Trade Transparency Initiative would give President Obama the ammunition he will need to put congressional protectionists of both parties where they rightfully belong—on the permanent defensive.

Unfortunately, this past year has taught us a lot about the White House's priorities, and trade transparency doesn't - to put it nicely - appear to be high on the President's list.  Thus, while I applaud Congressmen Brady and Boren for their attempts to unearth the Section 421 decision's dirty little secrets, I seriously doubt that a Trade Transparency Initiative - on tires or any other protected product - is coming anytime soon.

Collin Peterson: Wheat Leader, Subsidy Lover

Congratulations to House Agriculture Committee Chairman Collin Peterson (D-MN) for being named the Wheat Leader of the Year:

"Chairman Peterson never fails to go to bat for agriculture when push really comes to shove," said Karl Scronce, [National Association of Wheat Growers] president and a wheat producer from Oregon. "We are proud to name him our Wheat Leader twice in just three years because he really does embody the agriculture voice on the Hill--and that's a voice that's desperately needed."

Yes, desperately needed - by subsidy-loving, WTO-disregarding American agribusiness.  Indeed, Cato's Sallie James today provides a great rundown of Peterson's latest pro-subsidy, anti-trade statements, several of which were made upon receiving his big wheat award (the Golden Kernel?). 

Given our Dear Wheat Leader's critical role in shaping congressional agriculture policy, James' analysis should put an end to any naiveoptimistic thoughts out there that President Obama's newfound "fiscal discipline" could translate into reform of bloated, WTO-illegal American farm subsidy programs in 2010.  Any hope of preemptively resolving WTO disputes over US agriculture subsidies should be similarly chucked out the window.  (Of course, readers of this blog gave up hope of any near-term reforms weeks ago.)

You know, maybe being Wheat Leader ain't all it's, ahem, cracked up to be.

Waiting for B.O.

Foreign criticism of US trade (non)policy continues to mount.  This time, we hear from Jean-Daniel Gerber, Swiss State Secretary for Economic Affairs, who writes in today's WSJ Europe a depressing letter to President Obama beggingadvising the US to get back in the global trade game. The whole op-ed is worth reading, but here's my favorite passage:

In previous multilateral trade rounds, the U.S. took the lead and was an active deal maker. Without its strong involvement, none of the eight previous rounds of trade negotiations would have been concluded successfully. The U.S. co-initiated the Doha Round shortly after the terror attacks of 9/11, and passed legislation granting fast-track negotiating authority to the American president. Washington assumed its responsibility, and aggressively pushed forward the negotiating process. Today, the situation has changed: The White House's special negotiating authority has now elapsed, and the U.S. seems to have other priorities.

The world knows that the U.S. faces significant domestic issues—its budget deficit, foreign and domestic debt, its real estate crisis, its health and tax reforms. Nonetheless, if the U.S. wants to retain its status as the world's most important economic power, it must put trade back at the top of its agenda.

Some time ago, the Obama Administration announced that it would forge a new foreign trade strategy. But its trading partners are still waiting. We speculate on what such a policy would look like. We hope it would stress the unequivocal commitment to the multilateral, rules-based system of the WTO; that it would show U.S. willingness to enter the endgame of the Doha talks; and that it would fully assume American leadership on such crucial debates as industrial goods, agriculture, intellectual property rights, and trade facilitation. Without such a commitment, the multitude of ministerial declarations risk remaining hollow. Many countries, in all parts of the world, are waiting for a clear signal from President Obama in favor of trade liberalization. Concluding the Doha talks would benefit everyone....

Without American leadership, a conclusion of the Doha talks is not feasible. The world needs the U.S.'s active participation, and it needs it now. The first test will come in March, when trade negotiators are due to take stock of their progress since the 7th WTO Ministerial Conference in Geneva last December. This important step is a prerequisite for a successful conclusion of the Doha talks by the end of this year.

Everything that Mr. Gerber says is true, but he fails to consider - at least publicly - that maybe the Obama administration's trade inaction, particularly in the Doha Round, has little to do with an intense focus on America's "significant domestic issues" and much to do with a basic political decision to avoid upsetting its anti-trade base (and a majority of House Democrats) by pursuing an "aggressive" international trade agenda.  If the latter's correct, then no amount of history and logic is going to compel President Obama to act.

Then again, maybe Mr. Gerber's Swiss diplomacy simply prevents him from being so explicit.  I sure hope that's the case, and that he and the rest of the world are trying to use international political pressure - and good ol' fashioned public shaming - to prod the White House into moving on trade.   I doubt that such a  passive approach will be sufficient to counter the labor unions' (and congressional Democrats') Kung-fu deathgrip on US policy, and think that a more aggressive, competitive approach is necessary (see, e.g., the EU-Korea FTA).  But regardless, the passive route is certainly better than the alternative that Gerber lays out in his op-ed: the world naively and quietly waiting and wishing for a US trade policy renaissance that might never come.

(At least until 2012.)

Hide and Seek Protectionism, Ctd.

Last month, I explained how the United States' new legal strategy of "settling" WTO challenges to its "zeroing" methodology appeared to be a sneaky way to maintain a protectionist policy (zeroing has been repeatedly ruled inconsistent with WTO rules) while avoiding lengthy, costly WTO litigation:

[D]omestic manufacturers - particularly the powerful and well-connected US steel industry - believe that the US zeroing practice is still an effective tool to discourage imports, and thus they still intensely lobby their congressional allies to fight for zeroing, despite the long string of adverse WTO rulings. The Obama Administration, as it has with myriad other bouts of congressional protectionism (e.g., Mexican trucks or Buy American), has acquiesced on the issue and not pushed the Department of Commerce to stop zeroing, so the WTO cases keep coming (and coming and coming). And the protectionism continues.

Moreover, the administration might actually side with the congressmen and view the prior adverse WTO decisions as wrong (notice how the US submission doesn't say that the practice itself is WTO-illegal but merely cites the adverse Appellate Body decision - lawyer nuance!). But at this point, the only hope for reviving zeroing is through express validation in a revised WTO Antidumping Agreement. Thus, USTR views the endless WTO cases as perhaps the only way to keep the zeroing issue ripe for negotiation in the WTO's Doha Round negotiations on Rules (which would result in, among other things, a new AD Agreement). But because the Doha negotiations are stalled (at best), and because the outcome of any new WTO challenge to the US zeroing practice is pretty much a slam-dunk against the US, they simply accept their fault, and amend the isolated, challenged instance, rather than actually change the broader zeroing policy. Thus, they keep most of the protectionism in place, placate domestic industries and their political muscle, and live to fight another day at the WTO - all the while avoiding lengthy litigation and WTO-sanctioned retaliation (not to mention those brutal copying costs!).

A WTO decision issued Friday on US anti-dumping measures on Thai plastic bags, first pointed out by the International Economic Law and Policy Blog, makes this "hide and seek" strategy even clearer.  It turns out that the United States and Thailand worked out a settlement deal in advance of the panel decision, which inevitably sided with Thailand (the US admitted fault in its first submission):

3. The United States will not contest Thailand's claim that the measures identified in the attached request for the establishment of a panel are inconsistent with the first sentence of Article 2.4.2 of the Anti-Dumping Agreement on the grounds stated in United States - Final Dumping Determination on Softwood Lumber from Canada, WT/DS264/AB/R (adopted 31 August 2004)....

5. Provided that the panel's finding is limited to a finding that the measures identified in the attached request for the establishment of a panel are inconsistent with the first sentence of Article 2.4.2 of the Anti-Dumping Agreement, the parties agree that, pursuant to Article 21.3(b) of the DSU, the reasonable period of time for bringing each such measure into conformity with the Anti-Dumping Agreement will be six months, beginning on the date on which the DSB adopts the report of the panel.

The IELP blog summarized these paragraphs well: "Thus, the U.S. would not contest the claim, the panel would find a violation, the U.S. would not appeal (presumably), and the implementation period would be six months."  The only thing left out was "...and the United States would continue screwing all other foreign respondents that haven't challenged the illegal US zeroing practice."  (Although they'd probably have been classier about it.)

Korea just recently filed a WTO case against US zeroing in anti-dumping investigations of stainless steel plate in coils, stainless steel sheet and strip in coils, and diamond sawblades.  And it's all but certain that the United States will continue its sneaky zeroing strategy in that case.

The only uncertain thing is what country will be the next to bring a challenge.

2010 Predictions, Ctd. (Subsidy Edition)

Looks like one of my 2010 predictions is shaping up quite, ahem, nicely.  As you may recall, I predicted that 2010 would see a significant increase in anti-subsidy cases because of, among other things, "the massive proliferation of government subsidies in 2009 and increased tradeflows in 2010."  Well, according to Reuters, conflict appears to be brewing between developed and developing countries over this very issue:

Rich-country members of the World Trade Organisation blocked calls on Friday by developing countries to examine the possible protectionist impact of bailouts and financial stimulus packages.

Developing countries believe bailouts can have an unfair protectionist effect by helping industries in states that can afford them; typically high-income countries and some major emerging countries like China.

At a meeting of the WTO's trade policy review body, the United States and Japan blocked proposals for future WTO analyses of trade measures to cover fiscal measures such as bailouts, according to an official who attended the meeting.

The European Union did not reject the proposal completely but said it required further study so it could be conducted in a realistic and pragmatic manner.

The chairman of the WTO, Hungary's ambassador to the body Istvan Major, said he would continue discussions on this issue, but did not set a timeframe for further moves.

The WTO's regular protectionism reports, introduced in response to the financial crisis, have focused on conventional trade measures such as tariff increases and anti-dumping duties.

The call to include bailouts and stimulus packages was led by Argentina, backed by Ecuador, Cuba, Brazil, India and China.

Adding such measures to the WTO's "protectionism list" is a very good idea - subsidies can distort domestic and foreign markets just as much as tariffs can.  So it's surprising that the United States would block such a move, isn't it?  (Note: not actually surprising at all.)  Regardless, it's clear that a lot of countries are focusing on the potential economic disruption caused by all of the subsidies, bailouts, "stimuli" and rescue packages unleashed in 2009.  And if tradeflows do indeed continue to increase in 2010, domestic countervailing duty cases, or WTO subsidy challenges, might not be far behind.

Don't say I didn't warn you.

Could the WTO Tear Down China's Great Firewall?

Reuters reports that the United States Trade Representative (USTR) is "mulling" (great word!) a challenge to China's internet restrictions - the humorously-named-but-not-actually-funny-at-all "Great Firewall of China":

U.S. trade officials have asked for more information as they weigh whether to pursue a case against Chinese Internet restrictions that impede Google and other companies, an attorney for a U.S. free speech group said on Friday.

"They've asked us for more detail about it. We are trying to put that together right now," said Gilbert Kaplan, a partner at King and Spalding, which represents the First Amendment Coalition, a nonprofit advocacy group...

The U.S. free speech group, known then as the California First Amendment Coalition, first approached the U.S. Trade Representative's office in late 2007 with the idea of challenging China's barriers to Internet access at the World Trade Organization.

It gave the trade office, run at the time by the Republican administration of former President George W. Bush, "a very extensive white paper, or memo, describing the WTO violations that the 'Great Firewall' caused, and that were actionable in our view under the WTO, and a request that USTR begin a WTO case against China regarding the Firewall," Kaplan said.

Although no case was filed, Kaplan said U.S. trade officials never ruled out that possibility.

"We're continuing to request that they start that case. That dialogue is continuing," Kaplan said.

A spokeswoman for the U.S. trade representative's office had no immediate comment.

A study by the Brussels-based think tank ECIPE in November called government censorship the biggest trade barrier that Internet companies face.

Many countries censor the Internet for political or moral reasons. China has developed one of the most pervasive methods. In Cuba, all unauthorized surfing is illegal, while many Western countries limit access to child porn sites.

A WTO case could help "clarify the circumstances in which different forms of censorship are WTO-consistent," ECIPE said....

China agreed as part of its commitments to join the WTO in 2001 that U.S. service companies would have the same access in China as their own companies.

"We believe that applies to the Internet and Internet companies," Kaplan said.

China's web restrictions in effect force U.S. Internet companies to "put servers and hardware in China, rather than doing what they do everywhere else in the world, which is use their U.S. base," Kaplan said.

"If we try to serve the Chinese market from the U.S. or anywhere outside the Great Firewall, our Internet access is so slow that no one will use our sites," he said.

WTO rules also require countries to follow transparent and understandable procedures, he said.

Instead, China "is very randomly stopping our Internet companies and our Internet access with no prior notice and no set of regulations," Kaplan said.

The free speech group's 2007 white paper is here, and they state that China's internet restrictions violate a whole host of WTO rules, including GATT Article III (national treatment), China's services commitments under the GATS and China's WTO Accession Protocol. 

There's certainly not enough information in the white paper to judge whether these allegations are really solid, but even if they are, there are several reasons to doubt that USTR will end up bringing a WTO complaint against the Great Firewall:

• From a basic legal perspective, the white paper does not preemptively address or rebut China's inevitable claim that, even if the Great Firewall violates some WTO rules (and I'm not saying it does or doesn't), it's still permissible under the general exceptions of GATT Article XX - particularly GATT Article XX(a) which exempts from WTO disciplines "illegal" trade measures that are "necessary to protect public morals."  The standards for applying any Art. XX exception are very high, but one must wonder whether a WTO panel or the Appellate Body would really be willing to rule against China's Art. XX(a) claims, regardless of their strength or weakness.  (This is especially true considering that the WTO implicitly advocated deference to countries Art. XX defenses with respect to potentially protectionist climate change regulations.)

• I also wonder whether USTR and the White House will be willing to bring the case given the potentially serious diplomatic concerns surrounding it.  This is one hot diplomatic potato, and China would not take kindly to such a public and direct challenge to its sovereignty.  Instead, might the White House prefer to resolve Google's complaints through quiet diplomacy rather than WTO litigation?  A case like this would no doubt dominate the headlines and could force China's discolsure of sensitive information, thus potentially salting the already-strained US-China relationship.  As such, the diplomatic route appears more likely.

• Finally, I question whether China would comply with any WTO ruling against the Great Firewall, and wonder whether the United States really wants to deal with the damaging repercussions of any such non-compliance for a WTO that's already reeling from a messy and comatose Doha negotiating round.  As the US is well-aware (see, e.g., internet gambling or cotton subsidies), compliance with adverse WTO rulings is discretionary (Members can choose to be hit with retaliatory tariffs instead), so the chances that China accepts a WTO ruling and changes its internet systems seem slim.  Non-compliance seems more likely, and that would open up yet another can of worms.  Indeed, I don't know that China would even comply with the WTO's informational requests on this issue (it often refuses in US trade litigation).  Would the United States really want to instigate a case that it knows China will never abide by?  Would that really be good for the multilateral trading system?  It seems to me that the answer to both of these is "no."

Then again, USTR chose the passive route in 2007 - for either diplomatic or legal reasons - and look where that got us.  So maybe this White House thinks that the risks are worth it.  I doubt it, but I'm obviously not at USTR or advising the White House, and I definitely haven't analyzed the legality very closely.  So maybe I'm missing the airtight legal arguments or some important diplomatic angles.  Only time will tell, I guess.

Needless to say, this is one potential case that I'll definitely be watching.  And for once, I'll probably not be the only person (or one of the only ten people) keeping an eye out.

Final note: I should be clear here that I'm in no way opposing a WTO case against, or any other legitimate challenge to, Chinese censorship.  It would be a fantastic thing for liberty - and the Chinese citizenry! - if the US could somehow find a "soft" way to reduce China's strict informational controls.  I just think that USTR will end up passing on this case, and that this announcement is more a PR/diplomacy move than realistic challenge.  But, hey, maybe I'm wrong.  Wouldn't be the first time.

US Trade Policy Stinks; So Now What?

Two days ago, I lamented the "startling incoherence" of current US trade and economic policy, concluding:

The President and his economic team speak of expanding exports, particularly SME exports, yet they pursue policies that expressly thwart those goals.  Their USTR inaugurates a bridge between the US and Mexico, while expressly preventing Mexican trucks from traveling over it.

And American small business owners (and the rest of us) are left wondering, "what the....?"

This loud "harumpf" prompted a thought-provoking response over at my Facebook page from a friend/colleague who said, and I paraphrase, that because it's becoming increasingly clear that US businesses cannot count on the current administration for top-down, traditional leadership on trade (i.e., FTAs, WTO negotiations, etc.), "we should be looking for alternative ways of pursuing... economic engagement, particularly with trading partners in the developing world where economic growth is continuing."

I couldn't agree more, but this alternative approach, of course, begs the question: "how can businesses enhance economic engagement without the aggressive, and economically rational, support of the White House and Congress?"  Afterall, it's the White House that negotiates trade agreements, and it's the Congress that approves them.  So what's a private sector guy (or gal) to do?

It's a great question, and obvious answers are hard to come by.  But fortunately for me, the World Bank just released a new study that provides one good response: logistics (aka "trade facilitation").  The Bank's Logistics Performance Index (LPI) measures the ease of shipping and trade logistics on a national basis, and thus provides a way for us to evaluate countries' performance in trade logistics as well as to identify areas for future improvement (the big winner: Germany).  The study defines logistics as "an array of essential activities—from transport, warehousing, cargo consolidation, and border clearance to incountry distribution and payment systems—involving a variety of public and private agents," and finds that:

A competitive network of global logistics is the backbone of international trade. Unfortunately, many developing countries have not yet benefited from the productivity gains of logistics modernization and internationalization implemented over the last 20 years by advanced economies.

Improving logistics performance has become an important development policy objective in recent years because logistics have a major impact on economic activity.  Evidence from the 2007 and 2010 LPIs indicates that, for countries at the same level of per capita income, those with the best logistics performance experience additional growth: 1 percent in gross domestic product and 2 percent in trade.

In other words, logistics improvements alone can help poorer countries develop faster and also dramatically increase trade.  Even shorter: richer customers and quicker routes to them.  Indeed, in announcing the 2010 LPI, World Bank Trade Department Director Bernard Hoekman stated, “Our research shows that increasing logistics performance in low-income countries to the middle-income average could boost trade by around 15 per cent and benefit all firms and consumers through lower prices and better quality services.”   

Impressive.  And not an FTA, WTO or international bureaucrat in sight!

Obviously, the Bank intends its report to herald a call for greater government investment in logistics, and the World Bank's own Trade Facilitation Facility, launched in April 2009, was created for this very purpose.  But there's no reason why private business groups can't get into the act by, for example--

1. volunteering to help develop logistics best practices (including those based on and incorporating the Revised Kyoto Convention on the simplification and harmonization of global customs procedures);
2. providing private capital for basic logistics improvements like customs software and equipment or port/road construction; or 
3. establishing private logistics services companies in developing countries that lack them. 

Indeed, given some of the Bank's less-than-stellar results and the US government's newfound aversion to realistic free trade policies, a private approach is probably preferable to a Bank-directed or government one.  And if the LPI's findings are even remotely correct, the potential returns on private logistics investment - significant improvements in economic development and trade - could be worth the costs to US and other companies with a big stake in increased economic engagement with the developing world, i.e., trade in their goods and services.  (It might even attract some smart entrepreneurs interested in organizing and guiding those companies' investments.)  These private parties could use the LPI and other studies on trade facilitation as a roadmap for their work.  Many of the countries that jumped in the LPI rankings are developing nations that introduced reforms based on the 2007 LPI report findings, and the report's authors found that other developing countries that improve their trade logistics systems stand to make similar gains.  So we have already tangible benchmarks and real results, not just theory.

And again, the US government's involvement is completely unnecessary (at least until the new "logistics investment fund" is nationalized, of course - I kid, I kid.).

So maybe instead of paying lobbyists millions (and millions) of dollars to advocate the negotiation and passage of trade agreements before a totally disinterested Obama administration and US Congress, US (and foreign) companies should pool those millions and spend them on targeted logistics investments in developing countries desperately in need of - and willing to accept - them.

At this point, it's not like the return on their investment could be any worse than it's been on FTA/Doha advocacy, now could it?

(Note: I'm not the first guy to suggest logistics reforms as an alternative to "traditional" free trade moves.  Cato's Dan Ikenson advocated trade facilitation instead of the WTO's Doha Round back in 2007.  But he didn't focus on how the private sector could get involved, and, of course, had a US president far more interested in expanding trade than our current White House resident.  The 2010 LPI, however, does provide more support for Dan's original conclusions.)

Carbon Tariffs Update: EU Meetings Produce Nothing; UN Deadline "Softens"

The latest EU meeting of climate ministers produced no new mandates and demonstrated a logjam over emissions reductions targets and border measures. This turn of events should come as little surprise to those of us used to watching the glacial pace of EU policymaking, but it's still worth noting because the last time we checked in with EU ministers, they were loudly and angrily squawking about the collapse of the UN Climate Conference in Copenhagen. Well, they're still squawking, but so far the ministers' frustrations have not resulted in a new push for carbon tariffs (aka "border adjustment measures") on imports from countries that have less severe climate change mitigation policies. Here's The Economic Times with the "news":

The European Union failed to arrive at a consensus on the quantum of its emission reduction commitment. At the meeting of EU ministers in Spain, there was disagreement over whether the 27-member bloc should commit to cutting its emissions by 30% by 2020 from its 1990 levels.

While Britain, France and Germany have called for scaling up the bloc’s commitment to 30%, the move was opposed by Poland, Hungary and Italy. Ambassadors from EU members will continue discussions on emission target in Brussels on Wednesday.

The reduction of greenhouse gas emissions by 30% is conditional on “comparable” offers made by other rich nations and “economically more advanced developing countries contribute adequately according to their responsibilities and respective capabilities”.

Sidelined at the Copenhagen climate conference held in December, the EU is attempting to regain its influence in the global climate debate. The bloc, which has been the most pro-active, seeks to pressure other nations to increase the level of ambitions by setting a higher target for itself. Those supporting a higher target like the UK have argued that the offer is conditional on other developed countries follow suit. In doing so, the EU hopes to reassert its influence in the climate debate.

There has been some heartburn within the EU over the way the US, which has been rather unambitious in its climate efforts, and the world’s target emitter China took over the Copenhagen summit. Germany, another proponent of a higher conditional commitment, argued that a 20% reduction was no longer ambitious, and that the European economies could afford to take on a 30% reduction. However, in Seville, Poland, Italy and Hungary wanted to omit any reference to the 30% target.

Going by the offers made by developed countries in Copenhagen, the reduction in emissions would be about 13% on average in 2020 from 1990 levels. Given this, it is being argued that a commitment to a deeper cut by the EU cannot be justified. The 20% reduction goal is underpinned by recent legislation that tightens carbon dioxide caps on energy and manufacturing companies in Europe’s emissions-trading system and that requires each EU nation to limit discharges from industries outside the programme. A move towards a deeper cut in emissions would mean a tightening of curbs in the emissions trading programme.

France, which is also pushing for a higher commitment, would like the EU to consider tariffs on imports of manufactured goods from countries with weaker climate-protection rules as a way to protect European industry from unfair competition. France has suggested that the 30% reduction target could require a carbon inclusion mechanism, to protect the European industry.

The northern member states are sceptical about a trade mechanism that included the price of carbon dioxide. However, the failure by other developed countries to match a 30% reduction in emissions by the European Union could once again open the door to considering protecting European industry with measures such as taxes on products imported from nations that block adoption of binding reduction targets.

The EU deadlock continued today, highlighting a growing rift between EU members about what to do on climate change, particularly where it looks increasingly likely that the US won't pass any sort of climate change bill in 2010.

Meanwhile, the UN announced today that the January 31 deadline established in Copenhagen for countries to announce their carbon emissions targets is no longer, well, a real deadline:

The UN has dropped the 31 January deadline by which time all countries were expected to officially state their emission reduction targets or list the actions they planned to take to counter climate change.

Yvo de Boer, UN climate change chief, today changed the original date set at last month's fractious Copenhagen climate summit, saying that it was now a "soft" deadline, which countries could sign up to when they chose. "I do not expect everyone to meet the deadline. Countries are not being asked if they want to adhere… but to indicate if they want to be associated [with the Copenhagen accord].

So far, only 20 of 192 countries have announced their climate change plans. That's not good, and it's far from certain whether 2010 will produce anything tangible on the multilateral front, or whether everything will get punted to Mexico City at the end of the year.

Regardless, I'll certainly be here keeping an eye out for sneaky (likely French) protectionists dressed in pretty green clothing.

Quote of the Day

Comes from Richard Barley of the Wall Street Journal:

[W]hy should China agree to make itself less competitive for the benefit of high-deficit nations? [Bank of England Governor Mervyn] King argues that the crisis was a result of the inability to cope with huge capital flows from China, India and elsewhere as a result of globalization. But the other key factor, surely, was monetary policy in low-saving nations like the U.K. and U.S. that encouraged asset-price inflation and risk-taking. A tightening of policy earlier would no doubt have damaged these economies, but might have occurred before imbalances grew to the dizzying proportions they did. There is no law of economics that requires already indebted nations to keep borrowing and consuming.

Indeed. As I've said a few times, China's currency and trade policies can only contribute to (allegedly) problematic "global imbalances" because the US, UK and other developed governments can't stop spending, printing and borrowing money. If they could stop, then what China did wouldn't matter too much. But of course, American and British leaders can't impose any semblance of fiscal restraint - now or ever - so they blame China, much like a compulsive gambler blames his bookie.

Are you listening, Mr. Krugman?

The Startling Incoherence of US Trade and Economic Policy

I've written a few times about how 2009 exposed inconsistencies in the Obama administration's trade and economic policies, but I'm not sure that anything compares to the last few days.  Over that time, a confluence of events provides us with two crystal clear examples of a White House that either has no idea what it's doing on trade, or simply doesn't care.  Allow me to explain.

(1) US Policy on Exports and Small and Medium-sized Enterprises (SMEs). Today the non-partisan US International Trade Commission (ITC) released Small and Medium Sized Enterprises: Overview of Participation in U.S. Exports, which found:

U.S. small and medium-sized enterprises (SMEs) accounted for about 30 percent of known U.S. merchandise exports between 1997 and 2007....

The most heavily exported goods were computer and electronic products, machinery, and chemicals, with the biggest share of merchandise exports going to Canada and Mexico, according to the report.

The USITC, an independent, nonpartisan, factfinding federal agency, completed the report at the request of the U.S. Trade Representative. As requested, the USITC provided an overview of SME characteristics, including their role in generating domestic jobs and economic activity; described the value of overall SME exports; listed the principal products, industries, and destination markets involved; and highlighted data gaps that inhibit a complete understanding of SMEs' role in U.S. exports. Highlights of the report follow.

* SMEs accounted for approximately 30 percent of known U.S. merchandise exports between 1997 and 2007 and about half of private nonagricultural gross domestic product (GDP) between 1998 and 2004.

* Top merchandise export categories for SMEs in 2007 were electrical products, machinery, and chemicals; these goods were primarily exported to Canada and Mexico. Wood products and apparel and accessories were the sectors with the highest concentrations of SME exports.

* Canada and Mexico were the largest destination markets for U.S. merchandise exports from firms of all sizes, including SMEs, in 2007.

* Much of the growth in SME merchandise exports between 1997 and 2007 was attributable to an increase in the number of net new market entrants SMEs that were new to exporting. Export growth from large firms, by contrast, resulted almost exclusively from increases in the value of exports by existing firms.

* Judging by patterns of cross-border exports and the operations of U.S. affiliates abroad, it is likely that Canada and the United Kingdom were among the largest markets for U.S. SMEs' services exports in two important fields (finance/insurance and professional services) in 2006-2008....

The full text of the study is available here (PDF).  The whole thing is worth a skim, but most interesting for the purposes of this blog post are the top foreign markets for American SME goods.  As mentioned, NAFTA partners Canada and Mexico are the top destinations (21.8% of all SME exports), and the report also shows that the other leading markets are (in reverse order) Malaysia, Israel, Italy, Singapore, Australia, India, Switzerland, France, Brazil, Belgium, Taiwan, Hong Kong, Netherlands, Korea, Germany, United Kingdom, Japan and China. Thus, of the top 20 SME export destinations, five are current FTA partners (Canada, Mexico, Australia, Singapore, Israel), one has a completed FTA (Korea), and one a suspended FTA (Malaysia).  The rest are relatively rich (Europeans and Japan) or huge (China, India and Brazil) markets.

Two days after the ITC report's release, the Office of the United States Trade Representative - which requested the ITC study - will hold a big dog-and-pony show here in DC in order to show that "USTR is committed to supporting economic recovery through export-oriented growth... [and] works to make trade policy work for America's small- and medium-sized businesses - America's biggest job creators and a wellspring of export potential."  This forum reflects, as I've noted repeatedly, a key component of the President's economic recovery strategy: increasing US exports, especially by SMEs.

Now, I've questioned the likelihood of an export-based recovery, but let's assume for now that the strategy is sound.  What has the White House actually done to push this strategy, other than hold on a forum on SMEs and exports?  I mean, we have a new ITC study showing that SMEs ship disproportionately to US FTA partners, and a White House strategy to increase SME (and all other) exports, yet the White House nonsensically refuses to advance pending FTAs with Panama, Colombia and South Korea (already one of the SMEs top export markets).  Even worse, the White House has openly admitted that it will not soon resolve antagonistic disputes (Buy American and Mexican trucks) with the top two purchasers of SME exports in Canada and Mexico.  Indeed, because of the trucking dispute, US exports actually face $2.4 billion in Mexican retaliatory sanctions.

How does this make any sense at all?  The contradiction between pro-export, pro-SME rhetoric and trade obstructionist reality is simply stunning.  (Except from the most basic - and cynical - political perspective, of course.)

(2) The NAFTA Bridge to Nowhere.  On a more comical level is the joint US-Mexico ceremony last week opening the first "international bridge" between the two nations in ten years. Here's the AP with the news:

Mexican President Felipe Calderon and the U.S. trade representative have inaugurated a new bridge on the U.S.-Mexico border, the first new land port of entry on the southern U.S. border in 10 years....

"It's the bridges that unite the people and elevate the competitiveness of economies," Calderon said.

The new bridge route, three miles west of the existing Hidalgo-Reynosa International Bridge, bypasses downtown Reynosa, and is expected to cut about 30 minutes off the drive to Monterrey.

The route runs 3.2 miles (5.1 kilometers) between the U.S. and Mexican ports of entry and it is open to noncommercial traffic only.

U.S. Rep. Henry Cuellar of Laredo, Texas, heralded the bridge as an example of efforts to ease legal movement on the border and Calderon said commerce would help build the economy.

"The best opportunity we have to create jobs on both sides of the border is to strengthen ties between Mexico and the United States," Calderon said.

U.S. Trade Representative Ronald Kirk called the bridge opening "a potent symbol of our connectedness."

Unfortunately for US and Mexican exporters, the bridge can be little more than a "symbol" of "economic competitiveness" for two very basic reasons: (i) it's for non-commercial use only; and (ii) even if commercial trucks were allowed on the bridge, they couldn't pass over it because the White House has refused to allow Mexican trucks on US roads - in direct violation of NAFTA. So here we have the USTR lauding the opening of a bridge that will do almost nothing to, you know, actually increase trade between the United States and one of its biggest trading partners (and SMEs second largest export market).

You cannot make this stuff up. Seriously.

Sadly, these contradictions reflect the current state of US trade and economic policy. The President and his economic team speak of expanding exports, particularly SME exports, yet they pursue policies that expressly thwart those goals. Their USTR inaugurates a bridge between the US and Mexico, while expressly preventing Mexican trucks from traveling over it.

And American small business owners (and the rest of us) are left wondering, "what the....?"

Independents' Day

Congratulations, Scott Brown - Republican US Senator-elect for the Commonwealth of Massachusetts.

I repeat: Republican US Senator-elect to the Commonwealth of Massachusetts.

Wow.

With Independent voters (aka "unenrolled") in Massachusetts officially outnumbering Democrats and Republicans by large margins, this was always their race to decide, despite the state's long, long tradition of Democratic dominance.  And boy, did they decide.

Loudly.

Let Freedom Ring

Obama Gets a "B" on Trade

From the anti-trade crowd. That sounds about right.

I guess the professional protectionists would only give the big guy an "A" if he erected a giant wall around the United States and then set all of our trade agreements on fire during a prime-time presser. Dare to dream!

A Pattern Emerges

As you may recall, the Democrat Party during the special congressional election in New York's 23rd district grew desperate and ran a standard fearmongering ad accusing the conservative candidate, Doug Hoffman, of "shipping jobs overseas."  I crucified the protectionist ad here, and for good reason - literally every line was erroneous.  Well, it seems that when the going gets tough for Democrats, they turn to a time-tested classic: idiotic fearmongering protectionism:

Standard drivel, but only one problem: this time, the Democrats' little ad has drawn the ire of UPS, and the Party's being sued:

Shipping giant UPS isn’t amused by a Democratic Party campaign pamphlet attacking Republican Senate candidate Scott Brown that plays off the company’s slogan “What can Brown do for you?”

Atlanta-based United Parcel Service, known for its ubiquitous brown trucks, demanded yesterday that the Massachusetts Democratic Party, which is listed as paying for the pamphlet, stop distributing it.

The mailer asks “What can Brown do to you?” It shows Scott Brown dressed up as a UPS driver and says, “He can reward corporations that ship your job overseas just like George W. Bush.”

It’s unclear how many of the mailers had gone out.

“Our legal team sent the Massachusetts Democratic Party an e-mail today,” company spokeswoman Susan Rosenberg said yesterday. “As part of ongoing UPS brand protection, we asked that no further copies be distributed.”

As of late yesterday, Rosenberg said UPS had not received a response. The Massachusetts Democratic Party did not respond to a message left at its headquarters in Boston by the Herald.

Yeah, promoting protectionism by stealing the identity of a company that relies upon free trade is probably a horrid political strategy. (Although I can't say I'm surprised by such a move, considering Coakley's campaign is quickly becoming one of the worst.campaigns.ever.)

Unfortunately, I doubt that the UPS suit will do anything to discourage the Democrats' future use of their protectionist campaign playbook.

And that's a shame.

America's Edge

According to a great new article in today's WSJ, the US remains the world's leader - by significant margins - in science and innovation.  Other countries are making gains - a good thing for everyone - but the dire predictions that the United States will lose its innovative edge anytime soon appear to be overblown.  More on this later, but for now, enjoy:

The U.S. remains the world's science and technology leader, but other countries are gaining ground, the National Science Board said Friday in its biennial report on science and engineering.

The U.S. accounted for nearly a third of $1.1 trillion spent on research and development globally in 2007, minted more science and engineering doctorates than any other country, and led the world in innovative activity. Efforts by China and other developing Asian countries to boost their science and engineering capabilities are bearing fruit, however, and the gap between them and the U.S., though still wide, is narrowing.

For the 10 years ending in 2007, the most recent year for which the data were available, spending on research and development grew between 5% and 6% annually in the U.S., Japan and the European Union. Similar spending in India, South Korea and Taiwan grew an average 9% to 10% a year over the same period. In China, it averaged more than 20%.

The U.S. awarded 22,500 doctorates in natural sciences and engineering in 2007, but more than half of them were awarded to foreign nationals. Past experience suggests that rather than return to their native countries, many of those new Ph.D.s will stay in the U.S. The report noted that 60% of temporary visa holders who earned doctorates in science in engineering in 1997 were working in the U.S. in 2007. The National Science Board is the advisory body of the National Science Foundation, an independent U.S. government agency.

U.S. researchers published about a quarter of an estimated 760,000 research articles in peer-reviewed journals in 2008. Chinese researchers published 8% of the research articles, up from just 1% in 1988.

Despite China's strides, researchers in China accounted for only about 1% of U.S. patents granted in 2008. Despite Chinese government efforts, inventive activity in China "appears elusive, at least as indicated by patents filed in a major Western market," the report noted.

U.S.-based inventors accounted for 49% of patents granted, down from 55% in 1995.

Budget Gimmicks in a Trade Bill?

I fully admit that I'm not a tax/budget geek, but a tax provision slipped into a benign trade bill has set off my libertarian spidey-senses. BNA (subscription) explains:

Legislation (H.R. 4284) to extend the Generalized System of Preferences and the Andean Trade Preference Act, signed by the president Dec. 28, contains an offset that would increase 2014 estimated tax payments for corporations with at least $1 billion in assets in 2013.

The act (Pub. L. No. 111-124) increased by 1.5 percent the portion of corporate estimated tax payments due in July 2014 through September 2014.

It amended the Tax Increase Prevention and Reconciliation Act of 2005 to increase estimated tax payments for such corporations due in July, August, and September 2014 to 101.75 percent of what was otherwise due, according to the Congressional Research Service.

JCT estimated that the provision would increase revenues by $806 million in fiscal year 2014 and decrease revenues by $806 million in fiscal year 2015.

The measure passed the House Dec. 14 and the Senate Dec. 22, in both cases under a suspension of the rules by voice vote and unanimous consent, respectively.

The final law is here, and the legislative language is as follows:

SEC. 4. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.

The percentage under paragraph (1) of section 202(b) of the Corporate Estimated Tax Shift Act of 2009 in effect on the date of the enactment of this Act is increased by 1.5 percentage points.

The CBO scoring of the law is here. The CBO scoring matches the JCT estimate above, saying that this tax measure will goose federal revenues by $806 million in FY14, but immediately reduce them by the same amount in FY15.  So what gives?

I googled around and found only one analysis of the underlying "Corporate Estimated Tax Shift Act of 2009," from a random blog which calls the Act "good for the government, which extracts money from the business community sooner than planned."  So by increasing the percentages in the underlying Act, a random, non-germane provision of the GSP bill seems to extract even more money from big business "sooner than planned."

But why?  Normally, I'd just blow this minutia off, but considering the ridiculous budget gimmicks that the 111th Congress has attempted to pull off in order to secure its overreaching agenda, I'm calling "shenanigans."  So, any tax/budget specialists out there care to opine as to why the government is trying to squeeze out an extra 800 million at the end of FY14 instead of letting it go as planned into FY15?

Understanding the Trade Deficit 101

Often when reasonable free traders explain the strong, positive correlation between the US trade deficit and economic growth, an ill-intentioned or partially-informed skeptic will complain that the free traders' analysis must be wrong because the official calculation of GDP subtracts imports, and thus the trade deficit (i.e., more imports than exports) must be a "drag on economic growth."  This response is, as expected, completely wrong, but it's rare that we see a detailed explanation of why.  Fortunately for us, Cato's Dan Ikenson puts on his economist/accountant hat today and provides this full explanation in what must be one of the nerdiest blog posts in the history of the interwebs.

WARNING: Ikenson's analysis is really, really boring, so grab a cup of coffee before tackling it.  But because the trade deficit is perhaps the least understood and most demagogued of all trade issues, this information also really, really valuable.  So thanks, Dan.

You big geek.

A Good Day in the Fight against Green Protectionism

Several positive developments today in our quest against protectionism masquerading in green clothing:

(1) The EU's new trade chief sounds great.  Not only does Karel de Gucht oppose carbon tariffs out of practical and trade war concerns, but he also advocates a multilateral agreement to eliminate barriers to trade in environmental goods.  Of course, de Gucht doesn't really have a say on these issues, but it's still good to hear these things from a high-ranking EU official - particularly when some European leaders (*cough*Sarkozy*cough) are clamoring for green protectionism.

(2) American farmers are unanimously opposed to Cap and Trade and the EPA's regulation of greenhouse gases.  At the American Farm Bureau's annual meeting, delegates voted unanimously to "strongly oppose 'cap and trade proposals before Congress' and strongly support 'any legislative action that would suspend (the Environmental Protection Agency's) authority to regulate greenhouse gases under the Clean Air Act."  As you'll recall, both the House and Senate versions of Cap and Trade include carbon tariffs (aka "border adjustment measures"), and the EPA's new GHG authority hinted at import regulations, so opposition from a powerful group like the AFB is good news.  And for good measure, the AFB announcement even throws in a reference to ClimateGate.  Bravo, farmers. Bravo.

(3) The ITC struck down a ruling that Japanese wind turbines violated GE patents and thus should be banned from the US market.  Normally, I wouldn't get into the nitty-gritty of a case like this, but, as Law360 notes below, it involved billions of dollars in "green" products, a politically-connected plaintiff (GE), and had become highly politicized.  (Even Chuck Schumer makes an appearance!)   Thus, the case ended up smelling a lot more like potential eco-protectionism than your basic trade/IP litigation:

In a reversal of an administrative law judge's ruling, the U.S. International Trade Commission has terminated a Section 337 complaint filed by General Electric Co. against Mitsubishi Heavy Industries Ltd., finding no violation of GE patents by Mitsubishi wind turbine components.

The decision, handed down Friday, puts an end to an ITC dispute over designs for wind turbine technology, in which GE accused Tokyo-based Mitsubishi and subsidiaries Mitsubishi Power Systems Inc. and Mitsubishi Heavy Industries America Inc. of importing turbine parts that infringed three patents....

The ITC opened its investigation in March 2008, based on a complaint filed by GE alleging that Mitsubishi was importing and selling certain variable-speed wind turbines and components that infringed the '039 and '085 patents, as well as a third, U.S. Patent Number 7,321,221.

In August, the ITC ALJ issued a final initial determination affirming two 337 violations on the '039 and '985 patents and recommending limited exclusions barring the allegedly infringing products from entering the U.S.

However, an investigative attorney from the ITC Office of Unfair Import Investigations disputed the ALJ decision, questioning particular infringement findings on patent-specific claims, as well as general concerns about GE's fulfillment of the technical prong of the domestic industry requirements with respect to the U.S. wind turbine market.

Based on the conflicting reports, the full commission announced in October that it would review the ALJ's initial determination...

With a number of green energy stimulus projects under way, Congress has taken a keen interest in the dispute, with lawmakers weighing in heavily for both sides in recent weeks.

Sens. Charles Schumer, D-N.Y., and Kirsten Gillibrand, D-N.Y., along with U.S. Rep. Paul D. Tonko, D-N.Y., sent the ITC commissioners a letter dated Jan. 6 urging them to “consider the importance of the domestic industries and ensure that intellectual property rights are upheld” in the GE-Mitsubishi case.

New York is home to the global headquarters for GE's wind energy business, according to the lawmakers.

Sens. Blanche Lincoln, D-Ark., and Ron Wyden, D-Ore., wrote the ITC in October saying the ALJ decision deserved a second look in light of an expected spike in demand for renewable energy technology.

At least one of Mitsubishi's 2.4-megawatt variable speed turbines has been installed in Wyden's home state, the senator said.

Congress' interest prompted Georgia Republican Sens. Saxby Chambliss and Johnny Isakson to warn commissioners in a Dec. 23 letter that the case “may have become politicized.”

Since entering the wind energy market in 2002, GE has become one of the largest U.S. suppliers of wind turbines, accounting for 43 percent of the market in 2008, according to the ITC.

Good for the ITC to resist the political posturing of Schumer and his colleagues.  Of course, GE is also a very strong supporter and ally of the President, whose administration recently issued a sketchy ruling raising tariffs on solar panels (which GE also makes).  But I'm sure that there's no connection to any of this.

Totally.