Carbon Tariffs Update: India Talks Even Tougher; White House Doesn't Care

Bridges weekly reports that India is not playing around on carbon tariffs:

India will bring a WTO challenge against any “carbon taxes” that rich countries impose on Indian imports, Indian Environment Minister Jairam Ramesh said this week.

“If they impose such a tax, we will take them to the WTO dispute settlement forum,” the minister told The Hindu Business Line, an Indian daily newspaper. “We will deal [with this] through hard negotiations. Such barriers are not going to be WTO-compatible and we will fight it.”

No such measures have been implemented, but politicians in both the United States and the European Union have discussed the possibility of imposing tariffs or other forms of “border carbon adjustment” on goods imported from countries with laxer regulations on greenhouse gas emissions. Buzz around the idea - widely known as a “carbon tax” - has grown since December’s climate conference in Copenhagen failed to produce a global deal to reduce emissions of heat-trapping gases. Proponents say that the measures could help level the playing field for firms and industries based in countries with strict climate regulations.

A form of border carbon adjustment was written into the climate legislation passed by the US House of Representatives last summer. US President Barack Obama criticised the measures, warning of the dangers of “sending any protectionist signals” amid the economic downturn. The Senate has yet to vote on its version of the bill.

European heads of state reportedly remain divided over whether the 27-nation bloc should impose a carbon tax at EU borders. At a recent summit of European leaders, Austrian Cancellor Werner Faymann argued that “it wouldn’t be a good negotiating tactic,” Agence-France Presse reported. But French President Nicolas Sarkozy is an ardent supporter of the measures. Sarkozy told journalists last week that European Commission President Jose Manual Barroso will put forward a proposal for a European carbon border tax in June.

But many in Europe remain unconvinced. Speaking to journalists earlier this month, Connie Hedegaard, the European Commissioner for Climate Action, cautioned against the unilateral measures. If we trust other countries’ pledges to take action to limit climate change, then “it should not be the time to say, OK, but we just give you a carbon tax. Why not now make an effort to try to conclude the international deal?” Hedegaard said, according to a report from Dow Jones.

Now, I've discussed the Indians' very serious efforts and strong words on carbon tariffs over the last few months, as well as my thoughts that the EU's carbon tariff ambitions appear dead for now (despite the glimmer of "optimism" that Bridges reports above). 

The United States, however, is worth keeping an eye on in the coming months.  And that's a bit of a surprise.

As mentioned last week, a bi-partisan group of US Senators is planning to unveil in the next few weeks new climate change legislation that will include, among other things, carbon tariffs.  I said at that time that the legislation's chances of passage this year were nil, but President Obama's big announcement today that he's going to (eventually) open a few areas of US coastline to offshore oil and gas exploration raises those odds from 1,000,000:1 to, say 1,000:1 because it indicates that (i) the White House is going to put a lot of effort into moving climate change legislation this year; and (ii) they're going to "reach across the aisle" - or at least try to appear like they are - in an attempt to score a few GOP votes (paging Olympia Snowe!).  I still think that the new "bi-partisan" legislation, with its controversial carbon tariff provisions, isn't going anywhere in this year, given the absolute drubbing that Democrats are already facing in the mid-term elections, but hey, in politics you never, ever know for sure.

So stay tuned, folks.

USTR Releases Annual Report on Foreign Trade Barriers

USTR released today its annual report on foreign trade barriers - the National Trade Estimate (NTE) - along with two new reports on non-tariff barriers to agricultural products (Sanitary and Phytosanitary, or SPS, issues) and manufactured goods (Technical Barriers to Trade, or TBT).  The SPS report and TBT report are not brand new - the old NTE hit on these issues - but they do represent an increased USTR focus on non-tariff barriers (NTBs), and are all part of the "enforcement" efforts under the Obama administration's new National Export Initiative.

I plan to blog more on the NTE at some point, but for now, let me just deliver two initial thoughts:

• Although the NTE is nothing new (it's released annually and has been for decades) and a quick review indicates that the 2010 version looks to be about 80% recycled from last year's report (cutting-and-pasting is also nothing new for the NTE), the media, of course, have focused on China and the fact that the new reports (a) omit entirely any mention of Chinese currency policies (hooray!); and (b) list tons of other Chinese trade barriers.  This coverage is not surprising, of course, considering what a hot button issue China trade is right now.  But despite the significant focus on, and pointed discussion of, Chinese barriers to US exports, everyone needs to take a long, deep breath here.  First, the lack of a currency mention means that USTR is not getting into the currency debate and is leaving the issue to Treasury - where it always has been and should remain.  This is a good signal that the administration is not planning on doing anything overly hasty regarding China's currency (like a WTO complaint) and is leaving the overheated rhetoric to Congress.  Second, the laundry list of Chinese trade barriers is nothing new.  Last year's China section was 56 pages long; this year's sections are about 49 pages total (37 NTE + 5 SPS + 6 TBT).  So it's not like the Obama administration is taking some obscenely hard line here.  Indeed, they look to be pretty level-headed.  Kudos for that.

• A quick comparison of the 2009 report and the 2010 report indicates that USTR's discussion of Google's problems with China's "great firewall" has been purged from the 2010 report.  The general discussion of Chinese censorship remains, but no mention of Google - even though the Google-China conflict has escalated dramatically over the last year.  What gives?  My two guesses: (1) Google wants the issue under the radar and asked USTR to remove the discussion (maybe even after getting some grief from the PRC last year); or (2) the White House understands the immense sensitivity and political volatility of this issue and wants to avoid a serious bilateral diplomatic conflict (replete with screaming, red-faced politicians!).  Of course, there's always option 3: maybe I don't know anything (always an option).

More later on this, but that's it for now.  Happy reading!

More Questions Than Answers In Williams Arson Investigation:

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How reliable are canine accelerant dogs? Greene County chief assistant prosecutor Dan Patterson says they are a useful tool in prosecution. Defense attorney Andy Hosmer says the "hits" the dogs make need to be backed up by lab analysis.

Greene County chief assistant prosecutor Dan Patterson confirms that lab tests conducted on the clothing of David Williams, the man accused of setting a fatal house fire that claimed the lives of three children on March 15th, reveal that there was no presence of accelerants either on the clothing or "burn patterns" that were found in the West Olive house that trained accelerant dog Ashes hit on.

Hosmer says that the National Fire Protection Association's handbook recommends lab tests confirm the existence of an accelerant that is recognized by an accelerant dog. "The lab results that the state says they have gotten back from the crime lab are inconsistent with what the their trained dog told them."

In December of 1991 a similar fire took place in Corsicana, Texas. Cameron Todd Willingham was convicted of starting a fire that killed his three children. Arson investigators testified that their were "char patterns" and accelerants used to start that fire and that Willingham was responsible for the fire that claimed his children's lives.

Prosecutors offered Willingham a plea deal, if he would plead guilty they would take the death penalty off the table and offer him a life sentence. Willingham, who maintained his innocence, rejected the state's offer and took his chances with the jury. It was a gamble that ultimately cost him his life.

In August of 1992, after deliberating less than an hour, the jury convicted Willingham of three counts of capital murder.

In January of 2004, Willingham was scheduled to be put to death, Dr. Gerald Hurst, a scientist and fire investigator, who has been successful in helping overturn numerous arson convictions was contacted by friends and relatives of Willingham. Hurst agreed to have a look at the case pro bono. Hurst concluded that the Willingham fire was accidental and that the burn patterns and accelerant found at the scene was the result of flashover.

Lawyers for Willingham filed Hurst's findings with the Texas Board of Pardon and Parole. Attorney's say the board received the findings, but never reviewed them before denying Willingham's plea for clemency. He was executed on February 17, 2004.

Hosmer says, "An innocent man in Texas was executed for a similar situation. We don't want to see an innocent man go to jail here for something he didn't do."

Prosecutor Patterson has choices when Williams appears for his preliminary hearing on May 3rd. Either drop the charges and let investigators continue their investigation, proceed with the case or amend the charges. Judge Mark Powell denied Hosmer's motion to have his client's bond reduced from $250,000. "He really didn't offer a reason why," Hosmer said.

Hosmer says, "We will pursue whatever options we have available to us. My client maintains his innocence. We haven't made a decision as to how we will proceed."

PC4D: The Spoils of Protectionist Politics

I've often opined that placating anti-traders is a fools errand for politicians.  That rule applies, however, only to supporters of open markets and free trade.  Indeed, as today's news shows us, such unscrupulous pandering can actually reap huge political dividends for our elected protectionist, ahem, "leaders."

First, protectionism can provide a campaigning politician with the perfect bogeyman from which he can "rescue" his now-frightened constituents.  Consider this recent stump speech by everyone's favorite China-hater and the loudest sponsor of the Currency Exchange Rate Oversight Reform Act of 2010 (S. 3134), Sen. Chuck Schumer (D-NY):

China isn't playing fair when it manipulates its currency and it's time to fight back, U.S. Sen. Charles Schumer said today.

Standing before the Crucible Industries gate, Schumer, D-NY, announced that he and 15 Senate colleagues, Democrat and Republican, are cosponsoring a bill that would impose tariffs on Chinese goods if the Chinese government continues to peg its yuan artificially low against the dollar.

The bill would help fight a practice that is unfairly making Chinese goods cost less than competing American products, costing thousands of American jobs and hindering U.S. job creation, he said.

"The point we're making to the Chinese right here in front of Crucible Steel -- you don't play by the rules, we're going to make you play by the rules," Schumer said as Syracuse Mayor Stephanie Miner, Solvay Mayor Kathleen Marinelli, Crucible plant and union leaders and other business and political officials looked on.

International agreements call for countries to let their currencies float in value in relation to other currencies, Schumer said. Doing so restores some balance in international trade, he said.

By keeping its currency artificially low, China in effect makes its exports to the United States cheaper compared with U.S. products, Schumer said. It also make U.S. exports more expensive compared with Chinese goods, he said, making it harder for American companies to compete in China and globally....

The only argument against the proposal is that it could hurt efforts to get China to join the United States in diplomatic activity such as a boycott of Iran, Schumer said.

"Nothing is more important than jobs in America. If we don't keep our jobs here, if we don't have good-paying jobs, all the rest goes by the wayside," Schumer said.

"I don't think on this one there is a very cogent other side other than you might get the Chinese mad," he said. "You know what I say? Too bad."

What a tough guy!  (Stop snickering.)

Now, leaving aside Sen. Schumer's gross factual misrepresentations about the China currency issue, his stump speech provides us with a classic case of another type of Protectionist Campaigning for Dummies: what I'll call the "fake white knight."  Here, Schumer (who, in case you missed it, is up for re-election this year) demonizes a voiceless opponent in China by claiming that its pernicious, "unfair" trade practices are destroying good ol' American jobs.  He then claims that his legislation will "get tough" with, and thus save his constituents from, the evil strawman (China) that he just created!  (All with no downside, of course.)  Thus, in one little speech, Schumer creates an enemy, creates a solution, and promises to resist the naysayers and use his legislative solution to vanquish an enemy that he alone constructed.

Our hero!

And because only Schumer, his staff and the few unions/manufacturers in attendance know the actual facts of the issue (thank you, Public Choice Theory), and because no one dares stick up for the Chinese (lest they be called a supporter of "shipping jobs overseas"), the good Senator can demagogue China with impunity.  It's the perfect crime (against US consumers).

And as Sen. Arlen Specter (DRD-PA) proved today, this is one crime that does pay.  Handsomely.

Salena Zito at the Pittsburgh Tribune reports that Sen. Specter's re-election bid today picked up the all-important endorsement of the Pennsylvania AFL-CIO and all of the state's other labor unions:

The Pennsylvania AFL-CIO today endorsed Sen. Arlen Specter in the May 18 Democratic primary election, marking the fourth time in Specter's five terms he earned the labor organization's support....

After spending 30 years as a Republican and switching party affiliations, Specter has earned all of the major labor union endorsements in his primary race against U.S. Rep. Joe Sestak of Delaware County....

"Both Sestak and Specter came in and gave presentations to our board," said Bill George, Pennsylvania AFL-CIO president. "They both received standing applauses, but it was Specter who won two-thirds of the vote of our 54-member board."

George said an endorsement from the labor organization, which represents 900,000 workers, is tough to earn.

"The candidate has to get two-thirds of the vote; there have been times over the years where we have not endorsed."

I can't say I've ever heard of a politician getting a standing ovation and less than one-third of the vote, but hey, congrats Joe Sestak.  And in Joe's defense, he didn't really stand a chance here because he's not a Senator yet and can't sponsor protectionist legislation that anti-traders like the AFL-CIO just eat up with a fork, knife and collectively-bargained spoon.  I mean, is there any doubt that Senator Specter's recent protectionist pandering, including his sponsorship of the Unfair Foreign Competition Act of 2010 (S. 3080) and his loud support for carbon tariffs in Senate climate change legislation, helped secure that critical campaign endorsement?  (Obvious answer: Nope.)

So nice work, Senator!  You're the best panderer ever! 

Well, you and Chuck Schumer.

Jury Convicts Mountain Grove Man Of Cousins Murder:

Benny Volner

A Texas County jury has convicted a man from Mountain Grove of first-degree murder for the beating death of his cousin two years ago.

Prosecutor Chris Wade proved to the jury that 32 year-old Benny Volner beat his cousin, Dustin Skaggs, 20, to death because he believed Skaggs was having an affair with his estranged wife. The jury also convicted Volner of robbery and armed criminal action.

Skaggs' body was found in the trunk of his car in Laclede County, submerged in a water-filled quarry near the small town of Phillipsburg in February of 2008.

Three other relatives of both men were charged with Skaggs' death. Prosecutors say Dennis Volner, of Hartville believed his estranged wife, Julia Monnahan and Skaggs were having an affair. Wade alleges that Benny Volner, along with Dennis Volner and Elvis Volner hid outside Skaggs' home and waited for him to leave work about 3:00 in the morning. Anderson says Julia Monnahan pretended she had car trouble and flagged Skaggs down with a flashlight. Investigators say when Skaggs stopped to help Monnahan he was ambushed.

Court documents allege that Elvis Volner hit Skaggs in the head over 20 times with a metal pipe. The young man's body was then stuffed into the trunk of his car which was driven to Laclede County, and pushed off a hill into the quarry.

Dennis Volner pleaded guilty to second-degree murder for his part in his cousins death last November and was sentenced to 15 years in prison. The case against Elvis Volner, of Mountain Grove is still pending. Julia Monnahan, of Hartville is to appear in a Douglas County courtroom next week on Apr. 6th.

Benny Volner, whose case was moved to Texas County on a change of venue, is scheduled to be sentenced on May 19th.



*****Greg Brock contributed to this story

Christian County Prosecutor Schedules News Conference Regarding Rufus Church Death Investigation:

Christian Count prosecutor Ron Cleek

Christian County prosecutor Ron Cleek has scheduled a news conference for 9:30 a.m. April 7th pertaining to the investigation into Rufus Church's death.

Church was found shot to death one year ago in a service bay of the Ozark Dodge, a car dealership that he co-owned.

Rufus ChurchRufus Church

The coroner for Christian County, Arthur Adams, amended Church's death certificate a few months after the civic leaders death from homicide to pending investigation.

Last year Cleek said that his office was running down leads that had taken them to Jefferson City and out of state. Since then, the Highway Patrol has released very little information about the ongoing investigation into Church's death investigation.

Monday Quick Hits

A few noteworthy items for those of you whose brains weren't fried by yesterday's WTO analysis:

• Crappy Anniversary!  On the six month anniversary of President Obama's bad decision to impose tariffs on Chinese tires under Section 421 of US trade law, Reps. Kevin Brady (R-TX) and Dan Boren (D-OK) have sent a letter to President Obama asking him to report on the economic impact of the controversial trade measures (hint: it hasn't been pretty).  As you'll recall, Brady and Boren sent USTR a similar letter back in January and apparently were totally ignored (shocking, I know).  Money quote: "This tire tax affects all Americans—workers, distributors, retailers, and consumers.  Fortunately, the law gives the President the opportunity to review the tax after six months to see if it is working or not. In January, Congressman Dan Boren and I wrote to the Administration and asked for confirmation that it has a system to collect the full range of information so that the President can fairly assess the impact of the tax on all Americans. Regrettably, no such system is in place."  I'm sure it was just an oversight, Congressmen!  Surrrrre.  National Journal reports, however, that Ways & Means Democrats remain opposed to such sanity and transparency, calling the tire tariffs "one in a series of actions he has taken to enforce trade laws," and urging Obama to "do more to address the trade gap with China...."  As we all know, both the "421 as enforcement" and "trade deficit" assertions are utter nonsense and should be treated as such.  But they do provide yet another example of the Democrats' reliance on these two classic protectionist myths.  Broken records, these guys.

• China currency sanity exists; you just need to know where to find it.  For those of you who still want more good stuff debunking the absurdity coming from many of our elected officials and pundits on China's currency policies, I recommend the following: Stanford's Ronald McKinnon drops some serious knowledge on a stable yuan-dollar exchange rate and the yuan and the trade balance;  Reuters' John Kemp on global imbalances and the "Triffin dilemma" (a year old but still good); and AEI's Mark Perry on that dastardly currency manipulator that is, err, Hong Kong?

• Is the US really ending "zeroing"?  Washington Trade Daily reports (no link) that "The United States is finally giving up the battle with the World Trade Organization over the continued use of the controversial 'zeroing' methodology in calculating antidumping duties, US Trade Representative General Counsel Tim Reif said on Friday....  Speaking at a meeting of the Society for International Law, Mr. Reif said he still believes that the WTO is going beyond the bounds of Article Two of the [Anti-dumping] agreement, but said USTR now is working interagency to administratively correct the 'zeroing' issue and bring the United States into compliance."  As you may recall, US officials said similar things at an early-March WTO meeting (and were met with skepticism by me and everyone else).  However, this is now the second time that the US has publicly stated, without subsequent retraction, their desire to finally comply with multiple WTO rulings against the controversial practice, so maybe Reif & co. actually mean it.  I've complained loudly for months about US refusal to stop zeroing in administrative reviews, and how that refusal could end up costing US exports billions in WTO-authorized retaliation, so if this turns out to be true, it's a very welcome development and deserves to be praised.  The proof, however, will be in the interagency pudding.  So stay tuned.

Exit question: given that the United States was endlessly litigating (and losing) WTO disputes on its zeroing practices in order to maintain its negotiating position in the WTO's Doha Round that WTO rules should be changed to expressly allow for zeroing, does the change in US position signal that USTR has totally given up on Doha?  Cripes.

Is Schumer-Graham Consistent with WTO Rules?

When Sens. Chuck Schumer (D-Campaigning) and Lindsay Graham (R-Textile Industry) introduced the Currency Exchange Rate Oversight Reform Act of 2010 (S. 3134), one of the bill's big selling points was that, unlike previous currency bills, this one was, like, totally consistent with WTO rules.  For example, here's the United Steelworkers (USW) touting the bill's provisions which rewrite US law to apply countervailing duties (CVDs) on Chinese imports that allegedly benefit from PRC currency policies:

Significantly, the proposed act requires the U.S. Department of Commerce to investigate currency undervaluation as a countervailable subsidy under U.S. trade remedy laws. The USW believes a countervailing duty remedy is the simplest and most appropriate way to remedy the injurious effects of currency subsidies in a manner consistent with World Trade Organization rules.

While it's certainly true that S. 3134 abandons previous versions' most obvious WTO violation - a 27.5% tariff on all Chinese products that would expressly violate US commitments to apply tariffs in a non-discriminatory manner and below certain "bound" levels - it appears that the USW's statements about the new bill's legality are, to put it kindly, overly optimistic.

[OBVIOUS DISCLAIMER: The following is a quick-n-dirty review and in no way represents legal advice from me or my law firm.  Now back to the show.]

The legislation's new "duty" provisions are in Section 110 ("Currency Undervaluation Under Countervailing Duty Law"), and, even though the 27.5% tariff is gone, at least three immediate WTO problems stick out.  First, the legislation explicitly raises WTO concerns regarding the mandatory initiation by the Department of Commerce (DOC) of an investigation to determine whether a nation's currency policies are providing a countervailable subsidy (and thus potentially subject to remedial tariffs).  Section 110 also raises separate WTO concerns related to (1) whether currency policies are a "financial contribution" or "income or price support" by a government, and (2) the "specificity" of any subsidy conferred through such currency policies.  And here's where things get really interesting: the latter two issues, while essential components of any CVD determination, are actually absent from the legislation itself.  I opine below on why such elements could be missing; regardless of the reason, they raise serious legal questions.

Before we get to these issues, however, here's some necessary (and admittedly boring) background about the initiation of a CVD investigation and what constitutes a "countervailable subsidy" under US law.

• Initiation. Under US law (19 USC 1671a), DOC will initiate an CVD investigation in two circumstances: automatically or by petition. Where initiation is automatic (1671a(a)), DOC will initiate where it "determines, from information available to it, that a formal [CVD] investigation is warranted." For initiation by petition (1671a(b) and (c)), DOC will initiate where: (i) the evidence provided in the petition sufficiently alleges, based on available information, the elements necessary to impose CVDs under US law; and (ii) the petition is filed by or on behalf of the domestic industry. For (ii), "by or on behalf of the domestic industry" means the domestic producers or workers representing (a) 25 percent of the like product's production; or (b) 50 percent of the production of the portion of the industry expressing "support" for the petition.

• "Countervailable subsidy." There are three types of subsidies that may be countervailed under US law (19 USC 1677): (i) domestic subsidies, (ii) export subsidies and (iii) "import substitution" subsidies. A "subsidy" exists where DOC finds a (i) "financial contribution" or "income or price support within the meaning of Article XVI of GATT 1994" (ii) provided by a government (or entrusted/directed private entity) that (iii) confers a benefit upon the recipient.  That subsidy is only countervailable, however, if it is "specific" to an enterprise/industry.  While domestic subsidies require an express DOC finding of specificity, export subsidies ("a subsidy that is, in law or in fact, contingent upon export performance") and import substitution subsidies ("a subsidy that is contingent upon the use of domestic goods over imported goods") are automatically specific under US law (i.e., DOC need not find that the subsidies are specific to an enterprise/industry).   In these latter cases, however, DOC still must show that a subsidy exists, as per the three factors outlined above.

Now on to S. 3134's CVD provisions.  For the sake of brevity (stop laughing), I'm not going to excerpt all of Section 110, but you can read it here if you're a masochist.

The legislation amends Section 1671a(c) ("Petition determination") to force DOC to initiate a CVD investigation of currency "undervaluation" or "fundamental misalignment" where (i) a petition is filed by an "interested party" alleging the the elements necessary to impose CVDs under US law, and (ii) the petition is accompanied by sufficient information reasonably available to petitioner.  The bill does NOT, however, require that the petition be filed "by or on behalf of the domestic industry."  Thus, any interested party (like a union, perhaps?) can file a currency/CVD petition and DOC must initiate a CVD investigation even if the petitioner represents a tiny fraction of the total domestic industry involved.  Yikes.

Now, this change perhaps could have been intended to create a bizarre "hybrid" of the "automatic" and "by petition" methods of initiation, but because the bill amends 1671a(c), it must be read as a type of initiation by petition, not a type of "automatic" initiation (or some zany new form of initiation).  However, WTO rules - particularly Art. 11.4 of the WTO Subsidies (SCM) Agreement - require an examination of "industry support" where a CVD investigation is initiated by petition (using the same 25%/50% thresholds described in US Law).  Thus, it would appear that S. 3134, if enacted, probably violates Art. 11.4 of the SCM Agreement as such.

The legislation also addresses how to calculate the subsidy "benefit" during once DOC initiates a case and undertakes a CVD investigation.  Nothing overtly problematic in the benefit sections jumps out (although in practice there could be lots of problems, as Dan Ikenson notes here).  On the other hand, Section 110 is absolutely silent on (i) whether currency policy is a "financial contribution by the government" (and thus a "subsidy"); or whether (ii) any such subsidy is specific under US Law.  This is really important because S. 3134 fails to address two of the more challengeable aspects of any Law that would apply CVDs based on currency policy.

The reasons why these two aspects are so "challengeable" are very sound.  Let's consider them separately.

(1) Financial contribution or income/price support.  As noted above, US law requires that a subsidy entail an "income or price support under GATT Art. XVI" or "financial contribution."  The latter is defined in 19 USC 1677(5) as:

(i) the direct transfer of funds, such as grants, loans, and equity infusions, or the potential direct transfer of funds or liabilities, such as loan guarantees, (ii) foregoing or not collecting revenue that is otherwise due, such as granting tax credits or deductions from taxable income, (iii) providing goods or services, other than general infrastructure, or (iv) purchasing goods.

WTO rules (Art. 1 SCM) follow this language pretty closely.   GATT Art. XVI:1 includes as a subsidy "any form of price or income support, which operates directly or indirectly to increase exports from ... its territory."  Given these definitions, it is very questionable whether WTO rules would allow a national currency policy to be deemed a "financial contribution" or an "income or price support" because currency policies don't meet any of these key terms' express criteria.  Indeed, most independent analysts - like this recent CRS Report on the issue - believe that it would be a real stretch to deem currency manipulation a financial contribution.

(2) Specificity and prohibited subsidies.  WTO rules take a slightly different approach from US law regarding specificity and export subsidies or import substitution subsidies.  Article 2.1 of the SCM Agreement defines specificity ("specific to an enterprise or industry or group of enterprises or industries") and sets forth guidelines for specificity as a matter of law or fact.  Article 2.3 adds that "Any subsidy falling under the provisions of Article 3 shall be deemed to be specific."  Under Art. 3 of the SCM Agreement, export subsidies and import substitution subsidies are prohibited outright.  Art. 3.1(a) defines export subsidies as "subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I."  Art. 3.1(b) defines import substitution subsidies as "subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods." Given these definitions, there is clearly a huge question as to how a nation's currency policy is "specific" to an enterprise/industry or a "prohibited subsidy" under WTO rules because a nation's currency is available to all citizens and not contingent upon exportation or import substitution.  (The CRS Report cited above also concurs with this reading.)

Because of the obvious concerns surrounding financial contribution and specificity in any CVD/currency legislation, both of these issues have been raised by critics of such bills' previous iterations.  However, the earlier bills (like S. 1027, introduced by Sens. Sherrod Brown (D-USW) and Debbie Stabenow (D-UAW) in May 2009) typically mandated that currency manipulation (or "misalignment" or "undervaluation" or whatever) expressly constituted a financial contribution, and an automatic export subsidy under US law.  The bills thus obviated the question of how DOC would find financial contribution and specificity, but they raised immediate and explicit WTO concerns under Articles 1 through 3 of the SCM Agreement.  S. 3134, on the other hand, does not address these issues at all and instead just punts the controversial issues to DOC.  And, as noted above, supporters of the bill just-so-happen to be publicly selling the new Schumer/Graham as being more WTO-compatible than past versions.  (How conveeenient!)

Given this background, it seems quite possible that S. 3134's significant omissions were expressly intended by the drafters to (i) avoid immediate scrutiny by the bill's opponents of previous CVD bills' most questionable provisions under WTO rules; (ii) provide the bill's co-sponsors with "cover" should any scrutiny arise; (iii) gain support for the bill among Senate colleagues; and (iv) maybe even delay a formal WTO challenge if the bill ever became US law.

Sneaky sneaky!

I should note that point (iv) here is quite arguable, as a WTO Member could still claim that the bill establishes "measure" that has a "prospective effect" which violates WTO rules (See, e.g., US-Continued Zeroing (AB)).  In particular, a WTO Member would argue that no financial contribution or specificity can possibly exist in the case of the countervailing duty investigations of WTO Members' currency policies that the measure (S. 3134) requires.  Such an approach not only is probably ok under WTO rules, but also is just plain ol' common sense: if I pass a law that targets redheads for taxation and mandates what to do with the "redhead revenues," but doesn't expressly direct the government to collect a tax from redheads, that doesn't mean that the law doesn't tax redheads.  Duh.

However, any such WTO challenge could not be based on the simple letter of the law itself, which merely requires DOC to initiate an investigation and provides a benefit methodology for any such investigation. Thus, one could easily see the bill's drafters purposely leaving the offending financial contribution and specificity provisions out of S. 3134 in order to achieve goals (i) through (iv) above.  But our elected representatives would never do something so surreptitious and misleading, right?

Rrrrrrriiiiiiiiiiiiight.

(They're still probably going to run into explicit WTO problems with those mandatory initiation provisions, but those are relatively new additions to the currency bills and definitely not as publicized/scrutinized.)

It is easy to see why the Senators' might want to avoid this scrutiny during debate, and how the lack of express WTO vulnerability on financial contribution and specificity could be a selling point to other Senators. However, shelter from immediate WTO challenge (assuming it happened, which again is far from certain) would also be quite valuable to the S. 3134's supporters, including those unions and domestic companies seeking protection from Chinese imports.  If a WTO Member actually held off on immediately challenging the new law at the WTO, the Member's next "concrete" opportunity would only come after the law is applied - i.e., after DOC had preliminarily determined in a CVD investigation that a countervailable currency subsidy existed by establishing a methodology for financial contribution and specificity.  Given the typical timeframe for drafting a petition and issuing a preliminary determination, DOC's first preliminary determination on currency subsidies could take a year or more from the law's enactment.  In the meantime, the new law's initiation provisions could lead to a flood of new CVD petitions/investigations and thereby immediately affect (read: harm) the commercial behavior of many Chinese exporters.  Thus, domestic petitioners could have a one-year "buffer" between the law's enactment and WTO challenge.  Petitioners would also be able to keep filing petitions for several more years as the original WTO challenge is litigated.  And consumers, of course, would be helpless to stop any of it.  Oh goody.

While this all may sound far-fetched, a very similar scenario actually occurred in the China/CVD/Non-market economy (NME) cases in 2006-07.  Despite the filing of a CVD/NME petition and years of political pressure to begin applying CVDs to "non-market economies," China only brought a formal WTO challenge on the issue after DOC's preliminary determination in the first CVD case (Coated Free Sheet Paper - full disclosure: my firm litigated this case on behalf of the Chinese exporters).  The WTO dispute was dropped when the International Trade Commission issued a negative final determination, but China has since filed another WTO complaint that is currently pending and won't be final (assuming the US appeals) for several more years.  Meanwhile, many other China/CVD petitions have been filed, and many countervailing duties are currently in place against Chinese imports.  Although the China/CVD case differs from the currency matter because US law was totally silent on the matter (as opposed to S. 3134 expressly amending the law), it's possible that the Schumer-Graham drafters were hoping for just such a "delayed" outcome, given (i) the past experience of the bills' drafters with intense criticism about the WTO-inconsistency of their CVD/currency bills; (ii) the S. 3134's blatant omission of any language on financial contribution or specificity; and (iii) the recent experience with the China/CVD cases in the United States.

So there you go.  Isn't US trade remedies politics fun?  Ok, fine, maybe not, but it's still critically important to recognize how professional protectionists like Schumer, Graham and the AFL-CIO try to game the system in order to quietly push their agendas and to mislead the public about the costs and implications of their suggested policies.

Umm, Yeah, About Those Bilateral Trade Stats....

In his weekly column, the WSJ's "Numbers Guy" (John Miller) gets into the weeds on international trade statistics and echoes a lot of the stuff that I've been saying here for a while:

According to some economists, trade in finished products—the things consumers actually buy, such as cars, computers and iPods—declined by much less than 12.2% last year. That is because as much as two-thirds of the value of goods that go into trade statistics represent intermediate parts, which are imported from other countries and used to make finished products that then get re-exported. Economists call this the "valued-added effect." If the value of imported parts were stripped out, however, global trade would have declined by between 4% and around 8% last year, economists say.

By ignoring the multinational composition of goods, conventional trade data also make trade imbalances between some trading partners seem larger than they really are.

China imports a huge quantity of parts from places like Japan and South Korea, but when those components are assembled into finished goods and shipped to the U.S., all the pieces count as Chinese exports, inflating the U.S. trade imbalance with its most polarizing trade partner.

A study by the Sloan Foundation in 2007, for example, found that only $4 of an iPod that costs $150 to produce is made in China, even though the final assembly and export occurs in China. The remaining $146 represents parts imported to China. If only the value added by manufacturers in China were counted, the real U.S.-China trade deficit would be as much as 30% lower than last year's gap of at $226.8 billion, according to a number of economists.

At the same time, the U.S. trade deficit with Japan would have been 25% higher than the $44.8 billion reported last year, because many goods that China and others export to the U.S. contain parts purchased in Japan.

The current method of calculating trade data is a headache for senior trade officials like Mr. Lamy. "It makes everything appear more volatile," he said recently in Brussels. "That creates a political problem."

At a time of financial crisis, Mr. Lamy would prefer that politicians, civil servants and academics focus on finished products. Big swings in trade flows make commerce appear more volatile than it is, he says. Inflated trade deficits with China stoke fears in the U.S. about job losses.

The latest round of global trade talks, which began in 2001, has stalled because of political fears about trade in the U.S., India and other countries. More than 100 members of Congress recently urged the administration of President Barack Obama to label China as a "currency manipulator." At recent Senate conference, Sen. Arlen Specter (D., Pa.) said that "we have lost 2.3 million jobs as a result of the trade imbalance with China between 2001 and 2007."

Great graphic, huh?  Anyway, the article goes on to say that, despite how misleading the current trade stats are, many economists believe that they're the best possible data.  That may be true, and it's totally fine for economists to quibble about that and even to ultimately stay with the "old model" of tracking trade.  From a purely political and/or policy perspective, however, it's a totally different story.  The obvious fact that our current trade statistics really don't show what's going on out there - i.e., the actual effects of trade flows on nations, their exporters/importers, or their workers - should cause everyone to view the outraged assertions re: bilateral trade from protectionists like Arlen Specter with very serious skepticism.

Better yet, just ignore them altogether.  Because, as I've said many times now, today's protectionists are still playing Atari 2600, while the global economy's playing Wii (or PS3 or XBox 360 or... you get the idea).

The VATMan Cometh?, ctd.

Charles Krauthammer today:

That’s where the value-added tax comes in. For the politician, it has the virtue of expediency: People are used to sales taxes, and this one produces a river of revenue. Every 1 percent of VAT would yield up to $1 trillion a decade (depending on what you exclude — if you exempt food, for example, the yield would be more like $900 billion).

It’s the ultimate cash cow. Obama will need it. By introducing universal health care, he has pulled off the largest expansion of the welfare state in four decades. And the most expensive. Which is why all of the European Union has the VAT. Huge VATs. Germany: 19 percent. France and Italy: 20 percent. Most of Scandinavia: 25 percent.

American liberals have long complained that ours is the only advanced industrial country without universal health care. Well, now we shall have it. And as we approach European levels of entitlements, we will need European levels of taxation.

Obama set out to be a consequential president, one on the order of Ronald Reagan. With the VAT, Obama’s triumph will be complete. He will have succeeded in reversing Reaganism. Liberals have long complained that Reagan’s strategy was to starve the (governmental) beast in order to shrink it: First, cut taxes; then, ultimately, you have to reduce government spending.

Obama’s strategy is exactly the opposite: Expand the beast, and then feed it. Spend first — which then forces taxation. Now that, with the institution of universal health care, we are becoming the full entitlement state, the beast will have to be fed.

And the VAT is the only trough in creation large enough.

As a substitute for the income tax, the VAT would be a splendid idea. Taxing consumption makes infinitely more sense than taxing work. But to feed the liberal social-democratic project, the VAT must be added on top of the income tax.

Ultimately, even that won’t be enough. As the population ages and health care becomes increasingly expensive, the only way to avoid fiscal ruin (as Britain, for example, has discovered) is health-care rationing.

It will take a while to break the American populace to that idea. In the meantime, get ready for the VAT. Or start fighting it.

Well, that's certainly depressing.  But hey, you can't say I didn't warn you a few months ago (for some different, but mostly the same, reasons):

The White House and Congress are already pushing a huge tax on energy (through Cap and Trade) that would certainly decrease domestic consumption of energy-intensive products (especially if it includes carbon tariffs on imports of these goods).  But Cap and Trade appears dead in the Senate this year, and the White House has already hinted that the legislation might need to be shelved so the administration can focus on deficit-reduction and jobs policies in 2010.

On the other hand, several high level Democrats - including those inside the White House - are openly contemplating a Value-added Tax (VAT) on all domestic consumption.  The VAT not only would significantly temper American consumption, but also would raise massive amounts of new revenue for the cash-strapped US government to pay down its debt (also mentioned in Obama's "strategy" speech) and/or finance major new government programs like trillion-dollar health care "reform."  Finally, VATs are not collected on export sales, and any previous VAT paid on inputs used to make the exported product is typically refunded at the border.  So exports gain new preferential status in the US economy under a VAT system.  In sum, a VAT would be a classic three-fer for the Obama White House: discouraging US consumption, encouraging exports, and (sneakily) raising oodles of revenue for the federal government.  Of course, whether it's actually good for economic growth is a totally different matter (hint: it isn't).

In this light, Obama's odd "Asia strategy" makes a lot more sense: he's essentially giving notice to China and other Asian economies that rely - at least in part - on American consumption that such consumption is going to be dramatically tempered by a new VAT - a policy that also will encourage US exports and help quell fears about an exploding US deficit and an imploding US dollar.  Pillars #1 and #2 are just window dressing.

Of course, the President and his party could avoid all of this "rebalancing" nonsense and encourage strong US and Asian economic growth if they would just stop spending money that the United States doesn't have and lower taxes (particularly capital gains and payroll taxes), not raise them, to encourage savings, investment and hiring.  But that's not how they roll (as the $2 trillion ObamaCare debacle and the President's $3 trillion budget make abundantly clear).  Instead, they're scheming to find a new, secret way to confiscate lots of taxpayer money, discourage American consumption, and boost exports.  Cripes.

So open your wallets, everyone.  The VATman cometh.  Let the "rebalancing" begin.

Since I wrote that little piece of sunshine, the White House introduced its inevitably-ineffectual National Export Initiative, so any future VAT recommendation might be premised on "saving" both the federal budget and the fledgling NEI (with its silly goal to double exports in five years).  Maybe not, but as the debt piles up and US exports don't spike, a serious VAT proposal becomes an increasingly plausible scenario.

As Dr. K says, there's still time for the American people to fight this travesty and to prove us both wrong.  Please, please do so.

ObamaCare and America's Global Economic Influence, ctd.

A few weeks ago, I opined on whether the passage of ObamaCare was, as some in the commentariat claimed, the only thing that can save American global economic influence.  As you can imagine, I heartily disagreed, and part of my argument was that pretty much everything in the current healthcare legislationlaw indicated that it was going to harm US companies' global competitiveness, not help it:

[W]hile rising healthcare costs are indeed an issue for US businesses, the latest estimates show that ObamaCare will increase burdens on US employers, not reduce them - hence why both the US Chamber of Commerce and National Federation of Independent Business vehemently oppose the current bills (and why Wal-mart sneakily supports them).

Unfortunately, it's taken all of three days for my statements to have proven true (not that I was the only one saying them, of course).  Here's the AP with the awful, totally expected news (emphasis mine):

The health care overhaul will cost U.S. companies billions and make them more likely to drop prescription drug coverage for retirees because of a change in how the government subsidizes those benefits.

In the first two days after the law was signed, three major companies — Deere & Co., Caterpillar Inc. and Valero Energy — said they expect to take a total hit of $265 million to account for smaller tax deductions in the future.

With more than 3,500 companies now getting the tax break as an incentive to keep providing coverage, others are almost certain to announce similar cost increases in the weeks ahead as they sort out the impact of the change.

Figuring out what it will mean for retirees will take longer, but analysts said as many as 2 million could lose the prescription drug coverage provided by their former employers, leaving them to enroll in Medicare's program....

For the government, the tax changes are expected to raise roughly $4.5 billion over the next decade to help pay for the health overhaul. Some of the savings would be negated by retirees enrolling in the Medicare plans....

American industrial companies that are struggling to compete globally against companies with much lower labor costs are particularly likely to eventually drop retiree coverage, said Gene Imhoff, an accounting professor at the University of Michigan.

"Anything that they can use to justify pushing something away from the employees, pushing it back on the employees or the government, they're going to do it," Imhoff said. "I'm not sure you can really blame them for trying to do this."...

Nationwide, companies would take a $14 billion hit on their financial statements if all of the roughly 3,500 companies receiving the subsidies continued to do so, according to a study by Towers Watson, a human resources consulting firm.

That financial hit will be a one-time cost as companies report a new cost estimate for the benefits over the life spans of all retirees.

Deere and Caterpillar were among a group of 10 companies that sent a letter to congressional leaders in December warning of the cost increases. The others were Boeing Co., Con-Way Inc., Exelon Corp., Navistar Inc., Verizon, Xerox Corp., Public Service Enterprise Group Inc. and MetLife Inc....

Faaaaantastic!  AK Steel ($31 million), 3M ($85-90 million) and AT&T ($1 billion) also recently reported having to take massive hits to their bottom lines and/or dropping parts of their employees' insurance.  And more companies are expected to make their distressing announcements in the coming days.

Of course, if the United States didn't have the second highest corporate tax rate (39%, incl. state taxes; 35% federal) in the world, such tax hits might not matter that much, but, well, we do, so they hurt like hell and further hinder American companies' ability to compete with their global competitors.  Even worse, these hobbled US companies can expect less help from private investors because the new health bill also imposes myriad new taxes on "high-income" (over $250k) investors, causing them to pull their money out of the market and move it offshore or to municipal bonds.

Is it any wonder why some US companies move operations offshore?  Why deal with this insane government-induced squeeze from the top, bottom and middle?  Of course, not all companies are screwed, as the aforementioned AP article reports: "Consumers Energy, a Michigan gas and electric company with 2.9 million customers, said it will not take a big first-quarter charge because, like most utility companies, it can try to recover the added costs from its customers through rate hikes."

Oh, so consumers will take the hit.  That's much better.  (<---sarcasm) 

But hey, ObamaCare might suck for US companies and consumers, but it's not all bad news, as this story from the Christian Science Monitor tells us:

With 22 pen strokes, President Obama signed into existence not just a historic healthcare reform law but also monumental piles of paperwork: New member registration forms. More claims. Ever-expanding databases. And on top of that, pressure to cut costs.

The bulge in administrative work may look like a nightmare to American insurance firms and government employees. But to outsourcing executives here in India, it’s heaven-sent. A number of Indian companies are already anticipating an increase in workload thanks to Obama's healthcare law.

The addition of 32 million insured Americans is “very significant” for Indian outsourcers, says Ananda Mukerji, chief executive officer of Firstsource Solutions in Mumbai. Companies like his will see “increased opportunities” as US health insurers and hospitals scramble to reorganize to comply with the new law, he wrote in an email to the Monitor.

This extra work will include processing new enrollments, organizing bigger member databases, processing more claims, providing more support services, and managing more revenue, he says.

In particular, outsourcers can expect to benefit from insurers’ need to minimize administrative costs, Mr. Mukerji says, citing a recent Deloitte Center for Health Solutions study showing that up to 41 percent of the cost of a health plan is administrative.

Feel that Stimulus!  Now, to be fair, the CSM article does go on to say that some of those administrative jobs are coming back to the United States, but that's because they can't be outsourced due to regulations like Buy American which prohibit foreign work on government contracts.  That's hardly "good news" because it just means even higher costs for consumers and businesses (i.e., it's government-forced, not market-based).

What a debacle.  And we're only in the first week.

Carbon Tariffs Update: What Gaia Giveth, Gaia Taketh Away

After a long hiatus, carbon tariffs - you remember, those pesky unilateral border taxes on imports from countries that have "insufficient" climate change systems - are back in the news.  First up is the good news, and boy is it good: after originally being declared unconstitutional, the French Carbon Tax is raide morte.  Here's the FT with the big news:

The French government on Wednesday said it would abandon its plan to introduce a carbon tax on domestic energy and road fuels unless there was agreement for a European Union-wide levy.

The U-turn on the controversial environmental tax come two days after the governing UMP party of President Nicolas Sarkozy suffered a heavy defeat in regional elections. Senior UMP politicians have blamed the defeat in part on the proposed tax, which was due to come into effect on July.

François Fillon, prime minister, told a meeting of centre-right parliamentarians that France would not penalise its industry by introducing the tax unilaterally.

“All decisions taken on the issue of sustainable development must be analysed in the light of our competitiveness,” Mr Fillon told the deputies. “We want the decisions to be taken in common with other European countries otherwise we are going to see a growing shortfall in our competitiveness.”

The decision to ditch the tax divided the government. Chantal Jouanno, the junior minister for the environment, lashed out at the decision saying she “despaired of this retreat”.

Since an EU-wide carbon tax is unlikely to gain approval in months ahead, if at all – the Swedish government pushed the idea with little success during its EU presidency last year – the French levy has, in effect, been shelved.

France would have been the largest economy to impose a levy on energy use linked to a notional price of carbon. France has one of the lowest “carbon footprints” in Europe largely because of 88 per cent of its electricity comes from nuclear plants.

But the government adopted a carbon tax – originally intended to raise €3.5bn a year – to further reduce French emissions by targeting those from households, road transport, and industrial consumption of gas and oil.

Mr Sarkozy had also hoped that carbon tax would pay political dividends by helping to woo green voters to his centre-right party in Sunday’s elections, a calculation the evidently failed to pay off.

As you'll recall, the French, in particular Mr. Sarkozy, were easily the loudest demandeurs for EU-wide carbon tariffs, due in large part to the fact that, if they were going to screw their economies with a carbon tax, they wanted everyone to make sure that everybody's economies were screwed along with them.  Now, with the EU's number one carbon tax/tariff cheerleader silenced, and (as the FT notes) with the whole carbon tax issue dead in the EU, it's pretty safe to say that carbon tariffs are shelved in Europe for the rest 2010. 

And all I can say is, très fantastique!  (Ok, I promise, that's the last abuse of the French language.  For now.)

Now for the bad news.  Now we all know that Mother Gaia is a huge fan of balance, so it shouldn't come as any surprise that, as the carbon tariffs door slammed shut in the EU, it instantly cracked open across the pond:

Details are beginning to leak out about the climate bill, after weeks of closed-door negotiations among key Senate lawmakers and staff.

Sens. John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joe Lieberman (I-Conn.) spent the past week presenting an eight-page outline of the bill to key business groups, including the U.S. Chamber of Commerce and the American Petroleum Institute.

But the bill provides a weaker cap on greenhouse gas emissions than many environmentalists had hoped. And it’s chock-full of sweeteners for coal, oil, offshore drilling and nuclear power — energy sources viewed with some skepticism in the environmental community but seen as key to picking up the votes of a handful of moderate Republicans....

[The sponsors] hope to send a draft of their proposal to the Environmental Protection Agency by the end of this week. The agency needs six to eight weeks to do an economic analysis of the bill, according to administration officials.

Graham told POLITICO that the proposal mirrors the Markey-Waxman legislation that passed the House last June by putting an economywide cap on greenhouse gas emissions starting in 2012 — with the goal of reducing pollution 17 percent by 2020 and 80 percent by 2050.

But unlike the House bill, the Senate proposal puts different kinds of limits on different industries.

Separate caps are put on utilities and manufacturers that will have to buy and trade pollution allowances from the government, according to people briefed on the bill. A “hard collar” is put on the price of the allowances to prevent them from dropping below $10 per ton. If the price exceeds more than $30 per ton, the government will flood the market from a strategic reserve of 4 billion credits. The price is indexed to inflation and increases at a set rate.

Manufacturers will be phased into the cap by 2016 to give fossil-fuel-intensive industries such as paper, aluminum and steel time to adjust to the new system. In a letter he sent to Kerry earlier this month, Sen. Carl Levin (D-Mich.) asked that the cap be delayed at least 10 years for manufacturers.

The legislation also tries to protect those industries from foreign competition by levying a “carbon tariff” on imports of goods from countries, such as China and India, that do not regulate emissions. The proposal was drafted by manufacturing-state Democrats, who refused to support the legislation unless it protected trade-sensitive industries from foreign competition.

Sigh.  Here we go again.  Now, granted, getting this boondoggle through Congress this year is about as likely as my winning the AFL-CIO's Protectionist of the Year Award (ed. note: not a real award).  But still, it looks like it's time to pull out the ol' carbon tariffs scorecard (as of Dec. 5 2009):

Pro carbon tariffs - Sen. Max Baucus (D-MT); Sen. Ben Cardin (D-MD), Sens. Lindsay Graham (R-SC) and John Kerry (D-MA); Sens. Amy Klobuchar (D-MN), Arlen Specter (D-PA), Carl Levin (D-MI), Claire McCaskill (D-MO), Debbie Stabenow (D-MI), Kay Hagan (D-NC), Mark Begich (D-AK), Sherrod Brown (D-OH), Tim Johnson (D-SD), Al Franken (D-MN), Evan Bayh (D-IN), John Rockefeller (D-WV), Robert Byrd (D-WV), Robert Casey (D-PA) and Russ Feingold (D-WI); the US House of Representatives (in Waxman-Markey), France, and Paul Krugman.

Voting present - the White House.

Anti carbon tariffs - the rest of the world.

Thursday Quick Hits - Currency Sanity Edition

After a little introspection (read: narcissistic mirror-gazing), I've come to realize that I've been RANTING a lot about the China currency debate recently, so in the spirit of happiness and comity, today's quick hits will feature only things on this tense issue that make me smile.  Needless to say, Chuck Schumer will not be featured.

• WTO probably won't be kind to US attacks on China currency, and vice versa.  James Bacchus, former head of the WTO's Appellate Body (basically the "Supreme Court" of the WTO) has a great op-ed in today's Wall Street Journal Asia.  The whole thing is definitely worth reading, but here's the basic gist: "[Labeling China a 'Currency Manipulator'] would—if further negotiations failed—likely result in litigation at the World Trade Organization. Whether the U.S. or China prevailed, a WTO case would be self-defeating for both countries and disastrous for the global trading system." Bacchus goes on to explain how (i) US application of countervailing duties (CVDs) against Chinese imports that are allegedly "subsidized" by the PRC's currency "manipulation" would definitely be challenged by China at the WTO and would probably not go well for the US (something I'll be writing about soon), (ii) a US offensive challenge against China under GATT Article XV:4 would be unprecedented and thus a total wildcard, and (iii) either defensive or offensive case could, because of the huge political, legal and economic ramifications, threaten to tear the now-fragile WTO to shreds.  (Not that it matters, but I couldn't agree more.)

• Most of congress will not, ahem, appreciate the results of the RMB's eventual appreciation.  Cato's Dan Ikenson has a nice piece of new analysis and recent commentary (circulating here and elsewhere) about the likely results of the appreciation of China's currency, the RMB, versus the dollar.  The basic gist: the trade balance ain't gonna change that much, unilateral action against China would result in needless retaliation, and "[i]f it is desirable that China recycle some of its estimated $2.4 trillion in accumulated foreign reserves, U.S. policy (and the policy of other governments) should be more welcoming of Chinese investment in the private sector. Indeed, some of China's past efforts to take equity positions or purchase U.S. companies or buy assets or land to build new production facilities have been viewed skeptically by U.S. policymakers-and scuttled-ostensibly over ill-defined security concerns." Me: but Dan, dude, those "policymakers" don't want China buying private debt, they want it buying public debt, but just at a cheaper (devalued) price. Duh.

• Dear Congress: this may come as a surprise, but your hyper-aggressive, unilateralist options, umm, stink.  AEI's Phil Levy testified before the House Ways & Means Committee yesterday and did a really nice job laying out all of Congress' options on the China currency issue, and then politely laying the smack-down on all but the least-aggressive of them through a simple dose of sanity and logic.  He also shows how the RMB peg actually hurts China a lot more than the United States, and how, even if the currency hawks like Paul Krugman and Fred Bergsten are right about the US being in a "liquidity trap," it would be impossible for the Chinese to revalue fast enough without, you know, totally destroying their economy.  Definitely worth a read, even though we all know that logic and sanity have no place in the China currency debate.

Sen. Schumer: "This Fake China Study Like Totally Proves You Should Vote for Me!"

I was hoping tonight to do a quick-n-dirty review of whether the latest legislation attacking China for its currency policy - the Currency Exchange Rate Oversight Reform Act of 2010 (S. 3134) - violated WTO rules.  But alas, that will have to wait until tomorrow because the legislation's loudest sponsor, Sen. Chuck Schumer (D-Fear), is cooing like a giddy little sinophobic schoolgirl about a new "study" by the Economic Policy Institute which "shows" that "unfair China trade," particularly China's currency "manipulation," has "cost" US "jobs."  (Ed. note: quotes intended to convey the author's extreme sarcasm.)

According to EPI, the United States has lost 2.4 million jobs because of China's trade practices, and Sen. Schumer, you see, is gonna milk that sucker for all she's worth, baby::

Since 2001 America's lost 2.4 million manufacturing jobs because of our trade gap with China, which has ballooned due to China's undervalued currency. We cannot ignore the impact of these jobs anymore.  Right now one in ten workers is out of a job in America - 15 million Americans. This report shows that if China were playing by the same rules as the U.S. 2.4 million of those workers might be collecting paychecks instead of job hunting."

He then added:  “These [EPI] figures exceeded even our worst expectations.”  (Cue ominous music.)

Now, I've laid into EPI before, and briefly commented last night on the "think tank's" new anti-China publication, so I really thought that'd be the end of it.  But considering how tense and unstable the current US-China trade relationship is, and considering that China's currency policies are one of the main sources of that tension/instability, and considering that Sen. Schumer is using EPI to push his antagonistic currency legislation, I think it's absolutely necessary to point out tonight just how awful Sen. Schumer's loud reliance on EPI's work really is.

So here we go.

First, let's drop a little knowledge about EPI itself.  Did you know that it's board of directors is manned by nine of the biggest union poo-bahs on earth?  Andy Stern (SEIU)?  Check!  Richard Trumka (AFL-CIO)?  Check!  Ron Gettelfinger (UAW)?  Check!  Leo Gerard (USW)?  Check!  The list literally goes on and on.  EPI also receives about 30% of its annual funding from labor unions.  So it's union-run and union-funded.  And guess who is the primary force against free trade in the United States.  That's right - the unions.  And guess who just loves to use EPI's numbers to push its pernicious protectionism.  Yep - same guys.  So the unions fund and run EPI and then turn around and cite their anti-trade stats as if they come from some reputable, unbiased DC think tank.  Yeah, that's not sketchy at all.  Uh huh.

Now why do you think that the good Senator failed to mention these important little nuggets?

Next, let's look back at EPI's track record when it comes to other "studies" about trade and US job losses.  As I said a few months back:

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 [Dan] 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.

For some intensive economic criticism on why EPI's models are so ridiculous, go here (and scroll to the middle of the page).  Indeed, Griswold just yesterday mocked EPI by pointing out how recent events blow a massive hole in their buffoonish system:

In years when the trade deficit was rising, it was common practice for the labor-union-friendly Economic Policy Institute to publish detailed studies showing that larger trade deficits caused the U.S. economy to lose hundreds of thousands of jobs each year. For example, according to an October 2008 EPI paper, rising non-petroleum trade deficits from 2000 to 2006 caused a lost of 484,400 jobs per year, while the shrinking deficit in 2007 lead to the creation of 272,500 jobs.

By the EPI’s own internal logic, the past two years should have been a boom time for job creation. Between 2007 and 2009, the non-petroleum trade deficit dropped by $174 billion as the sagging domestic economy cut demand for impost. If that was good news for jobs, somebody forgot to tell the U.S. labor market. Since the end of 2007, the U.S. economy has shed a net 8 million jobs.

Oops, maybe it’s time for EPI to rework its model.

That shrinking 2009 trade deficit kinda makes you wonder why EPI's latest China study, which (again) uses the trade balance to determine "job losses," only goes through 2008, huh?  Actually, no it doesn't.  You see, as Griswold's conclusion above makes clear, EPI is a laughingstock in this town, and pretty much everyone with access to the interwebs knows that their studies are, as the kids say, beat.  Except Sen. Schumer, of course.  Now how could a United States Senator, and his massive staff, fail to just Google EPI and find such widespread, longstanding criticism before trotting out EPI's latest masterwork to support the Schumer/Graham currency legislation?  That's so weird.

And then there's the loud smackdown that EPI's latest China study received today from multiple sources.  First, is the US China Business Council, which (if I don't say so myself) repeats a lot of the stuff I've been saying for a while about protectionist myths and China's currency:

An updated study released yesterday blaming widespread US job losses on trade with China is again based on flawed analysis and distracts from the real challenges facing the US economy and the trade relationship with China, the US-China Business Council (USCBC) said today.

"The Economic Policy Institute's latest study, 'Unfair China Trade Costs Local Jobs' is once again built on the faulty assumption that every product imported from China would have been made in the US otherwise. As I said two years ago, this assumption is clearly wrong--several decades wrong, in fact," said John Frisbie, USCBC's president....

"Much of what we import from China replaces imports from other countries, not products we make in the US today. A jobs impact study that ignores the facts undermines its own credibility."

As of the end of 2008 (the latest data available), the United States was the world's largest manufacturer--and likely remains so today. US manufacturing jobs, on the other hand, have been in a long decline over the past four decades, long before China came on the scene, and now constitute about 9 percent of total US employment.

"The main reason for the decline in manufacturing jobs is productivity, not China. The US makes more with fewer people, primarily because of productivity and technology advances," continued Frisbie....

US exports to China in 2009 were just under $70 billion, about the same amount as in 2008. US exports to the rest of the world in 2009 declined by 19 percent. "China outperformed in a down year," said Frisbie. China remains the third-largest export market for US goods, after Canada and Mexico, and has been the fastest growing market for US goods over the past decade.

EPI's focus on changing China's exchange rate to reduce the US trade deficit is equally flawed, Frisbie noted. "Yes, China needs an exchange rate that better responds to China's global trade flows. But China's exchange rate is probably not as significant a factor in the US trade deficit that some make it out to be."

China's currency appreciated nearly 20 percent between 2005 and the start of the global recession in 2008, when PRC monetary authorities stopped exchange rate movement because of the developing uncertainty in the financial markets. During the period of significant renminbi appreciation, the US trade deficit with China continued to grow, underscoring the limited relationship between the exchange rate and the trade deficit.

And then there's Ikenson again who angrily blogs:

EPI’s methodology (to use the term loosely) is not to be taken seriously, though, because it derives from a simple formula that approximates job gains from export value and job losses from import value, as though there were a straight line correlation between the jobs and trade data. It pretends that there are no jobs created when we import, and that import value is somehow an appropriate measure of job loss.

The flaws of those assumptions are many, but perhaps the easiest one to convey is that most of the value embedded in imports from China is not Chinese....

According to the results from a growing field of research, only about one-third to one-half of the value of U.S. imports from China comes from Chinese labor, material and overhead. Official U.S. import statistics—which pay no heed to the constituent value-added elements—therefore overstate the Chinese value in those imports by 100 to 200 percent, on average. The cited job loss figures are based on import values that are unequivocally overstated because one-half to two-thirds of that value are the costs of material, labor, and overhead added in other countries, including the United States.

What is seldom discussed—because they are often portrayed as victims—is that large numbers of American workers are employed precisely because of imports from China. This is the case because the U.S. economy and the Chinese economy are highly complementary. U.S. factories and workers are more likely to be collaborating with Chinese factories and workers in production of the same goods than they are to be competing directly. The proliferation of vertical integration (whereby the production process is carved up and each function performed where it is most efficient to perform that function) and transnational supply chains has joined higher-value-added U.S. manufacturing, design, and R&D activities with lower-value manufacturing and assembly operations in China. The old factory floor has broken through its walls and now spans oceans and borders.

Though the focus is typically on American workers who are displaced by competition from China, legions of American workers and their factories, offices, and laboratories would be idled without access to complementary Chinese workers in Chinese factories. Without access to lower-cost labor in places like Shenzhen, countless ideas hatched in U.S. laboratories, that became viable commercial products and support hundreds of thousands of jobs in engineering, design, marketing, logistics, retailing, finance, accounting, and manufacturing might never have made it beyond conception because the costs of production would have been deemed prohibitive for mass consumption. Just imagine if all of the components in the Apple iPod had to be manufactured and assembled in the United States. Instead of $150 per unit, the cost of production might be double or triple or quadruple that amount.

Consider how many fewer iPods Apple would have sold, how many fewer jobs iPod production, distribution, and sales would have supported, how much lower Apple’s profits (and those of the entities in its supply chains) would have been, how much lower Apple’s research and development expenditures would have been, how much smaller the markets for music and video downloads, car accessories, jogging accessories, and docking stations would be, how many fewer jobs those industries would support and the lower profits those industries would generate. Now multiply that process by the hundreds of other similarly ubiquitous devices and gadgets, computers and Blu-Rays, and every other product that is designed in the United States and assembled in China from components made in the United States and elsewhere....

EPI’s work on this subject provides fodder for sensational stump speeches. But it is also a major disservice to a public that is hungering for truth, and not self-serving advocacy masquerading as truth.

Other wonks had similarly unpleasant things to say about the EPI study, but hey, you don't need to be a wonk to see just how silly EPI's work really is.  Just look at the numbers themselves.  Without counting a single actual job, the EPI China study showed that by 2008 trade with China had cost the District of Columbia 3100 jobs (thank god I was spared!) or the folks in Santa Clara County 26,900 jobs.  And, as the study's dastardly little footnotes make clear, EPI's numbers are even more exact because they're rounded.  Again, without counting a single job.  Such pseudo-economics makes the White House's Stimulus* job numbers look Nobel-worthy by comparison, and it's so ridiculous that it should be rejected on its face.  Indeed, because most sane people probably would reject their argument if the exact number were used, EPI did that rounding.  It sounds more plausible that way, you see?  Unfortunately, as the analysis above makes clear, it ain't.

Yet despite the clear union-rigging, the history of EPI incompetence, the myriad recent criticisms, and all the failed smell-tests, Sen. Chuck Schumer waves the EPI study around like it's the Gospel and uses it to aggressively push legislation that could legitimately ignite a trade war between the United States and its second largest trading partner.  Now why on earth do you think he'd do that?

A cynic might say that it's because Schumer's up for re-election this year and has a long history of demagoguing China when he's campaigning.  But a United States Senator wouldn't knowingly use a nonsensical, union-funded study from a long-debunked organization to push controversial legislation that could destroy a $400 billion dollar trade relationship and millions of (real) American jobs, now would he?

As that cynic might say, yes.  Hell yes.