Political Litmus Tests, ctd.

A few weeks back, I explained why a candidate's stance on free trade served as a good political litmus test:

I'm probably one of the few people on the planet who views candidate's trade policy as a key determinant of whether I'll vote for him/her. That's kinda crazy, I know, but if you study trade policy and politics like I do, you realize pretty quickly that a candidate's stance on free trade is quite predictive of whether he/she generally puts facts and principle before politics and self-interest. You see, public figures who support free trade and reject protectionism are pretty brave souls. They turn down eager corporate and union donations from those unseemly rent-seekers who seek to thwart international competition at the expense of American companies and families. They ignore attacks on their patriotism from misguided demagogues. And they openly push policies which, despite their overwhelming economic and historical support, are met with public hostility and ignorance and an unethical opposition willing to take full advantage thereof.

On the other hand, those who freely discard their free market, trade liberalization ideals (or who never had them in the first place) are either ignorant of basic law and economics or are willing to eschew those facts in order to gain a short-term political advantage based on misunderstood public opinion polls. Neither option is very flattering and each raises serious questions as to the candidate's fitness as a leader and public servant.

In today's Washington Post, columnist George Will identifies another good litmus test (and one I've frequently discussed here) - ethanol:

Life poses difficult choices, but not about ethanol. Government subsidizes ethanol production, imposes tariffs to protect manufacturers of it and mandates the use of it — and it injures the nation’s and the world’s economic, environmental, and social (it raises food prices) well-being.

Where does a certain GOP frontrunner stand on this no-brainer of an issue and what does his stance say about his political courage and ability to beat President Obama in 2012?

Go grab some popcorn, read Will's column and find out for yourself.

Mitt Romney's Playing with Chinese Matches

On Sunday, I explained the economic, strategic and political problems with Mitt Romney's plan to impose countervailing duties on Chinese imports in order to pressure China into changing its currency policies.  Today, two news articles show that, only a week after its release, Romney's politically-motivated plan may already be backfiring.  The WSJ explains:

As early as this month, the Democratic-controlled Senate is expected to vote on a central plank of Mitt Romney’s economic plan.

Well, that’s not how Senate Majority Leader Harry Reid (D., Nev.) will put it, nor will Sens. Charles Schumer (D., N.Y.) or Sherrod Brown (D., Ohio), the authors of the Senate bill to label China a currency manipulator and order the Department of Commerce to impose countervailing duties on Chinese imports. Since Mr. Schumer has been pressing the issue since 2005, he’s not about to give it up to a newcomer.

But the fact that the former Massachusetts governor and Republican White House hopeful has promised to do the same thing if elected president has not escaped notice – either among Democrats or among conservative groups unhappy with the plank.

“Basically, Mitt Romney is standing with the most liberal members of Congress in wanting to raise taxes on American consumers. It’s beyond ridiculous that Romney won’t endorse legislation that would, in effect, implement the protectionist executive order he himself has said he’d sign on Day 1 of his presidency,” said Andy Roth, vice president for government affairs at Club for Growth, a conservative political action committee.

Mr. Romney’s 160-page “Believe In America” economic plan largely sticks to Republican type, promising fewer regulations, lower corporate taxes and a repeal of President Barack Obama’s health care law. But it also talks tough on China, promising steep tariffs on Chinese imports unless Beijing allows its currency to float on international exchange markets.

“It is time to end the Obama administration’s acquiescence to the one-way arrangements the Chinese have come to enjoy,” the policy says. “We need a fresh and fearless approach.”

Sen. Brown, one of the most liberal and labor-friendly members of Congress, echoed that sentiment earlier this month as he promoted the same move: “Strong trade law enforcement—including cracking down on China’s illegal currency manipulation—is critical to closing the trade gap with China and America’s other trading partners. It’s past time for Congress to act.”

Mr. Romney’s campaign would not say whether the candidate would endorse the Schumer-Brown bill. “There have been a number of pieces of legislation addressing China’s unfair trade practices. Governor Romney clearly laid out the approach he would take on this issue in his jobs and economic growth plan,” said campaign spokeswoman Andrea Saul.

Sen. Brown’s staff was happy to tweak the Romney campaign, even as the senator sought credit for the effort.

“Senator Brown has had a long history of standing up against unfair Chinese trade practices. He’s glad that Governor Romney now shares his views that we must put American workers first by treating Chinese currency manipulation as an unfair subsidy so that our companies can compete on a level playing field,” said Meghan Dubyak, a spokeswoman for the senator.

The Boston Globe had a similar story today, snarkily concluding that if Schumer's anti-China bill becomes law, "it would be one less executive order for Romney to pursue and would leave 58 items left on his economic plan."  As humorous as that is, of course, it's also quite distressing because, as I explained at length on Sunday and in previous blog posts, anti-China currency is misguided and potentially devastating for American families and companies (and thus, the US economy).

And, as I also explained on Sunday, Mitt Romney would definitely deserve some of the blame:

[E]ven assuming that the Romney team is just playing politics and doesn't actually intend to follow through with its China currency plans (a valid assumption, I think), the endorsment of the currency/CVD approach by one of the GOP's top presidential contenders could have serious, unintended political and economic consequences before the 2012 election by fueling congressional anti-China protectionism.  Indeed, the plan could unintentionally achieve its politically-motivated goal by leading to the implementation of a US currency/CVD law.  Problematic House legislation (H.R. 639) mandating that the Commerce Department treat "undervalued currency" as a countervailable export subsidy now has over 200 co-sponsors, a large marjority of which are Democrats.  If Romney's indirect endorsement of that legislation lets a few squishy House Republicans join as co-sponsors and thus gets the total number to 218 (an absolute majority), it could lead to a "discharge petition" and force a floor vote on the bill, and there's nothing that sane/resistant GOP leadership could do about it.  Senate Democrats have been itching to vote on similar legislation, and a few Senate Republicans (e.g., Lindsay Graham and the Maine Senators) would certainly join the charge, again with Mitt Romney's implied support.  And does anyone expect President Obama to veto any China currency bill that reaches his desk? 

...[I]f that bill becomes law, it could have serious consequences for US exporters and consumers.  And its implementation could legitimately be owed - at least in part - to Mitt Romney's economic platform.  That's hardly what one should expect from the "safe" and "moderate" GOP candidate.

Other than the fact that the Senate is going before the House, this analysis still stands.  And I must admit: I never thought that my prediction could come true so quickly (the Senate vote announcement came as a pretty big surprise to most observers).  Small victory for me, I guess; too bad it would also be a big loss for the US economy.

When Governor Romney first announced his economic plan, the WSJ editorial board warned that "once a President unleashes protectionist furies they are hard to contain."  Considering this week's distressing events and Mitt Romney's contribution thereto, they probably should change that warning to include "Presidential candidates."

Stay tuned, folks.

Mitt Romney's Big China Trade Fail

As mentioned, Mitt Romney released his big economic plan last week.  Let me first say that there is a lot in the dictionary-length manifesto that I like, such as his calls for reducing the corporate income tax rate, passing pending FTAs, and enhancing domestic energy production.  However (and you knew that there was a "however"), as I alluded to last Tuesday, one headline issue in the Romney plan is deeply flawed: his stance on China trade and, in particular, currency.  The Wall Street Journal recently expressed similar distaste for Romney's China trade plan, arguing that it could incite additional US protectionism and spark a "trade war" with one of America's biggest trading partners.  But I think that the Journal was actually being far too kind on this front.  Indeed, on China trade, Romney's plan is wrong-headed on pretty much every level: economic, legal, strategic and political.

But before I get into all of that, let's first see what Governor Romney proposes on China. First, the plan explains how the current US-China trade relationship is bad for American workers and businesses because it is "one sided."  It targets China's lack of effective IPR enforcement, discriminatory procurement policies, market access restrictions and currency policies.  On currency in particular, the plan states that "China’s unfair trade practices extend to the country’s manipulation of its currency to reduce the price of its products relative to those of competing nations such as ours. While the extent and impact of the manipulation is widely debated, the practice provides an invisible subsidy to Chinese goods sold internationally and an invisible tariff on other nations attempting to sell in China."  The primary (only?) evidence of this assertion is the following graphic, which shows the current US-China trade balance:

The plan then suggests ways to change this "one-sided relationship."  After arguing for more border enforcement to prevent Customs circumvention and for a more aggressive USTR at the WTO and in US courts, the plan promises an aggressive unilateral approach to China's currency policies:

Current U.S. law requires that the Department of the Treasury release a biannual review in which it identifies any countries that are manipulating their currency to gain an unfair advantage. The Department of Commerce also has the power to find that Chinese currency policy constitutes an unfair subsidy to Chinese exporters, and to assess countervailing duties on Chinese products. The Obama administration has declined to take either action, effectively accepting China’s problematic practices. That acceptance has to end. If China fails to move quickly to bring its currency to fair value, the Department of the Treasury in a Romney administration will designate China a currency manipulator and the Department of Commerce will impose countervailing duties.

So to summarize: as evidenced by the bilateral trade deficit, China's currency "manipulation" is unfairly tilting the playing field in China's favor; thus, President Romney would require Treasury to declare China a "currency manipulator" and then instruct DOC to impose countervailing duties (i.e., tariffs) on Chinese imports unless China floats its currency.  Indeed, one of President Romney's "Day One" Executive Orders would be an "Order to Sanction China for Unfair Trade Practices," which "[d]irects the Department of the Treasury to list China as a currency manipulator in its biannual report and directs the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency."

As mentioned, there is a lot wrong with this plan, so let's go through it subject by subject.  I've already addressed a lot of the problems with this line of thinking in my April post on Donald Trump's similar China policy, so where possible I'm going to steal from that because I'm lazy and no one is paying me for this.

1. Romney's plan gets its basic facts wrong. 

As I noted in April, any suggestion that China's currency policies are driving the bilateral trade balance and thereby harming the US economy is rife with problems. (I've replaced "Trump" with "Romney" here and throughout this post because they're basically arguing the same thing.)

[I]t's important to understand the serial fallacy of Trump[Romney]'s basic factual assertions, i.e., that (a) China's currency remains extremely undervalued versus the US dollar; (b) China's currency policies are driving both the US-China trade balance and US unemployment; and (c) that the US trade deficit, and especially the United States' bilateral trade deficit with China, is a big problem for the US economy.

As I've noted here many times, China's currency policies are not nearly the vehicle of economic destruction that Trump[Romney]  and others claim them to be....  [A]s I've noted repeatedly here, the real dollar-yuan exchange rats has increased dramatically - almost 50% percent - since 2005.  Second, as the real value of China's currency has increased, American unemployment has gone from about 5% in 2005 to slightly under 9% today, and the US-China trade deficit has (except for the recession) steadily increased.  So there's no strong connection between China' currency and total American jobs or the trade balance (as the Congressional Research Service has repeatedly noted).

Next, Trump[Romney]'s assertion that $300 billion annual US-China trade deficit is a sign that America is "losing at trade" is the height of economic ignorance.  First, there's actually a strong correlation between US economic growth and an expanding US trade deficit.  As Cato's Dan Griswold recently wrote in a must-read paper on the subject:

An examination of the past 30 years of U.S. economic performance offers no evidence that a rising level of imports or growing trade deficits have negatively affected the U.S. economy. In fact, since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. Stock market appreciation, manufacturing output, and job growth were all significantly more robust during periods of expanding imports and trade deficits.

And if fixating on the overall US trade balance weren't dumb enough, Trump[Romney] goes one further and obsesses over an even more economically meaningless stat when he worries about the US-China trade balance.  As I've noted here repeatedly, the proliferation of global supply chains and multinational investment has rendered bilateral trade balances a totally unimportant trade policy metric.  Indeed, old school trade stats like these have become so obsolete that the WTO has launched a new global initiative to determine how better to account for actual trade flows.  The most common example of the indisputable obsolescence of the US-China trade deficit is the iPhone (and the iPod before that): each device imported into the US from China accounts for about $300 towards the bilateral trade deficit, yet the Chinese get only about six bucks worth of value from the item's assembly and shipment.  Meanwhile, the US-based Apple and its affiliates get hundreds of dollars from an iPhone's final US sale (for things like design, marketing, and even some manufacturing).

Even the idea that China is totally dominating the United States is absurd.  Yes, China has experienced impressive GDP growth, but (a) that's what developing countries do; and (b) America is still much, much wealthier, greener, and more productive.  Moreover, China's incessant quest for GDP growth through industrial planning has led to some pretty scary inflation (which is driving the increase in the Yuan's real value), some major league economic distortions (e.g., a frightening property bubble and an increasingly troublesome high-speed rail system), and a lot of other serious problems that, if not solved pretty quickly, could implode the entire Chinese economy.  

None of these facts has changed since I wrote the post above.  In fact, additional factual support has emerged since I first wrote it.  For example, the Economist's Big Mac Index - routinely cited by American currency hawks - now shows that the RMB is slightly overvalued versus the dollar.

2. Romney's plan is legally problematic.

Unlike Donald Trump's brilliant plan to impose an across-the-board tariff on Chinese imports, the Romney plan takes a slightly more nuanced approach by designating China a currency manipulator in the Treasury Department's semi-annual currency report and directing Commerce to impose CVDs on Chinese goods.  However, this change doesn't save Romney's plan from serious legal pitfalls.

First, as I've explained here repeatedly, Treasury's assessment and designation of foreign countries as "currency manipulators" is conducted pursuant to US law (22 U.S.C. § 5301-5306), which defines "currency manipulators" as countries that "manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade.”  Treasury's assessment must be done in consultation with the IMF and prusuant to pretty strict guidelines.  In short, the President can't just tell Treasury to designate a country a "currency manipulator," and he/she certainly can't do it publicly via Executive Order (as Romney's plan promises).  To do so would not only violate the letter of the law, but also destroy the Treasury report's credibility.

Second, the President can't just instruct the Commerce Department to begin imposing countervailing duties on Chinese goods.  Pursuant to US trade law and regulations, the imposition of countervailing duties on imports requires (i) a petition from an affected industry or self-initiation by Commerce (something that never happens) requesting remedial tariffs on a discrete subset of allegedly subsidized imports; (ii) preliminary and final findings, based on extensive evidence (including rebuttal from Chinese producers, US importers and the Chinese government), of that said imports are being subsidized; and (iii) preliminary and final findings by the non-partisan International Trade Commission that said imports are injuring the US industry.  Each of these steps is required by US law and WTO rules.  So Romney's plan to, on the very first day of his presidency, just start imposing CVDs on Chinese imports would be in direct conflict with both US law and the United States' WTO obligations.

Third, even assuming that the Romney plan actually envisions a more subtle approach by merely authorizing DOC to begin investigating "currency manipulation" as a countervailable subsidy, it would still raise major red flags for two big reasons: (1) the treatment of a country's currency policy as a countervailable subsidy probably violates WTO rules (as I explained here in excruciating detail); and (2) DOC's current policy for imposing CVDs on imports from "non-market economies" like China has been ruled illegal by both the WTO's Appellate Body and the US Court of International Trade.  So even assuming that the Romney plan takes this more conservative approach, it still faces serious legal problems.

3.  Romney's plan is economically unsound.

Unfortunately for Governor Romney, the economics of his plan are just as dubious as its factual and legal premises.  Assuming for a moment that the plan survives the legal problems I outlined above (an admittedly charitable assumption, I know), the imposition of tariffs on Chinese goods would end up causing a lot of pain (for both China and the US) for little or no economic gain.  

First, as noted above, the Romney plan may be WTO-inconsistent, so China would very likely go straight to the WTO and could win the right to impose retaliatory tariffs on US exports in the amount of the damage caused by the tariffs.  Considering that Chinese imports into the US totaled $365 billion in 2010 and that US exports to China totaled about $100 billion in 2010, this WTO-legal retaliation could take a significant chunk out of the United States' third largest export market (and one of American exporters' fastest-growing markets - US exports to China have more than doubled since 2005).

Second, as I noted in April with respect to Donald Trump's call for tariffs on Chinese imports:

[T]he economic pain wouldn't stop with US exporters because the Trump Tariff, just like any other consumption tax, would inevitably increase US prices of everything that American consumers currently buy from China.  Remember, US importers, not Chinese exporters, pay US tariffs and pass those on to American consumers.  This, of course, means that American families, many of whom are already struggling to get by, would end up paying more - a LOT more - for food, clothing, electronics, Smithsonian souvenirs, and everything else that now says "Made in China."  However, individuals wouldn't be the only ones screwed by the Trump Tariff - American businesses (and their many workers) would also be hit hard.  Because almost half of what we import from China is industrial supplies and materials or non-automotive capital goods - i.e., inputs used by American companies - lots and lots of these firms would inevitably pay more for the things that they need to remain globally competitive.  These higher costs, of course, also mean fewer employees, if not outright bankruptcy.  Awesome.

[I]t's [also] highly unlikely that the Trump Tariff would lead to a significant increase in US manufacturing.  Sure, a few directly competitive US companies would benefit from that sweet, sweet import protection (by being able to milk US consumers for more money, natch), but the far more likely result is trade diversion - i.e., our imports would shift from China to other (more expensive) foreign countries like Vietnam, India or Mexico.  This is exactly what happened when the US imposed tariffs on Chinese tires under Section 421, and it's the very common result in anti-dumping and CVD cases.

Finally, even if the Trump Tariff succeeded in getting China to rapidly appreciate its currency (and, as noted below, it won't), it's far from certain that such appreciation would harm China's global competitiveness.  As Cato's Dan Ikenson stated last year: "RMB appreciation not only bolsters the buying power of Chinese consumers, but it makes Chinese-based producers and assemblers even more competitive because the relative prices of their imported inputs fall, reducing their costs of production. That reduction in cost can be passed on to foreign consumers in the form of lower export prices, which could mitigate entirely the intended effect of the currency adjustment, which is to reduce U.S. imports from China."  As an intermediate producer and big assembly hub, China is importing more these days than they did during the last period (2005-2008) of nominal currency appreciation, so Ikenson's insights likely hold truer today than they did even a few short years ago.

In sum, the Trump Tariff would cause massive pain for very, very little gain.

Since I wrote that, other empirical evidence has emerged to further demonstrate the economic ignorance of any US plan to unilaterally attack China's currency policies via import tariffs.  For example, the San Francisco Fed has found that of every dollar spent on "made in China" product, $0.55 goes to US companies and workers.  So any tariffs on Chinese imports would actually harm these Americans as much, or more, than it would Chinese producers.  Also, the New York Fed very recently demonstrated that (i) RMB appreciation has little affect on the prices of Chinese consumer goods imported into the United States; (ii) for basic commodities, a rising Chinese currency might just lead to trade diversion rather than bolstering the prospects of directly-competitive US companies; and (iii) increasing Chinese import prices can actually harm the US economy by feeding US inflation and raising input costs for American businesses.  All of this strongly argues against Romney's duty-based approach to confronting China.

4. Romney's plan is strategically weak.

There are also several strategic problems with Romney's plan for aggressive, uniltateral action against China.  As I explained in April:

The idea that the Chinese government would just roll over and concede "defeat" in the face of President Trump[Romney]'s big, macho tariff is absurd.  First, Trump[Romney] fails to grasp that the Chinese government would never, ever do anything that makes it appear weak in the face of American aggression.  Instead, retaliation, not concession, is the far more likely reaction (just as China did when President Obama imposed those tire tariffs), and such sinophobic chest-thumping would likely retard, not quicken, the gradual appreciation of the yuan that China needs to undertake.  Second, China's not nearly as dependent on the US market as Trump[Romney] seems to think.  The EU is now China's biggest export market, and Chinese exports to the US represent under 30% of China's exports to its top 10 export destinations.  So while the US market is big and important, China has other options.  Third, China couldn't rapidly and dramatically appreciate its currency even if it wanted to because any such move would implode the Chinese - and by extension, global - economy.

All of this remains true today, so one must why Governor Romney thinks that designating China a "currency manipulator" and threatening it with legally-suspect countervailing duties would do anything to help US exporters sell more products in China.  History has proven that the far more likely outcome of any direct confrontation is less trade, not more, between the United States and China.  And I seriously doubt that the Governor wants that.

Moreover, and as I've repeatedly explained here, prioritizing unilateral action on China's currency policies distracts from the real problems with the US-China trade relationship, such as IPR enforcement and market access.  Romney's plan exemplifies this misstep: it mentions these other bilateral trade issues, but instead of focusing on them, its primary policy action - and the only thing warranting a "Day One" executive order - is on currency.  And, let's face it, the chances of successfully negotiating or litigating these other, far more important issues after aggressively targeting China's currency policies would be dramatically diminished.  In short, Romney's plan pushes an ineffectual and potentially harmful China trade policy at the expense of an effective and helpful one.

There is one other strategic problem with Romney's plan: it sets a bad, and perhaps uncontrollable, precedent.  China is certainly not the only country in the world that is intentionally meddling with its currency for trade purposes.  As I noted a few days ago, the Wall Street Journal reported that Korea appears to be pursuing a similar policy (and is reaping the same inflationary problems because of it).  And other news reports indicate that many countries in Latin America and Asia are also attempting to temper the their currencies' appreciation.  The United States runs a trade deficit with many of these nations, so once the pandora's box of currency protectionism is opened with respect to China, how will the Romney administration ignore perfectly-consistent calls from domestic industries or Congress for similar levels of protection from imports from these other "currency-meddling" countries?  And if such pleas are ignored, how will President Romney justify only targeting China, and how would this disparate treatment not lead to serious bilateral conflict?  And, finally, many have argued that the United States' easy money policy is creating an artifically weak US dollar and thus giving US exports a similarly "unfair" advantage in other markets, so what's to stop China or another country from targeting these "subsidized" US exports in a similar protectionist fashion?

Should this really be the platform of the supposedly safe, business-savvy GOP candidate?  Really?

5. Romney's plan is even bad politics.

According to the aforementioned Wall Street Journal editorial, Romney's staffers explained that the China section of his economic plan was inserted at the the insistence of Romney himself, thus indicating that it was far more about politics than economics or good policy.  However, attacking China's currency policies is not a shrewd political move for a GOP candidate for several reasons.
First, the plan is straight out of the DNC's playbook - literally.  Currency/CVD legislation is a pillar of the Democrats' protectionist "Make it in America" agenda, so the idea that aligning oneself with Nancy Pelosi, Harry Reid and Chuck Schumer (and against a large majority of House and Senate Republicans) is a surefire political winner for a GOP presidential candidate seems a tad far-fetched.

Second, the plan undermines Romney's political strengths and accentuates his biggest political weakness.  Romney prides himself on being a pragmatic, "data-driven," businessman with a firm grasp of the global economy, but, as I've explained in excruciating detail above, this plan displays a startling ignorance of the global economy and US law.  Romney also bills himself as being a "safe," moderate pick who can win nervous independents, but instigating a major conflict with one of America's largest trading partners and needlessly exposing US consumers and exporters to possible economic harm is hardly a "safe" move.  Finally, perhaps Romney's biggest weakness is his image as a "fllip-flopper" who will do or say anything to win the election, and his new, aggressive China trade plan will only help to cement that image because it's a 180 degree turn from his 2008 campaign platform that, as the WSJ noted, almost everyone recognizes as politically motivated.

Third, assuming that Romney is the GOP nominee, the plan sets him up for an embarrassing exchange with President Obama in the general election.  The Romney plan is clearly intended to demonstrate that Obama has been "weak" on China trade issues.  And while this general point is certainly debatable, if Romney accuses Obama, as he does in his economic plan, of handling the currency issue poorly, the President can quite easily explain - far more succinctly than I do here - that Romney's alternative displays a serious ignorance of how the global economy, US law and the US-China relationship actually work.  Why expose yourself to such a simple rebuttal instead of hitting Obama on real bilateral issues like our reckless deficit spending, which enables China's continued purchase of US government debt?

Finally, even assuming that the Romney team is just playing politics and doesn't actually intend to follow through with its China currency plans (a valid assumption, I think), the endorsment of the currency/CVD approach by one of the GOP's top presidential contenders could have serious, unintended political and economic consequences before the 2012 election by fueling congressional anti-China protectionism.  Indeed, the plan could unintentionally achieve its politically-motivated goal by leading to the implementation of a US currency/CVD law.  Problematic House legislation (H.R. 639) mandating that the Commerce Department treat "undervalued currency" as a countervailable export subsidy now has over 200 co-sponsors, a large marjority of which are Democrats.  If Romney's indirect endorsement of that legislation lets a few squishy House Republicans join as co-sponsors and thus gets the total number to 218 (an absolute majority), it could lead to a "discharge petition" and force a floor vote on the bill, and there's nothing that sane/resistant GOP leadership could do about it.  Senate Democrats have been itching to vote on similar legislation, and a few Senate Republicans (e.g., Lindsay Graham and the Maine Senators) would certainly join the charge, again with Mitt Romney's implied support.  And does anyone expect President Obama to veto any China currency bill that reaches his desk? 

As explained above, if that bill becomes law, it could have serious consequences for US exporters and consumers.  And its implementation could legitimately be owed - at least in part - to Mitt Romney's economic platform.  That's hardly what one should expect from the "safe" and "moderate" GOP candidate.

*   *   *

So there you have it, folks.  Romney's China trade plan is very problematic from an economic, legal, strategic and political perspective, and in my humble opinion, a serious misstep by the candidate.  Indeed, Romney's manifesto essentially admits the shoddy factual and economic basis for its assertions on China's currency when it states that "the extent and impact of the manipulation is widely debated."  But if that's really the case, then why on earth is he promoting such an irresponsible and potentially damaging course of action?  And can we really trust a candidate that would so imprudently promote such a policy just to score a few, shortsighted political points?

"Safe" candidate, indeed.

NY Fed: Labor Costs & Inflation Drive Rapid Increase in Chinese Consumer Goods Prices

In a must-read article, the NY Fed studies the prices of Chinese imports into the United States and comes to some very interesting conclusions.  First, the basics:

We find that, in a sharp reversal of earlier trends, U.S. import prices for consumer goods shipped from China have been rising rapidly in recent quarters—by 7 percent between 2010:Q2 and 2011:Q1. 

Second, the authors explain that appreciation of China's currency appears to have had a direct and measurable effect on Chinese imports of commodity-intensive industrial supplies (e.g., steel), but had far less (if any) effect on consumer goods like the iPod:

[B]etween 1997 and 2005, when the RMB was pegged to the dollar, prices in all major categories of imports from China were on a downward trend. This trend reversed itself when the RMB was allowed to appreciate against the dollar in 2005.

By separating commodity-intensive industrial supply prices from other categories, we see that between 2005 and 2009 higher import prices of goods from China were mainly driven by jumps in industrial supply prices—goods that rely heavily on commodity inputs. Over this four-year period, consumer prices only increased 7 percent, even though the nominal RMB appreciated 20 percent against the dollar.

This pattern changed in mid-2010, when the RMB started to appreciate again. Import prices of consumer goods rose by 7 percent between 2010:Q2 and 2011:Q1, a period in which the nominal RMB appreciated 4 percent against the dollar and the CPI-adjusted real RMB appreciated nearly twice as much.

Third, the authors explain that labor costs and inflation, not RMB appreciation, are very likely causing the recent price increases for Chinese consumer goods imports:

Sharply increasing wages for Chinese workers and other escalating costs faced by Chinese firms in the country’s coastal manufacturing export hubs may be contributing to the rising prices of consumer goods shipped to the United States. Indeed, heightened unrest by workers demanding improvements in pay and double-digit wage-increase settlements have been making headlines in recent years (see, for example, Economic Times, New York Times, and Financial Times). Although data used to construct manufacturing unit labor costs are far from ideal, we estimate that wage-based unit labor costs resumed their upward trend in 2010 at the fastest pace in at least a decade, after dipping in 2009 due to a softening of China’s manufacturing labor market during the global economic crisis (see chart below). Moreover, the government enacted a major new labor law in 2008 that has likely driven up overall costs for firms.

Fourth, the authors discuss why economic growth and demographic issues will probably cause Chinese labor costs to keep rising, thus jeopardizing China's global dominance as a low-cost manufacturer:

Cyclical and structural factors are likely contributing to the rise in Chinese manufacturing unit labor costs. In particular, strong wage growth has partly reflected the very rapid cyclical recovery of Chinese manufacturing following the post-Lehman global trade shock, as well as the role of stimulus policy in generating greater incentives for migrant workers to stay closer to their home provinces inland rather than move to the coast to find jobs. Structurally, China is generally acknowledged to be undergoing a profound demographic shift to a rapidly aging society at an unusually early stage in economic development. China’s prime manufacturing cohort of people ages fifteen to thirty-nine has already peaked in size, and the United Nations projects that the working-age population as a whole will peak sometime over the next decade (see chart below). This implies that the days of seemingly limitless “surplus” labor supply may be nearing an end. And indeed, anecdotal reports of labor shortages in China’s coastal manufacturing provinces have surfaced periodically since at least 2003 (see, for example, Financial Times and “Chinese Workers Get Perks—Labor Shortage Spurs Firms to Court Factory Employees Pressure on Pay—and Prices,” Wall Street Journal, August 16, 2004)—about the time manufacturing unit labor costs started to rise....

Firms may be able to partially adapt to heightened labor shortages in China’s coastal manufacturing hubs by enhancing efforts to raise productivity and by moving factories inland, where labor remains considerably cheaper. However, over the longer term, the demographic shift facing China is real, as is the government’s desire to encourage faster household income growth, rebalance the economy away from investment and toward consumption, encourage the development of inland provinces, and develop higher-value-added industries. This suggests that while China’s days as the world’s factory may not be numbered, the prospect of continued rising prices of Chinese goods seems highly likely.

Finally, the authors explain what rising Chinese import costs will mean for the American economy (hint: it's not good):

More expensive consumer goods from China would represent a significant shift in U.S. inflation pressures, given China’s history of being a low-cost supplier of consumer goods to the United States. While it is difficult to assess the precise impact of changes in import prices on U.S. inflation, there are a number of channels we can identify. First, higher prices of imported consumer goods contribute directly to the U.S. CPI. Second, imported goods also enter into the production of domestic goods as some of these are intermediate inputs, which contribute directly to U.S. producers’ costs and thus add further pressure to increase the price of domestic goods. Third, higher import prices of Chinese goods may allow competitors, which include other exporters to the United States and domestic producers, to also charge higher prices and thus increase their mark-ups. Alternatively, competitors may try to gain market share by keeping their prices low and thus offset some of the inflationary pressures from the higher import prices of Chinese goods.

In short, higher Chinese import prices mean inflationary pain for American families and companies, and any lost Chinese market share will be replaced not only by domestic producers but also other foreign competitors.

Given all of these facts, why are American politicians attacking China's currency policies again?   To maybe help a few US companies who produce commodity-intensive industrial supplies, while definitely harming many more US companies, consumers and workers who directly benefit from low-priced Chinese imports?

Oh, right: they're doing it precisely because they're politicians.

(h/t Mark Perry)

Tuesday Quick Hits

I'm travelling this week, so blogging will remain light, but here are a few things to keep you going:

• Senate Minority Leader Mitch McConnell (R-KY) takes to the op-ed pages today to explain what many of us have been saying for a month now: President Obama's "blame Congress" strategy for the continuing stagnation of US FTAs with Colombia, Panama and Korea is extremely disingenuous.

• Mitt Romney released his economic plan today, including a detailed section on trade policy (starting at p. 41).  I'll have a lot more on this later, but for now let's just say that, on US-China trade, Governor Romney regrettably appears to have taken a page right out of Donald Trump's China playbook.  (Jon Huntsman's recently-released plan was far less antagonistic.)

• The WSJ today explains how Korea is facing a serious inflation problem because its trying to competitively devalue its currency as in the face of continued easy money policy in the United States.  If this all sounds familiar, it should: China's having the same problem for much the same reason.  Crazy how basic economics works, eh?

• Speaking of China, the WSJ reports that its "low wage export engine" is starting to "sputter" due to labor cost inflation and competition from other low-cost countries like Vietnam.  Shocking, I know.

• The WSJ rightly explains that Asia's impressive increase in high net-worth individuals is a good sign for those economies (and the global economy more broadly), but it's troubling that some of that increase is due to cronyism and government patronage rather than merit.

That's it for tonight, folks.

Do Free Market Policies Lead to a "Race to the Bottom"? (Hint: No)

The recent entry of Texas Governor Rick Perry into the Republican presidential race has produced a stampede of bad op-eds and blog posts from Democrats and other liberals seeking to discredit him and/or Texas' amazing successes.  There are a lot of bad hit-pieces out there at this point - and a lot of great rebuttals (see, e.g., here, here, here, here and especially here) - but for my money the worst so far is today's Politico op-ed by Delaware Governor Jack Markell, who warns that Governor Perry's radical, free market ideas would lead to a "race to the bottom" in the United States:

Perry argues that if the nation adopts his approach to business development — based on less regulation, less taxation and less litigation — the economy “will absolutely take off like a rocket.”

Perry’s priorities are not unimportant. But there are lots of countries with no regulation, little taxation and no real threat of litigation — usually also where wages are low and much of the wealth resides with a tiny slice of the elite.

That’s a lousy model for middle-class Americans....

The model favored by Perry is fueled by low-wage jobs, which creates a race to the bottom. The middle-class model involves competing with other countries in a race to the top — to attract research and development operations, high-end manufacturing, design shops and the like.

Now, leaving aside the fact that it's a total myth that the jobs created in Texas are all low-wage "McJobs," or that Perry adopted some sort of scorched earth campaign against government spending - on education, infrastructure or anything else - during his tenure as Governor, I'd like to focus tonight on Governor Markell's main message: that fiscally conservative, free market, "tea party" policies have lead to a "race to the bottom" around the world and would inevitably do the same here in the United States.  Is that really a credible premise?  Are the free market countries championed by fiscal conservatives all banana republics with "low wages" and tremendous income inequality?

In short, no.  Not at all.

Indeed, had the Governor even done the most basic of research, he would have seen that the most "free market" ("free-marketest"?) countries in the world, praised by conservatives and libertarians alike, are also some of the wealthiest, most modern and, in many cases, most "progressive."  For example, the Heritage Foundation's Index of Economic Freedom, which examines countries against a series of fiscally-conservative benchmarks (e.g., low taxes, limited regulations, free trade, small government), lists such backwards, downtrodden places as Hong Kong, Singapore, Australia, New Zealand, Switzerland, Canada, Ireland, Denmark in its top ten "most free" countries.  Indeed, the only country that could possible meet Governor Markell's misleading description is Bahrain.

Meanwhile, the libertarian Frazer Institute's Economic Freedom of the World Report, using similar measures of economic freedom (including limited government), lists most of the same countries that Heritage's Index identified: Hong Kong, Singapore, New Zealand, Switzerland, Chile, Canada, Australia, Mauritius, and the United Kingdom.  What horrible, dangerous countries!

Oh, wait.

On the other hand, the countries that rank near the bottom (or, on Gov. Markell's apparent scale, the top!) of these lists are such liberal paradises as Cuba, Iran, North Korea, Venezuela, Myanmar, Zimbabwe and Libya.

Sign me up!

In all seriousness, this simple example makes it abundantly clear that the Governor has no idea what he's talking about when he says that, if President Rick Perry turned the United States into some sort of "tea party paradise," it would inevitably turn into a third-world disaster zone.  The world's real free market paradigms, according to the very fiscal conservatives that Governor Markell openly derides, are some of the richest, healthiest and most developed countries in the world.  Considering that a simple Google search makes this fact abundantly clear, the Governor's either really slow or really disingenuous.

I'm guessing the latter, but, well, you never know.

But, hey, maybe the Governor has some fantastic ideas of his own that could somehow trump the centuries of proven prosperity that free market capitalism has repeatedly provided across the globe:

Building a sizable, vibrant and growing middle class requires great schools, a highly trained workforce and an attractive and exciting quality of life. That’s why initiatives like common core standards, heightening our focus on STEM education (science, education, engineering and math) and investing in our state and national parks and open space continue to be so important.

Yes, nothing will get this country back on its economic feet faster than Government spending (sorry, "investment") on our state and national parks and, umm, "open space."  We're saved!

Ugh.

No wonder liberals are openly wishing for an alien invasion.  They've clearly run out of earthly ideas.

GOP Candidates Push the Manufacturing Myth

Although I didn't watch the GOP debate the other night, I heard it was quite a contentious affair.  But a quick review of the transcript reveals one issue on which several of the candidates seemingly agreed (again): the American manufacturing sector is in dire straits.  Here's a sample:

SANTORUM: ... When I grew up in Butler, Pennsylvania, a little steel town, 21 percent of the people of this country worked in manufacturing. It is now nine. If you want to know where the middle of America went, it went to China, it went to Malaysia, it went to Indonesia. We need to bring it back.

HUNTSMAN: ... If we want to strengthen our core in this country, which we must do, the percentage of our GDP that is from manufacturing is down to 10 percent or 11 percent. When I was born, it was 25 percent. It used to mean something when you read “Made in America.” We don’t make things anymore in this country. We need to start making things in this country.

Unfortunately, and as I've said here many times, this is flat wrong: the US manufacturing sector is producing more value today than it ever has (even in this nasty recession), but it's just doing so with fewer workers and as a lower percentage of total GDP.

Our amazing industrial productivity, of course, is not isolated to the United States.  In fact, it's happening pretty much everywhere on the planet (including China):

This, along with the growth of the US services sector, accounts for the historical decline of manufacturing's share of US GDP - something also happening everywhere else in the world:

As I noted a while back (quoting AEI's Mark Perry), a very similar thing happened to the US agriculture sector last century (and yet no one laments the "decline of American farming").

I guess the bright side from the Iowa debate is that no one on the stage blamed manufacturing's "decline" on free trade or China or Mexico, and instead focused on many of the real problems that American manufacturers (and other businesses) currently face, such as our government's onerous tax and regulatory policies.  But, still, sloppy statements and anecdotes such as those from Huntsman and Santorum reflect a basic misunderstanding of the American economy, and, as we all know, are ripe for protectionist demagoguery.

And, frankly, they should know better.

More Commentary on the GOP Presidential Candidates, Trade and US Manufacturing Jobs

Last week I blogged on the GOP presidential debate in New Hampshire and the candidates' responses to a basic question on the decline of US manufacturing jobs.  Since then, several smart people have weighed in on the issue.  First, WorldTradeLaw.net's Simon Lester pointed out in the comments to my original post that Governor Pawlenty certainly isn't the only one who's been blaming trade for job losses:

Check this out from Romney the other day:

VAN SUSTEREN: The IMF is predicting that China's economy is going to surpass our own in the year 2016. First of all, how does -- what does that mean to us? What does that mean to the average American? How do we feel that? And secondly, why is China able to surpass us?

ROMNEY: China is able to surpass us in part because over last couple of decades, American policy has been so relaxed towards China. We've allowed them to manipulate their currency to make our products more expensive than theirs. And that has allowed them to come into our country and replace a lot of jobs in this country. …

We, frankly, have been turning a blind eye to China's policies with regards to our economy for far too long, and America has to get serious about saying, We want to make America the most attractive place for business in the world, not China. And the consequence of not doing that would be potentially seeing our standard of living decline and over time, seeing China build a military that could rival any in the world.

VAN SUSTEREN: How do we actually, though, turn that around? China is our bank. We owe them, you know -- you know, so much money that it's almost breathtaking. They hold more of our debt than any other nation. You know, what do we actually do to sort of turn that around so that they don't take our jobs, so that our dollars aren't going there to get their cheaper goods?

ROMNEY: ….
… you have to make it very clear that to trade with America on the most favored basis that you have to honor our laws. You have to allow your currency to float. You have to make sure that the products that come into the U.S. have not been, if you will, pirated through technology that's been stolen by various companies in China. We're going to have to be serious with China about enforcing our laws, enforcing agreements that are fair and free and not giving them the kind of free ride that they've had so far.

I'd argue that Romney's response isn't as bad as Pawlenty's comments in New Hampshire, but still, it's a good catch by Simon and, well... ugh.

Next, Dan Drezner expressed similar concerns about what was said - and not said - at the GOP debate:

In presidential campaigns, this amounts to "don't expect to see any new trade deals anytime soon." As for the other dimensions of globalization, well, peruse the section on immigration provided you have a green card if you dare. No one said anything about the positive economic and demographic benefits America receives from immigration.

The other thing that was striking was what wasn't said during the debate. All of the candidates focused like sharks with frikkin' laser beams attached to them on the economy. The standard GOP litany of solutions for jump-starting the economy were offered: tax cuts, cutting regulation, tax cuts, cutting government spending, tax cuts, reigning in the Fed, tax cuts, ending Obamacare, tax cuts. Not one of the candidates, however, mentioned trade liberalization as part of their fornmula for getting America moving again.

To be fair, this isn't as bad as when Obama and Clinton were debating over who would eviscerate NAFTA faster in 2008 (and funny, isn't it, how that never happened). And it's not like I was a huge fan of Obama's trade policy. To be just as fair, howeever, at least the current president completed KORUS negotiations and signaled strong interest in the Trans-Pacific Partnership. I get the sense that no one in the GOP field is going to stick their neck out on international trade or investment. For the party that claims to be in favor of lower taxes and regulation, this is a travesty.

I commented on Dan's post when it was published, and I always refuse to admit I'm wrongtry to be consistent, so just I'll be lazy and just repeat my instant analysis here:

I think you're right to be concerned about Pawlenty's statements and the other GOP candidates' silence in the NH debate (hence, why I blogged about it).

However, I think you got two things sorta-wrong here:

(1) I wouldn't oversell the NH debate too much, especially as a forecast for any future GOP president's support for new FTAs or trade more generally. Almost all (if not all) of the candidates have come out in support of the pending FTAs with Korea, Colombia and Panama - even Pawlenty did so in his big economic speech at the UChicago last week. And a few have been even bolder (check the Club for Growth's reports on each candidate for a full rundown). Moreover, recall that a large majority (about 80%) of GOP House freshman (incl. lots of Tea Partiers) recently wrote a letter calling for passage of the pending FTAs. So the GOP still - it seems - supports free trade, with the usual mercantilist, "get tough" caveats (unfortunately).

(2) I think you're too optimistic about this President's "support" for free trade. First, he sat on the 3 FTAs for 2+ years and only began to consider moving them thru Congress after watering them down (raising tariffs, onerous labor and tax provisions, etc.) to appease Big Labor. Even now, he's holding the agreements hostage until the GOP relents on the bloated TAA expansion that was rammed thru as part of the Stimulus* Bill - another sop to labor, btw. Second, his big "push" for TPP has produced a lot of soundbites but very little substance, and seriously risks failure now that they've moved off their November 2011 deadline for a deal. Finally, Doha is - at best - comatose and more likely dead, and a big part of the blame must rest on the administration's refusal to submit an agressive offer on farm subsidies and industrial market access (coupled with pretty crazy demands on developing countries' participation in voluntary, plurilateral agreements).

Given these two things, I think it's very safe to say that a Republican president would be a pretty big step up from the current resident of 1600 Pennsylvania Avenue.

Of course, none of this changes your primary message - that GOP contenders who embrace snake-oil protectionism are betraying their fiscally conservative message, and that voters should be wary of these charlatans.

Next, AEI's Phil Levy did an excellent job elaborating on some of the problems that Dan, Simon and I noted with respect to the GOP candidates, trade and US manufacturing jobs, and he then throws down the gauntlet:

What are the early prospects for Republican presidential leadership on trade? Dan Drezner and Scott Lincicome last week took Gov. Tim Pawlenty to task for his debate remarks on the topic. Pawlenty espoused "fair trade" and increased enforcement as the primary response to the country's manufacturing employment woes....

[T]allying up each party's merits and demerits on trade is a distraction from the more important point. We know from two years of experience that President Obama is inclined, at best, to "lead from behind" on trade. At a time when global trade talks are engaged in a prolonged and dramatic death scene and U.S. foreign relations increasingly hinge on the ability to cement commercial ties, there is a desperate need for leadership of the sort that can only come from the White House. Dan and Scott are right to scrutinize the Republican candidates and see whether any of them might provide it.

There is a temptation to excuse statements like Pawlenty's. After all, in his call for "fair and open trade," he was hardly embracing protectionism. Fair trade is the sort of elastic term that means different things to different groups, but seems to poll well with all of them. Isn't this just smart politics on Pawlenty's part? Why should Republicans cede enforcement fervor and the embrace of fairness to the Democrats? This could be cast as the equivalent of a pro-motherhood, pro-apple pie platform.

Such temptation should be resisted. It is misleading to tell Americans that the prime cause of manufacturing job loss lies with imports. This offers the false hope that very real employment problems can be fixed with judicious application of trade barriers. As with any snake oil, there is the dual danger that the potion will not work and that reliance on the false cure will preclude a search for a true remedy. One of the great challenges that any American leader will face in coming years is how to structure the social safety net to meet a job market that is far more dynamic than in times past, one in which Americans will change both employers and perhaps their type of employment with greater frequency than ever before. Trade is one driver of this dynamism, but technological change and domestic competition are at least as important, likely more. Any candidate who misses the broader challenge and misattributes the problem to foreign cheating is not just pandering; they are failing to engage on a central economic issue and missing an opportunity to win a mandate for a much-needed policy response.

There has been an intriguing battle among Republican candidates, in the wake of Indiana Gov. Mitch Daniels's withdrawal from consideration, to claim the role of Teller of Difficult Truths. The first skirmishes have come over ethanol subsidies, which some candidates -- including Pawlenty -- have dared to oppose (though John Dickerson has questioned just how brave this stance really is). Trade offers the candidates another such opportunity. It may be too soon to render final judgment, but it will be telling to see which candidates use the opportunity to offer a vision for American engagement in modern commerce and which opt to pander to easy prejudices.

Great stuff, as usual, by Phil.

Finally, EconLog's David Henderson provides, in my opinion, the best response that a presidential candidate could give on American manufacturing jobs:

It's unlikely that we'll have more manufacturing jobs. The story of economic progress is one of doing more with less. This has been especially true in U.S. manufacturing, where the value of manufacturing, in inflation-adjusted terms, reached an all-time high before our current recession. And while that has happened, we've had fewer and fewer people becoming more and more productive. Moreover, every major manufacturing economy, including China's, has lost manufacturing jobs.

He then adds:

Manufacturing employment declined from the mid-1990s to 2002 in a number of countries whose economies are rapidly developing, including China, Brazil, and South Korea. In fact, China, Brazil, South Korea, and Japan had steeper percentage declines in manufacturing employment over that period than the United States.

This is from Economic Report of the President, 2004, p. 76.

So who's gonna step up and tell the American people these "hard truths"?

Is Tim Pawlenty Gunning to Be the GOP's Protectionist Candidate in 2012?

Last week, I lamented that GOP Presidential hopeful Tim Pawlenty's mercantilist statements on free trade were somewhat contradictory and really mundane.  His latest statements on trade, however, are more troubling and have him increasingly looking like the GOP's protectionist for 2012 (there's always at least one).

If you were (sane) like me, you didn't spend last night glued to CNN to watch the GOP Presidential Debate in New Hampshire.  But a quick search of the debate transcript (yes, I know, I need to rescind my previous allegation of sanity) reveals that the only comments on trade came from Pawlenty in response to a question on how the candidates "plan on returning manufacturing jobs to the United States":

PAWLENTY: There's a number of things we need to do. Restore manufacturing in this country. And I grew up if in a meat packing town. I grew up in a manufacturing town. I was in a union for six or seven years.

I understand what it's like to see the blue-collar communities and the struggles that they've had when manufacturing leaves. So I've seen that firsthand. But number one, we've got to have fair trade, and what's going on right now is not fair.


I'm for a fair and open trade but I'm not for being stupid and I'm not for being a chump. And we have individuals and organizations and countries around this world who are not following the rules when it comes to fair trade. We need a stronger president and somebody who's going to take on those issues.

Sigh.  I've already dismantled the "fair trade" and "everybody cheats" myths several times on this blog, so I won't do so again here.  And, frankly, Pawlenty's statements here are almost identical to the tough-guy chest-thumping that he's done in the past about free trade (as I noted last week), so his statements last night, while underwhelming, aren't really that disturbing or noteworthy.

What is disturbing and noteworthy, however, is that Pawlenty, when asked about manufacturing job losses, immediately resorted to scapegoating free trade as the primary driver of those losses.  And, by the way, he was the only GOP hopeful to do so.  Ron Paul (unsurprisingly) targeted US monetary policy; Michele Bachmann (quite rightly) attacked onerous US tax and regulatory policies; Rick Santorum also took a swipe at tax policy.  None of them blamed trade policy for manufacturing job losses.

Except Governor Pawlenty.

Of course, this stance is utter poppycock:  not only are most American manufacturing job losses the result of things like technology gains and changing consumer tastes, but they also have been happening for decades and are in no way unique to the United States.  Moreover, a lot of American manufacturers depend on trade (imports and exports) in order to remain globally competitive and/or to find new customers abroad.  So, if anything, our politicians should cite free trade policy as a solution to, not cause of, US industrial job-losses.  Thus, it's quite troubling that, when asked about those job losses, Tim Pawlenty's first thought was to blame trade - a strategy, by the way, that's right out of the protectionist playbook.  The unions do it; pandering Democratic politicians do it; and the professional anti-traders do it.

So why is a GOP presidential candidate - especially one who just recently championed free market fiscal policies that directly contradict such an anti-trade stance - doing it too?

I honestly have no idea.

Fortunately for Pawlenty, his trade statements received big praise from one pundit.  Unfortunately, it was MSNBC's Ed Schultz (start at the 3:30 mark):

Visit msnbc.com for breaking news, world news, and news about the economy

Err, congrats Governor.

Thinking Inside the Box on Trade

Former Minnesota Governor and GOP Presidential hopeful Tim Pawlenty delivered a rousing speech today on his economic vision for America.  The full text of the speech is here, and it's unsurprisingly receiving praise and sneers from the chattering classes (sometimes both in the same commentary).  His calls for a serious reduction in the corporate tax rate from 35% to 15%, the elimination of tax loopholes and a flattening of individual tax rates will certainly help improve American companies' global competitiveness (and attract foreign investment).  And his repeated call for reform of ethanol subsidies is, as I've already noted, not bad considering a lot of his current GOP primary competition.

But Pawlenty's stance on free trade was, well, utterly pedestrian::

Just as the federal government must break down barriers within our domestic markets. We must break down barriers in international markets.

Congress should ratify completed free trade agreements with South Korea — and Colombia. And complete the agreement with Panama. We should start new bilateral talks with our trading partners. To promote our exports.

President Obama set a goal of doubling exports. Yet his policies have prevented this. Mine will achieve it.

Ahh, yes, the political siren-song of mercantilism.  Grrreat.  Of course, this exports-good-imports-not-so-much position is in line with Pawlenty's previous statements on trade, as noted in the Club for Growth's handy primer on the candidate:

In an interview during a trade mission to China in 2010, Pawlenty said that “we all agree from an American perspective that the Chinese manipulation of their currency and pegging of it to the dollar is inappropriate and unfair.” In later comments, Governor Pawlenty did not rule out imposing tariffs on China.

Also, Pawlenty fought against lower trade barriers on sugar when CAFTA was being considered by Congress, and he was in favor of retaining the temporary steel tariffs imposed by President Bush.

While we understand the political considerations Pawlenty had in trying to protect his home state sugar beet industry, his support of trade barriers is equivalent to support of higher costs for consumers – both in Minnesota and across the country.

A 2011 MinnPost article described Pawlenty’s attitude towards trade policy this way: “Pass pending free trade deals with Colombia, Panama and South Korea while looking for more. And don’t be afraid to call out trading partners – China by name – when they don’t live up to their end of the bargain. ‘I’m for free trade, but I’m not for being a chump,’ he said to the approval of the crowd.”

Pawlenty's mercantilist message is, as the Club rightly notes, problematic from an economic perspective, and, of course, it contradicts the strong support for cutting most other types of taxes that the candidate outlined in his pro-growth speech today.  Furthermore, as Dan Ikenson and I noted in a recent paper, Pawlenty's exports-only trade message is also both unnecessary and counter-productive from a political standpoint.  In short, it's just the same old pablum.

Fairly or not, Pawlenty's been routinely characterized as an uninspiring "second-tier" candidate.  On some issues, his speech today might help the Governor shake that reputation, but his unoriginal stance on trade - one that fails to recognize the benefits of imports and the realities of a today's globalized economy, and that contradicts the rest of his pro-growth, low-tax message - sure won't.