Wednesday Quick Hits

Plenty of great links to share today (the last day of my 34th year on the planet), so let's get right to it.

• The Economist reports on how increasing labor costs in China are once again changing the globalization dynamic - in many cases, back in US manufacturers' favor: "'Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,' says [BCG's] Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar.... Companies are thinking in more sophisticated ways about their supply chains.  Bosses no longer assume that they should always make things in the country with the lowest wages.  Increasingly, it makes sense to make things in a variety of places, including America."  The whole article is definitely worth a read.  (h/t Mark Perry)

• The WSJ's Mark Gongloff throws some cold water on the "China is dumping US Treasury debt" hysteria.

• Heritage's Bryan Riley makes a great catch:   "People who believe the United States no longer manufactures anything need to check out the newest Consumer Reports “Best Cars” list. The magazine recently selected the top cars for 2011 in 10 categories. Five 'best models' are made in the USA, three in Japan, one in Canada, and one in Mexico. Four of the made-in-the-USA models carry foreign nameplates; by contrast, the one Chevy on the list is made in Mexico."

• Cato's Dan Griswold provides clear and concise arguments for allowing Mexican trucks to travel on US roads.

• AEI's Michael Auslin provides a roadmap for expanding US-India trade and explains why it should be a point of emphasis.

• A must-read story in USA Today shows that US visa restrictions may be driving companies out of Silicon Valley and the United States entirely: "Silicon Valley may be the cradle for tech start-ups, but some foreign-born executives, engineers and scientists are leaving because of better opportunities back home, strict immigration laws here and California's steep cost of living."  I totally get the need for us to secure our borders and staunchly police illegal immigration, but the United States is suffering (and will suffer a lot more in the future) because of our government's inability to develop and implement policies to efficiently and lawfully keep super-smart foreign entrepreneurs and workers here.  Our lack of such policies is, ahem, bordering on the insane. (Sorry, I couldn't resist.) 

• The White House has surprisingly announced that it won't move pending FTAs with Colombia, Panama and South Korea unless the House GOP ties it to the now-expired Trade Adjustment Assistance program.  IBD dismantles the administration's political motivations, while Cafe Hayek's Don Boudreaux eviscerates TAA's shoddy economic foundations.  (More on this issue to come.) 

• Logistics improvements in China would mean huge gains for consumers and exporters, further proof that trade facilitation efforts can dramatically improve global trade when market access negotiations break down: "Logistics costs as a percentage of GDP are around 21%, compared with 10% in the U.S. and 13% in India.... [T]he country has a fragmented system, high tariffs for road transport and multiple providers piling on fees.... A Chinese government investigation found that two-thirds of the retail price of vegetables represents logistics costs. And even though costs are high, service is often poor.  Local logistics providers are famously slow and unreliable. Assuring end-to-end delivery of products across provincial boundaries is a real challenge."  Unfortunately, things appear to be getting worse instead of better:

• Looks like we're seeing a serious bubble in US farmland, yet American agriculture subsidies keep, ahem, plowing ahead. (Sorry, I couldn't resist... again)

• Good news: US exports surge to a new record high.  Less-good-news: as the graphic below makes clear (courtesy of Mark Perry), US exports are still below their pre-recession trendline.

That's all for today.  Enjoy!

America's Cotton Problem

A little heralded congressional vote last week shows just how hard it will be to reform America's bloated, trade-distorting farm subsidy programs and, more generally, get the US government's insanely profligate spending problem in check.  On Friday, the US House of Representatives overwhelmingly rejected a bi-partisan amendment to the 2010 continuing budget resolution that would have ended $140 million in annual bribespayments to Brazilian - yes, Brazilian - cotton farmers.  The payoffs, which I've repeatedly blogged on, resulted from a ludicrous deal between the Obama administration and the Brazilian government to stave off Brazil's imposition of retaliatory tariffs on US exports due to the United States' refusal to amend its cotton subsidy programs so that they complied with WTO rules (the cotton subsidies had been repeatedly ruled WTO-inconsistent in dispute settlement proceedings).

Cato's Sallie James provides some good analysis (and much-needed hostility) on the amendment's failure:

Republicans -- those stalwart fiscal conservatives! -- voted 75 in favor and 164 against. The Democrats showed more courage and voted in favor of the amendment 108 to 82. (These numbers are according to C-SPAN; I will post an update if they prove to be incorrect)....

The Hill article (linked to in the first paragraph of this post) points out that some members (presumably the Republicans who voted against the amendment) were concerned that "the move [to cease the payments to Brazil] could create a trade war if Brazil decided to retaliate."  It doesn't seem to occur to those concerned members that one way to avoid a trade war would be to abide by international obligations and cease subsidizing U.S. cotton farmers. It would also shave a few million from that huge deficit about which they profess to be concerned.

Sallie's point is exactly right.  If House members are truly concerned about a trade war with Brazil, then the sane, fiscally-conservative approach is not to continue paying $140 million in Brazilian hush money but instead to eliminate the offending cotton programs (and other US farm programs that are either unnecessary or WTO-inconsistent).  That this very sensible thought didn't even register in the US Congress is a testament to just how entrenched agriculture interests are on Capitol Hill.

And unfortunately, it gets worse.

Congress' latest vote on, and apparent support for, cotton subsidies is particularly egregious given the fact that the current environment for reform is pretty much perfect.  First and most obviously, the US government is flat broke, and the new Congress has a massive new contingent of Tea Party-driven budget cutters who - one would think! - would be open to ending the Brazilian bribes and embracing significant and immediate cuts to WTO-illegal US farm subsidy programs.  Second, those bribes and the US cotton program are taking place during a period of record cotton prices and unprecedented investment in American cotton production:

[Cotton] prices hit a 150-year-high last week, more than double what it was a year ago. (What happened 150 years ago? The Civil War began, and cotton jumped to $1.89 a pound. What do you think Rhett Butler was trying to smuggle past those Union gunships?)

Also having an effect: droughts and flooding in China, Pakistan and Australia, plus restrictions on exports from India. Plus, the world’s economy looks a little better than it has in the recent past. People can afford clothes.

At the same time, the Virginia Department of Agriculture and Consumer Services announced today that cotton acreage in the state is expected to increase by nearly 27 percent, from 82,250 acres in 2010 to an estimated 105,000 acres this year. In 2007, Virginia farmers planted only 58,000 acres. The last time the state topped 100,000 acres was 2006. Part of this is smarter agriculture and innovative research. Part of it is supply and demand.

Third, the WTO's Doha Round negotiations will probably die if not completed by the end of 2011, and as Phil Levy and I wrote in December, a bold US commitment on farm subsidy cuts and cotton reforms will be essential to completing a final deal.

Given these facts, there might never be a better time than right now for cotton subsidy cuts, and yet the House - and all those new fiscal conservatives - have once again refused to address the broader cotton issue and instead prefer to continue embarrassingly paying off Brazilian cotton farmers.  Awful.

Moreover, the House's latest cotton episode reveals a far more serious problem with the future of America's inefficient, outdated farm policies and US budget-cutting efforts more generally.  If the US House of Representatives can't make some basic cuts to American cotton subsidies amidst serious budget shortfalls, a wave of new budget-conscious GOP freshmen, record high cotton prices, unprecedented private investment in American cotton, and a Doha Round on life support, then what hope is there for a serious US farm subsidy reform proposal as part of Doha or otherwise?  And if (allegedly) fiscally conservative House Republicans can't defund the WTO-illegal US cotton programs or, at the very least, stop the insanity of sending 140 million in taxpayer dollars to Brazil's farmers every year, then why should we think that they'll have the courage to tackle the much more politically-sensitive and important budget reforms that will be absolutely essential to getting our crippling budget deficit in check?

After last Friday's vote on the cotton bribes, the answers to these bigger questions don't look too promising.

Valentines Quick Hits

Here are a few headlines for your romantic night with that special someone.  Maybe you could even read a few of them to him/her to get in the mood:

• For those of us out there who waited until the last minute and bought our wives some surprisingly-cheap-yet-high-quality Valentines Day roses from your neighborhood Whole Foods (a "fair trade" advocate, by the way), I hope you checked where the flowers were from.  I did: Colombia.  Heritage's Bryan Riley explains that "Americans saved more than $16 million on roses last year thanks to U.S. trade policy toward Colombia.... As Valentine’s Day approaches, with Mother’s Day not far behind, it is a good time to consider the benefits of the proposed U.S.–Colombia Free Trade Agreement not just for U.S. flower buyers but for the Colombian workforce and U.S. exporters as well."

• Don Boudreaux and David Henderson refute Ian Fletcher's ridiculous claim that, while American manufacturing is at an all-time high and remains the world's largest by value, the problem is that the sector just ain't growing fast enough.  Next up, Fletcher will argue that whether protectionism is idiotically self-destructive depends on what your definition of "is" is.  Seriously.

• Keith Hennessey provides a detailed analysis of the President's allegedly pro-trade statements before the US Chamber of Commerce and arrives at a depressing conclusion that some of us have known for a while now: "This sounds like a free trade agenda, or at least a pro-trade agenda, which would be good from a President whose party often leans heavily toward protectionism. The problem is that the U.S. already has trade agreements with Panama and Colombia. The President is in reality saying that he is undoing those deals. He also appears to be saying that 'unprecedented support from … labor [and] Democrats …' is a precondition to further progress on free trade."  Thus, we're doomed.

• Here's a telling update on that sketchy Chevron-Ecuador dispute that I mentioned a few weeks ago (and further proof that third-party dispute settlement of investment disputes is not as horrible and pernicious as some trade skeptics breathlessly allege).  The Hague is still reviewing the case, but the domestic court has ordered Chevron to pay billions.  And guess who really wins big from the domestic ruling: "The court also ruled that Chevron should pay the Amazon Defense Front, a coalition formed by the plaintiffs, an additional 10% in damages, or about $860 million. The judgment says the amount of the damages could be doubled if Chevron doesn't apologize publicly to plaintiffs by advertising in the next 15 days in newspapers in the U.S. and Ecuador.  Pablo Fajardo, an attorney for the plaintiffs, said his team was still reviewing the 200-page document and couldn't give a full opinion until Tuesday. He said that although he didn't rule out the possibility of appealing to ask for a higher amount, the fact that the judge issued a ruling favorable to the plaintiffs was a 'very positive step.'  Last summer the plaintiffs asked the court for $113 billion in damages."  Ahh, social justice.

• The Economist has a fascinating cover story on a new technology called "3D printing" and how it could totally revolutionize manufacturing.  After reading it, ask yourself this: "Is it really smart for the White House to pin the hopes of America's economic recovery on a dramatic increase in manufacturing employment?"

• I kinda pity Randy Erwin, the founder of the "Buy American Challenge."  I mean, the guy seems well-intentioned and, unlike most anti-traders, he's advocating a purely voluntary import embargo (rather than one produced by political lobbying and enforced by government coercion).  Nevertheless, he's still really, really misguided, as Don Boudreaux and Mark Perry demonstrate.

• The NYT reports that "Over the last decade, the [USDA's Market Access Program] has provided nearly $2 billion in taxpayer money to agriculture trade associations and farmer cooperatives. The promotions are as varied as a manual for pet owners in Japan and a class at a Mexican culinary school to teach aspiring chefs how to cook rice for Mexican consumers. Money also went to large farmer-owned cooperatives like Sunkist, Welch’s and Blue Diamond, which grows and sells almonds. Combined, the three companies had over $2 billion in sales in 2009."  Awesome.

• China's now the world's #2 economy (by country).  Razeen Sally explains in the WSJ that, if China ever wants to become a world leader, it needs to ditch the childish protectionism.

• Harvard professor Martin Feldstein provides a laundry list of reasons why the President needs to dramatically lower the corporate tax rate if he's serious about re-invigorating the American economy.  And he drops this little nugget: "Eliminating every loophole in the taxation of domestic corporate profits identified by the administration's own Office of Management and Budget would raise less than $60 billion of extra revenue in 2011, enough to lower the combined federal-state corporate rate to 35%. The U.S rate would still be higher than in every other country but Japan, and a full 10 percentage points higher than the average in other industrial OECD countries."  

• This is hilarious.  (In humor lies truth.)

Happy V-Day, everyone.

Big Tax Deal Sets the Stage for Future "Green" Trade Disputes

With over 83 Senators approving of the big Obama-GOP tax compromise and (most) pundits on both sides of the aisle supporting the deal, it's easy to see that, despite liberal histrionics to the contrary, the measure is going to end up as law in the very near future.  And while a free market idealist like me certainly has some gripes with the deal and would have preferred something permanent, paid-for and porkless, it's probably the best that we can expect from the current group of bumbling doofuses on Capitol Hill.  That said, several of the bill's lesser-known elements - in particular the "green" measures added to (allegedly) garner Democrat support - raise some pretty serious concerns on the trade front.  The full text of the legislation (H.R. 4853) is here, and the rundown of the the bill's green pork is in the summary released by Sen. Reid last week:

Biodiesel and renewable diesel. The bill extends through 2011 the $1.00 per gallon production tax credit for biodiesel, as well as the small agri-biodiesel producer credit of 10 cents per gallon. The bill also extends through 2011 the $1.00 per gallon production tax credit for diesel fuel created from biomass.

Refined Coal. The bill extends through 2011 the placed-in-service deadline for qualifying refined coal facilities.

Extension of energy-efficient new homes credit. The bill extends through 2011 the credit for manufacturers of energy-efficient residential homes.

Alternative fuels credit. The bill extends through 2011 the $0.50 per gallon alternative fuel tax credit. The bill does not extend this credit any liquid fuel derived from a pulp or paper manufacturing process (i.e., black liquor).

Extension of special rule for sales of electric transmission property. The bill extends through 2011 the present law deferral of gain on sales of transmission property by vertically integrated electric utilities to FERC-approved independent transmission companies.

Extension of special rule for marginal wells. The bill extends through 2011 the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well.

Section 1603. The bill extends for one year the start-of-construction deadline for the cash grant in lieu of tax credit program, established in Section 1603 of the American Recovery and Reinvestment Act.

Ethanol. The bill extends through 2011 the per-gallon tax credits and outlay payments for ethanol. The bill also extends through 2011 the existing 14.27 cents per liter (54 cents per gallon) tariff on imported ethanol and the related 5.99 cents per liter (22.67 cents per gallon) tariff on ethyl tertiary-butyl ether (ETBE).

Energy-efficient appliances. The bill extends through 2011 and modifies standards for the Section 45M credit for US-based manufacture of energy-efficient clothes washers, dishwashers and refrigerators.

Energy-efficient existing homes. The bill extends the credit under Section 25C of the Code for energy-efficient improvements to existing homes, reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act. Standards for property eligible under 25C are updated to reflect improvements in energy efficiency.

Alternative vehicle refueling property. The bill extends through 2011 the 30% investment tax credit for alternative vehicle refueling property.

Although I'm certainly not a fan of any of these measures, not all of them raise red flags on the trade front.  However, several of them do.  First, there's the biodiesel "blenders" tax credit, which had expired in 2009 and will be extended through 2011 (with retroactive application through all of 2010).  As you'll recall, this bit of green pork has already resulted in the EU's imposition of countervailing duties (CVDs) on US biodiesel exports and a pending copycat investigation in Australia.  And according to the WSJ, the EU is investigating allegations by its domestic biodiesel industry that US exporters are trying to circumvent the CVD order by trans-shipping their products through third countries.  When the tax credit expired, the CVD order was thought to also be on the outs, but now, well, we get more tariffs and trade frictions with the EU, the likely imposition of Australian tariffs, and the potential for other countries to copy the European case, as all that subsidized US biodiesel is inevitably overproduced and diverted to other foreign markets.  Nice.

Speaking of overproduction and foreign market saturation, next up is probably the rottenest piece of green pork in the tax deal: ethanol subsidies and tariffs.  Over the last few weeks, many folks - including Al Gore himself! - have explained just how awful America's ethanol policies are.  They cost a fortune, distort energy markets, increase food prices, encourage cronyism, and actually harm the environment.  (Great video on all of these unintended consequences here.)  Unmentioned in those analyses, however, is the serious risk that the United States' ethanol measures will result in new trade disputes.  First, the ethanol "blender" tax credit is pretty much identical to the biodiesel subsidies that have attracted EU and Australian tariffs, so they're almost certainly eligible for similar CVDs.  According to recent stats, the EU is experiencing record imports of US ethanol, and, as the FT helpfully points out, European producers are getting angry:

The US pumps out a record 37m gallons of ethanol a day, easily surpassing rival Brazil’s sugar-based industry in output.

Producers are running out of places to put this ethanol. The US government mandates 12bn gallons in the fuel supply this year, but a decline in American driving and a 10 per cent cap on how much can be blended into motor fuel has created a glut.

“The domestic market here in the US is essentially saturated. We are looking for a home for the surplus,” says Geoff Cooper at the Renewable Fuels Association, a US trade group.

That home is increasingly abroad. US ethanol exports are more than double those of a year ago, totalling 251m gallons in the nine months through September, government trade data show. The surge comes as rising sugar prices and the real’s appreciation against the dollar made Brazil’s product more expensive.

The export trend puts a spotlight on the government support for ethanol that totalled $7.7bn in 2009, according to the International Energy Agency....

Companies that blend US ethanol with petrol may claim the [45 cent-per-gallon blender’s tax] credit even if the fuel is shipped overseas. Blends of up to 90 per cent ethanol imported in Europe also enjoy customs duties that are €60-€70 lower than the €102 per cu m duty on purer “denatured” ethanol, says Christoph Berg, managing director at consultant F.O. Licht in Hamburg. The US ethanol trade data mask additional volumes hidden in petrol blends.

“There is increasing trade from the US to Europe which is using domestically produced ethanol and blends this ethanol with gasoline, thus being eligible for the [US] tax credit and also being eligible for lower import duties in the European Union. This of course makes quite a profitable operation,” says Mr Berg.

Traders acknowledged using the credit for ethanol blends before it leaves the US. “If the [credit] is not there, the demand for product stays. It just means there are higher prices,” said a senior executive at one US exporter.

But use of the credit threatens to open a rift between the US and the much smaller European ethanol industry, echoing an earlier US-EU dispute over biodiesel.

Rob Vierhout of ePure, a trade association for Europe’s ethanol industry, said: “The European ethanol industry is very concerned about the growing volume of US ethanol exports to Europe. Obviously, the weaker dollar and the blend wall create circumstances that make non-US fuel ethanol markets attractive.”

European government support to ethanol was $2.1bn in 2009, IEA said.

The US also ships ethanol to some major oil exporting countries including Saudi Arabia and the United Arab Emirates. Analysts say in many cases these exports are used as an additive to raise the quality of local petrol stocks....

Ok, let's see.  Subsidized product with a history of trade friction: check!  Glut in the domestic market and surging exports: check check!  Aggreived domestic industry with experience using domestic trade laws: check!  For those of you keeping score at home, that's the ol' trade dispute superfecta.

Furthermore, as I've noted before, Brazil has for years been threatening to challenge the United States' $0.54/gallon tariff on imported sugar ethanol as inconsistent with WTO rules.  It's quite possible that the Brazilians have been waiting to see if these silly tariffs (and subsidies) were going to expire before going through the time and expense of bringing a WTO dispute.  Well, now they know.  And even if Brazil doesn't bring a formal case to the WTO, the brazen US extension of one of the countries' biggest bilateral irritants sure isn't going to engender the cooperative spirit that will be absolutely necessary to conclude the recently-revived Doha Round in 2011, now will it?  Of course, why should our glorious, pork-loving Congress care about a silly little thing like the health of the multilateral trading system?  Blech.

Finally, the tax measure extends two subsidies for US manufacturers of "green" things like solar panels and wind turbines - the "Section 1603 grants" and the "Section 45M credit."  Each of these programs are blatant handouts to US "green" manufacturers, and as I've already discussed at length, the combination of subsidies like these and White House efforts to boost US manufacturing exports are just asking for trade frictions:

Leaving aside the absurdity of a flat-broke nation subsidizing sketchy firms with borrowed money, stories like this have "future trade problem" written all over them. You see, cheap government loans to struggling domestic companies are a common example of an illegal (or "countervailable") subsidy under global trade rules. And, if Solyndra and Tesla survive (a big "if" from the looks of it), their exports to other nations that produce similar solar panels/electric cars would be very vulnerable to national trade remedies cases, just like those EU and Aussie cases against US biofuels. And if those cases result in new tariffs and copycat cases in other markets (a very common occurrence), these companies will lose precious foreign market share and, in some cases, could even go bankrupt entirely unless alternative markets quickly materialize. Big problem.

The US is simultaneously (i) throwing billions of tax dollars at companies like ADM, Cargill, Solyndra and Tesla through various agriculture and energy programs and (ii) pushing these companies' exports through the NEI. As I mentioned months ago, such a combination is a recipe for trade frictions and maybe even a bunch of new investigations of - and eventual tariffs on - US agricultural and "green energy" exports.

Just as I predicted months ago, the still-struggling economy has caused jittery, pork-loving US lawmakers to extend many biofuel and green manufacturing subsidies in the year-end tax deal.  And with US exports surging, only time will tell if the big compromise ends up being an unintended stimulus for trade lawyers around the world.

Wednesday Quick Hits

Just a few links tonight for your reading pleasure:

• Forbes rates the 10 worst cars of 2010, and you'll never guess what's all over the list. (Oh wait, yes you will.). "The real secret, McElroy adds, is that almost every hybrid on the market today is a flop: 'I guarantee you every single automaker is losing money on every single hybrid they build, with the exception of the Prius.'  Hybrids are losing money because consumers just aren't buying them. In the 12 years since hybrid vehicles have been on the American market, and with seven mainline brands selling more than 20 hybrid options--everything from the Lexus HS250h sedan to the Cadillac Escalade Hybrid SUV--hybrids still make up just over 2% of the market. And half of that belongs to the Prius."  The SmartCar is also in the top 10.  And once again, we shockingly find that there's money in making cars that people, you know, actually want.  Will Washington ever learn? 

• Defunct, WTO-illegal law is still paying out millions to its chosen benefactors.  (Zombie protectionism continues to roam the earth.)

• AEI's Phil Levy tells us everything we wanted to know about the KORUS but were afraid to ask.  A great rundown of most of the big issues surrounding the FTA (and I'm not just saying that because I was cited).

• In India, higher inflation and input costs spell trouble for domestic manufacturers.  Is this what American firms (many of whom rely on imported inputs) have to look forward to in the wake of QE2?  Awesome!  

• US farm exports set to break records in 2011, and the WSJ wonders if we're witnessing the next asset bubble in the booming US farmland market.  These are two very important things to consider as our politicians debate whether to extend our massive, trade-distorting agriculture subsidies in the next Farm Bill.

That's all for tonight, folks.

Sunday Quick Hits

I'm just back from some business travel, and there's lots to mention, so let's get right to it:

• Ten months of Section 421 tariffs on Chinese tires produce nothing except higher domestic prices and increased imports from other countries.

• New Cato briefer: The Miscellaneous Tariff Bill: A Blueprint for Future Trade Expansion.

• New Heritage briefer: Targeting the Yuan: A Feel-Good but Futile Response.

• Op-ed: Why imports are a boon for the US economy (and another reason why Keynesianism is dumb).

• In response to Krugman's latest China currency column, monetary economist rightly asks if we can revoke PK's Nobel prize.

• Boeing-Airbus dispute: the EU strikes back.

• WSJ editorial board asks an obviously rhetorical question: does Obama or the USW run US trade policy?

• Yet another trade dispute over "green" subsidies: this time Japan goes after Canada's "feed-in tariffs" for renewable energy generation.  You were warned, people.  You were warned.

• Shocker: Dems' anti-china push is based on politics, not economics.

• Excellent NYT op-ed on how visa reform is critical to the future of US global competitiveness.  Me: something China is already doing, by the way.

• Journalist notices that US pols attack China's currency policies to "save American jobs," but they don't seem to care about those same jobs when they block Chinese investment in the United States.

• Breakthrough?  Iowa farmers starting to balk at taking government money.

That should keep you all busy for a while.

Monday Quick Hits

Lots of interesting stuff over the last two weeks, so let's get right to it:

• FedGov economists: Increasing exports won't increase US manufacturing jobs.  Three economists from the US International Trade Commission write, "While export promotion is often seen as a strategy of increasing manufacturing employment, in the past decade US employment growth has all been in the services sectors. Even though manufacturing is important in itself, the promotion of US exports is likely to generate more indirect jobs in wholesaling, transport, and professional services than direct jobs in manufacturing."  Of course, you already knew this because you read my post on the issue last November(!).

• While loudly demagoguing manufacturers that ship jobs overseas, the administration is spending millions of taxpayer dollars to train foreign IT workers.  Holy policy disconnect, Batman!

• On the bright side, lousy US trade policy can't hold back global trade.  From The Economist: "Trade has not been devastated by the raft of protectionist actions taken during the downturn. According to the World Bank, the rise in tariffs and anti-dumping duties explains less than one-fiftieth of the collapse in world trade during the recession. For the most part, the fall in trade reflected a drop in demand." Even better, early evidence suggests that "re-balancing" is occurring: "There is even some evidence that activity has rebalanced from the lopsided trade pattern that existed just before the crisis. Then, the share of emerging-world imports that came from rich countries had been on a steadily declining path. But now demand from emerging economies is helping to prop up rich-world exports to a larger degree than is commonly realised. According to IMF figures, of nine emerging markets in the G20, seven got a higher share of their imports from rich countries in 2009 than they did a year earlier. Just 59% of China’s imports came from rich countries in 2008, but this rose sharply to 66% in 2009. India obtained 42% of its imports from rich countries in 2008, but last year this rose to 47%."  Gee, and we didn't even have to impose self-flagellating 35% tariffs on China to do it! (Paul Krugman was unavailable for comment.)

• Sen. Lincoln may be going down in flames, but she's gonna subsidize everything on her way out.  Behold, desperation efforts from Arkansas' queen of farm subsidies: "Large-scale farms would disproportionately benefit from a $1.5 billion disaster aid package for which Sen. Blanche Lincoln says she's secured funding, an advocacy group said in a report released Thursday. Lincoln, who is in a tough re-election fight in Arkansas, has said she's received assurances from the White House that the Agriculture Department would fund $1.5 billion administratively for farmers who lost crops in 2009. Democrats agreed to cut the aid from a small business lending bill last week. The Environmental Working Group on Thursday projected that the largest share of the aid — $210 million — could go to Lincoln's home state with 270 farms collecting more than $100,000 each in disaster subsidies."

• Shocker: BMW outpaces its European rivals by making cars that people actually want.  From the WSJ (subscription): "Making cars people want to buy is a better investment proposition than making cars governments have to bribe people to buy. Just look at BMW, the top-performing European auto stock this year even as rivals received a substantial boost from scrapping incentives. Through design and good fortune, an expectation-beating second quarter could be a harbinger of further outperformance by the German company."

• Something to remember the next time you hear your congressman/senator badmouthing China and/or pining for a trade war.  The US China Business Council recently released its annual report on US exports to China (helpfully broken down by congressional district).  Their overall conclusions: "'Even with a global recession, American businesses and American workers continue to benefit from expanding opportunities to sell high-value manufactured goods to the China market, the world’s fastest growing economy,' USCBC President John Frisbie said. 'A clear trend that began in 2000 continued in 2009: Exports to China continued to outpace export growth to other global markets,” Frisbie continued. “US exports to China have jumped 330 percent since 2000, compared to 29 percent to the rest of the world.'”

• The Obama administration celebrates CAFTA's 5th birthday by filing a labor complaint against Guatemala.... naturally.  My favorite quote: "In a statement released yesterday by the Guatemalan Ministry for Foreign Affairs, the Central American country expressed surprise at the complaint, and was even more taken aback by Washington’s decision to announce the dispute in such a public fashion. The Ministry’s statement also alluded to Guatemala’s concerns that the complaint could be politically motivated."  Playing politics with US trade policy?  This administration?  Never!

• Leaked: WTO sides with China in dispute over US barriers to chicken imports.  Per Reuters: "A World Trade Organization panel has ruled in favor of China in its dispute with the United States over an effective U.S. ban on imports of Chinese chicken, a Chinese source said on Tuesday. The WTO issued a ruling in the poultry dispute to the two parties on Monday, but it remains confidential until it is published in a couple of months time. There was no official comment from Chinese or U.S. authorities. Asked whether China had won the case, the source, who is familiar with the ruling, told Reuters: 'You could say that ... It went well.'"

• Video: Vietnam continues to take market share from China.  Bloomberg: "The communist nation drew 13.5 percent of the Association of Southeast Asian Nations' foreign direct investment pool in 2008, up from 4.4 percent two years earlier, according to the 10-member group."

Wednesday Quick Hits

I'm travelling once again, so just some headlines and snarky commentary tonight:

• At this rate, the only onese left running in the "race to the bottom" will be a unicorn and a leprechaun.  More proof in China that the race to the bottom is a myth.  (Get it?) (h/t Alec Van Gelder).

• "The value goes to where the knowledge is."  The iPhone4 continues where previous iPods left off - providing proof that, despite misleading "trade deficit" stats between the U.S. and China, the real winners are Apple's employees, shareholders and consumers.)  Mark Perry provides us with some great commentary and the money graphic:

• The only difference between the "green economy" and Three Card Monty is that we're not forced to play monty.  This time, NRO's Kevin Williamson explains how many of your and my tax dollars are going to BP in the form of subsidies for corn ethanol.  Hint: it's a-%&*!ing-lot.

• NYT Editors: "Hey, did you ever notice that the United States no longer has a trade policy?"  Yes, this editorial (unsurprisingly) was written 12 months late, but, hey, at least they've finally noticed.

My (and Your) Tax Dollars to Subsidize Brazilian Cotton Farmers Indefinitely

Great* news!  Because of an agreement reached last week between the United States and Brazil, American citizens will continue to be forced to provide hundreds of millions of tax dollars in hush money"technical assistance" to Brazilian cotton farmers!  Granted, the new agreement also delays the imposition of about $1 billion in Brazilian retaliatory sanctions against American exports due to US refusal to implement multiple adverse WTO rulings against the US cotton subsidy program.  But considering the undeniable fact that such a move was in both country's commercial interests (the sanctions would punish Brazilian consumers and American exporters alike), the big news here is the embarrassing fact that the agreement continues the aforementioned Brazilian briberycompensation.  Cato's Sallie James does a good job summing up this debacle as follows:

Notwithstanding the efforts of four brave congressmen, the belated concession to reality by House Agriculture Committee Chairman Collin Peterson, and the misgivings of trade analysts including myself, it appears that the “temporary” deal struck by Brazil and the United States in April to ward off Brazil’s retaliation for WTO-illegal U.S. cotton supports is here to stay....

You will recall that the deal includes about $147 million worth of taxpayers’ money given to Brazilian cotton farmers in the form of “technical assistance,” just so we can continue our own insane cotton support programs without fear of U.S. exporters (including holders of patents and copyrights) being hit by retaliatory trade barriers and unpunished piracy.

Brazil in some senses has the right idea, of course. They recognize, correctly, that retaliation in the form of increased tariffs on American imports only hurts their own consumers, hence their stated desire for “negotiation and reform” instead of sanctions.  But they sure do have a lot of faith in the willingness of Congress to enact reform without serious pressure from, among others, aggrieved trade partners.

I hope their faith and saint-like patience is rewarded. In the meantime, we have (at least) two more years of subsidizing Brazilan farmers in addition to our own.

What a mess.  But I would disagree with Sallie on one thing: I don't think that the trade-savvy Brazilians have any delusions about the "willingness" of Congress to enact ag subsidy reforms, with or without foreign pressure.  Instead, I think the Brazilians realize perfectly well that (a) this Congress certainly isn't going to do anything about the US cotton program, (b) a billion dollars in trade sanctions will do nothing but harm their struggling economy; and (c) their threat of sanctions loses value the longer it's dangled out there (and it's been dangling for a while now).  So they're going to keep their (remaining) powder dry until (a) the global economy improves and (b) a new Congress takes over in 2011 that will probably be more, umm, "budget-conscious" and will very, very likely be without one of "King Cotton's" biggest champions - Senate Agriculture Committee Chair Blanche Lincoln (D-AR), whose chances of getting re-elected in 2010 are currently hovering between slim and none.  So the Brazilians' move last week might not reflect pie-in-the-sky idealism, but instead some good ol' fashioned DC cynicism.

But regardless of Brazil's motivations, one thing is very clear here: the US government's unwillingness to reform its insane, illegal agricultural subsidy programs means that, for the foreseeable future, American taxpayers will be forced to not only throw billions of their hard-earned dollars at American agribusiness, but also dish out millions in bribes to Brazil's cotton farmers.

Is it any wonder why a clear majority of the American people have finally had enough?


* "Great" may or may not actually mean "crappy."

Brave Reps Fight the Congressional Ag Subsidy Machine; Machine Yawns

A couple weeks ago, I wrote about the valiant bi-partisan effort in the US House of Representatives to repeal American cotton subsidies that have been repeatedly ruled illegal under WTO rules and have caused the Obama administration to insanely subsidize Brazilian cotton farmers to the tune of $150 million in order to delay Brazil's imposition of $1 billion in sanctions on US exports pursuant to those WTO rulings.  Back then, Reps. Jeff Flake (R-AZ), Ron Kind (D-WI), Paul Ryan (R-WI), and Barney Frank (D-MA) sent a great letter to President Obama pointing out the insanity of our current farm policy and asking that the White House lead the repeal effort - a letter that apparently went straight from Capitol Hill to the Oval Office trashcan.  (Shocking, I know.)

Undaunted, these brave and lonely Congressmen gained two more colleagues, Dave Reichert (R-WA) and Earl Blumenauer (D-OR), and issued on May 4 another sternly-worded letter on the absurd American cotton subsidies and the embarrassing US-Brazil dispute.  This time, the letter went to an equally unreceptive audience, if not moreso - the Chairs and ranking members of the Senate and House Agriculture committees: Sens. Blanche Lincoln (D-AR) and Saxby Chambliss (R-GA), and Reps. Collin Peterson (D-MN) and Rep. Frank Lucas (R-OK).  The full text of the letter is printed below, and you've gotta admire the signatories' efforts - there's simply no doubt that they have a very strong argument that the current US cotton subsidy situation is obscene. 

However, you've also gotta chuckle at the idea of this letter landing on the desks of proven cotton-benefactors Lincoln and Chambliss, of "Wheat Leader" Peterson, and of farm subsidy "champion" Lucas (whose district, by the way, has received almost 3.4 billion in farm subsidies since he took office).  Yeah, I'm sure that these subsidy-loving pols are going to get right on this matter.  You know, right after they finish keynoting the next annual meeting of the National Cotton Council.

But hey, at least these guys are trying.  That's a helluva a lot more than we can say about Lincoln, Chambliss, Peterson or Lucas.  Or President Obama for that matter.

------

The Honorable Blanche Lincoln
Chairman
Senate Committee on Agriculture, Forestry and Nutrition
328 Russell Senate Office Building
Washington, DC 20510-6200

The Honorable Collin Peterson
Chairman
House Committee on Agriculture
1301 Longworth House Office Building
Washington, DC 20515

The Honorable Saxby Chambliss
Ranking Member
Senate Committee on Agriculture, Forestry and Nutrition
416 Russell Senate Office Building
Washington, DC 20510-6200

The Honorable Frank Lucas
Ranking Member
House Committee on Agriculture
1305 Longworth House Office Building Washington, DC 20515


Dear Senators Lincoln and Chambliss and Congressmen Peterson and Lucas,

With the April 6, 2010 announcement by U.S. Trade Representative Kirk and Secretary of Agriculture Vilsack of an agreement between the U.S. and Brazil over the cotton dispute, the need to overhaul our domestic commodity support programs is more apparent than ever. Among other commitments, the Administration has agreed to begin paying Brazil $147.3 million annually for “technical assistance and capacity building” to head off the threat of retaliatory tariffs on exports costing U.S. industry $560 million and unprecedented sanctions against U.S. intellectual property rights costing $260 million. We will subsidize both U.S. cotton farmers as well as Brazilian agribusiness until the issue is resolved or until the passage of the next farm bill, while Brazil retains its right to move forward with its countermeasures.

It is clear that the necessary authority to resolve this issue rests with Congress and we write to respectfully inquire about respective committee plans moving forward. Between the threat to American innovation from cross retaliation against intellectual property rights of U.S. companies and budgetary pressures that make the payments to Brazil all the more disconcerting, there is a growing need to make fundamental changes in the U.S. farm policy. Passage of the next farm bill is years away at best and at worst there is no guarantee that it will include sufficient reforms to prevent Brazil from putting into place the tariffs and sanctions they have deferred for now. We believe it is imperative that the Committees address this issue and request that your Committees consider legislation that would resolve the cotton issue in advance of the coming farm bill reauthorization. Alternatively, if the farm bill is deemed to be the appropriate process to address this issue, we urge the Committees to rank the cotton issue among your top farm bill priorities and ask that you commit to ensuring the inclusion of sufficient legislative reforms to put this matter to rest.

While the U.S. cotton program has undergone revision by both Congress and the Administration, these changes were insufficient to resolve the cotton issue. Now the stakes have been raised with a wide array of American businesses being used as a lever against the U.S. in Brazil’s authorized retaliation. It is clear that our agricultural subsidies are outdated and are quickly becoming a liability for future trade growth. We understand these matters are complex. However, without such a commitment or plans to deal with the issue in advance of the farm bill, it would unfortunately appear that the Administration’s actions will have only delayed the inevitable retaliation against American businesses and workers at the cost of $143.7 million per year.

We look forward to working with you to address the pressing need to reform the agricultural subsidy programs, and in particular the cotton programs, so that they will help rather than hinder international trade.


Sincerely,


JEFF FLAKE
RON KIND
PAUL RYAN
BARNEY FRANK
DAVID REICHERT
EARL BLUMENAUER

Bi-Partisan Opposition to US Cotton Subsidies

Easily the biggest roadblock to reforming America's bloated, irrational and (often) WTO-inconsistent farm subsidies is the overwhelming bi-partisan support for them.  Whether in Congress or the White House, Republican or Democrat, it doesn't matter - agribusiness gets some L-O-V-E from almost everyone in Washington.  For a simple example of this fact, one need only look to the awful legislation introduced this week by Sens. Chuck Grassley (R-IA) and Kent Conrad (D-ND) that would obtusely extend a bevvy of ridiculous ethanol subsidies and the 54-cent-per-gallon tariff on imported sugar ethanol.  Of course, these Senators aren't alone in their blind love for using Americans' tax dollars to line the pockets of US agribusiness; indeed, you can't fall down on the House or Senate floor without hitting at least two Congressmen/Senators who issue a near-Pavlovian "Aye" vote every time they hear the words "farm" and "support" used in the same sentence.

However, there have always been a few poor, ostracized souls in Congress who refuse to grab a ladle for the farm subsidy gravy train, but they're pretty darn rare, and they end up taking a lot of heat on Capitol Hill and the campaign trail.  (Indeed, when they run for President, they end up getting pummeled like longtime subsidy-hater John McCain did in the all-important Iowa caucus and elsewhere in the Midwest).   So when a group of Republicans and Democrats join together to scream a chorus of "STOP THE INSANITY" on US farm subsidies, they deserve kudos and support.  Thursday was one of those times, as Congressmen Jeff Flake (R-AZ), Ron Kind (D-WI), Paul Ryan (R-WI), and Barney Frank (D-MA) sent a letter to President Obama, asking him to finally resolve the US-Brazil dispute over WTO-illegal American cotton subsidies by reforming the offending farm programs (something I've been advocating for months now) rather than what the White House is currently doing - i.e., keeping the trade-distorting programs in tact, bribingsubsidizing Brazilian cotton farmers with about $150 million in hush money"technical assistance," and putting future reform in the hands of some of the biggest cotton-lovers in Congress.

The letter from the Congressmen - affectionately referred to by Cato's Sallie James as the "Four Congressmen of the Cotton Subsidy Apocalypse"- highlights the patent absurdity of the current US action in the cotton dispute.  Just how absurd you ask?  Well, absurd enough to get super-conservative Paul Ryan and ultra-liberal Barney Frank to team up to stop the policy.  The letter is available here in a PDF, and I've also pasted it below as an image because I think it deserves as much circulation as possible.  It also deserves ample public praise, so kudos, Congressmen.  Nice job.  And who knows, maybe the ridiculous US-Brazil dispute will end up being the breaking point for a few more your House and Senate colleagues, pushing them to finally wise up and call for a dramatic reform of America's truly stupid (and dirty!) agricultural policies.

(Although I'm not holding my breath.)

Wednesday Quick Hits

There's been a flurry of noteworthy activity over the last couple days, so let's get right to it:

• Spreading your and my wealth to the world's cotton farmers.  As I noted a week ago, the United States avoided about $830 million in Brazilian trade sanctions by giving Brazil's cotton farmers about $150 million in annual hush money"technical assistance," instead of just eliminating the WTO-illegal US cotton subsidy programs that caused the whole mess in the first place.  Well, apparently USTR wasn't content with bribingsubsidizing only Brazilian farmers because it announced today that this slush fund can also provide US taxpayer money to farmers in Africa, Haiti, and, well, everywhere else.  So instead of reforming our own bloated ($2.8 billion/year), trade-distorting and WTO-inconsistent farm subsidies, we've decided to just subsidize everyone on the planet.  Problem solved!  Final note: Inside US Trade reports that Brazilian retaliation levels will balloon to more than $1 billion later this year, based on 2009 US subsidy amounts and the standard WTO calculation methodology.  Oh, goody.

• And speaking of Brazil and awful American subsidies....  BNA reports (subscription) today that Sens. Chuck Grassley (R-IA) and Kent Conrad (D-ND) introduced new legislation (S. 3231) to extend through 2015 a whole host of ethanol subsidies (volumetric ethanol excise tax credit, or the blenders' credit; the small ethanol producers tax credit; the cellulosic producers tax credit) and the 54-cent-per-gallon tariff on imported ethanol.  NRO's Kevin Williamson sums up this awesome subsidy/tariff combo best: "Ethanol users are paying a tax penalty to provide a tax break to ethanol producers.  How does that make sense, if using ethanol is a good and worthwhile thing that we want to encourage?  It does not make sense.  Government logic: Ethanol is so important, so green, and so wonderfully job-creating, that we have to give it enormous tax subsidies to maximize the benefits of using it.  And it is so very important… that we have to use punitive import tariffs to keep Americans from maximizing the benefits of using it, if the profits are not captured by our political constituents."  Nice.  The only thing Kevin leaves out, however, is that Brazilian producers of low-cost, cleaner-burning sugar ethanol are howling mad at this development, and justifiably so.  First, as I mentioned a while ago, new US renewable energy standards had given sugar ethanol preferred status in the US biofuels market, something Brazilian producers were very excited about.  Second, Brazil earlier this month announced the elimination of its own tariff on imported ethanol as a good faith sign of support for free global trade in biofuels.  So in one fell swoop, the Grassley/Conrad tariff destroys the benefits of point 1 and spits in the face of point 2.  Classy.

• Senators Schumer and Graham were, unsurprisingly, unavailable for comment.  The US-China Business Council released today its annual report on US exports to China, broken down by state.  The USCBC press release notes that 19 states exported over a billion dollars in American products in 2009, and that "China is the third-largest US export market, after Canada and Mexico, with $69.6 billion in sales during 2009, down just 0.2 percent over 2008--by far the best record for a major US export market in 2009.  US exports to the rest of the world combined fell nearly 20 percent in 2009."  Cato's Dan Griswold adds, "The USCBC figures tend to undercut complaints that China’s currency policies have stymied U.S. exports to that country.  In fact... since 2005, U.S. exports to China have been growing three times faster than our exports to the rest of the world."  I'd only add that, according to the USCBC study, New York (home to Sen. Chuck Schumer) exported $2.44 billion to China in 2009, second highest ever, and South Carolina (home state of Sen. Lindsay Graham) exported $869 million in the same year, the most ever for that state.  No wonder these guys want to start a trade war with China!  Oh, wait....

• Great news!  US international labor negotiations will be run by long-time AFL-CIO director!  Wait, what?  The Hill reports (emphasis mine) that "Cathy Feingold has been named by the AFL-CIO as its new director of international affairs, beginning June 1.  She follows Barbara Shailor, who is headed to the State Department to serve as special representative for international labor affairs."  Some of Shailor's past work can be seen here and here.  As you can see, she'll be an unbiased American advocate for free trade, economic growth and global development.  Or not.  (More on the new American approach to trade and labor standards is available here.)

• And finally, a Cotton/Farm subsidy palette cleanser to make you feel a tiny bit better about America.   Just so you leave here tonight with the warm-fuzzy knowledge that not everyone on Capitol Hill is willing to disregard global trade rules because he/she's in the bag for American agribusiness, I give you this great video of Rep. Jeff Flake (R-AZ) (h/t Andy Roth):
  
  
  
  See?  They're not all bad... and Jeff Flake's definitely one of the good ones.

That's all for tonight, folks.

US Bribes, Delays Its Way Out of Cotton Retaliation; American Taxpayers, African Farmers Foot the Bill

There was some big news earlier this week re: the US-Brazil dispute over WTO-illegal American cotton subsidies.  Let's have Reuters explain:

The United States on Tuesday headed off a move by Brazil to impose penalties on a wide range of U.S. goods by offering concessions on a export loan guarantee program and said it would try to negotiate an end to a long-standing trade spat over cotton.

The last-minute proposal came as Brazil was set to impose tariffs and lift protections on $829 million in U.S. goods, which would have been its right after a 2009 World Trade Organization ruling against U.S. cotton subsidies....

Under the plan, the United States pledged to make some short-term tweaks to its export credit guarantees and give Brazil about $147.3 million per year in damages for a "technical assistance" fund.

Brazil will give the U.S. Congress more time to figure out a longer-term solution to programs ruled illegal by the WTO.

The U.S. plan prompted Brazil to delay its planned moves, pending further bilateral talks, which Washington hopes will be complete by June....

Brazil recognized that it was impossible for the Obama administration to make major changes to farm programs without changes in legislation in Congress -- difficult to accomplish quickly in a sharply partisan environment, [former USTR official Jon] Huenemann said.

"The notion of breaking off something for just cotton outside of the Farm Bill process is an extremely tall order, and the Brazilians knew that," he said.

The plan buys Congress time to deal with cotton in its five-year Farm Bill law, due for renewal in 2012....

Blanche Lincoln, chairman of the Senate Agriculture Committee, and her Republican counterpart, Saxby Chambliss, said they were open to looking at changes for the Farm Bill.

"Ultimately, Congress, and the Senate and House Agriculture Committees in particular, are responsible for crafting changes to these programs," the senators noted.

The U.S. National Cotton Council, which represents farmers, also said it was pleased that the negotiations on long-term changes will be handled by Congress in the Farm Bill process.

The USDA announced on Tuesday it would cancel unused export credit guarantees by April 9, and would offer any remaining credits under new rates, with details still to be announced.

The news did not immediately affect cotton futures prices. One trader said the market would watch for further details.

USDA also said it would work to find ways to allow imports of fresh beef from Brazil.

So basically, the deal is as follows: Brazil won't impose almost $900m in retaliatory sanctions on US goods, and in return, the US will give Brazilian cotton almost $150m per year in "technical assistance" money, will slightly expand the US market to Brazilian beef, and will "tweak" its export credit guarantee program.  Meanwhile, US cotton subsidies - which the WTO has repeatedly found are illegal under WTO rules and distort global cotton markets to the detriment of Brazilian and poor African cotton producers - will remain untouched and the dispute will drag on.  And over time, Tom Vilsack, Blanche Lincoln (D-AR) and Saxby Chambliss (R-GA) will  help craft a long-term fix to US cotton subsidies through the 2012 Farm Bill.

What a total crock.

Now, don't get me wrong, the US-Brazil deal is not all bad.  Indeed, I see two good results: (1) it helps US exporters and Brazilian consumers by delaying the imposition of hundreds of millions of dollars in sanctions on US exports to Brazil; and (2) it helps solidify one of my 2010 trade predictions (i.e., "There will be no change to US farm... subsidy policies").

Of course "good" (and I obviously use that term loosely) thing number (2) leads us to the bad things about this deal, and boy are they bad.  First and foremost, the deal does nothing to end WTO-illegal US cotton subsidies that cost American taxpayers $2.8 billion dollars per year, distort global cotton markets, and harm poor cotton producers across the globe, especially in Africa.  Second, it puts US taxpayers on the hook for another $150 million in bribessubsidies - to Brazilian farmers!  Deus meu!  Third, it delays ultimate resolution of an onerous WTO dispute that's been tarnishing the United States' international reputation for years.  And fourth, the deal puts the cotton dispute's long-term fate in the hands of Tom "Subsidy Recipient" Vilsack and two of Congress' biggest cotton subsidizers - Sens. Blanche Lincoln and Saxby Chambliss.

No wonder that the National Cotton Council was "pleased that the negotiations on long-term changes will be handled by Congress in the Farm Bill process."  They're keeping all of their taxpayer cheese, and their top two wolves are guarding the Farm Bill hen house!

Unbelievable.

Oh, who am I kidding, this whole "deal" is totally believable.  Despite loud pleas from free market advocates and Republican leaders (which Huenemann forgot to mention to Reuters, by the way) to really resolve the US-Brazil cotton dispute by - crazy, I know - actually terminating the WTO-illegal, trade distorting American cotton subsidies, the Obama administration has taken the easy way out.  Of course, only this administration would think that $2.8 billion plus another $150 million in US taxpayer money (that we, of course, have to borrow because we're broke) would be "easy," but hey, that's how this White House rolls, baby.  I mean why tick off agribusiness and its big supporters on Capitol Hill (from both parties) during an election year when you can just stick it to US taxpayers and poor African farmers (or consumers or exporters or...)?

I don't know about you, but I just can't wait to see what June's big bilateral deal will be.  I mean, if this initial fix is any indication, taxpayers are really going to get screwed then.

But hey, at least US cotton farmers are happy.  Ugh.

More Brazil Cotton - Corrections

As noted in my recent backgrounder, the WTO last August authorized Brazil to impose a little under $300 million ($294.7m) in retaliatory sanctions against the United States as a result of US refusal to comply with the WTO's decisions in Upland Cotton.  Those numbers, however, were based on 2006 trade statistics, and the level of actual retaliation imposed by Brazil this year would be based on more recent statistics, as calculated using a formula sanctioned by WTO arbitrators. (Total retaliation is supposed to equal the amount of the injury that the U.S. subsidies currently impose on Brazil.)  Over the last few months, there have been multiple conflicting reports about just how big Brazil's actual sanctions will end up being, and there have been no public WTO source documents confirming an exact amount.  For this reason, the aforementioned backgrounder used the original WTO numbers (i.e., $294.7m).  However, lost (to me at least) in yesterday's announcement was the official release from the Brazilian Government (translated via Google) giving the number (based on 2008 trade data), and, well, it's a lot bigger than $300 million - almost three times bigger.  Here's the relevant excerpt from the translated release:

The extra charges levied on U.S. products included on the list should represent an additional cost to U.S. exporters $ 560 million, calculated based on the behavior of trade in 2008.

Brazil has set aside another $ 270 million for retaliation in intellectual property rights, which will have more time to implementation. Among the measures supporters within the government are "parallel importation" of products (purchase of products that are protected by U.S. patents in countries that do not pay the patent, such as India) and collection of taxes on royalty payments of audiovisual products like sitcoms and movies of American companies.

A final decision on retaliation in intellectual property, called "cross-retaliation" will depend on meeting the Board of Trade (Camex), which will choose the sectors to be affected and shall submit the decision to public consultation. The government acts with caution, since the right to apply to "cross-retaliation" has been granted so far only two cases of small countries that have chosen not to exercise their right for fear of reprisals.

With the publication of the list of goods subject to trade retaliation to the U.S., the government fixed within 30 days, after which the measures will enter into force. The Brazilian government has been authorized by the WTO to create additional barriers to American products as a result of dispute raised by Brazil against subsidies to cotton growers in the U.S.. At the end of the case, the WTO has estimated $ 830 million annual losses of Brazilian producers with the unfair advantage given to U.S. producers.

So that's a total of $830 million in total sanctions - $560m in tariffs on US goods (paid by American exporters, of course) and $270m in intellectual property infringements.  USTR's information sheet confirms these amounts too.  Yikes.

Second, international policy gadfly Chris Nelson issued a correction to last night's report about which agency in the Obama administration dropped the ball on the negotiations with Brazil:

[I]n last night's Report, we mistakenly placed the main burden for dealing with Congress and the Brazilians on Commerce...our misunderstanding, not our source's.

In fact, informed sources clarify, our basic story is unfortunately correct, that the Administration dropped the ball with Brazil.  But the ball was supposed to be carried by USTR.

Now in fairness, sources note, USTR has been engaged, both with the Brazilians and the US business community.

The mission today by Commerce Secretary Locke is for a long-standing regular meeting of the US-Brazil CEO forum.

However, what is driving everyone crazy is the authorized USG "line" that somehow "the ball is in Brazil's court"...total nonsense, alas.

It's the US that lost the case, finally and irrevocably, with the final WTO ruling last November after years, quite literally, of argument and negotiation.

So you don't need either a law degree or years of trade negotiating experience to grasp that responsibility for movement is entirely on the US side...at least to the extent that a counter-offer should be tabled before the US can complain about Brazil issuing its 30-day warning on tariffs.

So to recap: the White House still deserves heaps of blame, it's just a different part of the White House at fault.  Alrighty then.

Brazil Cotton, Ctd. (UPDATED)

[Updates at bottom, including Brazilian source documents.]

Well, looks like news reports from Friday that Brazil would again delay its retaliation against American exports as part of the bilateral cotton dispute at the WTO were wrong a little off.  According to numerous news outlets, the list of targeted US exports was released today.  Here's Bloomberg with the news:

Brazil has published a list of 102 U.S. products on which it will raise tariffs for 365 days in retaliation for American cotton subsidies as allowed by the World Trade Organization.

The list, published today in the Official Gazette, raises tariffs on American-made cars, boats and refrigerators among other industrial goods. Potatoes, raisins, cherries and pears are among the agricultural exports that will be sanctioned. The tariffs range from 14 percent to 100 percent.

Brazil may take additional measures, according to the statement published in the Gazette.

More on this news later.

UPDATE: Reuters reports that the new list won't go into effect for 30 days, so it looks like last week's story about the 30-day delay and continuing US-Brazil consulations wasn't entirely "wrong," just off about the list being delayed.  And my analysis from Saturday remains valid.

UPDATE2: The pages of Brazil's official gazette listing the targeted US exports are below (click to enlarge), and the AP has more details here.  The table in the bottom left/top right of the first/second image is the list.  If you're like me and don't speak Portuguese, you can still figure out all of the products listed because the tariff codes on the left are universal under the Harmonized System.

UPDATE3:  Chris Nelson of the Nelson Report has some of the juicy details behind today's retaliation announcement and Sec. Clinton's visit to Brazil last week, and it's not pretty for the United States [see 3/9 correction here]:

Commerce Secretary Locke is due in Brazil tomorrow (3/9) with a US counter-proposal of some kind.

However, informed sources say that unless there was a "miracle" of staffwork since Friday, "he will not have a fully prepared counter-offer to present, as there was NONE ready last week, even though we've known about this day of reckoning for years."

And to produce one properly "means it's highly unlikely Locke will have anything resembling a complete offer, since to get one is a vastly complex matter, dealing with many, many players and variables in Congress and elsewhere."

Specifically, the WTO decision rules against US subsidies to cotton farmers, and our export credit guarantees... meaning any substantive changes would have to be approved through the legislative process....

[T]he Brazilians were expecting Secretary of State Clinton to raise the case during her visit last week, indeed, they had been led to believe she would at least discuss the US counter-proposal allegedly being delivered by Locke...

Instead, sources say not only did Hillary NOT deliver any of the prepared talking points on the cotton case, but as of Friday, as noted above, there was NO US counter-proposal for Locke to bring with him.

So if any delay is to be negotiated, it seems likely to be based on a promise of some distant, future legislative remedy, not on the facts.

On Clinton's meetings last week, sources here say she didn't relay any of the prepared comments in her briefing book: "Whether she simply forgot, or decided she couldn't, because of the situation back here, I don't know", the source adds....

For what it's worth, observers say that the fault here is NOT USTR's, as responsibility for brokering a compromise proposal rests with Commerce, and to a certain extent the State Department's econ bureau.

[A] former senior US trade official "who rarely sides with the Brazilians on anything!" comments, on background, "the US has had years to work on something for this case. So we really are remiss on this. If we want our trading partners to meet their obligations to us, then we have to live up to our obligations, too...."

What a complete and utter mess.  Unmentioned in the reports above is the fact that Brazil still hasn't released its "cross-retaliation" plan for this same case.  As you'll recall from my recent (co-authored) Heritage Foundation backgrounder, the WTO has authorized Brazil to assess both (i) basic retaliatory tariffs against US goods (based on the list posted above) and (ii) certain sanctions on US intellectual property rights in Brazil.  As stated in the brief, "The IP sanctions will include suspensions or limitations on $270 million worth of U.S. imports' patents, copyrights, and trademarks and temporary bans on royalty remittances."  And according to the AP, Brazil is expected to list its final list of IP sanctions on March 23rd.  Faaaantastic.

Now, despite what appear to be the United States' finest attempts to totally botch this case and stupidly hurt its own exporters, there's still a very reasonable chance that (i) the US and Brazil will broker some sort of fix before the retaliation begins in 30 days, or (ii) Brazil will again delay the retaliation in order to keep trying on a compromise deal.  As I said last week, it's pretty obvious that Brazil doesn't want to impose these sanctions and would take some sort of compensatory deal unrelated to the US cotton program (something Brazilian officials expressly admitted today).  So maybe these tariffs won't ever see the light of day.

Nevertheless, the Obama administration's trade incompetence is on full display here, and we're definitely one big step closer to full-on retaliation by Brazil due to that incompetence and (of course) several years of good ol' fashioned political refusal to comply with the underlying WTO rulings against US farm subsidies.

Finally, and as I said on Saturday, even if Brazil and the United States reach some sort of "deal," it's quite likely that the illegal US farm programs will remain in place, that US credibility at the WTO (and in the global trading system more generally) will take another hit, and that the efficacy of the WTO itself will be further called into question.

More to come...

Brazil Determined to Make My New Briefer on Cotton Dispute Half as Important

[UPDATED HERE]

BNA is reporting (subscription) that Brazil will - for the third time in less than a month - delay its announcement of a final list of US exports that will face about $300 million in retaliatory tariffs due to US refusal to comply with multiple WTO rulings against American cotton subsidies.  Brazil is delaying the list - originally due in mid-February, then March 1st, then March 8th - because Secretary of State Clinton has promised that the US will work things out:

During a one-day visit to Brazil, Secretary of State Hillary Clinton announced March 3 that in the coming week the United States would send two high-level government officials to Brazil to present compensation proposals to resolve the dispute over U.S. cotton subsidies.

Brazil has threatened to apply sanctions if the United States does not remove its cotton subsidies. The World Trade Organization last year ruled in favor of Brazil in the country's challenge of American compliance with a WTO ruling on cotton subsidies and granted Brazil the right to apply sanctions against U.S. products of up to $294.7 million, although the total could increase....

Prior to Clinton's comments, Brazil's Foreign Minister Celso Amorim told the press conference that on March 8, Brazil will release a list of between 100 and 120 products imported from the United States that could be subject to sanctions. After this, he said that Brazil will wait 30 days before making its final decision....

The Brazilian government's position from the beginning has been that the U.S. cotton subsidies must be removed as part of any negotiated agreement. Government officials have said they favor negotiations over sanctions and would consider compensation offers but are waiting for a proposal from Washington to resolve the dispute. Thus far, they say, no acceptable proposal has been received.

The Heritage Foundation's Daniella Markheim and I recently wrote a web memo on the dispute and its implications for US exporters and US trade policy more broadly.  This latest news makes it increasingly clear that (a) Brazil really isn't keen to retaliate against the US (and you can't really blame them, since such tariffs would hurt Brazilian consumers as much as the targeted US exporters); and (b) the United States and Brazil might "resolve the dispute" without actually ending the illegal US cotton subsidies at issue.  On the latter point, some have floated the idea that a reduction in the steep US tariff on Brazilian sugar ethanol might do the trick - especially after new US renewable energy standards give the product preferred status in the US biofuels market.

So if Brazil doesn't retaliate, problem solved, right?  Well, not exactly.  First, the market distorting subsidies would still be in place and thus continue to harm Brazilian and other global producers, particularly those in poor African countries like Benin and Chad.  Second, and as Daniella and I argue in our brief:

The U.S. has brought 94 trade disputes to the WTO in the trade body's 15-year history.  When the WTO has ruled in America's favor, the U.S. government is quick to laud the decision and demand that the offending party immediately comply. Yet when the WTO rules against the U.S., as it did in Upland Cotton, American officials denounce the ruling, question the WTO's authority, and make every effort to delay or skirt required reforms.

Such hypocrisy undermines U.S. credibility and the WTO's efficacy. The Administration has announced its intention to root out the unfair trade practices of other nations, but such enforcement efforts will fall flat until America cleans up its own approach to trade. Why would other nations comply with WTO rulings when the U.S. so brazenly ignores them?

America's refusal to comply with WTO rulings also erodes U.S. credibility as a free trade champion and weakens America's influence in multilateral trade negotiations. It is time for America to live up to the same high standards it demands from the rest of the world and end trade-distorting support programs, including payouts to King Cotton.

By my quick count, the United States has refused to comply with multiple WTO rulings on its farm subsidies, its antidumping procedures (both "zeroing" and the "Byrd Amendment"), and its ban on internet gambling.  Now, the United States isn't alone it its blatant disregard for global trade rules - the EU and other nations also haven't complied with adverse WTO decisions.  So far, such noncompliance remains the exception at the WTO, but it's definitely been on the rise over the last few years, and it undoubtedly encourages other countries to do the same (especially with the US as one of the most frequent scofflaws).

If these trends continue and the noncompliance exception ever swallows the rule, the WTO is in big trouble.