China CVD, ctd: The Wasted Opportunity

Yesterday, I took the first of what will likely be many looks at the Appellate Body's new "US-China CVD" decision and concluded that, from a legal perspective, the decision would have pretty significant (and likely adverse) implications for the United States Government.  From a policy perspective, however, it appears that Friday's ruling has cost the US as much, if not more, and the Obama administration only has itself to blame.

I stated yesterday that the Appellate Body's decision could have the following effects on the United States' current policy with respect to simultaneously imposing anti-dumping (AD) duties and countervailing duties (CVDs) on imports from "non-market economies" (NMEs) from China:

Finally, the AB's ruling could - could - effectively end [the Department of Commerce's] messy 5-year "CVD NME" experiment altogether. As you'll recall, the US Court of International Trade (CIT) has already ruled that DOC's CVD NME methodology, as applied in a case against Chinese offroad tires (which was also one of the cases at issue in the WTO dispute), violated US law. That case is currently under appeal at the Court of Appeals for the Federal Circuit, and if the CAFC upholds the CIT's very aggressive decision, you'll now have both the US courts and the WTO's Appellate Body finding major problems with DOC's current CVD NME policy (which, again, has been followed in many completed and pending AD/CVD investigations against China and other NMEs like Vietnam). The result of all of these adverse rulings could be one of three things: (i) DOC adopts a new CVD NME methodology that dramatically limits (or offsets altogether) the concurrent application of anti-dumping and countervailing duties against Chinese and other NME imports (although the CIT seemed to preclude this option); (ii) DOC no longer allows for concurrent AD/CVD investigations of NME imports; or (iii) DOC deems China to be a "market economy" and thus uses standard AD/CVD methodologies in all future cases. This last option seems pretty unlikely because domestic petitioners just love the NME methodology, but it's actually the simplest and most reasonable solution (especially when you consider the silly fact that Russia is a "market economy," while China isn't).  Regardless of the (hypothetical) option chosen, however, the end result would be pretty much the same: the diminished (or eliminated) value of petitioners' shiny new CVD NME weapon against Chinese imports.

The effects of this diminished (or eliminated) CVD NME tool are not just limited to petitioners in trade remedies cases; they also affect the broader trade negotiating positions of the US and Chinese governments when it comes to the NME issue altogether.  Before Friday, all of those existing AD/CVD orders against China as an NME, as well as the threat of future cases, were a very big pain for China and a very big weapon for the United States (especially considering that it had an extremely favorable WTO panel ruling in its back pocket).  Thus, the removal of China's NME designation (thereby "graduating" it to "market economy" status for anti-dumping cases) was a very big carrot that the United States could have used to negotiate Chinese concessions on important market access issues like China's indigenous innovation policies, its problematic stance on intellectual property rights, or its reluctance in the Doha Round.

Now, the Appellate Body's ruling will force major changes to the United States CVD NME policy and has totally flipped-the-script (as the kids say) on the US-China negotiating dynamic.  As I noted yesterday, there is no easy fix for the United States to comply with the AB's decision - there are dozens of AD/CVD determinations that will need to be re-done; USTR and the Commerce Department are going to have to do some serious legal gymnastics to develop and defend any new CVD NME methodology; and full compliance might even require an act of Congress (which should just go swimmingly).  So now, China's graduation to a market economy is in both its own and the United States' interest.  China would benefit by ditching the "non-market economy" stigma, and its exporters (and US consumers, natch) would benefit from the predictability of the market economy methodology for AD/CVD investigations and reviews.  But the United States also will benefit by forgoing all of the pain that will inevitably accompany its WTO compliance efforts.

Put simply, United States held on to its NME negotiating stock too long, and it just crashed.  It's certainly not worthless, but it'll never again be as valuable as it was last week.  Never.

And, not to rub any salt in the Obama administration's wounds with yet another I-told-you-so, but here's what Dan Ikenson and I tried to advise them on this issue back in 2009:

The time has come to seriously consider carrots and not just sticks—particularly since the pain from the sticks is not limited to its intended targets, but is felt in the United States and in other countries, given the transnational nature of supply chains. President Obama would invigorate the relationship if he were to grant China “market economy” treatment in anti-dumping cases.While such a reform would take very little out of petitioning industries’ hides, the gesture would win vast sums of goodwill from the Chinese—goodwill needed to resolve more important issues going forward. Indeed, repeal of the non-market economy (NME) designation presents a “win-win” scenario for several reasons. 

First, graduation from NME status is one of the Chinese government’s top international trade priorities. China wants to be treated like all other major economies, and accordingly, the Chinese government is likely willing to make important concessions in other contested areas of trade policy to achieve market economy status.  But the longer we wait to grant market economy status to China, the less valuable that concession becomes. Under the rules governing China’s accession to the WTO, the United States must repeal China’s NME designation by 2016. Thus, the value of that “concession” will be greater in 2009—seven years early—than it will be in 2010 or 2012. Much beyond 2012, and the concession looks a bit like Confederate money.

Second, China’s NME designation has drawn intense criticism from domestic consuming industries, trade policy experts, and U.S. trade partners because of its incongruous application (for example, Russia was deemed a “market economy” in 2002, yet still is not a WTO member, while China became a WTO member in 2001) and the latitude for abuse of administrative discretion it affords. Also, the relatively recent change in policy that opened the door to countervailing duty cases against China has sparked controversy about whether NME treatment in anti-dumping cases should still be permissible. U.S. revocation of China’s NME status would alleviate many of those domestic concerns at virtually no cost to domestic petitioning industries, but petitioners value NME because of the trade-suppressing uncertainty the process
engenders.

It is important that President Obama understand that our trade relationship with China has been mutually beneficial, that the rhetoric about the impact of unfair Chinese practices has been highly exaggerated, and that unnecessary provocation could open a Pandora’s Box of economic problems.

Alas.

Selling Trade in the 21st Century

Frequent readers of this blog (all six of them!) know that one of my many pet peeves is the attempt by supporters of free trade to try to sell it to the general public using a mercantilist, exports-only approach.  As I've explained ad nauseam, not only is this approach unnecessary in a 21st century global economy, but it's also self-defeating:

This approach - championed by Republican and Democrat administrations alike - is one that focuses almost entirely on expanding US exports, while completely ignoring the proven benefits of imports and foreign investment for US businesses and consumers. And it is manifest in America's insistence on "reciprocal" trade negotiations with other countries - a decades-old system in which the United States only agrees to open its markets if our trading partners open theirs too. Of course, this outdated system (and the United States' blind commitment to it) reinforces the idea that exports are good, and imports are the bad things that we must reluctantly accept in order to gain new export markets.

The reality, of course, is that both exports AND imports are good, and there are mountains of empirical and anecdotal evidence supporting this central truth - especially in this modern era of global supply chains and multinational investment. But when our leaders' attempts to sell trade focus only on exports, and when "reciprocity" becomes the central tenet of national trade policy, the obvious, yet completely wrong, implication is that the trade balance (exports minus imports) is a "scorecard," and that a trade deficit (more imports than exports) means that we are "losing" at trade. And, sadly, this false implication is readily manipulated by protectionists seeking to restrict global trade (and, by extension, individuals' right to voluntarily engage in, and benefit from, it).

More discussion of this fact is here, here, here and here - did I mention this was a pet peeve?  Thus, you can imagine my consternation when the well-intentioned folks at the US Chamber of Commerce released their Top 10 Reasons Trade is Good for America, and it focused almost entirely on exports.

Here we go again.

Fortunately, Cato's Dan Ikenson saved me a lot of time and effort and provided a fantastic amended version of the Chamber's top 10 list.  Dan's edits are in bold:

1. The United States is the number one manufacturing nation in the world, and that success depends on exports. And since over half of the total value of U.S. imports consists of “intermediate goods” (products that are used as inputs for further value-added activity), manufacturing success also depends on imports.

2. The United States is the world’s number one services exporter and has been since services trade data have been tracked. And one of the reasons that foreigners are able to purchase American services is because they have been able to earn dollars by selling goods to American businesses and consumers.

3. U.S. agricultural exports support nearly a million jobs in the United States. And, agricultural and manufactured imports have made life’s necessities and conveniences more affordable to hundreds of millions of Americans.

4. 95 percent of the world’s consumers lives outside the United States... as do 95 percent of the world’s workers, who produce many of the goods Americans consume as imports less expensively than Americans can, freeing up U.S. resources for investment, innovation, and consumption of the higher value products and services that Americans produce.

5. FTA countries purchased more than 40 percent of U.S. exports in 2009. And imports from those countries have helped extend families’ budgets and reduced the costs of production for U.S. business relying on inputs from those countries.

6. Since the creation of the WTO in 1994, U.S. exports of goods and services have doubled to more than $1.5 trillion. And real U.S. GDP has increased by 50 percent.

7. Imports support millions of U.S. jobs in retail, research, design, sourcing, transportation, warehousing, marketing and sales... and in manufacturing.

8. U.S. exports to China have quadrupled over the past 15 years, and China is now the 3rd largest market for U.S. exports. And U.S. imports from China, too often wrongly portrayed as evidence of U.S. profligacy or decline, have enabled U.S. industries that require access to lower-cost labor for economic viability to be born, to blossom, and to spark the advent of new products and industries.

9. U.S. companies with overseas investments account for 45 percent of all U.S. exports. And foreign companies operating in the United States employ 5.6 million Americans, support a payroll of $408.5 billion, provide compensation that is 33% higher than the U.S. average, account for 18% of U.S. exports, pay U.S. taxes, support local charities, and act as investment magnets in communities across the country.

10. Trade supports 38 million jobs in the United States–more than one in five American jobs. And most Americans enjoy the fruits of international trade and globalization every day: driving to work in vehicles containing at least some foreign content; talking on foreign-made mobile telephones; having extra disposable income because retailers like Wal-Mart, Best Buy, and Home Depot are able to pass on cost savings made possible by their own access to thousands of foreign producers; eating healthier because they now can enjoy fresh imported produce that was once unavailable out-of-season, etc.

Great stuff, and certainly worth repeating at every possible opportunity.  But if you ask me, what's as great or greater is Dan's rock-solid reasoning for trumpeting his amended top-10 list (beyond the basic economics, of course):

Informing new members and reminding old of the benefits of exports to U.S. businesses and workers is clearly a worthwhile objective of the Chamber, the business community, and really anybody interested in economic growth. But in some respect there’s a preaching-to-the-choir element in that approach. You’re not going to find too many policymakers opposed to exports, and the administration has constructed a whole new bureaucracy devoted to the proposition that exports should double in five years.

Where the trade agenda has stalled (and where it always has problems) is on the rough terrain that—for lack of a better catchphrase—might be called “rationalizing” imports. That’s been the hard part of trade adovcacy over the years: “We had to cede some access to our markets, but look what we got in exchange!”

In pitching the very same bilateral trade agreements two and three years ago that the business community is pitching today, then-USTR Susan Schwab liked to remind Congress that the United States had an aggregate trade surplus with the countries with whom the Bush administration had concluded free trade agreements, as though that were the appropriate success metric. “We export more to them than we import from them; let’s call this a triumph!” But anyone inclined to accept that statistic as conclusive could simply visit the Commerce Department’s website and see that, at the time, our overall trade account was in deficit by about $800 billion. Thus, if “exports minus imports” is the measure by which we judge the benefits of trade, then America should shun trade entirely. That sales approach doesn’t seem to be in short- or long-run equilibrium. Mercantilist arguments only ensure that every step forward on trade requires a full-fledged battle. We need better—that is, more comprehensive—salesmanship of trade for the new Congress.

Yes, yes, yes and yes.  As Dan notes, and as I've said repeatedly here, a winning trade sales pitch includes the economic benefits of both exports and imports, as well the basic and obvious morality of free trade (and, by extension, the immorality of protectionism).  Indeed, in a modern political climate increasingly skeptical of Big Government and crony capitalism, the latter moral arguments are probably the most compelling of all.  Otherwise, we're just repeating the same old losing arguments which cede almost the entire playing field to the other side.

Until the well-intentioned folks in Congress, the US business community and elsewhere understand these very simple facts and begin to embrace a smarter trade marketing strategy, a majority of Americans will never buy what free traders are selling.  And after decades of trying - and failing - to market free trade through mercantilism, it's not like we could do any worse.

The Perils of "Reciprocal" Trade Policy

A few days ago, I opined that the United States' use of "Buy American" protectionism as a negotiating crowbar to pry open Canada's own procurement market was a "very, very dangerous" move.  Little did I know that it was actually a precedent-setting event.  Here's Inside US Trade (subscription) with the depressing details:

Following a meeting with Mexican officials, U.S. Trade Representative Ron Kirk this week announced that he has offered Mexican officials to explore a reciprocal procurement deal by which Mexican firms would have access to U.S. government procurement contracts subject to Buy American provisions, provided that Mexico offers reciprocal access to U.S. firms.

This would be akin to an arrangement that the U.S. worked out with Canada last week, Kirk said in a Feb. 9 press conference following a two-day visit to Mexico with Deputy U.S. Trade Representative Miriam Sapiro.

He described the U.S.-Canada arrangement as reciprocal, giving U.S. businesses access to provincial procurement in exchange for Canadian firms bidding on procurement subject to Buy America provisions in the 37 states covered by the Government Procurement Agreement....

“We have committed to work with Mexico in a similar way [as Canada] if Mexico believes that is something that Mexican businesses are interested in pursuing,” Kirk said. “We would welcome the opportunity to have further dialogue and negotiations with the minister of economy to fashion the right program if Mexico so desires.”...

I've commented a few times about why "reciprocity" should not be the goal of free trade policies or trade negotiations, but it's mostly been in the context of "selling trade": the model reinforces the dangerous public misconception that imports are bad, because it - against all empirical evidence to the contrary - posits that our markets should be liberalized only if we get new export market access in return.

But the US-Canada and the US-Mexico negotiations also raise another serious problem with the "reciprocity model" - it implicitly justifies, and even advocates, protectionism.  In this case, we have the United States Trade Representative loudly trumpeting a blatantly protectionist measure - Buy American - because his team was able to use it to open Canada's procurement market, and now they're moving on to Mexico.  The logical extension of this policy is as simple as it is dead wrong: if this Buy American protectionism opened Canada's market, we should raise other barriers to foreign goods and services as a way to get other countries to give us market access!  Never mind that such barriers - as did Buy American - would punish US businesses and consumers and harm the US (and global) economy. And never mind that domestic liberalization benefits the economy regardless of what other countries do.  Nope.  We only open our markets when you open yours.  Ugh.

Of course, the absurdity of Kirk's "reciprocal protectionism" logic is easily exposed when one simply extends it to the Nth degree (Bastiat would be proud).  Just ask: Would the USTR ever advocate raising all US tariffs to their maximum allowable ("bound") rates under WTO rules as a way to then "negotiate" lower tariffs or other market access from our trading partners?  Just as with Buy American, the plan would be consistent with America's "international obligations."  And just like the US-Canada deal, those negotiations could result in "reciprocal arrangements."  But the new protectionist bargaining chips also would mean massive tax increases for American families, dramatic cost increases for American businesses, huge declines in foreign investment (as we commit economic suicide), and probable retaliation from our trading partners.  So USTR Kirk would never propose that.  He'd be laughed out of the room (unless that room was full of union leaders, of course).

And yet he justifies, and even praises, a little Buy American horse-trading because it's "reciprocal" and is now looking for other "reciprocal negotiations" with Mexico?  That's just silly.

As I said last week, "Buy American has been a complete debacle. It has stymied economic growth here at home and encouraged tit-for-tat protectionism abroad. To applaud anything but its complete dissolution is absurd, and to applaud its use as a tool in trade negotiations is very, very dangerous."

Unfortunately, it looks like that "danger" is also very, very real.

POTUS' Trade Pitch Misses the Plate

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



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

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

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

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

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

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

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

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

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

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

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

It's Time to Take Doha Out Back and Shoot It

The WTO's Doha Round once held the promise of increasing global welfare by hundreds of billions of dollars and lifting millions of the world's poor out of abject poverty. Today it's become little more than a travel subsidy program for international diplomats and a tired punchline for trade geeks like me. And it needs to finally be put out of its misery.

It pains me to say this. For the last few years, I've resisted my colleagues' time-of-death declarations, most recently pointing to the near-breakthrough at last year's "mini-ministerial" as evidence that the Doha Round, while imperfect, was salvageable.  But last week's Ministerial Meeting in Geneva has finally settled it for me: Doha is dead.

As a doornail.

Now, true believers will argue that WTO Members are still trying, and that the Geneva Ministerial meeting was never intended to include formal Doha Round negotiations, and they'd certainly be right on both counts.  But three things were made very clear during last week's meeting, and each alone provides a strong indication that the Doha Round is in trouble.  Combined, however, they make it clear that the negotiations are a lost cause, and it's time to pull the plug.

(1) The apparent abandonment of the Round by much of the developing world.  To little fanfare, a group of 22 developing countries, including Brazil, India, Argentina and South Korea (but not China), announced the completion of a "South-South" trade agreement that would reduce tariffs on trade in manufactured goods between all signatories. The agreement, expected to be expanded to more countries and finalized by September 2010, does not formally conflict with the Doha Round - indeed, GATT Article XXIV, GATS Article 5 and the WTO's Enabling Clause each allow for regional trade agreements.  Informally, however, the agreement clearly signifies a lack of developing country confidence in Doha. First, the agreement was spearheaded by Jorge Taiana, foreign minister of Argentina and a longtime Doha critic who was quoted as saying that the agreement "is a clear demonstration that the developing countries are willing to continue working on strengthening South-South trade and in a process of liberalisation compatible with development." (Translation: we don't need no stinking Doha.)

Second, the timing of the announcement - smack-dab in the middle of the Geneva Ministerial Meeting - also is a clear signal of developing country disapproval for the current Doha Round process (often excluding developing Members from high-level negotiations), focus and outcome.  (Apparently, DG Lamy and other developed country ministers were extremely peeved upon learning that the Agreement's completion would be announced mid-Ministerial.)  Finally, the completion of the agreement will certainly diminish the signatories' incentives to complete a Doha Round Agreement that would undermine any tariff preferences/benefits that the South-South Agreement would provide them, particularly vis-a-vis non-signatories.  For example, Brazilian imports would have a significant tariff advantage over Chinese (or American or European) imports in, say, the Argentinian market, so why would Brazil want to ruin that sweet deal with a Doha Round Agreement that forced Argentina (and all other WTO Members, including South-South signatories) to liberalize its market for all WTO Members?  The obvious answer: it wouldn't.

So when the Doha Development Round is publicly undermined/opposed by the very targets of that "development," you know you have problems.

(2) The mirage of United States' involvement.  Developing countries aren't the only ones who have moved on.  I've complained for months now about how the Obama administration's lack of real involvement was hurting the Doha Round, and this fact was a constant theme of the Geneva Ministerial.  Indeed, in the last two weeks we saw developing Members, developed Members and industry groups all openly kvetching about the United States' (i) lack of Trade Promotion Authority (aka "fast track" negotiating authority); and (ii) refusal to make concrete commitments on agricultural and industrial market access, and the retarding effect of these things on the negotiations.  Personally, I think a lack of TPA is a surmountable obstacle because the US has completed trade negotiations (albeit few) without TPA.  But the last few months have made it very, very clear that one of the worlds richest countries, biggest subsidizers and supposed "free trade leaders" simply can't sit on the sidelines expressing vague "support" for the round, making demands of its trading partners, yet refusing to make real commitments of its own.  Such childish behavior might be acceptable by China or Argentina or even India or Brazil, but not the United States.  And past Doha Round breakthroughs have proven that when the US plays the "adult" in the room - e.g., being the first to make a strong farm subsidy commitment at last year's mini-ministerial - it can generate momentum and get things done.  When it sits back, however, everybody just points fingers, and nothing gets done.  Nada.

Either the White House doesn't understand this reality, or they understand it all-too-well.  In other words, the Obama Administration naively thinks that Doha can be completed with the United States being - to mangle an old saying - just another country on the WTO rollcall between Albania and Zimbabwe.  Or they think that the Doha Round is dead (or not going anywhere anytime soon) and have decided that there's simply no point in angering the farm lobby, domestic labor unions, certain manufacturers and the anti-trade greens in 2010 by offering formal liberalization commitments for a Doha Agreement that isn't going to materialize soon (or ever).  Instead, they'll just sit back, express "support," try to force things through secret bilateral meetings, and fail.  Happily.

Given the significant international trade experience at USTR - Ron Kirk notwithstanding (natch) - I find it impossible to believe the former scenario.  On the other hand, the latter, "politics-first" stance seems very plausible, given (i) the myriad other examples this year of this administration sacrificing trade to advance political priorities; and (ii) the United States' blatant refusal (subscription) last week to commit to a ministerial-level "stock-taking" session in March 2010.  The stock-taking brushoff is especially damning, as it's a crystal clear sign that the United States isn't planning to make formal negotiating offers anytime soon and just doesn't want to get publicly lambasted (again) by most other WTO Members in less than four months. Who needs that, right? Ugh.

Of course, this might be smart politics, but it's dreadful policy.  As I've already pointed out above, things at the WTO just don't move without US leadership, so if Doha wasn't already dead, the Obama administration's political calculations pretty much ensure that it is now.

(3) The Round's complete lack of credibility.  For the last several years, business groups and other Doha Round observers have been treated to a silly five-step dance: (i) set deadline; (ii) breathless, optimistic urgency by WTO leadership (most recently DG Lamy); (iii) missed deadline; (iv) finger-pointing; and (v) stock-taking.  (Over and over and over and....)  Only twice since 2005 has there been significant movement: November-December 2005 (with the agriculture offers of the US and EU) and last year's mini-ministerial.  Other than that, nothing has moved - it's been eight years, and we're still negotiating agriculture and industrial modalities! - and yet the deadlines, baseless optimism and finger-pointing continue.  Indeed, although one must feel sorry for DG Lamy and certainly can't fault his enthusiasm, the "deadline dance" has caused his calls for completion of the Round in (now) 2010 to be met with chuckles, instead of urgency.  And while this diplomatic stagnation is kinda humorous, it's also created a complete lack of confidence in the global business community - the primary lobbying force behind any final deal - that a Doha Agreement is forthcoming.  Without that confidence, business groups simply won't spend the time and money necessary to engage in a major pro-Doha lobbying effort.  And without strong business support, WTO Members (who are always politicians first, and free traders second or third) have little motivation to confront their protectionist constituents with a major trade liberalization agreement.  In Geneva last week, the key business groups were there, but their efforts were pretty minimal compared to years past.  Sure, they'll swear up-and-down to the contrary (except for the occasional moment of candor), but deep down everyone knows better.

Each of these three problems was on full display at Geneva last week, and they're the key reasons that I'm throwing in the towel on a comprehensive free trade agreement to emerge from the Doha Round.  Yet while this is a somewhat depressing realization, there are a couple reasons for hope.  First, if WTO Members could ever bring themselves to admit that Doha's dead, they could quickly complete the Round's uncontroversial negotiations, such as those on trade facilitation, that could improve global welfare by billions of dollars.

Second, and as I discussed recently, the collapse of the Doha Round might cause nations truly interested economic growth and development to take a hard look at the efficacy of reciprocal trade liberalization and maybe, just maybe, seek a better way forward.  In an era of global supply chains, foreign investment and multinational corporations, current "free trade" negotiations - which incorrectly treat liberalization as a zero-sum game and deem market access offers to be "concessions" - are proving increasingly antiquated and difficult.  (Why should doing something that's undeniably in your interest be so darn painful?)   Now more than ever, open markets and improved capital flows are beneficial in their own right, and the Doha's failure could accelerate the process of transitioning away from the old-school "reciprocity model" to a system in which nations engage in unilateral trade liberalization in order to better compete for global capital and talent.

I know, I know, that's some Lamy-esque optimism there, but it's all I got right now.  I'm in mourning afterall.

Now somebody give me the gun, and let's get this over with.

Rethinking Protectionism and Reciprocal Trade Policy

Cato Institute scholar (and coauthor) Dan Ikenson has a new paper out this week that examines whether globalization - in particular the interconnectedness created by modern investment patterns and global supply chains - has rendered protectionism and reciprocal, tit-for-tat trade policy obsolete.  (By "obsolete protectionism," of course, I mean "utterly ineffective in protecting domestic jobs and production," not "ineffective as a political tool to scare-up votes" (see, e.g., Schumer, Chuck).)

Dan and I grazed this subject in our paper when we said, among other things, "The fact is that U.S. labor and Chinese labor are better characterized as complements in a transnational production supply chain rather than competing substitutes in a zero-sum world.  That is a relatively new reality of international commerce that trade policy, trade negotiations, and too many trade commentators have yet to fully grasp."  I also rubbed up against the issue when I noted how Ford Motor Company was ripping seats out of its imported vans in order to secure preferential tariff access and proclaimed that "protectionists play Atari 2600 while the world now plays Wii."

Well, Ikenson's new paper takes a much deeper look at the relatively new phenomena of foreign investment and integrated supply chains and their impact on not only old school protectionism, but also classic trade negotiations based on reciprocal market-opening "concessions":

During the past few decades, a truly global division of labor has emerged, presenting opportunities for specialization, collaboration, and exchange on scales once unimaginable. The confluence of falling trade and investment barriers, revolutions in communications and transportation, the opening of China to the West, the collapse of communism, and the disintegration of Cold War political barriers has spawned a highly integrated global economy with vast potential to produce greater wealth and higher living standards.

The factory floor is no longer contained within four walls and one roof. Instead, it spans the globe through a continuum of production and supply chains, allowing lead firms to optimize investment and output decisions by matching production, assembly, and other functions to the locations best suited for those activities. Because of foreign direct investment, joint ventures, and other equity-sharing arrangements, quite often "we" are "they" and "they" are "we." And because of the proliferation of disaggregated, transnational production and supply chains, "we" and "they" often collaborate in the same endeavor. In the 21st century, competition is more likely to occur between entities that defy national identification because they are truly international in their operations, creating products and services from value-added activities in multiple countries. There is competition between supply chains, but only after there is cooperation and collaboration within supply chains.

But trade and investment policy has not kept pace with these remarkable changes in commercial reality. Our globally integrated economy requires policies that are welcoming of imports and foreign investment and that minimize regulations or administrative frictions based on misconceptions about some vague or ill-defined "national interest." To nurture the promise of our highly integrated global economy, governments should commit to policies that reduce frictions throughout the supply chain–from product conception to consumption–as well as in the flow of services, investment, and human capital.

There's plenty more of that great food for thought in Dan's paper, so go read the whole thing here.

One final note: once you understand the cool phenomena that Dan lays out, you're going to start noticing that instances of globalization confounding protectionist shenanigans have become very common.  For example - and not to pile on Senator Schumer (although it's often hard to resist) - the Peterson Institute's Jacob Funk Kirkegaard noticed last month that the good Senator received quite the smackdown by today's economic realities when he tried to protest a Texas wind energy project that used Chinese turbines paid for by Stimulus* dollars:

The issue of from where and when the government assistance comes in, Senator Schumer seems a little astray on his fixation with China.

The turbine in question—A-Power’s 2.5 megawatt turbine—is German technology, not Chinese, produced by the German company Fuhrländer, from which A-Power licensed it in 2007. The wonders of globalization make it even more complicated than that. In March, A-Power entered into another joint venture, that one 75 percent owned by none other than the US company GE Drivetrain, to operate a wind turbine gearbox assembly and testing plant in Shengyang.

Therefore, the gearboxes going into A-Power’s Chinese-made turbines that are heading to Texas will be produced by an entity majority-owned by the US corporation GE Transportation and hence US technology.

Such economic revelations make Schumer's simplistic jingoism seem downright silly.  However, I must admit that I feel a tad sorry for the Senator and other antiquated politicians like him.  I mean, it must be really tough on them when one of their go-to political moves becomes totally obsolete and often self-defeating.

(Ok, ok, I don't feel sorry for them.)