Guitars, Catfish and the Rise of Regulatory Protectionism in America

Ever since the advent of the WTO, and the GATT before it, governments' ability to use tariffs, quotas and other straightforward forms of trade protectionism has been limited and, in many cases, subject to retaliation by other WTO Members.  Indeed, such limitations on trade protectionism were the goal of the WTO's "channel and bind" strategy - "channel" all trade barriers into easily quantifiable tariffs, and "bind" them at agreed maximum levels.  However, as I've mentioned here before, these basic WTO disciplines also are subject to broad "exceptions" (under GATT Article XX and XXI) for things like national security, public health, safety and the environment.  Thus, regulatory measures can often (but not always) pass WTO muster, even though they restrict international trade.  These exceptions are widely recognized as necessary to protect WTO Members' sovereignty, and I think that they do serve that important purpose in most cases.  On the other hand, these exceptions also create an extremely ripe opportunity for WTO Members to use health, safety, environmental regulations as a backdoor means of protectionism.

The most high-profile example of the problems created by regulatory protectionism is probably the recent attempts by some US and EU government officials to impose carbon tariffs on imports from countries that haven't adopted sufficient economy-killing climate change mitigation measures.  Carbon tariffs, much like global warming itself, appear to be dormant right now, but that hasn't stopped the United States from pursuing other climate change-related regulatory measures and imposing many other kinds of regulatory protectionism over the last few years.

The most recent and publicized instance of this troubling trend came in last week's anger-inducing news that the federal government raided Gibson Guitars due to alleged violations of the Lacey Act, recent expansions of which prohibit trade in certain protected woods and create an extremely onerous "strict liability" (i.e., you're guilty even if you didn't intend to break the law) compliance standard:

Federal agents swooped in on Gibson Guitar Wednesday, raiding factories and offices in Memphis and Nashville, seizing several pallets of wood, electronic files and guitars. The Feds are keeping mum, but in a statement yesterday Gibson's chairman and CEO, Henry Juszkiewicz, defended his company's manufacturing policies, accusing the Justice Department of bullying the company. "The wood the government seized Wednesday is from a Forest Stewardship Council certified supplier," he said, suggesting the Feds are using the aggressive enforcement of overly broad laws to make the company cry uncle.

It isn't the first time that agents of the Fish and Wildlife Service have come knocking at the storied maker of such iconic instruments as the Les Paul electric guitar, the J-160E acoustic-electric John Lennon played, and essential jazz-boxes such as Charlie Christian's ES-150. In 2009 the Feds seized several guitars and pallets of wood from a Gibson factory, and both sides have been wrangling over the goods in a case with the delightful name "United States of America v. Ebony Wood in Various Forms."

The question in the first raid seemed to be whether Gibson had been buying illegally harvested hardwoods from protected forests, such as the Madagascar ebony that makes for such lovely fretboards. And if Gibson did knowingly import illegally harvested ebony from Madagascar, that wouldn't be a negligible offense. Peter Lowry, ebony and rosewood expert at the Missouri Botanical Garden, calls the Madagascar wood trade the "equivalent of Africa's blood diamonds." But with the new raid, the government seems to be questioning whether some wood sourced from India met every regulatory jot and tittle.

It isn't just Gibson that is sweating. Musicians who play vintage guitars and other instruments made of environmentally protected materials are worried the authorities may be coming for them next....

The tangled intersection of international laws is enforced through a thicket of paperwork. Recent revisions to 1900's Lacey Act require that anyone crossing the U.S. border declare every bit of flora or fauna being brought into the country. One is under "strict liability" to fill out the paperwork—and without any mistakes.

Conservatives and libertarians are rightly incensed by this kind of regulatory adventurism and its effects on US businesses, but what the article above leaves out is that, as noted in a recent Heritage Foundation study, the Lacey Act's legal requirements and strict liability standard are so severe that the law - intentionally or not - has crippled trade in both illegally-harvested and legally-harvested wood products.  And this protectionism has occurred mainly to the detriment of small importers and developing country exporters who simply can't afford to jump through all of these hoops (or risk even trying to do so).

Unfortunately, the Lacey Act is not alone.  For example, the WSJ reported last month that a little-known provision in the Dodd-Frank financial "reform" law, which bans trade in "conflict minerals," is causing harmful unintended consequences for poor African miners engaging in legal commercial behavior:

The world is in the midst of a commodity boom, but in a mineral-rich and desperately poor corner of Africa exports of tin, tantalum and tungsten have fallen by more than 70% since last summer. These are not the effects of war or natural disaster--although the region suffers from all of that and more--but rather of what local small-time miners are calling "Obama's embargo."

The African miners are basically right about the source of their troubles, though if they want to be more specific with the blame they might also call it the McDermott embargo, after the Democratic Congressman from Washington state. Jim McDermott is one of the architects of the Dodd

The goal of Section 1502 is to cut off money to those responsible for the fighting in the Democratic Republic of Congo, and by those lights the sales collapse shows that it's working. A spokesman for Mr. McDermott tells us that if the trend persists, they hope to see a similar drop in the rate of carnage. Over the past dozen years, more than five million people have been killed and more than 200,000 women raped in the fighting between rebel groups and government forces.

Section 1502 requires companies that use these minerals--they have applications in everything from electronic gadgets to medical devices--to disclose whether they, or anyone along their supply chains, source their minerals from Congo or any of the countries at its borders. If so, their SEC reports will have to detail the steps they're taking to not "directly or indirectly finance or benefit armed groups" in the region. If companies cannot demonstrate such steps, they will have to declare on their websites that their products may be funding African atrocities.

Behind the scenes, companies are working to soften the rules. Some industry groups are also putting in place systems that will let them continue to source from central Africa while telling the SEC their supply chains are "conflict free." But the logistics of guaranteeing this on a large-scale are daunting, and many suppliers find it easier to leave central Africa entirely. A case in point is the procurement policy of the H.C. Starck group, which affirms that it rejects all raw materials from the region, "even if we are offered material with allegedly official certifications from other state authorities."

Shifting all sourcing to places such as Canada or Australia may drive up industry and consumer costs somewhat. But as Verizon points out in a letter to the SEC, "For the foreseeable future, it is going to be much easier to demonstrate that the minerals are from somewhere other than the DRC Zone, than to prove that minerals mined in the DRC Zone are responsibly sourced."

The highest price is being paid in central Africa, where millions of people, and 16% of the Congo's population, are dependent on small-time digging. By all accounts most of the money from central African mining goes to these artisanal miners. Soldiers and rebels do pocket some of the proceeds, and that's a depressing reality.

But mineral operations also provide the local population with centers of commerce, with cash to pay for supplies and workers and easily traded goods. As money from the mines becomes increasingly scarce, Congo's warlords have moved on to targeting the banana trade. Perhaps conflict-free bananas will be the next object of activist enthusiasm.

Meanwhile, the butchery continues, with recent reports of government troops raping more than 100 women and children over a three-day spree in the Congo's South Kivu region. If all the money from minerals dries up, these killers will not shy from even more atrocious means to fund their ambitions. As for Western policy makers, Section 1502 is a useful lesson in how well-meaning attempts to "do something" in Africa unintentionally harm the innocent without touching the guilty.

So to recap: a little-know provision of a national financial reform law has caused imports of African minerals to collapse.  Meanwhile, this regulatory protectionism, and the carnage in Congo that it was intended to prevent, continues.

Your tax dollars at work, folks.  Sigh.

But wait, there's more: the Journal reported in February that the USDA is considering reclassifying Vietnamese "catfish" in order to subject it to far more onerous importation and inspection requirements.  And, gee, you'll never guess what would happen if USDA's proposed rule takes effect:

The U.S. Department of Agriculture is seeking public comment on its proposal to classify the pangasius as a "catfish." A lot rides on that name. The 2008 farm bill specifies new safety inspection on imported catfish so onerous it would amount to a ban for at least several years while foreign fishermen struggle to comply. Pangasius is the target because it has a similar taste and texture to American catfish but is cheaper—the main reason American catfish farmers have tried for years to ban the imports.

The problem is that the pangasius is an entirely different species of fish. In an earlier bout of protectionism, Congress even passed a law making it illegal to call pangasius "catfish" for marketing purposes. Since that hasn't deterred American consumers from buying pangasius, Washington is willing to call the Vietnamese fish a catfish again if that makes it easier to ban.

This would be funny if it weren't so costly and probably illegal. On health-and-safety grounds, both the 2008 law and USDA's moves to enforce it make little sense. Vietnamese pangasius, like all fish imports, already is regulated by the Food and Drug Administration. There have been no reported safety problems with the Vietnamese imports. In contrast, USDA has no experience regulating fish despite its history overseeing meat, and catfish will be the only fish species under its regulatory purview....

As for the illegality, stricter regulation is unlikely to pass muster at the World Trade Organization. Trade expert James Bacchus, in an opinion commissioned by fish importers, argues that the U.S. would likely lose if Vietnam sued precisely because FDA regulation already is effective. Trade judges would conclude the only reason to change the regulation was protectionism, and they'd be right. A former Democratic Representative from Florida, Mr. Bacchus was the chief judge of the WTO's appellate panel for eight years.

USDA has yet to announce its intentions with respect to the final rule on catfish pangasius, but it's clear that the proposed rule would amount to an effective ban on a perfectly safe, fairly-traded product that Americans really want.

And so much for Obama administration efforts to encourage healthier American eating habits, eh?

Another law to watch is the Food Safety Modernization Act.  The Act also imposes  new verification and other requirements for US importers and foreign exporters of all types of foods.  The FDA has yet to promulgate the new regulations that will implement the new trade provisions, so the law's overall impact on food imports and domestic food prices remains to be seen.  However, a recent study by Texas A&M University estimates that the programs will be extremely costly:

FDA will likely pursue a strategy of passing as much costs as they can/are allowed to the domestic private sector. Importers will have incentives to pass the costs of compliance verification on to their sources of supply. Foreign governments interested in increasing their country’s exports could end up bearing the costs of developing new export-oriented programs....

The FSML will place substantial costs on the private sector. These costs will have substantial structural impacts. They will also raise food prices. These declaratory conclusions are based on economic logic/theory backed by analyses of the impacts of the implementation of virtually identical food policies and programs by FSIS/USDA, for similar programs implemented by the LGMA, and by research indicating the impacts of food safety import regulations.

So the law will inevitably lead to higher food prices for American families and higher compliance costs for developing country farmers - a classic protectionism exacta.  (Meanwhile, the law's also raising serious concerns about domestic enforcement.)

Now, although I'm clearly not a fan of intensive regulatory adventurism (particularly in this economy), I don't mean to question the trade intentions of these particular regulations - well, not all of them, at least.  But it's undeniable that they are creating real impediments to lawful trade and needlessly harming American businesses and consumers, as well as poor foreign producers and exporters.  And, of course, these onerous regulatory trade barriers appear to have increased rapidly during President Obama's time in office, so one must necessarily ask the obvious question:

Is this all one big coincidence?

I honestly have no idea, and I also don't know whether these new regulatory measures, or any others out there, meet the requirements for one of the aforementioned WTO exceptions and thus are allowed under global trade rules.  But I'm quite sure that, as regulatory protectionism proliferates in the United States, other nations are undoubtedly going to go through the WTO dispute settlement process to find out.

EU Joins the "Green Litigation" Party

In early 2010, your humble correspondent began warning of an inevitable rise in trade disputes over "green" subsidies.  Since that time, several cases have popped up, and yesterday the EU announced that it wanted in on the fun:

The European Union has decided to request WTO consultations with Canada regarding the renewable energy policy of one of its provinces, Ontario, which provides subsidies to producers of renewable energy provided they use domestic technology. This is in clear breach of the WTO rules that prohibit linking subsidies to the use of domestic products.

The European Union leads the world in the promotion and development of renewable energies, and welcomes the commitment of Ontario to encourage their use. However, the promotion of renewable energies must be done in a manner consistent with international trade rules. The EU believes that the Ontario Green Energy and Economy Act (OGEA) is inconsistent with Canada's WTO obligations. Under the WTO, it is illegal to condition access to a subsidy to the use of domestic products.

The Ontario Green Energy and Economy Act (OGEA) empowers the Ontario Power Authority (OPA) to develop programmes to encourage the use of renewable energy. Under this regime, the OPA has developed a feed-in-tariff (FIT) programme that allows it to buy renewable energy at an above market price. This is a subsidy. In order to benefit from this incentive programme, the OPA has set conditions that favour domestic products and services. As an example, for solar energy 40-50% of the initial costs to develop a project must be made of up products or services from Ontario, rising to 60% for projects developed after 2011; for wind energy these rates amount to 25% for the initial costs, rising to 50% for projects developed after 2012.

Exports from the EU into Canada in wind power and photovoltaic power generation equipment are significant, ranging from 300 to 600 million € in 2007-2009. These figures could be higher should the local content requirements be removed from the legislation in question. The EU is also increasingly concerned by such measures taken by other trading partners.  Japan has already initiated WTO dispute settlement in respect of Ontario's measures. The EU initially sought a negotiated solution with Canada, but it was not possible to reach such a solution with Canadian authorities.

The WTO announced this new case today.  I've mentioned the Japan-Canada dispute before, and its details are available here on the WTO website.

More to come, I'm sure.

I Swear, I Had Nothing To Do With This...

On Monday night, I recommended that, given President Obama's depressing timidity on US trade policy, WTO Members should "formulate appropriate contingency plans, such as putting the [Doha] Round on ice until, oh I don't know, 2013 when the White House will (hopefully) be occupied by someone more amenable to free trade."  Well, less than a day later, it became crystal clear that pretty much everyone in Geneva, except the Obama administration of course, agrees with me (emphasis mine):

The likelihood of the Doha round of world trade talks being declared dead this year rose on Tuesday when it became clear that even a partial deal would not be possible.  The talks, named after the Qatari capital in which they were launched in 2001, have drifted further towards oblivion in advance of a twice-yearly meeting of ministers this December.

Pascal Lamy, the World Trade Organisation’s director-general, told negotiators in Geneva on Tuesday that the WTO’s negotiating function was “in paralysis”. He urged member countries to use the December meeting to have a broad conversation about the future of Doha rather than try to make concrete progress.

Negotiators have tried to rescue a minuscule part of the talks by proposing a stand-alone “early harvest” package to be agreed in December which would extend market access to some of the world’s poorest countries and reduce cotton subsidies – a subject of particular interest to a group of west African nations.

But the US said on Tuesday that such an agreement would not be possible because of the refusal of other governments to accept other elements in the package....

Michael Punke, the US ambassador to the WTO, said on Tuesday that the stand-alone deal was impossible. “It has become clear to us and to many others that a so-called early harvest package is not happening and is not going to happen,” he said. “As we feared, participants have proven much more comfortable in talking about what others can give than in talking about what they can contribute themselves.”

A deal to give the least-developed countries (LDCs) completely free access to rich nations’ markets and reduce cotton subsidies would require difficult commitments by Washington. The US has already failed to reform its generous payments to politically powerful cotton farmers, despite having had them declared illegal by the WTO, and a deal for the LDCs would cut across the existing US scheme to give preferential access to all African countries.

Yi Xiaozhun, the Chinese ambassador, took implied aim at the US, saying that the insistence on bringing in new issues was crippling discussions. “The intention of various members to put on their own demands . . . would finally kill the core package that the LDCs really need,” said Mr Yi.

The Doha round has made no significant progress since a ministerial meeting collapsed in mid-2008 in Geneva. An increasing number of officials admit privately that the round will never conclude, but as yet no government has publicly declared it over.

We all see what's going on here, right?  Any deal on cotton and LDCs - relatively minor issues that almost all WTO Members support - would require legislative changes to US laws and, of course, the expense of political capital by the already-campaigning White House to get that done.  As I said on Monday, the President's unwillingness to spend such capital on trade issues is well-documented at this point.  Indeed, when it comes to our WTO-illegal cotton subsidies, the Obama administration is so utterly unwilling to take some political lumps and pursue necessary reforms that it's resorted to bribing Brazilian cotton farmers (with taxpayer dollars, of course) instead of modifying the offending programs.

And let's please not kid ourselves here and blame Congress for the Administration's political pusillanimity on these trade issues - the House voted to terminate the Brazilian payoffs just last month, and both the Republican-controlled House and Democrat-controlled Senate recently showed a willingness to address US preference programs by attaching them (rightly or not) to the US-Colombia FTA implementing legislation.  So if the White House really wanted to get a cotton/LDC package through Congress, it could very likely do so.

But that would require, you know, political courage and effort - something sorely lacking these days over at 1600 Pennsylvania Avenue (and not just on trade).

So, given these sad facts, what does USTR do in Geneva?  They submarine the December deal by making other demands that many nations adamantly oppose.  Who knows whether they did this to try to buy off domestic opposition to the cotton/LDC package or to just kill the chances of a final deal, but the result of their demands was the same in either case: inevitable failure.

Again.

Yes, other Members like the EU also have made additional demands, but do you really think that they would maintain their positions if the United States expressed robust support for the basic LDC/cotton package?  I sure don't.  Indeed, as Phil Levy and I argued last December, bold US leadership could have realistically secured a robust Doha package in 2011.  Certainly it could get this feeble package across the finish line.

And yet, here we are.  Sigh.

So, once again, American political cowardice has helped scuttle an important trade liberalization initiative.  And, once again, supporters of robust American free trade policy are reminded that we, like the WTO negotiators in Geneva, should just pack it all in until 2013 (hopefully).

Any optimism before that time would just be foolish.

Why the Doha Round Is in Deep Trouble

Apologies for the blog silence over the last week or so; I was travelling for work and had nary a free second to post.  (I trust you survived without me.)  And since the US FTA debacle remains at basically the same place where I left it (i.e., a frustrating, painful and unnecessary stalemate created by the White House), I want to stop obsessing about turn away from the FTAs tonight and look at another depressing trade issue: the sorry state of the WTO's Doha Round of multilateral trade negotiations.

Columbia University's Jagdsish Bhagwati has a typically excellent op-ed in yesterday's NYT (h/t Steve Craven) on this very issue.  He laments, rightly I think, the bipartisan lack of support for the Doha Round, despite the fact that it has "far greater potential to create prosperity and help working Americans" than the pending FTAs that are currently sucking the life out of the US trade policy debate.  Bhagwati argues that the round deserves our attention and strongest efforts, and his reasoning is clear and pretty irrefutable:

Bilateral trade agreements are not the same as free trade. Yes, they liberalize trade for the parties involved, but outsiders then face a handicap. The discrimination comes in the form of barriers like tariffs and antidumping charges, which countries impose on imports that they believe are priced artificially low.

When the United States negotiates bilateral deals with other countries, the unbalanced nature of the one-on-one negotiations also opens the way for all manner of lobbies to ram their self-serving demands into the agreements.

For example, when Washington negotiated free trade deals with Chile and Singapore, Wall Street lobbied to curtail those countries’ right to impose restrictions on capital flows at times of crisis — even though the International Monetary Fund now admits that such restrictions often make sense. Business lobbies have also pressed for excessively favorable treatment on intellectual property rights.

American labor unions have learned these same tricks, urging Democratic legislators and administrations to block bilateral trade deals unless their demands for labor protections are met, as they did with the three long-delayed agreements now pending.

But larger countries with more clout, like India and Brazil, will allow no such provisions. They correctly see these labor provisions as a form of anticompetitive protectionism. And they point out that it takes chutzpah for the United States to argue for labor rights abroad that often exceed those at home.

Moreover, when powerful business and labor interests can extract concessions in those bilateral deals, they have no reason to support a multilateral trade agenda. Mr. Obama’s trade representative, Ron Kirk, points out that business leaders press bilateral trade deals, not the Doha round. The proponents of bilateral deals always complain that multilateralism is too slow. This surely confuses cause and effect....

The failure of Doha would cause immeasurable harm. It would undermine the credibility of the W.T.O. and its progress in promoting multilateral trade liberalization, and it would begin to erode the binding dispute settlement mechanism, an achievement unparalleled in other international institutions.

The value of that mechanism was demonstrated just this month, when a W.T.O. panel ruled for the United States and the European Union in a case challenging China’s restrictions on exports of industrial raw materials.

Bhagwati then offers a four-point roadmap for concluding the Doha Round.  It relies on one man - President Barack Obama - to "set our trade policy in the right direction" and get the Round across the finish line:

First, Mr. Obama needs to bring the business lobbies on board....

Next, the canard that Doha offers little gain for the United States must be put to rest....

President Obama must persuade labor unions, core Democratic constituents, that they are wrong to buy into the fear-mongering that says trade with poor countries produces poverty in rich countries....

The president should ask Democrats and Republicans to immediately add the Doha round, as it has been negotiated over 10 years, into the same all-or-nothing package as the three bilateral deals. Such a bold gesture has a precedent. After sitting on the fence his first year in office, President Bill Clinton embraced the cause of trade, despite the political costs, and fought fiercely, and against great odds, for the Uruguay round. Mr. Obama should do no less.

The specifics of Bhagwati's recipe for Doha success are different from those that Phil Levy and I set forth in an IBD op-ed last December, but the overall point of each piece is identical: Doha is extremely important, and its fate rests in the President's hands alone.

Unfortunately, as Levy and I noted last year, the political and economic conditions for White House leadership on Doha were much better back then than they are now, and, of course, the Obama administration did absolutely nothing to advance the Round since that time.  Nothing.  So, while I applaud Bhagwati's analysis and efforts, I think he's absolutely kidding himself if he really thinks that this already-campaigning President will wake up tomorrow and start vigorously defending the Doha Round and spending significant political capital convincing US businesses and, more importantly, American labor unions(!) that multilateral trade liberalization is an important and worthwhile endeavor.  Indeed, the current FTA impasse is a crystal clear reminder of President Obama's abject refusal to take on US labor unions in order to promote an American free trade agenda.  So why would he and his political team do it with a much larger (and more economically significant) trade agreement?

Quick (and obvious) answer: they wouldn't, and thus, the Doha Round remains in deep, deep trouble for the foreseeable future.

The sooner we all realize this sad fact, the faster we can formulate appropriate contingency plans, such as putting the Round on ice until, oh I don't know, 2013 when the White House will (hopefully) be occupied by someone more amenable to free trade.

It certainly couldn't get any worse.

Green Disputes on the WTO's Horizon

Over the last year or so , I've frequently expressed concern about the potential for increasing trade frictions over green protectionism, i.e., anti-trade measures couched in allegedly environmental terms.  ICTSD reports that the WTO will soon adjudicate two new green trade disputes which could have pretty significant ramifications (emphasis mine):

Environmental issues featured prominently in last week’s meeting of the WTO Dispute Settlement Body (DSB), as members deferred Japan’s first request for a panel on the Canadian province of Ontario’s green energy plan, while granting the Ukraine’s request for a panel to adjudicate its dispute with Moldova on discriminatory “environmental charges.”...

Ontario’s feed-in tariff (FIT) programme for renewable energy has been an area of contention between Ottawa and Tokyo since last autumn. Under the FIT programme, Ontario supports the generation of green energy by guaranteeing electricity purchase prices, grid access, and long-term contracts to renewable energy producers thus limiting their risks and supporting needed investments. Around 75 similar programmes are currently in place worldwide.

However, it was not the FIT programme itself but a local content provision within the programme that landed Canada at the WTO. To receive FIT support, renewable energy producers must ensure that a certain percentage of the goods and services used for setting up the facility comes from Ontario. This can be as high as 60 percent. Japan alleges that the measure violates the national treatment provisions of the General Agreement on Tariffs and Trade (GATT) and the Agreement on Trade-Related Investment Measures (TRIMS).

Tokyo also claims that the local content requirement makes the FIT a “prohibited subsidy,” under the terms of the WTO’s Subsidies and Countervailing Measures (SCM) Agreement....

The Japan Ministry of Economy, Trade and Industry, in a 1 June press release on the dispute, cited concern over the “possible proliferation of such protectionist measures all over the world” as their motivation for seeking the WTO’s assistance on this matter. They noted that their consultations with Canada in October did not provide them with the intended result, given that Canada “raised a local content requirement from 50 percent to 60 percent on 1 January 2011.”...

The DSB established a panel for a dispute between Moldova and Ukraine this Friday; Ukraine had issued its initial panel request on 24 May, which Moldova blocked (see Bridges Weekly, 1 June 2011).

The Ukraine case stems from a 1998 Moldovan law that allows Moldova to apply charges to imports whose use contaminates the environment, in addition to other duties or taxes. The fee ranges from 0.5 to 5 percent of the customs value of those products.

Like the Canada - Renewables case, national treatment also plays a significant role in the Moldova - Environmental Charges dispute. Ukraine alleges that Moldova’s actions are in violation of the WTO’s General Agreement on Tariffs and Trade (GATT) 1994, by not charging the same fees to like domestic products.

Ukraine also claims that Moldova charges importers an environmental fee for plastic or “tetra-pack” packages containing imported goods, without applying the same charge to like domestic goods.

The Ukraine case could provide an indication as to how a WTO panel might resolve a dispute over highly controversial "carbon tariffs," which would in theory apply to imported products based on the carbon-intensity of their production process.  As you'll recall, both the US and EU have flirted with the idea of imposing carbon tariffs as part of their broader climate change mitigation policies, while developing countries like China and India have promised to immediately challenge such measures at the WTO.

Both cases will definitely be worth watching.

Behold, the Insane (and Possibly Illegal) Bi-partisan FTA Deal!

As you may have heard, the White House and congressional Republicans are currently battling behind closed doors over a way forward for the pending US free trade agreements with Colombia, Panama and South Korea.  National Journal [$] reports on the latest developments (emphasis mine):

House Republicans retreated from their plan to begin preliminary markup on the pending trade agreements with Colombia, Panama, and South Korea, but the public stalling may signal that negotiators are making better progress behind closed doors.

Several people involved in the talks said on Monday that weekend negotiations over Trade Adjustment Assistance moved the parties closer to a deal. The White House has made clear that it wants Congress to reach a deal on TAA before beginning the markup process on the bills.

A House Republican aide said that preliminary hearings, expected to get under way this week, have not been scheduled. The move could pave the way for a deal to be announced before markups begin.

An aide to Rep. Kevin Brady, R-Texas, said in an e-mail: “While no date has been set for the mock-markups, we remain optimistic that a bipartisan solution will soon be reached.”

Some stakeholders said that the biggest sticking point has been finding enough revenue to offset the cost of the program extension. The White House originally pushed for extending a version of the worker retraining funds that was expanded in 2009 to include service employees and health care. But it appears that the deal will be significantly scaled back....

Lawmakers from both chambers have floated a wide range of frameworks in recent weeks. The chief concern has been raising enough revenue to counteract the cost of TAA and tariffs that will expire when the deals come into force.

Several of the parties involved said that a large portion of the pay-fors could come from additional customs fees, although that money would be insufficient to cover the full cost of the package. But the revenue gap may not be insurmountable....

The negotiated agreement on the trade deals may be sufficient to gain the bipartisan support needed to advance a comprehensive package before August, but it may not be enough to win the backing of skeptical Democrats in the House. Once the deals are introduced, they will need only a simple majority to pass in both chambers.

For a moment, let's ignore the fact that these agreements have been completed and signed for about four years, and that the President alone has the power to submit the FTAs for congressional consideration and approval (a simple majority vote in both chambers without amendment and pursuant to strict timelines), and that the three agreements would undoubtedly pass the House and Senate all by themselves.

And let's ignore the fact that the TAA program, in whatever form, has proven itself to be costly, ineffectual (politically and practically) and economically unjustifiable, and that, because he also really wants these FTAs to be implemented, the President is in effect holding a hostage that he's not willing to shoot.

And let's ignore the fact that, even with an eventual deal on the TAA bribe subsidy, most House Democrats (and many Senate Dems too) will never, ever, EVER support these FTAs (as the article makes clear and the Senators themselves have admitted).

Instead, for a moment, let's just focus on the big bi-partisan agreement outlined above.  Why on earth is this "breakthrough deal" even being considered?

First, it's absolutely irrational.  As noted, the parties have reportedly agreed to impose new (or higher) "Customs fees" in order to offset the cost of the TAA subsidy and the lost tariff revenue resulting from the FTAs implementation.  But "customs fees" are simply hidden taxes on import consumers.  A quick review of the US Customs website on "customs users fees" makes this clear.  They're paid (mainly) by commercial transporters bringing goods (imports) into the United States, thus raising the costs of importation.  And those higher costs, of course, are eventually passed on to American consumers through higher import prices.

Thus, pursuant to the bi-partisan deal outlined above, the FTAs' great import liberalization benefits will be immediately and tangibly undermined by new taxes on those very same imports (and others)!  Amazing.  Heaven forbid that Congress fill the tariff gap created by the FTAs and pay for TAA by actually eliminating federal spending on, oh I don't know, one of its absolutely-critical research programs into cow farts or cocaine-using monkeys.  Nope, the Obama administration's (and some congressional Republicans') big plan is to offset the elimination of taxes on import consumers by... wait for it... raising taxes on import consumers.  (It's truly a mercantilist's dream come true!)  Even worse, those new taxes will be necessarily be much larger than the amount of the FTA tax cut because they also have to fund a politically and economically dubious subsidy program that isn't even guaranteed to buy the approval of the FTAs' current congressional opposition!

Only in Washington, folks.  Only in Washington.

Unfortunately, it gets even worse: the big plan might also be illegal under global trade rules.  Granted, the description above is way too ambiguous to make any definitive conclusions about the deal's legality, but assuming that the agreement would raise US customs users fees (or implement new ones) in order to generate revenue for the federal government, it would probably violate GATT Article VIII, which governs WTO Members' imposition of "Fees and Formalities connected with Importation and Exportation" (in other words, customs fees).  The key provision of Article VIII reads:

1.(a) All fees and charges of whatever character (other than import and export duties and other than taxes within the purview of Article III) imposed by contracting parties on or in connection with importation or exportation shall be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products or a taxation of imports or exports for fiscal purposes.

WTO panels have interpreted this provision narrowly, and an old GATT panel has actually looked into the US system of customs users fees.  In these cases, the panels have ruled that Article VIII's requirement that a customs fee be "limited in amount to the approximate cost of services rendered" is actually a "dual requirement," because the charge in question must first involve a "service" rendered, and then the level of the charge must not exceed the approximate cost of that "service."  They've also found that the term "services rendered" means "services rendered to the individual importer in question," and that the fees cannot be imposed to raise revenue (i.e., for "fiscal purposes").

Interestingly, a relatively recent Customs Department notice about an increase in the amount of applicable customs users fees makes clear that the US government's customs fees are intended to approximate the costs of customs services (e.g., inspection) actually rendered (emphasis mine):

On October 22, 2004 the President signed the American Jobs Creation Act of 2004 (Pub. L. 108-357). Section 892 of the Act amended Title 19 United States Code 58c to renew the fees provided under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), which would have otherwise expired March 1, 2005, and to allow the Secretary of the Treasury to increase such fees by an amount not to exceed 10 percent in the period beginning fiscal year 2006 through the period for which the fees are authorized by law....

CBP is increasing the fees by the amounts authorized so that they more accurately reflect the actual costs of providing the services for which they are charged. On April 24, 2006, CBP published a Notice of Proposed Rulemaking in the Federal Register (71 FR 20922) proposing to amend the regulations in accordance with the current statutory provisions by increasing the fees for: (1) customs services provided in connection with the arrival of certain commercial vessels, commercial trucks, railroad cars, private aircraft and private vessels, passengers aboard commercial aircraft and commercial vessels, and barges or other bulk carrier arrivals, (2) each item of dutiable mail for which a customs officer prepares documentation, and (3) annual customs brokers permits.

But now, the US government specifically and expressly intends to raise these fees (and/or others) in order to fund TAA and offset lost tariff revenue on imports from Korea, Colombia and Panama - absolutely nothing to do with the "actual costs of providing the services for which they are charged" or, in WTO parlance, the "the approximate cost of services rendered."  So, even assuming that this plan doesn't run afoul of more general WTO non-discrimination provisions by singling out certain countries, how is the deal even remotely WTO-consistent under the most conservative reading of GATT Article VIII?

I honestly have no idea.

But, hey, even assuming the plan isn't illegal, that doesn't change the fact that it's clearly insane.  So it's got that going for it, which is nice.

Could someone again please remind me how we got into this mess?

Monday Quick Hits (World Champion Dallas Mavericks Edition)

I'm sure that you, like me, are still tired from celebrating the Mavs' ridiculously unexpected victory last night. So here's a little pick-me-up:

• Sec. Clinton: Free trade is great for everyone (except Americans!).  In all seriousness, if you've ever wondered whether the Obama administration's free trade foot-dragging reflects political opportunism or a sincere-yet-misguided misunderstanding of basic economics, wonder no longer.

• WTO Director General Pascal Lamy explains that, because of global supply chains, value-added is a much better way to measure trade flows, and old school trade stats "give us a distorted picture of trade imbalances between countries." A full WTO report on this issue gives us a detailed understanding of the abject absurdity of politicians' breathless claims about global trade imbalances based on the old metrics.  For example, on our elected officials' currency demagoguery, Lamy stated: "When products include many parts made in many other countries, the effect of an isolated exchange rate appreciation or depreciation to the selling price in export markets will be reduced to the domestic content of these exports, to its 'value added content'. This may explain why empirical studies about the impact of exchange rate changes on imbalances tend to show they only have limited or ambiguous effects."  Translation: the demagoguery is pretty much baseless.  Heritage's Bryan Riley has more on our misleading trade stats here.

• In a must-read editorial, George Will absolutely destroys the White House's refusal to submit pending FTAs to Congress without congressional assurances on expanded Trade Adjustment Assistance.  My favorite lines: "A government borrowing $58,000 a second cannot afford Obama’s policy of Stimulus Forever, and there is this problem with TAA at any level: It is unjust to treat some workers as more entitled than others to protection from the vicissitudes of economic dynamism. Consider a hypothetical Ralph, who operated Ralph’s Diner until Applebee’s and Olive Garden opened competitors in the neighborhood. With economies of scale and national advertising budgets, those two franchises could offer more choices at better prices, so Ralph’s Diner went out of business. Should he and his employees be entitled to extra taxpayer subventions because they are casualties of competition? Why should someone be entitled to such welfare just because he or she is affected negatively by competition that comes from abroad rather than down the street? Because national trade policy permits foreign competition? But national economic policy permits — indeed encourages, even enforces — domestic competition. In 2001, when approximately 80,000 people worked in 7,500 music stores, the iPod was invented. Largely because of that and other technological changes, today only about 20,000 people work in 2,500 music stores. Should those 60,000 people be entitled to extra welfare because they are “victims” of technology? Does it matter if the 60,000 have found work in new jobs — perhaps making or selling electronic devices? In 2008, Americans bought 1.4 billion books made of paper and 200 million e-books. Soon they will buy more e-books than paper books, and half the nation’s bookstores will be gone. Should the stores’ former employees be entitled to special assistance beyond unemployment compensation? Reactionary liberalism holds that existing jobs must be protected with policies that reduce the economic dynamism that would mean a net increase in American jobs. So the dreary probability is that even if the TAA entitlement were re-enriched to stimulus levels, Democrats would again move the goal posts, concocting new objections to the trade agreements."  Yep. 

• Speaking of TAA, I quite enjoyed this NYT op-ed from former Bush official Matthew Slaughter and former Clinton official Robert Lawrence about how to resolve the White House's self-imposed TAA/FTA impasse.  Their solution: (i) pass the FTAs as soon as humanly possible, and then (ii) scrap TAA and the current mishmash of other federal unemployment benefits and replace the ancient, broken programs with a more streamlined and rational system that is market-friendly and doesn't discriminate against Americans who lost their jobs due to technology or something other than (allegedly) trade policy.  I don't agree with everything they propose, but I love this idea (and have advocated something similar for a few years now): "enabling unemployed workers to make penalty-free withdrawals from savings accounts like 401(k)’s and I.R.A.’s to finance costs like occupational retraining and relocation."  Sadly, the chances of this deer-in-the-headlights White House actually doing something as rational and economically-beneficial as the Slaughter/Lawrence plan are, well, not good.

• Is the, ahem, "Chicago way" coming to Geneva?  The Peterson Institute's Gary Clyde Hufbauer reports on what he sees as a very troubling development at the WTO: USTR's attempt to block Appellate Body member Jennifer Hillman from serving a second term on the world's most important arbiter of trade disputes: "The United States has never before blocked its Appellate Body appointee from serving a second term. Since the USTR has offered no explanation for blocking Hillman, suspicions are bound to arise that the United States is displeased with her decisions on the AB and wants to name a judge who is more attentive to US positions in future cases. These suspicions are bound to erode confidence in the WTO judicial system, and create a chilly reception for Hillman’s successor appointee. 'Judicial independence' is a hallowed American concept, now enshrined in the WTO.... But as a member of the bar, as well as President, Obama should seriously reconsider this damaging precedent."

• Does CNBC get just how contradictory this ridiculous news story about the Japan tragedy and the US trade deficit is?  Compare and contrast (emphasis mine): "The after-effects from the March earthquake and tsunami in Japan left behind one on the US economy: An unexpected shrinking in the massive trade deficit. But that improvement may not last long….  Most of the $3.1 billion decline came from Japan and a $2.5 billion drop in auto-related imports. The tsunami devastated the Japanese auto industry, slowing parts distribution and production essential to US car manufacturing and sales."  So to recap: choking off essential inputs for US manufacturers is a "positive impact."  Riiiiight.  (h/t Bryan Riley) 

• The Mises Institute's Jeff Tucker explains how US treatment of Vietnamese catfish basa and swai is an "archetype of disgusting protectionism."  Yep.

• In case you're wondering, inflation and rising labor costs aren't isolated to China.  According to the WSJ, India's facing similar issues: "Maruti Suzuki India, the local unit of Suzuki Motor, is facing what's become a familiar hazard in the country: labor action. On Wednesday, a strike by about 2,000 workers at one plant entered the fourth day. With $9 million of potential revenue lost each day from the closure, the total is about $32 million, or close to 1.5% of last quarter's revenue. Maruti's troubles are the latest reminder of the effect of labor unrest as workers demand better wages and benefits, triggered partly by high inflation. Last month, a similar protest by the employees of national carrier Air India lasted nine days, causing a revenue hit of $30 million. In 2010, Hyundai Motor India had to rehire most of the employees it had sacked after a two-day protest that cost a similar amount."

• Slate's Bryan Palmer explains why Europe "sucks" at innovation.  The intro reads like an article from The Onion: "The French government has banned television reporters from using the words Twitter and Facebook when referring generically to social media, because all that free advertising gives the companies an unfair advantage." Sacre bleu! 

• Bloomberg's editors go back to basics, explaining why protectionism is politically attractive yet economically stupid.  The whole thing is worth reading, but I really enjoyed this quote: "Furthermore, the benefits of free trade do not require reciprocity. Avoiding tariffs and quotas is good for us whether China, Japan or Europe follow suit."  Exactly.

• In case you need further evidence of the White House's secret understanding of free trade's myriad benefits, here's video of CIA Director (and current Secretary of Defense nominee) Leon Panetta explaining the strategic importance of free trade, especially with our allies in Korea, Colombia and Panama (start at 6:04, with Sen. Rob Portman's smart line of questioning):

Panetta: Senator, I think that when it comes to protecting our security there are number of areas that have to be addressed and one of those obviously is not just the military responsibility but there is an economic side of this that plays a very important role in terms of promoting better security. The ability of these other countries to develop trade with us to develop their economies creates greater stability within those countries. I think that’s a fact and to the extent that we can help promote that kind of trade, that we can promote that kind of economic development, I think it assists these nations in their ability to achieve stability. Columbia is a good example. They have done a great job going after narco trafficking. If we can help, you know be able to help them develop their economy, that could become another added factor in providing greater security in that region and the same thing is obviously true for Korea.

That's all for tonight.  Go Mavs!

Crazy Thought: Maybe, Just Maybe, the Multilateral Trading System Works

One of the more fashionable claims out there right now is that the World Trade Organization (WTO), and the multilateral trading system more generally, is on its last leg.  Critics on the left and right claim that this inevitable demise is due in large part to (i) the embarrassing and economically harmful implosion of the Doha Round negotiations, and (ii) China's refusal to comply with global trade rules and WTO Members' inability to do anything about it.

Yesterday's USTR announcement regarding Chinese wind power subsidies, however, would seem to indicate otherwise.  On both counts.

I've rebutted each of these arguments in previous posts.  On the former, I've noted that, while the Doha Round is certainly a tragic victim of really boneheaded politics, the existing WTO/GATT rules are a great baseline, nations are still itching to join the WTO (for pretty obvious economic reasons), and the global trade body is and will continue to be a uniquely peaceful and (relatively) efficient system of settling global trade disputes.  On the latter complaint, I've pointed out China's recent success in dispute settlement and (relative) willingness to comply with adverse WTO decisions.

And that brings us back to the USTR announcement, which provides further support for my arguments.  Here's Bloomberg with the summary:

China agreed to end hundreds of millions of dollars of subsidies to wind-power manufacturers following a complaint the U.S. filed at the World Trade Organization, the U.S. Trade Representative’s Office said.

China’s Special Fund for Wind Power Manufacturing illegally required aid recipients to use Chinese-made parts, the U.S. said in a case filed in December at the WTO after getting a complaint from the United Steelworkers union. Individual grants were for as much as $22.5 million.

“Subsidies requiring the use of local content are particularly harmful and are expressly prohibited under WTO rules,” U.S. Trade Representative Ron Kirk said today in a statement. “We challenged these subsidies so that American manufacturers can produce wind turbine components here in the United States and sell them in China.”

As you may recall, the US WTO complaint originated from a petition by the US Steelworkers Union under Section 301 of US trade law.  As I noted last year, the USW petition was sure to have some merit given the Chinese government's rampant support for its "green" manufacturers, and the US WTO complaint smartly targeted "prohibited" import substitution subsidies - pretty low hanging fruit in the trade world.

So to recap: the USW filed a petition seeking USTR action (which, by law, had to go through the WTO) against Chinese "green manufacturing" subsidies; USTR reviewed the petition and then filed a WTO complaint against the most trade-distorting (and easily provable) Chinese subsidies targeted by the USW; and, after several weeks of WTO-required bilateral consultations, the Chinese government voluntarily agreed to eliminate the subsidies, to the tune of hundreds of millions of dollars.

Wow.  It's almost like the rules-based trading system works or something.  Weird.

Now, if only we could get USTR to challenge the United States' own trade-distorting green subsidies.  Sigh.

Trade Remedies and US Competitiveness

Today Cato's Dan Ikenson published a new paper on the US antidumping law and American competitiveness.  Here's the paper's setup in Ikenson's Forbes op-ed on the same subject:

During the decade from January 2000 through December 2009, the U.S. government imposed 164 antidumping measures on a variety of products from dozens of countries. A total of 130 of those 164 measures restricted (and in most cases, still restrict) imports of intermediate goods and raw materials used by downstream U.S. producers in the production of their final products. Those restrictions raise the costs of production for the downstream firms, weakening their capacity to compete with foreign producers in the United States and abroad.

In all of those cases, trade-restricting antidumping measures were imposed without any of the downstream companies first having been afforded opportunities to demonstrate the likely adverse impact on their own business operations. This is by design. The antidumping statute forbids the administering authorities from considering the impact of prospective duties on consuming industries—or on the economy more broadly—when weighing whether or not to impose duties.

That asymmetry has always been insane, but given the emergence and proliferation of transnational production and supply chains and cross-border investment (i.e., globalization)—evidenced by the fact that 55% of all U.S. import value consists of raw materials, intermediate goods, and capital equipment (the purchases of U.S. producers)—it is now nothing short of self-flagellation.

Here's my favorite part:

If you need more evidence that the antidumping status quo is weighted heavily against import-consuming U.S. industries, consider this gem: three of the nine mineral raw materials that are the subject of the U.S. case against China in the WTO (magnesium, silicon metal, and coke) are simultaneously subject to U.S antidumping restrictions. That’s right! With our own import restricitons firmly in place, the United States is suing China to remove its export restrictions on the same products. That sounds like an excellent use of resources.

And here's the paper's basic conclusions:

The NEI should include a serious commitment to antidumping reform. At a minimum, consuming industries should be given legal standing to participate fully in antidumping proceedings, antidumping measures should be rejected if the projected costs of those restrictions on those firms and on the broader economy exceed some reasonable threshold, and any duties applied should not exceed the level found necessary to remedy injury to the petitioning domestic industry.

Be sure to read the whole thing here.

Weekend Quick Hits

Apologies for the light blogging this week - it's been a brutally long one for your humble correspondent.  But here's a treasure-trove of headlines to make up for my absence:

• Alternate headline: Former USTR Portman Joins Gaggle of Protectionist Senators to Ask Current USTR Kirk to Pursue Silly Protectionist Policy that USTR Can't Actually Achieve. (Silly letter available here.)

• Must-read WSJ analysis: Blather in Washington won't affect the US-China exchange rate; Chinese inflation will.  (Yes, this should sound very familiar.)

• In case you missed it, AEI's Claud Barfield ably responds to my blog post on the United States' sordid history of "FTA bullying."  His future analysis on this issue promises to be great.

• Forbes analysis: US corporations pay a LOT of taxes, especially those dastardly oil companies!

• Shocker: "Both the European and global carbon markets could significantly increase costs for EU steelmakers, while at the same time reducing the potential for offsetting those costs, speakers at Steel Business Briefing’s Green Steel Strategies conference in Brussels argued.  European Union Allowance (EUA) prices are expected to rise to around €40/tonne by 2020, according to forecasts presented by Carine Hemery of carbon market analysts Orbeo. Moreover, the amount by which steelmakers can cut their costs by offsetting with UN carbon credits, called Certified Emissions Reductions (CERs), could fall from around €3-4/t currently to just €1-2/t in 2013-2020, she adds."  Me: Is lobbying for carbon tariffs soon to follow?

• Vladimir Putin puts on a clinic on "How Not to Improve Your Country's Chances of Getting Into the WTO Anytime Soon."

• According to a new report by sympathetic environmentalists, governments and industries are lying to us about the efficacy of wind power generation.  I'm shocked!

• Cato's Dan Griswold deflates the silly White House rhetoric that we're "on track" to double US exports in the next 5 years.

• WorldTradeLaw.net's Simon Lester has an insightful blog post about the "dangers of talking about competitiveness" in the context of international trade rules (and disputes).  I agree.

• China's commerce ministry (MOFCOM) announced preliminary anti-dumping and countervailing duty rates for sedans and SUVs from the United States.  As you'll recall, this case started back in 2009 as a not-so-subtle response by the Chinese government to the President's decision to impose safeguards duties on Chinese tires under Section 421 of US trade law.  Final rates in the China AD/CVD case will be out in a few months.

• US-China business Council released state-by-state data on US exports to China between 2000 and 2010.  The results are pretty staggering.  For example, exports to China from my home state of North Carolina - a place that's unfortunately (and irrationally) represented by many a protectionist politician - increased over 500% since 2000 and now stand at over $2.2 billion. 

• Arnold Kling discusses a new paper on trade and US employment trends that's (rightfully) getting a lot of buzz.  Tyler Cowen has more praise and discussion here.

• The 2011 Name of the Year bracket is out, and it is as awesome as ever.

• Finally, ReasonTV follows my lead but enlists the far-more-persuasive Sallie James to implode Bernie Sanders' insane war on the imported trinkets that are were sold at the Smithsonian giftshops:

Monday Quick Hits

The eastern seaboard is clearly under attack from global cooling.  Here are some interesting links to get you through these dark and cold "spring" days.

• Chevy Volt: the car from Atlas Shrugged Motors.

• Sore losers implore the US to take their ball and go home.  I like to call this the "Cartman strategy."

• New 2004 UCLA study: FDR's statist policies prolonged the Great Depression by seven(!) years.

• Sarah Palin advocates import liberalization in India, further solidifying her free trade bona fides: "[I]n the early 1990′s, due to clear, commonsense, pro free-market reforms, India’s economy took off! [It] abolished import licenses; cut import duties; removed investment caps & broke the union’s grip on industry."

• The United States has the most progressive tax system in the industrialized world.  Key graf: "[T]he top 10 percent of households in the U.S. pays 45.1 percent of all income taxes (both personal income and payroll taxes combined) in the country. Italy is the only other country in which the top 10 percent of households pays more than 40 percent of the income tax burden (42.2%). Meanwhile, the average tax burden for the top decile of households in OECD countries is 31.6 percent."

• A fascinating study (and a related WSJ op-ed) from the UK think tank Policy Exchange on the impact of global trade on the effectiveness (or, more accurately, the impotence) of the EU's climate change regulations has me wondering whether our policymakers will (i) learn the right lesson from the EU's experience - and the one advocated by Policy Exchange ("to accelerate the development of technologies that will be genuinely competitive with fossil fuels" rather than "browbeat[ing] developing countries into going green") or (ii) use the study to justify their calls for eco-protectionism.  I'm hoping the former but cynically expecting the latter.

• US steelmaking giant Nucor recently broke ground on a new iron making facility in Louisiana that would employ hundreds.  The same site is also permitted for another iron facility, and many are guessing that a steel mill will also show up down there in the next few years.  Oddly, ABC News isn't doing a week's worth of news stories on the Nucor plant(s) or any of the many other industrial expansion efforts across the country.

• Why won't Sen. Sherrod Brown (D-OH) debate GMU's Don Boudreaux on the merits of free trade?  (Yes, that's a rhetorical question.  *cluck cluck*)

• Cato's Dan Griswold points out that the easiest way to decrease American income inequality appears to be destroying the US economy.  (Obvious response: Shh, dude, don't give anyone any bright ideas.)

• So much for the silly myth of "McJobs" in the service industry.  According to this handy primer from the National Retail Federation, the import-dependent retail industry in 2009 employed 330,000 managers who earned an average annual salary of $91,650.  And there are another 300,000 or so well-paid folks in other positions.  (This isn't new, but it's worth mentioning here anyway.)

• Finally, Jonah Goldberg at AEI points us to an awesome video from Hans Rosling about the amazing improvements in global wealth and health over the last few decades.  All of it is cool and worth watching, but for our purposes, the most relevant point is around the 10:00 mark when Rosling unequivocally credits the dramatic, disproportionate (relative to other African nations) improvement of Mauritius on the country's embrace of free trade.

 Enjoy!

China and the WTO: A Marriage Doomed to Fail?

Last week the World Trade Organization, in particular China's membership in the global trade body, came under scrutiny from the anti-trade left and, surprisingly, the (mostly) pro-trade right.  The former's response was totally expected as the logical extension of anti-traders' longstanding "strategy" of seizing on some new headline as ex post justification for their opposition to trade liberalization.  Ian Fletcher (among others) acted the part perfectly as he melodramatically bemoaned the horrible decision of the WTO's Appellate Body in the US-China AD/CVD dispute (upon which I've already commented):

The World Trade Organization has a long history of anti-American actions. They've just handed us another one, and in the process handed a big freebie to Chinese state capitalism.

Fortunately, the obvious bias and error of Fletcher's "arguments" is made evident by simply citing, you know, the actual record of WTO disputes between the US and China since the latter joined the organization about a decade ago.  First, there's the small fact that the Appellate Body actually sided with the United States in two of the four claims raised in that case.  Then, there's the broader data refuting Fletcher's silly allegations. According to the WTO, the US and China have been involved in 17 formal disputes there, with the the United States the complainant in ten of those cases.  Four of those ten are still pending, and the United States has prevailed (through a formal dispute settlement ruling or a mutually agreed solution that resulted from required consultations) in - wait for it - all six cases.  For those of you who aren't math majors, that's a 100% success rate.  So much for the WTO's obvious anti-Americanism, eh?

And let's also not forget the dramatic benefits that China's WTO Membership bestowed upon American exporters (a metric that even a mercantilist like Fletcher can support).  Cafe Hayek's Don Boudreax, citing Doug Irwin's great book, summarizes those benefits quite succinctly (emphasis mine):

While it’s true that China – like nearly every other nation on earth – has in place a plethora of growth-inhibiting mercantilist policies, the overwhelming economic story in China over the past 33 years is the liberalization of its markets – a liberalization that includes dramatic reductions in trade barriers. Here’s economist Douglas Irwin: “In December 1978 China began to end its policy of economic isolation. Under the leadership of Deng Xiaopeng, the government decollectivized agriculture, allowed private entities to trade, and permitted foreign investment…. In 1992 the weighted average tariff [in China] on manufactured goods was over 45 percent. Since China joined the WTO in 2001, the country’s average tariff will eventually fall to less than 7 percent.”

Since these data pretty much annihilate Fletcher's claims, let's move on to what struck me as the more surprising China/WTO criticism - the grumbles of discontent coming from free trade supporters on the right.  AEI's Claude Barfield explains:

At this morning’s AEI conference, Reconsidering America’s China Policy: Engaging Party and People, I had an important exchange with Heritage Foundation scholar Derek Scissors. Derek is a keen and acute observer of China’s economy and trade policy. His major theme this morning revolved around a recantation: to wit, that he had originally supported China’s entry into the World Trade Organization (WTO), but now thought this was a mistake. He stated that the problem was that neither he, nor the decision makers at the time, had foreseen the about-face Chinese leaders after 2001 would make on key trade and investment policies. He argued that China’s leaders in the 1990s had been genuinely committed to a more open economy and downsizing the state sector. However, the leadership since then has reversed course and is committed to a new form of state capitalism and inward-looking development that will inevitably bring the PRC into conflict with WTO rules—in areas such as currency, indigenous innovation, climate change, and competition policy.

Barfield, to his credit, ably refutes Scissors' primary concerns but concludes on what I think is a very odd note (again, emphasis mine):

I, in turn, argued that whatever the future problems and conflicts within the WTO, on balance the world (and the United States) was better off with China inside the WTO. In 2001, China was forced to assume obligations well beyond those demanded of any other nation, developed or developing, as the price of WTO membership. By and large, it has fulfilled those obligations. Does it cut corners and attempt to weasel out of it commitments? Yes. But all nations—particularly those with highly paid trade lawyers such as the United States and EU—continually attempt to “reinterpret” loosely-worded WTO rules (check out U.S. positions on cotton subsidies and sketchy dumping cases). Though it initially reacted with fury at WTO cases against it, China over the past several years had skillfully defended itself at the WTO. Indeed it has just won a major case on anti-dumping and subsidy rules against the United States.

The bottom line is that the issues Derek worries about in general were not, and still are not, WTO obligations. When the GATT/WTO was founded in the 1940s and 1950s, state capitalism was the norm throughout much of Europe; and trade rules for the most part did not, and do not, cover many of these misguided economic policies. During the recent crisis, state intervention increased rather substantially (viz, Government Motors), even while traditional protection barely ticked up. 

In future years, backing the state out of its new role will be a major challenge for the world trading system. And here, Derek makes a point that is worth pondering. When pressed, it was clear that what really concerned him was that China was now so large, and with such outsized influence, that if it kept to the present inward turn, it would destroy the WTO, whatever the niceties of legal obligations. Here I agree, but that is a challenge for future negotiations and does not reverse the reality (in my view) that the world trading system was better off by accepting Chinese membership. Or putting it another way, that also speaks to Derek’s fears—without China as a member could we any longer call it the World Trade Organization?

Clearly the answer to Barfield's final question is a big, fat "no" - omitting the world's largest exporter and second-largest economy from an organization dedicated to liberalizing and harmonizing global trade would instantly de-legitimize the body (although one could rightly question whether China would have ever gained this impressive status without (a) the the trade and economic liberalization brought about by its WTO accession, and (b) the protections that WTO rules have provided China's exports of goods and services).  But should we really be concerned that if China continues its nettlesome trade and economic policies "it would destroy the WTO, whatever the niceties of legal obligations"?

Color me extremely skeptical.

Granted, I wasn't at this discussion, so maybe I'm misinterpreting Scissors' and Barfield's concerns.  But I see several flaws with the idea that China's relatively-isolated fits of protectionism will eventually destroy the WTO.  First, there is the question of whether China would allow this to happen.  Clearly, China sees a lot of value in WTO membership from both a PR and legal perspective.  On the former, WTO membership and China's participation as a "responsible stakeholder" gives China a lot of global street cred - distinguishing it from "rogue" economic nations like North Korea or Russia (which is just desperate to join for, inter alia, this very reason).  On the latter, China's recent "win" at the WTO's Appellate Body, and the country's increasingly frequent resort to WTO dispute settlement (or threats of bringing a WTO case) makes it clear that China is quite pleased with the global trade body's role as an arbiter of global trade rules and potential check on importing nations' protectionism.  For two examples of this reality, consider how often the Chinese government promised an immediate WTO challenge to any US legislation targeting China's currency practices or to climate change legislation that included "carbon tariffs."  So would China really be willing to let the WTO die just to maintain something like its indigenous innovation policy?  That seems really unlikely to me.

Second, and as Barfield sorta mentions, China has actually proven to be pretty good about (i) complying with adverse WTO dispute settlement rulings by revising the illegal trade measures at issue and (ii) liberalizing its trade and investment regime pursuant to its phased-in WTO accession commitments.  Sure, the Chinese haven't been perfect and often draw the ire of their trading partners, but as Barfield and Boudreaux note above, pretty much nobody has been perfect (see, e.g., US refusal to implement adverse WTO decisions on internet gambling or zeroing or cotton subsidies).  I imagine that China's (often reluctant) compliance is due to the same reasons I already mentioned - a strong desire not to implode a global organization that they highly value.  So, when push comes to shove, China begrudgingly caves on WTO matters just like everybody else, or it pays for its non-compliance through retaliatory sanctions (again, just like everybody else).  Such (totally routine) behavior hardly seems like the actions of a rogue nation destined to implode the WTO.

Third, I'm extremely skeptical that the trade issues that Scissors and Barfield raise - such as currency, indigenous innovation, climate change and competition - are really the WTO-breakers that they (apparently) assume.  Beyond that fact that, as Barfield notes, these issues are not really covered by standard WTO disciplines (and this omission is very much intentional - just ask USTR about EU competition policy sometime), are these really the mission-critical issues that are going to destroy a global trade organization that has (in some form) been around for more than six decades?  Let's look at each quickly:

• On China's currency, I've repeatedly noted that the issue is quickly resolving itself due to domestic inflationary pressures and, well, lots of nations have meddled with their currencies over the last few years.

• On indigenous innovation, China's already revising some of the policy's more troublesome aspects, and has agreed to submit a better offer to accede to the WTO's Government Procurement Agreement (which would discipline many other aspects).  This is admittedly a long slog and should certainly be a US negotiating priority, but it is making progress (albeit at at a glacial pace).

• On climate change, China's reluctance to sign an intensive multilateral climate change agreement and its opposition to carbon tariffs is hardly is isolated to China alone - it's something shared by almost all developing country nations (see, e.g., India's threats to bring a WTO dispute against any national climate change laws that include carbon tariffs).

• And on competition policy, again, see the United States and the many other (very sane) nations that aren't really down with global harmonization of competition (i.e., anti-trust) disciplines.

Finally, it just doesn't seem that other WTO Members harbor concerns that China's naughtiness is going to end up scuttling the WTO.  Of course, they'd never admit publicly that they had such troubling feelings, but they're still negotiating as if the WTO agreements are going to still be valuable in a few years, and they're still bringing new disputes against China and each other.  I don't know about you, but I wouldn't be wasting my government's finite resources on securing new dispute settlement rulings against China if I thought the body was going anywhere anytime soon, would you?

Now, look, I'm certainly not saying that the WTO is invincible, and as I've already noted, the body's utility as a vehicle for new trade liberalization could (could!) be coming to an end.  And who knows, maybe an issue will arise that will pit WTO Members against each other in such an entrenched and permanent way that it'll effectively destroy the global trade organization.  But in China or any other WTO Member, I've yet to see anything even remotely big enough to do it.

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.