Archives: October, 2012

Building a Free Trade Area of Most of the Americas

Today the Free Trade Agreement between the United States and Panama went into effect. The United States now has FTAs with Canada and eleven Latin American countries stretching from Mexico to Chile. My colleague Bill Watson has a less enthusiastic view of the FTA with Panama here.

Last week during the third presidential debate, Mitt Romney talked about how the United States has not taken full advantage of trade opportunities with Latin America. Some experts, such as Ted Piccone at the Brookings Institution, were quick to point out that Romney’s call for expanded trade with Latin America isn’t very realistic since Washington already has in place FTAs with all the Latin American countries that want trade agreements with the United States while those who don’t, such as Brazil and Argentina, aren’t interested in one. However, that doesn’t mean that there’s no room for a substantial hemispheric trade agenda.

As we can see in the table below, the countries Washington has free trade agreements with in the Americas also have similar FTAs among themselves. There are some missing links here and there, but overall these countries have created a fragmented version of a free trade area of the Americas. One obvious problem of this is what Jagdish Bhagwati has called the “spaghetti bowl effect” of so many trade agreements with different rules of origin, tariff schedules and non tariff regulations.

There are some efforts underway to tackle this problem. For example, Mexico has individual FTAs with five Central American countries, but it’s now negotiating with them to merge all these trade agreements into one. Mexico has also announced the creation of the Pacific Alliance, a trade bloc that will also include Colombia, Peru and Chile.

The United States should lead an effort to merge all these regional FTAs into one single Free Trade Area of the Americas for these nations willing to be part of it. The negotiations could also help to complete those missing links in the hemispheric trade jigsaw puzzle. And once achieved, this FTAA would leave the door open for other Latin American countries that might want to join in the future (the most likely candidates would be Uruguay and Paraguay given their growing dissatisfaction with Mercosur).

Even though the United States wouldn’t gain much in terms of market access from such an FTAA, harmonizing trade rules along the continent would certainly help boost trade in the Americas. Moreover, the political cost would be minimal since Washington already has FTAs in place with all these countries.

Bill Clinton proposed the idea of a Free Trade Area of the Americas in 1994, though he quickly abandoned it despite wide interest in Latin America. The negotiations were finally launched in 2001 but fell apart in 2005 after it became obvious that countries such as Brazil, Argentina and Venezuela weren’t interested anymore. But this must not mean that the goal isn’t worth pursuing in a different way. There is a good case to be made for building an FTAA of the willing.

Free Trade and Other Things in Panama

The United States­–Panama Trade Promotion Agreement came into force today.  Ideally, trade agreements promote free trade by obligating each country involved to remove import barriers for goods coming from the other.  This agreement does just that, and Cato’s trade votes database counts a vote in favor of implementing the agreement as a vote opposing trade barriers.  But the history of this agreement and the current lack of free trade momentum make it difficult to get very excited.

This agreement was signed over five years ago in June of 2007 but was not ratified by Congress until December 2011.  Why did it take so long?  In order to make the deal more palatable to certain interests, Congressional leaders and the Obama administration held up a vote until additional side agreements and assurances were made by Panama.  These included a 2009 labor law that restricts the rights of nonunion workers in Panama, and a 2010 agreement that gives the U.S. government access to bank records of U.S. citizens in Panama.  Even the original agreement contained contentious non-trade obligations designed to further specific special interests; the last bits of implementing legislation that Panama enacted this fall were to expand its copyright laws and to provide patents for plants.

The agreement does lower barriers to trade in goods and services and open up government procurement markets in both countries, but the cost is sweetheart deals and handouts for Hollywood, U.S. agribusiness, and big labor.  The fact that this agreement faced so many obstacles is a bad sign for the future of free trade agreements in the United States, especially considering that Panama’s economy is roughly the size of North Dakota’s.  The obstacles that stalled and frustrated this agreement have very little to do with trade itself and will likely resurface in every free trade negotiation and implementation debate in the near future.

(Even if the goal is only export promotion, the U.S. government has better ways to do that than tinker with Panama’s intellectual property rules.  The long-planned expansion of the Panama Canal will finish in 2014; if Congress seriously wants to promote trade, it could work to make sure U.S. ports are able to accommodate the New Panamax-sized ships that will be traveling through.)

The United States signed 12 free trade agreements with 17 countries between 2000 and 2007, and none since.  President Obama is working on the Trans-Pacific Partnership which currently includes 10 other countries—but we already have agreements with all but four of them.  Governor Romney has proposed signing more agreements with countries in Latin America, but there aren’t a lot of countries left in that region that would be interested.  A genuine free trade agreement with Brazil would be excellent, but it would likely require reform of U.S. agriculture subsidies—a tough sell requiring political courage and a commitment to trade liberalization.

The entry into force of an agreement with Panama today ironically marks a low point in the health of the free trade consensus.  It is quite telling that free trade agreements are now called “trade promotion agreements” or merely “partnerships.”  The language of free trade is in desperate need of revival to ensure that these agreements do not become tools for exporters to pursue their special interests.  Expanding exports, improving American innovation, and creating jobs should be touted as (some of) the benefits of free trade, not as the goals of managed trade policy.  Free trade should be the only goal.

Trick-or-Treat at 1600 Pennsylvania Avenue

I shared a cartoon last Halloween that made fun of those who support class-warfare tax policy.

Now we have a related cartoon, featuring a stop at the White House.

The next two cartoons are almost identical. We’ll start with this one from Michael Ramirez.

Ramirez is one of my favorite cartoonists, incidentally, and you can see more of his work here, here, here, here, here, here, here, here, here, here, herehereherehereherehere, and here.

Here’s a Gary Varvel cartoon with the exact same message.

Instead of great minds thinking alike, this is a case of great cartoonists thinking alike. Though they probably have great minds as well.

But I don’t want to make too many fawning comments since I would modify both of these cartoons so that the kids were looking at papers that said “Medicare” and “Social Security” instead of “debt.”

It’s always important to focus first and foremost on the disease of spending, after all, and not the symptom of red ink.

Last but not least, I can’t resist linking to this comedian’s video, which includes some very good economic insights about work incentives.

Sort of like this Wizard of Id parody featuring Obama.

Disaster Response and Federalism

The title of a New York Times editorial claims that “A Big Storm Requires Big Government.” The Times implies that when confronted with a major natural disaster like Hurricane Sandy, Americans would be screwed if they didn’t have bureaucrats from the Federal Emergency Management Agency (FEMA) to “to decide where rescuers should go, where drinking water should be shipped, and how to assist hospitals that have to evacuate.”

(Gee, I had no idea that it was government planners who directed my local Wegmans to ramp up shipments of bottled water to meet the demand of people rushing to stock up on H2O.)

One would think that the Times might have been more restrained in casting as our savior the same outfit that responded to Hurricane Katrina with trailers contaminated with formaldehyde. Nope. According to the Times, it’s crazy to think that the “financially strapped states” could handle disaster relief. “Who would make decisions about where to send federal aid?” the Times asks. “Or perhaps there would be no federal aid, and every state would bear the burden of billions of dollars in damages.”

Why shouldn’t the states be responsible for paying for disaster response? The last time I checked, the federal government was also financially strapped. Regardless of which level of government assumes the responsibility of paying for it, the money ultimately comes from taxpayers. Under the current arrangement, taxpayers in, say, Arizona will pay for disaster recovery in Pennsylvania. Is it really more absurd to expect the citizens of Pennsylvania to pay for their own disaster response than people living in, say, the Rockies? Here’s another crazy thought: maybe Pennsylvanians would have more of an incentive to scrutinize the effectiveness and efficiency of relief efforts in their state if they were footing the bill?

A 2006 Cato study written by economists Russell Sobel and Peter Leeson argues that the federal government’s top-down disaster system is “fundamentally flawed.” Bureaucratic red tape and the inherent inability of federal officials to effectively coordinate the delivery of supplies can stymie relief efforts. State and local officials are naturally closest to those affected and thus better appreciate the needs of their communities. However, federal red tape can impede the ability of those on the frontlines to effectively deliver assistance. Take, for example, FEMA’s interference with the delivery of relief supplies to hospitals during Katrina:

The Red Cross “begged to be allowed to go [into New Orleans]” to distribute essential relief supplies but was prevented by government officials from doing so. FEMA confiscated critical emergency supplies, shipped by the hospital’s out-of-state private owner to assist the hospital’s 137 remaining patients, while the supplies were in transit to Methodist Hospital in New Orleans. “Those supplies were in fact taken from us by FEMA, and we were unable to get them to the hospital,” one hospital representative remarked. To avoid FEMA’s confiscatory actions, the owner sent a second shipment to Lafayette (130 miles from New Orleans) and had a private helicopter fly it directly to the rooftop of the hospital in New Orleans.

Sobel and Leeson recount numerous examples of FEMA’s inability to coordinate the delivery of relief assistance. Here’s another:

Perhaps the most stunning example of how a centralized federal bureaucracy is inherently ill-equipped to coordinate the direction of relief resources is what has become known as the “odyssey of the ice.” FEMA ordered 182 million pounds of ice to be delivered to stranded families and aid workers. Yet some of the ice ended up in Portland, Maine, more than 1,500 miles away from the disaster area. The cost of shipping and storing the 200-plus truckloads of the Portland-bound ice was $275,000…

A truckload of ice even ended up at the Reid Park Zoo in Tucson, Arizona. The driver of the ice truck got so many conflicting commands from government relief officials that he ended up traveling through 22 states without ever delivering a single bag of ice to a hurricane victim. Instead, he ended up donating it to the Tucson zoo to be enjoyed by the polar bears.

Of course, anytime federal policymakers have the green light to spend other people’s money, politics invariably come into play. The President is responsible for declaring that a disaster qualifies for federal aid. According to Sobel and Leeson, recent presidents issue the most “major disaster” declarations when it is reelection time:

After examining all disasters from 1991 to 1999, a comprehensive study by Garrett and Sobel found that states politically important to the president in his reelection bid have a significantly higher rate of disaster declaration. Recent data confirm the continuation of this political manipulation. In 1996, when Bill Clinton was up for reelection, he set a record by declaring the largest number of major disasters in history: 75. Unsurprisingly, the second-highest year for disasters in history was 2004, George W. Bush’s reelection year, when he declared 68. Ninety percent of the increase in disasters declared between 2003 (a nonelection year) and 2004 were in the 12 battleground states where the election was decided by 5 percent or less.

The year with the largest number of disasters declared during George H. W. Bush’s administration was also the year he was up for reelection, and this holds true for Ronald Reagan as well. Other striking individual examples abound, including a two-foot snowstorm in Ohio (a state that went for Bush), which netted that state disaster relief during the 2004 election year, while Wisconsin (a state that went for Kerry) was denied disaster relief in 2005 in the aftermath of a major tornado.

The authors also note that “For every representative a state has on the House disaster relief oversight committee, it receives about $30 million in additional funding when a disaster is declared. All told, the [Garret and Sobel] study found that nearly half of all disaster relief is motivated by politics rather than by need.”

Finally, Sobel and Leeson point out that “The vast majority of disasters declared are for rain, snow, and other mundane weather events.” Indeed, the following chart shows that the total number of federal disaster declarations has substantially increased since the mid-1990s.

What has happened is that disaster assistance has become effectively nationalized. So for all of the Times’ whimpering about cutting FEMA’s budget, the real problem is that the federal government has (once again) overstepped its boundaries. But just as is the case with all federal aid to lower levels of government, the receiving state and local politicians are only too happy to take the “free” federal money instead of having to ask their constituents to come up with it.

Lawyers Can’t Game the Class-Action System at the Expense of Would-Be Plaintiffs

To discourage plaintiffs’ lawyers from trying to keep class-action lawsuits in state courts that have a reputation for trial awards and settlements that benefit those same lawyers, Congress passed the Class Action Fairness Act of 2005.

In relevant part, CAFA provides defendants with the right to move class actions to federal court where the claim for damages against them exceeds $5 million.  But can clever lawyers keep these cases out of federal court by simply “stipulating” that potential damages are less than $5 million — and before the named plaintiff is even authorized to represent the alleged class?

In The Standard Fire Insurance Co. v. Knowles, the named plaintiff in a putative insurance-recovery class action in Arkansas state court tried to avoid that removal to federal court by stipulating that his not-yet-certified class would not seek more than $5 million in damages at trial.  Notably, the stipulation is worded in such a way that it will not apply if the class definition is later altered.  Treating this stipulation as “binding,” however, implicates the Fifth Amendment due process rights of the would-be class members who are thus far absent from and unaware of the lawsuit.

After the lower federal courts denied removal, the Supreme Court took the case to determine whether a plaintiff in a class action may indeed defeat a defendant’s statutory right to federal removal under CAFA simply by stipulating to a limit on the amount in controversy.  On Monday, Cato filed an amicus brief arguing that the plaintiff and his attorneys are violating the due process rights of absent class members who would be bound by the judgment in a lawsuit that, if allowed to proceed, would end their right to sue over the same claims while simultaneously limiting their compensation under those claims.

CAFA was enacted specifically to discourage attorneys from “forum shopping” (seeking friendlier courts) and attempting to keep cases out of federal court. Lawyers who game the system by agreeing to cap damages in an effort to keep cases in more favorable state courts violate the federal due process rights of absent would-be class members, thereby flouting CAFA.

The Supreme Court will hear the case in early 2013.

California Officials: ObamaCare ‘Exchange’ Will Hike Premiums up to 25%

California is one of the few states charging ahead on establishing one of ObamaCare’s health insurance “exchanges.” According to the Los Angeles Times:

California insurance officials have expressed concern about substantial rate hikes for some existing policyholders going into the exchange.

Under a new rating map approved by state lawmakers, the Department of lnsurance estimated that premiums for similar coverage could increase as much as 25% in West Los Angeles, 22% in the Sacramento area and nearly 13% in Orange County.

California officials have floated the idea of legislating lower prices. One way would be to throw West Los Angeles and Orange County into the same risk pools. That might reduce premiums in West L.A., but only by increasing premiums in Orange County. With a few simplifying assumptions, premiums in both  West L.A. and the O.C. could rise by 19 percent. An alternative would be to cap premium increases. One state official proposes a cap of 8 percent. But that would just be an implicit form of government rationing. If insurers cannot charge premiums that cover their costs, they will cover fewer services.

If Oklahoma prevails in its lawsuit against the IRS, or if any similar plaintiffs prevail, California will look pretty silly for charging forward with an Exchange. California will have imposed on its employers an unnecessary tax of $2,000 per worker – a tax that California employers can avoid by relocating to states that have not created an Exchange. It will also have unnecessarily exposed 2.6 million California residents to ObamaCare’s individual mandate – i.e., a tax of $2,085 on families of four earning as little as $24,000 per year, which those residents can likewise avoid by relocating to another state.

Watch this space for development.

Romney’s Economic Advisers Pretend to Support Free Trade

Governor Romney’s economic advisers (Glenn Hubbard, Greg Mankiw, John Taylor, Kevin Hassett) have a short post about his economic plan.  In it, they sort of talk about trade issues:

Advancing international trade is another part of the plan. A recent study by the International Trade Commission concluded that reducing intellectual property violations [in] China could produce about 2 million jobs in the United States.  While that is, of course, an estimate, Governor Romney has made reducing barriers to trade with China []  a primary focus of his trade opening policy, and this advancement of trade clearly would be a large net positive for the successful idea-intensive firms that drive economic growth.

What’s important to note here is that these prominent, well-respected economists are not talking about free trade, despite their best efforts to make it seem like they are.  Free trade means reducing protectionism, both at home and abroad.  That means removing protectionist barriers to imports and exports, resulting in specialization of production and greater efficiency, among other things.  But that’s not what they are saying here.  Instead, they want to “advance” international trade by increasing exports to China, mainly through forcing China to strengthen intellectual property laws and enforcement.

Now, I’m not going to argue that there should be no intellectual property protection.  But I do question the notion that U.S. intellectual property standards are precisely where they should be, and that the rest of the world should do exactly what we do.  That may in fact be the case; however, nobody ever bothers trying to show it. And if I had to guess, I would say we probably over-protect intellectual property in a number of areas.

But the larger point here is that we shouldn’t let political advisers confuse the issues with deceptive rhetoric.  Free traders are not interested in “advancing” international trade by simply pushing for more exports.  If we were, we would support export subsidies.  Real free traders don’t!  What we want instead is the removal of protectionist barriers to trade (“ours” and “theirs”):  Tariffs, quotas, many subsidies, to name a few.

(To be fair, later they talk vaguely about how President Obama is not doing enough to promote trade agreements.  However, they never say anything positive about actual free trade, which is a bit strange because they all probably do support free trade.)