Archives: 10/2014

As Expected, WTO Clove Cigarette Case Goes Nowhere

The World Trade Organization’s judicial body determined over two years ago that a U.S. law banning clove cigarettes while leaving domestically produced menthols on the shelf was protectionist discrimination.  Now the U.S. and Indonesian governments have reached a “settlement” in which Indonesia agrees to drop the case in exchange for nothing.

Technically, the settlement, as reported, includes a few promises from the United States, but these are so weak as to be practically meaningless.  For example, the United States agrees to refrain from “arbitrary discrimination” against Indonesian cigars (which is already not allowed) and to “postpone” filing its own case against Indonesian export restrictions (which no longer impact U.S. companies).

American refusal to comply with global trade rules against regulatory protectionism is both unfortunate and, in this case, unsurprising.  There were two basic ways that the U.S. government could have come into compliance: 1) by dropping the ban on cloves, or 2) by extending the ban to menthols.  Neither of those options was politically feasible, so the United States did nothing.

Normally, the WTO dispute settlement process can be very helpful in overcoming political barriers to trade liberalization.  When one country loses a case at the WTO and fails to comply, the complaining country has the right to retaliate by raising tariffs on goods from the losing country.  This creates concentrated losses that have much greater political impact than the generally diffuse costs of protectionist policies.  The ultimate goal is to “induce compliance”—the losing country discontinues its offending practice so that the retaliation will stop. 

But the United States is very big and powerful, so that for most countries cutting off imports from the United States is not only ineffective at swaying Washington policymakers but also very harmful to their own economy. Indonesia appears to have decided that dropping the case and walking away makes more sense than continuing to press forward with costly, futile retaliation.

Unfortunately, the clove cigarette settlement joins a growing list of similar cases in which the United States has taken advantage of its economic and political power to avoid complying with WTO rules.  These include a successful challenge by the tiny island nation of Antigua against U.S. restrictions on cross-border online gambling that Antigua has no way to enforce. 

Perhaps the most embarrassing example of noncompliance is the deal between the United States and Brazil reached after Brazil won a case against U.S. cotton subsidies.  The United States managed to avoid retaliation and keep the subsidies by agreeing to send Brazilian cotton farmers a check for $147 million every year. That arrangement appears to be coming to an end with the United States providing one final payment of $300 million and keeping the cotton subsidies indefinitely.

The United States doesn’t always refuse to comply with WTO decisions.  The threat of retaliation from Canada and Mexico may very well make a difference in the ongoing fight over protectionist U.S. regulations related to origin labels for meat.  A big difference between that case and clove cigarettes is that Canada and Mexico are the two largest export markets for U.S. products. 

There’s reason for optimism, but the reputation of the WTO dispute settlement process is being put at serious risk by this administration’s lack of commitment to the rules of the international trading system.

Promoting Democracy in Hong Kong: Combining Prudence with Idealism

Hong Kong is part of China.  But administered separately from the rest of the People’s Republic of China, the territory respects civil liberties while hosting the world’s freest economy. 

Demonstrators are pressing Beijing to make good on its promise of  democratic rule and free elections.  But the PRC will not, indeed, cannot, give residents of Hong Kong what it refuses to give the rest of its citizens.  The city’s future depends on finding a compromise that preserves Hong Kong’s freedom and peace.

The British colony grew out of imperial China’s weakness.  London seized Hong Kong Island, then the Kowloon Peninsula, and later “leased” the New Territories.  In 1997 the latter’s 99-year term ran out.  At which point Beijing was legally entitled to take back the New Territories.

Dividing Hong Kong would have been a practical nightmare.  And Beijing might not have continued to honor territorial cessions forced more than a century before.  So in 1984 London agreed to the full territory’s return.

One wonders:  What if Prime Minister Margaret Thatcher had scheduled a referendum in which the territory’s residents could freely express their decision?

At the time a still weak and isolated Beijing probably would have felt little choice but to accept an adverse vote.  However, the PRC might have chosen to bide its time, as it has done with Taiwan, and now would be demanding the territory’s return.

Returning Hong Kong meant transferring millions of people to communist China.  The PRC committed to respect Hong Kong’s uniqueness for a half century. 

However, Beijing never promised to hold fully free elections.  Rather, it stated:  “The chief executive will be appointed by the Central People’s Government on the basis of the results of elections or consultations to be held locally.” 

The Basic Law (essentially the territory’s constitution), approved six years later by Beijing, provided for “nomination by a broadly representative nominating committee in accordance with democratic procedures.”   The PRC claims that is what it is implementing. 

As of 2017 residents will be able to elect their ruler, but only from candidates vetted by Beijing.  It won’t be real democracy, but then, there never was much chance that the Chinese Communist Party would institute real democracy in any area under its control.

That’s not fair to Hong Kong’s residents.  So it’s impossible not to admire the protestors.  However, their very passion threatens their objective.  They have divided over tactics and sparked criticism from some other residents. 

The greatest risk is that the Chinese leadership might believe it must choose between repression and either chaos or democracy.  In 1989 the CCP sent in tanks to clear democracy-minded demonstrators out of Tiananmen Square.

Beijing would pay an even higher price for cracking down in Hong Kong.  Still, the Chinese regime places self-preservation above everything else.

Moreover, if China violently dispersed the protestors, it would not likely stop there.  Media freedom and judicial independence also would be at risk. 

This week tensions eased as demonstrators and government officials agreed to talks.  Democracy advocates should temper their idealism with an acute sense of pragmatism. 

Beijing might sacrifice the territory’s chief executive, Leung Chun-ying, and make other concessions, such as broadening the nomination process.  But the PRC will insist that Chinese officials, not Hong Kong residents, be in charge. 

Unfortunately, as I write in Forbes online, “Nothing the U.S. does can bring democracy to the territory.  To the contrary, the more Washington attempts to intervene, the more likely China is to perceive the demonstrators to be threats.” 

Democracy advocates have moral right on their side.  Still, raw power is likely to prevail in any showdown.  The protestors must temper idealism with prudence.  They must not allow the perfect to become the enemy of the good for their own sake—and ultimately that of Hong Kong and China as well.

The 95 Percent Rule, Bulgaria, and the New York Times

Recent reportage in the New York Times reminded me of my 95 Percent Rule: “95 percent of what you read about economics and finance is either wrong or irrelevant.” In her piece on the Bulgarian elections, Mariana Ionova wrote:

“[Bulgaria’s] economy is growing at an annual rate of about 1.6 percent, but that is the slowest pace in the union, and about half the European average.”

These alleged facts aren’t even in the ballpark (see the accompanying chart). Bulgaria is neither the slowest growing economy in the European Union, nor is it growing at half the European average. In fact, Bulgaria is growing slightly faster than the European average.

Once again, the 95 Percent Rule rules.

E.U. Austerity, You Must Be Kidding

The leading political lights in Europe – Messrs. Hollande, Valls and Macron in France and Mr. Renzi in Italy – are raising a big stink about fiscal austerity. They don’t like it. And now Greece has jumped on the anti-austerity bandwagon. The pols have plenty of company, too. Yes, they can trot out a host of economists – from Nobelist Krugman on down – to carry their water.

But, with Greece’s public expenditures at 58.5% of GDP, and Italy’s and France’s at 50.6% and 57.1% of GDP, respectively – one can only wonder where all the austerity is (see the accompanying table). Government expenditures cut to the bone? You must be kidding. Even in the Unites States, where most agree that there is plenty of government largess, the government (federal, plus state and local) only accounts for a whopping 38.1% of GDP.

As Europe sinks under the weight of the State, it’s austerity, not anti-austerity, that should be on the menu.

Biden Should Not Have Apologized

Vice President Joe Biden has reportedly apologized to the leaders of Turkey, the United Arab Emirates, and other Middle East countries for his previous comments that they had, perhaps inadvertently, supported Sunni extremists in the Syrian civil war.  The uproar occurred because Biden had stated that Turkey, Qatar, and the UAE had given “billions of dollars and tens of thousands of tons of weapons” to Syrian Sunni fighters seeking to overthrow Bashar al-Assad’s regime.  Those governments, he charged, had been willing to give aid to “anyone who would fight Assad.  Except that the people who were being supplied were al-Nusra and al-Qaeda and the extremist elements of jihadis coming from other parts of the world.”  

It is unfortunate that Biden felt the need to retract those comments, because his criticism was quite accurate.  As I point out in a recent article on Aspenia Online,  the rise of ISIS is the latest phase of a regional struggle for power between Sunnis and Shiites.  The primary arena is Syria, where a fight rages between largely Sunni insurgents and Assad’s governing coalition of Alawites (a Shiite offshoot), Christians, and other religious minorities who are petrified about possible Sunni domination.  Saudi Arabia, Qatar, Turkey, and the UAE enthusiastically backed the insurgents, and although the Obama administration might prefer to forget its role in the rise of ISIS, the United States provided aid to them as well.

The other, closely related, arena is Iraq with its continuing sectarian animosity.  Eliminating Saddam Hussein’s rule ended decades of Sunni domination of that country’s politics and economy.  The new Shiite-led government was in no mood for conciliating the displaced elite that had stifled their faction for so long.  Instead, the regime seemed to go out of its way to marginalize and humiliate the Sunni minority.  Iraq has seethed for years because of sectarian hatred, drifting to the brink of civil war in 2006 and 2007, and finally exploding into a full-blown internecine conflict this year.  Some Iraqi Sunnis may harbor worries about the extremist nature of ISIS, but they also see the group as the one entity capable of mounting a serious armed challenge to the Baghdad government.      

The U.S. Fall in Economic Freedom and the Rule of Law

The United States is the 12th  freest economy in the world according to the new Economic Freedom of the World report. Co-published today by Cato and the Fraser Institute, it finds a strong relationship between economic freedom and human well-being.

The U.S. ranking is part of a worrisome decline in economic freedom that began more than a decade ago. For decades, the United States ranked in second or third place on the index. In 2000 it was #2, yet by 2005 it ranked 8 and it continued its precipitous fall until recently. On a 0-10 scale, the U.S. rating is now 7.81 compared to 7.74 last year, a slight improvement. The level of economic freedom in the United States is lower today than it was in 1980. Since 2005, Canada has ranked higher than the United States.

The authors of the report note that the United States has fallen in all five areas that they measure: size of government; legal system and property rights; sound money; freedom to trade; and regulation. But the rule-of-law indicator (legal system and property rights) has seen the biggest decline and, as the graph shows, it has been enormous.

The U.S. Decline

The measured deterioration in the rule of law is consistent with scholarship in that field and, according to the report, is a result of “increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs,” and other property rights violations. Because the rule of law is of course a cornerstone not just of economic freedom but of all freedoms, and because there is a strong relationship between economic freedom and other liberties (civil and political), all Americans should be concerned with the findings of the report.

A deterioration in the rule of law should also be of special concern to Hong Kong, the top ranked territory in the index, where recent protests highlight the danger that Beijing’s interference in its legal system, including the perception of such, poses to the overall freedoms and economic success of Hong Kong.