Tag: International

The (Beginning of the) End of the Shameful U.S. Cotton Deal?

Heartening news from the Appropriations Committee yesterday: they voted to cut aid to farmers generally, and to make significant changes to an egregious cotton program. But first, some background.  You’ll recall the embarrassing deal made by the Obama administration last year to head off Brazil’s right to impede American exports in retaliation for WTO-illegal cotton support. The United States is, in other words, now sending almost $150m worth of “technical assistance” and “capacity building” funds to Brazil, just so we can continue to subsidize American cotton growers without penalty (so much for U.S. promotion of the rule of law in international commercial relations). Rep. Ron Kind (D-WI) tried to end that deal earlier this year, but to no avail. Big Ag’s friends in Congress argued, unfortunately successfully, that any changes to the cotton bribes should be dealt with in the context of the 2012 Farm Bill, and by the agriculture committees (good luck with that).

But yesterday, the Appropriations Committee approved by voice vote an amendment from Rep. Jeff Flake (R-AZ) to take the fiscal 2013 payment to Brazil from funds that would normally go to supporting U.S. cotton growers. According to an article [$] in the Congressional Quarterly, Rep. Flake argued that “American cotton growers should pay the bill since the United States was making the payment on their behalf.” Well played, sir.  Rep. Rosa DeLauro (D-CT) filed an amendment that would send the FY2012 cotton payment to the Women’s, Infants and Children nutrition program instead.

The Committee also voted to lower the income eligibility cap to $250,000 AGI.

The CQ article did contain this worrying footnote, however:

Support for the amendments may be tenuous — especially if lawmakers cannot hide behind the anonymity of a voice vote. After winning the voice vote in committee, Flake sought a roll call, prompting appropriators of both parties to suggest that he did not need the recorded vote. Flake took their advice and demurred.

 Leglislators are usually shy about publicizing their positions only when they think it could get them in political hot water, so let’s not uncork the champagne yet.

“Dear Foreigners, You Do the Math” —USA

A brand new Harvard University study finds that American students perform very poorly in math compared to their peers in other nations.

What’s that? You’ve heard this all before? Not quite.

This study compares the percentages of students scoring at advanced levels across countries, and it controls for the confounding effects of differing populations of disadvantaged groups. When the researchers looked exclusively at white students and at students with at least one parent with a college degree, the results remained largely the same. Among white students, for instance, 8 percent of Americans scored “advanced” in math, landing us in 25th place among nations for which scores were available–behind nearly every other advanced industrialized nation on Earth. And the highest ranked U.S. state, Massachusetts, trails the overall averages of 14 nations.

This may come as a shock to those who imagined that America’s educational shortcomings were restricted to inner cities or disadvantaged populations, but it is entirely consistent with results reported more than a decade ago as part of the Third International Mathematics and Science Study, showing that U.S. students taking advanced mathematics and physics classes lagged their peers in other industrialized nations at the end of high school, often by wide margins.

So how, then, have we remained an economic superpower for so long if our school system is so bad? The answer is that we have historically enjoyed one of the freest economies on Earth, a relatively unfettered labor market, and comparatively low taxes–all of which have drawn to our shores many of the world’s best and brightest. Regrettably, our comparative advantage in those areas has eroded over the past several years.

Perhaps, instead of continuing to make our economy more like our failing centrally planned school monopoly, we should allow our education system to benefit from the freedoms and incentives of the marketplace that was always the engine of our prosperity….

U.S. Antidumping Regime Restrains U.S. Export Growth

In honor of World Trade Week—and for its decreed purpose of educating Americans about trade—this post is about U.S. trade policy working at cross-purposes with other policies or goals of the administration. So numerous are these examples of trade policy dissonance, that a committed wonk could devote an entire website to the task of documenting them.

If the administration were serious about making trade policy work—rather than just paying it lip service—it would compile its own exhaustive list of laws, regulations, policies, and practices that actually undermine its stated objectives of facilitating economic growth, investment, and job creation through expanded trade opportunities. Then, it would make the changes necessary to ensure that our policies are paddling in the same direction. But that is not happening—at least as far as I can see.

At the beginning of the year, President Obama announced his goal of doubling U.S. exports in five years. He even formalized the goal by granting it an official name—the National Export Initiative. Well, I see no imminent harm in setting the ambitious goal of reaching $3 billion in exports by 2015 (although I am wary of the tactics under consideration and the evocation of Soviet Five-Year Plans). But it betrays a lack of true commitment to that goal when nothing is being done to reduce the competitive burdens imposed on U.S. exporters by our own myopic, anachronistic trade remedies regime. The president exhorts U.S. exporters to win a global race, yet he overlooks the fact that Congress has tied many of their shoes together.

The costs of the U.S. Antidumping and Countervailing Duty laws on U.S. exporters are manifest in various forms, but this post concerns the burdens imposed on U.S. producer/exporters who rely on the raw materials and other industrial inputs that are subject to AD and CVD measures. Indeed, most of the products subject to the 300 U.S. AD and CVD orders currently in effect (like steel and chemicals) are, in fact, inputs to downstream U.S. producers, many of whom compete (or try to compete) in foreign markets. (Just take a look at this list and decide for yourself whether these are products that you’d buy at the store or if they are inputs a U.S. producer would use to produce something else that you might buy at a store.)

AD and CVD duties squeeze these U.S. producer/exporters’ profits, first by raising their input costs and then by depriving them of revenues lost to foreign competitors, who, by producing outside of the United States, have access to that crucial input at lower world-market prices, and can themselves price more competitively. This is not hypothetical. It is a routine hindrance for U.S. exporters. And one that has eluded the president’s attention, despite his soaring rhetoric about the economic importance of U.S. exports.

Consider the case of Spartan Light Metal Products, a small Midwestern producer of aluminum and magnesium engine parts (and other mechanical parts), which presented its story to Obama administration officials, who were dispatched across the country earlier this year to get input from manufacturers about the problems they confronted in export markets.

Beginning in the early-1990s, Spartan shifted its emphasis from aluminum to magnesium die-cast production because magnesium is much lighter and more durable than aluminum, and Spartan’s biggest customers, including Ford, GM, Honda, Mazda, and Toyota were looking to reduce the weight of their vehicles to improve fuel efficiency. Among other products, Spartan produced magnesium intake manifolds for Honda V-6 engines; transmission end and pump covers for GM engines; and oil pans for all of Toyota’s V-8 truck and SUV engines.

Spartan was also exporting various magnesium-cast parts (engine valve covers, cam covers, wheel armatures, console brackets, etc.) to Canada, Mexico, Germany, Spain, France, and Japan. Global demand for magnesium components was on the rise.

But then all of a sudden, in February 2004, an antidumping petition against imports of magnesium from China and Russia was filed by the U.S. industry, which comprised just one producer, U.S. Magnesium Corp. of Utah with about 370 employees. Prices of magnesium alloy rose from slightly more than $1 per pound in February 2004 to about $1.50 per pound one year later, when the U.S. International Trade Commission issued its final determination in the antidumping investigation. By mid-2008, with a dramatic reduction of Chinese and Russian magnesium in the U.S. market, the U.S. price rose to $3.25 per pound (before dropping in 2009 on account of the economic recession).

By January 2010, the U.S. price was $2.30 per pound, while the average price for Spartan’s NAFTA competitors was $1.54. Meanwhile, European magnesium die-casters were paying $1.49 per pound and Chinese competitors were paying $1.36 per pound. According to Spartan’s presentation to Obama administration officials, magnesium accounts for about 40-60% of the total product cost in its industry. Thus, the price differential caused by the antidumping order bestowed a cost advantage of 19 percent on Chinese competitors, 17 percent on European competitors, and 16 percent on NAFTA competitors.

As sure as water runs downhill, several of Spartan’s U.S. competitors went out of business due to their inability to secure magnesium at competitive prices. According to the North American Die Casting Association, the downstream industry lost more than 1,675 manufacturing jobs–more than five-times the number of jobs that even exist in the entire magnesium producing industry!

Spartan’s  outlook is bleak, unless it can access magnesium at world market prices. Its customers have turned to imported magnesium die cast parts or have outsourced their own production to locations where they have access to competitively-priced magnesium parts, or they’ve switched to heavier cast materials, sacrificing ergonomics and fuel efficiency in the face of rapidly-approaching, federally-mandated 35.5 mile per gallon fuel efficiency standards.

And to add insult to injury, the Obama administration recently launched a WTO case against China for its restraints on exports of raw materials, including magnesium. Allegedly, since January 2008, the Chinese government has been imposing a 10 percent tax on magnesium exports. How dissonant, how incongruous, how absolutely imbecilic it is that, in the face of China’s own restraints on its exports (which the U.S. government officially opposes), the U.S. antidumping order against imported magnesium from China persists!  How stupid.  How short-sighted.

Spartan’s is not an isolated incident. Routinely, the U.S. antidumping law is more punitive toward U.S. manufacturers than it is to the presumed foreign targets. Routinely, U.S. producers of upstream products respond to their customers’ needs for better pricing, not by becoming more efficient or cooperative, but by working to cripple their access to foreign supplies. More and more frequently, that is how and why the antidumping law is used in the United States. Increasingly, it is a weapon used by American producers against their customers—other American producers, many of whom are exporters.

If President Obama really wants to see exports double, he must implore Congress to change the antidumping law to explicitly give standing to downstream industries so that their interests can be considered in trade remedies cases. He must implore Congress to include a public interest provision requiring the U.S. International Trade Commission to assess the costs of any duties on downstream industries and on the broader economy before imposing any such duties.

The imperative of U.S. export growth demands some degree of sanity be restored to our business-crippling trade remedies regime.

Beware of Americans Proselytizing the Chinese Economic Model

In a Cato paper released earlier this month, I argued that the glacial pace of America’s economic recovery and its growing public debt juxtaposed against China’s almost uninterrupted double-digit annual economic growth and its role as Congress’s sugar daddy have bred insecurity among U.S. opinion leaders, many of whom now advocate a more strident approach to China, or emulation of its top-down approach.

I cite, among others, Thomas Friedman of the New York Times, who is enamored of autocracy’s capacity to facilitate China’s singularity of purpose to dominate the industries of the future:

One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power, and wind power. China’s leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar. Beijing wants to make sure that it owns that industry and is ordering the policies to do that, including boosting gasoline prices, from the top down.

Friedman’s theme—but less googoo eyed and more all-hands-on-deck!—is echoed in an op-ed by China-expert James McGregor, which ran in yesterday’s Washington Post.  McGregor conveys what he describes as an emerging sentiment within the U.S. business community in China.  That is: the Chinese government is hell bent on creating national economic champions; is using its increasing leverage (as global financier and fastest-growing market) to impose its own interpretations of the global rules of economic engagement in support of its comprehensive industrial policy, and, ultimately; the United States must wake up and rise to the challenge by crafting some top-down industrial policy of its own.

I don’t dispute some of McGregor’s premises.  China’s long process of market liberalization has slowed down, halted, and even reversed in some areas.  Policies are proliferating that favor local companies (particularly state-owned enterprises), hamper the operations of foreign-owned firms, and impede market access for imports.  Indeed, many of these policies are likely the product of industrial planning. 

But McGregor’s conclusion is extreme:

The time has come for a White House-led, public-private, comprehensive examination of American competitiveness against a clear-eyed view of China’s very smart and comprehensive industrial development policies and plans…What technology do we protect? What do we share? What are our commercial strategic imperatives as a nation? How do we retool the U.S. government’s inadequate and outdated trade bureaucracy to provide thoughtful strategic focus and interagency coordination? How do we overcome the fundamental disconnect between our system of scattered bureaucratic responsibilities and almost no national economic planning vs. China’s top-down, disciplined and aggressive national economic development planning machine?

Central planning may be more en vogue in Washington than usual nowadays, but to even come close to reaching his conclusion requires disregarding many facts, which is how McGregor gets there sans tongue in cheek.

First, in an effort to preempt any suggestion that China’s protectionism is nothing exceptional and can be remedied through the World Trade Organization and other channels, McGregor offers this blanket statement: “Chinese policymakers are masters of creative initiatives that slide through the loopholes of WTO and other international trade rules.”  I realize that op-ed writing forces one to economize on words, but that statement, which serves as McGregor’s springboard to socialism, cannot suffice for an analysis of the facts.  One of those facts is that the United States has been successful in compelling changes in China’s protectionist practices in all of the formal WTO disputes it has lodged that have been resolved thus far (6 of 8 formal cases have been resolved).  If China violates the agreed rules of trade, and its actions impair benefits or impose costs on U.S. interests that are too large to ignore, pursuing a WTO case is a legitimate and proven channel of resolution. Chinese protectionism can be addressed without the radical changes McGregor counsels. 

But I think McGregor—sharing the tactics of other in the media and politics—exploits public angst over a rising China to promote his idea as the obvious and only solution to what he sells as a rapidly-metastasizing problem.  McGregor argues that China is aiming to create national champions through subsidies and other preferential policies, while charging foreign companies admission to its market in the form of technology transfer, joint-venturing requirements, and local content rules.  McGregor claims, that this appropriation of foreign technology will be used to “create Chinese ‘indigenous innovations’ that will come back at us globally.”  Ultimately, McGregor fears that “American technology companies could be coerced to plant the seeds of their destruction in the fertile China market.”

It is telling that McGregor doesn’t consider U.S. government expropriation of those companies’ technology assets as planting the seeds of their own destruction.  Indeed, it is nothing short of expropriation when technology that is owned by individual companies in the private sector, making unique decisions to improve their own bottom-lines on behalf of their own shareholders is suddenly subject to the questions McGregor wants answered: What technology do we protect? What do we share? What are our commercial strategic imperatives as a nation?  Those questions, let alone the answers, imply that the U.S. government should have at least de facto ownership and control over these privately-held technology assets.

What is wrong with allowing each of these companies to decide for themselves whether they want to license or transfer some of their technology to Chinese companies, as the price of doing business in China?  Some will, some won’t, but the presupposition that those who do are selling the golden goose is not based on fact.  Let companies decide for themselves how to use their resources, and don’t treat industry as a monolith, as in “What are our commercial strategic imperatives as a nation?” 

Had we tried to answer and implement the answer to that question in the face the Japanese “threat” two decade ago, we’d be bereft of some of the most ingenious technological breakthroughs and the hundreds of industries and thousands of products that “our system of almost no national economic planning” has yielded.

When we peel away the chicken-little rhetoric, when we dispense with neo-Rahm Emanualism (“Never manufacture a good crisis and then let it go to waste”), when cooler heads and analytical minds prevail, the economic question boils down to this: What has been more successful at creating growth, central planning or decentralized dynamism?  For both China and the United States, it has been the latter. 

My bet is that China’s re-embrace of greater central planning will be brief, as it wastes resources, yields few -if any- national champions, and limits innovation.  For similar reasons, U.S. opinion leaders will eschew central planning, as well.

‘The Dumbest Terrorist In the World’?

Businessweek has a story quoting a former federal prosecutor in Brooklyn, Michael Wildes, speculating that Faisal Shahzad, the would-be Times Square bomber, made so many mistakes (leaving his house keys in the car, not knowing about the vehicle identification number, making calls from his cellphone, getting filmed, buying the car himself) that he may be the “dumbest terrorist in the world.” But Wildes can’t accept the idea that an al Qaeda type terrorist would be so incompetent and suggests that Shahzad was “purposefully hapless” to generate intelligence about the police reaction for the edification of his buddies back in Pakistan.

Give me a break. This incompetence is hardly unprecedented. Three years ago Bruce Schneier wrote an article titled “Portrait of the Modern Terrorist as an Idiot,” describing the incompetence of several would-be al Qaeda plots in the United States and castigating commentators for clinging to image of these guys as Bond-style villains that rarely err.  It’s been six or seven years since people, including me, started pointing out that al Qaeda was wildly overrated. Back then, most people used to say that the reason al Qaeda hadn’t managed a major attack here since September 11 was because they were biding their time and wouldn’t settle for conventional bombings after that success. We are always explaining away our enemies’ failure.

The point here is not that all terrorists are incompetent – no one would call Mohammed Atta that – or that we have nothing to worry about. Even if all terrorists were amateurs like Shahzad, vulnerability to terrorism is inescapable. There are too many propane tanks, cars, and would-be terrorists to be perfectly safe from this sort of attack. The same goes for Fort Hood.

The point is that we are fortunate to have such weak enemies. We are told to expect nuclear weapons attacks, but we get faulty car bombs. We should acknowledge that our enemies, while vicious, are scattered and weak. If we paint them as the globe-trotting super-villains that they dream of being, we give them power to terrorize us that they otherwise lack. As I must have said a thousand times now, they are called terrorists for a reason.  They kill as a means to frighten us into giving them something.

The guys in Waziristan who trained Shahzad are probably embarrassed to have failed in the eyes of the world and would be relieved if we concluded that they did so intentionally. Likewise, it must have heartened the al Qaeda group in Yemen when the failed underwear bomber that they sent west set off the frenzied reaction that he did.  Remember that in March, al Qaeda’s American-born spokesperson/groupie Adam Gadahn said this:

Even apparently unsuccessful attacks on Western mass transportation systems can bring major cities to a halt, cost the enemy billions and send his corporations into bankruptcy.

As our enemies realize, the bulk of harm from terrorism comes from our reaction to it.  Whatever role its remnants or fellow-travelers had in this attempt, al Qaeda (or whatever we want to call the loosely affiliated movement of internationally-oriented jihadists) is failing. They have a shrinking foothold in western Pakistan, maybe one in Yemen, and little more. Elsewhere they are hidden and hunted. Their popularity is waning worldwide. Their capability is limited. The predictions made after September 11 of waves of similar or worse attacks were wrong. This threat is persistent but not existential.

This attempt should also remind us of another old point: our best counterterrorism tools are not air strikes or army brigades but intelligence agents, FBI agents, and big city police.  It’s true that because nothing but bomber error stopped this attack, we cannot draw strong conclusions from it about what preventive measures work best. But the aftermath suggests that what is most likely to prevent the next attack is a criminal investigation conducted under normal laws and the intelligence leads it generates. Domestic counterterrorism is largely coincident with ordinary policing. The most important step in catching the would-be bomber here appears to have been getting the vehicle identification number off the engine and rapidly interviewing the person who sold it. Now we are seemingly gathering significant intelligence about bad actors in Pakistan under standard interrogation practices.

These are among the points explored in the volume Chris Preble, Jim Harper and I edited: Terrorizing Ourselves: Why U.S. Counterterrorism Policy is Failing and How to Fix It – now hot off the presses. Contributors include Audrey Kurth Cronin, Paul Pillar, John Mueller, Mia Bloom, and a bunch of other smart people.

We’re discussing the book and counterterrorism policy at Cato on May 24th,  at 4 PM. Register to attend or watch online here.

Drug Violence in Mexico

The apparent drug gang killings of U.S. consular employees this weekend in Juarez, Mexico are a bloody reminder that President Obama is getting the United States involved in yet another war it cannot win. Drug gang killings also occurred in Acapulco, with a total of 50 such fatalities nationwide over the weekend.

Unfortunately, Obama has responded to the latest incident by following the same failed strategy as his predecessors when confronted with drug war losses: a stronger fight against drugs.

Though the deaths are the first in which Mexican drug cartels appear to have so brazenly targeted and killed individuals linked to the U.S. government, illicit drug trade violence has killed some 18,000 people in Mexico since President Calderon came to power in December 2006—more than three times the number of American military personnel deaths in the Iraq and Afghanistan wars combined.

The carnage only shot up after Calderon declared an all-out war on drug trafficking upon taking office. After more than three years, the policy has failed to reduce drug trafficking or production, but it is weakening the institutions of Mexican democracy and civil society through corruption and bloodshed, which are the predictable products of prohibition.

The 29 people killed in drug-related violence this weekend in a 24 hour period in the state of Guerrero sets a dubious record for a Mexican state. And an increasing number of Mexicans, including former Mexican Foreign Minister Jorge Castañeda, are calling for a thorough rethinking of anti-drug policy in Mexico and the United States that includes legalization. Legalization would significantly reduce drug cartel revenue and put an end to an enormous black market and the social pathologies that it creates.

Will Taxing Foreign Visitors Promote Tourism?

President Obama is taking a break today from promoting a more federalized health-care system to sign a bill creating a federalized tourist promotion campaign.

In a closed ceremony at the White House, the president signed the Travel Promotion Act. After gaining final passage by the Senate last week, the bill will raise an estimated $200 million a year by imposing a $10 tax on visitors to the United States from countries where they are not required to obtain a visa. The revenue will be used to create and fund a new agency, the Corporation for Travel Promotion, that would work with the U.S. tourism industry to promote the United States as a global travel destination.

I’m all for promoting tourism to the United States. Tourism is an important “service export” that generates more than $100 billion a year in earnings from foreign travelers to the United States. But a new federal agency and a new tax on travel are not the right way to drum up more tourism business.

First, just on principle, promoting a particular industry should be the business of that industry, not the business of government. Americans also export billions of dollars worth of farm goods, semiconductors, machinery, aircraft, pharmaceuticals, and chemicals, along with financial, education, insurance, and other services. None of those industries deserves their own tax-financed promotion board either. If the payoff from promotion is so huge, the industry should be willing to bear its cost without the aid of the government.

More practically, it goes against basic economic logic to promote tourism to the United States by imposing new costs on tourists. Granted, $10 is not a large amount, but the demand curve for tourism is downward sloping - as it is in every other market. A higher price will lead to less demand, not more. As a spokesman for the International Air Transport Association told ABC News:

It’s absolutely counterintuitive. To us, we’re saying we’d love to see more people visit the United States, but we’re going to charge you more for the privilege of entering the country. We are in favor of increased tourism and visitation… but let’s look at our priorities. We don’t think that videos and billboards are necessarily a priority. Instead, we should be focusing on how to make customs and immigration easier for people.

As I argued in a previous post, the U.S. government should be doing more to keep dangerous people off  flights to the United States instead of making it even more difficult for perfectly harmless tourists and business travelers to get on those same flights.

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