Tag: markets

Time to Lose the Trade Enforcement Fig Leaf

During his SOTU address last week, the president declared it a national goal to double our exports over the next five years.  As my colleague Dan Griswold argues (a point that is echoed by others in this NYT article), such growth is probably unrealistic. But with incomes rising in China, India and throughout the developing world, and with huge amounts of savings accumulated in Asia, strong U.S. export growth in the years ahead should be a given—unless we screw it up with a provocative enforcement regime.

The president said:

If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores. But realizing those benefits also means enforcing those agreements so our trading partners play by the rules.

Ah, the enforcement canard!

One of the more persistent myths about trade is that we don’t adequately enforce our trade agreements, which has given our trade partners license to cheat.  And that chronic cheating—dumping, subsidization, currency manipulation, opaque market barriers, and other underhanded practices—the argument goes, explains our trade deficit and anemic job growth.

But lack of enforcement is a myth that was concocted by congressional Democrats (Sander Levin chief among them) as a fig leaf behind which they could abide Big Labor’s wish to terminate the trade agenda.  As the Democrats prepared to assume control of Congress in January 2007, better enforcement—along with demands for actionable labor and environmental standards—was used to cast their opposition to trade as conditional, even vaguely appealing to moderate sensibilities.  But as is evident in Congress’s enduring refusal to consider the three completed bilateral agreements with Colombia, Panama, and South Korea (which all exceed Democratic demands with respect to labor and the environment), Democratic opposition to trade is not conditional, but systemic.

The president’s mention of enforcement at the SOTU (and his related comments to Republicans the following day that Americans need to see that trade is a two way street – starts at the 4:30 mark) indicates that Democrats believe the fig leaf still hangs.  It’s time to lose it.

According to what metric are we failing to enforce trade agreements?  The number of WTO complaints lodged? Well, the United States has been complainant in 93 out of the 403 official disputes registered with the WTO over its 15-year history, making it the biggest user of the dispute settlement system. (The European Communities comes in second with 81 cases as complainant.)  On top of that, the United States was a third party to a complaint on 73 occasions, which means that 42 percent of all WTO dispute settlement activity has been directed toward enforcement concerns of the United States, which is just one out of 153 members.

Maybe the enforcement metric should be the number of trade remedies measures imposed?  Well, over the years the United States has been the single largest user of the antidumping and countervailing duty laws.  More than any other country, the United States has restricted imports that were determined (according to a processes that can hardly be described as objective) to be “dumped” by foreign companies or subsidized by foreign governments. As of 2009, there are 325 active antidumping and countervailing duty measures in place in the United States, which trails only India’s 386 active measures.

Throughout 2009, a new antidumping or countervailing duty petition was filed in the United States on average once every 10 days.  That means that throughout 2010, as the authorities issue final determinations in those cases every few weeks, the world will be reminded of America’s fetish for imposing trade barriers, as the president (pursuing his “National Export Initiative”) goes on imploring other countries to open their markets to our goods.

Rather than go into the argument more deeply here, Scott Lincicome and I devoted a few pages to the enforcement myth in this overly-audaciously optimistic paper last year, some of which is cited along with some fresh analysis in this Lincicome post.

Sure, the USTR can bring even more cases to try to force greater compliance through the WTO or through our bilateral agreements.  But rest assured that the slam dunk cases have already been filed or simply resolved informally through diplomatic channels.  Any other potential cases need study from the lawyers at USTR because the presumed violations that our politicians frequently and carelessly imply are not necessarily violations when considered in the context of the actual rules.  Of course, there’s also the embarrassing hypocrisy of continuing to bring cases before the WTO dispute settlement system when the United States refuses to comply with the findings of that body on several different matters now.  And let’s not forget the history of U.S. intransigence toward the NAFTA dispute settlement system with Canada over lumber and Mexico over trucks.  Enforcement, like trade, is a two-way street.

And sure, more antidumping and countervailing duty petitions can be filed and cases initiated, but that is really the prerogative of industry, not the administration or Congress.  Industry brings cases when the evidence can support findings of “unfair trade” and domestic injury.  The process is on statutory auto-pilot and requires nothing further from the Congress or president. Thus, assertions by industry and members of Congress about a lack of enforcement in the trade remedies area are simply attempts to drum up support for making the laws even more restrictive.  It has nothing to do with a lack of enforcement of the current rules.  They simply want to change the rules.

In closing, I’m happy the president thinks export growth is a good idea.  But I would implore him to recognize that import growth is much more closely correlated with export growth than is heightened enforcement.  The nearby chart confirms the extremely tight, positive relationship between export and imports, both of which track similarly closely to economic growth.

U.S. producers (who happen also to be our exporters) account for more than half of all U.S. import value.  Without imports of raw materials, components, and other intermediate goods, the cost of production in the United States would be much higher, and export prices less competitive.  If the president wants to promote exports, he must welcome, and not hinder, imports.

Global Markets Keep U.S. Economy Afloat

Three items in the news this week remind us why we should be glad we live in a more global economy. While American consumers remain cautious, American companies and workers are finding increasing opportunities in markets abroad:

  • Sales of General Motors vehicles continue to slump in the United States, but they are surging in China. The company announced this week that sales in China of GM-branded cars and trucks were up 67 percent in 2009, to 1.8 million vehicles. If current trends continue, within a year or two GM will be selling more vehicles in China than in the United States.
  • James Cameron’s 3-D movie spectacular “Avatar” just surpassed $1 billion in global box-office sales. Two-thirds of its revenue has come from abroad, with France, Germany, and Russia the leading markets. This has been a growing pattern for U.S. films. Hollywood—which loves to skewer business and capitalism—is thriving in a global market.
  • Since 2003, the middle class in Brazil has grown by 32 million. As the Washington Post reports, “Once hobbled with high inflation and perennially susceptible to worldwide crises, Brazil now has a vibrant consumer market …” Brazil’s overall economy is bigger than either India or Russia, and its per-capita GDP is nearly double that of China.

As I note in my Cato book Mad about Trade, American companies and workers will find their best opportunities in the future by selling to the emerging global middle class in Brazil, China, India and elsewhere. Without access to more robust markets abroad, the Great Recession of 2008-09 would have been more like the Great Depression.

Spending Our Way Into More Debt

Huge deficit spending, a supposed stimulus bill, and financial bailouts by the Bush administration failed to stave off a deep recession. President Obama continued his predecessor’s policies with an even bigger stimulus, which helped push the deficit over the unimaginable trillion dollar mark. Prosperity hasn’t returned, but the president is persistent in his interventionist beliefs. In his speech yesterday, he told the country that we must “spend our way out of this recession.”

While a dedicated segment of the intelligentsia continues to believe in simplistic Kindergarten Keynesianism, average Americans are increasingly leery. Businesses and entrepreneurs are hesitant to invest and hire because of the uncertainty surrounding the President’s agenda for higher taxes, higher energy costs, health care mandates, and greater regulation. The economy will eventually recover despite the government’s intervention, but as the debt mounts, today’s profligacy will more likely do long-term damage to the nation’s prosperity.

Some leaders in Congress want a new round of stimulus spending of $150 billion or more. The following are some of the ways that money might be spent from the president’s speech:

  • Extend unemployment insurance. When you subsidize something you get more it, so increasing unemployment benefits will push up the unemployment rate, as Alan Reynolds notes.”
  • “Cash for Caulkers.” This would be like Cash for Clunkers except people would get tax credits to make their homes more energy efficient. Any program modeled off “the dumbest government program ever” should be put back on the shelf. 

  • More Small Business Administration lending. A little noticed SBA program created by the stimulus bill offered banks an “unprecedented” 100 percent guarantee on loans to small businesses. The program has an anticipated default rate of 60 percent. Small businesses need lower taxes and fewer regulations, not a government program that perpetuates more moral hazard.

  • More aid to state and local governments. State and local government should be using the recession to implement reforms that will prevent them from going on another unsustainable spending spree when the economy recovers. Also, we need fewer state and local government employees – not more – as they’re becoming an increasing burden on taxpayers.

The president said his administration was “forced to take those steps largely without the help of an opposition party which, unfortunately, after having presided over the decision-making that led to the crisis, decided to hand it to others to solve.” Mr. President, nobody has forced you to do anything. You’ve chosen to embrace – and expand upon – the big spending policies that were a hallmark of your predecessor’s administration.

NAEP Math Scores, NCLB, and the Federal Government

I’m surprised anyone was surprised by the recent flat-lining of scores on the NAEP 4th grade math test. The rate of improvement in NAEP scores has been declining since No Child Left Behind was passed, and the recent results are consistent with that trend.

But what really amazes me is that so many people think the solution is just to tweak NCLB! The unstated assumption here is that federal policy is a key determinant of educational achievement. That’s rubbish.

We’ve spent $1.8 trillion on hundreds of different federal education programs since 1965, and guess what: at the end of high school, test scores are flat in both reading and math since 1970, and have actually declined slightly in science. (Charted for your viewing pleasure here).

If we’ve proved anything in the past 40 years, it is that federal involvement in education is a staggering waste of money.

Meanwhile, education economists have spent the last several decades finding out what actually does work in education. They’ve compared different kinds of school systems and it turns out that parent-driven, competitive education markets consistently outperform state monopoly school systems like ours. I tabulated the results in a recent peer-reviewed paper and they favor education markets over monopolies by a margin of 15 to 1.

So policymakers who actually care about improving educational outcomes should be spending their time and resources enacting laws that will bring free and competitive education markets within reach of all families. And they should be ignoring the education technocrats who – like Soviet central planners – just want to keep spending other people’s money tweaking their fruitless five year plans.

Curbing Free Trade to Save It

In the latest example of “We had to burn the village to save it” logic, Sen. Sherrod Brown (D-OH) argues in a letter in the Washington Post this morning that the way to “support more trade” in the future is to raise barriers to trade today.

Brown criticizes Post columnist George Will for criticizing President Obama for imposing new tariffs on imported tires from China. Like President Obama himself, Brown claims that by invoking the Section 421 safeguard, the president was merely “enforcing” the trade laws that China agreed to but has failed to follow. He scolds advocates of trade for talking about the “rule of law” but failing to enforce it when it comes to trade agreements. Brown concludes, “If America is ever to support more trade, its people need to know that the rules will be enforced. And Mr. Obama did exactly that.”

Nothing in U.S. trade law required President Obama to impose tariffs on imported Chinese tires. As my colleague Dan Ikenson explained in a recent Free Trade Bulletin, Section 421 allows private parties to petition the U.S. government for protection if rising imports from China have caused or just threaten to cause “market disruption” to domestic producers. If the U.S. International Trade Commission recommends tariff relief, the president can decide to impose tariffs, or not.

The law allows the president to refrain from imposing tariffs if he finds they are “not in the national economic interest of the United States or … would cause serious harm to the national security of the United States.”

As I argue at length in my new Cato book Mad about Trade, trade barriers invariably damage our national economic interests and weaken our national security, and the tire tariffs are no exception. If the president had followed the letter and spirit of the law, he would have rejected the tariff.

And since when is causing “market disruption” something to be punished by law? Isn’t that what capitalism and market competition are all about? New competitors and new products are constantly disrupting markets, to the discomfort of entrenched producers but to the great benefit of the general public and the economy as a whole.

Human beings once widely practiced an economic system that minimized market disruption. It was called feudalism.

C/P Mad About Trade

Why Wall Street Loves Obama

wall streetWas it just me, or did there seem to be a whole lot of applause during Obama’s Wall Street speech?  Remember this was a room full of Wall Street executives.  The President even started by thanking the Wall Street execs for their “warm welcome.”

While of course, there was the obligatory slap on the wrist, that “we will not go back to the days of reckless behavior and unchecked excess,” but there was no mention that the bailouts were a thing of the past.  Indeed, there is nothing in Obama’s financial plan that would prevent future bailouts, which is why I believe there was such applause.  The message to the Goldman’s of the world, was, you better behave, but even if you don’t, you, and your debtholders will be bailed out.

The president also repeatedly called for “clear rules” and “transparency” - but where exactly in his plan is the clear line dividing who will or will not be bailed out?  That’s the part Wall Street loves the most; they can all say we’ve “learned the lesson of Lehman:  Wall Street firms cannot be allowed to fail.”  At least that’s the lesson that Obama, Geithner and Bernanke have taken away.  The truth is we’ve been down this road before with Fannie and Freddie.  Politicians always called for them to do their part, and that their misdeeds would not be tolerated.  Remember all the tough talk after the 2003 and 2004 accounting scandals at Freddie and Fannie?  But still they got bailed out, and what new regulations were imposed were weak and ineffective.

As if the applause wasn’t enough, as Charles Gaspario points out, financial stocks rallied after the president’s speech.  Clearly the markets don’t see his plan as bad for the financial industry.

It would seem the best investment Goldman has made in recent years was in its employees deciding to become the largest single corporate contributor to the Obama Presidential campaign.  That’s an investment that continues to yield massive dividends.

The Legacy of TARP: Crony Capitalism

When Treasury Secretary Hank Paul proposed the bailout of Wall Street banks last September, I objected in part because the TARP meant that government connections, not economic merit, would come to determine how capital gets allocated in the economy. That prediction now looks dead on:

As financial firms navigate a life more closely connected to government aid and oversight than ever before, they increasingly turn to Washington, closing a chasm that was previously far greater than the 228 miles separating the nation’s political and financial capitals.

In the year since the investment bank Lehman Brothers collapsed, paralyzing global markets and triggering one of the biggest government forays into the economy in U.S. history, Wall Street has looked south to forge new business strategies, hew to new federal policies and find new talent.

“In the old days, Washington was refereeing from the sideline,” said Mohamed A. el-Erian, chief executive officer of Pimco. “In the new world we’re going toward, not only is Washington refereeing from the field, but it is also in some respects a player as well… . And that changes the dynamics significantly.”

Read the rest of the article; it is truly frightening. We have taken a huge leap toward crony capitalism, to our peril.