Tag: trade

Obama’s Trip to Latin America

As Ted Carpenter notes below, President Obama is departing on an important trip to Latin America. The countries that he will visit exemplify the macroeconomic stability and advancement of democratic institutions now found in much of the region.

Brazil, by far the largest Latin American economy, has enjoyed almost a decade of sound growth and poverty reduction. Chile is the most developed country in the region thanks to decades of economic liberalization, a process that has also made it Latin America’s most mature democracy. And El Salvador is undergoing a delicate period in its transition to becoming a full-fledged democracy with its first left-of-center president since the end of the civil war in 1992.

In an era when most Latin American nations are moving in the right direction—albeit at different speeds, with some setbacks, and with notable exceptions—the United States can serve as a catalyst of change by contributing to more economic integration and the consolidation of the rule of law in the region.

Unfortunately, despite President Obama’s assurances that he’s interested in strengthening economic ties with Latin America, his administration is still delaying the ratification of two important free trade agreements with Colombia and Panama. President Obama also continues to support a failed war on drugs that significantly exacerbates violence and institutional frailty in the region, particularly in Mexico and Central America.

It’s good that President Obama’s trip will highlight significant progress in Latin America, but his administration’s policy actions still don’t match the U.S. goals of encouraging economic growth and sound institutional development in the region.

Despite Huawei’s Experience, America Is Open to Chinese Investment

After several days of defiance, Chinese telecom equipment manufacturer Huawei announced Monday that it would abide a recommendation from the Committee on Foreign Investment in the United States (CFIUS) that it divest of U.S. technology company 3-Leaf. CFIUS is an inter-agency group charged with reviewing the national security implications of proposed foreign investments in U.S. companies and assets and advising the president about whether or not he should block those transactions on security grounds. CFIUS is composed of representatives from 16 different U.S. government departments and agencies and is chaired by the Secretary of the Treasury.

Last week, CFIUS issued a recommendation that the president block Huawei’s $2 million purchase of assets—including certain patents—from 3-Leaf on the grounds that the transaction presented a risk to national security. (Technically, the recommendation was for the president to compel Huawei to divest of 3-Leaf, since the transaction was consummated in May 2010, before CFIUS was made aware of the deal). Apparently, CFIUS was concerned about Huawei’s ties to the Chinese government—specifically the Chinese military.

Despite assurances from Huawei’s vice president of government affairs, William Plummer, that the company “is 100 percent employee-owned and has no ties with any government, nor with the PLA,” Huawei’s ownership structure is opaque. A letter submitted to administration officials from U.S. Senators Jim Webb (D-VA) and Jon Kyl (R-AZ) alleged that Huawei has a “history of illegal behavior and ties with the People’s Liberation Army, Taliban and Iranian Revolutionary Guard.” The letter also accused Huawei of various patent and trademark infringements and suggested that the small scale of Huawei’s acquisition ($2 million) was designed to enable the transaction to avoid scrutiny—a theory that is lent credibility by Huawei’s decision not to inform CFIUS of its intention to purchase 3-Leaf.

Huawei’s decision this week to abandon the deal spares the president from issuing a formal opinion on the matter, and in all likelihood spares Huawei the added humiliation of a formal rejection from the U.S. president. Meanwhile, Huawei and officials of the Chinese Ministry of Commerce are lambasting the CFIUS decision as further evidence that the United States is closed to Chinese direct investment, and implying that U.S. investors might expect similarly shoddy treatment in China. What to make of all of this?

First, as I’ve argued before (e.g., here, here, and here), the United States should be open to foreign direct investment from all countries and the rules and regulations governing investment should be transparent, consistent, straightforward, and applied equally to suitors from all countries. That being said, state and local governments should be aggressively courting Chinese investment, for the reasons I gave in a paper published 14 months ago:

If it is desirable that China recycle some of its estimated $2.4 trillion in accumulated foreign reserves, U.S. policy … should be more welcoming of Chinese investment in the private sector. As of the close of 2008, Chinese direct investment in the United States stood at just $1.2 billion—a mere rounding error at about 0.05 percent of the $2.3 trillion in total foreign direct investment in the United States. That figure comes nowhere close to the amount of U.S. direct investment held by foreigners in other big economies. U.S. direct investment in 2008 held in the United Kingdom was $454 billion; it was $260 billion in Japan, $259 billion in the Netherlands, $221 billion in Canada, $211 billion in Germany, $64 billion in Australia, $16 billion in South Korea, and even $1.7 billion in Russia.

Some of China’s past efforts to take equity positions or purchase U.S. companies or buy assets or land to build new production facilities have been viewed skeptically by U.S. policymakers, and scuttled, ostensibly over ill-defined security concerns. But a large inflow of investment from China would have an impact similar to a large increase in U.S. exports to China on the value of both countries’ currencies, and on the level of China’s foreign reserves.

In light of China’s large reserves, its need and desire to diversify, America’s need for investment in the real economy, and the objective of creating jobs and achieving sustained economic growth, U.S. policy should be clarified so that the benchmarks and hurdles facing Chinese investors are better understood.

Since 2008, Chinese direct investment in the United States has increased from $1.2 billion to perhaps as much as $6.5 billion last year. If only President Obama’s speech last week at the Chamber of Commerce exhorting U.S. business to invest and hire were given at the Guandong Business Club…

Second, I am no security expert, so I cannot comment on the credibility of CFIUS’ concerns or the senators’ allegations about Huawei. But I think it is entirely reasonable to have a process, like that conducted by CFIUS under the Foreign Investment and National Security Act, to vet transactions to ensure that those presenting risks to national security are brought to the attention of the president, who can then exercise his discretion to block them. Like some prospective export transactions, some prospective purchases of U.S. assets present legitimate security risks that may warrant intervention. Is the process completely apolitical and immune from insider maneuvering? No. Is there scope for politically driven decision making? Yes. Can the process be used to steer a transaction away from the foreign suitor and toward a politically favored domestic entity? Sure. But so far there have been few accusations of that nature, so why make the perfect the enemy of the good?

Finally, in the immediate case, Huawei acted clumsily, if not irresponsibly, and in defiance of a process with which it should by now be quite familiar. In 2008, Huawei had to withdraw its bid for American company 3Com after CFIUS found national security problems, some of which could have been resolved had Huawei been more forthcoming about its ownership structure and business dealings. Likewise, Huawei was excluded from participation in a major network upgrade by Sprint Nextel over similar concerns about the company’s ties. That the company thought it could just circumvent CFIUS carrying that kind of historical baggage and quietly purchase 3-Leaf last May speaks to a profoundly amateurish decision making process at Huawei, or an imperative to conceal something.

Despite the sour grapes expressed by Huawei and its patron, the Chinese Ministry of Commerce, the United States is open and ready to welcome Chinese investment

Measuring Progress on Violence against Union Members in Colombia

During a recent Congressional hearing on President Obama’s trade agenda, Rep. Sander Levin (D-Mich.) stated his continued objections to the FTA with Colombia:

“Union worker violence in Colombia remains unacceptably high - if not the highest in the world. Limited progress is being made in the investigation and prosecution of those responsible. Additionally, reports indicate that threats against union workers and others have increased, and there has been little concrete action today to pursue these cases.” [Emphasis added].

Levin warned that, despite signs of a more constructive approach to this issue from Colombia’s new president Juan Manuel Santos, “The only adequate measuring stick is progress on the ground.”

Rep. Levin should take a look at the Free Trade Bulletin that my colleague Dan Griswold and I published this week: “Trade Agreement Would Promote U.S. Exports and Colombian Civil Society.” When it comes to progress on the ground regarding violence against union members, Colombia already has a remarkable record. The number of assassinations of trade unionists has dropped 77% since its peak in 2001, compared to the total number of homicides in the country, which declined by 44% in the same period.

 

 

 Sources: National Union School (ENS) and Ministry of Social Protection (MPS).

If we look at the homicide rate as defined by the number of murders per 100,000 inhabitants, the rate for union killings was 5.3 per 100,000 unionists in 2010, six times lower than the homicide rate for the overall population (33.9 per 100,000 inhabitants).

In our paper, we present evidence that shows that union members enjoy greater security than other vulnerable groups of Colombian civil society, such as teachers, councilmen and journalists. Also, we highlight research conducted by economists Daniel Mejía and María José Uribe of the Universidad de los Andes in Colombia, which found no statistical evidence supporting the claim that trade unionists are targeted for their activities. Instead, their results show that “the violence against union members can be explained by the general level of violence and by low levels of economic development.”

As for Rep. Levin’s claim that there has been “little concrete action” to pursue crimes against trade unionists, once again the evidence says otherwise. In 2010 there were over 1,400 trade unionists under a government protection program—more than any other vulnerable group of Colombia’s civil society. In 2007, a special department was created in the Office of the Prosecutor General dedicated exclusively to solving crimes against union members and bringing the perpetrators to justice. Close to 85 percent of the sentences issued since 2000 for assassinations of trade unionists were issued after the creation of this department.

If Rep. Levin’s “adequate measuring stick is progress on the ground,” then he should recognize the tremendous achievements made by Colombia so far in reducing violence against trade unionists, and solving the crimes committed against them.

You can read the full paper here.

Rising Exports — and Imports — Are Good News for U.S. Economy

The U.S. trade deficit rose in 2010, and the bilateral deficit with China reached a record high last year, according to the monthly trade report released this morning by the U.S. Commerce Department. The usual critics (such as Peter Morici of the University of Maryland) are already spinning it into yet another indictment of trade, but the report contains a lot of good news for the U.S. economy.

Last year, Americans bought $2,330 billion worth of goods and services from other countries, while selling $1,832 billion, for a trade deficit of $498 billion. Our bilateral deficit with China grew to a record $273 billion.

Politicians and commentators love to focus on the trade deficit, as though it were a scorecard of who is winning in global trade. But the real measure is the total volume of trade. As economies expand, so does trade, both imports and exports. Exports help us reach new markets and expand economies of scale, while imports bless consumers with lower prices and more choices, while stoking competition, innovation, and efficiency gains among producers.

By this measure the trade report was good news all around, and one more sign that the U.S. and global economies continue to recover from the Great Recession. Last year, U.S. exports of goods were up 21 percent from 2009, while imports were up 23 percent. In contrast, in the recession year of 2009, exports of goods dropped 18 percent from the year before while imports plunged 26 percent. (Unemployment soared in 2009, but, hey, at least the trade deficit was “improving”!)

Our trade with China last year tells the same story. The value of goods imported from China rose 23 percent in 2010 (the same rate as imports from the rest of the world), while the value of the goods we exported to China jumped by 32 percent. That’s a rate of export growth that is 50 percent higher than export growth to the rest of the world. Members of Congress who complain that China’s managed currency is somehow a major barrier to U.S. exports should take note.

Gingrich & Woolsey on Energy

The other day, The Wall Street Journal provided a public service by lambasting Newt Gingrich for his absurd speech to the ethanol lobby in Des Moines last month (money line:  ”Obviously big urban newspapers want to kill it because it’s working, and you wonder, ‘What are their values?’”).  Today, Gingrich and fellow ethanol-maven James Woolsey struck back in those very same pages.  In doing so, Gingrich provided yet more evidence that he’s intellectually unfit for office.

“It is in this country’s long-term best interest,” he said, ”to stop the flow of $1 billion a day overseas.”  Really?  So money sent overseas is gone forever.  News to me.  The only thing you can buy with dollars earned from oil sales to the U.S. is to buy things denominated in dollars or to exchange them so that someone else can.  And we sell a lot of stuff to foreigners that are denominated in dollars (treasury bills for one) and that money comes right back to the good old U.S. of A.

But put that aside.  If Gingrich really believes this, then why not just ban all imports all together?  Is that what the GOP is about these days - rank gooberism on trade?

And one other thing; the U.S. does not spend $1 billion a day on foreign oil.  It spends about half that; $530 million a day (in 2009 anyway).

“[I] co-produced a movie with my wife, Callista, ‘We Have the Power,’ that argued for an ‘all of the above’ energy strategy which would maximize all forms of domestic energy production.”  Apparently, being a pol means that one doesn’t have to pick and choose between investments a, b, or c.  We’ll just mandate everyone invest in everything that can attract a lobbyist. 
When you hear this stuff about an ”all of the above” energy strategy, what you’re hearing is a complaint that the Democrats aren’t subsidizing enough of the energy industry.  They are too tight-fisted with the public purse.  They are not ambitious enough in their planning.  And while Republicans bang the table for more, more, and more handouts to private corporations, liberals like Amory Lovins (prominent left-of-center energy guru) and Carl Pope (former head of the Sierra Club) call for zeroing out everyone’s subsidies and leaving the energy market the heck alone (at least when it comes to this matter).  It’s a mad, mad world.
 
“Nevertheless,” says Gingrich, ”the Journal attempts to equate my career-long commitment to increased American energy production with the anti-energy agenda of President Obama. This is a laughable charge, especially considering I have been one of the most vocal opponents of the president’s energy policies since he took office.”  Perhaps, but on this matter, Gingrich is attacking the administration from the Left.  
 
Even more amusing was James Woolsey’s lecture to the editorial board over what it means to be a conservative.   “We could not help wondering,” he asked along with his co-author, Gal Luft, ”why the Journal, despite its commitment to free enterprise, chose to attack Newt Gingrich for his call to open vehicles to fuel competition, which would cost auto makers under $100 per new car.”  Well Jim, a commitment to free enterprise is a commitment to allow enterprises to be free to produce whatever they want.  Of course, if Woolsey had read Gingrich’s speech to the ethanol lobby, he would not need to wonder - it’s about their sick, twisted values.
 
Nonetheless, Woolsey claims that such a mandate ”is perfectly in line with conservative economic principles.”  That may be true given what conservatives believe about economics.  But it’s not consistent with a principled support for a free market.
 
Finally, “Challenging Mr. Gingrich’s conservative bona fides based on his support for breaking oil’s virtual monopoly over transportation fuel is not only myopic but also the best gift the Journal can give OPEC.”  But … oil dominates the transportation market because it is a heck of a lot cheaper than any other fuel.  If it weren’t so much cheaper than ethanol, then we would have no need for such massive subsidies for the same.  The same goes for electric cars.  If and when that changes, oil’s “monopoly” will crumble.  Until then, taking oil out of transportation markets simply takes cheap fuel out of transportation markets.  It would be fun to watch a Gingrich/Woolsey ticket run on that.

Appreciating China’s Currency

China’s President Hu Jintau arrives in Washington today for a state visit, turning the spotlight once again on U.S.-China trade and China’s allegedly undervalued currency, the yuan. Not one to let such an opportunity go to waste, Sen. Charles Schumer (D-N.Y.) is introducing legislation that would threaten to impose duties on imports from China if the yuan does not appreciate quickly.

Count me skeptical that a more expensive yuan relative to the U.S. dollar would make much of a dent in our bilateral trade deficit with China, or that it would have any positive effect on U.S. economic growth and employment. But even if those assumptions were true, the big story is how much the yuan as already appreciated against the dollar.

It has been a mantra of Sen. Schumer and other critics of U.S.-China trade that the yuan is undervalued by 15 to 40 percent. They were saying that before the 2005 appreciation, and they’re saying that now, as though nothing has changed.

Yet a lot has changed. In nominal terms, the yuan appreciated by more than 20 percent between 2005 and 2008. That’s when China relaxed its hard peg with the dollar and allowed its currency to gradually appreciate. After holding the peg steady again during the recent financial turmoil, China has again allowed it to rise another 3 percent since last June.

The nominal rate is just part of the story, however. Price levels in the United States and China determine the real exchange rate–the actual amount of goods that can be bought with each currency. A big story in China recently is its rising inflation rate, which makes Chinese goods relatively more expensive at any given exchange rate. In this way, a relatively higher inflation rate in China compared to the United States acts in the same was as a nominal increase in the exchange rate of the yuan.

When you combine the effect of rising prices in China with the higher nominal value of the yuan, you get a double boost to the real exchange rate. According to a chart on the front page of this morning’s Wall Street Journal, the real value of the yuan has appreciated by 50 percent since the beginning of 2005. In early 2005, 100 Chinese yuan could be exchanged for about $12; today it can be exchanged for $18 (in real, inflation adjusted dollars).

Rather than complain, Sen. Schumer and his allies should congratulate themselves on achieving their goal of a much stronger yuan and a much weaker dollar, even if we are still waiting for the tonic effect they predicted it would have on jobs and growth.

Congress: Where 20 Jobs = $580m

When talking to groups about the political economy of trade protection, I always mention concentrated benefits versus diffuse costs. Public choice theory explains many bad policies, of course, but tariffs and subsidies are excellent examples of interventions that benefit the few at the expense of the many.

Congress, or specifically two members of that esteemed body, have recently provided me with a textbook example. The Generalized System of Preferences is a federal program that offers duty-free access to the U.S. market to certain goods from certain developing countries. Or, I should say, was a federal program, because it expired on December 31. My opinion of the program is ambivalent at best, but one cannot deny that the program brings real cost savings to American consumers and businesses – to the tune of $580 million a year – through lower import duties.

But those duty savings are, apparently, worthless in the face of special interest politics. From Inside U.S. Trade on January 6 [$]:

An Alabama sleeping bag manufacturer that benefited from the expiration late last year of the Generalized System of Preferences (GSP) program is now taking further steps in an attempt to ensure that Congress does not renew the program this year in the same form.

Exxel Outdoors CEO Harry Kazazian this week said his company is in the process of expanding its U.S. plant by adding workers and increasing production, and that this expansion is occurring as a direct result of the fact that Congress allowed the GSP program to expire on Dec. 31.

Under GSP, Bangladeshi sleeping bags that competed with the Exxel Outdoors product were able to enter the U.S. duty-free. On behalf of Exxel Outdoors, Sen. Jeff Sessions (R-AL) last year refused to let any renewal of GSP pass that would not remove at least some sleeping bags from the scope of the GSP program (Inside U.S. Trade, Dec. 23).

With the future of the GSP program still uncertain, Kazazian said he is now expanding his Alabama plant in part to put pressure on Congress to either not renew the GSP program, or renew it in a modified form that would exclude imported sleeping bags from its scope.

Kazazian said that if GSP is renewed in its old form, he would have to reverse his expansion plans. He reasoned that members of Congress may be more willing to accommodate Sessions and remove sleeping bags from GSP if faced with the prospect that renewing the program in its full form would lead to the firing of U.S. workers.

“I can’t see how anyone would make any decisions against us,” he said in an interview this week. “We are going to work as hard as we can to make sure sleeping bags are exempted from the GSP.”

These expansion plans must be really something if they can justify holding up such a broad program, right?

Kazazian said that he plans to hire 20 additional employees to start a fourth production line at the Alabama plant. He said he will commence the first phase of its expansion this month by investing in additional equipment and retooling the plant’s operations.

That’s right, readers. The GSP expired and millions of U.S. consumers and businesses (not to mention developing country exporters) are being penalized to save a hypothetical 20 (that’s two-zero) jobs that don’t even exist yet. The jobs being lost by businesses that depend on the GSP to keep them competive are, apparently, not worth consideration. And as for consumers’ buying power being eroded, well forget it.

Come back, Mancur Olson. Your country needs you.