Tag: world trade organization

Newsflash: Politicians Pander to Agriculture!

The American Soybean Association (ASA) recently asked each of the presidential candidates to respond to a series of questions about agricultural policy issues. The questions covered farm bill and crop insurance, estate tax, biodiesel, biotechnology, trade, research, regulations, and transportation and infrastructure. The candidates’ responses (full text here) were not exactly models of courageous and principled policymaking.

I won’t parse the entire thing, as it is just too depressing and some of the issues (e.g., the estate tax) fall outside my area of research. But I will comment on a couple of the topics.

On subsidies and crop insurance, both candidates pledged to support passage of the farm bill, and the crop insurance and disaster provisions it contains. Mr Romney—no Senator John McCain in this area, at least—went on to make a broader statement about his philosophy on farm supports:

On the broader question of farm programs, we must be cognizant that our agricultural producers are competing with other nations around the world. Other nations subsidize their farmers, so we must be careful not to unilaterally change our policies in a way that would disadvantage agriculture here in our country. In addition, we want to make sure that we don’t ever find ourselves in a circumstance where we depend on foreign nations for our food the way we do with energy. Ultimately, it is in everyone’s interest is achieve [sic] a level playing field on which American farmers can compete.

Ugh. That is a monumentally awful statement. First, not all nations subsidize their farmers. New Zealand and (not to brag) Australia, for example, subsidize their farmers very little, and in very minimally distorting ways, and yet their agricultural  exports generally are thriving. They compete with other agricultural exporters because they try to be the best they can be given their natural resource endowments, research, experience, and human capital.  Second, the caution against unilaterally changing policies is, of course, ubiquitous in many trade policy statements (see, e.g., Ex-Im Bank, manufacturing, reducing tariffs generally). It is also economically insane to enact bad policies because other countries do so. Especially when it is becoming clear that other large agricultural subsidizers (e.g., Japan and the EU) are not exactly thriving, many and varied though their problems may be.

Third, as for the importance of farm supports in maintaining food independence, that’s also nonsense. As I’ve argued ad nauseum, (e.g., here), subsidies aren’t keeping us well-fed: if food abundance depended on government support, we’d see nothing but so-called program crops (soybeans, wheat, corn, cotton, and rice) on supermarket shelves. Judging by the size of my fellow Australians on my last visit home, no-one is starving there despite very little government support for agriculture. By the way, if you want to read some comments from a president who actually knows what he is talking about, read Indonesia’s President Susilo Bambang Yudhoyono’s comments in this article, where he calls for lower trade barriers around the world, particularly for food security reasons.

Mr. Romney’s support for the Senate-passed farm bill also is at odds with his statement to the ASA about the importance of open trade. Even putting aside Mr Romney’s typical mercantilist obsession with exports, I wonder if he realizes that the changes proposed in the Senate farm bill would increase the amount of subsidies deemed trade-distorting by the World Trade Organization, putting trade liberalization at risk? U.S. government spending on trade-distorting support, the “worst” kind, is at record lows right now, mainly thanks to higher commodity prices. But even a senior United States Department of Agriculture official admits (paywall) that the proposed changes to farm policy—including a move towards revenue insurance—would likely see that progress eroded:

But Joseph Glauber, chief economist at the U.S. Department of Agriculture (USDA), said in an interview with Inside U.S. Trade that if either the Senate-passed farm bill or the version approved by the House Agriculture Committee were enacted, that would likely increase the level of U.S. trade-distorting payments.

While stressing that his assessment is preliminary in light of the fact that no legislation has been finalized, Glauber said it is fairly apparent that cutting direct payments and replacing them with either a revenue guarantee program or a price-loss program, as the two legislative proposals envision, would lead to an increase in amber box payments.

In fact, Glauber argued that changing U.S. farm policy along the lines of either of the farm bill proposals could make it more likely that the U.S. exceeds the $7.6 billion cap to which the U.S. informally agreed in the Doha round, especially in those years where commodity prices dip down and subsidy payouts increase.

Pass the farm bill, in other words, and multilateral liberalization efforts get more difficult.

Finally, I note that Mr. Romney also couldn’t resist adding his standard, wrongheaded, and increasingly prominent talking point about “vigorously enforcing” U.S. trade law, and catching cheaters (plenty of blog posts by my colleagues on this topic can be viewed on this blog). I wonder if he realizes that the United States itself has been caught breaking the rules of agricultural trade, and how hypocritical his statements about farm subsidies and trade are in that context? Plenty of damage, and retaliation, has been unleashed because of various ways the U.S. government conducts its affairs in agriculture.

So, in short, there is not much to like in either candidate’s statements, with Mr. Romney deserving special opprobrium because of his professed free-market, limited government principles. But we knew that.

Free Trade Is Not the Same Thing as Protectionism

That sounds obvious, right? I would have thought so. But this Washington Post article on U.S.-China trade issues seems to conflate the two. There’s a lot to criticize in the article, but I want to focus on these two sentences:

WTO challenges are not the only tool the United States has to try to open China’s market. The Commerce Department has imposed dozens of tariffs on Chinese products considered unfairly priced or subsidized.

Now, World Trade Organization complaints are certainly a way to open foreign markets. But imposing tariffs on foreign products through anti-dumping and countervailing duties is not, repeat not, a way to open foreign markets. Rather, it is a way to close our markets. Not the same thing at all.

Caribbean Trade Dispute Gives the U.S. a Rum for Its Money

Rum subsidies in U.S. Caribbean islands have sparked an internal trade war and are inviting a World Trade Organization (WTO) challenge from ill-affected countries in the region. According to an envoy representing a number of Caribbean countries that recently came to Washington, the U.S. government is unwittingly funding industrial policy in the U.S. Virgin Islands and Puerto Rico by tying aid dollars to rum production in a way that is inconsistent with our trade obligations and may cause the destruction of the entire foreign Caribbean rum industry. Under current law, U.S. Caribbean islands receive money from the U.S. treasury based on how much rum they import to the mainland. In recent years, they’ve begun to use that money to increase the amount of rum they produce,  so they can get even more money. Although the total amount of money involved is low enough to keep it under Congress’s (myopic) radar, the resulting subsidies are too high for independent Caribbean economies to compete against. Unless Congress places restrictions on how the money can be used, the United States could once again find itself in the embarrassing position of being taken before the WTO for accidentally ruining the economy of a small Caribbean island.

The antagonist in this saga is something known as the “rum cover-over” program. As it does with all distilled spirits, the federal government charges an excise tax of $13.50 per proof gallon of rum sold in the United States. This equates to roughly $2 per bottle. Under the cover-over program, almost all of that money is directly granted to the U.S. Virgin Islands and the Commonwealth of Puerto Rico using a complex formula so that each receives a share of the money based on how much rum it produces relative to the other. The tax is collected from sales of all rum imported to the mainland, even from other countries, and in 2010 the cover-over amounted to approximately $450 million—$100 million to the Virgin Islands and $350 million to Puerto Rico.

The industrial death spiral began when the government of the U.S. Virgin Islands cleverly discovered that, instead of using the money for infrastructure and welfare programs, it could use the bulk of the money to entice Captain Morgan producer Diageo to relocate there from Puerto Rico. Because the move will increase rum production in the U.S. Virgin Islands relative to Puerto Rico, the subsidy more than pays for itself by it helping the territory capture a larger share of cover-over funds.

Puerto Rico initially asked Congress for help. There is currently no rule on how the two entities can spend the cover-over funds, so Puerto Rico’s non-voting delegate to Congress, known as a Resident Commissioner, proposed legislation that would cap at 15 percent the portion of the funds that could be used to subsidize rum production. When that effort failed, the Puerto Rican government reportedly responded by ramping up its own subsidy programs. The result has been an expensive trade war over mainland consumer tax dollars granted in return for rum production.  For perspective on how important this is for the players involved, it’s worth noting that the U.S. Virgin Islands government has an annual budget of just under $1 billion dollars and is hoping to increase its cover-over revenue from $100 million to $240 million.

The new twist on this saga comes from the detrimental effect this subsidy war has had on rum production in other parts of the Caribbean. Matched up against firms receiving U.S. subsidies reported to be close to or even to exceed production costs, producers in other Caribbean countries are unable to compete in the U.S. market on price. These economies generally rely on tourism and raw material exports and have precious few value-added industries. If the United States is interested in economic development in the region, the least it could do is refrain from crippling emerging industries with unfair subsidies. While the two U.S. Caribbean governments spend federal tax dollars to entice major rum brands to their islands in order to earn more federal tax dollars, the rest of the Caribbean is struggling just to stay afloat.

It should not be surprising then that the form, size, and effect of these subsidies establish a strong case that the United States is in violation of its trade obligations, and Caribbean representatives have raised the possibility of a challenge at the WTO. WTO rules prohibit subsidies that are targeted to a single industry and cause injury to that industry in the territory of another member. Also, the size and amount of production covered by these subsidies may be so great that they could be considered “contingent in fact on export performance”—a kind of subsidy that is strictly prohibited.

This situation is certainly not just a local issue between two somewhat-foreign governments. The program implicates U.S. trade obligations toward vulnerable Caribbean neighbors, and Congress, being the enabler of the dispute, is already involved. A program that directly pits two U.S. jurisdictions against each other in a fight for hundreds of millions of dollars with no strings attached is unjustifiably irrational, and no one should be surprised that it hasn’t gone well. Capping the amount of the cover-over funds that can be used to support rum production, as originally proposed by Puerto Rico, is an effective and painless way to fix the problem, or at least to keep it from getting worse.

Congress Poised to Escalate the U.S.-China Trade War

U.S. policymakers hold the key to vastly improved economic relations with China.  They also have the key to the vehicle that will take the bilateral relationship over the cliff, which appears to be the route that has been chosen. Republican House Ways and Means Chairman Dave Camp will introduce legislation this afternoon that makes explicit the applicability of the U.S. Countervailing Duty (anti-subsidy) law to imports from countries considered to have “Non-Market Economies” (i.e., China and Vietnam). 

Maybe that’s not as obvious an example of escalation as Nixon’s bombing of Cambodia during the Vietnam War, but it is very likely to accelerate the deterioration of U.S.-China economic relations.  Costs will rise and life will become more difficult for U.S. companies trying to do business in China, as well as for U.S. producers and consumers who rely on imports from China.

Those pushing the legislation don’t want the public to understand the issues, which are highly technical and legalistic (and, quite frankly, too much trouble for our legislators to think through, particularly when there’s only political upside in China-bashing). But the consequences will be felt broadly – and there’s danger in that – so let me attempt to boil the matter down to a few salient points.

The U.S. government considers China a non-market economy for purposes of how it applies the antidumping law.  Certain outdated assumptions about prices, wages, and interest rates being unreliable and fictitious in non-market economies result in China being subject to a punitive antidumping calculation methodology – the NME methodology – by the U.S. Commerce Department.  Under the terms of the treaty by which China joined the World Trade Organization back in 2001, the United States must end the NME designation by no later than December, 2016, which means that China will then be subject to the still-onerous, but less-punitive, market-economy methodology.

The United States also has a Countervailing Duty law, which for 22 years up until 2007 had not been applied to imports from countries that, for purposes of the antidumping law, were deemed NMEs.  In not applying the CVD law to NMEs during that period, the Commerce Department was being consistent: if prices and other market signals are unreliable or fictitious in Country A for purposes of antidumping determinations, then they cannot be reliable of useable for purposes of measuring the benefits of subsidies in Country A in CVD cases. 

For political purposes, that logic suddenly ceased to apply in 2007, when Commerce changed its policy and began initiating CVD cases against NMEs.  Today, the U.S. government has 24 separate CVD orders in place on various imports from China (in addition to 5 cases pending determinations).  In December, the U.S. Court of Appeals for the Federal Circuit ruled that it is illegal for the United States to apply its countervailing duty law to NMEs because Congress’s intent had been subsumed in the policies of multiple administrations to not apply the law to NMEs, and reinforced by the fact that there had been substantial revisions to the trade laws during that 22-year period – a period during which Congress did not make CVD application to NMEs explicit. (Scott Lincicome is the authority on the background and legal interpretation of the “GPX” case.)

Excluding legal appeals (which take us to the same decision tree if the CAFC decision is upheld), the Obama administration has three choices.  First, it can abide the CAFC decision, revoke the 24 existing CVD measures, drop the pending cases, and initiate no more CVD investigations against NME countries. Second, it can do what it is doing: work with Congress to pass a new law making CVD explicitly applicable to NMEs, which will be perceived by Beijing as taking extraordinary measures to punish China, which will invite blatant and subtle forms of retaliation from the Chinese government against U.S. interests and produce numerous lawsuits over the myriad legal issues stemming from the acts of preserving 24 CVD measures imposed under a law that has been found to be illegal.  Third, it can graduate China to “market economy” status now, instead of waiting until 2016.  Option three requires no legislative action whatsoever, preserves domestic industry access to both the AD and CVD laws, and wins enormous amounts of goodwill from Beijing.

From the perspective of a free trader, the first option is best.  But its likelihood can be measured in terms of hundredths of a percentage point.  The second option, which leaves use of the CVD law as well as applicability of the NME methodology of the AD law to China in tact, is the worst.  The third option preserves access to the CVD law, as well as the antidumping law, for U.S. protection-seekers, but requires the Commerce Department to use the market economy methodology in cases involving China.

Option three is the great compromise.  It makes antidumping actions against China slightly less onerous for U.S. consumers and Chinese producers, but domestic industries still have access to both laws.  That’s not great for consumers, consuming-industries, or free-traders on its face, but it would be considered a sufficiently decent gesture of good will by Beijing that it could stop and possibly reverse declining relations.  And that could head off a destructive trade war and be the catalyst for considerably more trans-Pacific cooperation resolving issues that adversely affect consumers, producers, workers and investors in both countries, and beyond.

Unfortunately, dark clouds are gathering as pursuit of that path seems less likely this afternoon.

Yet More U.S. Trade Policy Incoherence

In hailing this week’s ruling by a World Trade Organization dispute settlement panel that certain Chinese government restrictions on raw material exports violate China’s WTO commitments, U.S. Trade Representative Ron Kirk made the point that such restrictions hurt U.S. manufacturers who rely on those imported raw materials.

Today’s panel report represents a significant victory for manufacturers and workers in the United States and the rest of the world. The panel’s findings are also an important confirmation of fundamental principles underlying the global trading system. All WTO Members – whether developed or developing – need non-discriminatory access to raw material supplies in order to grow and thrive.

And, simultaneously, by artificially increasing domestic supply, the same export restrictions advantage Chinese manufacturing consumers of those materials.

China’s extensive use of export restraints for protectionist economic gain is deeply troubling. China’s policies provide substantial competitive advantages for downstream Chinese industries at the expense of non-Chinese users of these materials.

And here’s how the USTR website described the central issues of the case:

China maintains a number of measures that restrain exports of raw material inputs for which it is the top, or near top, world producer. These measures skew the playing field against the United States and other countries by creating substantial competitive benefits for downstream Chinese producers that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products…These raw material inputs are used to make many processed products in a number of primary manufacturing industries, including steel, aluminum and various chemical industries. These products, in turn become essential components in even more numerous downstream products.

I agree.

But what you won’t find in the USTR’s statements is any acknowledgement that the U.S. government, in defiance of Ambassador Kirk’s logic, maintains import restrictions on three of the nine raw materials at issue in the China WTO case. That’s right! While arguing correctly that Chinese restrictions on exports of magnesium, silicon metal, and coke raise production costs and subsequently reduce U.S. manufacturing competitiveness, the U.S. government maintains antidumping restrictions on the same inputs, which raises U.S. production costs and reduces U.S. manufacturing competitiveness. (See pages 14-17 of this new Cato paper to learn what happened to certain U.S. industrial consumers of these raw materials)

How can such dissonance persist, you ask? Under the U.S. antidumping law, manufacturing consumers of subject imports have no legal standing to participate in the proceedings. In fact, the U.S. administering agencies are forbidden by statute from even considering the impact of antidumping duties on the downstream, consuming industries. Nor is an assessment of the costs of prospective antidumping restrictions on the broader economy permitted to carry any weight under the statute.

Instead, in the present case, those producers hurt by our own import restrictions had to take the circuitous route of enlisting the support of the USTR to pursue a WTO case to secure – what will eventually be – only a half-a-loaf solution. Even if and when China relents with respect to its export restrictions, the U.S. antidumping restrictions on imported raw materials will persist because the law effectively insulates the patrons of antidumping measures from competition.

It should be embarrassing to the administration that it rigorously pursues a WTO case to end an economic injustice committed by another country that we gleefully inflict upon ourselves. We are committing economic self-flagellation by ignoring antidumping reform in this country, where 80 percent of all antidumping measures in place restrict crucial manufacturing inputs. And it’s not like President Obama doesn’t understand the relationship between manufacturing competitiveness and access to manufacturing inputs. Here’s what the president said less than one year ago, when he signed into law a tariff liberalization bill:

The Manufacturing Enhancement Act of 2010 will create jobs, help American companies compete, and strengthen manufacturing as a key driver of our economic recovery. And here’s how it works. To make their products, manufacturers—some of whom are represented here today—often have to import certain materials from other countries and pay tariffs on those materials. This legislation will reduce or eliminate some of those tariffs, which will significantly lower costs for American companies across the manufacturing landscape—from cars to chemicals; medical devices to sporting goods. And that will boost output, support good jobs here at home, and lower prices for American consumers.

But, then, at some point, that logic no longer resonates with this administration.

Antidumping reform is an essential ingredient of U.S. manufacturing competitiveness. Anyone inclined to celebrate the U.S. WTO “victory” in the Chinese export restrictions case should understand the rest of that story.

Ryan’s Plan for Farm Subsidies

I thought I would add some detail to the posts my colleagues have already written on Congressman Paul Ryan’s (R-Wisc.) 2012 budget resolution.

Interestingly – and, I would argue, appropriately – the agriculture stuff appears in the “Ending Corporate Welfare” section of the plan, most of  it on page 36. After outlining the ways that farming America is doing well, Ryan’s plan would cut almost $30 billion (or 20 percent of projected outlays) over the next 10 years from farm subsidies (direct payments, currently costing about $5 billion per year) and crop insurance subsidies. Cuts will also reportedly fall on nutrition and conservation programs, but I will let my colleagues weigh in on those.

The focus on crop insurance is encouraging, because crop insurance is an increasingly important part of U.S. farm policy, especially in recent years when commodity prices have been high: high prices reduce the amount of money taxpayers spend on commodity payments, but increases crop insurance premiums, which we all subsidize. They now cost about $6 billion, or more than commodity payments.  And, as the blueprint points out, surely farmers “should assume the same kind of responsibility for assuming risk that other businesses do.” Well played, Congressman.

One point on where the cuts fall on the commodity payments side: As a free-marketeer, I acknowledge that direct payments are less market-distorting than price-linked payments, and they are less (although not fully) questionable under World Trade Organization rules.  If we are going to shovel money to farmers, in other words, sending unconditional welfare checks is the least distorting way to do it. But there is no money to raid from the price-linked programs because of high prices, so if savings are to be found, we need to raid the direct payment cookie jar. And, really, with $7 corn and red ink from here to eternity, surely this is an ideal time to wean farmers off of the government teat.

Reactions from the farmers’ friends, by the way? Predictable. The Chairman of the House Agriculture Committee dismissed the blueprint’s plans for agriculture as “simply suggestions” and that the Agriculture Committee will write the 2012 Farm Bill, thankyouverymuch. (Ryan himself said that the cuts should start in 2012, implying that the Farm Bill schedule should go ahead as planned).

The National Farmers Union spoke the usual blather about Americans spending less of their income on food than in other nations (perhaps because we are, you know, richer?) for the “safest, most abundant, most affordable food supply in the world,” which has been the favorite line of the farm lobby for years now.  The Corn Growers and the National Cotton Council joined them in trotting out variations of the new favorite talking point, about how agriculture has already taken a hit from cuts to crop insurance and that cuts to agriculture’s budget should be no larger than cuts to other areas. 

The blueprint is not my ideal plan, to be sure. That plan would have a line in it about removing the federal government once and for all from all aspects of the agricultural market, including by disbanding the U.S. Department of Agriculture.  It would at least include something about disbanding the production- and price-determined subsidies, so we’re not all on the hook again if prices fall. But it is a good start.

Senator Reid’s Gamble

My colleague Dan Mitchell has already written about the tax deal reached between President Obama and congressional Republicans.  But there might be something in the package for people wishing to play poker freely online.

Sen. Harry Reid (D., Nev.) is apparently circulating draft legislation to overturn the Unlawful Internet Gambling Enforcement Act of 2006, which blocked financial institutions from processing transactions with online gambling companies.  I would characterize that as a good move overall, apart from three quibbles. First, the draft legislation would – you guessed it –place a tax on the wagers (you didn’t think you’d get your freedom back without conditions, did you?). Second, the bill applies only to poker, and continues to prohibit “Internet gambling” more broadly. And third, the fine-print sounds problematic from a trade policy (and trade law) point of view:

…Mr. Reid’s office is considering language that would allow only existing casinos, horse tracks and slot-machine makers to operate online poker websites for the first two years after the bill passes, which could limit the ability of other companies to enter the market.

Carving out this fast-growing market for established gambling service providers sets off my protectionist alert. The cosy little cartel wouldn’t just exclude domestic potential competitors; I wrote a short paper a few years ago on how the UIGEA got the United States into hot water with the World Trade Organization, and the same arguments apply today. The United States still – despite vague, and so far empty, talk about changing its commitments with WTO members – has an obligation under the General Agreement on Trade in Services to open its market to online gaming operators abroad.

Politico has more about the groups supporting this move, suggesting (as are many Republicans opposed to internet gambling) that Reid has seen religion on online poker in direct response to the campaign contributions he received from gambling interests. I’m not so much interested in that angle –politicians responding to special interests is hardly news – as I am in the substance of what the legislation is proposing. And if the following reporting from Politico is accurate, the substance is troubling enough :

The National Indian Gaming Association is opposing Reid’s effort to insert the online poker language in any tax cut bill, said an official with the group, Jason Giles. He asserted it gives an advantage to Las Vegas-based gambling operators while discriminating against tribal operators.

“It is drafted to create an initial regulatory monopoly for Nevada and New Jersey for the first several years of the bill, which gives Las Vegas operators time to capture the market,” he said.

A gambling industry insider familiar with Reid’s efforts said Republican-leaning Vegas casino moguls Steve Wynn and Sheldon Adelson, while generally supportive of Reid’s legislation, take issue with provisions that could allow companies that previously operated in violation of online gambling laws to cash in.

The UIGEA is/was a nightmare for online operators to work around, partly because it never really defined “unlawful internet gambling.” Therefore, I am not sure how one would determine unambiguously whether a company “operated in violation of online gambling laws”.  The UIGEA referred to transactions processors rather than gambling companies. And in any case, a few European operators (PartyGaming most famously) withdrew from the U.S. market at the time the UIGEA passed, just to be safe, and yet have continued to face prosecution.  The European firms are at the cutting edge of online gaming services. Of course Messrs. Wynn and Adelson would want them out of the picture, but legislators should resist their attempts.

While Reid’s proposal may be an improvement on the status quo, it falls far short of restoring the full freedom of consenting adults to use their money, time, and online access in a manner of their choosing. It also is a long way from allowing a competitive, open market in gaming services to thrive. We should see this as a step in the right direction, but not the end game.