Topic: International Economics and Development

Debating the Law of the Sea Treaty

The Law of the Sea Treaty (dubbed LOST by opponents, and LOS by supporters), represents the culmination of a decades-long project to clarify the rules governing the oceans, from the seabed to the waves. The treaty, first rejected by President Reagan in 1982, has been revised over the years; now prominent Republicans, including Indiana Senator Richard Lugar, are urging passage. The Bush Administration has quietly endorsed the process.

Doug Bandow, who wrote a paper for Cato on the subject two years ago, makes a strong case for why the Senate should reject the treaty and continue with the status quo. He squares off this week against Raj Purohit of Citizens for Global Solutions in an online debate at the Partnership for a Secure America.

If you haven’t followed the issue closely, Doug and Raj do a good job of spelling out the relevant arguments for and against.

CAFTA Survives U.S. Meddling

Costa Rica’s voting public wants to join CAFTA. This comes despite last-minute efforts by leading U.S. Democrats to dissuade Costa Ricans from voting to support the national referendum.

Worse, these particular lawmakers showed an alarming cynicism in attempting to convince Costa Ricans to reject CAFTA.

For example, Sen. Bernie Sanders and Rep. Michael Michaud recently traveled to Costa Rica for press conference with Ottón Solís, a former presidential candidate who opposes CAFTA. Their message was that Costa Ricans had nothing to fear by rejecting CAFTA, since, according to them, the country would continue to enjoy duty-free access to the American market under the Caribbean Basin Initiative (CBI).  However, as a congressman in 2000, Sanders voted against CBTPA, an extension of the CBI that allows duty-free access to Costa Rican textiles and tuna . This program expires next year.

More recently, Nancy Pelosi and Harry Reid sent a letter to Costa Rica’s ambassador in Washington reaffirming Sanders’ message: Costa Ricans can safely reject CAFTA and continue to enjoy trade preferences to the U.S market. Guess what? Reid also voted against the CBTPA in 2000.

Reid and Sanders were later joined by Sen. Sherrod Brown, who gave a highly-publicized speech in the Senate floor in solidarity with Costa Rican naysayers. Brown himself was a naysayer to the CBTPA when he was in the House of Representatives in 2000.

This is the cynicism of protectionism at its best: Profess concern for Costa Rican workers after consistently opposing previous efforts to ease trade restrictions with the country. A majority of Costa Ricans voters didn’t buy the story and supported CAFTA.

Still, with these kinds of friends, who needs enemies?

Taxes, Trade and the “Level Playing Field”

Almost every nation has a value-added tax (VAT), which is a type of national sales tax that is imposed at each stage of the production process. Indeed, the United States is the only developed nation without a VAT. But this is a good thing. It is no coincidence that the burden of government in America is smaller than it is in almost every other industrialized country. Simply stated, VATs are “money machines” for big government.

Not surprisingly, this is why many politicians in Washington would love a VAT. But what is surprising is that some otherwise sensible people are sympathetic to a VAT because they think it will help exports. They point out, quite correctly, that the World Trade Organization allows governments to provide rebates for value-added taxes on exports (a practice known as border adjustability). But they are wrong when they argue that this boosts exports and creates a trade advantage.

Regarding the first point, it is downright silly to argue that imposing a VAT - and then creating an export exemption - will boost exports. At the risk of stating the obvious, the export exemption cancels the tax, so the price of American products sold outside US borders would not change.

It is also misguided to claim that a border-adjustable VAT gives other nations some sort of trade advantage. Under current law, all goods sold in America, whether made in America or made in Europe, are sold without a VAT. Likewise, all goods sold in Europe, whether made in America or made in Europe, are sold with a VAT. How much more level can the playing field get? This is not just a debate for navel-gazing academics and lint-covered policy wonks. As reported by the Wall Street Journal, some Republican presidential candidates (or at least their advisers) are focused on “border adjustability.”

Mr. Thompson’s aides outline a change to the tax code that would move away from taxing income or profits and shift toward a system that would reduce taxes on exports when they cross the border and impose them on imports when they enter the country. Under international rules, the European value-added tax, a kind of sales tax, is waived for exports, but those rules block the U.S. from reducing corporate-profit taxes for exporters. “The best thing to do would be to have the [World Trade Organization] change its rules to level the playing field, and that should be the first step. If that fails then we should play by the same game that everyone else plays,” said Lawrence Lindsey, Mr. Thompson’s economic adviser and former director of the National Economic Council for President Bush.

The key question, of course, is whether focusing on the unimportant issue of border adjustability leads to good policy or bad policy. Senator Thompson has made some positive noises about a wholesale replacement of our current anti-growth tax system with a consumption-base tax system like a flat tax or national sales tax. That would be great news, and it would be great news even if border adjustability led the candidate to choose a sales tax over the flat tax. What matters is not border adjustability, but that we would be getting rid of the many warts in the current tax system. But if a myopic fixation on border adjustability led a candidate to propose a VAT or other form of national sales tax without fully (and permanently) eliminating the income tax, then politicians would have an additional source of money to waste and America would be at grave risk of becoming an uncompetitive, European-style welfare state.

Regulatory Competition Leads to Better Policy in France

The Financial Times reports that France is deregulating and cutting taxes in hopes of competing with London in the financial services market. The article also notes that Switzerland and Germany also are trying to attract business by reducing the burden of government. Needless to say, these positive reforms would not happen if the bureaucrats in Brussels had the authority to create a continent-wide regulatory regime. Another threat to deregulation and better policy is IOSCO (the International Organization of Securities Commissions), which wants to impose one-size-fits-all regulation on all jurisdictions - particularly ones with a more laissez-faire approach:

The French government yesterday unveiled its plans to boost Paris as a financial centre, proposing a more lightly regulated market for companies and funds on the Euronext exchange. Several of the measures are closely modelled on UK structures, as the French capital seeks to make up ground lost to London. The new market segment would operate according to European Union minimum standards in terms of listing and disclosure. …Switzerland’s leading financial services companies launched their own campaign last month for tax cuts, a relaxation of immigration rules and other measures to turn their country into the world’s third largest financial centre after London and New York. Frankfurt launched its own more lightly regulated market segment two years ago… Ms Lagarde said the government had already shown serious commitment to financial services by cutting taxes, particularly for higher earners. France’s high taxation is one reason why so many young French bankers flock to London.

Shockingly Bad

Cato adjunct scholar Tyler Cowen takes on Naomi Klein’s book Shock Capitalism in the New York Sun:

Rarely are the simplest facts, many of which complicate Ms. Klein’s presentation, given their proper due. First, the reach of government has been growing in virtually every developed nation in the world, including in America, and it hardly seems that a far-reaching free market conspiracy controls much of anything in the wealthy nations. Second, Friedman and most other free market economists have consistently called for limits on state power, including the power to torture. Third, the reach of government has been shrinking in India and China, to the indisputable benefit of billions. Fourth, it is the New Deal — the greatest restriction on capitalism in 20th century America and presumably beloved by Ms. Klein — that was imposed in a time of crisis. Fifth, many of the crises of the 20th century resulted from anti-capitalistic policies, rather than from capitalism: China was falling apart because of the murderous and tyrannical policies of Chairman Mao, which then led to bottom-up demands for capitalistic reforms; New Zealand and Chile abandoned socialistic policies for freer markets because the former weren’t working well and induced economic crises.

My old friend Steve Horwitz asks Klein a couple of pointed questions:

1. You say that crises are opportunities for free market ideologues to force their preferred policies through in violation of democratic processes. However, in the gravest crisis of the 20th century, the Great Depression, it was government that grew enormously, and the free market was restricted, in ways never before seen in the US….How do you reconcile the main thesis of your book with the historical evidence that government has grown and markets have been made less free in almost every crisis of the 20th century? …

2. In the aftermath of the biggest crisis in the US of the 21st century (9/11), government spending has grown enormously, government regulations have expanded, and civil liberties are threatened. Each of these are results that people like Milton Friedman and many other classical liberal free market economists not only oppose, but oppose precisely because they are antithetical to the very free market reforms they would like to make. … What gives? It certainly seems like crises produce a lot more government and a lot less free market reform.

Horwitz is making the same point Justin Logan made recently; as Bruce Porter and Robert Higgs have shown, much of the growth of government throughout American history (and elsewhere) has been a result of crises like wars and depressions. Sometimes, it’s true, an economic crisis may precipitate economic reforms, as in New Zealand in the mid-1980s. But the historical record shows that states usually seek more power, not less, when confronted by a crisis.

Pinochet’s economic reforms in Chile, of course, are a centerpiece of Klein’s argument. Pinochet was a military dictator, the argument goes, and he implemented the policies of Milton Friedman. QED. But there are lots of military dictatorships – Wikipedia counts 34 in Latin America – and Pinochet’s junta seems to have been the only one to pursue free-market policies. It’s an exception, not a rule. Which is hardly surprising: military men tend to be attuned to hierarchy and control, not to the undirected diversity of a market economy.

How Do Americans Really Feel about Trade?

As it turns out, it’s pretty difficult to tell! Much, apparently, depends on how the question is phrased.

Today, the Washington Post reports findings from the latest Pew Global Attitude Project report, which was released yesterday. The Pew study finds that 59% of Americans have a positive view of trade, while 36% have a negative view. The results differ to some extent by demographic characteristics like age, income, and political party affiliation. Pew found that 64% of Republicans believe “the impact of trade on our country is good.”

That figure differs vastly from the result of the WSJ/NBC poll (about which I wrote yesterday), which found that 59% of Republicans believe that foreign trade has been bad. What explains these nearly diametrically opposite conclusions? A very significant factor appears to be the question phraseology.

In the WSJ/NBC poll, the respondent was asked to identify the statement that came closer to his/her point of view.

Statement A: “Foreign trade has been good for the U.S. economy, because demand for U.S. products abroad has resulted in economic growth and jobs for Americans here at home and provided more choices for consumers.” (32% of Republicans agree)

Statement B: “Foreign trade has been bad for the U.S. economy, because imports from abroad have reduced U.S. demand for American-made goods, cost jobs here at home, and produced potentially unsafe products.” (59% of Republicans agree)

In the Pew poll, the respondent was asked the following question:

What do you think about the growing trade and business ties between the
United States and other countries — do you think it is a very good thing, somewhat good, somewhat bad or a very bad thing for our country?

Pew tallied the “very good” and “somewhat good” responses and found they represented 59% of total respondents, and 64% of Republican respondents.

What does this all mean? It means that respondents provide answers to questions as asked, and that it is the data interpreters who give too much meaning to the responses elicited by their questions. Neither the Pew question nor the WSJ/NBC question probes peoples’ comprehensive views about trade (and it is evident to me, as I wrote yesterday, that the phrasing of the WSJ/NBC questions biased the results). Nevertheless, the written summary of the results of each poll would have the reader believe that each poll is dispositive of the issue.

That the question phraseology appears to be a determinant of the answer suggests that a better way to discern Americans’ views about trade would be to ask a multitude of questions — including redundant questions phrased differently.

Two figures that appear to be credible from the Pew report are a bit disconcerting. The same question asked of Americans was also asked of citizens in 46 other countries. Positive views of trade were lowest in the United States. And the 59% holding positive views constitutes a huge drop off from 2002, when the same question from Pew found 78% of Americans holding positive views on trade.

Thus, while it appears that Americans are souring on trade, it is hard to tell how many Americans are how sour.

Correction to Yesterday’s Post, (Lies, Damn Lies,…)

Yesterday on this blog, I posted my criticisms of a WSJ/NBC poll and a WSJ article that was based on that poll. Although I firmly stand by my central criticism that there was a clear bias in the phraseology of Question 10 that was completely unnecessary, I made a factual error in my post that I wish to correct.

In paragraph four, I assert (about the poll) that “no questions were asked about whether the respondents would agree with a Republican candidate who favors tougher regulations to limit foreign imports.” But it was subsequently brought to my attention that such a question was asked at question 7.7 of the poll. I stand corrected.

Had I not overlooked that question, I would not have criticized the author for reporting a “phantom result.” I apologize to John Harwood for the assertions and implications related to that point.

With the exception of the second and third sentences of paragraph four, the entire blog post, with the same tone and same conclusions, remains valid.