Topic: International Economics and Development

Trade Telltale

Since the “Great Compromise” on trade policy between the administration and Congress last spring, I have been outspokenly skeptical about prospects for further trade liberalization before 2009.  In that deal, the administration bowed to the wishes of Congressional Democrats to include enforceable labor and environmental provisions in pending and prospective trade agreements. 

For that accommodation, the Congressional leadership was supposed to help secure passage of the pending bilateral agreements with Peru, Panama, Colombia, and Korea.  Almost immediately, though, the leadership voiced additional concerns about Colombia and Korea, which are widely considered to be very long-shots at best.

But after visiting Peru last month and getting his own fingerprints on the final details of the deal, House Ways and Means Committee Chairman Charles Rangel of New York returned home and voiced his support for the agreement.  And, it appears, there is support for the Peru agreement among members of Ways and Means and Senate Finance.  Several Congressional staffers have suggested that if the Peru vote garners relatively strong Democratic support, there may be hope for the others.

The problem, however, is that the House Democratic Caucus may not be prepared to follow.  Remember all of those freshman Democrats who campaigned in ’06 on an anti-trade message?  It seems they won’t go quietly into the night.  Whereas the veteran Democratic trade leadership may be inclined to use protectionist rhetoric to shift the terms of the trade debate in their favor, the new blood in their caucus is more inclined to believe it.  In that regard, the Rangels and Levins and Baucuses on the Hill (guys that probably know better) have helped create a potential Frankenstein.

On Friday, rank and file Democrats addressed a letter ($) to their Caucus Chairman, Rahm Emanuel of Illinois, asking that the next caucus meeting be devoted to the U.S.-Peru Agreement.  The letter notes that there isn’t much support for the agreement among Democrats and that the Ways and Means Committee markup scheduled for tomorrow will prove divisive.

There were only seven signatories to the letter and it is unclear how representative it is of Democratic sentiments.  But if the topic proves divisive and rancorous – a development Nancy Pelosi wants to avoid – it will be interesting to see which side the House Speaker chooses to rein in.  The outcome of this potential impasse will tell much about the direction Democrats want to go on trade.

European Central Bank Mocks French Fiscal Policy

An amusing public fight is taking place, with Germany and the European Central Bank on one side and France on the other. I’m not sure whether this calls for a surrender joke or a wry reference to the Iran-Iraq war and how it would be nice for both sides to lose, but I will demonstrate uncharacteristic maturity by instead focusing on the policy implications.

The French, not surprisingly, are wrong. They have been badgering the European Central Bank to mimic the mistakes of America’s Federal Reserve by creating too much liquidity in order to artificially lower interest rates.

Germany is on the side of the Central Bank, which wisely has focused on maintaining the value of the currency (which helps explain why the dollar has been falling compared to the euro). As part of this spat, the head of the European Central Bank very publicly pointed out the wretched state of France’s bloated government budget. The EU Observer reports:

European Central Bank (ECB) chief Jean-Claude Trichet has said that France’s public finances are in “very great difficulty.” “In 2007, according to statistics from the European commission, France will be the country spending the most in public expenditure in relation to gross domestic product, not only within the eurozone but among the 27 members of the European Union”, Mr Trichet told Europe 1 radio on Sunday (23 September). On top of that, “the development of France’s public finances has on average been significantly worse than that of other European countries”, he added. …Mr Trichet’s comments also come as a reply to French president Nicolas Sarkozy, who has repeatedly criticised the ECB lately on a number of points, notably for not cutting interest rates. …Mr Trichet, who has also repeatedly stressed the need for the ECB to remain independent from any political pressure and has been riled by Mr Sarkozy’ comments, pointedly took Berlin as an example of a government which has managed to lower its public expenditure. Currently, Germany’s public spending is nine percentage points of GDP lower than that of France, which has to “adapt faster”, if it wants to benefit best from a global economy, Mr Trichet said.

Europeans Do Not Want American-Style Capitalism

The Financial Times reports on a poll showing that Europeans generally want more government intervention and have little desire for an “American-style” capitalist system. At the same time, the Europeans have little faith that they can compete in the modern economy. It is unclear, though, whether they understand that their support for bigger government is a reason why Europe has trouble competing with the rest of the world:

Europeans have little faith that their continent can compete economically with fast-growing Asian countries – but are even more convinced that it should not become more like the US. …multinational corporations are seen by Europeans as more powerful than governments, while those polled generally believed that regulations protecting workers’ rights should be strengthened rather than relaxed. …When asked whether Europe’s economy should be more like that of the US, the results were clear-cut. Those saying it should not, included 78 per cent of Germans, 73 per cent of the French, 58 per cent of the Spanish. In both Italy and the UK, 46 per cent opposed the US model. …Asked if a free-market, capitalist economy was the best system, Spanish and German respondents agreed overall, but the French and Italians did not. The British were less clear, although there was more support than opposition for a “capitalist” system.

The unintentionally amusing (or sad) part of the story is that America does not have an “American-style” capitalist system. The difference between the United States and Europe is that America has a medium-size welfare state while most European nations have large-size welfare states. The difference is not trivial, which is why America is more prosperous, but Europeans have a very distorted view of the United States thanks to ideologically biased information sources such as Michael Moore and CNN International.

President of Senegal to Speak at Cato

Since becoming the president of Senegal in 2000, Abdoulaye Wade has been one of Africa’s most vocal proponents of liberal economic reforms. As he recently said, “I don’t want money, and I don’t want hand-outs. I want trade agreements….I believe in a liberal economy and have never put much faith in the state-run economy, because it fails….The state should intervene only to create the conditions necessary for the private sector to thrive. I am counting on the private sector, because it is crucial to Senegal’s future.” Join us on September 28 to hear President Wade discuss economic reforms in Senegal and the future of liberalization on the African continent.

Why Not Let Belgium Disappear?

The International Herald Tribune reports on the growing hostility between the French and Dutch regions of Belgium, which has manifested itself in a three-month failure to form a government. But why is this bad news? First, the absence of a government means that politicians are not concocting silly new ideas to waste money and over-regulate the economy (which is also why gridlock is a good thing in America). But more importantly, why not let the country divorce? Or, at the very least, engage in radical decentralization so that the two regions (or three, if Brussels becomes a capital city akin to D.C.) have complete fiscal autonomy?

[M]ore than three months after a general election, Belgium has failed to create a government, producing a crisis so profound that it has led to a flood of warnings, predictions, even promises that the country is about to disappear. …Officials from the former government — including former Prime Minister Guy Verhofstadt, who is ethnically Flemish — report for work and collect salaries. The former government is allowed to pay bills, implement previously-decided polices and make urgent decisions on peace and security.

…[T]here is deep resentment in Flanders that its much-healthier economy must subsidize the Francophone south, where unemployment is double that of the north. …Belgium has suffered through previous political crises and threats of partition. But a number of political analysts say that this one is different.

The article also has an amusing passage on a TV program that tricked many viewers into thinking the nation was in the process of splitting up.

RTBF, a Francophone public television channel, broadcast a hoax on the break-up of Belgium. The two-hour live television report showed images of cheering, flag-waving Flemish nationalists and crowds of French-speaking Walloons preparing to leave, while also reporting that the king had fled the country. Panicked viewers called the station, and the prime minister’s office condemned the program as irresponsible and tasteless. But for the first time, in the public imagination, the possibility of a breakup seemed real.

Will American Capitalism Be Surpassed?

Sallie James hit the nail on the head in her blog post today: ”business deals, and not formally negotiated trade agreements, are driving globalization.”

That made me think of this Deutsche Post webpage I came across. 

It sounds spectacular: The world’s largest shipping and logistics hub at the world’s largest airport, all in low-tax, freewheeling Dubai.

America used to do great stuff like this. But while we’ve still got a moribund and bloated government postal service, Germany’s privatized Deutsche Post seems to be at the leading edge in global shipping and business services.  We’ve got congested, government-owned, and union-dominated seaports, while Dubai will be host to a huge and efficient intermodal system.

America still has lots of world-beating companies such as FedEx and Intel. The problem is in Washington: federal policymakers sit on their hands doing little to improve economic productivity while ambitious upstarts such as Dubai and Ireland are providing more freedom and more opportunity for businesses to grow.

The True Leaders of Trade Liberalization

A great article today [subscription required] in the Financial Times reminds us that business deals, and not formally negotiated trade agreements, are driving globalization.

That’s not to say that a good outcome on the Doha round wouldn’t be welcomed (and things are looking up on that score). But preferential trade agreements are often not the historic breakthroughs that politicians make them out to be. They make great photo-ops, though.