Topic: International Economics and Development

You Mean It Could Get Worse?

The House Agriculture Committee yesterday released its preliminary discussion draft of the commodity section of the Farm Bill (the section that deals with the subsidy programs). But the changes proposed by Rep. Colin Peterson (D, Minn.), House Agriculture Committee chairman, are precisely the wrong sort of changes needed to avoid legal challenges to its farm programs and inject life into the Doha round of global trade talks.

Chairman Peterson has suggested increasing most of the price-linked subsidies, and paying for the increase out of the money currently allocated for direct subsidies that farmers receive regardless of production or market prices.

When farmers are paid according to the amount they produce, this encourages overproduction and depresses world market prices. That infuriates our trade partners, and we can expect more of the type of legal challenge to U.S. farm programs as the cotton case (more here) and the new case against U.S. farm subsidies brought by Canada (background here).

While paying farmers “money for nothing” may be fiscally irresponsible, it is less market distorting than the types of subsidies that Chairman Peterson is proposing to increase. It makes no sense to increase the types of payments that are causing legal trouble. And if commodity prices fall from the current historic highs, then these subsidies would have a necessarily higher budgetary impact than the current setup.

My colleage Dan Griswold and I have proposed bribing farmers to let us scrap the whole thing altogether.

Bark Dwarfs Bite in China Currency Legislation

Yesterday, THE much-anticipated, passable-with-a-veto-proof-majority, WTO-consistent, legislative response to Chinese intransigence over its undervalued currency was introduced in the Senate.  As it turns out, “much-anticipated” and “legislative” appear to be the only apt adjectives.  It is unlikely to pass with a veto-proof majority, and my initial analysis leads me to conclude that its provisions would likely contravene U.S. WTO commitments. 

That being said, I am heartened by the bill because, despite all the hostile rhetoric and hand wringing on Capitol Hill, it seems to reflect a surprising degree of realism and rationality that I assumed was missing in Congress.  It quietly acknowledges that precipitous currency adjustment could be destabilizing and that U.S. WTO obligations are, in fact, worthy and worthwhile commitments to honor. 

On the continuum of prospective proposals under consideration ranging from innocuous to the nuclear 27.5% across-the-board-tariff, the “Currency Exchange Rate Oversight Reform Act of 2007” is relatively tame.  It has its problems and it is unnecessarily intrusive, but if this represents the final word of Congress on the matter, I’ll take it. 

Here is the gist of the bill. 

First, it makes “currency misalignment” instead of “currency manipulation” the trigger for action, which effectively lowers the threshold, and is thus not good.  Changing the designation effectively strips the Treasury Secretary of the discretion to determine whether currencies are manipulated intentionally for purposes of gaining a trade advantage.  Under the new rule, a formula will be used to determine automatically whether a conclusion of misalignment is rendered.  The precise formula is still a bit unclear to me, though. 

Depending on the degree of misalignment, countries will either be put on notice and consultations requested or priority action will be considered right away.  As far as I can tell, it would be a minimum of six months after the designation of misalignment before any punitive action can be taken against a priority country.   

Punitive action includes a cessation of U.S. government purchases of goods and services from the offending country; U.S. denial of support for multilateral institution or OPIC financing of projects in the offending country; U.S. denial of support for proposals and other items of interest to the “offending” country within multilateral institutions; adverse consideration of proposals to graduate the offending country from non-market economy status to market economy status for purposes of the antidumping law, and perhaps most significantly; adverse treatment of exchange rate conversions for purposes of calculating antidumping deposits and owings.  That would lead, inevitably, to higher dumping duties.  

Ultimately, if insufficient action is taken by the offending country to bring its currency into alignment, the
United States can lodge a formal complaint in the WTO (although it is unclear to me exactly what WTO provision the offending country would be violating). WTO-consistency was one of the driving considerations of this bill.  But I rather doubt that the antidumping provision would pass muster with a dispute panel, since Article 2.3 of the Antidumping Agreement seems to require that currency conversions be made using the exchange rate on the date of the U.S. sale.  The new legislation would allow the
U.S. authorities to substitute its estimate of the market-based exchange rate for the official exchange rate. Finally, and very importantly, as is the case with respect to Section 421 trade cases (the China-specific safeguard, agreed as part of China’s accession protocol), the president has the authority under this bill to reject any remedial/punitive measures on national economic security grounds.  That’s a very important safety net because the executive branch is typically much less willing to engage in the sort of punitive actions that Congress tends to demand reflexively. 

Thus, at the end of the day, even though the legislation is banal and unnecessary, something was going to materialize legislatively.  Congress talked itself into a corner with its continuous complaining about the administration’s failure to address “unfair” Chinese practices.  Congress promised to get tough if the administration continued to fiddle.  So it had to walk the walk.   

Despite some harsh provisions, it could have been worse.  Practically speaking, at the end of the day, there might not be much difference between this legislation and the gradual, negotiations approach to the Chinese currency issue that is favored by the administration, and to which this legislation is supposed to be an alternative.  Here’s why. 

By the time the bill introduced yesterday makes it through conference, passes both chambers of Congress, gets vetoed by the President, and then secures two-thirds majorities in both chambers to override the veto to become law, and then the new regulations are promulgated, it will likely be too late for the statutory September 15 Treasury report to be issued.  The earliest report that could identify Chinese currency misalignment would be the March 2008 report, and the earliest that countervailing action could take effect would be September 2008.  The Yuan has appreciated against the dollar by nearly 8.5 percent since July 2005.  Since the Chinese government allowed for a wider band of daily fluctuation and appreciation two months ago, the Yuan is now on a steeper trajectory of appreciation.  By then—15 months from now—the Yuan is likely to have appreciated considerably more.  It could very well have appreciated “between 15 and 40 percent,” which has been the estimate of undervaluation for the past few years.  If that is the case, there should be no need for action.  

But, finally, given the feature of executive override and precisely because sanctions are a long way off under this bill, I can’t see it passing Congress with a veto-proof majority.  But a more hostile, impose-sanctions-first-ask-questions-later bill is also unlikely to pass with a veto proof majority.   

Thus, the preferable and much wiser gradual approach it is, by default. 

Does Globalization Undermine Redistribution?

An article in the UK-based Guardian notes that wealthier regions within nations and wealthier nations within Europe are increasingly unhappy with the amount of money being used to subsidize less productive areas. The article suggests the growing unease is a function of globalization, though it is more plausible to argue that the high tax rates associated with redistributionist policies are becoming more untenable because of globalization:

…disputes over public money and how to spread it fairly are rife across large tracts of Europe, eroding national solidarity, feeding separatism, encouraging populism, and generating friction between Europe’s wealthy centres of excellence and their less fortunate national hinterlands. The rich bits of Europe are revolting. And it is some of the most successful and attractive cities on the continent that are in the revolutionary vanguard. From the fashion and finance mecca of Milan to the hi-tech centre of Munich, from the world’s diamond capital, Antwerp, to the vibrant coastal hub of Barcelona, Europe’s most dynamic cities and regions are increasingly rebelling against “subsidising” the poorer parts of their countries, demanding to keep their home-grown wealth, and causing headaches for central governments. … In Italy, the centre-left government of Romano Prodi has just received a drubbing in local elections, particularly in the north, not least because the north perceives Rome as the agent pilfering its hard-earned cash only to hand it over to the “spongeing” south where the Mafia and Camorra soak up the subsidies. …In Belgium, Flemish nationalists complain that the public sector payrolls in Wallonia are twice the size of those in Flanders. “It’s majority socialist in the south, the last Soviet republic in Europe,” says Filip Dewinter, the Vlaams Belang leader. “They’re stealing our money with the collaboration of the government in Brussels. We’re a hard-working people, very prosperous, low unemployment, and we’re giving them €12bn (£8bn) every year to finance their social security. We can stand alone.” In Germany, the wealthy southern states of Bavaria and Baden-Württemberg balked at the Berlin government’s health service reforms last year because they had to pay more into the national kitty than poorer parts of Germany. In Britain, in the debate over Scottish devolution or independence, the wealthy south-east appears increasingly aggrieved over the Barnett formula that ordains higher per capita public spending in Scotland than in England.

Back to Square One on Immigration

Opponents of comprehensive immigration reform are undoubtedly congratulating themselves on the apparent demise yesterday of S. 1348. The bill failed to win enough votes in the Senate for cloture and a final vote. Leading the charge to defeat the bill were a group of Republicans opposed to just about any legalization or expansion of visas for low-skilled workers.

We’ve made the case at the Center for Trade Policy Studies for an immigration system that recognizes the need of our growing economy for more foreign-born workers and the benefits we would enjoy from more legal immigration. The only alternative offered by opponents of reform is to spend more on the same enforcement efforts that have failed in the past to stop illegal immigration. Conservatives who are normally skeptical of big government place all their hope in dramatic increases in spending for border enforcement, longer fences to nowhere, more raids on U.S. workplaces, and more red tape and national ID cards for American workers.

The bill before the Senate was flawed in many ways. The number of temporary worker visas was insufficient, its interior enforcement provisions too intrusive, the point system too convoluted. But the bill was at least pointing in the right direction.

The Republicans who brought the bill down have yet to put forward any practical and principled alternative.

Europeans Continue to Flee

Immigration is not just about Latin Americans moving to the United States for higher wages. It is also about Europeans moving to just about anywhere that has lower taxes.

A column in the Washington Times explains that, as a result, most of Europe’s major economies are suffering a significant brain drain:

Last year more than 155,000 Germans emigrated from their native country. Since 2004 the number of ethnic Germans who leave each year is greater than the number of immigrants moving in. …In a survey conducted in 2005 among German university students, 52 percent said they would rather leave their native country than remain there. …Some complain that the tax rates in Germany are so high that it is no longer worthwhile working for a living there.

…The situation is similar in other countries in Western Europe. Since 2003, emigration has exceeded immigration to the Netherlands. In 2006, the Dutch saw more than 130,000 compatriots leave. …In Belgium the number of emigrants surged by 15 percent in the past years. In Sweden, 50,000 people packed their bags last year — a rise of 18 percent compared to the previous year and the highest number of Swedes leaving since 1892. In the United Kingdom, almost 200,000 British citizens move out every year.

Americans who think that the European welfare state is the model to follow would do well to ponder the question why, if Europe is so wonderful, Europeans are fleeing from it. European welfare systems are redistribution mechanisms, taking money from skilled and educated Europeans….

[A] German sociologist at the University of Bremen, warns European governments that they are mistaken if they assume that qualified young ethnic Europeans will stay in Europe. “The really qualified are leaving,” Mr. Heinsohn says. “The only truly loyal towards France and Germany are those who are living off the welfare system, because there is no other place in the world that offers to pay for them…. It is no wonder that young, hardworking people in France and Germany choose to emigrate,” he explains.

Tony Blair’s Wise Warning against ‘Isolationism and Protectionism’

In an essay published this week by the Economist magazine, outgoing British Prime Minister Tony Blair shared “What I’ve Learned” during his decade in office. I’ll leave it to others to dissect what he said about the transatlantic alliance, the Iraq War and the National Health Service, but his words of wisdom on the importance of an open global economy are worth quoting.

Declaring that “‘Open v closed’ is as important today in politics as ‘left v right,’” Blair wrote:

Nations do best when they are prepared to be open to the world. This means open in their economies, eschewing protectionism, welcoming foreign investment, running flexible labour markets. It means also open to the benefit of controlled immigration. For all nations this is a hugely contentious area of policy. But I have no doubt London is stronger and more successful through the encouragement of targeted migration.

Isolationism and protectionism now cut across left and right boundaries. They are easy tunes to play but pointless in anything other than the very short-term.

I wish more members of the U.S. Congress would learn the same lessons.

Robert Reich, Wrong Again

President Clinton’s secretary of labor, Robert Reich, complains on Marketplace Radio that the new immigration bill may encourage immigration by high-skilled people. He argued:

A century ago, America’s immigration policy was best summarized in Emma Goldman’s famous lines on the Statue of Liberty: “Give me your tired, your poor, your huddled masses yearning to breathe free.”

It’s a lovely poem, and it’s true that America was the land of opportunity for millions of people. But as Julian Simon pointed out, on the whole immigrants in the 19th century were not tired, poor, huddled masses. He cites findings from economist P. J. Hill:

[I]mmigrants, instead of being an underpaid, exploited group, generally held an economic position that compared very favorably to that of the native born members of the society.

Reich is wrong again. But then, he’s notoriously loose with the facts.

Update: An alert reader points out that I was still half-asleep when I heard this commentary and cut-and-pasted Reich’s words. Of course it wasn’t the anarchist Emma Goldman who wrote the words on the Statue of Liberty, it was the New York City poet Emma Lazarus.