Topic: International Economics and Development

Let Them Go Barefooted

Just about every American needs to buy socks every year, while a relatively tiny number of U.S. workers actually MAKE socks for a living. Yet the Bush administration may decide by this Friday whether to sock it to the many for the temporary benefit of one small and dwindling industry.

Under a provision of the Central American Free Trade Agreement approved by Congress in 2005, the Bush administration is weighing whether to impose special duties on socks imported from Honduras. According to today’s Wall Street Journal, the move would placate a particular lawmaker in Alabama with several sock factories in his district and a few other, mostly southern lawmakers whose votes may be necessary for upcoming trade deals the administration wants.

Has U.S. trade policy come to this? For the sake of a domestic sock industry that, by its own count, employs only 20,000 workers, the U.S. government would impose a temporary 13.5 percent tariff on the 8.3 percent of imported socks that come from the small neighboring democracy of Honduras—a country that entered into a free trade agreement with the United States only two years ago.

By design, the tariff would mean higher sock prices for the 300 million or so Americans who buy and wear socks. And the sock tax would fall disproportionately on lower-income families, who spend a higher share of their income on such staples as food and clothing.

The Bush administration should forget nose counting for future trade agreements if gathering votes means raising trade taxes on low-income Americans. If the administration wants to support free trade, it should resist any calls for higher tariffs.

Wannabe Software and Movie Pirates: Hold Your Fire

A story from the Associated Press today suggests that WTO-sanctioned piracy is still a way off. Antiguan Finance Minister Errol Cort arrives in Washington today to discuss the internet gambling dispute with U.S. Trade Representative Susan Schwab, in hope of resolving the case.

Last month I reported that a WTO arbitration panel had agreed with Antigua that the U.S. restrictions on gambling over the internet entitled the Antiguans to retaliation – in this case by suspending its obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) to protect U.S. trademarks and copyrights, as well as suspending market access for some U.S. services firms. Antigua has long maintained that retaliation is not its preferred option, and would rather negotiate with the Americans to allow regulated access to the U.S. internet gambling market.

Antigua has strongly rejected the WTO arbitrators’ decision about the level of damages – a decision that is made especially controversial given that one of the three panelists dissented from the opinion, a rare occurrence in WTO jurisprudence, and by their own admission that they were on “shaky grounds” in determining the level of damages. According to Antigua, by basing their analysis on the “most likely scenario of compliance” by the United States rather than the export opportunities foregone, the arbitrators were showing unfair sympathy to the American case. The Americans were pleased that the $21 million in annual damages was well below the figure sought by Antigua ($3.4 billion), but expressed concern over the form of retaliation authorized. The United States had originally argued that their restrictions were worth only $500,000 in damages.

Notwithstanding the back-and-forth over the amount of sanctions, a couple of problems remain. First, who is to say how much it is worth to, say, download illegally a new CD or movie. Is it equivalent to the market value of buying a legal copy of the material? Or is it worth the cost of the download itself (less than a penny, I imagine). That is important because the WTO would limit Antigua to $21 million fairly strictly, and the U.S., under instruction from Hollywood and the software industry, would be expected to pounce if they saw the limit violated. There is also the question of whether Antigua would be able to export the fruits of its copyright violation to other countries and “earn” the $21 million that way.

While this is not the first time that the WTO has sanctioned violating intellectual property protections by suspending obligations under (that first came in March 2000, when the WTO gave Ecuador permission to suspend TRIPS obligations to the tune of $201 million in their dispute over European banana tariffs), the authorization has never been “actioned.” And, if the U.S. comes to its senses and begins to allow its citizens to gamble online freely, this case may not bring that to fruition either.

Radical Economic Reform in Georgia

The nations of the former Soviet Union include some of the world’s most interesting free-market reformers. Estonia is famous for its laissez-faire approach, but Georgia deserves attention as well - and not just because I went to the University of Georgia (a different Georgia, I’ll admit, but let’s not get bogged down in details).  A few years ago, it implemented a 12 percent flat tax. But it still had a problem of a very high 20 percent payroll tax rate, so Alvin Rabushka reports that Georgia has lowered the combined 32 percent flat tax/payroll tax rate to 25 percent this year. But why stop there? According to the Wall Street Journal, Georgia now plans to lower the 25 percent tax rate to 15 percent over the next five years and also abolish the capital gains tax:

Newly re-elected Georgian President Mikheil Saakashvili wants to slash taxes, speed privatization, ease foreign-investment rules and tap international capital markets as part of a radical plan to shake up the economy of the Black Sea country, his prime minister said in an interview. “The state will basically do everything to support business and investments instead of standing in the way of it,” said Prime Minister Lado Gurgenidze… The government last week signed off on a proposal that would cut average income taxes to 15% from 25% over the next five years. Capital-gains taxes, currently at 20%, would be abolished altogether.

A Refreshing Dose of Antidumping Heresy

Arguably the most sacred text in U.S. trade policy scripture is the antidumping law. Over the years, congressional support for a tough antidumping regime has been broad, bipartisan, and nearly absolute. Any member tempted to challenge the sanctity of the antidumping status quo and question whether it wasn’t too rigid, too unfair, too offensive, or too anachronistic would be advised to veil his weakness lest he be emblazoned with a scarlet “H” (for heretic).

That is why a recent letter from ranking Republicans on Ways and Means and its trade subcommittee (Jim McCrery of Louisiana and Wally Herger of California, respectively) to USTR Susan Schwab is more than first meets the eye. It may constitute a welcome schism in the Church of the Holy Trade Remedy Law.

While the letter is generally about the Doha Round, offering the congressmen’s opinions about the vital components of a final Doha agreement (should one ever come to fruition), it breaks new ground in the way it links the U.S. negotiating positions on agriculture, NAMA (non-agricultural market access – or industrial tariff liberalization), services liberalization, and rules (the most prominent topic of which is antidumping). For the first time in public—to my recollection, at least—members of the congressional committee with oversight of trade policy acknowledge that the (strident, unrelenting, congressionally-mandated) U.S. position on antidumping might be too costly.

Since July 2004, U.S. exporters have faced more AD cases abroad than U.S. domestic industries have brought against imports here, so any final result on [the] [R]ules [negotiations] must address the needs of our companies injured by dumping or subsidization but cannot hamstring our vulnerable exporters. A balanced rules outcome would ensure that the United States is not required to sacrifice ambitious market access provisions in agriculture, NAMA, and services.

By “balanced rules outcome,” the congressmen mean one that takes into account the interests of U.S. exporters that are subject or could be subject to foreign antidumping actions, as well as U.S. import-users (55% of U.S. imports in 2006 were “intermediate goods” – inputs used by U.S. manufacturers in their own production processes), who are hurt by antidumping restrictions. And, also, by “balanced rules outcome,” they mean that the cost of a defensive agenda with respect to antidumping reform is necessarily limiting progress on the offensive agenda of opening foreign markets to U.S. exporters.

This is a linkage we have been making for quite some time. It is a positive sign that members of Congress are connecting the same dots. Perhaps this thesis should be nailed to a wall in the Capitol Building.

IMF Concludes Lower Tax Rates Can Yield More Tax Revenue

A new study from the International Monetary Fund looks at what happened in Russia after the 13 percent flat tax was implemented and concludes that there was a Laffer Curve effect. Indeed, the increase in taxable income was so large that it completely offset the impact of the lower tax rate. In other words, this was one of the rare cases of a tax cut “paying for itself” (in the vast majority of cases, lower tax rates generate revenue feedback, but the net result is still less money for government).

Interestingly, the study finds that the additional revenue materialized because people are more willing to obey the law when the tax rate is low, as theory would predict, but did not find an increase in labor supply, which theory also would predict This anomaly aside, it is still good news that the IMF recognizes that there is a Laffer Curve and that high tax rates are needlessly destructive:

Can tax rate cuts increase revenues?

…The Russian flat tax experiment is particularly interesting: after the introduction of flat taxes, and effective personal income tax rate cuts, tax revenues increased substantially and almost immediately. Furthermore, they increased much faster than labor supply and output. The paper explains how tax rate cuts can increase tax revenues through tax compliance spillovers in such a manner.

…This paper shows that endogenous tax compliance responses can be responsible for the massive increase in tax revenues. The key intuition is that tax regimes are prone to spillovers, as the aggregate behavior of taxpayers determines how much time the tax authority can dedicate to the individual taxpayer. In a way, tax evaders protect each other by tying down the tax authority’s limited capacity. Hence, small cuts in the tax rates can lead to much larger changes in the behavior of taxpayers — most importantly, it can make them much more likely to declare their incomes honestly. These spillovers can lead to increasing tax revenues.

…taxpayers evade less tax payments when the tax rate is lower… evasion increases with the tax rate.

…Three cases could be highlighted. First, countries with high official tax rates and relatively weaker tax authorities, such as some of the transition economies, might benefit from tax rate cuts and improving compliance. Second, the model might be also relevant for countries with high tax rates, even if tax enforcement seems to be strong in absolute terms. Third, low tax countries which have particularly weak tax enforcement could also think about improving tax compliance via tax rate cuts.

Ethanol Program Milks Consumers Dry

Have you noticed how the price of milk has shot up in the past year? A big chunk of the blame lies with Congress and the ethanol program.

In its effort to promote the fantasy known as “energy independence,” the U.S. Congress favors the ethanol industry with a 51-cent-per-gallon exemption from the federal gasoline tax, and a 54-cent-per-gallon tariff on imported ethanol. By artificially stimulating the domestic ethanol industry, the program has created an insatiable demand for corn, driving up feed grain costs for dairy farmers, leading to higher prices for milk.

I’ve often disagreed with Sen. Chuck Schumer (D-N.Y.) on trade issues, especially his threat to slap tariffs on imports from China, but on this issue, the senator has positioned himself as the American consumer’s best friend. According to a story this week in the New York Daily News:

“Ethanol has increased the average American’s grocery bill $47 since July,” said Sen. Chuck Schumer, citing figures from Iowa State University.

Schumer (D-N.Y.) is pushing for an immediate end to the 54-cent-per-gallon tariff on ethanol imports as a way to increase the supply of the federally mandated fuel additive, reduce pressure on the corn market and bring down milk prices.

“Bring the cheaper ethanol in, reduce the price of corn, and then reduce the price of milk,” he said.

The senator is on to something. While were at it, let’s eliminate remaining U.S. tariffs on imported shoes, clothing, sugar, rice, cheese and, yes, milk.

Energy Price Controls in China

From our “never thought I’d live to see the day file,” Chinese Prime Minister Wen Jiabao announced yesterday that China would freeze energy prices as a means of combating inflation and appeasing public anger over escalating fuel prices. Well, been there, done that. If past is prologue, don’t expect a happy ending to this story.