Topic: International Economics and Development

Enlightenment Thinking on the Move: Economic Freedom of the World Report Now in Arabic

Thanks to the hard work of my colleagues Fadi Haddadin and Ghaleb Hijazi, who run Cato’s Arabic website Misbahalhurriyya.org, an elegant Arabic edition of the 2006 Economic Freedom of the World Report has now been released. The Arabic version was unveiled at a recent meeting in Beirut organized by the Fraser Institute of Canada and the Friedrich-Naumann Stiftung of Germany that we attended with our colleague Andrei Illarionov.

The printing of the Arabic edition was gorgeous, as were the cool brochures and other materials that Fadi and Ghaleb had produced in Jordan. The entire report in Arabic is available online now for downloading in PDF format. The availability of such thorough-going comparisons should, I hope, introduce a greater degree of cause-and-effect thinking into discussions of policy, which would be a great advance over the conspiracy theorizing that is unfortunately so common in the Middle East. (Besides all the data, it includes William Easterly’s hard-hitting critique of “foreign aid,” “Freedom vs. Collectivism in Foreign Aid.”)

The printed edition of the report was also delivered to the economics and politics editors at An Nahar, Al Hayat, and other papers (many more are in the mail) and will be distributed at the upcoming meeting of Arab economists in Kuwait this weekend. Congratulations to Fadi and Ghaleb and their team for such a success.

Our colleague Andrei Illarionov gave a remarkable presentation, based on statistical data, on the roots of economic stagnation in the Arab Middle East. A condensed version will appear in the Arabic press, and — if I can cajole him — in English, Spanish, Russian, and other languages.

Signs of Sanity at the International Trade Commission

Today is a pretty good day, as far as trade policy goes.

This morning, pursuant to a five-year “Sunset Review,” the U.S. International Trade Commission voted to revoke longstanding antidumping and countervailing duty restrictions against imported carbon steel plate and corrosion-resistant steel from 15 different countries.  The ITC also voted to continue the measures against corrosion-resistant steel from Korea and Germany for at least another five years.

While not perfect, today’s outcome is something to rejoice.  Revocation of trade remedy restrictions is rare, indeed, and rarer still where steel is concerned.

As described in this recent paper, the U.S. steel industry is doing phenomenally.  And given the dramatic growth in demand for steel in other regions of the world, today’s decision is unlikely to produce a significant surge in U.S. steel imports.  But at least now, U.S. steel consuming industries, which have been forced to endure some of the highest steel prices in the world on account of the limited competition, will have greater flexibility and negotiating leverage to counter the growing market power of the domestic steel industry.

Another Blue Ribbon Energy Report Falls Flat

Yesterday saw the publication of yet another blue ribbon style report on energy policy, this one called Recommendations to the Nation on Reducing U.S. Oil Dependence, from the Energy Security Leadership Council.  The press went wild.  Color me unimpressed.

The authors of the report are convinced that America’s reliance on foreign oil is a dangerous thing.  But why?  Panicky narratives abound, but none of them are particularly well informed.

Consider the widespread concern about the prospect of being cut off from supply.  Relying on foreign producers for oil means that we might find ourselves without physical access to petroleum if those foreign producers were to decide to shut us out.  But that worry is only plausible if you fail to understand and fully appreciate the fungible nature of the global oil market.  As MIT oil economist M.A. Adelman once wrote:

Rarely has a word [“access”] been so compact of error and confusion. Nobody has ever been denied access to oil: anyone willing to pay the current price could have more than he wanted. One may assume what he likes about future demand, supply, and market control, and conclude that the future price will be high or low, but that price will clear the market in the future as in the past. The worry about “access” assumes something queer indeed: that all of the producing countries will join in refusing to sell to some particular buyer—for what strange motive is never discussed … it takes only one other country, with a desire for gain, to cure this irrationality. 

The 1973 oil embargo proves the point.  As Adelman notes,  

The “embargo” of 1973–4 was a sham. Diversion was not even necessary, it was simply a swap of customers and suppliers between Arab and non-Arab sources… .  The good news is that the United States cannot be embargoed, leaving other countries undisturbed. 

In short, the only way for producers to keep their oil out of America is to impose a military blockade of U.S. ports.  Market agents – not agents of the producer states – decide where oil goes when it enters the market.  As long as someone is willing to buy oil from a producing state and then sell it to the United States, no shut off is possible absent military force.

OK, so physical access isn’t the problem – our vulnerability to producer-induced price spikes is the real worry.  Or is it? 

Recent macroeconomic studies suggest that the economy is nowhere near as vulnerable to oil-induced recessions as once thought.  How else to explain the world’s gangbuster economic performance in the teeth of the present price spike?

Nor is it reasonable to fear that producers might shut down drilling platforms in an act of global economic spite.  Producers need oil revenues more than consumers need the oil.  Even vitriolic anti-American regimes such as revolutionary Iran, Iraq under Saddam Hussein, and Libya prior to our recent rapprochement, have shown no interest in committing the economic and political suicide entailed in shutting down the only significant source of revenue they have.

Supply disruptions can and do happen, but they have historically tended to be modest and temporary.  Over the past 50 years, we’ve had 12 supply crises with an average of a 5.4 percent reduction in global oil supply for each event, and none of those supply disruptions lasted for more than 9 months.

Question #1 – don’t market agents have every incentive to insure against such events?  That, after all, is what futures contracts, oil inventories, and energy efficient technologies are for.  To argue that government must act to hedge against such possibilities is to argue that governmental actors are better risk managers than market actors.  And that is a fairly dubious proposition.

Question #2 – what sense does it make to say goodbye to an energy source that is cheap most of the time but expensive some of the time (oil) and hello to an energy source that is expensive all of the time but presumably more price stable (biofuels)?  If any individual company or consumer wants to go that route, then fine.  But why should the government dictate energy choices for every single person and corporate entity in the United States?  Are market actors so incapable of making intelligent decisions about what to buy that the feds have to step in?  And if so, why not have the feds grab the reins in other sectors of the economy?  

The final worry is that our dependence on foreign oil requires military expenditures and foreign policy contortions to keep producers safe and friendly.  But this is nonsense.  If the U.S. didn’t pay to secure oil production and tanker traffic abroad, producers would do so as long as the marginal costs associated with security expenditures were less than the marginal benefits associated with oil production – as they certainly are.  The U.S. military “oil mission” is really a welfare program in disguise.  And friendly relationships have nothing to do with it.  As noted above, without oil revenues, producing states could not pay their troops, fund their secret police, build luxurious palaces, or even feed their people (read: keep riots from breaking out).  Whether they like us or not, they have to produce, and as long as they produce, we will have oil to buy as long as we are willing to pay the market clearing price.

All of this is well known and completely uncontroversial to oil economists of the Left, Right, and Center.  But it’s a complete revelation to foreign policy mavens and military professionals, who simply do not understand a single thing about the oil market.  Unfortunately, too many people in Washington listen to the latter but not the former.

And yes, it simply kills me to see that Cato board member Fred Smith (CEO of Federal Express) is one of the two co-chairmen of the group that issued this report. 

WTO Membership Promotes a More Open China

Each year the U.S. Trade Representative’s Office issues a report on the status of China’s compliance with its obligations as a member of the World Trade Organization to open its market further to global competition. Mandated by law, the most recent report was issued yesterday, all 109 pages, and it is generating media buzz (check out this New York Times story, for example) for its critical comments about China’s failure to fully comply with its commitments.

The report was certainly well timed to make a spalsh. This week, a high-powered U.S. delegation is heading to China, led by U.S. Treasury Secretary Henry Paulson and including Federal Reserve Chairman Ben Bernanke. The delegation aims to cajole the Chinese to speed up not only trade liberalization but the flexibility of their currency.

This week also marks the 5th anniversary of China’s accession to the WTO as its 143rd member after 15 years of negotiations. As a condition of its entry, the Chinese government agreed to lower tariffs on imports and open its market further to foreign investment and services trade. After five years, the phased implementation process is officially over.

I’ve been reading through the USTR’s report today and I think the news media have been somewhat hyping its negative aspects (surprise, surprise). It does rightly criticize China for not doing enough to stop piracy of intellectual property and to freely allow certain imports and services. But the report also notes impressive progress.

China’s market is significantly more open today than it was even five years ago. For example, before its accession, China did not allow foreign-owned companies to freely import, export, and distribute goods within China. Today those so-called trading rights are widely permitted. China’s tariffs on goods of the greatest importance to U.S. industry have fallen from an average of 25 percent in 1997 to 7 percent. Tariffs on information technology goods from the United States have fallen to zero. Overall U.S. exports to China are up 35 percent so far in 2006 compared to last year and are up 158 percent since 2000.

My Cato colleague Daniel Ikenson goes beyond the USTR report in an op-ed titled “Toasting China: Why Their WTO Membership is a Blessing,” to show that China’s entry into the WTO has been good for the U.S. economy.

All in all, this should be a happy anniversary for everyone who supports freer markets and expanding trade.   

More Trade, More Jobs, Higher Wages

Critics of international trade argue that imports mean fewer jobs and lower wages for American workers. They repeat this mantra despite plain evidence to the contrary.

The latest evidence comes this morning with another U.S. Labor Department report that the U.S. economy continues to create new jobs at a healthy clip. U.S. payrolls grew by another 132,000 in November. The unemployment rate ticked up slightly to a still relatively low 4.5 percent because new workers surged into the labor market.

In the past year, total payroll employment has jumped by 1.8 million. Since mid-2003, payroll jobs have grown by 6.2 million, and since 1990 total payroll jobs have grown by 27 million. That impressive job growth has occurred against a backdrop of rising U.S. trade with the rest of the world, so clearly trade does not mean fewer jobs for American workers.

What about wages? They too are rising again, according to the same labor-market reports this morning. Average wages are up 4.1 percent from a year ago, ahead of inflation. When benefits are added, total compensation for U.S. workers continues to rise faster than inflation and is up significantly in real terms compared to previous years.

Like technology, trade can cause turnover in the labor market. But also like technology, trade raises the overall productivity of American workers, leading to better jobs and higher real wages.

The best analysis on this subject remains the 2004 Trade Briefing Paper, “Job Losses and Trade: A Realty Check,” by my Cato colleague Brink Lindsey.

Lou Dobbs Watch

The “Lou Dobbs Tonight” show on CNN long ago ceased to be a serious news program and has become a nightly screed against free trade, immigration, and a competitive, market economy. The opinions expressed by Lou Dobbs, his “correspondents,” and the large majority of his guests are typically based on questionable and selective facts that miss the real story.

Consider a “Lou Dobbs Tonight” segment the other night on how a “flood” of imports into the United States has caused “the incredible deterioration of the manufacturing industry.” The program’s anchor that night, Kitty Pilgrim, blamed the development on “the commitment of successive administrations to so-called free trade policies.”

The segment featured two biased CNN correspondents plus three guests who are all professional critics of trade: Alan Tonelson of the U.S. Business and Industry Council, an organization of generally declining, protectionists industries; Robert Scott of the Economic Policy Institute, a labor-union backed research group; and Bob Baugh of the AFL-CIO, the largest union umbrella organization.

As for the facts, nowhere in the segment was it mentioned that American factories are producing more goods than ever as measured by inflation-adjusted volume. U.S. manufacturing capacity and production have actually increased by 50 percent, in real terms, since the early 1990s, when such important trade agreements as the North American Free Trade Agreement and the Uruguay Round Agreements Act went into effect. Domestic output of automobiles and parts, a special focus of the CNN segment, is also much higher than in the earlier, pre-NAFTA, pre-WTO days.

As Cato research has shown, imports of manufactured goods and domestic output of manufactured goods tend to rise and fall together along with the overall health of the U.S. economy. When we prosper, we trade; when we trade, we prosper.

Apparently the “Lou Dobbs Tonight” program won’t let a few basic facts get in the way of a sensationalized story. Perhaps CNN should change its name to the Cable Opinion Network, or CON for short.

A Timely Chiding from the Washington Post

Today’s editorial in the Washington Post is a timely reminder of the negative consequences if Congress does not renew certain non-reciprocal trade preference deals (mainly allowing developing countries to import certain goods to the United States tariff free).

Although it strikes a somewhat mercantalist tone (e.g., it seems to imply that there may be reason to block trade deals if they do not “save American jobs”), the editorial board is right to say that the benefits to the United States from renewing these deals, both economic and political, certainly outweigh any “costs” from opening up trade that some members of Congress usually get upset about. Extending permanent normal trade relations to Vietnam (a topic I have blogged about here and talked about in this podcast) should be an especially simple matter.

I am a little skeptical about the long-term benefits of non-reciprocal trade preferences; they can lead to a culture of dependency and concentration in certain industries, and create political constituencies against multilateral trade liberalization, for example. But I wouldn’t go so far as to say that the problems related to these types of deals generally are sufficient to outweigh the benefits of approving the particular deals under consideration. In any case, somehow I doubt that the nuanced arguments against development-related unilateral preferences are the reason behind failure to pass the deals. The Washington Post suggests the inertia may be due to simple laziness. Surely not?