Topic: International Economics and Development

Trade Showdown Looks Inevitable

Yesterday I argued that Congress’s unflinching devotion to the antidumping law poses a real threat to the world trading system.  As the WTO dispute settlement mechanism renders more decisions against U.S. antidumping actions and procedures, Congress will grow more inclined to question the efficacy and legitimacy of the WTO in public.  And that is a slippery slope.

I wrote:

To Congress, trade remedy laws are not the problem.  Dumping and subsidization are.  And the latest Appellate Body decision against zeroing makes it that much harder to combat “unfair” trade.

Accordingly, Congress is highly unlikely to go quietly into the night after the WTO’s latest indictment of zeroing. Thus, confrontation–perhaps intractable confrontation–between the United States and the WTO dispute settlement system may be in the cards later this year.

Well, judging from this news release and letter, written by the two highest ranking legislators on trade issues, “later this year” is here.  Stay tuned.

Trade is Much Bigger Than the Doha Round

There have been whispers of late regarding prospects for a last minute resurrection of the WTO’s Doha Round of multilateral trade talks.  My colleague Sallie James does a great job discussing those prospects with polite skepticism in a recent Cato podcast.  Let me be a little more direct: Doha’s dead, yadda yadda yadda, now let’s move on!

Ok, that sounds a bit cavalier.  So please allow me to clarify.  To be more precise, Doha is not dead permanently; it is in a cryogenic state, available for resuscitation under different circumstances. 

Atop the many reasons to conclude that Doha’s time has passed for now is this: the Bush administration has neither the will nor the resources to engage in the type of horse trading necessary to produce an agreement that would be simultaneously acceptable to our trade partners and our Congress (and worthy of the negotiating efforts expended thus far).  As with every other policy initiative “championed” by the Bush administration (and trade was never really a priority), trade’s oxygen has been consumed by the Iraq inferno.

Judging from the commentaries I’ve read and conversations I’ve had, I am less inclined than most to view Doha’s deep freeze as some colossal economic setback.  Certainly it is a(nother) foreign policy setback for the United States, which will undoubtedly be accused of perpetuating poverty and misery the world over.  To the extent there is some small truth in that (some U.S. trade policies have acute, adverse impacts on people in developing countries), Doha’s failure carries real costs.  But by and large, there is no reason to assume that international trade and foreign investment will suddenly slow or reverse course.  In fact, trade and investment are likely to continue to grow handsomely and the world economy will continue to expand, as more and more people from more and more countries partake of the global economy.  And furthermore, I suspect that some, if not many, of the reforms and liberalizations proposed in the Doha Round will be adopted, ultimately, without need of agreement, by countries (including the U.S.) that recognize it is in their interest to reform regardless of what other countries do. 

What concerns me more than the failure to reach a new accord is the potential for marginalization of the old agreements and institutions.  The agreements that culminated in the creation of the World Trade Organization in 1995 and the quiet success of its dispute settlement system (which has “handled” 357 disputes) have a lot to do with trade’s contribution to world economic growth.  Long-standing rules and familiar processes have helped reduce and eliminate some of the uncertainties (and therefore, risks and costs) traditionally associated with trading and investing with foreigners.  If member countries were to begin questioning the efficacy of the system or the wisdom or propriety of its adjudication process when it becomes politically convenient to do so, calls to skirt the rules and ignore the verdicts might not be too far behind.  And that behavior could prove contagious, leading to new uncertainties, greater risks and costs, and ultimately, degradation and a potential collapse of the rules-based trading system.

That scenario, should it unfold, is a long way off.  But the seeds of discontent are sowing.  U.S. policymakers have from time-to-time expressed skepticism about WTO rulings.  That skepticism is memorialized in Section 2101(b)(3) of the legislation that gave President Bush trade promotion authority in 2002:

Support for continued trade expansion requires that dispute settlement procedures under international trade agreements not add to or diminish the rights and obligations provided in such agreements. Therefore-

(A) the recent pattern of decisions by dispute settlement panels of the WTO and the Appellate Body to impose obligations and restrictions on the use of antidumping, countervailing, and safeguard measures by WTO members under the Antidumping Agreement, the Agreement on Subsidies and Countervailing Measures, and the Agreement on Safeguards has raised concerns; and

(B) the Congress is concerned that dispute settlement panels of the WTO and the Appellate Body appropriately apply the standard of review contained in Article 17.6 of the Antidumping Agreement, to provide deference to a permissible interpretation by a WTO member of provisions of that Agreement, and to the evaluation by a WTO member of the facts where that evaluation is unbiased and objective and the establishment of the facts is proper.

Reactions in Congress to WTO dispute settlement decisions have been most acerbic when the subject has concerned U.S. application of its trade remedy laws.  As I reported last month, the WTO Appellate Body’s indictment of the U.S. antidumping calculation practice known as zeroing led to a rare change in practice at the Commerce Department.  However, some in Congress were not very pleased, suggesting the administrative actions circumvented congressional authority.Just last week, the Appellate Body ruled again on the issue of zeroing in the United States, but this time the ruling was even more encompassing, forbidding the practice under almost every conceivable comparison methodology.  Compliance with the ruling would be a landmark achievement in the realm of antidumping reform because the practice of zeroing is the single greatest systemic inflator of dumping margins.  And therein lies the problem.  In terms of the practical effect on the bottom line, banning zeroing entirely is akin to fairly ambitious antidumping reform, which Congresses past (and presumably present) have opposed.

When Congress granted President Bush trade promotion authority in 2002, it did so with strings attached. 

(14) TRADE REMEDY LAWS.-The principal negotiating objectives of the United States with respect to trade remedy laws are-

(A) to preserve the ability of the United States to enforce rigorously its trade laws, including the antidumping, countervailing duty, and safeguard laws, and avoid agreements that lessen the effectiveness of domestic and international disciplines on unfair trade, especially dumping and subsidies, or that lessen the effectiveness of domestic and international safeguard provisions, in order to ensure that United States workers, agricultural producers, and firms can compete fully on fair terms and enjoy the benefits of reciprocal trade concessions; and

(B) to address and remedy market distortions that lead to dumping and subsidization, including overcapacity, cartelization, and market-access barriers.

To Congress, trade remedy laws are not the problem.  Dumping and subsidization are.  And the latest Appellate Body decision against zeroing makes it that much harder to combat “unfair” trade.

Accordingly, Congress is highly unlikely to go quietly into the night after the WTO’s latest indictment of zeroing. Thus, confrontation–perhaps intractable confrontation–between the United States and the WTO dispute settlement system may be in the cards later this year.

Antidumping is not the only area where the United States is on the defensive in the WTO.  Without an ongoing negotiating round, new cases concerning agricultural subsidies are likely to be brought (Brazil and Canada have already done so). 

If the United States refuses to comply (or is seen dragging its feet for a long time), other WTO members might follow the example, and eventually the dispute settlement mechanism could become a dead letter. These are the risks to the multilateral trading system. 

The failure of Doha to bear fruit in the form of a new ambitious agreement is disappointing, but hardly catastrophic.  However, to the extent that the absence of an ongoing negotiating round (indeed, in the wake of the first failed multilateral negotiating round ever) might liberate politicians to call for unilateral actions that contravene trade agreements, it will be more important to be vigilant in the face of threats to global commerce.

The Czechs (Finally) Have a New Government

The 7-months-long political stalemate in the Czech Republic ended this morning. The Czech Parliament approved a coalition government consisting of the liberal Civic Democrats, conservative Christian Democrats and centrist Greens. The new government is committed to a flat individual and corporate tax rate of between 17 percent and 19 percent (to be determined during pre-budget negotiations), and slashing regulation and state expenditure.

A last-minute desertion of two MPs from the socialist opposition enabled the government to squeak through, but the government remains in a precarious position. With only a 100 seats in a 200 seat Parliament, the government’s reform program will be difficult to push through.

Venezuela: Plus ça Change, Plus C’est la Même Chose

Hugo Chavez came one step closer to becoming a full-fledged dictator last night, as “Venezuelan lawmakers gave initial approval to a bill granting … [him] the power to rule by decree for 18 months so that he can impose sweeping economic, social and political change.” The vote in the National Assembly was unanimous — as befits a budding communist country.

Not that Chavez’s powers were much constrained prior to yesterday, but his soon-to-be official recognition as Venezuela’s dictator serves as an important reminder that state control of the economy and dictatorship go hand in hand.

Since the collapse of the Soviet empire, many defenders of socialism have argued that dictators, including Mao, Stalin, and Pol Pot, were aberrations; they took Marx’s ideas in the wrong direction. They claim that nationalization of the means of production (call it communism, socialism, or Marxism) and democracy can be compatible. In The Road to Serfdom, Hayek showed that it cannot. Some 50 years later, Hayek’s argument holds. Every socialist regime tends toward authoritarianism of some sort.

Chavez reminds us of the anti-democratic nature of socialism. As such, he is turning into a major embarrassment for many on the Left who supported him. Unfortunately, what the proponents of socialism again and again fail to realize is that it is the message, not the messenger, that is embarrassing.

How Large are Federal Oil Subsidies?

Yesterday, I co-authored an op-ed with Peter Van Doren on the Democrats’ energy bill scheduled for a vote today in the House.  The bill is advertised as an exercise to eliminate the subsidies going to “Big Oil” and to use that money instead to subsidize renewable energy (the fact that “Big Oil” is also in the renewable energy business and will simply find that the federal checks are going to different corporate in-boxes has apparently not occurred to anyone, but I digress).  But did the Democrats wipe out all the subsidies, or did they leave some big subsidies behind?

A lot of people think that the Democrats left a lot of money on the table.  Today in the Christian Science Monitor, for example, economist Doug Koplow argues that the biggest subsidy left untouched by Pelosi & Co. relates to the military protection of oil producing facilities and shipping lanes abroad, a mission which costs the taxpayer at least $19 billion a year. 

While the Ds certainly were less than thorough in their anti-oil-subsidy crusade, I’m not so sure that the subsidies are anywhere near as large as many people think.

Quantifying the national security costs associated with ensuring the safe and reliable delivery of foreign oil is difficult.  The Congressional Research Service estimated in 1997 that those costs may be anywhere between $0.5-65 billion, or 1.5 cents to 30 cents per gallon for motor fuel from the Persian Gulf.  Agreement about the extent of the military’s “oil mission” is difficult because military and foreign policy expenditures are generally tasked with multiple missions and objectives, and oil security is simply one mission of many.  Analysts disagree about how to divide those missions into budgetary terms. 

Debate about the size of the U.S. military’s oil mission and related foreign policy expenses, however, is not particularly relevant to a discussion about whether and to what extent oil companies are subsidized by this kind of thing.  From an economic perspective, the key question is whether an elimination of U.S. military and foreign aid expenditures dedicated to “the oil mission” would result in (a) greater corporate expenditures to secure oil from abroad, and/or (b) an increase in the price of oil, and, if so, how much?  That is the true measure of the subsidy if it indeed exists.  That’s because, if the oil mission provides no value to multinational oil companies or oil consumers - as I maintain - than it is not a subsidy.  Measuring the subsidy by the amount of money government spends on the oil mission is at best a measure of how much politicians believe the national security externalities might be.  Political assessments may or may not be accurate.            

To be sure, if the termination of the American “oil mission” implied the termination of all military, police, and court services in the region, petroleum extraction investments would become more risky, extraction of oil might decrease, and prices would increase.  But remember that oil companies in the Middle-East are creatures of government.  So the question is really whether Middle-East governments would produce less oil because the United States ended its oil-related military mission and foreign aid.  Or would oil producing states provide – or pay others to provide – military services to replace those previously provided by the United States?           

I strongly suspect that a cessation of U.S. security assistance would be replaced by security expenditures from other parties.  First, oil producers will provide for their own security needs as long as the cost of doing so results in greater profits than equivalent investments could yield.  Because Middle-Eastern governments typically have nothing of value to trade except oil, they must secure and sell oil to remain viable.  Second, given that their economies are so heavily dependent upon oil revenues, Middle-Eastern governments have even more incentive than we do to worry about the security of production facilities, ports, and sea lanes.  

In short, whatever security our presence provides (and many analysts think that our presence actually reduces security) could be provided by other parties were the United States to withdraw.  The fact that Saudi Arabia and Kuwait paid for 55 percent of the cost of Operation Desert Storm suggests that keeping the Straits of Hormuz free of trouble is certainly within their means.  The same argument applies to Al Qaeda threats to oil production facilities.           

If oil regimes paid for their own military protection and the protection of their own shipping lanes, would U.S. Middle-East military expenditures really go down?  The answer might very well be “no” for two very different reasons.  First, the U.S. Middle-East military presence stems from our implicit commitment to defend Israel as well as the region from Islamic fundamentalism, and those missions would not likely end simply because Arab oil regimes paid for their own economic security needs.  Second, bureaucratic and congressional inertia might leave military expenditures constant regardless of Israeli or petroleum defense needs.              

Thus, U.S. ”oil mission” should not be viewed as a subsidy that lowers oil prices below what they otherwise would be.  Instead, the expenditures are a taxpayer-financed gift to oil regimes and the Israeli government that has little, if any, effect on oil prices or corporate profits.  Now, I’d be happy to see the oil mission go, but “Big Oil” won’t be any poorer for it.

Identity Crisis Book Forum Thursday at Cato

On Thursday, the Cato Institute is having a book forum on my book Identity Crisis: How Identification is Overused and Misunderstood.

Commenting on my presentation of the book will be James Lewis from the Center for Strategic and International Studies and Jay Stanley from the ACLU.

The REAL ID Act is under siege from state leaders who are bridling at this unfunded surveillance mandate, and legislation was introduced at the end of the 109th Congress to repeal REAL ID. But the immigration debate this year will surely fuel the push for a national ID with the demand for “internal enforcement” of immigration law. Identity Crisis lays the groundwork for all these discussions.

The event is streamed for those not in the area. To register, go here.

The National ID Debate, Part II

“It is the policy of the United States that the Social Security card shall not be used as a national identification card.”

So reads the last line of the Illegal Immigration Enforcement and Social Security Protection Act of 2007. The bill would put an encrypted machine-readable electronic identification strip on each Social Security card, which would enable employers to access an “Employment Eligibility Database” at the Department of Homeland Security. The database would include the citizenship status of every Social Security card holder.

Employers who hired someone without checking this … national Social Security identification card … against the Department of Homeland Security’s database would be punished. (Must remember: “It is the policy of the United States that the Social Security card shall not be used as a national identification card.”) 

So goes the push for “internal enforcement” of immigration law — sure to be an important topic in the immigration debate this year. 

The national ID law that is now in place, the REAL ID Act, is a reaction to the terror attacks of 9/11, and the assumption that knowing who someone is tells us what that person plans to do. 

But the REAL ID Act is in retreat. With states bridling at the burden they’ve been asked to bear in order to implement the act, legislation to repeal REAL ID was introduced late last year, and it is likely to be re-introduced soon.

The next wave of the ID debate will be about immigration.

On Thursday, January 18th, we’ll be having a lunch-time book forum here at Cato on my book, Identity Crisis: How Identification is Overused and Misunderstood. I will present the book, and I have invited two interesting commentators — skeptics of different parts of my theses — to weigh in. 

Please join us for what I hope will be an interesting discussion of identity issues, and a preview of an important part of the coming immigration debate. 

Register for the book forum here.