Topic: International Economics and Development

Speak with Forked Tongue; Carry Large 2x4

The next time you meet a Canadian at a cocktail party and consider invoking fuzzy feelings of fraternity by toasting our countries’ recent softwood lumber accord, better to just smile, nod your head, and stare intently at your shoes.  Calling the U.S.-Canada Softwood Lumber Agreement (2006) an “agreement” mocks the fact that the Canadians had no viable alternative but to sign on the dotted line.

One option was to endure the cost and uncertainty of continuous litigation, continued restrictions on their lumber exports, and the specter of never again seeing the $5.3 billion in duties collected illegally by U.S. Customs on previous exports.  The other option was for Canadians to agree to impose export restraints (in the form of export taxes or quotas) on their lumber and see the return of about 80 percent of that $5.3 billion.

The U.S.-Canada softwood lumber dispute dates back many decades, but the most recent spate of protection, rulings, and edicts relates to litigation that began in the early 1980s, evolved into the Softwood Lumber Agreement of 1996, and then produced new trade remedy cases and a string of litigation beginning in 2001, when SLA 1996 expired.  (This paper attempts to present a chronology of events—but the most recent events are not documented therein.)

Make no mistake: the United States is the villain in the lumber dispute. 

Its agencies administered the trade remedy laws illegally and when they were required to make amends, pursuant to the terms of the North American Free Trade Agreement, they refused.

In short, antidumping duties can be imposed if the petitioning industry is materially injured by reason of dumped imports; countervailing duties can be imposed if the petitioning industry is materially injured by reason of subsidized imports.  In 2002, the United States imposed both antidumping and countervailing duties on Canadian softwood, which prompted Canada to challenge those findings under NAFTA’s dispute settlement procedures.  The NAFTA panel found that the U.S. International Trade Commission failed to meet the legal threshold for finding injury, and that the Commerce Department failed to find, legally, dumping or countervailable subsidization.

Second, third, and fourth attempts by those agencies to render affirmative findings within the law were also found wanting by the NAFTA panel, which eventually ordered the agencies to revoke the measures.  The United States refused, and instead insisted that an agreement to limit Canadian lumber sales was the only way to resolve the issue.  By that point, U.S. Customs had collected about $5 billion on softwood imported from Canada pursuant to those illegal antidumping and countervailing duty measures.  The U.S. industry was insistent that those monies be distributed to them, as beneficiaries of the now-repealed Byrd Amendment.  The importers (and the Canadian producers to whom many were related) demanded that those duties be refunded promptly.

Well, an ugly compromise was struck in the form of the Softwood Lumber Agreement (2006).  Under its terms, the importers/producers will be refunded about 80 percent of their rightful $5.3 billion, and despite the illegality of the measures and the fact that the United States completely disregarded its NAFTA obligations, the domestic petitioners will keep about $500 million and the U.S. government (actually, the Bush administration—these funds will be outside the domain of congressional appropriators) will keep about $450 million to be used for “meritorious initiatives.”  Such initiatives will include low-income housing projects, disaster relief, and various other vote-purchasing endeavors.

Meanwhile, the days when you could just pick up the phone, dial your favorite Canadian lumber producer, and place an order for 100 pallets of 2x4s at $344 per thousand board feet are over.  No longer will the purchasing agents at Home Depot, True Value Hardware, Ryan Homes, and elsewhere be able to negotiate lumber volumes and prices based on quaint considerations like supply and demand.  Canadian lumber will be required to sell for a minimum of $345 per thousand board feet.  If prices dip below that level, Canadian exports will be subject to a combination of export taxes (ranging from 5 to 15 percent) and volume restrictions.  So yes, the agreement does allow freedom of lumber trade to reign, as long as the prices are high enough.  Once the benefits of trade go too far and actually provide cost savings for consumers, freedom will be reined in.

On so many different levels, U.S. actions and attitudes in the lumber dispute–and the interventionist outcome it produced–betray an administration that is only rhetorically commited to free trade.  And that can’t possibly ignite the embers of global trade liberalization.

Public Health & Economic Literacy

My former research assistant is now pursuing a master’s degree in public health at Harvard. She recently blogged about her economics course:

During econ class today, the professor explained in great detail the ways in which the federal government tinkers with agricultural output, like price floors and crop restriction and so forth. A lot of my classmates were genuinely surprised at the extent to which government messes with food production to placate the farm lobby, and that, in turn, surprised me. I thought most people — or most well-educated grad students and medical residents, who make up my class — knew all about concentrated benefits/diffuse costs, and why we probably pay more for milk than we should. At one point, a student from India, astonished, said, “You mean the government actually sets aside these funds every year for this purpose?” Professor: “Of course not. We run deficits.”

Again, these students made it all the way to Harvard without any exposure to such things. Makes me wonder if any research has been done on the economic literacy of the public health profession. (E-mail me mcannon [at] cato [dot] org" href="mailto:mcannon [at] cato [dot] org">here if you’re aware of any.)

Let’s just hope that Adrienne’s econ class is a required course.

A New Solution to the Trade Deficit ‘Problem’

I’ll be honest with you folks — in Australia we have an expression, “Only in America!” It is used whenever outlandish, seemingly crazy, or especially unusual ideas or events occur over here. It is frequently used by news-readers. Please don’t be offended.

Anyway, I am proposing a new expression, “Only from Congress.” It could be used to describe, well, whenever an outlandish, seemingly crazy, or especially unusual idea is announced by members of Congress. And to kick things off, I would like to introduce the first item for your consideration.

Two Democratic senators, Byron Dorgan of North Dakota and Russ Feingold of Wisconsin, have proposed that any company wishing to import goods into America would need a government-issued certificate. The senators, according to this New York Times article (link requires subscription), view this as a “market-based system to cut the trade deficit to zero within 10 years.”

It would work thus: Any company that exports goods would be issued an import certificate that would allow it to import goods. The “exchange rate” would fall from $1.40 in the first year (i.e., $1 worth of exports would earn $1.40 worth of imports), to $1.30 in the second year, and so on until we achieve “balance.” If a company does not wish to import anything, it can sell the import certificate to someone who does. I guess that’s the “market-based” part.

Sherman Katz of the Carnegie Endowment for International Peace was quoted in the article as saying that “’it looks on the face of it to represent an enormous intrusion of government activity into business totaling trillions of dollars each year.”

“Enormous” doesn’t seem to quite capture it though, does it? How about “insane”?

Can you imagine the type of federal oversight this would require? And how would our trade partners react to the U.S. market being restricted in this way?

And what about oil? Ah, the wise senators have already thought of that. Oil would be given a 10-year phase-in, to allow the economy “time to find and develop alternative energy supplies.”

Imports of goods keep inflation in check and imports of capital keep interest rates down and help finance economic growth. Restricting imports would necessarily restrict capital flows into the economy because of the necessary balance between the current and capital accounts. To bring investment in line with savings, domestic interest rates would need to rise, reducing investment and economic growth. (More here.)

Question for the senators: What sort of certificate would you issue to cope with those sorts of macroeconomic effects?

I’m guessing we can expect lots of “Only from Congress” ideas in the coming campaign season. I’m excited.

Don’t Count on China

Following on from the visit last month of United States Trade Representative Susan Schwab, the Director-General of the World Trade Organization, Pascal Lamy, is visiting China this week to drum up Chinese support for reviving the Doha round of multilateral trade negotiations. He appears to have been given the same non-response as the USTR.

The Chinese have put the ball squarely back in the court of the EU and the United States, saying it was up to the major developed countries to take the lead in reviving the talks. (full story here).

China has so far kept very quiet in the trade talks, limiting their participation to argue for a ‘time out’ from trade liberalization for newly-acceded members. Having given major “concessions” to join the club, they figure they’ve paid their dues and should be given time to soak up the atmosphere. And given the often poisonous rhetoric surrounding China’s role in the world economy (not least from certain U.S. Congressmen), one can hardly blame them from keeping their heads below the parapet in the negotiations proper.

It is true, as Ambassador Schwab and DG Lamy have argued, that China has gained a lot from joining the WTO (although many of those gains would have been realized anyway as a result of unilaterally liberalizing their economy) and would stand to lose from a failed WTO. Similarly, China should be held to account for the commitments it made upon joining the WTO. But expecting China to take a more active role in the negotiations, and reverse their stance of the past five or so years, is a bit much. And, as they have proved on the currency issue, the Chinese won’t be bullied.

The “quiet diplomacy” to revive the round will likely continue, including at the IMF and World Bank shindigs later this month. But if a miracle occurs and the Doha round is concluded, it won’t be because of China’s efforts.

Rural Newspaper Calls for the President and the Senate to “Mind Their Business”

The Enid News and Eagle posted an opinion article last week on the new farm bill. Admittedly, it is a rural paper (based in Enid, Oklahoma) catering to a rural readership. Most of you will probably not have seen it. But I was struck by a number of passages.

Take this one, for starters:

“It seems the 2002 farm bill was one of the more popular farm bills to come out in the history of farm bills, according to Frank Lucas. The Third District representative has been traveling the state getting input from agricultural officials and farmers on what should be included in the 2007 version of the farm bill.”

Of course the 2002 Farm Bill was popular, Congressman, at least with the “agricultural officials and farmers” you are talking to. A significant backtrack from previous farm bills, payments to farmers under the 2002 Farm Bill are projected to average over US$20 billion per year from 2005 to 2007. Agriculture officials are hardly going to support huge cuts to the agriculture budget, either.

Or consider this gem:

“…the House committee knows the most about agriculture and has the most contact with the people it will affect…”

The Enid News and Eagle is suggesting that the “people it will affect” are farmers and ranchers. This is undeniably true. But this farm bill, like all the others before it, will also affect every taxpayer and consumer of food in the country, not to mention commodity producers abroad. (more here)

On the one hand, it seems fairly reasonable that as part of the 2007 Farm Bill preparations, the administration and House and Senate Committee Members are holding a series of hearings all over the country. But on the other, who shows up to those hearings? Is it the consumers and taxpayers who, while collectively shelling out billions of dollars every year to agricultural subsidies and paying over-market prices, shoulder relatively little burden as individuals? No. Most of them have jobs to go to and little incentive to harangue Congressmen and officials. Farmers, on the other hand, are relatively well organized and have large incentive to ask for more money (or, in their more modest moments, ‘just’ the status quo).

Finally, for good measure, the Enid News and Eagle proposes letting the House agriculture committee and the farmers have full and exclusive rights over the farm bill:

“While we encourage input from farmers and ranchers, we discourage a lot of input in the bill from the president and the Senate.”

I’m new to this country, but isn’t there supposed to be a system of checks and balances here? Why do these opinion writers assert that there is no role for the administration or the Senate in crafting a new farm bill? While I, too, think there should be “little input” from government in farm policy, I don’t restrict my skepticism to only one chamber and the president.

If you missed our forum today on the farm bill, you can watch it here within the next 24 to 48 hours.

Hat-tip to Keith Good for the tip on the Enid News and Eagle.

Middle Class Squeeze?

New Census Bureau numbers released today on income, poverty and health coverage in 2005 are bound to fuel charges that the poor are getting poorer while the middle class continues to be squeezed. See what 25 years of tax cuts for the rich, globalization, and declining union membership have caused? But a look at the numbers inside the report tells a different story.

If we define the middle class as households earning between $35,000 and $75,000 a year, the middle class in America remains a huge demographic group. According to the Census report, Table A-1, the middle class made up 33.3 percent of U.S. households in 2005. That share is indeed somewhat smaller than in 1980, when 38.2 percent of households earned between $35,000 and $75,000 a year in real (inflation-adjusted) 2005 dollars.

Aha, so the middle class really is shrinking if not exactly disappearing, the alarmists might respond. But the Census numbers also show that over the past 25 years, the share of U.S. households earning less than $35,000 a year has also shrunk, from 44.5 percent in 1980 to 38.4 percent in 2005. Meanwhile, the share of households earning more than $75,000 a year has jumped from 17.4 percent to 28.3 percent.

In other words, if the middle class in America has shrunk, it is only because so many formerly middle-class households have moved to the upper-income brackets, while a significant number of households previously in the lower brackets have moved up to the middle class and beyond.

The solid economic growth of the past two decades has indeed lifted all kinds of household boats. By the most basic measure of real household income, a broad swathe of Americans are better off than they were 25 years ago—thanks to growth fueled in good measure by lower marginal tax rates, expanding trade, and a more flexible domestic economy.

Cato Unbound - Migrating Toward National ID?

The current Cato Unbound, Mexicans in America, is the usual provocative and wide-ranging fare.  There’s no lack of issues - or passion - in the debate about immigration.

One item in the current discussion that piques my interest - indeed, concerns me - is the formative consensus that “internal enforcement” of the immigration laws is a good idea. 

University of Texas at Austin economics professor Stephen Trejo writes:

Given that most illegal immigrants come to the United States to work, why don’t we get serious about workplace enforcement? Retail stores are able to verify in a matter of seconds consumer credit cards used to make purchases. Why couldn’t a similar system be put in place to verify the Social Security numbers of employees before they are hired? …  I suspect that we could do much more to control illegal immigration by directing technology and other enforcement resources toward the workplace rather than toward our porous southern border.

Doug Massey, co-director of the Mexican Migration Project at the Office of Population Research, Princeton University, has interesting information and ideas for reform to which he would adjoin ”a simple employment verification program required of all employers to confirm the right to work.”

It does sound simple - until you step back and realize that the simple idea they’re talking about is giving the federal government the power to approve or reject every Americans’ job application.  Does anyone think that this power, once adopted - and the technology put in place to administer it - will be limited to immigration law enforcement?

To do this, all people - not just immigrants, all people - would have to be able to prove their identity to federal standards, likely using some kind of bullet-proof identity document (even more secure than current law requires).  That will soon be in place thanks to the REAL ID Act.  Once we’re all carrying a bullet-proof identity document, do you think that its use will be limited to proof of identity for new employees?

It’s easy to see how facile acceptance of internal immigration law enforcement adds weight to arguments for expanded government control and tracking of all citizens.  There are plenty of reasons to be concerned with internal enforcement, and the national ID almost certainly required to make that possible.  Many of them are discussed in my book, Identity Crisis: How Identification is Overused and Misunderstood.