Topic: Tax and Budget Policy

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.

A Damn Fine Health Care Proposal

The White House is sending out teasers regarding a health care proposal that President Bush will unveil in his (penultimate!) State of the Union address on Tuesday.  By design, such teasers leave out important details.  Yet they give the outlines of what could be a damn fine health care proposal.

The president is proposing to limit the currently unlimited tax break for employer-sponsored health insurance.  He’d also extend that newly limited tax break to people who don’t get coverage from an employer – in fact, he’d completely break the link between the tax break and employment.

That tax break is behind much of the inefficiency and inequity in America’s health care sector.  It encourages almost 200 million Americans to behave irresponsibly, which increases the cost of health care for themselves and everyone else.  Economists on the left and right have argued for limiting or eliminating it for decades.  The last president to propose such a limit was named Reagan.

It’s going to be a tough sell, of course.  The administration estimates that 20 percent of covered workers would face a higher tax burden, and those workers probably will object that their taxes would increase.  The fact that reducing government influence over people’s decisions is effectively a tax cut is a much harder point for most people to grasp.  Other opponents will scream that the proposal would destroy employer-based health insurance.  What those opponents actually mean, however, is that they don’t think workers should be free to choose where they purchase their health insurance.

I have criticisms of the proposal, too.  For example, I think we should do more to give workers ownership over the money that employers currently spend on health benefits.  (Mike Tanner and I lay out one way to do so in Healthy Competition: What’s Holding Back Health Care and How to Free It.)  Unless workers own those dollars, they might have to take a pay cut to exercise their new freedom to choose, which doesn’t seem like freedom at all.

Important details are still missing – details that will determine how helpful, complicated, and politically feasible the proposal will be.  I’ll withhold final judgment until I see the final product.  But at this point, it appears that President Bush is the only prominent politician who is taking health care reform seriously.

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.

Irony, in the Alanis Morissette Sense

Here’s a nice book-end to Chris Edwards’ recent post — and the flurry of controversy — about federal compensation reaching precisely double the national average: 

Tax Prof Blog (via Volokh) notes that federal employees owe $2.8 billion in taxes. Tax Prof lists and compares the “scofflaw” rates of different agencies and departments, with the U.S. Commission on Civil Rights coming in just shy of 10 percent.

But Tell Us What You Really Think of the NCLB, Matt

Matt Ladner, VP for research at the Arizona-based Goldwater Institute, has some harsh words for the No Child Left Behind Act:

The latest incarnation, in fact, represents yet another step in the long sad history of ineffectually throwing money at public schools. NCLB is headed for the ash-heap of failed education reforms. The only question at this point is how expensive of a failure it will become.

NEJM Reviews Medicare Meets Mephistopheles

This week’s issue of the New England Journal of Medicine carries a review of the Cato Institute’s latest health care book, Medicare Meets Mephistopheles by Cato adjunct scholar David A. Hyman. Reviewer Peter Jacobson of the University of Michigan School of Public Health writes:

Hyman’s bracing critique reflects the fact that neither Medicare’s problems nor the ascendancy of market-based approaches to solving them can be ignored any longer.

Medicare Meets Mephistopheles provides a good starting point for free-market advocates who are serious about preventing the federal government from imposing price controls on prescription drugs, or otherwise stealing from future generations.