Topic: Trade and Immigration

A Cautionary Tale on Negotiated vs. Unilateral Trade Liberalization

By
Sallie James

Many economists, including myself, take some convincing when it comes to the benefits of bilateral and regional trade agreements. I’m not as skeptical as the likes of, say, Rep. Ron Paul, who often votes against preferential and piecemeal trade liberalization legislation on the basis of it being “managed trade”  (his latest protest vote on that score was a “nay” on granting Russia permanent normal trade relations status).  But since the 1950s, when the work of Jacob Viner showed that when trade agreements cause the importing country to favor less-efficient producers (a phenomenon known as trade diversion), trade theory has pretty-much consistently shown a hierarchy of mechanisms for increasing commerce across borders: unilateral trade liberalization is best, followed by multilateral trade liberalization (although the current WTO round of trade negotiations is dead), and then regional or bilateral agreements. Most economists more-or-less subscribe to this hierarchy on the basis of pure economics, although we disagree on the extent to which political and practical concerns should trump the economic theory in order to harvest at least some benefits for consumers and taxpayers, who have had their wallets picked for decades if not centuries in the name of “leveling the playing field.” (In the interests of preserving appetites in anticipation of Thanksgiving, I will spare the readers further details on the esoteric and internecine squabbles between trade economists on this topic.)

In the early to mid-2000s, the Bush administration (followed by others) tried to turn this thinking on its head, arguing that bilateral negotiations can aid trade liberalization by (a) forcing the hand of foot-draggers, by scaring them into joining the fray and (b) setting up a series of trade blocs that subsequently could be joined together like a jigsaw puzzle (a process known as “competitive liberalization”, a term coined by Fred Bergsten at the Peterson Institute of International Economics). Die-hard unilateralists like Jagdish Bhagwati (a member of the Herbert A. Stiefel Center for Trade Policy Studies Advisory Board), instead cautioned of a “spaghetti bowl” of trade agreements. Preferential deals would cause extra burdens for customs authorities, they said, for example by giving rise to complicated and in some cases conflicting rules about deciding where a good comes from for the purposes of assigning tariff rates.

Economists and free trade advocates also worry about the effect that preferential deals have on multilateral trade negotiations. I saw this first-hand when I worked on the Doha Round in 2005-06. Many World Trade Organization members, particularly developing countries, receive preferential (i.e., lower) tariff rates on their exports to developed countries. They thus often raise concerns about non-discriminatory tariff cuts because it would mean their preferences were worth less (called “preference erosion,” in the jargon of trade negotiators).  You then see the somewhat perverse situation of developing countries arguing against tariff cuts in rich countries, or at least demanding compensation for it.

The latest example of the conflict between modes of liberalization – in this case, unilateral v. regional liberalization – comes from closer to home. The trade press is buzzing with the news that the Obama Administration has raised concerns about the efforts of some lawmakers to cut tariffs on certain footwear items (on the basis that we do not make them in the United States and therefore have no competitive interest in the market). These sorts of efforts happen regularly in the form of “miscellaneous tariff bills” (MTBs), usually with little fanfare given the uncontroversial politics of it, Republican concerns notwithstanding. Why would the administration object to limited tariff relief on goods not produced domestically? Because, as is typical among trade negotiators, they want to keep the tariffs in place as bargaining chips:

Alex Boian, director of trade policy at the Outdoor Industry Association (OIA), said in an interview that administration officials in private conversations have made clear their reservations relate to the fact that Vietnam is seeking a reduction in U.S. footwear tariffs in the context of the TPP talks. In the administration’s view, these tariff lines represent “prime negotiating leverage” with Vietnam in [the Trans-Pacific Partnership negotiations], Boian said. (emphasis added. Source: Inside U.S. Trade [paywall])

A few industry groups have raised a stink, pointing out that the tariff relief provided by the MTB is limited and temporary, so are unlikely to threaten the TPP. And procedurally, it is not clear if the administration even has the right to object to the MTB tariff breaks on this basis anyway. More broadly, I find myself sympathetic to the arguments of the American Apparel and Footwear Association, which in their letter to United States Trade Representative Ron Kirk, said:

…the objection that “Enactment would undermine existing U.S. trade preferences” creates  significant concerns.  In addition to the reasons outlined above, the basic premise of this objection is faulty. To extend the logic outlined in this objection, the current negotiations toward a TPP agreement would “undermine existing U.S. trade preferences” as would negotiations toward a Doha Round agreement at the World Trade Organization.

For that matter, under this logic, any new trade negotiation would “undermine existing U.S. trade preferences.” By making such an objection, the administration is essentially arguing that U.S. trade policy should be brought to a halt altogether. [emphasis added]

Indeed. When it comes to preferential trade deals, caveat emptor.

Topics: 
International Economics and Development, Trade and Immigration

Happy Imported Thanksgiving!

By
Simon Lester

From the establishment trade policy perspective, trade is all about jobs.  Hence, I wasn’t too surprised to see this blog post from the U.S. Trade Representative’s office, explaining how Thanksgiving helps the U.S. balance of trade.  They start by reassuring everyone that eating Thanksgiving foods is suitably patriotic in economic terms: “Chances are most … Thanksgiving food staples will be grown and raised here in America.”  But apparently it’s not enough that we are avoiding imports; we must also be exporting, because that creates jobs!  In this regard, they note the following figures for U.S. exports (2011 figures) of Thanksgiving fare:

– $520 million in fresh, frozen, whole or cut turkey

– $255 million of potatoes

– $19 million of fresh cranberries

– $952 million of apples

– $1.25 billion of wine

– $2 million of pumpkin seeds

– $183 million of pecans.

We here at Cato’s trade policy center have no objection to exports, but we really like imports as well.  So, with the help of research assistant Inu Barbee, I have put together some rough import figures for those same products:

– $30 million of fresh, frozen or processed turkey

– $857 million of fresh or frozen potatoes

– $50 million of fresh cranberries

– $133 million of apples

– $4.8 billion of wine

– $35 million of pumpkin seeds

– $287 million of pecans

To sum up:  Enjoy your Thanksgiving dinner, wherever it came from!

Topics: 
Trade and Immigration

The Politics of Procrastination—Russian Trade Edition

By
K. William Watson

The House of Representatives passed a bill today authorizing permanent normal trade relations (PNTR) status with Russia, by a vote of 365-43.  The bill repeals a cold war–era trade restriction that has prevented the United States from benefiting directly from Russia’s entry into the World Trade Organization last August (and Moldova’s entry in 2001).  It also adds a travel restriction on certain Russian officials involved in a particular incident a few years ago in which an anti-corruption activist died in a Russian jail.  There is no doubt the bill will pass the Senate in its current form.

It has been almost a year since Russia completed the negotiations necessary to be accepted into the WTO, after almost two decades of on-and-off diplomatic effort.  If PNTR with Russia could pass by a margin of 8-1, why did it take so long to get it through Congress?

The only answer I can offer is dishearteningly cynical.  The consensus among close observers is that the Republican House leadership delayed taking up the matter in a bid to pressure President Obama into more vocally supporting the bill, thereby alienating his Big Labor campaign allies—the only constituency that offered any opposition—and so they could look tougher than the president on foreign policy.  The president chose not to play that game and deflected the resulting scorn from a not-insignificant portion of the business community toward Congress.  Is it naïve of me to wish that elected officials would just vote for what they think is right instead of playing partisan games with our fortunes and freedoms?  Probably.

When Russia joined the WTO last August, I wrote that it was a good day for liberty everywhere but in the United States.  After some frustrating and needless delay, the American people are getting to join the party.  

Hа здоровье!

Topics: 
Trade and Immigration

Farm Subsidies Are Not A Partisan Issue, Episode 2153

By
Sallie James

Further evidence of the nonpartisan nature of support for agriculture subsidies emerged yesterday, when Bloomberg’s Alan Bjerga published a story showing that of the 10 biggest subsidy-receiving counties, 9 of them voted for Mitt Romney (friend of subsidized agriculture himself, it should be noted):

“Farmers vote Republican but they like Democratic programs,” said former Representative Charles Stenholm of Texas, who served as the top Democrat on the House Agriculture Committee while in office and is now a lobbyist. “They consider themselves to be conservative, and if something is important to them, then they don’t consider that liberal.”

…Farmers “tend to be more conservative” in general than other voters, supporting less regulation while still wanting to maintain a safety net for food and livestock producers, said Robert Stallman, president of the American Farm Bureau Federation, the biggest U.S. farmer group. Still, the farm vote shouldn’t be dismissed by the White House, he said. “That doesn’t mean there aren’t large numbers who supported” the president, he said.

Mr Stallman clearly knows which side his bread is buttered on, doesn’t he? No need to alienate the most powerful man in the free world just because of a few pesky votes!

This is not the first time Republicans have exhibited hypocrisy on farm subsidies. In the aftermath of the 2010 congressional elections, a few “tea party” Republicans voiced support for farm subsidies, even though they are a terrific (in both senses of the word) example of all that is wrong with the bloated federal government. But now we have evidence based on voting records that—as I guess is supposed to be the case in a democracy—our congressional “leaders” are really just giving the voters what they want.

And giving it to them good and hard.

Topics: 
Government and Politics, Tax and Budget Policy, Trade and Immigration

‘Going Big’ on Trade

By
Simon Lester

Reuters reports that Congressman Kevin Brady (R-TX), chairman of a key trade subcommittee in the House of Representatives, wants to see big things on trade in President Obama’s second term:

“We need to go big. We need to go smart. But above all we need to go on trade,” Brady said at an event organized by the Global Business Dialogue and the Washington law firm of McDermott Will & Emery.

Sounds great!  So what does he have in mind?

Brady outlined an agenda that includes many initiatives already being pursued by the Obama administration, including a regional free trade agreement in the Asia Pacific and possible free trade talks with the European Union.

Beyond that, he said, “America needs to lead again on trade” through projects such as a bilateral investment treaty with China and “an honest assessment” of ways to boost trade with two other major developing countries, Brazil and India.

He urged the Obama administration, in consultation with Congress, to weigh free trade talks with additional countries such as Egypt, Turkey and Georgia.

The United States should also consider bringing additional Latin America countries into the Trans-Pacific Partnership (TPP) agreement currently being negotiated with Mexico, Peru, Chile, Canada, Australia, New Zealand, Singapore, Vietnam, Malaysia and
Brunei, he said.

Well, all right, I guess that is something.  I’m not sure it actually counts as “free trade,” of course, because it involves preferential trade with certain countries, not free trade with all.  But it is something.

What would be better, in my view, is this:  Propose some new unilateral trade liberalization, to demonstrate to the world that the United States actually believes in free trade.  Here’s one suggestion for a place to start:  Cut farm subsidies!

Topics: 
International Economics and Development, Trade and Immigration

A Nation in Decline?

By
Randal O'Toole

Der Spiegel, the German magazine, argues that the recent election campaign is evidence that the United States is a nation in decline. Certainly the political system is having its problems, but Der Spiegel’s prescription of going further into debt to build high-speed trains and other European follies is a dubious way to fix those problems.

The real decline is in the Republican Party, which couldn’t manage to capture the White House or the Senate despite high unemployment and other economic problems. Given the economy, this election was the Republicans’ to lose, and lose it they did. They began shooting themselves in their collective feet early in the last decade when they made immigration a big issue, thus earning the enmity of Latinos, the nation’s fastest-growing and second-most important ethnic group.

Unfortunately, our two-party system too often limits voters to a choice between a social & fiscal liberal vs. a social & fiscal conservative (or, worse, a social & fiscal liberal vs. a social conservative & fiscal liberal). A large percentage of potential voters don’t feel comfortable in either party, and the libertarian side of me thinks, or hopes anyway, that many of those “independents” are socially liberal but fiscally conservative.

By focusing on fiscal issues, the tea parties seemed to provide an alternate route, one that set social issues aside. But, as Marian Tupy notes, too many Republican candidates made social issues a major part of their campaigns, thus alienating both Democrats and independents. Romney, who was neither a true fiscal nor social conservative, didn’t help by offering an inconsistent message, as often criticizing the president for cutting budgets, such as medicare and defense, as for spending money.

So the next two years look to be the same as the last two: Democrats in the White House and controlling the Senate while Republicans hold the House. Does that mean more gridlock, with Republicans opposing any tax increases and Democrats opposing any budget cuts?

In the face of a fiscal cliff–meaning automatic budget cuts and tax increases if Congress doesn’t find another resolution–Obama hopes for a Grand Bargain in which Republicans accept some modest tax increases in exchange for some modest budget cuts. However, I suspect Republicans are immediately going to regroup for 2014 and 2016, and won’t want to commit themselves to such a bargain. Moreover, most of the push against a Grand Bargain is coming from liberals, not conservatives. So I suspect we will be seeing two more years of gridlock.

Take my issue, transportation, which Congress has to deal with again in 2014, the year the 2012 transportation bill expires. What would a Grand Bargain look like for reauthorization of the gas tax and the spending of those tax revenues? A five-cent increase in gas taxes in exchange for cuts in some of the worst examples of pork? It doesn’t seem likely; increased gas taxes would just feed the pork barrel, and any cuts in pork would probably be restored in annual appropriations. Fiscal conservatives have nothing to gain by supporting such a Grand Bargain.

Does that mean the U.S. is in decline, as Der Spiegel says? Not necessarily. Elections today are no more contentious than they were between 1876 and 1900, when several presidential elections were decided by less than a percent of the vote and at least two of the electoral college winners lost the popular vote. Politics then were dirtier, or at least as dirty, as any time in American history.

The real threat to the future of the country is not political polarization but the huge fiscal hole Congress has dug, which means the real question is whether our economy can recover enough to ever fill up that hole. The standard free-market answer is that the uncertainty created by Obama’s overregulation and inconsistent attitudes towards business will prevent such a recovery. We can only hope that this is wrong.

If they are to participate in this recovery, Republicans must drop the emphasis on social issues (which aren’t really decided at the national level anyway) and their hostility towards immigrants. I hate to think that America’s future depends on Republicans coming to their collective senses, but the alternative of Democrats suddenly becoming fiscally conservative seems even less likely.

Topics: 
Energy and Environment, Government and Politics, Tax and Budget Policy, Trade and Immigration

‘Un-American’ Trade Disputes

By
Simon Lester

Borrowing the title from a Stephen Colbert segment, this blog post is going to be about trade disputes not involving America. Given recent trade rhetoric, you might think that all trade disputes are about the U.S. and China, but that’s not the case. Other countries have disputes, too, and some of them are very interesting, getting into the core issue of what international trade rules should be about.

First up is a complaint by Canada and Norway against the EU related to a ban on “seal products.”  According to the EU regulation at issue, seal products means “all products, either processed or unprocessed, deriving or obtained from seals, including meat, oil, blubber, organs, raw fur skins and fur skins, tanned or dressed, including fur skins assembled in plates, crosses and similar forms, and articles made from fur skins.”  Under the regulation, with limited exceptions, seal products may not be imported or sold in the EU.

Canada and Norway have a significant seal harvest, and are concerned about lost sales in the EU market (as well as the spread of the EU policy to other countries).  The main legal claims (a very rough version, anyway) are that the EU Regulation discriminates against Canadian/Norwegian seal products in favor of competing EU products, and that the regulation is more trade-restrictive than necessary.

This case helps illustrate the scope of international trade rules.  Writing about the case a couple years ago, blogger Matt Yglesias wondered

why the seal issue is being handled as a trade policy matter in the first place. In other words, why ban the import of seal products rather than simply ban selling seal products? Clearly the EU’s concern here is with the existence of a commercial market for dead seals rather than with the transnational flow of seals per se.

In fact, the law involves both an import ban and a general sales ban.  (Why separately ban imports when you have already banned sales?  Most likely for administrative convenience.  Importation is a good place to catch these things.)  But regardless, even if the law had not mentioned imports, a general sales ban could have been challenged at the WTO.  This is an important point that Yglesias doesn’t seem to realize, and if he missed this, I suspect others might miss it as well.  In what way are general product bans covered by WTO rules?  For one thing, even facially neutral measures may in fact be cases of disguised protectionism, having a disparate impact on foreign products.  For another, as noted, there are rules that prohibit domestic laws from being more trade restrictive than necessary.  Such rules go beyond simple protectionism, and provide another way to challenge a general product ban.  Do some of these rules intrude too far into domestic affairs?  There is lot of debate about that in trade circles.

A second case has been brought by Ukraine against Australia, involving Australia’s “plain packaging” rules for cigarettes (the Dominican Republic and Honduras are likely to join the case), which require cigarettes to be sold in plain packages with no logos and a uniform font for the brand name.  Here, there are the same trade arguments as in the seal products case:  the measure is discriminatory, and more trade-restrictive than necessary.  Also, there are claims that plain packaging interferes with the tobacco companies’ trademarks, in violation of the WTO’s rules on intellectual property.

I thought it was worth mentioning these cases here for the following reason.  If international trade rules can be used to challenge any government law or regulation that affects trade, even if the measure is facially non-discriminatory, these international rules are going to be quite broad, and could have an impact on much, if not all, domestic governing.  It may be worth thinking about these issues to make sure we properly balance international governance and domestic policymaking, and these cases provide a good opportunity to do so.  (I wrote more about this in an op-ed for The Jurist on the plain packaging case.)  The cases are at an early stage, and it’s not clear how they will turn out.  But the mere fact that they are being tried in an international court is noteworthy.

One final point:  Just to be clear, I don’t mean to defend the laws at issue—the seal products ban and plain packaging for cigarettes—as a matter of policy.  Rather, I’m just focusing on whether they should be found in violation of international trade rules.

Topics: 
International Economics and Development, Trade and Immigration

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