Topic: Trade and Immigration

On Onions, Oil, and ‘Speculators’

Politicians who blame “speculators” in futures markets for the run up in oil prices — such as Sen. Byron Dorgan (D-N.D.) writing in this morning’s USAToday — should consider a lesson from the lowly onion.

Onions are one of the few commodities in the United States for which there are no futures markets, according to an item published Friday in Fortune magazine. (Futures markets allow the sale of commodities for set prices at future dates.) It seems that in the late 1950s domestic onion producers blamed those same speculators in futures markets for driving onion prices DOWN. They successfully lobbied Congress to ban all futures trading in onions, a ban that is still in place a half century later.

So has the absence of futures-market speculation kept onion prices low and stable? Quite the contrary. According to Fortune:

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics’ belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.

Sen. Dorgan and his allies will need to find someone else to blame for volitale and rising oil prices.

Will Sanctions Save Zimbabwe?

Events of the past few weeks have made it clear that President Robert Mugabe of Zimbabwe is a dictator and a bully who presides over a sham democracy epitomized by today’s mock “election.” But does that sad fact require or even justify imposing sanctions against that already tortured southern African country?

European Union leaders are already talking tough about withdrawing their ambassadors. Meanwhile, the UN Security Council plans to discuss new sanctions against Zimbabwe as early as next week.

I share the dismay with Mugabe’s thuggery and mismanagement of the economy, but count me skeptical that trade sanctions, oil embargoes and other economic reprisals would achieve anything positive.

If 165,000 percent inflation, widespread hunger, and mass shortages and unemployment have not undermined Mugabe’s government, Western sanctions are probably not going to make a crucial difference. Zimbabwe’s president and his sycophants will continue to enjoy their palatial homes, catered meals and chauffeured limos. Sanctions would only deepen the suffering of their unfortunate subjects. As our research at Cato has shown, economic sanctions almost never work.

Another complication is that Mugabe’s government is not unique. According to Freedom House, Zimbabwe’s suppression of civil and political liberties is no worse than 15 other countries, including China, Belarus, and Saudi Arabia. A total of 44 other countries share with Zimbabwe the label of “Not Free.” Should the West aim sanctions at all of those countries, too, or is Zimbabwe to be singled out because, by a fluke, the opposition actually came close to winning a rigged election?

The ongoing tragedy in Zimbabwe will probably not end until that country’s closest neighbors, including South Africa, intervene aggressively, or Mugabe himself departs this world to meet his maker.

This Can’t Be Good

France has reportedly called an extraordinary meeting of European Union trade ministers to discuss EU trade negotiating strategy in the World Trade Organization’s floundering Doha round of trade talks.

France takes over the EU’s rotating presidency on 1st July for six months, inconvenient timing considering that the WTO’s Director-General Pascal Lamy has called a July 21st meeting of around 30 trade ministers from key countries in a last-ditch effort to cobble together a deal. The political calendar (a U.S. presidential election in November 2008, followed by a brand-new European Commission and Indian elections in 2009) means that no deal in July likely means no deal until 2010.

France has been a long-standing irritant to the Doha round and President Sarkozy, despite his sometimes-promising rhetoric, has not been the free-market reformer we might have hoped for. I wrote previously on his hostility towards the Doha round, and he has reportedly seized on Ireland’s rejection of the Lisbon treaty as a signal that Europe’s strategy in the WTO needs to change.

Of course, a liberalizing result in the Doha round is not necessary for lower trade barriers (see here and here, for example), bit it certainly would be welcome.

Has Trade Saved Us from Recession?

Good news on the economy, sort of. The Commerce Department reported this morning that it has revised the economy’s growth rate in the first quarter of 2008 to 1.0 percent. That is slightly higher than the government’s earlier two estimates and it means we have probably dodged a technical recession, at least for the first half of this year.

Politicians on the campaign trail should take note of the report for a couple of reasons. First, let’s not exaggerate the U.S. economy’s current difficulties. Politicians love a full-blown crisis because it can be used to justify all sorts of regulatory and spending programs. This is not a crisis (and government “stimulus” efforts typically have little effect, anyway).

Second, they should give thanks to America’s more globalized economy for smoothing the business cycle and possibly saving us from full-blown recession this time around. Trade is one of the bright spots of the latest report. While the housing sector has contracted by a quarter, shaving more than a percentage point from overall GDP growth, exports have been going gangbusters. Exports rose by more than 5 percent in the first quarter on an annual basis, offsetting about two-thirds of the negative effect of the housing market.

As I wrote in a Cato Free Trade Bulletin earlier this year on the subject:

[E]xpanding trade and globalization have helped to moderate swings in national output by blessing us with a more diversified and flexible economy. Exports can take up slack when domestic demand sags, and imports can satisfy demand when domestic productive capacity is reaching its short-term limits. … A weakening dollar has helped to boost exports and earnings abroad, but the main driver of success overseas has been strong growth and lower trade barriers outside the United States.

Instead of blaming trade for our current economic slowdown, politicians should be thankful that trade has spared us from something worse.

U.S. Sugar Program Costs Another $1.75 Billion

The state of Florida announced yesterday that it will pay $1.75 billion to buy out the nation’s largest sugar producer and 300 square miles of land it owns north of the environmentally sensitive Florida Everglades. Although most news stories ignored the connection, the deal is yet another cost Americans continue to pay for our misguided agricultural programs.

The company selling the land, United States Sugar, has for decades benefited from a federal program that guarantees a minimum price for United States Sugar’s crop through a system of loan guarantees and strict import quotas. This means American families and sugar-consuming industries are typically paying two to three times the world price for sugar.

The sugar program also imposes damage on the environment, which motivated yesterday’s announcement. Like other farm programs, the sugar program encourages over-production. In the case of United States Sugar, that means the extraction of fresh water that would otherwise flow naturally into the Everglades, and the over-application of fertilizers that artificially raise the phosphorous content of the runoff, causing a sharp decline in periphyton, such as algae, that supports bird and other animal life in the Everglades. [For more about the environmental damage caused by U.S. farm programs, see my 2005 article published by the Property and Environment Research Center.]

In large part because of the damage caused by subsidized domestic sugar producers, Congress allocated $8 billion in 2000 for cleaning up the Everglades. Florida’s purchase of United States Sugar was just the latest installment in an ongoing clean-up operation.

Of course, Congress could have avoided much of this mess years ago by repealing the sugar program. If Americans had been free to buy sugar at world prices, our domestic sugar industry would have been smaller and more efficient with a much smaller environmental footprint. Converting the sugar-cane fields to more environmentally friendly uses would have been much less expensive because the annual subsidies would not have been capitalized into the value of the land.

When the Democrats took power in Congress in 2007, they pledged themselves to be in favor of reform, fiscal responsibility, and protection of the environment. Yet the new farm bill that Democrats voting overwhelmingly in favor of last month, and that their likely presidential candidate Barack Obama endorsed, strikes out on all three counts.

The Unmanageability of Managed Trade

Last week the U.S. International Trade Committee gave the green light to impose countervailing (anti-subsidy) and antidumping duties on imports of circular welded carbon steel pipe from China. The decision was noteworthy because it represents the first affirmative finding of injurious subsidization against China since the Bush administration lifted the informal 22-year old moratorium on using the CVD law against China. (The coated paper case last year was the first CVD case against China initiated post-moratorium, but ultimately the ITC did not find the domestic industry to be injured in that case, and thus no duties were imposed).

But the steel pipe case is noteworthy for another reason. It perfectly exemplifies the absurdity of our trade remedy laws. Under the antidumping and countervailing duty laws, consumers of the subject merchandise have no formal standing in the process. Under the statutes, the ITC is not permitted to consider the impact of prospective duties on these interests, nor is it required to even hear arguments from consuming interests.

Now, let’s juxtapose economic and business reality on this trade remedy law setup.

In 2001, the United States imposed antidumping duties on imports from several countries (including China) of hot-rolled carbon steel. (Despite record revenues, profits, and the unprecedented market power of U.S. steel producers, the ITC voted to continue those 2001 antidumping orders for another five years in 2007.)

Hot-rolled steel is a commodity product from which many different kinds of steel products are made, including circular welded carbon steel pipe. Before the 2001 order was imposed, Chinese producers could sell hot-rolled steel to Chinese and American producers of downstream steel products. After the antidumping order was imposed in 2001, the supply of hot-rolled steel for Chinese producers of downstream products – like circular welded carbon steel pipe – increased, and the price declined. Meanwhile, the supply of hot-rolled available to U.S. pipe producers, declined, and the price increased. What to make of all this?

Well for one thing, it’s not only plausible, but probable, that the reason U.S. pipe producers may be struggling is that access to their most important material input is stunted relative to their Chinese competitors’. The price of hot-rolled steel in the United States has been at record highs over the past couple years. And the antidumping order against hot-rolled is a tax on U.S. pipe producers and a subsidy to Chinese pipe producers.

If the antidumping law included a consumer interest provision (see “Mandate a Public Interest Test” on page 33), where the impact of prospective antidumping measures on downstream users and, indeed, on the economy as a whole was considered, there would be less demand for protectionist measures to compensate for the effects of protectionist measures.