Topic: Trade and Immigration

Carter, Reagan and the Poor

My colleague Tom Firey is right on the mark with his nearby blog post dissecting a recent Paul Krugman column on the supposed myths of the Reagan economic record. Allow me to pile on.

Krugman wrote in a January 21 column for the New York Times that the economic record of President Reagan was one of failure. The Reagan years did encompass a recovery from a steep recession, he acknowledges, but then, “By the late 1980s, middle-class incomes were barely higher than they had been a decade before — and the poverty rate had actually risen.”

Let’s bore in on the poverty numbers and the operative phrase “a decade before.”

As everyone knows, Reagan was in office for exactly eight years, from January 1981 to January 1989. To compare his last full year in office (1988) to “a decade before” would take us back to 1978, a period that would include the last two years of Jimmy Carter’s single term. Those two years, it turns out, were absolutely brutal for America’s poor.

The last half of Carter’s tenure was marked by double digit inflation, record high interest rates, and a sputtering economy that fell into recession in the first half of 1980. That stagflationary mix caused the poverty numbers to soar. From 1978 to 1980, according to the Census Bureau, the number of Americans living below the poverty line rose by 4.8 million and the poverty rate jumped from 11.4 to 13.0 percent.

The poverty rate continued to climb under Reagan as the nation labored through a steep recession in 1981-82, a recession largely caused by the Federal Reserve Board’s efforts to slay the Carter-era inflation. After peaking at 15.2 percent in 1983, the rate declined steadily through the rest of Reagan’s time in office. By his last year in office, the poverty rate was exactly the same—13 percent—as it was in Carter’s last year in office. That’s nothing to crow about, but neither is it an increase or an obvious sign of failure.

To compare the last year of Reagan’s presidency to 1978 has the effect of saddling the Reagan record with the last half of the Carter presidency—a neat statistical trick worthy of the current presidential campaign season.

Freudian Slip by the WaPo?

A telling penultimate sentence in an article Friday in the Washington Post (online) about proposed changes (and none of them good) to U.S. sugar policy.

But the top Senate Republican in the negotiations, Saxby Chambliss (Ga.), represents a major Savannah refinery that could be hurt by the proposed agreement, sources said. (emphasis mine)

And here I was thinking that Sen. Chambliss represents the state of Georgia.

Economic Retardant Package

Whether you have faith that a blast of demand-side fiscal stimulus can jump start the economy or not, policymakers are moving with dispatch to rig up a defibrillator. 

A couple hours ago, President Bush announced his support for a $140 billion “tax relief” package (scare quotes because, as Chris Edwards points out, we’re talking about money borrowed by the Feds on our and our children’s credit to be repaid by us and our children with interest), which amounts to about 1 percent of GDP.

The president is leaving to Congress the details of which citizens in which income groups get checks and how much. Chances are good that the Democratic Congress will produce a plan to get bigger checks into the hands of those who are most likely to spend it all and quickly — lower- and middle-income Americans. But if getting lower- and middle-income Americans to spend more is the key to reversing our slowing economy, why is the next big item on the House Ways and Means Committee’s docket antagonistic trade legislation that would make Chinese-produced goods more expensive? The committee is reportedly planning to put together a “China Bill” from the dozens of pieces of legislation introduced in the first session, including bills aimed at Chinese subsidization, dumping, and currency misalignment.

Think about it. Americans spent about $325 billion on imports from China in 2007 (actually, that figure is the customs value at the U.S. port, so U.S. consumers probably spent 10 to 20 percent more than that after factoring in the transportation, selling, and administrative expenses and profits reflected in the final prices). Lower- and middle-income Americans likely accounted for the majority of that spending.

Since the Chinese yuan was unhitched from a pure dollar peg in July 2005, it has appreciated against the dollar by almost 15 percent. Theory suggests that U.S. imports should decline in light of the higher relative prices to U.S. consumers, but they haven’t. Between July 2005 and July 2007, the yuan appreciated by about 10 percent against the dollar, yet imports from China increased by 36 percent between January-July 2005 and January-July 2007. (This paper goes into more detail about currency values and trade flows).

If, in 2008, the yuan increases in value 25 percent against the dollar (which is what many in Congress would like to see and is the object of some of the pending legislation) and U.S. demand is identical to 2007 (no new demand and old demand remains unresponsive to higher Chinese prices), then imports from China would total about $406 billion. In other words, $80 billion ($406 – $325) of the $140 billion “tax relief” package would go down the tubes, not supporting an ounce of additional U.S. economic activity.

So, is Congress not working at cross-purposes when it doles out cash to Americans to support economic activity and then limits the activity that can be supported by pursuing other policies that devalue that cash? Some might say that spending money on imported consumables doesn’t support U.S. economic activity, but they would be wrong. There is plenty of U.S. value-added in an import purchased on American retail shelves AND some percentage of the revenue that goes to China will be devoted to purchasing U.S. exports.

Perhaps the slowing U.S. economy juxtaposed against surging U.S. exports to a growing world economy will give Congress a fresh perspective on the benefits of trade.

Let Them Go Barefooted

Just about every American needs to buy socks every year, while a relatively tiny number of U.S. workers actually MAKE socks for a living. Yet the Bush administration may decide by this Friday whether to sock it to the many for the temporary benefit of one small and dwindling industry.

Under a provision of the Central American Free Trade Agreement approved by Congress in 2005, the Bush administration is weighing whether to impose special duties on socks imported from Honduras. According to today’s Wall Street Journal, the move would placate a particular lawmaker in Alabama with several sock factories in his district and a few other, mostly southern lawmakers whose votes may be necessary for upcoming trade deals the administration wants.

Has U.S. trade policy come to this? For the sake of a domestic sock industry that, by its own count, employs only 20,000 workers, the U.S. government would impose a temporary 13.5 percent tariff on the 8.3 percent of imported socks that come from the small neighboring democracy of Honduras—a country that entered into a free trade agreement with the United States only two years ago.

By design, the tariff would mean higher sock prices for the 300 million or so Americans who buy and wear socks. And the sock tax would fall disproportionately on lower-income families, who spend a higher share of their income on such staples as food and clothing.

The Bush administration should forget nose counting for future trade agreements if gathering votes means raising trade taxes on low-income Americans. If the administration wants to support free trade, it should resist any calls for higher tariffs.

Wannabe Software and Movie Pirates: Hold Your Fire

A story from the Associated Press today suggests that WTO-sanctioned piracy is still a way off. Antiguan Finance Minister Errol Cort arrives in Washington today to discuss the internet gambling dispute with U.S. Trade Representative Susan Schwab, in hope of resolving the case.

Last month I reported that a WTO arbitration panel had agreed with Antigua that the U.S. restrictions on gambling over the internet entitled the Antiguans to retaliation – in this case by suspending its obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) to protect U.S. trademarks and copyrights, as well as suspending market access for some U.S. services firms. Antigua has long maintained that retaliation is not its preferred option, and would rather negotiate with the Americans to allow regulated access to the U.S. internet gambling market.

Antigua has strongly rejected the WTO arbitrators’ decision about the level of damages – a decision that is made especially controversial given that one of the three panelists dissented from the opinion, a rare occurrence in WTO jurisprudence, and by their own admission that they were on “shaky grounds” in determining the level of damages. According to Antigua, by basing their analysis on the “most likely scenario of compliance” by the United States rather than the export opportunities foregone, the arbitrators were showing unfair sympathy to the American case. The Americans were pleased that the $21 million in annual damages was well below the figure sought by Antigua ($3.4 billion), but expressed concern over the form of retaliation authorized. The United States had originally argued that their restrictions were worth only $500,000 in damages.

Notwithstanding the back-and-forth over the amount of sanctions, a couple of problems remain. First, who is to say how much it is worth to, say, download illegally a new CD or movie. Is it equivalent to the market value of buying a legal copy of the material? Or is it worth the cost of the download itself (less than a penny, I imagine). That is important because the WTO would limit Antigua to $21 million fairly strictly, and the U.S., under instruction from Hollywood and the software industry, would be expected to pounce if they saw the limit violated. There is also the question of whether Antigua would be able to export the fruits of its copyright violation to other countries and “earn” the $21 million that way.

While this is not the first time that the WTO has sanctioned violating intellectual property protections by suspending obligations under (that first came in March 2000, when the WTO gave Ecuador permission to suspend TRIPS obligations to the tune of $201 million in their dispute over European banana tariffs), the authorization has never been “actioned.” And, if the U.S. comes to its senses and begins to allow its citizens to gamble online freely, this case may not bring that to fruition either.

A Refreshing Dose of Antidumping Heresy

Arguably the most sacred text in U.S. trade policy scripture is the antidumping law. Over the years, congressional support for a tough antidumping regime has been broad, bipartisan, and nearly absolute. Any member tempted to challenge the sanctity of the antidumping status quo and question whether it wasn’t too rigid, too unfair, too offensive, or too anachronistic would be advised to veil his weakness lest he be emblazoned with a scarlet “H” (for heretic).

That is why a recent letter from ranking Republicans on Ways and Means and its trade subcommittee (Jim McCrery of Louisiana and Wally Herger of California, respectively) to USTR Susan Schwab is more than first meets the eye. It may constitute a welcome schism in the Church of the Holy Trade Remedy Law.

While the letter is generally about the Doha Round, offering the congressmen’s opinions about the vital components of a final Doha agreement (should one ever come to fruition), it breaks new ground in the way it links the U.S. negotiating positions on agriculture, NAMA (non-agricultural market access – or industrial tariff liberalization), services liberalization, and rules (the most prominent topic of which is antidumping). For the first time in public—to my recollection, at least—members of the congressional committee with oversight of trade policy acknowledge that the (strident, unrelenting, congressionally-mandated) U.S. position on antidumping might be too costly.

Since July 2004, U.S. exporters have faced more AD cases abroad than U.S. domestic industries have brought against imports here, so any final result on [the] [R]ules [negotiations] must address the needs of our companies injured by dumping or subsidization but cannot hamstring our vulnerable exporters. A balanced rules outcome would ensure that the United States is not required to sacrifice ambitious market access provisions in agriculture, NAMA, and services.

By “balanced rules outcome,” the congressmen mean one that takes into account the interests of U.S. exporters that are subject or could be subject to foreign antidumping actions, as well as U.S. import-users (55% of U.S. imports in 2006 were “intermediate goods” – inputs used by U.S. manufacturers in their own production processes), who are hurt by antidumping restrictions. And, also, by “balanced rules outcome,” they mean that the cost of a defensive agenda with respect to antidumping reform is necessarily limiting progress on the offensive agenda of opening foreign markets to U.S. exporters.

This is a linkage we have been making for quite some time. It is a positive sign that members of Congress are connecting the same dots. Perhaps this thesis should be nailed to a wall in the Capitol Building.

Ethanol Program Milks Consumers Dry

Have you noticed how the price of milk has shot up in the past year? A big chunk of the blame lies with Congress and the ethanol program.

In its effort to promote the fantasy known as “energy independence,” the U.S. Congress favors the ethanol industry with a 51-cent-per-gallon exemption from the federal gasoline tax, and a 54-cent-per-gallon tariff on imported ethanol. By artificially stimulating the domestic ethanol industry, the program has created an insatiable demand for corn, driving up feed grain costs for dairy farmers, leading to higher prices for milk.

I’ve often disagreed with Sen. Chuck Schumer (D-N.Y.) on trade issues, especially his threat to slap tariffs on imports from China, but on this issue, the senator has positioned himself as the American consumer’s best friend. According to a story this week in the New York Daily News:

“Ethanol has increased the average American’s grocery bill $47 since July,” said Sen. Chuck Schumer, citing figures from Iowa State University.

Schumer (D-N.Y.) is pushing for an immediate end to the 54-cent-per-gallon tariff on ethanol imports as a way to increase the supply of the federally mandated fuel additive, reduce pressure on the corn market and bring down milk prices.

“Bring the cheaper ethanol in, reduce the price of corn, and then reduce the price of milk,” he said.

The senator is on to something. While were at it, let’s eliminate remaining U.S. tariffs on imported shoes, clothing, sugar, rice, cheese and, yes, milk.