Topic: Trade and Immigration

Which Part of “Not Green Box” Does the USDA Not Understand?

After a long wait, the United States finally notified the other members of the World Trade Organization of its spending on agricultural programs today. Although timely notification is supposedly a key requirement (and benefit) of the WTO, the U.S. had left members in the dark as to the true nature and extent of its farm subsidies since 2004, and that notification covered only the years up to 2001.

Today’s notification asserts that U.S. spending on so-called “Amber-box” domestic support (that which is linked to production and/or prices of agricultural commodities, and thus is the most market-distorting) was well below its limit of $19.1 billion in every year between 2002-2005 (the period covered by the latest notification). However, sources tell me that the administration admitted in a telephone press conference today that direct payments were classified as “green box” (spending which is at most minimally trade-distorting and therefore not subject to reduction commitments) in their calculations, in direct contravention of a 2005 WTO Appellate Body ruling on U.S. Cotton programs, which stated (at para. 342) “[P]roduction flexibility contract payments and direct payments … are not green box measures exempt from the reduction commitments by virtue of Annex 2 of the Agreement on Agriculture.” (my emphasis)

Seems pretty clear to me.

In other words, if direct payments are properly classified as amber box measures, the United States’ spending might look very different, and may not be below the legal ceiling after all, especially in years 2004 and 2005 (see more here). Members of Congress currently writing a new farm bill might want to keep the threat of WTO litigation (including pending challenges by Canada and Brazil) in mind.

Trade Telltale

Since the “Great Compromise” on trade policy between the administration and Congress last spring, I have been outspokenly skeptical about prospects for further trade liberalization before 2009.  In that deal, the administration bowed to the wishes of Congressional Democrats to include enforceable labor and environmental provisions in pending and prospective trade agreements. 

For that accommodation, the Congressional leadership was supposed to help secure passage of the pending bilateral agreements with Peru, Panama, Colombia, and Korea.  Almost immediately, though, the leadership voiced additional concerns about Colombia and Korea, which are widely considered to be very long-shots at best.

But after visiting Peru last month and getting his own fingerprints on the final details of the deal, House Ways and Means Committee Chairman Charles Rangel of New York returned home and voiced his support for the agreement.  And, it appears, there is support for the Peru agreement among members of Ways and Means and Senate Finance.  Several Congressional staffers have suggested that if the Peru vote garners relatively strong Democratic support, there may be hope for the others.

The problem, however, is that the House Democratic Caucus may not be prepared to follow.  Remember all of those freshman Democrats who campaigned in ’06 on an anti-trade message?  It seems they won’t go quietly into the night.  Whereas the veteran Democratic trade leadership may be inclined to use protectionist rhetoric to shift the terms of the trade debate in their favor, the new blood in their caucus is more inclined to believe it.  In that regard, the Rangels and Levins and Baucuses on the Hill (guys that probably know better) have helped create a potential Frankenstein.

On Friday, rank and file Democrats addressed a letter ($) to their Caucus Chairman, Rahm Emanuel of Illinois, asking that the next caucus meeting be devoted to the U.S.-Peru Agreement.  The letter notes that there isn’t much support for the agreement among Democrats and that the Ways and Means Committee markup scheduled for tomorrow will prove divisive.

There were only seven signatories to the letter and it is unclear how representative it is of Democratic sentiments.  But if the topic proves divisive and rancorous – a development Nancy Pelosi wants to avoid – it will be interesting to see which side the House Speaker chooses to rein in.  The outcome of this potential impasse will tell much about the direction Democrats want to go on trade.

The True Leaders of Trade Liberalization

A great article today [subscription required] in the Financial Times reminds us that business deals, and not formally negotiated trade agreements, are driving globalization.

That’s not to say that a good outcome on the Doha round wouldn’t be welcomed (and things are looking up on that score). But preferential trade agreements are often not the historic breakthroughs that politicians make them out to be. They make great photo-ops, though.

Senate Now Debating the Manner in Which to Fleece You

After a disastrous result in the House of Representatives, the farm bill debate has moved on to the Senate, where the main conflict is about how to provide assistance to farmers. Senator Max Baucus (D, MT), who sits on the Agriculture Committe but also holds the purse strings as Chairman of the Senate Finance Committee, favors a permanent weather-related disaster relief fund alongside more “traditional” farm subsidies. The Chairman of the Senate Agriculture Committee, Tom Harkin (D, IA) prefers government subsidies based on farm revenue rather than commodity prices, and more spending on “renewable fuels” and conservation of farmlands.

Sen. Harkin wants about $10 billion dollars over the amount currently slated for farm programs to pay for his pet projects, but Sen. Baucus has made it clear that if Sen. Harkin wants more money, then he has to dance somewhat to Mr. Baucus’ tune. Sen. Harkin has in recent days appeared more open to a “modest” permanent disaster-assistance program if it means he gets his money (see here). Something tells me that Sen. Harkin’s definition of “modest” might be different to mine. Nor am I convinced that a permanent disaster relief trust fund would prevent Congress from approving extra disaster funds along the way.

The administration has issued a veto threat, but on ominous grounds. For example, the administration does not like the tax package that the House approved to pay for extra money for food stamps and sees the House income cap of $1 million dollars annual adjusted gross income as an insufficiently tight means test. As well they might, because it would affect only 7,000 farmers.

The veto threat is ominous because (a) it is based on things that are minimal and easily fixed relative to the entire package itself and (b) President Bush passed the similar 2002 farm bill without too much wailing and gnashing of teeth. At no point has the administration seriously questioned the rationale for these programs. While the President may have little to lose this time by vetoing the thing, Secretary of Agriculture Mike Johanns is reportedly seeking the Senate seat vacated by Sen. Chuck Hagel in Nebraska in 2008. Secretary Johanns has pushed strongly for reforms of farm programs until now, but presumably he would not want to campaign after being behind a farm bill veto.

Here’s an idea: instead of spreading the love around to more farmers (like the $1.6 billion in extra spending for fruit and vegetable growers who have traditionally missed out on largess), tinkering with the income limit and changing the method by which we give money to farmers, how about we scrap the whole thing altogether? See here and here for starters.

Fred Thompson’s Questionable Views on U.S.-China Trade

Fred Thompson’s relatively late entry into the presidential race has left people scrambling to discern his views on a range of topics from social issues to trade with China. I’ll leave it to others of probe his position on the former, but I came across something this week on the latter that is not encouraging for those of us who support free trade.

Two years ago, the former Tennessee senator was one of 11 commissioners to approve and sign the “2005 Report to Congress of the U.S.-China Economic and Security Review Commission.” The commission was established by Congress in 2000 to hold hearings and write reports on the implications of America’s growing trade with China.

Americans are right to cast a sober eye toward China’s foreign policy intentions and human rights record, but the commission also dabbles in the worst sort of economic populism toward U.S.-China trade. Among the questionable assertions in its 2005 report:

China’s “active participation in the global economy … is resulting in the movement of jobs, especially manufacturing jobs but increasingly service jobs as well, from the United States to China and other countries offering higher rates of return on capital” (p.3).

“U.S. producers of advanced technology products are also subject to the growing pressures posed by China. In 2004, the U.S. trade deficit in advanced technology products with China grew to $36.3 billion” (p. 4).

“The opening of the Chinese, Indian, and former Soviet bloc economies has led to more than a doubling of the global market’s work force and likely will put downward pressure on U.S. wages for workers at all levels, including higher levels of the wage scale. Mobile capital and technology flows accelerate this trend” (p. 5).

“Congress should consider imposing an immediate, across-the-board tariff on China’s imports at the level determined necessary to gain prompt action by China to strengthen significantly the value of the RMB [its currency]. The United States can justify such an action under WTO Article XXI, which allows members to take necessary actions to protect their national security. China’s undervalued currency has contributed to a loss of U.S. manufacturing, which is a national security concern for the United States” (p. 14).

Cato’s Center for Trade Policy Studies has systematically addressed economic concerns about U.S.-China trade at our web site, but here’s the crib sheet:

U.S. job losses from trade with China have been small and have been more than offset by jobs created in sectors that do not compete directly with China. The U.S. economy has added a net 16.5 million jobs in the past decade of expanding trade and the national unemployment rate is a low 4.6 percent.

Trade with China and other emerging economies has helped to boost living standards in the United States by reducing prices for consumer goods that make our lives better everyday. Average real hourly compensation (wages and benefits) paid to American workers is up 22 percent in the past decade. Tariffs on imports from China would reduce the well being of tens of millions of American households.

Real manufacturing output in the United States is up 31 percent compared to a decade ago. As my colleague Dan Ikenson shows in a new study for Cato, U.S. manufacturers enjoyed record output, sales, profits, and returns on investment in 2006. The “advanced technology products” that the commission worries about are overwhelmingly laptop computers and other consumer electronics. A WTO panel would rightly laugh at the claim that imports from China have somehow endangered America’s “national security.”

Which brings us back to Fred Thompson. Does he really believe the many questionable assertions in the 2005 report of the U.S.-China Economic and Security Review Commission that he approved? Or was he not really paying much attention? Or has he revised his views since 2005? An enterprising economics and business reporter should ask him.

Growing Trade, Shrinking Deficit

The Commerce Department reported this morning that America’s current account deficit checked in at $190.8 billion for the second quarter of 2007. The number will undoubtedly provide fodder for critics of trade who see exports as the sole measure of success in the global economy and rising imports as a sure sign of failure.

The latest report is certainly newsworthy, but not in the negative way that many pundits and politicians will portray it.

The current account represents the broadest measure of America’s trade with the rest of the world, accounting for not only trade in goods but also services, investment income (such as interest, dividends, and profits), and unilateral transfers such as foreign aid and remittances.

The real news in today’s report is that America’s trade with the rest of the world continues to climb to new records despite the hand-wringing by many members of Congress and misguided pundits in cable TV land. Although the overall deficit declined slightly from the first quarter, our imports from the rest of the world are up 8 percent from a year ago and our exports are up 13 percent.

And although the rest of the world owns about $2.7 trillion more in U.S. assets than Americans own in assets abroad, we continue to earn more on our total investments abroad than foreigners earn on their investments here — about $16 billion more so far in 2007.

In a speech in Germany earlier this week, Federal Reserve Board chairman Ben Bernanke explained why running a current account deficit isn’t necessarily bad news for the U.S. economy, at least in the short to medium run. Among his main points:

First, these external imbalances are to a significant extent a market phenomenon and, in the case of the U.S. deficit, reflect the attractiveness of both the U.S. economy overall and the depth, liquidity, and legal safeguards associated with its capital markets….

Second, current account imbalances can help reduce tendencies toward recession, on the one hand, or overheating and inflation, on the other….

Third, although the U.S. current account deficit is certainly not sustainable at its current level, U.S. liabilities to foreigners are not, at this point, putting an exceptionally large burden on the American economy.

Check out the Center for Trade Policy Studies website for more on what the trade deficit means and what it doesn’t mean.

A Second Industrial Revolution?

Peter Goodman has a fine article in Monday’s Washington Post about the resilience and tenacity of the manufacturing sector in the United States – even in the storied ghost towns that dot the once-bustling textile regions of North Carolina.  Like my recent paper on the topic, Goodman points out that U.S. manufacturing is thriving:

The United States makes more manufactured goods today than at any time in history, as measured by the dollar value of production adjusted for inflation – three times as much as in the mid-1950s, the supposed heyday of American industry. Between 1977 and 2005, the value of American manufacturing swelled from $1.3 trillion to an all-time record $4.5 trillion, according to the Bureau of Economic Analysis.

And he reinforces a key point of my paper that has yet to penetrate the pessimistic political discourse:

With less than 5 percent of the world’s population, the United States is responsible for almost one-fourth of global manufacturing, a share that has changed little in decades. The United States is the largest manufacturing economy by far. Japan, the only serious rival for that title, has been losing ground. China has been growing but represents only about one-tenth of world manufacturing.

The major difference between my paper and Goodman’s story is that the former takes a birds-eye view of the manufacturing sector, presenting an impersonal, data-driven assessment of the state of U.S. manufacturing.  Goodman’s story focuses on a particular biotechnology company that occupies a former textile mill, producing a drug for liver ailments from a local pond weed.  The story is emblematic of the metamorphosis throughout the North Carolina and U.S. manufacturing sectors:

North Carolina encapsulates the forces remaking American manufacturing. Between 2002 and 2005, the state lost 72,000 manufacturing jobs, about three-fourths in textiles, furniture-making and electronics, according to the North Carolina Commission on Workforce Development. At the same time, the state has become a rising powerhouse in lucrative new manufacturing sectors such as biotechnology, pharmaceuticals and sophisticated textiles.

During the most recent decade, U.S. manufacturing has become increasingly oriented toward the middle and upper ends of the value-added spectrum.  Opportunities abound for workers with skills or the willingness and wherewithal to acquire them.  In fact, the title of the National Association of Manufacturers tenth annual Labor Day Report on the state of U.S. manufacturing is “Rising Incomes Cushion Economy,” and its subtitle is “Finding Highly Skilled Workers Remains a Challenge for Manufacturers.”  It seems to me that rising wages should make more workers willing to get the skills, and the need to find highly-skilled workers should induce manufacturers to assist on the wherewithal front.