Topic: Trade and Immigration

Rethinking Currency Manipulation

Interest groups in the United States have focused on the possibility of including provisions in trade agreements with the intent of countering currency manipulation.  The concern is that another country may choose to reduce the value of its currency relative to the U.S. dollar in order to encourage its businesses to export more goods to the United States.   Such currency realignment also would tend to make it more expensive for the devaluing nation to import products from this country.

It’s true that an adjustment in currency exchange rates – regardless of the reason for the adjustment – can have an effect on trade flows.  U.S. industries that export to foreign customers, or compete with imported goods in the domestic marketplace, understandably would prefer that currency relationships not become skewed against their commercial interests.  Currency stability improves the business climate by making it easier to build long-term relationships with customers and suppliers. 

However, currency exchange rates have fluctuated throughout recorded history.  Sometimes those changes may be driven by a government’s conscious desire to devalue its currency.  More often the variability in exchange rates reflects fundamental economic realities.  Economies that experience growing productivity and rising prosperity should not be surprised to find that market pressures cause their currencies to strengthen.  The reverse is true for countries that are growing slowly or not at all. 

A shift in exchange rates changes a country’s “terms of trade,” which is a term  used by economists to describe the ratio of a country’s export prices to its import prices.  From a U.S. perspective, if another country sets its currency at an artificially low level relative to the dollar, the U.S. terms of trade will improve.  The United States will be able to obtain a greater value of imports for the same value of exports.  Exporting the same number of airplanes and soybeans as before will pay for the importation of larger quantities of shoes, coffee, and automobiles. 

Putting Agriculture Subsidies Back on the Table

Yesterday, my colleague Bill Watson made the following point on this blog: “Perhaps China’s growing use of subsidies can change the dynamic, making it finally possible for international negotiations to take on U.S. agriculture subsidies.”  I’ve been thinking the same thing.  When it was just a few rich countries subsidizing, the political dynamic of subsidy reduction was challenging.  But if we are all subsidizing now, can’t we all just agree to stop?  Unfortunately, I fear the reality is going to be less promising than we might hope.

I confess that I did get a little excited and optimistic when I read a recent piece from U.S. Trade Representative Michael Froman, in which he said:

Take the example of agriculture, the subsidies for which have proven one of the toughest issues to tackle. In 2008, the proposed solution was that developed countries would cut their agricultural subsidies while developing countries would not.

But much has changed since that time. Just last year, a group representing agriculture-exporting countries, developed and developing alike, published a report listing the top four users of trade-distorting agricultural subsidies in today’s world, with India first, followed by China, the European Union, and the United States.

In a global commodities market, this double-standard makes no economic sense. In reality, trade-distorting subsidies from emerging economies have the same impact on global commodity prices as trade-distorting subsidies from developed countries. The United States is willing to wade back into the complex thicket of agricultural trade negotiations, but only if the discussion reflects today’s reality.

Parsing his words, he says the United States is “willing to wade back” in to these issues.  That’s slightly positive, suggesting the possibility of action.  But it’s going to take a bit more than this.  At some point, someone has to make an actual concrete proposal to eliminate or reduce agriculture subsidies.  That is, someone has to lay out specific details of a proposal for everyone to rein in subsidies.  It would be great if it were the United States, but it could be any of the big subsdizers.  However, it’s not going to happen unless and until someone takes this initiative.

Will China Help End U.S. Farm Subsidies?

This morning, U.S. Trade Representative Mike Froman appeared before the Senate Finance Committee to talk and answer questions about U.S. trade policy.  Most of the questions centered around trade promotion authority, the Trans-Pacific Partnership, and how best to further the interests of industries or commodity groups that lobby Senators.  One popular way to phrase a question is to accuse other countries, especially China, of unfairly propping up their own industries and then asking how the administration is going to counteract that.

So it was that Senator Johnny Isakson (R-GA) asked Ambassador Froman about China’s cotton subsidies.

China is basically hoarding … buying cotton and hoarding it, and is stockpiling it.  And they’re subsidizing their producers at twice the world market price.  What can be done with China to enforce through the WTO or through any agreements we might otherwise have to keep them from manipulating the cotton prices and suppressing the cotton market?  

This accusation is kind of funny.  The United States is by far the world’s leading exporter of cotton.  We also subsidize that cotton like crazy.  Admittedly, the U.S. government props up domestic agriculture in slightly more complex and opaque ways than simply hoarding cotton, but if Senator Isakson wants to end distortions of global cotton prices, he could just stop voting for them.

Ambassador Froman’s response:

Well I think this is a very important point more generally, which is that the whole pattern of agricultural subsidies has changed a lot over the last 10 or 15 years.  When the Doha Round started, the focus on agricultural subsidies was really the United States and the European Union.  But in both of those areas, subsidies have come down, while subsidies from China and India in the agriculture area have increased, and by some measure China’s now the largest subsidizer of cotton.  And so we’re engaging with them and we had conversations also in the last couple days about that and about taking a fresh look at where subsidies are being provided, how it’s distorting the market, and how that should play into global trade negotiations.  I think it’s important that we update our view of where subsidies are coming from and what impact it has. 

If you’re a poor subsistence farmer in Africa, it doesn’t matter whether the subsidy’s coming from the U.S. or from China; it matters that the subsidy exists.  And so we’re hoping to engage with China on this and to create some disciplines around this.

President Obama Offers Free Trade as Reluctantly as Possible

President Obama has proven once again that he is his own worst enemy on trade policy. Despite expectations that he would make a strong push for trade promotion authority (TPA), President Obama offered only quick mention of trade in this week’s State of the Union address. 

Although he did ask Congress to pass TPA to help him complete free trade agreements, the president backed up that request with some of the weakest arguments possible. I’ll give you the entire two paragraphs here:

21st century businesses, including small businesses, need to sell more American products overseas. Today, our businesses export more than ever, and exporters tend to pay their workers higher wages. But as we speak, China wants to write the rules for the world’s fastest-growing region. That would put our workers and businesses at a disadvantage. Why would we let that happen? We should write those rules. We should level the playing field. That’s why I’m asking both parties to give me trade promotion authority to protect American workers, with strong new trade deals from Asia to Europe that aren’t just free, but fair.

Look, I’m the first one to admit that past trade deals haven’t always lived up to the hype, and that’s why we’ve gone after countries that break the rules at our expense. But 95 percent of the world’s customers live outside our borders, and we can’t close ourselves off from those opportunities. More than half of manufacturing executives have said they’re actively looking at bringing jobs back from China. Let’s give them one more reason to get it done.

This is essentially a protectionist argument in favor of trade agreements. According to the president, the trade agreements his administration is negotiating will protect American workers from (1) China, (2) unfair competition, and (3) outsourcing. They’ll level the playing field and bring back jobs to America. 

Isn’t that what tariffs and subsidies are for?!

The Proliferation of Ex-Im Banks

As I was reading my print copy of the Economist last week, an advertisement taken out by the African Export-Import Bank, in search of a new President and Chairperson of the Board of Directors, grabbed my attention.  No doubt the pay and perks are pretty good, but I wasn’t thinking of applying.  Rather, it made me wonder, just how many Ex-Im Banks are there in the world?  To get a sense of it, I checked out the official list compiled by the Organization for Economic Co-operation and Development (OECD) for agencies in OECD countries , as well as Wikipedia’s broader, global list

It’s quite a long list!  Which leads me to the following point.  These days, trade negotiations often seem to have veered away from their traditional focus, with a lot of time now spent on issues such as intellectual property protection and labor rights.  Subsidies were one of the original targets of trade talks, and it would be great to put them back in the mix.  How about negotiating an end to the proliferation of export subsidies by these kinds of institutions?

How I-Squared Would Affect Employment Based Green Cards

Senator Orrin Hatch (R-UT) introduced the I-Squared Act of 2015 to reform the high-skilled immigration system.  Most of this bill attempts to improve the H-1B visa for temporary highly skilled workers by making the workers more legally mobile and increasing the quotas for that visa.  The H-1B is a dual-intent guest worker visa program, meaning that workers on the H-1B can pursue a green card while working on a temporary visa. The H-1B is a pipeline to the employment-based (EB) green card.

Most commentators will focus on the important and positive proposed reforms to the H-1B visa.  In contrast, I will focus on the reforms to the employment-based (EB) green card program.  I-Squared would exempt several categories of workers and their family members from the numerical quota imposed on EB green cards.  Although I-Squared does not increase the numerical quota, effectively it more than doubles the quota through exemptions.  As I detail here, this is a very positive move for U.S. economic growth.  Below I detail many of the exemptions in I-Squared and then make some suggestions for further streamlining and liberalizing the system.

Exempting Dependents

The most important exemption in I-Squared for EB green cards is for the spouses and children of workers.  Under current statutory interpretation, the family members of these workers count against the quota. Fifty-five percent of those who received the EB green card were the spouses and children of workers in 2013.  Allowing those spots to instead be filled with workers would more than double their number going forward.      

2013 Employment Based Green Cards: Families and Workers

Source: 2013 Yearbook on Immigration Statistics, Table 7.

US Lifts Ban on Long Haul Truck Deliveries From Mexico

The United States has finally ended a ban on long haul truck deliveries from Mexico.  The U.S. government promised to lift the ban twenty years ago as part of the North American Free Trade Agreement, but caved in to pressure from the Teamsters union claiming that Mexican trucks would be a safety hazard on U.S. roads.  Twenty years of data and two pilot programs seem to have been enough to convince your government that, in this case at least, Mexicans are just as good at doing things as other people.

But surely, you protest, the complaint could not have been that Mexicans are incompetent, but that Mexican safety standards and regulations are overly lax or poorly enforced.  To be fair, the Teamsters union has claimed that Mexican trucks are subject to inadequate regulation and that their drivers are poorly trained.  This argument would perhaps be meaningful if it weren’t so inexcusably misleading.  The fact is that all Mexican trucks operating in the United States have to get permits that require prescreening and regular inspections. 

In short, Mexican trucks operating in the United States are regulated by the U.S. government.  The only difference is the nationality of the truck’s driver and owner.