Summoning the Ghosts of Smoot and Hawley

Members of the 110th Congress haven’t been shy about expressing their disdain for trade. No fewer than two dozen trade-related bills, almost all of which are antagonistic toward U.S. trade partners or outright protectionist, were introduced in the first seven months of this Congress. While some of those bills were crafted mostly for political effect, it is pretty clear that some hostile trade legislation will at least make it to the floors of both chambers this session or next. With Congress adjourned for August recess, here’s where things stand.

For all intents and purposes, the completed bilateral trade agreements with South Korea, Colombia, Peru, and Panama have been shunted aside to consider, instead, enforcement-oriented legislation and the expansion of trade adjustment assistance legislation. Although House Ways and Means Committee Chairman Charles Rangel of New York has stated his intention to promote the Peru Agreement, it is doubtful that he will take to the task with much vigor or any success. His colleagues have different plans for trade policy.

Consider the names of some of the bills before Congress: The Trade Prosecutor Act; The Trade Enforcement Act; The Trade Law Reform Act; The Japan Currency Manipulation Act; The Balancing Trade Act; The Trade Adjustment Assistance Improvement Act, and the still-nameless legislation that would revoke normal trade relations status for China. Implicit in all of this: trade liberalization is bad, our trade partners cheat, and the folly of our embrace of globalization is evidenced by its massive human toll.

The Chinese “currency issue” has dominated trade discussions on the Hill. In the Senate, the currency bill most likely to make it to the floor is S.1607 (the Baucus-Grassley-Schumer-Graham Bill). It requires the Treasury Department to issue semiannual reports on the currencies of our trade partners, with action triggered against countries whose currencies are found to be fundamentally misaligned. If a currency is designated as such (and the country has been tagged for “priority action” because its central bank has engaged in “protracted, large-scale” exchange market intervention with partial or full sterilization) the country would have 90 days to take corrective measures. If insufficient measures are taken on the part of the offending country, a series of actions by the U.S. government would be triggered.

Most problematically, the bill mandates that all subsequent antidumping calculations (for products that are subject to antidumping measures) would require the conversion of foreign prices into U.S. dollars using the rate of exchange that would be observed if the currency weren’t misaligned. It is still unclear how the “would be observed” rate would be determined, but it’s crystal clear that such actions would be found to violate the WTO Antidumping Agreement.

If after one year, the currency is still misaligned, the legislation mandates the U.S. Trade Representative to lodge a formal complaint within the WTO. Again, it’s unclear which provision of the WTO agreements would be violated by the action or inaction of the foreign government.

The House’s currency bill contains similar provisions, but is more aggressive and more problematic. It would treat currency misalignment as an export subsidy, and mandates application of countervailing duties to offset those “subsidies.”

But currency isn’t the only topic on the congressional trade agenda. They’re thinking enforcement and reparations, too.

The Trade Adjustment Assistance Improvement act would broaden the scope for compensating workers and communities adversely affected by import competition. Financial assistance would be made available to primary and secondary service workers who can demonstrate that they lost their jobs to outsourcing.

On August 1, Senate Finance Committee Chairman Max Baucus of Montana introduced S.1919, The Trade Enforcement Act of 2007, which is a bill that consolidates his favorite provisions from the various stand-alone bills introduced earlier in the year. Among other things, it would:

  • create a Chief Enforcement Officer at the USTR to identify, investigate, and prosecute cases where trade partners are not in compliance with their obligations;
  • establish a panel of retired federal judges to review adverse WTO decisions, and to advise Congress on the efficacy of those decisions before any steps toward compliance are undertaken;
  • eliminate presidential discretion to not impose tariffs or quotas recommended by U.S. International Trade Commission in so-called China Safeguard cases;
  • eliminate presidential discretion to not apply the countervailing duty law to so-called non-market economies;
  • lower the evidentiary threshold for finding “material injury” in antidumping cases, which would encourage the initiation of more antidumping cases.

In the House, the inclination toward mischief is even greater than in the Senate. While versions of most of the provisions specified in S.1919 exist in various House bills, there is also legislation that would reverse U.S. implementation of a prior WTO ruling regarding the antidumping calculation practice known as zeroing. There are also provisions in the Trade Law Reform Act that would result in the calculation of higher antidumping duties by the Commerce Department.

There seems to me a huge inconsistency in all of these provisions. On the one hand, it says, let’s beef up our enforcement and prosecutorial capacity and bring more WTO cases. On the other hand, it says, let’s enact provisions that are likely WTO-inconsistent, and while we’re at it, show defiance of the WTO by affirming our belief that its rulings are beneath us. In other words, Congress wants to rely on the WTO to compel other countries to act in accordance with their commitments, while Congress decides on a case- by-case basis whether such WTO rulings against U.S. policies have merit.

This Congress, more than any in my lifetime, is apt to upset the apple cart in ways we may regret for years to come.

Cracking the Code on “Villainous” School Choice

Yesterday, over at The Huffington Post, education blogger Dan Brown – no relation to The Da Vinci Code’s author – posted a little homage to Democratic presidential candidates who have repudiated the No Child Left Behind Act (NCLB), toned down calls for teacher merit pay, and declared that all educators should be paid more. In other words, Mr. Brown praised candidates who boldly offered the same old, failed, “more money, thank you,” approaches to education reform we’ve been taking for decades. (NCLB is directly from that mold, but that’s not why Brown objected to it.) Indeed, Brown wrote that any presidential candidate who touted such bankrupt ideas is “inherently a champion of social justice.”

The absurdity of such over-the-top accolades, of course, deserves criticism. More galling, though, is how Brown characterized reforms that would lead to actual, transformative change:

If a candidate abdicates his responsibility to public education by offering superficial band-aids, or even worse, villainous profit-driven proposals like vouchers and privatization, then his true colors are seen.

“Villainous” school choice? Oh, come now, Mr. Brown! Advocating policies that have kept millions of poor kids trapped in bad schools while spending ever-greater sums of taxpayer money and protecting even atrocious teachers is the pinnacle of nobility, but parent-empowering school choice is villainous? It’s evil to let parents and children out of jail by enabling them to make their own educational decisions, but enlightened to keep them locked up and pay their jailers more?

One might not like school choice, but calling it villainous? Such dramatic, black-and-white characterizations might work for the other Dan Brown, but when it comes to educational reality, they just don’t make any sense.

The Czechs Adopt a Flat Tax

The lower house of the Czech parliament passed legislation earlier today implementing a 15 percent flat tax on personal income. The new tax system will take effect on January 1, 2008, and the rate is then scheduled to drop to 12.5 percent in 2009. The legislation also reduces the corporate tax rate from 24 percent today to 19 percent by 2010.

The reform, which was narrowly passed by 101 members of the 200-member parliament, now goes to the upper house, where the government has a massive majority and no obstacles are expected. Once the reform clears that hurdle, it will then be signed into law by the Czech President Vaclav Klaus, who is a free-market economist. That act would make the Czech Republic the 20th country to adopt a flat tax. (The Bulgarian government has agreed to introduce a flat tax by January 2008, but the measure has not yet passed through the Bulgarian parliament.)

The opposition socialists have stated that they will repeal the law if or when they return to power and may even raise constitutional objections to it. For now it seems, however, that the legislation will come into force.

The Czech flat tax is a big step in the right direction, and another sign that tax competition is having a positive effect. But the legislation is not perfect. One of the salient features of a pure flat tax is the elimination of tax exemptions, deductions and loopholes. The Czech legislation is less ambitious and many of the bad features of the current system will remain in force. Also, the 15 percent tax rate will be levied on gross income, including payroll taxes. This means the tax rate is not directly comparable to nations that impose the flat tax only on net income, such as Slovakia.

Good News from Iran

A variety of news outlets are reporting that Wilson Center scholar Haleh Esfandiari has been released from Evin prison “on bail,” and Reuters is reporting that Esfandiari’s lawyer, Nobel Laureate Shirin Ebadi, is stating that Esfandiari is now “legally allowed to leave the country.” Encouraging news.

Meanwhile, our thoughts and prayers are still with Kian Tajbakhsh, Ali Shakeri, Parnaz Azima, and their friends and families.

A Textbook Example of Government Failure

DCPS superintendent Michelle Rhee is doing a heroic job trying to get textbooks into classrooms by the start of school. One problem is that school officials still can’t tell her how many books they actually need. Classes start on Monday. 

Is the problem insufficient funding? As it happens, DCPS’s total gross budget for the last school year was upwards of one billion dollars according to its own website, and its enrollment was about 52,000 students. That means DCPS had total per pupil spending of nearly $20,000 last year, or half a million dollars per class of 25 students. You’d think that would cover books. 

The District’s perennial problem with getting books into students’ hands is a great illustration of what’s wrong with the status quo. When was the last time you walked into a Barnes and Noble or a Borders bookstore in mid August and didn’t see a well-stocked “back to school” display? Why is it so easy for them to handle inventory issues when they don’t even know how many customers they are going to have, while DCPS is flummoxed, year after year, despite having a fairly accurate enrollment number up front?  

The reason is simple: if you’re a bookseller, and you don’t have the books people want to buy on your shelves… they shop somewhere else. Keep that up for a few weeks or months and your bookshop is history. The reason DCPS can keep limping along despite doing such a poor job is that it doesn’t face real competition for that $20,000 per pupil per year in guaranteed funding. Sure, there are charter schools, but places there are limited. Sure, there’s a private school voucher program, but it’s even tinier. DC schools will start demonstrating the efficiency and quality of a competitive business when they start having to compete for the privilege of serving District children. Until then, it simply does not matter how intelligent or dedicated the superintendent happens to be. The central problem is the uncompetitive design of the system itself, not the people in it.

A Timely Reminder on Trade

From the Wall Street Journal’s ‘The Informed Reader’ blog today is a timely reminder that the stalled Doha round does not necessarily mean the end of trade liberalization efforts. According to the article, only 25 percent of tariff cuts between 1983 and 2003 were as a result of negotiated multilateral trade agreements. About 66 percent of tariff reductions came about from unilateral policy changes: from a recognition of the damage that tariffs do to one’s own economy through higher prices and lower productivity growth.

Unfortunately, there does not seem to be much political appetite for unilateral reductions in tariffs in the United States today (see here and here, for example) so a Doha agreement would have been welcome, to say the least. For one thing, subsidies (which are particularly prevalent in agricultural markets) are pretty much impossible to reduce on a bilateral or regional basis. But the expiration of trade promotion authority does not necessarily mean the end if lawmakers could get off the mercantalist bandwagon.