Geneva and Guantanamo

The news wires are saying there has been a major policy development concerning Guantanamo Bay.  The Bush administration is now changing its stance with regard to the Geneva Convention, reports say.

The White House says today’s announcement does not reflect a change in policy.  That is probably right.  That is, the Supreme Court ruling in Hamdan established some new law with respect to the application of Geneva to detainees and the Pentagon is now simply tinkering with some policies to comply with that ruling.

Because Clintonian word games still pervade the capital, however, one must scrutinize these policy announcements very closely.  For example, whatever the Pentagon is saying about Guantanamo today may be limited to the Pentagon and to the men held at Guantanamo Bay.  I say that because in 2002, President Bush issued a directive that pledged humane treatment to all prisoners in U.S. custody.  Attorney General Alberto Gonzales later admitted in 2005 that that directive did not apply to officers of the CIA and other nonmilitary personnel. 

An Army of Bureaucrats?

A few Members of Congress will reportedly draft legislation to create the United States Public Service Academy, which would be modeled after the four existing military academies.

Proponents of this idea note on their website that, “the federal government offers only one set of undergraduate institutions for high school seniors with the patriotic desire to serve their country: the military service academies.”

That may be true, but there are plenty of educational options for those who wish to pursue such a career.  Why should taxpayers be responsible for an additional $205 million a year for a new public service academy when hundreds and hundreds of colleges and universities already offer public service programs?

Orrin Hatch Backs Drug Legalization

Who would’ve thunk it? Turns out that former Senate Judiciary Committee chairman Orrin Hatch (R-Utah) doesn’t believe in jail terms for drug users. At least I guess that’s what this story means:

U.S. Sen. Orrin Hatch of Utah, a musician in his own right, helped secure the release of Atlanta R&B producer Dallas Austin from a Dubai jail after a drug conviction, the senator’s office confirmed Saturday.

In a statement released through his staff, the conservative Republican said he was contacted by Austin’s attorneys, then called the ambassador and consul of the United Arab Emirates in Washington on Austin’s behalf.

A Grammy winner who has produced hits for Madonna, Pink and TLC, Austin was arrested May 19 and convicted of drug possession for bringing 1.26 grams of cocaine into Dubai.

Surely Hatch thinks regular old Americans are due the same consideration as a Grammy-winning singer. He’d advocate the release of any American convicted of possessing 1.26 grams of cocaine, right?

Or are politicians hypocrites? Could it be that they think average Americans like Richard Paey should go to jail for using large amounts of painkillers, but not celebrities like Rush Limbaugh? Could it be that they laugh about their own past drug use while supporting a policy that arrests 1.5 million Americans a year, as a classic John Stossel “Give Me a Break” segment showed? (Not online, unfortunately, but you can read a commentary here.)

Putting people in jail for using drugs is bad enough. Putting the little people in jail while politicians chortle over their own drug use and pull strings to get celebrities out of jail is hypocrisy on a grand scale.

Porkers Get Prime Seats

This morning I attended President Bush’s speech on the release of the midsession budget review at the White House.  Bush first tied his tax cuts to the strong economic growth the nation is experiencing, and he was on solid ground. He then delivered some fine rhetoric about restraining spending and cutting special interest pork.  Perhaps his new budget and Treasury chiefs–Rob Portman and Henry Paulson–can actually get him to follow through on those frequently made promises.  But I would be more convinced if the White House hadn’t invited two of the Senate’s biggest pork barrelers–Ted Stevens and Conrad Burns–to sit right in the front row for the speech!  

Policy Dreams vs. Government Realities

When I came to Washington in 1990, central planning (“industrial policy”) was all the rage. As the 1990s progressed, the clamor for industrial policy faded, partly because the Japanese and German economies stagnated while the US economy soared.

But in my inbox this morning came news of a new study from the Progressive Policy Institute claiming that “America needs a national comprehensive strategy in order to maintain its preeminence within the world economy.”

Which government would implement this “national comprehensive stategy” I wonder? Surely not the same one that delivers non-stop pork barrel spending, management failure, and corruption year after year, decade after decade.

A Surplus of Benefits from Trade with China

The Chinese government reported on Monday that China’s trade surplus with the rest of the world hit a new monthly record in June [see story] and is on pace to reach $130 billion to $150 billion for all of 2006. The news will fuel demands that China allow the value of its currency to rise in international foreign exchange markets, making exports from China more expensive and imports to China more attractive. China’s currency, the yuan, has only appreciated about 3 percent since July 21, 2005, when its central bank announced that the currency would no longer be tightly pegged to the U.S. dollar.

Unfortunately, the news may also stoke support in Congress for imposing tariffs on imports from China if its government does not move soon to revalue its currency upward by 15 to 40 percent. As I explain in a Cato Trade Briefing Paper [“Who’s Manipulating Whom? China’s Currency and the U.S. Economy”] released today, imposing trade sanctions on China would be a colossal policy blunder.

Imposing tariffs on Chinese imports would be a direct consumer tax on tens of millions of American families. Of the $243 billion in goods we bought from China in 2005, about 80 percent were the type of products we use everyday in our homes and office—shoes, clothing, toys, sporting goods, bicycles, TVs, consumer electronics, and personal and laptop computers. In fact, shipments from China tend to bump up every fall as retailers stock up for the Christmas shopping season. The Grinch who stole Christmas would be delighted if Congress were to impose punitive tariffs on all those Chinese goods entering our country! 

The study found no support for arguments that China’s currency regime and trade with China in general are somehow hurting the U.S. economy or U.S. manufacturing. Rising imports from China have not primarily replaced domestic U.S. production, but rather they have replaced imports from other low-wage countries or from other East Asian countries that have relocated production to China. With the exception of apparel, few U.S. manufacturers compete head to head with products made in China. Overall U.S. manufacturing output is 50 percent higher today than in 1994 when China first pegged its currency to the dollar.

Focusing on the bilateral trade balance with China obscures the very tangible benefits Americans enjoy from our growing commercial ties with the people of China. 

To explore the issue further on the one-year anniversary of China’s currency reforms, Cato will be hosting a Policy Forum on July 19 titled, “U.S.-China Trade, Exchange Rates, and the U.S. Economy.” You can register for the event here.

Bhagwati vs. Bhagwati on Trade Liberalization

Jagdish Bhagwati, one of the world’s finest and most renowned trade economists, gave some of his thoughts on the Doha Round and prospects for trade liberalization in yesterday’s Cato podcast. Professor Bhagwati, who is also on the Board of Advisers of Cato’s Center for Trade Policy Studies, spoke more in depth on the subject at a Cato policy forum last month titled, “U.S. Trade Policy in the Wake of Doha: Why Unilateral Trade Liberalization Makes Sense.”

Unlike most trade policy observers, Bhagwati believes the Doha Round can still succeed. The key to success, he suggests, is for U.S. negotiators to embrace a concept he calls “relaxed reciprocity.”  Rather than seek a highly ambitious outcome by demanding all participants accept maximum “concessions,” U.S. negotiators should improve their own offer while accepting whatever level of reform other countries are willing to undertake.  The logic of this approach rests in the fact that most of the gains from trade liberalization come from opening one’s own market (access to cheaper inputs for business, greater competition and choice, productivity gains, lower prices for consumers), and thus, such reforms are not concessions at all.  Greater export market access for U.S. companies is just the icing on the cake, and the prospect of a lightly frosted cake is no reason to forego the entire dessert. His conclusion, then, is that U.S. negotiators should offer to open the U.S. market as wide as possible and accept minimal openings from abroad for the sake of achieving an agreement.

I concur with Professor Bhagwati that the United States should open its market without the condition that similar measures be undertaken abroad. Admittedly, my opinion is shaped in no small part by the arguments put forth by Bhagwati over the years.  But I think the United States probably has more to gain by doing so unilaterally and not partaking of an agreement that memorializes bold U.S. reform alongside marginal reform abroad. 

Any agreement, regardless of how minimalist foreign reform is, will be an invitation for the United States to bear the brunt of the blame for any adjustment costs or continued economic problems that persist in developing countries (even if those problems have nothing to do with the agreement).  Any agreement, no matter how bold or meager, will subject the United States to claims of arm twisting and bullying, regardless of the merits of those claims.  Such developments are precisely what the United States, with its tattered international reputation and credibility, does not need right now.  The costs of such fallout, although measured differently, could easily surpass any benefits associated with an agreement that requires nothing more than window dressing abroad.

Unless our trade partners are willing to agree to ambitious reform (which will undoubtedly cause adjustment costs but will also undoubtedly help spur economic growth and provide U.S. exporters with better terms) there is little point in the U.S. agreeing to a new deal.  On the contrary, by liberalizing independent of other countries, we reap the benefits of our openness, give the developing world better access, correct the reality and perception that U.S. trade barriers are a cause of developing world poverty, and remove the capacity for the United States to serve as a scapegoat for developing country stagnation.

The determinative calculation is whether the prospective net benefits of the marginal offerings of our trade partners exceed the net benefits of unilaterally liberalizing without any demands on our partners.  Of course that depends on how much reform is ultimately offered up abroad. 

In my view, the benefits from unilateral liberalization in terms of reversing growing hostility toward the United States and softening the ground for international receptivity to U.S. foreign and security policy objectives could be quite significant and could easily exceed the net benefits (marginal export benefits minus the costs of being perceived as an agreement’s strongman) of an agreement based on relaxed reciprocity.

Implicit in Bhagwati’s call for relaxed reciprocity is the idea that an agreement, regardless of the feebleness of the commitments it extracts, is valuable beyond the trade flows it may spur.  Agreements do produce greater certainty and without an agreement, the WTO and the verdicts of its dispute settlement system could lose crediblity among its member states.  After all, a multilateral trade negotiating round has never failed to produce an agreement.

Those are legitimate concerns.  However, I don’t believe U.S. unilateral liberalization would be an end in itself.  I believe such a policy, if commenced by the U.S., would inspire what Professor Bhagwati himself calls “sequential reciprocity.” If U.S. policymakers were to unconditionally open the U.S. market, others would likely follow suit.  Quite frankly, most countries have no choice but to open up well beyond what they are offering in the Doha Round.  In this highly integrated world of just-in-time supply chains, where countries are competing with each other for investment and markets, only the most transparent and efficient ones will succeed.  And it’s not like developing countries don’t know this conclusively.  Many are quite familiar with unilateral liberalization themselves.  In fact, the World Bank reports that between 1983 and 2003, developing countries reduced their weighted-average tariffs by 21 percentage points.  Nearly two-thirds of that reduction was achieved through unilateral reform.

Alas, unilateral liberalization or even relaxed reciprocity is unlikely to be embraced by this or the next Congress.  The concept remains foreign, even preposterous, to U.S. policymakers.  Last week, U.S. Trade Representative Susan Schwab acknowledged that even though imports are good for the economy, the winning formula does not entail convincing decision makers of that truth, but requires that the voices of those who will benefit from enhanced export access drown out the voices of those who will suffer from import competition, and that’s why an all-encompassing, ambitious agreement is the only one that will work politically in the United States.

We have a long way to go to change minds, but here’s the argument in a 24-page nutshell.