With global sugar prices at record highs, a coalition of sugar-using industries petitioned the administration to lift quotas on imported sugar to bring more competition and lower prices to the U.S. market. In a letter dated Aug. 7, the coalition pleaded that "Without a quota increase, consumers will pay higher prices, food manufacturing jobs will be at risk and trading patterns will be distorted. Please act now in the interest of all Americans."

Bowing to the American Sugar Alliance, the powerful lobby for sugar growers that Obama courted during the presidential campaign, the U.S. Department of Agriculture decided instead to keep the quotas at their current restrictive level. So much for change.

Since the early 1980s, the domestic U.S. sugar industry has enjoyed cartel-like control of the domestic market. A system of price supports and import quotas virtually guarantees domestic beet and cane growers an 80 percent market share. At times, this has forced American families and sugar-consuming industries to pay prices two or three times the spot world price.

This has been bad news for families, who must pay higher prices at the grocery store, but equally bad for a segment of American workers. Artificially high domestic sugar prices raise the cost of production for refined sugar, candy and other confectionary products, chocolate and cocoa products, chewing gum, bread and other bakery products, cookies and crackers, and frozen bakery goods. Higher costs cut into profits and competitiveness, putting thousands of jobs in jeopardy.

In a 2006 report, the U.S. Commerce Department confirmed that the sugar program is not such a sweetheart deal for the U.S. food manufacturing industry. When U.S. companies are forced to pay two to three times the world price for wholesale refined sugar, as they have for the past 25 years, it erodes their competitiveness and profitability.

For makers of confectionary products and breakfast cereals, for example, sugar accounts for 20 to 30 percent of the total cost of production. As a consequence, "Many U.S. (sugar-containing product) manufacturers have closed or relocated to Canada where sugar prices average less than half of U.S. prices and Mexico where sugar prices average about two-thirds of U.S. prices."

The Commerce report surveys the damage: Ferrara Pan Candy in Forest Park, Ill., closed its domestic facilities and eliminated 500 jobs while opening one plant in Mexico and two in Canada. Long a hub for the confectionary industry, the Chicago area lost 4,000 jobs in the industry from 1991 to 2001, including 1,000 jobs at Brachs facilities.

Elsewhere in the country, Kraft Inc. announced in 2002 that it was closing a Lifesavers candy factory in Holland to relocate production to Canada, where the company could buy sugar at world-market prices. Hershey Foods closed plants in Pennsylvania, Colorado and California while moving production to Canada. The number of sugar refineries in the United States has dropped from 23 to eight in large part because of the high costs of domestic raw sugar.

In each of those cases, company representatives cited the high price of domestic sugar as a major reason for the exodus of productive capacity and employment from the United States. In all, 6,400 workers in the sugar-processing industry have lost their jobs because of their own government's deliberate policy to drive up the cost of their major input. According to the U.S. International Trade Commission, the sugar program "saves" only 2,200 jobs in the sugar growing and harvesting industry. So our sugar policy eliminates three jobs for every one it saves.

The Commerce report concluded that "eliminating sugar quotas and tariff rate quotas and allowing sugar to freely enter the United States duty free would result in economic gains in the form of increased domestic food manufacturing production and U.S. exports, gains for consumers, taxpayer savings and a net positive effect on U.S. employment."

If Obama wants to stand up to special interests, put money in the pockets of working families and defend American manufacturing jobs, he should order the Department of Agriculture to reconsider its recent decision to uphold the unjust status quo of the sugar program.

Despite all of the stress points, both real and imagined, Sino-U.S. trade relations have held up remarkably well. Indeed, there have been pork bans, poultry bans, antidumping and countervailing duty investigations, World Trade Organization (WTO) dispute settlement decisions, accusations of currency manipulation, U.S. objections to China's export-led growth and complaints from Beijing about the impact on its U.S. debt holdings of uncontrolled spending in Washington.

Indeed, that these disputes have not erupted into bigger problems signals a growing maturity to the bilateral relations.

But even mature relationships have their breaking points. And President Barack Obama's woefully shortsighted decision to impose duties of 35 percent on Chinese-produced tires under Section 421 of the Trade Act of 1974, as amended — the so-called "China-Specific Safeguard" — is one of them.

In fact, it presents the most serious test yet. Even though imposition of the tariffs does not violate any trade agreements — and even though the Chinese Government has no recourse to retaliation within WTO rules — there should be no question that the possibility of an escalating trade war is real.

The tire decision marks the first time since well before China joined the WTO in 2001 that a U.S. president has personally ordered restrictions on imports from China. Of course there have been duties imposed under U.S. antidumping and countervailing duty laws on numerous occasions, and there have been quantitative restraints imposed on Chinese textiles and apparel.

But none of those outcomes required the participation of the U.S. president — and none were perceived as reflecting his personal wishes.

The edict to impose duties on Chinese tires, by contrast, came directly from President Obama himself, after he had two months to weigh the impact of the decision.

That he chose to levy a prohibitive duty of 35 percent is being perceived as a sign of disrespect by the Chinese Government and the people it represents — particularly when juxtaposed against former President George W. Bush. The previous president rejected trade restrictions on all four occasions when such recommendations from the U.S. International Trade Commission (ITC) reached his desk.

Under the law, which became effective as a condition of China's entry into the WTO, U.S. industries can seek temporary trade restrictions in cases where imports from China are increasing and causing market disruption. The evident threshold in these cases is fairly mild — as compared with the standard applied in anti-dumping, countervailing duty, and general safeguard cases.

Thus, the U.S. president is granted the discretion to reject the ITC's remedy recommendation if he determines that import restrictions would have an adverse impact on the U.S. economy that is clearly greater than its benefits, or if he determines that such relief would cause serious harm to the national security of the United States.

The cost of protectionism to the broader economy always exceeds the concentrated benefits accruing to the narrow interest groups seeking protection and a trade war could well compromise U.S. national security. So restrictions under this statute should always be rejected.

But President Obama's decision was guided strictly by selfish, political considerations: He felt he owed American unions for their previous and continuing support, regardless of the economic and diplomatic fallout.

Just one day after Obama's tire decision, the Chinese Government announced new trade remedy investigations of U.S. exports of automobiles and poultry. Whether those cases are based on evidence of dumping or subsidization that withstands formal evaluation is beside the point. The Chinese Government can always harass U.S. exporters with the threat of new investigations and throw other obstacles in their paths.

But the mere prospect of heightened trade tensions — let alone actual protectionist measures — breeds the kind of uncertainty that undermines trade and investment, and retards economic growth.

Those costs are felt most profoundly in the country imposing restrictions, thus China should do its best to avoid retaliation.

Of course exercising restraint could prove challenging for the Chinese authorities. The U.S. barriers could well lead to restrictions on Chinese tires in other countries — to "protect" their own producers from the diversion of supply from the U.S. market.

Furthermore, Obama's tire decision represents a blatant disavowal of the U.S. pledge at April's G20 summit in London to avoid new protectionist measures through 2010. The temptation of other G20 governments to indulge similar protectionist pressures at home for political gain might prove irresistible — especially now that the United States has abdicated its leadership role in the trade sphere.

And then there is the very real danger that other U.S. industries, encouraged by the outcome in tires case, will file their own Section 421 cases, leading to new restrictions on new products, and creating similar pressures abroad to follow suit — while igniting calls within China for retaliation.

It is not a pretty picture, but the Chinese Government could heroically forestall a trade war by taking the moral high ground, and doing its best to avoid ratcheting up the dispute with its own provocative measures.

Sino-U.S. cooperation on trade and investment has been too fruitful and too promising to allow a few problematic areas to define the broader relationship.

Although the stew that is the U.S.-China trade relationship has the potential to reach a full boil, it has been on a low simmer since before the start of the financial crisis and subsequent global economic slowdown. Despite pork bans, poultry bans, a steady stream of antidumping and countervailing duty investigations, dispute settlement judgments from the World Trade Organization, accusations of currency manipulation, admonitions regarding China's dependence on export-led growth, and China's concerns about the impact of profligate U.S. government spending on its U.S. debt holdings, the relationship has held up fairly well.

But that could all change quickly. By September 17 President Obama is required to render a decision in a potentially combustible case concerning automobile tire imports from China. Pursuant to a petition filed by the United Steelworkers of America under Section 421 of the Trade Act of 1974-known colloquially as the "China-Specific Safeguard"-the U.S. International Trade Commission has already recommended that Obama impose duties of 55 percent on imports of consumer tires from China. Under the law, the president can adopt, modify, or reject that recommendation.

Although this may sound like just another day in Washington, Obama's decision will be consequential. It will help clarify his administration's heretofore opaque tradepolicy objectives. It will set the tone for U.S.-China trade relations for the foreseeable future. And it will affect broader international trade relations, for better or for worse, as America honors or disavows its pledge to the Group of 20 nations to avoid new protectionist measures.

Under the statute, the president has discretion to deny import "relief" if he determines that such restrictions would have an adverse impact on the U.S. economy that is clearly greater than its benefits, or if he determines that such relief would cause serious harm to the national security of the United States. The first condition is met overwhelmingly. And, for good measure, there is a very strong argument that the second is met, too.

But at the end of the day the president is a politician, who is presumed to owe Big Labor for his election last November. Will the president do what is overwhelmingly in the best interest of the country? Or will he do what he thinks is best for himself politically? This paper provides some law and case background and then summarizes why the president should reject the recommendations of the USITC and deny import restrictions altogether.

The Section 421 Statute and a Brief History

Section 421 of the Trade Act of 1974, as amended, is a special statute that applies only to imports from China. It became U.S. law as a condition of China's accession to the World Trade Organization in 2001. The provision aimed to assuage fears about Chinese competition by establishing a special "safeguard" to deal with increased imports from China for the first 12 years after China's entry into the WTO.¹ The law will expire at the end of 2013.

The broader U.S. "safeguard" law, Section 201 of the Trade Act of 1974, authorizes the imposition of temporary trade barriers against increased imports that are a "substantial cause" of "serious injury" to American producers. The China-specific safeguard of Section 421, by contrast, sets a lower threshold for imposing trade restrictions. Specifically, the statute provides:

If a product of the People's Republic of China is being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of a like or directly competitive product, the President shall, in accordance with the provisions of this section, proclaim increased duties or other import restrictions with respect to such product, to the extent and for such period as the President considers necessary to prevent or remedy the market disruption.²

Under the statute, "market disruption" exists "whenever imports of an article like or directly competitive with an article produced by a domestic industry are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury, to the domestic industry."³ And the term "significant cause" refers to "a cause which contributes significantly to the material injury of the domestic industry, but need not be equal to or greater than any other cause."⁴

If the ITC renders an affirmative finding (which is decided by majority vote) or if there is an even split among commissioners, the affirming commissioners must submit recommendations for relief to the president and the U.S. Trade Representative within 20 days of the determination. The USTR then has 55 days to advise the president about the ITC's findings-a period during which it must hold hearings on the matter and solicit views from importers, exporters, and other interested parties. It is also authorized to pursue negotiations to address the underlying market disruption with the Chinese government during this period.

Unless an agreeable settlement is reached, the president must announce import relief by the 150th day after the petition's filing unless he determines that "provision of such relief is not in the national economic interest of the United States or, in extraordinary cases, that the taking of action . . . would cause serious harm to the national security of the United States."⁵ If the president chooses to grant import relief, it must become effective within 15 days of his decision.

It is also important to appreciate what Section 421 is not. It is not an "unfair trade" statute. Unlike the antidumping and countervailing duty laws, a Section 421 case does not include allegations of prices at less than fair value or prices that benefit from countervailable government subsidies. The evidentiary threshold is much lower. All that is alleged-and all that has to be established-in a 421 petition is that imports from China are increasing in such a manner as to be a cause of market disruption (or threat thereof) to the domestic industry.

Section 421 is not intended to remedy any wrongdoing on the part of Chinese exporters, but is intended rather to give U.S. producers the opportunity to holler "time out!" as they catch their breath, assess prospects, and attempt to adjust to a new level of competition. Of course there are huge costs to this kind of intervention in the marketplace, thus the president is granted discretion, under the law, to deny relief if he determines that the costs to the broader economy clearly exceed any benefits to the petitioning industry. While such discretion provides some comfort that the law's relaxed evidentiary standards won't be routinely abused by domestic interests seeking to stifle competition, there are no guarantees that the president's discretion will be based exclusively on considerations of the national economic interest. If there were, it would be nearly impossible to conjure a scenario in which the concentrated, temporary benefits to a specific industry receiving protection were not overwhelmed by the costs of that protection on the broader economy. Political considerations always influence decisions that lead to protection.

During the Bush administration (the first administration under which the law was in effect), there were six Section 421 cases filed by domestic parties, and in four of those the ITC found market disruption and recommended import restrictions. In each of those four cases, President Bush exercised his discretion to deny relief. Thus, trade restrictions have never been imposed under this statute.

Some Specifics of the Tires Case

The tires case is noteworthy in several respects, starting with the fact that it is the first Section 421 case initiated during the Obama administration. Petitioners came to regard the law as a dead letter under President Bush, but have been anxious to test its viability under a new president, who promised last year to decide Section 421 cases "on their merits, not on the basis of an ideological rejection of import relief like that of the current administration."¹⁷

The petition in the tires case was filed by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union-the United Steel Workers, for short-on behalf of workers in the U.S. tire industry. However, the USW represents workers accounting for only 47 percent of U.S. tire production capacity, so most workers in the industry are not officially supporting the petition.⁷ Furthermore, this is the first 421 case that does not have a domestic producer as the petitioner. Out of the 10 firms determined to comprise the entire domestic tire industry, none supports the union's petition for import restraints. Thus, this case, initiated on behalf of no producers and less than half of the industry's workers, and given the acrimony it has engendered within the U.S. tire-supply chain, is probably not the kind of case that President Obama idealized when he promised to decide these issues "on their merits."

In reaching its affirmative conclusion of market disruption in June 2009, the USITC cited the 215-percent increase in the volume of tire imports from China between 2004 and 2008 as a cause of material injury to the domestic industry. The conclusion of material injury was based on evidence of declining industry capacity, production, shipments, employment, wages, and financial results.⁸

The argument put forward by respondents in the case (i.e., various producers, exporters, and importers) during the ITC proceeding, which was ultimately rejected in the majority's determination, is that tire production is stratified among three quality "tiers," and that competition across tiers is mitigated. Most of the increase in imports from China was of the lowest tier, while most of the tires produced in the United States are of the top two tiers.

Furthermore, 7 of the 10 U.S. tire producers also manufacture tires in China, as well as in other countries.⁹ And of those 7 firms, 4-Goodyear, Michelin, Cooper, and Bridgestone-account for almost 90 percent of U.S. production. Thus, the change in composition of domestic and imported tires in the U.S. market is a function of the decisions of these U.S. producers. And it was a deliberate decision of U.S. producers to reduce production of Tier-3 tires-the lowest-end, lowest-profit-margin tires-at their U.S. plants, and increase sourcing of that tier in China and elsewhere, where lower production costs enable the realization of some profit, which in turn helps support continued production of Tier-1 and Tier-2 tires in the United States. Thus, the declining employment, production, capacity, and shipments are all attributable to intentional, conscious planning on the part of profit-maximizing firms.

For a law that is characterized by its champions as a tool to support our producers vis-à-vis Chinese producers and to ensure a level playing field, this test case for Obama pits American workers against American producers, and American workers against American workers. By going after Chinese producers, petitioners ensnare their own employers, as well as fellow American workers, organized or otherwise. Although the lightning rod is China (with all of the negative perceptions that have been cultivated about its trade practices), this case has little to do with China per se, and everything to do with organized labor begrudging U.S. producers for pursuing profit- maximizing strategies in a globalized world. In seeking sanctions, petitioners are asking Obama to indict globalization.

Whom Will Protectionism Help, and How

Duties on imports of tires from China are more likely to lead to greater production in other developing countries than to greater production in the United States. U.S. producers have chosen to outsource production of their lower-tier tires to China because producing those tires in that location makes the most sense economically. But raising the costs of producing in China by imposing trade restrictions would not make U.S. production more attractive. It would not bring back U.S. jobs. It would make Indonesian or Mexican or Brazilian production more attractive, and would likely divert jobs from China to those countries.

According to data compiled by the ITC staff, the average unit price (based on the customs value) of a tire imported from China in 2008 was $38.98.¹⁰ A 55-percent tariff would drive up the unit value to $60.42. But, in 2008, U.S. producers sold 159 million tires, valued at $11 billion, for an average price of $68.60.¹¹ Factoring in mark-up of the Chinese price, it is reasonable to conclude that prices of American- and Chinese-produced tires might retail for about the same price. But that outcome is highly unlikely to be incentive enough for globalized tire producers to divert production from China to the United States. Instead, producers are much more likely to shift production to Mexico, Brazil, or Indonesia, where the unit prices in 2008 (based on customs value) were $56.26, $48.93, and $32.10, respectively.¹²

Furthermore, the ITC's recommended remedy would be in place for three years. The statute expires in four years. What kinds of changes should be expected during the interim that would make the United States a more cost-effective place to produce Tier-3 tires, or any tires for that matter? There are no changes-short of technological advances that raise productivity and reduce the demand for labor-that could make the United States a better place to produce tires. But this case is about jobs and nothing else, so even that outcome wouldn't satisfy petitioners. Three years of "relief" will do nothing but perhaps defer the day of reckoning, while imposing heavy costs on the rest of the economy, taxing our relationship with China, and further sullying America's international standing.

Adverse Economic Impact Is Clearly Greater Than any Benefits

Formal economic models, testimony, anecdotes from representatives of industries in the tire-supply chain, and common sense analysis all reveal an excessive cost burden on the economy from the proposed remedy of 55-percent duties in year one; 45-percent duties in year two, and; 35- percent duties in year three.

In their dissenting opinion, ITC Vice Chairman Daniel R. Pearson and Commissioner Deanna Tanner Okun concluded:

[W]e find that imposing a trade-restrictive quota or tariff on the subject imports will be far more likely to cause market disruption than to alleviate it for domestic producers who have already undertaken significant strategic adjustments to adapt to a changing global market.¹³

Indeed, economist Thomas Prusa estimates that "the tire manufacturing industry will experience little to no job creation as a result of the tariff. Under the best-case scenario more than a dozen jobs will be lost for every job protected." Prusa estimates a net loss of at least 25,000 U.S. jobs if the recommended tariff is imposed. Under the best case, Prusa finds that higher prices and other inefficiencies stemming from the proposed remedies would sap U.S. consumers of $600 to $700 million per year, translating to an annual cost of $300,000 for every job "protected" in the tire industry.¹⁴

According to a statement of the U.S. Tire Industry Association, which represents all segments of the tire industry, including those that manufacture, repair, recycle, sell, service, or use new or retreaded tires, and also those suppliers or individuals who furnish equipment, material, or services to the industry:

Our members, by directly importing or contracting with suppliers, are meeting the demands of a segment of the tire consumer market for lower-cost tires. No manufacturing uptick would satisfy this product segment, but instead could create a need for product allocation, resulting in shortages and outages. In the best of times, such occurrences are troubling, but in today's climate, this could inflict severe financial harm on many retailers and on the motoring public.¹⁵

Consumer groups and other organizations have also expressed safety concerns about the impact of higher-priced tires on increasingly-pinched consumers. The likelihood that an increasing number of consumers will forego the replacement of old and worn-out tires presents a whole new category of risk and costs that are difficult to quantify economically.

If President Obama imposes trade restrictions in this case-regardless of whether those restrictions are as severe as the ITC's recommendation or if they are milder-the United States will have blatantly violated its commitment to the G-20 earlier this year to avoid new invocations of protectionism. That would be a colossal mistake that simultaneously undermines U.S. credibility on trade and invites other governments to indulge their own protectionist lobbies. The consequences for world trade could be severe. There should be no doubt that the demonstration effect would not only influence other governments toward intervention, but would also encourage other U.S. interests to pursue their own protection under Section 421.

The fact that President Bush rejected the ITC's recommendations to impose restrictions four times reinforces the perspective held by the Chinese government that the imposition of trade restrictions under Section 421 is firmly a matter of presidential discretion. Unlike antidumping or countervailing duties, which run on statutory autopilot without requiring the president's attention or consent, Section 421 explicitly requires the attention and participation of the U.S. president. In other words, although there are over 90 outstanding U.S. antidumping and countervailing duty orders against various Chinese products, none of them is considered to reflect the direct wishes of the U.S. president, and thus none of them rise to the level of a potentially explosive trade dispute.

Technically, if the United States imposes restrictions under Section 421, the Chinese are not entitled to formally retaliate. But that's cold comfort when it's quite obvious that trade restraints under Section 421 will no doubt be considered by the Chinese to be a directive of the U.S. president, and thus the offense taken and the consequences wrought could be profound. U.S. industries across the manufacturing spectrum have written to President Obama, urging him not to impose restraints in this case for fear that they will bear the brunt of the costs through lost export sales. This is a real possibility.

As to the question of national security, the prospect of a spiraling trade war with China, if duties are levied and retaliation ensues, will strain the commercial ties that have been successfully cultivated over the past few decades and will increase the risk that China becomes less helpful on crucial matters of U.S. foreign and security policy.

Conclusion

Through the first eight months of his tenure, the president has avoided making any decisions of consequence on matters of trade policy. While his actions have not been conclusively protectionist, his tepid rhetorical endorsements of trade and his conditional repudiations of protectionism have sown doubts at home and abroad about the direction of U.S. trade policy. A decision to reject trade restraints in the tires case would be reassuring to a world that is struggling to grow out of recession.

The stakes appear to be much higher for Obama than they were for Bush. The unions feel that they have earned the president's support and are more emboldened in their position now than in the past. Bush didn't win the near-unanimous support of organized labor leaders in his elections, as Obama did. Nor did Bush promise to get tough on Chinese trade practices, as Obama did. Instead, Bush set the precedent of denying relief-and he did it four times.

The USITC's recommendation of a 55-percent tariff is a remedy far more restrictive than the quota sought by the USW. The president, then, may be tempted to offer what he might think is a compromise solution, of lower duties or a tariff-rate quota. But the costs of any protectionism at this time and under these circumstances could unleash a protectionist backlash in the United States and around the world. It would be far less costly for the president to reject trade restraints altogether and to capitalize on his earned credibility by moving the trade agenda forward.

Notes

¹ Daniel Ikenson, "Bull in a China Shop: Assessing the First Section 421 Trade Case," Cato Free Trade Bulletin no. 2, January 1, 2003, p.1.

² 19 U.S.C. § 2451(a).

³ 19 U.S.C. § 2451(c)(1).

⁴ 19 U.S.C. § 2451(c)(2).

⁵ 19 U.S.C. § 2451(k)(1). Note that in cases in which the ITC is evenly split, the president has complete discretion about whether or not to accept the affirming commissioners' recommendations for relief.

⁶ Barack Obama (letter to Cass Johnson, President of the National Council of Textile Organizations, October 24, 2008), http://www.ncto.org/newsroom/pr20081029.pdf.

⁷ U.S. International Trade Commission, Certain Passenger Vehicle and Light Truck Tires from China, Investigations No. TA- 421-7, Publication 4085, July 2009, p. I-14.

⁸ For a full discussion of the statutory questions of increasing imports, material injury, and causation, see USITC, Certain Passenger Vehicle and Light Truck Tires from China, pp. 11-29.

⁹ Those companies are Toyo, Yokohama, Pirelli, Michelin, Goodyear, Cooper, and Bridgestone. USITC, p. IV-3.

¹⁰ USITC, Table IV-4, p. IV-10.

¹¹ Ibid., Table III-5, p. III-13.

¹² Ibid., Table II-1, p. II-4.

¹³ Ibid., p.45.

¹⁴ Thomas J. Prusa, "Estimated Economic Effects of the Proposed Import Tariff on Passenger Vehicle and Light Truck Tires from China," American Coalition for Free Trade in Tires (submission to the International Trade Commission, July 26, 2009).

¹⁵ Tire Industry Association (position statement, June 17, 2009), http://www.tireindustry.org/pdf/news_archives/press release061709.pdf.

Meyerson makes a few claims that cannot be allowed to stand. For example, he asserts: "We don't [make things] any more — at least, not like we used to. Since 1987, manufacturing as a share of our gross domestic product has declined 30 percent."

First of all, note that Meyerson's second sentence does nothing to support his first. A decline in the manufacturing sector's share of the total economy can result from growth in other sectors, rather than from a decline in total manufacturing output, and that's what's happening in the U.S.

According to data from the 2009 Economic Report of the President, as gathered and reported recently by George Mason University economics professor Don Boudreaux, since 1987, real U.S. manufacturing output has increased by 81 percent. And as reported by the Bureau of Economic Analysis, American real manufacturing value-added — the market value of manufactured goods, over and above the costs that went into their production — reached a record-high level in 2007 (the last year for which final data are available), breaking the record set in 2006, which broke the record set in 2005, which broke the record set in 2004. Notwithstanding the recent recession that has affected all sectors of the economy, U.S. manufacturing has been thriving in recent years.

If Meyerson isn't intentionally misleading Washington Post readers, he is simply unqualified to be rendering conclusions about the state of manufacturing. A basic look at the history of the statistic he used shows its uselessness to the point he wants to make. Manufacturing as a share of gross domestic product peaked in 1953 at about 28 percent of the economy — well before the period of U.S. industrial prowess Meyerson yearns for — and has been trending downward ever since. Today manufacturing accounts for about 12 percent of our services-dominated economy, but manufacturing output and value-added are higher than ever in real terms.

Second, if the United States doesn't "make things anymore," nobody does. According to data from the United Nations Industrial Development Organization, U.S. factories are the world's most productive, accounting for 25 percent of global manufacturing value-added. By comparison, Chinese factories account for 10.6 percent.

That may be hard to fathom, given that U.S. factories tend not to produce the sporting goods, toys, tools, and clothing found in Wal-Mart and other retail outlets nowadays. But U.S. factories make pharmaceuticals, chemicals, technical textiles, sophisticated components, airplane parts, and other products. American factories have moved up the value chain.

Contrary to this last point, Meyerson asserts, "The long-term decline of American manufacturing has depleted our high-tech, cutting-edge industries as much as it has our more venerable sectors." To support his claim, he cites the value of our "high-tech" exports falling behind China's beginning in 2004. By "high-tech," Meyerson means computers, iPods, and other consumer electronic gadgets so ubiquitous nowadays. But in reality, the percentage of Chinese value-added in these so-called high-tech exports is quite small. Economists at the U.S. International Trade Commission estimate that only about 50 percent of the value of U.S. imports from China is actually Chinese value-added; the rest is value added in other countries and embedded in the components, design, engineering, and labor.

For iPods, the Chinese value-added is a few dollars on a product that costs $150 to produce and retails for $299. So, as China's "high-tech" exports leave America's "in the dust," their sale in the United States and elsewhere supports high-paying American engineering, marketing, and logistics jobs, while providing Apple with the profits to conduct R&D to employ more engineers and keep the virtuous circle going.

The factory floor has broken through its surrounding walls and now traverses borders and oceans. What we have now is a world in which it is no longer "Us versus Them," but rather "Us and Them," a formulation that has been helping U.S. manufacturing to thrive. Without complementary Chinese and other foreign labor, far fewer American manufacturing ideas would come to fruition.

American manufacturing is by no means in decline. What should be is Meyerson's myopic way of seeing things.

Fortunately, the United States does not have to wait for a negotiated trade agreement to benefit from a more open trade in services. The United States should continue to press other nations, including developing countries, to open their markets to American service providers, while removing unwieldy restrictions at home. By autonomously reducing the remaining barriers on maritime services, rail and air transportation services, distribution services, and restrictions on the temporary entry of workers from abroad, many of the benefits to American consumers and industry will be realized regardless of what other nations choose to do.

But restoring the pro-trade consensus must be a priority of the Obama administration. If the United States indulges misplaced fears, restrains economic freedoms, and attempts to retreat from the global economy, the country will suffer slower economic growth and have greater difficulty facing future economic and foreign policy challenges.

America's trade skepticism is largely the product of a top-down process. Perceptions have been shaped overwhelmingly by relentless political rhetoric that relies on three myths. Congress and the media have spoken for years about the decline of U.S. manufacturing as though it were fact, when the overwhelming evidence points to a sector that, until the onset of the current recession, was robust and setting performance records. Both lament the U.S. trade deficit without attempting to convey or even understand its causes, meaning, or implications. And both attribute these alleged failures of policy to lax enforcement of existing trade agreements.

President Obama should reexamine these premises. He will find that they are long on fallacy and short on fact. Meanwhile, the president will find it necessary to rein in the congressional leadership's increasingly provocative approach to trade policy if he is to have success repairing America's foreign policy credibility.

The determination of the president to arrest and reverse America's misguided and metastasizing aversion to trade could dramatically improve prospects for restoring the pro-trade consensus.

Or do "liberals" generally oppose liberalization?

The Democrats have done well at all levels nationwide. Are the Democrats liberals? Do they favor liberalization?

If the Democrats are liberals and care about the poor, here are some things they should move to liberalize —

School choice. Giving parents the purchasing power to choose schools for their children improves education. Sweden has vouchers and it works well. Evidence increasingly shows that choice works and top-down government control doesn't.

Immigration. Let more in, including the low-skilled. Most Mexicans who come are much poorer than poor Americans, and they send part of their earnings to family members abroad. Their experience in the United States imparts liberal norms and they spread those norms abroad. Why should concern for the poor end at the border?

International trade. When two people engage in voluntary exchange, they both expect to gain, even when they live in different countries. When Americans trade with Brazilians or Indians, there are mutual gains. The trading partner abroad is often poorer than the American. As Paul Krugman and many before him have explained, free trade allows firms anywhere in the world to take advantage of scale economies, producing more for humanity while consuming fewer resources. Everyone wins. Economists overwhelmingly support freer trade.

Agricultural subsidies and protectionism. Prices of certain agricultural products are propped up by an array of governmental restrictions and cartel measures. Everyone pays the price at the grocery store, and the impact is regressive. Most economists support liberalization and the reduction of farm subsidies.

Drug prohibition. Most of the hundreds of thousands caged in prison cells on drug violations are poor. The illegal drug trade especially ravages poor neighborhoods. Those who suffer from impure, ill-labeled black-market drugs are poor. Most of those injured in black-market violence are poor. Most economists who publish judgments on the issue favor liberalization.

Occupational licensing. Licensing requirements restrict the supply and variety of services and raise prices. They also prevent poorer people from entering trades. Economists who write on the subject say that voluntary certifications, reputation, and other assurances work well, and they favor liberalization. Morris Kleiner of the University of Minnesota and Alan Krueger of Princeton University find that occupational licensing affects upwards of 25 percent of the workforce. Both have published judgments favoring liberalization.

The minimum wage. Unskilled workers have to compete against higher-skilled workers, machines, and anything else employers might do with their money. The minimum wage law strips unskilled workers of their primary means of competing: Lowering their price. Even when the minimum wage does not put them out of work, it affects the non-wage job attributes. It stands to reason that unskilled workers who get jobs at the minimum wage tend to face higher work demands, less flexibility, less on-the-job training, less non-wage benefits, and less recognition and consideration. In a depressed economy it is important that labor markets remain fluid and flexible.

The Food and Drug Administration control of pharmaceuticals. All drugs and devices are banned until individually permitted by the FDA. The costs, delays, and uncertainties suppress the development of drugs that would have saved lives. Economists who publish judgments on the matter resoundingly support liberalization.

Urban transit. State and local laws prevent market forms of transit — shuttles, jitneys, mini-buses, share-ride taxis, and smart carpools. Free-market forces have been largely forsaken to protect and serve governmentally run or planned systems that ill-serve the goals of mobility and efficiency. Economists who write on rail transit largely agree that most rail transit projects are ill conceived.

Rent control. Roughly 200 localities still have rent control. Economists who publish on the matter largely agree that it reduces the supply and the quality of rental-housing and generates conflicts. It increases prices of housing outside the rent-controlled sector. Very likely in the long-run it increases rents even in the controlled sector.

Do we think the Democrats will move to liberalize any of these?

What will they liberalize?

Why again do we call them "liberals"?

In early 2008, before the subprime mortgage crisis caused financial upheaval, the "crisis" on everyone's mind was the rapid growth in food prices. The spike was fueled by a "perfect storm" of high oil and fertilizer prices, ethanol mandates that encourage the use of feedstuffs such as corn and soybeans in fuel production, adverse weather events in major food exporting countries, a downward trend in agricultural investment because of rich-world subsidies that depressed prices and closed markets, an increase in demand from rapidly growing developing countries, and depreciation of the dollar (in which most commodities are priced).¹ More than 40 countries experienced riots (and, in the case of Haiti, the downfall of a government) inspired by high food prices, and important agricultural exporting countries from Argentina to Ukraine introduced misguided policy responses ranging from export taxes to outright bans in an attempt to fix the problem. India, a huge global player in many commodity markets, extended bans on exports of rice, wheat, and other crops until April 2009.

Since the early months of 2008, when food prices were constantly front-page news, the world seems to have moved on. First, the global financial crisis and general economic slowdown is a greater threat, and certainly will have more impact on voters in rich countries than do food prices, which are a relatively small part of their household spending. Second, commodity prices, though still high by historical standards, have fallen from their June record highs (see Figure 1). Corn was then selling for about $7 a bushel and pushed toward $8 in midsummer, but has since fallen back to about $4. Similarly, soybeans are selling for just under $9 a bushel as of late October, well below the $16-plus price in June.

These dramatic declines have not yet translated into substantial falls in the prices that American consumers pay at the grocery store. The U.S. Bureau of Labor Statistics' index for food prepared at home (i.e., the prices that consumers pay at the grocery stores) had increased 7.6 percent during the year leading up to September 2008, although the pace of acceleration slowed to a 0.6 percent increase in the month of September, down from a 0.8 percent increase in August.² The general economic slowdown might see these increases decelerate somewhat, but the general consensus is that grocery prices are sticky downwards because firms are reluctant to be the first to cut prices in their category (ingredient prices are locked in months in advance). American consumers should not expect significant relief soon.

Likewise, international relief agencies and intergovernmental organizations insist that the crisis is still a major one, despite recent price falls. Indeed, Table 1 shows that global stocks of many commodities are still low, and Oxfam estimates almost 120 million more people are at risk of starving than before the recent price surge. Although the FAO Food Price Index dropped 13 percent in October 2008 and by 6 percent over the year since October 2007, it was still 28 percent above its October 2006 level.³ Food aid agencies' budgets are still stretched thin, and history suggests that "surplus disposal" of food stocks from developed countries will fall, too. On the other hand, agricultural exporters (potentially mainly developing countries, if comparative advantage was allowed to work its magic) will gain from higher prices.

To be sure, the historically low stocks of many food commodities suggest that food prices will remain above their historical averages for a time, even if stocks have rebounded somewhat since last year (see Table 1) and demand growth seems to have moderated. The slowing growth in demand for commodities is expected to continue, judging by recent falls in the Baltic Dry Index (more than 80 percent since early summer), which tracks prices for shipping bulk cargo and is considered a leading indicator of international trade activity. But there is much that governments can do-or refrain from doing-to ameliorate the price spikes and to allow the price signals to encourage farmers to invest in farming and increase production.

The WTO's Role?

Restrictions on exports of the type enacted by governments in the wake of this crisis may reduce their domestic price, but they also increase the world price of those commodities if the exporter is big enough to move the market. That harms importing countries and reduces agricultural investment and farmers' incentives to increase production (because the domestic price is held down artificially). Export restrictions therefore have the potential to exacerbate high food prices in the long run.

Can the WTO play a role in preventing the types of counterproductive export restrictions implemented by governments in the wake of soaring food prices? Certainly it is a problem that the WTO is unaccustomed to: when the Doha round of multilateral trade negotiations was launched in November 2001, the focus in agriculture was on long-run declines in commodity prices and the effect of high import barriers on poor farmers abroad and subsidies of rich-country governments that artificially depress prices.

Indeed, export restrictions were not explicitly part of the original Doha mandate at all, although Japan and other countries had expressed concern about them before the Doha round was launched.⁴ Events have changed the emphasis, though: the problems facing the world at the current stage of the round are vastly different from those facing the global trading system when the round was launched: for example, food commodity prices increased by about 98 percent from 2001 to July 2008.⁵ If prices remain relatively high, agricultural trade negotiators will be forced to address agricultural trade policies that seemed almost moot a few years ago. The likely resistance by some WTO members to new issues outside of the mandate will come up against pressure to do something for poor net food importers.

Unfortunately, the scope in the existing WTO rules to restrict the use of policies designed to keep domestic goods inside a border are not necessarily helpful, either; they are certainly less developed than those relating to (more common) policies to keep imports out or to promote exports. Article XI:2 of the General Agreement on Tariffs and Trade places a general prohibition on quantitative restrictions on imports and exports of goods, but makes an exception in subparagraph (a) for

export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party

(emphasis added, to show the conditions that WTO members would need to satisfy in order to exercise this clause, and which would doubtless be subject to legal interpretation in the event of a dispute).

In order to set some rules for this relatively new terrain, net agricultural importing countries Japan and Switzerland proposed new rules on export restrictions in an informal (and not publicly available) document on April 30, 2008. They suggested that WTO members limit export restrictions "strictly to the extent necessary," notify other WTO members before instituting restrictions (the current draft language requires members to notify others within 90 days after the restrictions are implemented) and to give due consideration to the effect on importers and food aid. They also proposed time limits on restrictions (in an attempt to define the "temporary" condition in GATT Article XI:2(a)) and binding arbitration in the case of a dispute.⁶ The current draft agriculture text in the Doha round contains a requirement to lift all current restrictions on exports within one year of a Doha deal coming into effect.⁷ But these proposals are languishing with the rest of the Doha agenda.

Another way in which the WTO talks could influence food prices is by encouraging an increase in the amount of biofuels that can be traded under the "in-quota" tariff rate (many agricultural goods are traded according to tariff rate quotas, whereby a certain amount of trade is covered by one tariff level called the "in-quota tariff" and any trade above that quota is covered by a higher rate, the "out-of-quota tariff"). There is currently some uncertainty around trade in alternative fuels. Ethanol destined for use as a biofuel does not have a specific customs classification, but it tends to be classified by customs officials as an agricultural product. Biodiesel (diesel fuel made from vegetable oils), on the other hand, is classified as an industrial good and so it will be subject to the formula reductions agreed on as part of the negotiations on nonagricultural market access. Tariff reductions for alternative fuels are therefore subject to a degree of jurisdictional overlap in negotiating committees on industrial products, agricultural goods, and trade in environmental goods. Leaving aside the merits of agricultural-based fuels as an alternative to fossil fuels, free trade in these products will ensure that they are produced in the lowest-cost manner.

A successful conclusion to the Doha round could contribute positively to agricultural trade flows if it reduced the legal caps on tariffs (called "bound rates") to their current applied rates, and preferably below. That limits backsliding when and if price trends change. For example, it might be tempting-although wrongheaded-to increase import tariffs to protect farmers in India as prices fall again. Bound limits to tariffs will prevent politicians from increasing import tariffs if they feel it would be expedient. More certain market access would also increase the incentive to invest in agricultural production.

Reform in food aid programs would do much to alleviate the pain to the poorest people from food price increases. The Bush administration, for example, proposed in its 2008 Farm Bill package to increase the proportion of aid that is given in cash rather than U.S.-grown crops, so that more food could be bought in the local developing country market or region. That would save money on shipping costs (inflated because of U.S. requirements that food aid be shipped using U.S. flagged and manned ships) and support local and regional producers. But the bipartisan coalition of farm-state politicians ignored that initiative along with other needed reforms to U.S. farm programs.

There is reason to hope that export restrictions may be eased as food stocks recover and prices come down. Farmers do indeed respond to incentives when they are allowed to do so: rice fields have expanded globally by almost 2.5 billion acres since last year.⁸ But if governments prevent the valuable signal given by high prices from getting through to producers, or if they hoard any increases in products from the international market, then prices will not moderate and the food price crisis will continue, with predictable and tragic effects worldwide.

Notes

1. Sallie James, "Food Fight," Cato Institute Free Trade Bulletin no. 31, January 31, 2008.
2. Bureau of Labor Statistics, "Consumer Price Index: September 2008," October 16, 2008, www.bls.gov/cpi.
3. Food and Agriculture Organization of the United Nations, "Food Price Indices: November 2008," www.fao.org/worldfoodsituation/FoodPricesIndex/en/.
4. For more information about efforts in the Doha round to discipline export restrictions, see www.wto.int/english/tratop_e/agric_e/negs_bkgrnd09_taxes_e.htm.
5. International Monetary Fund, Indices of Primary Commodity Prices, 1998-2008, October 8, 2008, www.imf.org/external/np/res/commod/table1a.pdf.
6. International Centre for Trade and Sustainable Development, "Japan, Switzerland Propose Stronger WTO Curbs on Use of Food Export Restrictions," BRIDGES Weekly Trade New Digest 12, no. 15, April 30, 2008, http://ictsd/net/i/news/bridgesweekly/11075/.
7. World Trade Organization Committee on Agriculture Special Session, Revised Draft Modalities for Agriculture, July 10, 2008, document number TN/AG/W/4/Rev.3, www.wto.org.
8. "Global Rice Market Seen to Remain Tight in 2009," International Herald Tribune, October 20, 2008, www.iht.com/bin/printfriendly.php?id=17093549.

Bankruptcy works for many companies -- but it wouldn't for the Big Three

Point: Gary Burtless

Two of the Big Three U.S. automakers face grave and immediate peril. They are burning through their cash reserves so fast that they may be forced to seek protection under the bankruptcy laws within the next couple of months. Ford, which is in a stronger financial position than Chrysler or General Motors, may not survive much longer than its more imperiled competitors.

If any of the automakers enters bankruptcy, it is far from certain it will emerge as an intact company or as recognizable part of a different company. Assets of the company may be liquidated, and nearly all employees of the firm may be let go. The failure of any one of the Big Three would also precipitate the bankruptcy of firms that supply parts and services to the auto industry. All together, these firms employ hundreds of thousands of workers, many of whom will lose their jobs.

Two developments have pushed U.S. automakers into their current fix. First, the surge in gas prices made it hard for them to sell many of their most profitable cars and trucks. For years after gas prices fell in the mid-1980s, profits of the Big Three depended on healthy sales of gas-guzzling vehicles, including pickup trucks and sport utility vehicles. The higher gas prices of the last few years made these vehicles much less attractive to consumers. Both auto sales and profits went into the tank.

Second, the U.S. credit crisis has made it harder for the Big Three to arrange car loans for their customers and to obtain credit to fund their own operations. In addition, the financial meltdown has reduced the value of the assets that back promised pensions and retiree health benefits. The companies must now find the resources to make up for the losses in their pension fund reserves.

The credit crisis would also make it difficult or impossible for a bankrupt GM and/or Chrysler to obtain private loans to maintain their operations after they enter bankruptcy. For this reason, if for no other, the companies may need emergency federal credit merely to unwind their operations in an orderly way if bankruptcy should occur.

I fear that bankruptcy would threaten the long-term survivability of an automaker, even if the company could obtain credit after entering bankruptcy. Bankruptcy works well in many cases. Reorganization of a firm under the protection of the bankruptcy laws often produces a more efficient, healthier company, one that can flourish after it has renegotiated its pre-bankruptcy debts.

For the Big Three, however, bankruptcy would be much less helpful.

Car buyers are not purchasing a product they expect to consume immediately or within the next couple of months. They expect their cars will last half a decade or more. Nearly all of them hope the car's warranty will be honored, its parts will continue to be available, and plenty of mechanics will be around to take care of the vehicle. An auto company's impending or actual bankruptcy would severely shrink demand for its products, and the effect would not be temporary. What is the value of an auto company when its customers think the firm might disappear soon?

Bankruptcy poses a smaller challenge when the product or service sold by a company does not involve a long-term relationship after the sale. If Campbell's Soup were to disappear tomorrow, the unused cans of soup in my kitchen would remain as valuable to me as they were when I bought them. The situation of an automaker is quite different. If Chrysler were to disappear next year, the value of my new Dodge Caravan would plummet. My fear about a Chrysler bankruptcy is that many consumers would respond by marking down the probability that a new Chrysler can be dependably maintained or profitably resold. This in turn would reduce the prices consumers are willing to pay for Chrysler vehicles. Consumers' pessimistic expectations would make the ultimate liquidation of Chrysler more certain.

Bankruptcy may needlessly kill a U.S. automaker that could survive and thrive with a restructuring loan from Washington. If one or more of the Big Three should disappear, the country would also lose hundreds of thousands of jobs, both in the auto companies and in firms that produce parts for U.S.-made cars. Firms would ultimately spring up or expand to fill the hole in the car market left by the disappearance of a major automaker. But there is no guarantee the cars would be produced in the United States or with the deep pool of skilled manpower that has been developed here.

The truth is, no one knows what would be lost by allowing one of the Big Three to fail. In the short run, hundreds of thousands of jobs are likely to be lost. The confidence of U.S. consumers and investors, already badly shaken, is likely to weaken further. Fervent believers in free markets believe the country will eventually obtain a long-term benefit from the failure of one or all of the Big Three. Better cars would be produced more efficiently and more cheaply by a new competitor.

It's a nice story. I wish I could believe it. I think we can obtain the same long-term benefit by extending federal assistance -- with tough conditions -- to the existing industry. The costs and disruptions along the way to a healthier auto industry are likely to be much smaller if the Big Three are helped now rather than allowed to fail early next year.

Gary Burtless, a senior fellow at the Brookings Institution, served in the Carter administration as a staff economist for the Department of Labor and the Department of Health, Education and Welfare.

Federal loans would only prolong the pain

Counterpoint: Daniel J. Ikenson

Gary,

At a general level, what troubles me most about your position is that it reflects blind faith in the presumed healing powers of our political representatives -- and encourages their delusions of grandeur. Purely and simply, politicians cannot insulate every last American from every form of financial hardship, regardless of what they tell us. Their attempts to do so would only increase and prolong the hardship.

In my view, there is no fairer or more sensible alternative to allowing market forces to determine the landscape of the U.S. auto industry.

Taxpayers should never be forced to subsidize businesses -- in particular, those that produce failure. When you subsidize something, you get more of it. If Congress gives the Big Three $25 billion of our children's money, expect more failure.

In your opening paragraph, Gary, you note that the Big Three are "burning through their cash reserves." Indeed they are -- to the tune of a collective $6 billion per month. How, then, is $25 billion going to do anything other than kick the can down the road four or five months (maybe six or seven, if they manage to cut some costs)? Demand is not expected to improve any time soon. If they are going to be in the same position in the middle of next year, why waste $25 billion now?

Though your skepticism about bankruptcy echoes the automaker chief executives' congressional testimony last month, Chapter 11 bankruptcy is a viable and perhaps necessary option. To address your two biggest concerns, automobile warranties can be guaranteed by a third party, and getting financing in bankruptcy is often easier than the alternative because new creditors get paid back first.

Since the Big Three's lobbying blitz began on Nov. 5, I haven't once heard the argument (from someone unrelated to the Big Three) that the bailout is a good idea because these are good companies that happened to hit a rough patch. You seem to be trying to make that argument by suggesting the automakers are in "their current fix" because of circumstances beyond their control: rising oil prices and the credit crunch. But isn't Big Three management culpable for a lack of foresight in not having diversified their product offerings when they were making big profits on gas guzzlers? Isn't the United Auto Workers union blameworthy for extracting concessions that it (and management) knew were unaffordable and would exacerbate the cost gap between Detroit and the U.S. foreign nameplate producers such as Toyota? The Big Three management and the unions are not innocent victims of circumstance.

Knowing that, the thrust of their argument for the bailout is that there are hundreds of thousands, if not millions, of jobs on the line. If Americans can't empathize with corporate jet-setters, surely they would support a bailout to prevent massive job loss.

First, we are in the midst of an economic recession. People lose jobs during recessions (regardless of what politicians promise). But the number of jobs at stake has been blown out of proportion. They are based on a report from the Center for Automotive Research, a guns-for-hire consulting group in Michigan, which became the centerpiece of the lobbying blitz. Those figures presume that if one of the Big Three goes down, then the parts suppliers will go down, ultimately leading to the collapse of the other two automakers. Where is the economic logic behind that assessment? If Chrysler goes down, its suppliers may lose Chrysler business.

But as GM and Ford pick up some of Chrysler's market share, won't their orders to suppliers go up? Doesn't Ford's chief executive go to sleep at night thinking about how he can eat into GM's market? Then why should GM's collapse (if it were to happen) be a problem for Ford?

If the economic impact of job loss is the best argument for a bailout, then it would be far more efficient to subsidize the compensation of displaced workers by extending or expanding unemployment benefits. This way, the failed companies can liquidate (if Chapter 11 isn't viable) and more successful foreign-nameplate U.S. automakers (Honda, Nissan, Toyota, Kia and so on) and their workers can realize their just rewards.

Daniel J. Ikenson is associate director of the Cato Institute's Center for Trade Policy Studies.

Local food is often better-tasting and more nutritious. That's a pretty good reason to pay more for it. Maybe you want to support small local farms. Go ahead, if that's your bag. But don't think going local does much to reduce your carbon footprint. And it shouldn't do much to ease your conscience.

How far your food travels matters a lot less than what kind of food it is, or how it was produced. According to a recent study out of Carnegie Mellon University, the distance traveled by the average American's dinner rose about 25 percent from 1997 to 2004, due to increasing global trade. But carbon emissions from food transport only saw a 5 percent bump, thanks to the efficiencies of vast cargo container ships.

A tomato raised in a heated greenhouse next door can be more carbon-intensive than one shipped halfway across the globe. And cows spew a lot more greenhouse gas than hens, or kumquats, so eating just a bit less beef can do more carbon-wise than going completely local. It's complicated.

But one thing is clear enough: the farmers in Mexico, China, and Brazil, who produce a lot of the imported food Americans eat, are poorer than the farmers here in Iowa. A lot poorer. The corollary of "eat local" is "don't eat Mexican," so to speak. But the way poor people get less poor is to do business with people who have a lot of money, like us. If the local stuff is mouthwatering, you might as well pony up. But if your salad is made with Mexican lettuce, savor your righteousness.

Will Wilkinson discusses the “eat local” movement on Marketplace Radio (August 27, 2008) [MP3]

Members and trade observers went through a roller-coaster ride of imminent success and imminent failure many times during the nine-day meeting in Geneva that was called in a last-ditch effort to finalize the round. But after some hope of a deal on July 25, as 30 trade ministers agreed on a broad outline of cuts to agricultural and manufacturing tariffs and subsidies, the final blow came from the failure of seven major trading nations to agree on special protections for a limited number of farm goods.

At the beginning of the week, it looked as though the United States was the key obstacle to securing agreement. Washington had offered to reduce the amount of trade-distorting farm support from the present annual cap of about $48 billion to $15 billion (later reduced to $14.5 billion), but other members dismissed that offer as insufficient given price-support and subsidy outlays of a projected $9 billion over the next few years. Moreover, the offer came with quite a string attached: an assurance from other WTO members of no legal action if those subsidies hurt other countries.

As it happens, the U.S. offer was the last headline-grabbing move by any of the parties involved in the talks. After that offer was made early in the week, talks degenerated with an unhelpful stance by Indian Commerce Minister Kamal Nath on the ability of India to shield its farmers from import surges. Further intransigence followed from China, which expressed a belief that it had cut its own tariffs by more than enough when it joined the WTO.

We can expect more dueling-by-press release over the coming days as countries seek to avoid blame for the collapse of the round, while also seeking political capital at home for taking a "firm stance" in support of a misguided notion of national interest.

Although consumers who would have benefited from lower taxes on imported food, clothes, and automobiles have been dealt a blow, some special interests will no doubt be breathing a sigh of relief. Farmers in rich countries, who jealously guard their subsidies despite overwhelming evidence of economic damage at home and abroad, will be delighted that their special protections remain intact for the foreseeable future. Carmakers, too, can take comfort behind tariff walls that add thousands of dollars to the cost of a car.

Service providers and other exporters in the United States, however, have just lost their best immediate opportunity to expand abroad, especially into fast-growing developing countries. Farmers in those developing nations, many of whom are very poor, will also suffer from today's collapse.

The danger now is that the WTO will become just a meeting venue and treaty custodian, or, worse still, a quasi-international court that risks irking members into withdrawing from the organization. A litigation body without the constant promise of further negotiated reductions in trade barriers and subsidies would expose the WTO to further weakening.

While the present reality of globalized trading with international supply chains means we are unlikely to return to the trade-war era of the 1930s, a successful Doha round would have cemented the progress made since those dark days.

Of course, a deal was always a stretch considering the antitrade mood in the U.S. Congress -- a mood unlikely to be improved by the national elections in November. The 2006 congressional elections saw many pro-trade members replaced with outspoken trade skeptics, and with the economy slowing down and much-publicized malaise sweeping the nation, that trend looks set to continue. As testament to the power of the U.S. farm lobby, Congress was unlikely to agree to the type of deal that looked set to come out of Geneva this week.

But it would have been nice to produce an agreement, if only to send the message that -- go figure -- trade ministers understand the inherent value of trade.

In consequence, the statute books were stuffed with laws prohibiting many of the activities that would normally accompany the free trade in grain.

The arguments against government interference and for freedom in the grain trade were laid out in a comprehensive way by Condorcet (1743-1794) and Turgot (1727-1781) in France and Adam Smith (1723-1790) in England.

The serious student should consult Condorcet's Reflexions sur le commerce des bles (1776), Turgot's Lettres sur le commerce des grains, published posthumously in 1788, and Smith's The Wealth of Nations (1776).

For example, Smith discussed at length both speculation over time (buying low now in hope of selling high in the future) and arbitraging over space (buying low at one location in hope of selling for more than the purchase price plus transport costs at another location).

The first activity was known as forestalling and the latter engrossing. For Smith, forestalling and engrossing were a "most important operation of commerce".

And as he concluded: "The popular fear of engrossing and forestalling may be compared to the popular terrors and suspicions of witchcraft. The unfortunate wretches accused of this latter crime were not more innocent of the misfortune imputed to them, than those who have been accused of the former."

Invisible hand

Smith's prescription (as well as condorcet's and turgot's) was that governments should heed the maxim of laissezfaire. The idea of Smith's invisible hand was clear: "It is the interest of the people that their daily, weekly, and monthly consumption should be proportioned as exactly as possible to the supply of the season. The interest of the inland corn dealers is the same. By supplying them as nearly as he can judge, in this proportion, he is likely to sell all his corn for the highest price, and with the greatest profit; and his knowledge of the state of the crop, and of his daily, weekly, and monthly sales, enable him to judge, with more or less accuracy, how far they really are supplied in this manner. Without intending the interest of the people, he is necessarily led, by a regard to his own interest, to treat them, even in years of scarcity, pretty much in the same manner as the prudent master of a vessel is sometimes obliged to treat his crew."

As I pointed out in my May column "On Rice and Corn Laws", public opinion was eventually turned around and the Corn Laws were repealed.

What's behind the high prices

With rice prices soaring, the public's ire about speculators has risen – just as it did in the days of old.

No current-day politicians have matched Vladimir Ilyich Lenin, who told the Petrograd Soviet that "until we apply terror to speculators – shooting on the spot – we won't get anywhere."

That said, India's government has taken to shuttering commodity futures exchanges to protect the public from the sky-high prices caused by speculators. Interestingly, many commodities whose prices have surged such as tungsten and cobalt are closely held and don't trade on futures exchanges. Never mind. As Condorcet, Turgot and Smith might have said, what nonsense.

If it's not the speculators, then what is causing rice prices to surge? The rice price problem (and that of other commodities) is largely a dollar problem.

The fall in the dollar relative to gold has forced a massive increase in the world price of rice and other commodities.

David Ranson and I have constructed the accompanying chart that illustrates the way that the price of rice responds to changes in the price of gold.

The monthly history of the gold price for the past six decades is divided into three categories, according to the degree of the gold price change in the initial month. The evolution of the price of rice over the following year is then plotted.

It's clear that changes in the dollar's price have accounted for the lion's share of the changes in rice prices historically. Today is no different. It's time to stop blaming the speculators and start pointing a finger at the weak dollar.

The United Nations Food and Agriculture Organization estimates that world production of cereals was a record 2,108 million tons in 2007, and will hit a new record of 2,164 million tons in 2008. Rice production will rise by 7.3 million tons and wheat by 41 million tons. World cereal consumption has been growing slightly faster (3%) than production (2%) for a decade, so global stocks have fallen to 405 million tons. But this is not a disaster scenario, and it hardly explains skyrocketing prices.

In the U.S., one-fifth of the corn crop has been diverted to ethanol, and in Europe, some vegetable oil has been diverted to biodiesel. These ill-conceived policies have induced farmers to switch significant acreage from wheat to corn, soybeans and rapeseed, but world wheat output has nevertheless risen from 596.5 million tons in 2006 to an estimated 647.3 million tons in 2008. Corn-based ethanol cannot explain the runaway increase in the price of rice, which grows in very different conditions.

Biofuels caused an initial spike in prices, which then led to panic, export protectionism and speculation in commodities futures -- and these latter factors have increased prices much further. To protect domestic consumers from rising world prices, dozens of governments have curbed the export of rice and wheat -- principally Argentina, Brazil, Russia, China, India, Ukraine, Vietnam, Cambodia, Pakistan, Egypt, and Indonesia.

Export controls have reduced the amount of rice and wheat available for world trade. The FAO estimates that world trade in rice will fall from 34.7 million tons in 2007 to 28.7 million tons in 2008, and trade in wheat from 113 million tons to 106 million tons. Actual trade may fall even more, as more and more countries impose export controls. Absent these limitations, it would be inconceivable for trade in grain to contract so sharply after record world harvests.

Countries limiting exports hope to reduce hoarding, which could send prices even higher. India has set limits on the stocks that each trader can hold.

But countries imposing export controls, have, in effect, become hoarders themselves, creating an artificial scarcity in the world market, and an artificially high world price. Farmers know what their crops could fetch on the world market, so they demand higher prices at home. And around and around we go.

This has eerie similarities to the Great Depression, when many countries resorted to import protection to protect jobs at home, and simultaneously devalued their currencies to try and push up exports. Yet the Great Depression got worse, thanks to what John Maynard Keynes called the fallacy of composition.

If one country alone resorts to import protection and devaluation, it can temporarily increase jobs. But at a global level, one country's exports are another's imports. If all countries reduce their imports, they unwittingly end up reducing their exports, too. And job losses get worse.

Today, each country wants to curb agricultural exports and stimulate imports to reduce prices. But if every country limits exports, the result is a decline in world imports, so prices rise instead of falling.

Solving the problem may require coordinated international action. After the Great Depression, the world community created the Global Agreement on Tariffs and Trade -- which later morphed into the World Trade Organization -- to negotiate simultaneous cuts in import barriers by major trading powers. This coordinated approach thwarted free riders, and gradually gained acceptance by all.

WTO rules permit food export limitations. In the Doha Round of trade negotiations, WTO has sought to reduce agricultural subsidies causing excess production. It never anticipated that export controls might create scarcities.

The new developments may improve the prospects of the Doha Round. But quick action is needed to tackle rising hunger. The WTO should convene an emergency meeting for countries to jointly reduce export controls. Even modest concessions can be in exporters' self-interest, as they would cause world prices to fall sharply, and thus ease domestic price pressures.

The terrible irony is that world grain production will be at a record high in 2008. People are hungry, and it's not because there isn't enough food to go around.

Not surprisingly, this buffer-stock variant of "Father knows best" has not worked. For one thing, it assumes that government bureaucrats possess the same knowledge of market fundamentals and face the same incentives as well-financed, farsighted private traders. It also assumes that politics will not raise its ugly head. Both of these heroic assumptions are not met in the real world. Government buffer-stock schemes are rife with politics, and instead of generating profits from buying low and selling high, they tend to generate losses.

Rice is one of the most government-controlled commodities in the world. There are subsidies for rice producers and consumers. There are tariffs, quotas and, yes, buffer-stock programs. In consequence, the world's rice markets are fragmented and only 6% to 7% of world production is traded internationally.

Over the past year rice prices have more than doubled. Not because of private speculation and hoarding but because of government speculation and hoarding. As the price of rice began to climb, governments invoked their concerns for food security and increased their hoarding propensities. Exporting countries imposed restrictions to keep rice at home, while some of the largest rice importers signaled that they intended to significantly increase their buffer stocks. This proved to be a deadly supply-demand cocktail that set off panic buying, a price surge and food riots.

But this isn't the end of the rice story. Japan announced last month that it wants to export rice. The Japanese rice industry is superprotected, and the government holds huge stockpiles. Part of these stocks are accumulated because Japan agreed, as part of a World Trade Organization deal, to make regular purchases from foreign producers, mainly the U.S. To keep domestic rice prices high, the Japanese government hoards its WTO-mandated imports. Now that Japan wants to unload some of its rice, opposition is flaring up in Washington and other capitals, claiming that re-exports are not allowed under the agreement. When it comes to filling or releasing government stockpiles, politics clearly rules the roost.

The mother of all commodity hoards is the U.S. Strategic Petroleum Reserve. At its current status of 97% full, the SPR is more than twice the size of private crude oil inventories, with enough reserves to cover about 71 days of U.S. crude oil imports or 47 days of total U.S. crude oil consumption.

Last month Congress voted overwhelmingly to force President Bush to stop filling the SPR just as its capacity was about to be reached. The President magnanimously complied, and Congress began to debate whether crude oil in the SPR should be released to break the back of speculators.

What should be done with the hoard of crude? It's time to remove the release rules from the grip of politics. Market-based release rules would transform the SPR into an oil bank. It would provide the country with a huge precautionary inventory of oil, generate revenue to defray some of the government's stockpiling costs, smooth out crude oil price fluctuations and push down spot prices relative to prices for oil to be delivered in the future.

How would an oil (or rice) bank work? The government would sell out-of-the-money call options on its stockpiles. It might, say, sell December 2008 oil options with a strike price of $200 a barrel. If the price surged above that level, the option buyer would exercise and take delivery of crude oil from the government's stockpile. If the price never reached $200, the option would expire worthless, and no crude oil would be released.

Let the market, not politicians, determine the flow of rice, oil and other commodities. Lower, more stable prices will ensue.

The most recent rice price spike is partially the result of countries such as India and Egypt imposing restrictions and bans on exports, plus the desire of other governments including the Philippines, the world's largest rice importer, to bulk up their stockpiles. But the blame for the long-term trend of higher prices should be placed upon those who've delivered a weak U.S. dollar.

Not surprisingly, those who reside inside the Beltway, including Donald Kohn, vice chairman of the Federal Reserve, disagree. Mr. Kohn said in a speech in May that "the reduced foreign exchange value of the dollar may have played a role in the rise in the prices of oil and other commodities, but it probably has been a small one."

But determining what's behind the escalation in commodity prices involves a principle to which economists universally pay lip service but in practice often ignore or forget: the distinction between nominal prices and relative (real) prices. Nominal prices of commodities are determined by the value of the currency used to stipulate them, while relative prices of commodities are determined by supply and demand — scarcity, glut and other "real" causative factors.

When the value of the dollar falls, the nominal dollar prices of internationally traded commodities, like gold and rice, must increase because more dollars are required to purchase the same quantity of any commodity. That is why commodity traders know that everything trades off of changes in the value of the greenback. Accordingly, a weak dollar should signal higher commodity prices.

The accompanying chart tells the story. As the value of the dollar declines, the nominal dollar price of gold (our benchmark) increases. This is followed by a parallel change in the nominal dollar price of rice. The monthly price history of gold for the last 60 years is divided into three categories, according to whether the nominal dollar price of gold rose more than 10% in a month, rose less than 10%, or declined.

In the first category (22 months), the gold price rose more than 10% in "month zero" and the price of rice climbed sharply over the ensuing months, with an average cumulative increase of 25% over the next 12-month period. In the second category (278 months), the gold price rose in "month zero" by less than 10% and the price of rice rose moderately, with an average cumulative increase of about 7% over the next 12 months. In the last category (398 months), the gold price was stable or declined and the price of rice barely moved over the next 12 months.

Other data also suggest that the effect of the gold price on rice prices is roughly proportionate. For example, during the long period of the dollar's strength, from the end of 1979 to the end of 2001, gold suffered a cumulative decline of 40%, while rice experienced a cumulative decline of 52%. During the subsequent six years from the end of 2001 to the end of 2007, the price of gold rose 191% and the price of rice rose 127%.

Officials should stop wringing their hands over sky-high rice prices caused by alleged changes in rice's supply-demand fundamentals, and politicians should refrain from pointing accusative fingers at speculators and hoarders. The rice-price problem is a weak dollar problem. Until the dollar strengthens, the nominal dollar prices of rice and other commodities will remain elevated.

While it would be easy to chalk this travesty up to congressional Democrats — after all, President Bush has vetoed the bill — complacent Republicans in Washington deserve much of the blame.

In the House, passage of the farm bill was never in question. With Bush dead-set against it, the issue had been whether or not there would be sufficient opposition to sustain a presidential veto. That's where House Republican leaders dropped the ball.

To his credit, the top House Republican, Rep. John Boehner (Ohio), has openly stated his opposition to the farm bill. "The [legislation] ... extends flawed policies that keep American farmers dependent on government subsidies and discourage other countries from opening their markets to American farm export"," he noted in a May 13 letter to a colleague. "This approach doesn't help American farmers — it hurts them. We shouldn't support it."

Sage words indeed. Yet Boehner refused to use his position as House minority leader to pressure his colleagues to oppose the bill. Instead, he adopted a "vote your district" policy, which allowed GOP members to vote however they saw fit without fear of retribution.

The result? A behemoth of a bill that not only includes a continuation of price-linked subsidies, but also creates a new program that would encourage farmers to grow crops on marginal land.

House Republicans might have significantly improved the farm bill long ago when they assigned members of their caucus to committee seats. Instead, they packed their slots on the Agriculture Committee with members representing districts that receive a disproportionate amount of farm subsidies — and therefore enthusiastically support the status quo. Seventeen of the 21 Republicans on the House Agriculture Committee ended up voting for the farm bill. (Rep. Jean Schmidt, R-Ohio, did not cast a vote.)

House Republican leaders could have loaded the committee with congressmen who would push for caps and tighter means-testing on subsidy payments. If they had, Republicans might have improved upon the means-testing provisions, which Democratic leaders hail as serious reform, but which still enable a farming couple earning $2.5 million per year after deducting expenses to continue receiving checks from Uncle Sam.

In the Senate, Republican leadership has been similarly indifferent to reining in agriculture spending. Senate Republican Leader Mitch McConnell has openly supported the farm bill — and lobbied to include a special provision benefiting horse owners, many of whom reside in his home state of Kentucky. As in the House, Senate GOP leaders packed the Agriculture Committee with senators who consistently support higher spending. Of the 10 Republican committee members, only Sen. Richard Lugar of Indiana has regularly criticized subsidy payments.

The White House deserves similar admonition. Though President Bush stridently opposed the bill, his staff began lobbying aggressively against it only days before the vote on the conference report. Had they started earlier and worked harder, they might have convinced enough Republicans to oppose the bill — and maybe even enough to sustain a veto.

At the end of the day, taxpayers will be left holding the bag for a massive new farm bill that kicks them when they're down and damages America's competitive standing. And while some may be tempted to place the blame squarely on the shoulders of congressional Democrats, let's not forget that the Republicans rolled over, too.

The United Nations Food and Agriculture Organization estimates that world production of cereals was a record 2,108 million tons in 2007, and will hit a new record of 2,164 million tons in 2008. Rice production will rise by 7.3 million tons and wheat by 41 million tons. World cereal consumption has been growing slightly faster (3%) than production (2%) for a decade, so global stocks have fallen to 405 million tons. But this is not a disaster scenario, and it hardly explains skyrocketing prices.

In the U.S., one-fifth of the corn crop has been diverted to ethanol, and in Europe, some vegetable oil has been diverted to biodiesel. These ill-conceived policies have induced farmers to switch significant acreage from wheat to corn, soybeans and rapeseed, but world wheat output has nevertheless risen from 596.5 million tons in 2006 to an estimated 647.3 million tons in 2008. Corn-based ethanol cannot explain the runaway increase in the price of rice, which grows in very different conditions.

Biofuels caused an initial spike in prices, which then led to panic, export protectionism and speculation in commodities futures -- and these latter factors have increased prices much further. To protect domestic consumers from rising world prices, dozens of governments have curbed the export of rice and wheat -- principally Argentina, Brazil, Russia, China, India, Ukraine, Vietnam, Cambodia, Pakistan, Egypt, and Indonesia.

Export controls have reduced the amount of rice and wheat available for world trade. The FAO estimates that world trade in rice will fall from 34.7 million tons in 2007 to 28.7 million tons in 2008, and trade in wheat from 113 million tons to 106 million tons. Actual trade may fall even more, as more and more countries impose export controls. Absent these limitations, it would be inconceivable for trade in grain to contract so sharply after record world harvests.

Countries limiting exports hope to reduce hoarding, which could send prices even higher. India has set limits on the stocks that each trader can hold.

But countries imposing export controls, have, in effect, become hoarders themselves, creating an artificial scarcity in the world market, and an artificially high world price. Farmers know what their crops could fetch on the world market, so they demand higher prices at home. And around and around we go.

This has eerie similarities to the Great Depression, when many countries resorted to import protection to protect jobs at home, and simultaneously devalued their currencies to try and push up exports. Yet the Great Depression got worse, thanks to what John Maynard Keynes called the fallacy of composition.

If one country alone resorts to import protection and devaluation, it can temporarily increase jobs. But at a global level, one country's exports are another's imports. If all countries reduce their imports, they unwittingly end up reducing their exports, too. And job losses get worse.

Today, each country wants to curb agricultural exports and stimulate imports to reduce prices. But if every country limits exports, the result is a decline in world imports, so prices rise instead of falling.

Solving the problem may require coordinated international action. After the Great Depression, the world community created the Global Agreement on Tariffs and Trade -- which later morphed into the World Trade Organization -- to negotiate simultaneous cuts in import barriers by major trading powers. This coordinated approach thwarted free riders, and gradually gained acceptance by all.

WTO rules permit food export limitations. In the Doha Round of trade negotiations, WTO has sought to reduce agricultural subsidies causing excess production. It never anticipated that export controls might create scarcities.

The new developments may improve the prospects of the Doha Round. But quick action is needed to tackle rising hunger. The WTO should convene an emergency meeting for countries to jointly reduce export controls. Even modest concessions can be in exporters' self-interest, as they would cause world prices to fall sharply, and thus ease domestic price pressures.

The terrible irony is that world grain production will be at a record high in 2008. People are hungry, and it's not because there isn't enough food to go around.

Rice prices have contributed mightily to the ratchet – more than doubling since the beginning of the year. That said, the futures markets for rice, which are admittedly fragmented and thin, indicate that there are not acute rice shortages.

Given the recent food riots, the surge in the volume of news coverage about rice shortages and the political panic about rice policies – this news from the futures markets strikes a dissonant cord.

The economics of commodity markets provides the key to unlocking this mystery. The net cost of carrying inventories is equal to the interest rate, plus the cost of physical storage, minus the "convenience yield".

The convenience yield is driven by the precautionary demand for the storage. When the convenience yield is zero, a market is in "full carry", future prices exceed spot prices and inventories are abundant.

Alternatively, when the precautionary demand for a commodity is high, spot prices are strong and exceed future prices, and inventories are unusually low.

As the term structure of rice prices makes clear (see chart), the precautionary demand in Thailand is not elevated and inventories are ample. Indeed, for the term structure of prices to be signaling unusually low inventories, the term structure would be negative in slope, not positive.

In most countries, rice production and trade are subject to a plethora of laws and regulations. Subsidies to rice producers and consumers are widespread. Tariffs on imports and exports are common, as are import and export quotas.

Many of these policies derive from a food security rationale and the desire to keep a large proportion of rice production at home. In consequence, rice markets are segmented, with wide differences in rice prices (adjusted for rice quality and transport costs) among countries.

Not surprisingly, a relatively small proportion – only 6%-7% – of world production is exported.

To understand the distortions, inefficiencies and huge budget and economic costs associated with government meddling in Indonesia's rice production and trade all one has to do is read the current issue of the prestigious Bulletin of Indonesia Economic Studies.

It is hot off the press. This special issue of the BIES is devoted to Indonesia's rice policies.

A few of the findings in this dense volume give the flavor:

• The government employs policies that promote higher domestic Indonesian price prices in the desire to protect farmers and to reduce poverty. There is one problem with the government's policy premise: empirical evidence fails to support it. Indeed, according to the BIES, high rice prices hurt the large majority of Indonesians – perhaps 80%.



• A detailed analysis of rice production and consumption data shows that estimates of surpluses or deficits are unreliable. Indeed, they are so unreliable that one cannot accurately determine whether there is a surplus or deficit. This is remarkable because the estimates of surpluses or deficits are precisely the basis used by the government to determine the scale of official imports.
  
  In short, the unreliability of production and consumption data simply makes bufferstock strategies and other options proposed by central planning prophets infeasible.



• If all this isn't disturbing enough, the BIES presents evidence showing that greater parliamentary democracy in Indonesia has increased the political clout of farmers and agricultural processors. This, combined with parliamentarians' embrace of economic nationalism, has strengthened the support for more protectionism of the rice industry.

Now that governments in the rice-consuming countries have hit the panic button, we are witnessing a stampede to introduce more interventionist measures, discredited central planning solutions and more government-to-government trade deals.

This amounts to trying to deal with the problems created by massive government- created market distortions in the rice trade by throwing in some more distortions. This will, no doubt, simply magnify our current rice problems.

Rice laws and regulations are going in the wrong direction. It takes one back to the British Corn Laws. These mandated the virtually complete government regulation of British agriculture at the start of the nineteenth century.

Fortunately, that yoke was removed in 1846. Thanks to the efforts of Richard Cobden, John Bright and the Anti-Corn Law League, the Corn Laws were repealed. This resulted in the promotion of free trade, the importation of cheap food and a major surge in British standards of living.

What rice needs today isn't more government meddling but a modern version of the Anti-Corn Law League.

After consultation with the administration, the House Agriculture Committee proposed a bill recently that would spend $6 billion more over 10 years than a simple extension of current policy. That's a slight savings from the House's original proposal, which the president had threatened to veto. The agreement tightens eligibility requirements for farmers who receive subsidies, which would mean no payouts to farmers earning an adjusted gross income of more than $900,000 per year, or $500,000 if less than two-thirds of the income is derived from farming.

Those changes are welcome, but nowhere near the administration's initial demand of a $200,000 cap. According to the U.S. Department of Agriculture, in 2005, farms with average household incomes of $200,000 per year accounted for 9 percent of all farms but received 54 percent of government payments.

Similarly, although the new House proposal makes no changes to programs that increase subsidies when prices fall, it proposes to pay for extra spending on conservation and nutrition programs by suspending payments that go to farmers regardless of prices or production. Suspending payments for one year, that is: 2017. But these subsidies - called direct payments - are the least senseless of the commodity programs, and until recently, they were the administration's preferred method of supporting farmers' incomes. It's hard to see what the Bush team got for negotiating them away. How likely is it that a proposed cut in subsidies almost 10 years from now will stick? Congress can always find ways around proposed reforms, and has a habit of it.

For its part, the Senate has thrown a wrench in the House deal with the administration by insisting on programs costing an extra $12.3 billion over 10 years. Senators insist that they need more money for their pet projects if they are to avoid cutting into commodity subsidies (God forbid). One of those pet projects has become a major sticking point between the House and the Senate: a disaster assistance trust fund costing $5 billion over 10 years.

Senate Agriculture Committee members eager to find funds for extra goodies agreed to demands by powerful Senators Kent Conrad (D-N. D.), the chair of the Senate Budget Committee, and Max Baucus (D-Mont.), chair of the Senate Finance Committee, to establish the trust. Not by accident, the Environmental Working Group estimates that farmers from North Dakota and Montana, along with Kansas and Iowa, would collect more than half of the aid it would disburse. In any event, the Bush administration has rejected the Senate proposal as too expensive.

With the deadline looming, House and Senate negotiators seem to be closing in on a final compromise of $9 billion over the baseline.

In other words, the only possible compromise would cost taxpayers as much as two nuclear aircraft carriers in a year when the larger economy is slowing, and USDA forecasts that net farm income will amount to a record $92.3 billion.

It's unclear how the congressional wranglings will work out, but one thing is for sure: The administration was wrong to agree to the House's new deal, and it shouldn't go along with the $9 billion compromise.

While marginally better than last year's Senate farm bill, this is nowhere near the sort of change America needs. If Presidential Bush were to veto Congress' compromise, he could put Congress in the uncomfortable position of defending its desire to give big payouts to the wealthy.

The central government of China, facing a daunting task of building a harmonious society and developing the country in a balanced way, issued the No. 1 Central Document, its first major policy directive of the year, on the eve of the New Chinese Year. The document is unprecedented in its concern for land rights, and the degree of detail it devotes to specific mandates to protect the land rights of the 700 million rural Chinese.

This document is Beijing's strongest response yet to the disturbing fact that farmers' individual land rights remain insecure a quarter-century after the breakup of the collective farms, discouraging investment in land improvements and facilitating rampant land expropriations and irresponsible urban development.

Insecurity of farmers' land rights slows agricultural development and greatly affects farmers' peace of mind. In the first nine months of 2006, 17,000 cases of "massive rural incidents" (often violent protests) were officially reported, involving about 400,000 farmers. Land grievances were their top complaint.

With the widening gap between rural and urban development, more than 200 million farmers have migrated to cities, especially to developed coastal areas, seeking a better livelihood. Still other forms of upheaval result from this growing "floating population," as just witnessed in the toxic combination of natural disaster and transportation paralysis.

For the most part, the central government is actually not to blame for farmers' insecurity and a lagging agricultural sector. A series of national laws have been adopted to strengthen farmers' land rights since the 1990s.

The problem lies with local implementation: farmers' land rights are illegally "readjusted" away based on household population changes, reassigned to "outside developers," or taken by the cadres and sold for enormous profit to non-agricultural users. In a kind of double whammy, local governments exercise virtually unfettered power to expropriate farmlands for urban biased development, with grossly insufficient compensation to the farmers.

Against this backdrop, most of the tremendous wealth generated by China's reforms over the past three decades has not flowed into the countryside. The official rural-urban income ratio has worsened to 1:3.28, even without considering many social benefits available only in cities. Without secure property rights that would encourage them to make long-term and productivity-enhancing investments in land, many farmers choose working in developed cities.

One does not need to look far for counter-examples: after Japan, South Korea and Taiwan completed their post-war land reforms and ensured the security of farmers' land rights. Their rural economies roared ahead, resulting in a prosperous countryside that has helped moderate mass migration to cities, spreading it over two or more generations.

The 2008 Central Document now sends a powerful signal of change, assuring farmers' land rights in an unusually extensive and forceful way. Highlights include:

• Local governments and collective cadres must strictly implement legal rules on prohibiting readjustment and taking-back of farmers' land rights for selling them to non-villager developers.



• No land expropriations by local governments will be approved unless and until all procedural safeguards are satisfied, compensation is deemed adequate and fully delivered to the hands of affected farmers, and a social security safety-net is in place.



• Land rights certificates, which are the ultimate proof and documentation of land rights, must be issued to every farm household.



• For the first time, the Central Document calls for establishing a rural land rights registration system that provides further assurance and security to farmers.

The implementation of these policies will meet considerable local resistance, and it will require determination and ingenuity to pull it off. Beijing will have to put teeth in the policy. Political careers of local officials should be tied closely with their implementation of these pro-farmer initiatives. Serious consequences should be imposed, including removal from official posts, fines, civil or even criminal liabilities.

Last summer, several Ministries launched a joint campaign to inspect and rectify rural land violations. More than a thousand local officials were sanctioned over a three-month period as a result.

There should also be independent and comprehensive monitoring of local progress. Relying on self-reports from local governments on matters like this has been proven grossly inadequate. Sending independent inspection teams to the field will generate essential first-hand information, but it is not practical to have inspection teams everywhere.

The World Bank, my colleagues and I at the Rural Development Institute, and others have applied another useful approach to such monitoring of farmers' land rights -- including large-scale sample surveys -- over the past decade. A further option is to create channels, such as telephone hotlines, by which farmers can instantly report violations as they occur. News media and grassroots NGOs should be encouraged to monitor and report freely.

Finally, in the medium term, an accessible and reasonably independent judicial system needs to be established along with legal aid services for farmers. Local courts can hardly serve as an impartial forum to address farmers' complaints at present, because they are largely appointed and funded by local governments that are often the wrongdoers in land disputes. This link must be severed.

Meanwhile, legal professionals should be encouraged to provide independent legal aid services to aggrieved farmers, to at least partially mitigate the present judicial failure.

The clear implication of this powerful new document is that Beijing finally means business on securing land rights in farmers' hands. Grassroots development and "peace in mind" should follow.

Paying More for Food

During the calendar year 2007, food prices in the United States increased by 4.9 percent, with especially marked hikes for staples such as milk, cheese and bread (see Table 1). That was higher than the overall inflation rate for urban consumers (the CPI-U) of 4.1 percent over the year to December 2007 and much higher than the 2.1 percent increase in food prices in 2006.[1] In other words, food prices are rising more quickly than consumer prices overall, and more quickly than in the previous year. In the seven years 2000 to 2006, food prices increased by a comparatively modest average of 2.5 percent a year.

Table 1Food Product Price Increases (12 months ending December 2007)

Although U.S. government policies are clearly contributing to higher prices, other international factors are also at play. The food price index used by the Food and Agriculture Organization of the United Nations increased by almost 40 percent in the one year period since September 2006, primarily because of increases in the prices of dairy products and grains. That compares to a 9 percent increase in the 12month period to December 2006.[2]

Poorer people are especially hurt by higher food prices, because those with lower incomes spend a higher proportion (up to 50 percent) of their disposable income on food. To the extent that they prepare meals at home, the effect is more direct as they are closer to the origin of the supply chain (where there is less potential for absorbing higher prices). For those low-income countries that are net food importers, and therefore receive little offsetting gain for their farmers from higher food export prices, the situation looks worse: the FAO recently estimated that the total cost of imported food for this group of countries in 2007 would be some 25 percent higher than the previous year.[3] American (and European) biofuels policies that artificially inflate food prices abroad are harming the poorest of the world.

The frustration is showing. Rising soybean prices have seen mass street protests in Indonesia recently.[4] Other governments, such as those in Egypt, India, Kenya, Morocco, the Philippines and Vietnam have implemented what lamentably few governments will acknowledge is the right policy and have reduced tariffs on imported food (some of them have also restricted exports).[5] China has recently introduced price controls on grains and their products, edible oils, dairy products, milk, and eggs in an effort to control inflation.[6] The European Union recently suspended its land set-aside requirements in order to replenish grain stocks.

Growing demand for food, feed and fuel, combined with tight supply conditions, is driving this phenomenon. Global commodity stocks are at historic lows: wheat stocks, for example, are the lowest level since FAO began keeping records in 1980. Add this to a drought in wheat-exporting Australia and the price for wheat is at an all-time high, having doubled since early 2007. Without increased agricultural productivity, the trend is set to continue. The International Food Policy Research Institute recently estimated that global cereal prices will be 10 to 20 percent higher by 2015.[7] Futures prices for commodities indicate that the market expects high prices to continue for the foreseeable future.

In the past, agricultural commodity prices have been characterized by volatility around a trend decline, with periods of low prices typically outlasting temporary rallies. That was because commodity prices were mainly supply-driven: technology and productivity improvements increased agricultural yields, with weather conditions causing short-term fluctuations. While agriculture is still subject to the vagaries of the weather and will continue to benefit from productivity improvements, drought in Australia and the end of dairy export subsidies in EU have contributed to lower global supplies. Higher fuel prices have increased the cost of transporting commodities.

Facts on the demand side suggest that the recent price increases are more structural compared to the cyclical, supply-driven booms of the past. Government policies in developed countries that seek to support farmers by creating artificial demand for ethanol are an important culprit. In addition, economic growth in countries such as China, Brazil, and India has created a large and growing middle class that is acquiring western-style eating habits. The Chinese, for example, have almost doubled their consumption of meat from about 44 lbs. per capita in 1980 to 110 lbs. per capita today.[8] That in turn has pushed up demand for feed grains, because one lb. of beef requires about 13 lbs. of grain to produce.[9] Although high prices will encourage entrepreneurs to increase production, and infrastructure investment will help increase yields and correct the current market imbalance, government actions are impeding the efficient allocation of resources that would normally see lower prices.

How U.S. Government Policy Exacerbates Food Costs

Of the extra money that Americans are spending on food, some of it is as a direct result of government action. Consumers paid an implicit food tax of $5 billion in 2006, according to the Organization for Economic Cooperation and Development, because the federal government supports some farmers by maintaining price floors for their products.[10] The U.S. government also constrains supply by paying farmers to leave land idle as part of its Conservation Reserve Program.

In addition to taxing American consumers of rice, sugar, and dairy products, and subsidizing farmers to take land out of production, the federal government has contributed to higher commodity prices globally by encouraging the ethanol industry. Primarily derived from corn in the United States, ethanol affects the price of corn directly by adding to demand, and other commodities indirectly by drawing cropland away from their production. Indeed, in the last year the supply of corn has increased 24 percent in the northern United States during 2007, primarily because of higher corn acreage (the highest since 1933). Ethanol capacity has risen by around 40 percent in the last year because of government incentives. As farmers shifted production to meet surging demand for ethanol, the acreage devoted to rice, cotton and soybeans has decreased by 3 percent, 18 percent, and 16 percent respectively.[11]

The ethanol boom has knock-on effects in the rest of the rural economy. The growing use of cereals, sugar, oilseed and vegetable oils to produce ethanol and biodiesel is supporting crop prices and, indirectly through higher animal feed costs, raising costs for livestock production. As Table 1 shows, the prices for poultry, beef, and eggs have all increased by more than 5 percent this year. (Pork prices have risen relatively slowly because production has been very high compared to demand, although producers are expected to lower production during 2008 because of losses from low prices and higher feedcosts.[12]) Farmland prices in key corn-growing states such as Iowa, Nebraska, and South Dakota have increased by more than 20 percent in the last year.[13]

To be sure, higher commodity prices mean lower taxpayer outlays on price-triggered agricultural subsidies. The Congressional Budget Office predicted in January 2008 that higher agricultural prices would reduce farm and income support payments in fiscal years 2008-18 to an average of $7-8 billion per year, compared with recent peaks of over $20 billion.[14] But what these higher prices give to taxpayers with one hand, they take away with the other because the government must pay higher prices for the food they buy for school-lunch and other welfare programs such as food stamps (indexed somewhat to food prices). More importantly, the policies place an implicit tax on food and increase the prices that American families pay at the grocery store.

Then there are the biofuels subsidies themselves: the International Institute for Sustainable Development recently estimated that U.S. subsidies for biofuels will cost about $93 billion in the years 2006-12.[15] And to ensure that cheaper ethanol does not make its way to the U.S. market and harm domestic producers and distillers, the government levies a 54 cent-per-gallon tax on imported ethanol.[16]

Unfortunately for consumers, politicians' obsession with ethanol does not appear to be waning yet. The new energy bill signed by President Bush in December 2007 mandates an almost doubling of corn-based ethanol usage in 2008-9 billion gallons annually, up from 4.7 billion gallons in 2007-and a five-fold increase in ethanol blending to 36 billion gallons a year by 2022. The European Union has recently joined the party, too, by agreeing in March 2007 to use renewable sources (primarily rapeseed-or canola-oil) for 20 percent of power production and biofuels for 10 percent of transport fuel by 2020. None of these trends bode well for consumers looking for relief.

Although current high prices reflect largely global events, Americans should remember that, thanks to the federal government, they have traditionally paid up to double the world price for dairy products and close to triple the world price for sugar. Because of U.S. policies that protect the domestic markets for these products from import competition, Americans will still pay high prices for those products, even in the event that global commodity prices fall.

Instead of conflating the harm done to consumers from high global food prices, the federal government should abandon its protection of U.S. farmers from competition and its pursuit of a misguided biofuels policy whose environmental benefits are spurious at best. Politicians especially keen to "stimulate" the economy by putting more money in the hands of consumers should start by reducing the taxes on imported dairy products, sugar, rice, and ethanol.

Notes

[1] Bureau of Labor Statistics, "Consumer Price Index: December 2007," news release, January 16, 2008, http://www. bls.gov/news.release/pdf/cpi.pdf, accessed January 17, 2008.[2] Food and Agriculture Organization of the United Nations, "Food Outlook: Global Market Analysis," November 2007, www.fao.org/docrep/010/ah876e/ah876e00.htm.[3] Jacques Diouf, Food and Agriculture Organization of the United Nations, Press Conference on Soaring Food Prices and Action Needed, December 17, 2007, www.fao.org/newsroon/common/ecg/1000733/ed/facts99.pdf, accessed January 17, 2008.[4] R. Minder, J. Aglionby and J. Song, "Soaring Soyabean Price Stirs Anger among Poor," Financial Times, January 18 2008, www.ft.com/cms/s/0/508be5de-c552-11dc-811a-0000779fd2ac.html.[5] Diouf.[6] R. McGregor and J. Blas, "China Vows to Act on Prices," Financial Times, January 9, 2008, www.ft.com/cms/s/0/a1199c74be9c-11dc-8c61-0000779fd2ac.html.[7] Joachim von Braun, "The World Food Situation: New Driving Forces and Required Actions," IFPRI's Biannual Overview of the World Food Situation presented to the CGIAR Annual General Meeting, Beijing, December 4, 2007, www.ifpri.org/pubs/agm07/jvbagm2007.asp. .[8] Diouf; and author's kilograms-to-pounds conversion.[9] Cornell University News Service "U.S. Could Feed 800 Million People with Grain That Livestock Eat, Cornell Ecologist Advises Animal Scientists," press release, August 12, 1997, www.sciencedaily.com/releases/1997/08/970812003512.htm.[10] Organization for Economic Cooperation and Development, Agricultural Policies in OECD Countries: Monitoring and Evaluation 2007 (Paris: OECD, 2007), Table 15.1 (provisional figure).[11] National Agricultural Statistics Service, Crop Production: 2007 Summary (Washington: United States Department of Agriculture, January 2008), http://usda.mannlib.cornell.edu/usda/current/CropProdSu/CropProdSu-01-11-2008.pdf.[12] C. Hurt, "Pork Producers May Face Worse Year Ever in 2008", Weekly Outlook, Purdue University and University of Illinois at Urbana-Champaign, January 7,2008, www.farmdoc.uiuc.edu/marketing/weekly/html/010708.html.[13] J. Perkins, "Iowa Farmland Prices Rose Nearly 23% in 2007," Des Moines Register, January 22, 2008, www.desmoinesregister.com/apps/pbcs.dll/article?AID=/20080122/BUSINESS 01/801220375/1029/BUSINESS.

[14] Congressional Budget Office, "The Budget and Economic Outlook: Fiscal Years 2008 to 2018", January 2008, http://cbo.gov/ftpdocs/89xx/doc8917/01-23-2008_BudgetOutlook.pdf.

[15] D. Koplow, "Biofuels-at What Cost? Government Support for Ethanol and Biodiesel in the United States: 2007 Update," Global Subsidies Initiative, October 2007, www.earthtrack.net/earthtrack/library/BiofuelsUSupdate2007.pdf.

[16] For more on ethanol, see Jerry Taylor and Peter Van Doren, "The Ethanol Boondoggle: Who's Kidding Who?" Milken Institute Review (First Quarter 2007).