Topic: Trade Policy

We Need A Way Back To Multilateralism In Trade

As trade restrictions mount and as major trading countries remain mired in commercial impasse, an approaching global gathering in Central Asia next summer could prove to be the climax to the current battle between continued multilateral cooperation and increased unilateral confrontation in trade.

The World Trade Organization, with its commitment to international cooperation, has been struggling with the headwinds of unilateralism and protectionism. If a way back to multilateralism in trade is not soon found, the entire trading system may unravel, with grievous economic consequences for all the world.

So far, the developed countries of the world have been unable to counter the current trend toward the ultimately self-defeating insularities of economic nationalism. Thus, it may be left to the developing countries to play a decisive role in turning the tide. At this point, most developing countries understand – perhaps better than some of the developed countries – the considerable economic and geopolitical stakes they share in supporting the existing global trade regime.

While the rest of the world has been struggling to save the multilateral trading system overseen by the WTO, many of the developing countries that comprise most of the 164 members have just now started to benefit fully from their participation in the rules-based WTO system. The lower barriers to trade and the added links to global supply chains provided by membership in the multilateral trading system are helping further growth and feed prosperity by freeing and facilitating trade throughout the developing world.

One among numerous examples is Kazakhstan, which has grown rapidly through trade in the four years since it became a WTO member in 2015, and which has been chosen to host what could be a fateful WTO ministerial conference in its capital of Nur-Sultan in June of 2020. It can be argued that Kazakhstan and other developing countries that are just now climbing the economic ladder toward prosperity have the most at stake in saving a multilateral trading system that provides mutual market access under the rule of law. In the rules-based WTO, all countries are equal no matter the size of their economies or the extent of their trade. In the WTO, there is the rule of law instead of the rule of power. For developing countries, above all others, it would be ill-advised to undermine the international rule of law in trade.

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A Strong Currency Is No Good Reason to Keep Tariffs High

An interesting debate has arisen in Ecuador during recent weeks over the following proposition advanced by authors at a Quito think tank: a dollarized country shouldn’t reduce its tariffs when the dollar is overvalued relative to the currencies of its regional trading partners (according to purchasing-power-parity measures) because that would undermine its “competitiveness” in export market. As several commentators have noticed, this is reminiscent of the Mercantilist view that a country will lose too much of its gold if it does not discourage imports with tariffs or promote exports with subsidies, a view that David Hume and Adam Smith debunked long ago.

The debate began with the publication of an essay by José Hidalgo Pallares and Daniel Baquero for CORDES, a leading economic policy think tank in Quito. They proposed that it is not “convenient” to reduce the general level of tariffs at the moment, with a strong dollar already making imports cheaper and exports more expensive for Ecuador, and with the economy operating at below capacity. Their concerns were macroeconomic and balance-of-payments related:  “In recent years, imports have also grown more than exports … [T]he trade balance, which is one of the main components of the current account, registered a deterioration: from a surplus of $227 million in the first quarter of 2018 to one of just $2 million in the same period of 2019.” Reducing tariffs across the board, they argue, “would mainly favor consumer goods,” whereas “to revive the Ecuadorian economy, it is more advisable to take measures that really allow some recovery of external competitiveness, in order to encourage exports. Here fits an efficient labor reform, the elimination of excessive paper work[,] and trade agreements” that give Ecuadoran products better access to foreign markets. (This and all other translations are mine, Google-aided.)

Critical response to the essay was swift. Gabriela Calderón tweeted incredulously that CORDES, for years a strong critic of the tariff surcharges imposed by then-President Rafael Correa supposedly to “safeguard” dollarization, was now adopting the Correa position: “Amazing! Spend 10 years complaining about Correa and then reproduce his erroneous arguments in favor of trade restriction.”

I will argue that the CORDES proposition – namely that the advisability of a unilateral general tariff reduction depends on macroeconomic conditions – is mistaken. In a nutshell: The stock of money and the price level are self-regulating for a small country under dollarization. The size of Ecuador’s economy (gross domestic product) is comparable to that of Mississippi. Both are dollarized. What is true for Mississippi, in regard to the balance of payments, is also true for Ecuador: When the local prices of traded goods are too high for equilibrium with neighboring countries, arbitrage will bring them down. The problem of overvaluation that reduces Ecuador’s export competitiveness will resolve itself by a combination of (1) internal adjustments (input price reductions or productivity increases) that lower the cost-covering prices local producers need to charge when exporting goods, and (2) rising nominal prices in the trading partners (Colombia, Peru) whose currencies are presently relatively undervalued in exchange markets because inflation higher than Ecuador’s is anticipated.

For More Short Sea Shipping, Get the Federal Government Out of the Way

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Freight transport on the country’s coasts and inland waterways, more commonly known as short sea shipping, is in a pitiable state. Despite being the most energy-efficient method of freight transport it accounts for a mere 6 percent of domestic tonnage moved. The corresponding figure in Europe is 40 percent. Instead of using waterborne transport, Americans place about 75 percent of their freight on trucks. That means more highway congestion, more highway maintenance, and more pollution.

This is unlikely to change if a recent House Coast Guard and Maritime Transportation Subcommittee hearing on short sea shipping is any indication. 

At the hearing, Ranking Member Rep. Bob Gibbs (R-OH) noted various explanations for the dearth of short sea shipping such as ports configured to handle large vessels (rather than smaller ones more suitable for short sea shipping), a reluctance by shippers to switch to new transportation modes, and financing difficulties faced by shipbuilders. Maritime Administrator Mark Buzby, meanwhile, laid primary blame for short sea shipping’s relatively minimal usage on insufficient awareness of this transport option. 

Although numerous causes were proffered one of the most glaring obstacles to domestic short sea shipping mysteriously went unmentioned: the Jones Act. Passed in 1920, the law restricts domestic waterborne transport to vessels that are U.S.-flagged, U.S.-crewed, U.S.-owned, and U.S.-built. 

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Misunderstandings on the WTO, Trade, and the Environment

These days, the Trump administration’s attacks on trade liberalization, trade agreements, and the World Trade Organization are focused on issues such as trade deficits and allegations that the United States is being treated “unfairly.” But before Trump and his trade team hijacked the trade debate, there had been a critique from the left that trade was bad for the environment in various ways. One example was that trade agreements supposedly got in the way of domestic environmental regulation. There had been some trade disputes over domestic environmental regulations, some of which had included provisions that discriminated against foreign products in favor of domestic ones, and environmental groups were concerned about the impact of adverse rulings by WTO “panels” (i.e., quasi-judicial courts) on their ability to adopt such regulations. 

While that debate has been overshadowed recently, it came back yesterday after a WTO panel ruling on various U.S. state measures that discriminate against foreign products in the renewable energy sector. In reaction to this ruling, Todd Tucker of the Roosevelt Institute wrote the following

The World Trade Organization (WTO) is back in the news, with a Thursday ruling against seven U.S. states’ renewable energy policies. The WTO is already unpopular with right-wing nationalists like Donald Trump. By siding with India against the U.S., the WTO is likely to make left-leaning politicians and the burgeoning global environmental movement unhappy. 

States Are Acting on Climate because the federal government won’t

The WTO is acting against state level policies intended to improve the environment, stepping into the void left by the federal government. In 2009, the U.S. Senate refused to vote on what was at that time the most ambitious climate change legislation: the Waxman-Markey Act. Concluding that federal action might never be forthcoming, U.S. states (especially those than lean Democratic) began enacting climate policy of their own.

The measures range from biodiesel incentives in Montana, through nudges for Michigan-made clean energy manufacturing, to other schemes in California, Delaware, Connecticut, Minnesota and Washington State. The common denominator of these policies is an attempt to soften the inevitable economic dislocations of moving away from the carbon economy. The Michigan policy was typical: electricity providers get a renewable credit when they generate one megawatt of green energy. However, they get another tenth of a credit when that energy uses Michigan-made equipment or Michigan laborers.

… 

The WTO sees “Buy Local” politics as protectionist 

When India complained about these green schemes, they did not have to show that Indian companies tried to qualify for any of them, or that they had been denied access, or that they lost any money to make a case at the WTO. Under the rules of the General Agreement on Tariff and Trade (GATT), Michigan’s energy credit was invalid, because Indian solar panel exporters in theory would have not qualified for that extra tenth of a renewable energy credit if they had tried to sell them in Michigan.

This is a Problem for the Green New Deal

The WTO decision collides with a groundswell of progressive interest in a Green New Deal — a plan that looks a lot like the state policies that the commercial body just ruled against. The Green New Deal resolution by Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Sen. Edward J. Markey (D-Mass.) outlines five goals, 14 projects and 15 requirements to help evaluate those projects. Instead of just going ahead with carbon taxes (which would likely be unpopular), it gives groups that might be expected to oppose a carbon tax — front line communities, manufacturing workers — a stake in the deal’s success. It uses Buy Local or Hire Local requirements to make its proposed climate solutions politically sellable and viable. These are the sorts of provisions that India and other countries can be expected to challenge if and when a Green New Deal ever gets through Congress.

In reality, while there may be some actual trade and the environment conflicts that are hard to sort out, this is not one of them. The WTO ruling here is very narrow. It is not a general condemnation of subsidies for environmental causes. Rather, it simply says that governments cannot discriminate against foreign goods when adopting their environmental policies. That ruling is actually pro-environment. If governments are trying to promote the adoption of environmentally-friendly products, competition is helpful not harmful. Generally speaking, environmentalists should want more trade in these products, not less. As I jokingly put it on twitter, “The fundamental question: Do you want artisan, hand-crafted solar panels from the Eastern Shore of Maryland for a million dollars a pop, or do you want highly efficient solar panels made by a Chinese factory in Iceland that is powered by geothermal energy?” Shielding local producers from competition makes them stagnant and inefficient. That’s not the way to develop good renewable energy products. If the Green New Deal does that, it is not going to be very green.

There is a group of people out there who still believe in old school industrial policy, advocating a wide range of government interventions in the economy (including protectionist measures like the ones at issue here), in order to build up domestic manufacturing. But the policies they are pushing cannot be categorized as pro-environment, and often these policies will be pretty bad for the environment. It’s a shame, because this is one area where supporters of trade liberalization should be able to work together with environmentalists by pushing for lower trade barriers on these products, as my old colleague Bill Watson and I wrote about here

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Emergency Exit Strategy

His brand is crisis, so it can be hard to keep abreast of the various calamities President Trump stumbles into or deliberately courts. Now that tensions with Iran seem to have momentarily cooled, another recent episode of Trumpian brinksmanship, closer to home, deserves some attention before we lurch forward into new dangers. 

As you’ve surely heard, but may have already forgotten amid the fog of near-war, three weeks ago, President Trump threatened to declare yet another national emergency at the southern border. If Mexico didn’t sufficiently crack down on cross-border migration, Trump warned, he’d use “the authorities granted to me by the International Emergency Economic Powers Act” to hammer our third largest trading partner—and U.S. consumers—with a series of escalating tariffs on Mexican goods, rising to 25 percent across the board. 

Fortunately, on June 7, three days before the deadline he’d set, President Trump called off the trade war. But, Trump warned, he “can always go back” to raising tariffs if he’s not happy.

The notion that the president can, with the stroke of a pen, upend peaceful trade relations and implement a massive tax hike ought to sound the alarm about Trump’s expansive view of presidential emergency powers. Are they as vast as the president claims, and, if so, what can Congress do to rein them in? 

As I argued in Reason magazine recently, our latest Imperial President has aggressively exploited the powers he inherited, but hasn’t been much of an innovator in terms of devising genuinely new schemes for the expansion of executive power. Trump’s use of emergency authorities is the glaring exception to that pattern, the key area in which the “CEO president” has been menacingly entrepreneurial.

We saw this first in February, when President Trump declared a national emergency in order to “build the wall” on the U.S.-Mexico border. The statute Trump invoked, 10 USC § 2808, allows the president to divert funds to “military construction projects” supporting the use of U.S. armed forces in a military emergency. It had been used only twice before, by George H.W. Bush in the run-up to the Gulf War, and by his son in the aftermath of the 9/11 attacks—the sort of circumstances it was clearly designed to address. Though past presidents had used emergency powers liberally, before Trump, it apparently hadn’t occurred to anyone that you could use them to snatch funding for a pet project that Congress had repeatedly refused to support. 

Enforcement in the USMCA: The Draft SAA and the Trump Administration’s Elevation of Section 301

Enforcement of the U.S.-Mexico-Canada Agreement (USMCA) has proven to be an important stumbling block to its ratification in the United States. Democratic law makers have demanded that enforcement provisions be strengthened, particularly with regard to labor and environment provisions. Specifically, some have asked for the correction of a major flaw in the NAFTA state-to-state dispute settlement chapter, under which the appointment of dispute panels had been blocked (in part due to the absence of a roster of panelists to draw from). U.S. Trade Representative Lighthizer stated in congressional testimony that this issue had been addressed in the renegotiated text. In a response to a question from Sen. Ron Wyden (D-OR), asking “Would you be opposed to clarifying that the text of Chapter 31 of the revised NAFTA is not meant to allow panel blocking?,” Lighthizer said:

The text of Chapter 31 of the United States – Mexico – Canada Agreement (USMCA) is not meant to allow panel blocking. Indeed, panels have been successfully formed under Chapter 20 of the NAFTA (its precursor). As we move forward with Congressional consideration of the USMCA, we look forward to discussing this and any other issues related to enforcement with you and your colleagues.

However, as we have pointed out on multiple occasions, it’s not clear that the problem of panel blocking has been resolved by the new USMCA text. Notably, Lighthizer did not say it has been, instead emphasizing that the agreement “is not meant to allow panel blocking,” which is vague enough to suggest it does not preclude it.

To add another healthy dose of skepticism to Lighthizer’s claim, a draft [$] of the Statement of Administrative Action, which was submitted on May 30th (the final version of which will be part of the implementing legislation), seems to suggest he has something else in mind when it comes to enforcement.  Two relevant aspects are as follows.

First, on the problem of the roster, the draft SAA states:

b. Dispute Settlement: Nominations for Dispute Settlement Roster

Article 31.8 of the USMCA requires that by the date of entry into force of the USMCA the Parties establish a roster of up to 30 individual[sic] who are willing to serve as panelists. USTR will consult with the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate (“Trade Committees”) as it considers nominees for the roster of panelists and will provide the Trade Committees with the names of the experts it is considering, and detailed background information on each, at least 30 days before submitting the names of any nominees.

On its face, this appears to suggest that a roster will be established by the date of entry into force of the USMCA. However, there may be a problem ensuring that this happens. The problem is, there is nothing that guarantees that USTR will submit the names of nominees. Furthermore, even if they are submitted and a roster is established, there is no guarantee that the roster will be maintained.

In comments to the House Ways and Means Committee on enforcement of the agreement, we suggested two options for Congress to address this problem. First, they can call on the U.S. Trade Representative to reopen the USMCA and introduce new language to Chapter 31 that addresses the three principles we highlighted in a recent paper: the roster should not be a hurdle to appointing panelists; an independent third party can act as a facilitator in the panel appointments; and, in the absence of an independent third party, the complainant should have the power itself to appoint, in order to prevent the respondent from delaying panel formation. And second, Congress could call on the U.S. Trade Representative to work with Canada and Mexico to establish a roster of panelists right now, thus ensuring a roster is in place upon entry into force of the agreement.

Second, on the issue of enforcement more generally, the SAA devotes substantial attention to the use of Section 301 of the Trade Act of 1974 as an enforcement tool. The document states, at length:

c. Enforcement of U.S. Rights

Legislative authority currently exists for the Executive Branch fully to enforce U.S. rights under Chapter 31. Section 301 of the Trade Act of 1974, as amended, authorizes the United States Trade Representative (“USTR”) to take specific action, subject to the President’s direction, and to take all “appropriate and feasible action” in the President’s power that the President directs the USTR to take to enforce U.S. rights under trade agreements such as the USMCA.

The United States shall enforce its rights under the USMCA through consultations and the dispute settlement mechanism provided for in Chapter 31 when possible. However, a decision by Canada or Mexico to prevent or unreasonably delay formation of a dispute settlement panel would not prevent the Executive Branch from enforcing U.S. rights. In this circumstance, the USTR’s determination on whether the USMCA partner breached USMCA obligations or impaired U.S. rights under the USMCA would be based on the USTR’s evaluation of the relevant legal and factual issues, including the fact that the USMCA partner failed to cooperate in the dispute settlement process.

Once the USMCA enters into force, an interested person may file a petition with the USTR requesting section 301 action in any case in which the person considers that another USMCA government has failed to honor a provision of the Agreement or has caused the nullification or impairment of benefits that the United States could reasonably have anticipated under the Agreement. Alternatively, the USTR may, on his or her own initiative, institute a section 301 proceeding.

If the USTR decides to initiate an investigation under section 301 with respect to alleged Canadian or Mexican practices, section 303(a) of the Trade Act requires the USTR initially to attempt consultations with the government of the relevant USMCA country to resolve the matter. If the case involved a possible breach of the USMCA or impairment of U.S. rights under the USMCA, and if consultations have failed to produce a mutually acceptable solution, then section 303(a) requires that the matter be submitted to the formal dispute resolution procedures of the Agreement, or to the applicable dispute settlement procedures of another trade agreement to which the United States and the other USMCA country are parties. The USTR will seek information and advice from the private sector, including form the petitioner, if any, in preparing U.S. presentations for consultations and formal dispute resolution procedures.

Section 301 provides the USTR with authority to take appropriate retaliatory action in the event that a panel report upholds a U.S. allegation that another USMCA government has breached the Agreement or nullified or impaired U.S. benefits and the other government does not take satisfactory remedial action or provide satisfactory compensation.

There are few things worth highlighting here. First in its description of enforcement under the USMCA, USTR seems to be emphasizing and prioritizing the use of unilateral enforcement tools, as it tries to make the case that enforcement authority exists even without a functioning state-to-state dispute settlement mechanism. The contrast with the draft SAA for the Trans Pacific Partnership (TPP) is interesting, as the TPP SAA did not mention Section 301 in the context of dispute settlement at all.

Second, it is interesting that “a decision by Canada or Mexico to prevent or unreasonably delay formation of a dispute settlement panel” is singled out as the problem. As far as we know, these countries have never done this. Instead, it was the United States that prevented a panel being appointed. Thus, the key question to ask here is, what happens if the United States takes a decision to delay the formation of a panel? If the United States were to do so again, perhaps Canada or Mexico would retaliate by doing the same thing. But the real concern here is whether USTR will allow panels to be appointed.

Third, and most troubling, is the statement that a breach of the obligations “would be based on the USTR’s evaluation of the relevant legal and factual issues, including the fact that the USMCA partner failed to cooperate in the dispute settlement process.” At the core of all this, it seems as though Lighthizer is looking to create a shift away from neutral adjudication, and towards unilateral determinations and enforcement.  That would be a major step backwards for the rule of law in international trade agreements.

There is still time to address these issues before USMCA is ratified. Members of Congress are working with the administration to address these enforcement issues.  Ideally, they will be able to fix the flaws in NAFTA so that the USMCA actually works the way that it was intended: The three parties will be held to account for the obligations they have agreed to.

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Is the Trump Administration Pushing for a Cold War with China?

In a Washington Post op-ed last week, Josh Rogin argued this:

Despite what you may have read, the United States’ strategy toward China does not entail launching another Cold War, imposing a zero-sum game or even winning a “clash of civilizations.” In fact, the entire objective of the Trump administration’s Asia approach is to avoid outright conflict with China. But to do that, Beijing must be deterred from continuing on its aggressive path.

The idea that the White House’s new approach to confront China’s economic aggression and military expansion represents a “Cold War mentality” is popular with pundits both in Washington and in Beijing. But that accusation misunderstands what the United States is trying to do with China. …

Perhaps I am one of the pundits he had in mind, given that I wrote the following earlier this year:

Talking Ourselves into a Cold War with China

Sometimes the latest turns of phrase in policy circles are just fleeting headlines, soon to be forgotten. As a presidential candidate, Hillary Clinton called for “smart and fair trade.” But she disappeared from the political scene before we figured out what that meant.

However, other times they lead us down the road towards real changes in policy. Soon after the 9/11 attacks, Bush administration officials were accusing Saddam Hussein of being involved. At the time, the invasion of Iraq was hardly inevitable, and may not have seemed likely, but armed with the phrase “weapons of mass destruction,” the administration got the war momentum going, and that is the direction in which the country went.

The U.S.-China relationship is facing similar attempts to define it with very serious sounding terminology, as U.S. policymakers are in the grips of the latest bout of buzzwords and groupthink. The U.S.-China relationship, we are told, may undergo a “conscious uncoupling.” The two countries could be moving towards an “economic cold war.” Actual war is unlikely (although you never know), but nevertheless a seismic geopolitical shift is supposedly upon us.

There is certainly plenty of talk in Washington about a Cold War and a “clash of civilizations.” But is any of it coming from the Trump administration, rather than from pundits? Rogin points to one piece of recent evidence and quickly dismisses it:

Those who criticize U.S. policy on China argue that the United States went looking for another enemy after the fall of the Soviet Union. Some point to the unfortunate remarks by Kiron Skinner, the State Department’s policy planning director, who clumsily called the U.S.-China competition “a fight with a really different civilization and ideology.” That was an error, not a defining statement on U.S. policy.

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