Latest Cato Research on Globalization, Value Chains, FDI https://www.cato.org/ en Steve H. Hanke discusses hyperinflation on Cedice Joven https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-hyperinflation-cedice-joven Mon, 29 Jun 2020 13:55:13 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-hyperinflation-cedice-joven Steve H. Hanke discusses the state of the global economy on Sirius XM’s Wharton Business Daily https://www.cato.org/multimedia/media-highlights-radio/steve-h-hanke-discusses-state-global-economy-sirius-xms-wharton Thu, 28 May 2020 12:18:56 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-radio/steve-h-hanke-discusses-state-global-economy-sirius-xms-wharton Beware the Costs of a Technology Trade War https://www.cato.org/blog/beware-costs-technology-trade-war-attrition Daniel J. Ikenson, Huan Zhu <p>In a&nbsp;<a href="https://www.cato.org/blog/us-china-tech-battle-threatens-pandemic-containment-more">post</a> last month, we raised concerns about the unforeseen and underappreciated costs of expanding export controls on U.S. technology. Either those concerns fell on deaf ears or the administration did its due diligence and determined that the expected benefits outweigh the expected costs because—earlier this week—the Commerce Department published <a href="https://www.federalregister.gov/documents/2020/05/19/2020-10856/export-administration-regulations-amendments-to-general-prohibition-three-foreign-produced-direct">new rules</a> further restricting Huawei’s access to U.S. technology.</p> <p>U.S. exports to Huawei have been tightly controlled since Huawei and its affiliates were placed on the <a href="https://www.bis.doc.gov/index.php/policy-guidance/lists-of-parties-of-concern/entity-list">Entity List</a> in 2019 for national security reasons. However, because of the design of U.S. export regulations and the nature of technology supply chains, Huawei and its affiliates were still able to import semiconductors from foreign producers that use U.S. chipmaking equipment and software. The new rules are intended to close this loophole and completely cut off Huawei from U.S. technology.</p> <p>Explaining the purpose of those new rules, Commerce Secretary Wilbur Ross—betraying naïve expectations that Huawei would have just thrown in the towel and shut down its operations after last year’s U.S. sanctions—<a href="https://www.commerce.gov/news/press-releases/2020/05/commerce-addresses-huaweis-efforts-undermine-entity-list-restricts">offered</a>:</p> <blockquote><p>Despite the Entity List actions the Department took last year, Huawei and its foreign affiliates have stepped‐​up efforts to undermine these national security‐​based restrictions through an indigenization effort. However, that effort is still dependent on U.S. technologies. This is not how a&nbsp;responsible global corporate citizen behaves. We must amend our rules exploited by Huawei and HiSilicon and prevent U.S. technologies from enabling malign activities contrary to U.S. national security and foreign policy interests.</p> </blockquote> <p>Although we have been skeptical from the start that this is the right way to proceed with China, the die most definitely has been cast and the technology trade war is moving ahead at full speed. Of course, the U.S. government (many in the Trump administration and many in the Congress) has its reasons (some factual; some presumptive; some political) for this course of action. So, instead of rehashing concerns already raised, we offer (in convenient bullet point fashion) the most relevant facts and assumptions culminating in the current policy, as well as the expected benefits and likely costs of that policy. Unfortunately, the list of likely costs is long.</p> <p><strong>Facts</strong></p> <ul> <li>The U.S. government sees the Chinese government as a&nbsp;bad actor.</li> <li>The U.S. government sees Huawei as an adjunct of the Chinese government.</li> <li>The U.S. government sees Huawei as the leader in 5G technology.</li> <li>The U.S. government sees Huawei’s leadership in 5G technology as a&nbsp;threat to U.S. national security.</li> <li>The U.S. government sees a&nbsp;vulnerability to Huawei’s 5G leadership in Huawei’s dependence on U.S. semiconductors and semiconductor technology.</li> <li>The U.S. government seeks to exploit that vulnerability by depriving Huawei of the technology it needs to continue to dominate 5G.</li> </ul> <p><strong>Assumptions</strong></p> <ul> <li>Targeting Huawei with export controls and entity list restrictions to deprive it of needed inputs will slow or stop Huawei’s progress.</li> <li>U.S. sanctions on Huawei from the supply side will compliment U.S. efforts to compel other governments to forego purchasing Huawei gear on the demand side.</li> <li>Slowing or stopping Huawei’s progress will enhance U.S. national security.</li> <li>U.S. national security will be enhanced because U.S. or U.S.-backed 5G companies will emerge and fill the void as standard‐​setters and dominant suppliers of 5G network gear and consumer products.</li> <li>Leadership in 5G begets leadership in the next generation of communications technology and other technologies; followership consigns to more followership.</li> <li>The expected benefits of the U.S. government’s approach outweigh its expected costs.</li> </ul> <p><strong>Benefits</strong> (if the assumptions are accurate)</p> <ul> <li>The Chinese government’s ability to control or have disproportionate influence over global information and communications networks (and whatever other currently unforeseen powers that control or influence would bestow upon Beijing) will be reduced.</li> <li>Reducing Beijing’s power is—in this context and with certain caveats—akin to enhancing U.S. national security.</li> <li>Impeding Huawei’s success (albeit, through compulsion of other governments and laws restricting private companies from engaging in commerce or research and development with Huawei) could buy time for U.S. companies or U.S.-backed companies to emerge and take leadership in 5G and 6G technology space, providing U.S. economic and security benefits that might not otherwise manifest.</li> </ul> <p><strong>Costs</strong></p> <ul> <li>Cutting off Huawei from U.S. semiconductors, semiconductor equipment, and software will expedite China’s development of indigenous semiconductor production capabilities and, ultimately, put the world’s largest market for semiconductors out of reach of U.S. producers within a&nbsp;few years.</li> <li>Cutting off Huawei from semiconductors made with U.S equipment in third countries will compel chipmakers in those third countries to purchase non-U.S. equipment, ultimately drying up current U.S. export markets.</li> <li>Cutting off Huawei will inject even more uncertainty into global information and communication technology (ICT) markets, which likelywill slow the process of standards setting, which likely will retard product development schedules, which likely will deter investment in new technologies, and which likely will be resolved only by bifurcation or even greater splintering of global technology standards.</li> <li>Bifurcation or splintering of technology standards would significantly limit scope for economies of scale in production, as firms all along the ICT supply chain would be producing for fewer customers or producing in separate production runs for customers that follow different sets of standards.</li> <li>U.S. supply chain warfare could prove contagious, encouraging Chinese restrictions on exports of rare earth minerals or other inputs and&nbsp;Chinese retaliation against U.S. technology companies, while&nbsp;opening the door to all countries to treat trade as a&nbsp;strategic weapon rather than as a&nbsp;tool of cooperation and economic betterment.</li> <li>Technology decoupling will inspire a&nbsp;cold‐​war style competition between the United States and China to win the hearts and minds of third countries through the offering of carrots and the threats of sticks.</li> </ul> Thu, 21 May 2020 16:36:15 -0400 Daniel J. Ikenson, Huan Zhu https://www.cato.org/blog/beware-costs-technology-trade-war-attrition On ‘Supply‐​Chain Repatriation,’ It’s Buyer (And Nation) Beware https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware Scott Lincicome <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>One&nbsp;of the most fashionable COVID-19 proposals being circulated by Washington politicians and pundits these days is the “<a href="https://www.aei.org/economics/trump-adviser-reclaim-global-supply-chain-and-manufacturing-capabilities/" target="_blank">repatriating</a>” of global supply chains for pharmaceuticals, medical devices, and “personal protective equipment” that have been “outsourced” over the past three decades, leaving America utterly dependent on foreign countries, especially China, for these essential products. Bringing that manufacturing back home, so the story goes, is the only way to ensure future “resiliency” in the face of the next global pandemic. Otherwise, we’ll once again be left empty‐​handed and helpless — and, even worse, at the mercy of China and other untrustworthy foreigners.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>It’s a&nbsp;dire prediction. Fortunately, it is also mostly wrong. While COVID-19 has revealed certain products or policies that need a&nbsp;second look, full‐​scale repatriation — via protectionism, industrial policy, and other state micromanagement of private behavior — would leave us less, not more, prepared for the next national emergency.</p> <p>The first way repatriation plans go wrong is by relying on bogus data. The terrifying and oft‐​repeated claim that “80 percent of America’s pharmaceutical drug supply comes from China” is, as&nbsp;<em>Reason</em>’s Eric Boehm details,&nbsp;<a href="https://reason.com/2020/04/06/why-you-shouldnt-trust-anyone-who-claims-80-percent-of-americas-drugs-come-from-china/" target="_blank">essentially baseless</a>. A&nbsp;<em>Washington Free Beacon&nbsp;</em>piece provides an excellent case study in how easy it is to misunderstand the data:</p> </div> , <blockquote class="blockquote"> <div> <p>China … makes many American generic drug imports, including 95 percent of ibuprofen, 70 percent of acetaminophen, and 40 to 45 percent of penicillin. The slowdown attributable to the coronavirus’s effect on Chinese manufacturing has already created the possibility of a&nbsp;shortage of over 150 drugs, according to an FDA report.</p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Those percentages sound very bad. But isolated import‐​share figures tell us very little about actual “vulnerabilities,” because they omit domestic production and local inventories. According to a&nbsp;new study from the&nbsp;<a href="https://www.stlouisfed.org/on-the-economy/2020/april/us-rely-other-countries-essential-medical-equipment" target="_blank">St. Louis Federal Reserve</a>, China supplied almost 30 percent of all imported “essential medical equipment” (hand sanitizer, masks, personal protective equipment, ventilators, etc.) in 2018 but accounted for only 9&nbsp;percent of total domestic consumption because&nbsp;<em>American</em>&nbsp;producers supplied the vast majority (more than 70 percent) of these products. The U.S. does indeed need better data on pharmaceutical production (something the CARES Act seeks to remedy), but it’s clear that the United States still makes a&nbsp;lot of generic drugs — and even plays host to one of the largest ibuprofen plants in the world (in Texas). So China’s share of imports, without more context, is pretty meaningless.</p> <p>At the same time, we have massive stockpiles of other critical drugs to prepare for crisis‐​related spikes in demand. When India temporarily banned hydroxychloroquine exports, for example, everyone freaked out because India makes a&nbsp;lot of it. The freakout quickly dissipated, however, when it was revealed that we already had&nbsp;<a href="https://www.statnews.com/2020/04/06/trump-hydroxychloroquine-fact-check/" target="_blank">31 million doses</a>&nbsp;(donated by multinational drug companies) in the Strategic National Stockpile. State and local governments have since stockpiled&nbsp;<a href="https://abcnews.go.com/Health/wireStory/us-states-build-stockpiles-malaria-drug-touted-trump-70334274" target="_blank">30 million</a>&nbsp;more pills, and local pharmacies have their own inventories. Should hydroxychloroquine turn out to be a&nbsp;miracle drug (please consult your doctor!), it looks like we’ll be just fine, regardless of what India does next. (Though it certainly wouldn’t hurt to stop picking needless trade fights with India, the EU, and other allies.)</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>While the data on drug production are far from perfect, the numbers we do have aren’t nearly as bleak as the politicians and pundits claim. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Days after that scary‐​sounding FDA story about the “possibility” of drug “shortages” was leaked in late February, the agency published a&nbsp;formal “<a href="https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-supply-chain-update" target="_blank">Coronavirus (COVID-19) Supply Chain Update</a>,” finding no serious threats at that time. In fact, according to the FDA, there were 109 drugs “currently in shortage” on December 19, 2019 — weeks before the coronavirus hit; on February 28, 2020, in the middle of China’s crisis, that number was 103; last weekend, in the middle of our crisis, it was .&nbsp;.&nbsp;. 108. Maybe major vulnerabilities in the drug‐​supply chain will materialize in the future, but so far, so good.</p> <p>While the data on drug production are far from perfect, the numbers we&nbsp;<em>do</em>&nbsp;have aren’t nearly as bleak as the politicians and pundits claim. As already noted, more than 70 percent of essential medical supplies consumed in the United States in 2018 were made here (so much for that “deindustrialization” we hear so much about). Meanwhile, according to the Food and Drug Administration, of the roughly 2,000 global manufacturing facilities that produce active pharmaceutical ingredients (APIs), 13 percent are in China; 28 percent are in the USA, 26 percent in the EU, and 18 percent in India. For the APIs of World Health Organization “essential medicines” on the U.S. market, 21 percent of manufacturing facilities are located in the United States, 15 percent in China; and the rest in the EU, India, and Canada.</p> <p>A new report from the&nbsp;<a href="https://www.pacificresearch.org/wp-content/uploads/2020/04/BuyAmerica_F.pdf" target="_blank">Pacific Research Institute</a>&nbsp;provides more good news: China accounted for just 1&nbsp;percent ($1.5 billion) and 18 percent ($1.2 billion) of finished pharmaceutical imports and APIs, respectively, into the United States in 2019, and “combined, the United States had a $1.6 billion trade surplus with China for these pharmaceutical products and ingredients.” Within the United States, moreover, there are about 1,300 plants making drugs (often using imported inputs) employing about 120,000 American workers. According to the&nbsp;<a href="https://twitter.com/scottlincicome/status/1246136368595681281" target="_blank">World Trade Organization</a>, the United States is not just a&nbsp;top global producer and importer of medical goods but also a&nbsp;top exporter (No. 2&nbsp;overall, right behind Germany).</p> <p>Some crisis!</p> <p>Yet even if the data were as scary as claimed, widescale repatriation and “self‐​sufficiency” policies defy basic economic sense. For starters, there is the problem of maintaining pandemic‐​level capacity in non‐​pandemic times. According to&nbsp;<em>Politico</em>, for example, the United States could use 20 times the number of N-95 masks (500 million) that it used last year, and U.S. hospitals expect demand to multiply “8.6 times for face shields, 6&nbsp;times for swabs, 5&nbsp;times for isolation gowns and 3.3 times for surgical masks.” Maintaining that much excess capacity in times of normal demand is extremely costly (for many industries, profitability usually kicks in around 80 percent capacity utilization), and running at that level when there’s no pandemic would produce a&nbsp;global glut — ironically, quite similar to the ones we complain about when China subsidizes “global excess capacity,” and certain to cause new trade tensions.</p> <p>At the same time, there is burgeoning evidence of American manufacturers (and small‐​business owners) adapting their operations to meet the explosion in U.S. demand, but this often entails moving from higher‐​value products (e.g., cars or designer jeans) to products that are, in normal times, much lower‐​value products (e.g., ventilators or face masks) that can be made much more cheaply elsewhere. Redirecting this productive capacity to lower‐​value goods reduces these companies’ and their workers’ welfare and also raises prices for American consumers. That’s acceptable during a&nbsp;crisis, but not permanently. Long‐​term public health in the United States will not be advanced by forcing American doctors and their patients to pay five times as much for “Made in Texas” face masks as for the same thing made in China. Indeed, it’s precisely for this reason that dozens of&nbsp;<a href="https://accessiblemeds.org/sites/default/files/2020-03/AAM-Letter-to-President-Buy-American-EO-3-27-20.pdf" target="_blank">health and medical associations</a>&nbsp;recently wrote to the president opposing new “Buy American” restrictions on medical goods.</p> <p>Moreover, there is a&nbsp;thick historical record showing that protectionism, in whatever form, fails to produce a&nbsp;lean, thriving, and innovative domestic industry. Instead, past cases such as steel tariffs and Jones Act shipping restrictions show that government efforts to protect industries deemed “essential” to national security result not only in foreign retaliation and higher consumer costs but also in bankruptcies, layoffs, lower&nbsp;<em>domestic</em>&nbsp;output (e.g., fewer ships), and a&nbsp;small cadre of politically connected zombie companies whose overcompensated executives divert corporate resources from innovation and efficiency to lobbying and executive (not worker) pay. That’s precisely what you don’t want from an industry making life‐​saving pharmaceuticals or medical devices.</p> <p>On the other hand, there is ample evidence that “globalization” (i.e., the free flow of goods, services, capital, and information) has been an absolute blessing for the medical field and, thus, humanity — well beyond simply cheap PPE and generic drugs. Today, doctors and researchers from around the world work together to cure diseases that once killed hundreds of thousands of people each year. And it’s just this type of collaboration that might help to beat the current pandemic: as recently documented by the&nbsp;<a href="https://www.cato.org/blog/american-businesses-tackle-coronavirus?utm_source=twitter&amp;utm_medium=social-media&amp;utm_campaign=addtoany">Cato Institute’s Chris Edwards</a>, “globally, dozens of biotech and pharmaceutical companies are rushing to develop vaccines and treatments for covid‐​19 using a&nbsp;diversity of approaches.” Some of this might even involve (gasp!) China, as the Martin Sandbu of the&nbsp;<em>Financial Times</em>&nbsp;notes: “Within weeks of the new coronavirus’s emergence, Chinese scientists had sequenced its genome and shared their knowledge with the entire world.” Sandbu rightly adds that such a&nbsp;move “was made possible by our unprecedented degree of globalisation of technology, knowledge and communication, which in turn had piggybacked on expanding economic exchange.” Indeed.</p> <p>Of course, none of this happy talk changes the fact that a&nbsp;global pandemic raises unique problems that a&nbsp;normal market economy can’t (indeed, that no kind of economy can) immediately address. Fortunately, there are far easier solutions than fundamentally changing the U.S. and global economies via broad‐​based protectionism and industrial policy. The most obvious place to start is better government stockpiling of essential medical goods — something&nbsp;<a href="https://www.ft.com/content/b6ca9ded-00d5-4eed-a9b7-ed76a5df818a" target="_blank">Switzerland</a>, for example, has used to great effect during the current crisis (and something the United States is now quietly trying to fix in the CARES Act). Stockpiling is precisely the type of government action that even libertarians can support, and it’s also relatively cheap: For example, keeping pandemic‐​level quantities (500 million) of two‐​cent N-95 masks costs a&nbsp;whopping $10 million (a rounding error in D.C. these days).</p> <p>Other policies include requiring domestic manufacturers to maintain larger inventory levels for critical inputs; following&nbsp;<a href="https://twitter.com/scottlincicome/status/1247681857812078594" target="_blank">Korea’s lead</a>&nbsp;and implementing “pandemic preparedness” regulations that allow for the swift approval and production of testing and other essential medical equipment; entering into new&nbsp;<a href="https://www.cato.org/blog/withdrawing-tpp-was-senseless-act-wanton-destruction">trade agreements</a>&nbsp;with Vietnam, India, and other countries that can serve as alternatives to China; or, as already noted, collecting and publishing better data on medical‐​goods production and trade. All of these policies — along with private companies’ post‐​COVID efforts to fortify and diversify their supply chains — are infinitely better than forcefully “repatriating” them via something like the “Jones Act for Medical Goods” (shudder to think).</p> <p>Maybe these moves would still leave small holes in the system, requiring heavier‐​handed government planning, but maybe they won’t. Right now, we just don’t know. We know enough, however, to be skeptical of big new programs,&nbsp;<em>especially</em>&nbsp;when they just so happen to be the same ones that these same politicians have been pushing for years, often in response to imagined crises such as&nbsp;<a href="https://thedispatch.com/p/the-man-who-cried-wolf" target="_blank">trade deficits</a>&nbsp;or sugar — yes,&nbsp;<a href="https://www.nationalreview.com/2015/08/rubio-sugar-subsidies/" target="_blank">sugar</a> — imports.</p> <p>COVID-19 is a&nbsp;real crisis and has raised real concerns. It demands real solutions — not protectionism.</p> </div> Tue, 28 Apr 2020 09:27:56 -0400 Scott Lincicome https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware Simon Lester discusses COVID-19 and globalization on CBN’s The 700 Club https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-covid-19-globalization-cbns-700-club Wed, 22 Apr 2020 10:43:48 -0400 Simon Lester https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-covid-19-globalization-cbns-700-club Does Trade Integration Contribute to Peace? https://www.cato.org/publications/research-briefs-economic-policy/does-trade-integration-contribute-peace Jong-Wha Lee, Ju Hyun Pyun <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Globalization has been one of the most salient features of the world economy over the past century. Emerging markets and developing countries continue to integrate into the global trading system. World trade has increased rapidly, particularly since World War II—from 17.8 percent of worldwide gross domestic product (GDP) in 1960 to 47.4 percent of GDP in 2005.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>There has been a&nbsp;long tradition among social scientists to try to understand the economic, political, and social consequences of globalization. It has always been a&nbsp;hotly debated topic—not merely within academia but among the general public as well—whether globalization significantly affects economic growth, income inequality, national identity, and so on.</p> <p>Our research focuses on the effect of trade integration on international relations, specifically military conflict between individual states. Recent literature shows that military conflict can be extremely disruptive to economic activity and impede long‐​term economic performance. In particular, empirical studies on the effect that military conflict has on international trade find that conflict between countries significantly reduces international trade and thus seriously damages national and global economic welfare. However, the opposite relationship between international trade and the probability of interstate military conflict— that is, whether international trade has any significant impact on conflict—is still controversial.</p> <p>There is ongoing debate among scholars whether the increase of bilateral economic interdependence reduces interstate conflict. The “liberal peace” view in political science emphasizes that mutual economic interdependence can be a&nbsp;conduit of peace. It suggests that a&nbsp;higher degree of bilateral economic interdependence limits the incentive to use military force in interstate relations.</p> <p>While the liberal peace view is convincing, there are numerous counterarguments. For instance, dependency theorists and neo‐​Marxists argue that asymmetric economic interdependence could lead to negative consequences in a&nbsp;country—such as exploited concession and threatened national autonomy—thereby creating interstate tensions and conflicts. Many conflicts in the mercantilist era evolved out of trade disputes.</p> <p>Empirical studies have also investigated whether bilateral trade interdependence increases or reduces the likelihood of military conflict between trading partners. Similar to the theoretical literature, the findings of these studies are ambiguous. Some earlier studies and subsequent research show that there is a&nbsp;negative relationship between bilateral trade volume and the frequency of interstate military conflict. However, other studies have found that a&nbsp;measure of bilateral trade interdependence has a&nbsp;positive impact on reducing military conflict.</p> <p>In contrast to the numerous studies on the impact of bilateral trade interdependence on military conflict, there are only a&nbsp;few studies examining the role of global trade integration. If global trade integration increases trade interdependence uniformly with all bilateral trade partners, the distinction between bilateral and global trade integration is not critical. However, deeper integration into global markets can take place unevenly, lowering trade interdependence with some trading partners. The overall impact of trade integration on interstate conflict is likely to depend not only on the change in bilateral trade interdependence but also on global trade integration.</p> <p>An increase in global trade openness is expected to reduce the probability of military conflict, as it leads to an increase in the extent of bilateral trade interdependence. However, when the level of bilateral trade interdependence is controlled, the effect of increased global trade openness on the probability of bilateral conflict is not clear. Some research has found that trade openness has a&nbsp;significantly negative impact on the probability of military conflict. This suggests that global trade openness of the dyad can increase the opportunity cost of provoking a&nbsp;bilateral conflict because countries in the global market would prefer to do business with a&nbsp;peaceful partner, and a&nbsp;dyadic conflict can hurt the dyad’s trade with other countries. In contrast, a&nbsp;2008 study by Philippe Martin, Thierry Mayer, and Mathias Thoenig shows that multilateral trade openness—that is, global trade openness— increases the probability of interstate military conflicts. They argue that countries more open to global trade have a&nbsp;higher probability of conflict because an increase in multilateral trade openness reduces relative bilateral dependence to any given country and thus lowers the opportunity cost of military conflict.</p> <p>There is little systematic empirical research assessing the peace‐​promotion effect of both bilateral and global trade integration and how it relates to the geographical characteristics of states. There remains a&nbsp;lack of consensus in these findings. We attempt to fill this gap and produce novel results.</p> <p>We conduct an empirical assessment of the impact of trade integration on military conflict based on regressions utilizing a&nbsp;panel data set of observations of trade relationships between pairs of countries from 1950 to 2000. The results show that an increase in bilateral trade interdependence and global trade integration significantly promotes peace between countries. The strong positive effect of global trade openness on peace is a&nbsp;novel finding, contrasting the results of Martin, Mayer, and Thoenig. We also find that the impact of trade integration on military conflict varies depending on the geographical proximity between countries. Bilateral trade interdependence promotes peace more significantly for contiguous countries, whereas global trade openness contributes more to peace between distant countries. The results also show that geopolitical factors—such as bilateral distance, joint democracy, relative military capability, UN voting correlation, oil exports, religious similarity, and economic institutions such as free trade agreements and regional trade agreements—influence the probability of military conflict among pairs of states.</p> <p><strong>NOTE</strong>:<br> This research brief is based on Jong‐​Wha Lee and Ju Hyun Pyun, “Does Trade Integration Contribute to Peace?,” <em>Review of Developmental Economics</em> 20, no. 1 (2016): 327–44, <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/rode.12222" target="_blank">https://​doi​.org/​1​0​.​1​1​1​1​/​r​o​d​e​.​12222</a>.</p> </div> Wed, 22 Apr 2020 00:00:00 -0400 Jong-Wha Lee, Ju Hyun Pyun https://www.cato.org/publications/research-briefs-economic-policy/does-trade-integration-contribute-peace Alberto Mingardi discusses neoliberalism’s presence in globalization on the Bruno Leoni Institute podcast https://www.cato.org/multimedia/media-highlights-radio/alberto-mingardi-discusses-neoliberalisms-presence-globalization Tue, 18 Feb 2020 10:40:32 -0500 Alberto Mingardi https://www.cato.org/multimedia/media-highlights-radio/alberto-mingardi-discusses-neoliberalisms-presence-globalization Miscalculation and Grievance Explain Trump’s Aversion to Trade and Globalization https://www.cato.org/blog/miscalculation-grievance-explains-trumps-aversion-trade-globalization Daniel J. Ikenson <p>America’s divisive, deleterious culture war started long before January 20, 2017. But during the presidency of Donald Trump, a&nbsp;new front in that war was opened over the question of the future of America’s role in the world. After 70‐​plus years as the chief architect and underwriter of the liberal post‐​war order, which continues to produce relative peace and prosperity, the United States—under Trump’s stewardship—has ushered in a&nbsp;period of doubt about the propriety and efficacy of continuing those arrangements.</p> <p>In a&nbsp;speech today at the United Nations, Trump reiterated fealty to his America‐​first “doctrine,” leaving little doubt that U.S. support (financial, moral, and otherwise) for institutions, such as the World Trade Organization, the World Bank, the International Monetary Fund, the United Nations, and other consensus‐​driven organizations predicated on cooperation among nations can no longer be relied upon. These institutions aren’t perfect and can afford some reforms, but Trump is departing significantly from U.S. foreign and international economic policies under Democratic and Republican administrations going back to Harry Truman’s.</p> <p>Certainly, times have changed and there were never any guarantees that the institutions established after the war would endure—even for as long as they have. But before a&nbsp;critical mass succumbs to Trump’s plausible‐​sounding arguments that the United States (and all other countries) would thrive if it repudiated international institutions of cooperation and turned inward, consider that the America‐​first, protectionist, nationalist narrative that Trump has tapped into is nothing new. It has been around, lurking under the surface for many decades, occasionally finding expression in the rhetoric of a&nbsp;populist office seeker here and there. But that narrative is laced with misreads and inaccuracies. It is premised on the idea that, unlike global hegemons of previous centuries, the United States has been this benevolent giant, always acting selflessly and generously.</p> <p>The United States lent a&nbsp;hand to the victims and the vanquished of the 20<sup>th</sup> century’s&nbsp;worst conflagration. Americans provided the material and wherewithal to rebuild Europe and Japan after the War. We provided resources under the Marshall Plan. We provided a&nbsp;nuclear umbrella, which enabled Europe and Japan and others to focus their own resources on rebuilding their industries, their economies, and their political and civil societies.</p> <p>Europe and Japan rebuilt. They rebuilt their industries; they rebuilt their infrastructure; they created social welfare systems; and (in the eyes of Trump and his fellow nationalists)&nbsp;they had the gall to start competing with U.S. producers, while maintaining relatively high tariffs in their own markets. All along the way, they never so much as thanked us.&nbsp;</p> <p>Trump and his fellow nationalists might argue that the world has been ungrateful. They might argue that the world has taken advantage of the United States, that the United States has impeded its own development and potential by making prosperity accessible to others. Trump says: No longer will that be tolerated. Those trade deficits we’ve allowed to accrue over the years? No more! Those rules—under the General Agreement on Tariffs and Trade and the World Trade Organization—that we put forward and foolishly agreed to live by ourselves? No more. At least, no more without major changes that tilt the playing field in favor of the United States so that we can begin to recoup the billions upon billions of dollars stolen from us by a&nbsp;cheating, ungrateful world. In fact, Trump and those who think like him may think the United States should be entitled to special dispensation at the WTO because of America’s foundational role, our generosity, and the fact that we opted not to enslave and colonize the world after 1945.</p> <p>Of course, this is all a&nbsp;naïve and wrongheaded view of history, economics, diplomacy and statecraft. The notion that we live in a&nbsp;zero sum, Hobbesian world where there is limited scope for cooperation is the bogus premise behind the entire America‐​first platform. The notion that the United States had no interest in helping to strengthen Europe and Japan to resist Soviet expansionism and to afford U.S. exports is too ridiculous to even bother to discuss.</p> <p>All U.S. presidents since 1945 have had recourse to this more contentious approach to international relations, but none chose that path. Instead, they all preferred the rule of law and supported the institutions underpinning those rules. When people in other countries are free and can prosper, that is unequivocally good for Americans. When Americans can engage in commercial transactions with foreigners, we are all better off. Rules that foster exchange and cooperation are essential. To blow up the system because you may calculate that the United States will lose the least (a sort of limited nuclear war type of doctrine) becomes a&nbsp;plausible course of action to nationalists who think in&nbsp;zero‐​sum terms.</p> <p>Washington’s cadre of pro‐​trade, multilateral, internationalists—among whom I&nbsp;count myself—has failed to convince President Trump and those who favor his America‐​first brand of economic nationalism that trade is a&nbsp;win‐​win proposition and that the post‐​war liberal order underpinning globalization, while not perfect, should be salvaged and renovated, rather the wrecked. We need to do better.</p> <p>At the UN today, Trump claimed: “The future does not belong to globalists. The future belongs to patriots.” But the smartest patriots know that liberty at home is nourished by economic growth, which is fostered by trade, globalization and its well‐​functioning institutions.</p> Tue, 24 Sep 2019 17:09:10 -0400 Daniel J. Ikenson https://www.cato.org/blog/miscalculation-grievance-explains-trumps-aversion-trade-globalization Simon Lester discusses the latest on the trade war with China on WWL’s First News with Tommy Tucker https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-latest-trade-war-china-wwls-first-news Mon, 26 Aug 2019 12:09:00 -0400 Simon Lester https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-latest-trade-war-china-wwls-first-news Daniel J. Ikenson discusses the G20 summit on SiriusXM’s The Big Picture with Olivier Knox https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-g20-summit-siriusxms-big-picture Thu, 27 Jun 2019 11:50:00 -0400 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-g20-summit-siriusxms-big-picture Daniel J. Ikenson discusses U.S. — China trade tariffs on CHQR’s Afternoons with Rob Breakenridge https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-us-china-trade-tariffs-chqrs-afternoons Tue, 14 May 2019 11:21:00 -0400 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-us-china-trade-tariffs-chqrs-afternoons David Bier participates in the event, “Globalization in a Fractured World,” hosted by The Politics and Markets Project https://www.cato.org/multimedia/media-highlights-tv/david-bier-participates-event-globalization-fractured-world-hosted Wed, 03 Apr 2019 11:40:00 -0400 David J. Bier https://www.cato.org/multimedia/media-highlights-tv/david-bier-participates-event-globalization-fractured-world-hosted Tony Blair Is Right — Globalisation Is a Fact Not a Choice https://www.cato.org/publications/commentary/tony-blair-right-globalisation-fact-not-choice Ryan Bourne <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Don’t laugh, Brexiteers. But Tony Blair was in Washington DC this week lecturing Americans on the need “to argue the case for democracy from first principles”. In a&nbsp;think tank speech pushing “moderate”&nbsp;politics, the former prime minister and now “People’s Vote” champion was at his triangulating worst, particularly on Brexit.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Asked how he would counteract current “populist” moods, Blair spoke&nbsp;of addressing “grievances” that&nbsp;led to the UK’s referendum result.&nbsp;That means “dealing with” immigration, he said boldly, in his characteristically unspecific way. The former PM still, amazingly, seems unable to conceive that anyone might want to leave the EU for constitutional or political reasons.</p> <p>As ever with the former Labour leader though, survive the sound bites and eventually you’ll hear a&nbsp;pearl of wisdom setting him apart from most current MPs. Blair’s recognition of the importance of technological forces set to transform politics and society was a&nbsp;refreshing change from our usual dull political debates. But it was on global economics where he was perhaps at his most profound. Echoing other speeches, he once again observed that “globalisation is a&nbsp;force of nature, not a&nbsp;policy: it is a&nbsp;fact”.</p> <p>He’s right. A&nbsp;central failure of Western politics is the presumption there is a&nbsp;political answer to all issues. That everything is the result of some government decision or plan.&nbsp;<a href="https://www.telegraph.co.uk/business/2018/11/05/globalisation-stay-says-davos-boss/" target="_blank">Globalisation is no different</a>. Opponents of “globalism” like to pin the blame of our ills on policy. Trade deals and liberalisation, it is said, have helped hollow out industry. Migration policy failures have transformed communities and put pressure on public services. Corbynistas say free capital flows have contributed to a&nbsp;transient,&nbsp;short‐​termist business sector, and one that would constrain the party’s ability to deliver the activist state its supporters desire.</p> <p>There is partial truth in all this, of course. Trade protectionism has fallen&nbsp;significantly in recent decades and the extension of free movement to&nbsp;eastern European economies within&nbsp;the EU did result in huge inflows to Britain. Policy across Western states was indeed predicated on integration and the resulting specialisation of economies, based on strong evidence this would enhance prosperity. That, inevitably, affects industries’ structures and business ownership patterns.</p> <p>Yet Blair is right that globalisation is about so much more than policy. The greater economic interconnectedness we see reflects the free decisions of people in the face of new technologies as much as the actions of governments. Though states shape all sorts of personal decisions through policy, the increased cross‐​pollination of ideas resulting from culture, travel, study and the internet is not something that can be reversed or boxed away. Globalisation is thus a&nbsp;reality, not a&nbsp;set of policies.</p> <p>Consider some remarkable trends. According to the OECD, the number of foreign students&nbsp;<a href="https://www.telegraph.co.uk/news/2018/11/03/higher-education-market-succeed-bad-universities-must-allowed/" target="_blank">engaged in higher education worldwide&nbsp;</a>has risen dramatically from two million in 1999 to over five million in 2016. That has enhanced the exchange of culture and ideas. UN data show the number of outbound students of certain populous countries increasing particularly rapidly. China and India, for example, saw 120,000 and 54,000 people leave to study abroad in 1998. By 2013, that had jumped to 712,000 and 182,000. Even the US saw a&nbsp;rise from 38,000 to 60,000 over that period.</p> <p>As disposable incomes have increased and transport costs fallen, global tourism has boomed too. World&nbsp;Tourism Organisation data show a&nbsp;138pc increase in the number&nbsp;of people worldwide travelling to a&nbsp;foreign country between 1995 and 2016.</p> <p>This is not just a&nbsp;rich country phenomenon either. The share of total global travel undertaken by residents of high‐​income countries declined from 72pc to 60pc over that period. The OECD forecasts that by 2030, emerging economies will enjoy 57pc of the market share of international arrivals, way up from 30pc in 1980. This is little surprise when one considers modern transport can allow us to access the most difficult‐​to‐​reach areas of the globe in just one and a&nbsp;half to two days. One hundred years ago, the equivalent journey time would have been more like 40&nbsp;days.</p> <p>It’s not just physical movement of people to study and visit. The internet and social media are creating new networks and flows of information. In just nine years, between 2007 and 2016, internet use rose from just 5pc of the Indian population to 26pc, 9pc of the Chinese population to 50pc and 4pc of the Nigerian population to 47pc. Increasingly people around the world are consuming more and more of their news online, and from foreign sources.</p> <p>Social media is perhaps the best example of this networking effect. As of June 2017, it was estimated that 26pc&nbsp;of the global population has a&nbsp;Facebook account. Companies are now using these platforms to advertise products and build new markets overseas. These networks, for better or worse, are also shaping politics. They have provided communication outlets for revolutions, as in Tunisia, and have proven a&nbsp;useful vehicle to provide insights on the ground from the human catastrophe in Venezuela.</p> <p>Populist forces might well see success in their push back against the trade and migration policies of the past two decades. As Bank of England Governor Mark Carney warned last week, the world might now be set for a&nbsp;period of deglobalisation on trade given the possibility of a&nbsp;no‐​deal Brexit&nbsp;and the ongoing US‐​China trade&nbsp;war. But any government would find it extraordinarily difficult to take away the ability to travel, study, interact and freely exchange information from those who have already tasted that freedom.</p> <p>On this, Tony Blair is surely correct. Where globalisation is concerned, the genie is out of the bottle. Global integration will continue shaping our economy and our politics, whether we like it or not.</p> </div> Fri, 01 Mar 2019 11:51:00 -0500 Ryan Bourne https://www.cato.org/publications/commentary/tony-blair-right-globalisation-fact-not-choice Human​progress​.org is promoted on The Lars Larson Show https://www.cato.org/multimedia/media-highlights-radio/humanprogressorg-promoted-lars-larson-show Fri, 16 Nov 2018 11:30:00 -0500 Cato Institute https://www.cato.org/multimedia/media-highlights-radio/humanprogressorg-promoted-lars-larson-show The Economic Bedrock of Foreign Direct Investment https://www.cato.org/publications/commentary/economic-bedrock-foreign-direct-investment Daniel J. Ikenson <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>President Trump famously complains about the “unfair” practices of U.S. trading partners. If only those foreign cheats could be compelled to play by the rules, Trump argues, the United States wouldn’t be getting ripped off, running trade deficits, and losing hundreds of billions of dollars every year.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The fact is, however, that the trade deficit has nothing to do with unfair trade and everything to do with the world’s confidence in the U.S. economy. If anything, annual trade deficits mean the United States is winning hundreds of billions of dollars in net inflows of foreign investment every year. Inward investment — rather than export growth — is the real prize of international competition and it tends to reward good policies.</p> <p>The United States has long been the world’s premiere destination for foreign direct investment. In 2017, the accumulated stock of FDI in the United States surpassed $4 trillion, which accounts for nearly 25 percent of the total global stock. By comparison, the second largest destination is Hong Kong, which accounts for 6&nbsp;percent. China and the United Kingdom account for roughly 5&nbsp;percent each.</p> <p>With one out of every four dollars of global FDI invested in U.S. subsidiaries of foreign headquartered companies (“international companies”), the United States enjoys economic advantages that no other country has. A&nbsp;<a href="https://ofii.org/pressrelease/new-report-quantifies-how-fdi-helps-form-america-s-economic-bedrock" target="_blank">report</a>published this morning by the <a href="http://www.ofii.org/" target="_blank">Organization for International Investment</a>documents the significant contributions of these companies to the U.S. economy.</p> <p>These international companies tend to be among the best in their industries, having succeeded in their home markets before taking their best practices and testing their mettle abroad. They have contributed disproportionately to U.S. economic performance over the years, as observed across of variety of objective measures. Even though these entities as a&nbsp;group comprise a&nbsp;mere 1.3 percent of all U.S. businesses, collectively they punch well above their weight, accounting for:</p> <ul><li>5.5 percent of all private‐​sector employment</li> <li>6.5 percent of U.S. GDP (private‐​sector value added)</li> <li>14.8 percent of U.S. private‐​sector employee benefits</li> <li>16.0 percent of new private‐​sector, non‐​residential capital investment</li> <li>16.7 percent of private‐​sector research and development spending</li> <li>17.1 percent of all corporate federal taxes paid</li> <li>23.5 percent of U.S. exports</li> <li>24.3 percent higher worker compensation than the U.S. private‐​sector average</li> </ul><p>These direct contributions — and there are many more telling statistics in the report — provide only a&nbsp;partial picture of the impact of international companies on the economy.</p> <p>The full story must take into account the related economic activity that is spurred upstream of these companies with their suppliers, vendors, and intermediate goods’ providers, as well as the activity generated downstream through the spending of their employees. It must also consider the effects of these companies on the U.S. economy over time through the reactions of domestic companies rising to the challenge of new competition, the residual benefits delivered through technology spillovers, the adoption of best practices in governance and workplace management, and the hybridization and evolution of ideas that make companies more efficient, more pioneering, and more exciting places to work.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>In the 21st century, governments are competing to lure capital investment from the world’s best companies. Those companies have options and the importance of their contributions to U.S. economic growth and dynamism cannot be overstated.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Despite President Trump’s claims that trade killed U.S. manufacturing and that his mix of policies and threatening tweets will draw factories and their workers back to the United States, the fact is that over $1.6 trillion (40%) of that FDI is parked in U.S. manufacturing operations. That is by far the largest amount of FDI in any country’s manufacturing sector. If there’s been a&nbsp;race to the bottom driving factories south of the border and overseas, somebody forgot to tell foreign‐​headquartered companies, which continue to remain bullish on U.S. manufacturing.</p> <p>Over one‐​fifth (20.7%) of the U.S. manufacturing sector’s GDP is generated by these international companies, which account for one‐​fifth (19.9%) of total U.S. manufacturing employment. They account for almost half of all property, plant, and equipment expenditures in the manufacturing sector (45.2%), over 17 percent of all manufacturing‐​sector R&amp;D spending, and their effective tax rates exceed the U.S. manufacturing average by 35.8 percent.</p> <p>What the OFII report shows is that international companies contribute significantly to the U.S. economy, raising average economic performance across a&nbsp;wide range of pertinent metrics through their direct contributions, but also because their presence and participation in U.S. markets brings out the best in incumbent domestic firms.</p> <p>The report presents new and compelling evidence that international companies increase U.S. economic growth, vitality, and diversity well beyond the levels that would obtain without their contributions, and that U.S. policies should be designed to attract more of these companies—and more of their intellectual and financial capital—to U.S. shores.</p> <p>Foreign investment in the United States is a&nbsp;barometer of the faith of the rest of the world that the U.S. economy is safe and strong, and will perform well, prospectively, relative to other economies. Meanwhile, investment is essential to economic growth and higher living standards. To remain atop global value chains and at the technological frontier, the U.S. economy requires continuous inflows of fresh capital to replenish the machinery, software, laboratories, research centers, and high‐​end manufacturing facilities that harness our human capital, animate new ideas, and create wealth.</p> <p>Over the years, foreign companies have contributed significantly to the satisfaction of those capital requirements. With the world’s largest consumer market, relatively transparent business and regulatory environments, a&nbsp;skilled and productive workforce, an innovative culture, and deep and broad capital markets to commercialize that innovation, the United States has some big advantages in the global competition to attract investment.</p> <p>Although the United States accounts for nearly a&nbsp;quarter of the global FDI stock, the U.S. share was much a&nbsp;much larger 37 percent, as recently as 2000. Since then, the competition for FDI has been intensifying.</p> <p>By growing their economies, improving the education and skills of their workforces, strengthening the rule of law, implementing reforms to make their business climates more predictable, and adopting other best practices, countries once considered too risky have started to become viable competitors for a&nbsp;growing share of that investment.</p> <p>U.S. policymakers — even with all of the advantages the U.S. economy retains — can no longer passively assume that foreign companies will prefer to invest in the United States over other destinations under all circumstances. They cannot be complacent or ambivalent. They must be welcoming. And they must steer clear of protectionist policies, which tend to deter investment inflows.</p> <p>Although one or two observations on a&nbsp;timeline don’t make for a&nbsp;conclusive trend, the fact is that investment inflows have been waning in 2018. Whether that reflects concerns over the inward, protectionist turn of the current administration’s trade policies is unclear but, traditionally, protectionism has been more or a&nbsp;deterrent to, than a&nbsp;magnet for investment.</p> <p>While well‐​considered, carefully‐​crafted, transparent policies intended to protect legitimate national security interests may be necessary, the same cannot be said of measures designed to protect particular industries and groups from foreign competition. In the 21st century, governments are competing to lure capital investment from the world’s best companies. Those companies have options and the importance of their contributions to U.S. economic growth and dynamism cannot be overstated.</p> </div> Wed, 17 Oct 2018 13:57:00 -0400 Daniel J. Ikenson https://www.cato.org/publications/commentary/economic-bedrock-foreign-direct-investment Simon Lester discusses the impacts of the latest round of tariffs imposed on China on the U.S. auto industry on The Nolan Finley Show https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-impacts-latest-round-tariffs-imposed-0 Thu, 20 Sep 2018 11:42:00 -0400 Simon Lester https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-impacts-latest-round-tariffs-imposed-0 Johan Norberg discusses capitalism, globalism and other topics on The Dissenter podcast https://www.cato.org/multimedia/media-highlights-tv/johan-norberg-discusses-capitalism-globalism-other-topics-dissenter Mon, 30 Jul 2018 10:14:00 -0400 Johan Norberg https://www.cato.org/multimedia/media-highlights-tv/johan-norberg-discusses-capitalism-globalism-other-topics-dissenter How Innovation Drives Financial Inclusion https://www.cato.org/publications/commentary/how-innovation-drives-financial-inclusion Diego Zuluaga <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>At a&nbsp;time when the world’s two largest economies are engaged in a&nbsp;destructive quest to limit trade between people, any evidence of the benefits impact of globalisation cannot come soon enough.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Recently, we got just such an illustration in the form of the&nbsp;<a href="https://globalfindex.worldbank.org/" target="_blank">World Bank’s Findex</a>&nbsp;report on global financial inclusion. The report is a&nbsp;detailed survey of the banking, saving and borrowing patterns of households in 140 countries. It covers developed and developing nations, rich and poor, women and men, tracing progress in the expansion of access to financial services.</p> <p>Ready availability of reliable banking and payments facilities is essential for human flourishing. Contrary to what one might think, it is not for the rich and highly educated that these services are most important. Small‐​scale farmers, migrant workers and budding entrepreneurs in frontier markets depend critically on cheap and transparent payments and credit systems, as they have few alternative employment options and usually have meagre funds of their own.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Unless countries remove regulatory barriers to account ownership, they risk the poorest falling ever further behind. The political and social consequences of that would be dire.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Without basic financial services, the way of life of these people would be compromised and their living standards would decline.</p> <p>It is therefore an auspicious development that the six years between the first (2011) and third (2017) editions of the Findex report have seen significant increases in the percentage of the world’s population with mobile money or bank accounts. Sixty‐​nine per cent of adults worldwide now use one or both of those services, compared to 51 per cent at the start of the decade.</p> <p>Nowhere has the recent spread of financial services occurred most visibly than in emerging markets. While the share of adults owning accounts in these countries, at 63 per cent, remains far below their high‐​income counterparts, it stood at just 40 per cent six years ago. This rate of growth is remarkable even when compared to other measures of global development, such as the reduction of extreme poverty&nbsp;and the fight against communicable diseases, on which we have made great strides in recent decades.</p> <p>One trend more than any other helps to explain the recent progress of financial inclusion, namely the expansion of mobile banking and payments.</p> <p>The revolutionary effects of M‐​Pesa in Kenya are already relatively well‐​known. Since its introduction in 2007, this mobile money payments system has more than&nbsp;<a href="http://www.nber.org/papers/w17129.pdf" target="_blank">halved the cost of fund transfers</a>&nbsp;and cut processing times from hours to a&nbsp;few minutes or seconds. M‐​Pesa has forced incumbent money transmitting services such as Western Union to slash their fees. It has also introduced millions of Kenyans to the formal finance sector, facilitating access to bank and savings accounts.</p> <p>The extent to which other economies in sub‐​Saharan Africa have rushed to follow in Kenya’s footsteps is often not fully recognised, yet the Findex report bears it out. Since 2011, half a&nbsp;dozen countries, including Ghana, Nigeria, Senegal and Tanzania, have more than 40 per cent of adults with a&nbsp;mobile money or bank account.</p> <p>Financial technology is also having a&nbsp;marked impact on the emancipation of women in societies that have tended to be highly patriarchal.</p> <p>Aside from considerations of empowerment and autonomy, there are obvious practical reasons to want women to have access to finance. As well as making up half the adult population, they are chiefly in charge of household decisions and the raising of children, so financially active and literate women have a&nbsp;positive impact on the wellbeing of those around them.</p> <p>And women who own a&nbsp;bank account can save and build businesses independently from their husbands and fathers. In communities that are traditionally averse to enterprise, giving access to financial services to the few – including women – with entrepreneurial ambition can accelerate development.</p> <p>The spread of innovative banking and payments provision gives cause for celebration. Yet, just as the developing world gallops towards financial inclusion, Western countries are making it harder for their own people to borrow, save and invest.</p> <p>America provides perhaps the starkest illustration. As of 2015,&nbsp;<a href="https://www.fdic.gov/householdsurvey/" target="_blank">7&nbsp;per cent of U.S. households</a>, nine million of them, did not have a&nbsp;bank account. An additional 19.9 per cent were “underbanked” in that they had to resort to alternative (usually higher‐​cost) providers for credit and other banking services.</p> <p>Experts disagree on the drivers behind the scale of America’s unbanked problem. A&nbsp;<a href="https://www.kansascityfed.org/~/media/files/publicat/econrev/econrevarchive/2018/2q18hayashiminhas.pdf" target="_blank">paper published last week</a>&nbsp;by the Kansas City Federal Reserve Bank finds that income, education, employment and race all predict one’s likelihood of using basic banking services. Indeed, as Lisa Servon shows in her illuminating book&nbsp;<a href="https://www.amazon.com/Unbanking-America-Middle-Class-Survives-ebook/dp/B01912OYO0" target="_blank">The Unbanking of America</a>, the poor and minorities often&nbsp;<a href="https://www.npr.org/2017/01/10/509126878/what-is-driving-the-unbanking-of-america" target="_blank">prefer to use alternative financial services</a>&nbsp;because they find them more transparent, more accessible and even more respectful than banks are to them. But this convenience has a&nbsp;price, and it’s sometimes steep.</p> <p>The Kansas Fed researchers also find a&nbsp;strong correlation between internet connectivity and access to banking. While this relationship may reflect the general marginalisation of a&nbsp;fraction of the population who are poor, unbanked and unconnected, it points to the increasing importance of technology for securing access to financial services, even in mature markets.</p> <p>But too often regulation stands in the way of innovation‐​led financial inclusion. The Federal Deposit Insurance Corporation, a&nbsp;key U.S. bank regulator, has dragged its feet since 2008 on issuing new bank licenses. Similarly, a&nbsp;promised&nbsp;<a href="https://www.occ.gov/topics/responsible-innovation/comments/special-purpose-national-bank-charters-for-fintech.pdf" target="_blank">nationwide charter</a>&nbsp;that could lower barriers for new fintech platforms has been slow to materialise. Innovation in payments in the M‐​Pesa mould is hampered by disparate money transfer rules across the 50 states.</p> <p>Poor people’s access to banking is also hampered by a&nbsp;growing mire of anti‐​money laundering laws that threaten to&nbsp;<a href="https://www.heritage.org/economic-and-property-rights/commentary/beneficial-ownership-reporting-the-united-states" target="_blank">turn ordinary citizens into felons</a>, and by rules aimed at protecting consumers that make serving some of them uneconomical for banks. In the UK, the Financial Conduct Authority’s proposed cap on overdraft charges, which had been shelved but is now again under consideration, would almost certainly have this effect. Indeed, similar measures against payday loans have&nbsp;<a href="https://capx.co/behavioural-economics-in-practice-hasnt-lived-up-to-the-theory/" target="_blank">shut out hundreds of thousands of borrowers</a>&nbsp;from that market.</p> <p>Rich countries should take their lead from emerging markets and let innovation drive financial inclusion. Unless countries remove regulatory barriers to account ownership, they risk the poorest falling ever further behind. The political and social consequences of that would be dire.</p> </div> Wed, 27 Jun 2018 10:39:00 -0400 Diego Zuluaga https://www.cato.org/publications/commentary/how-innovation-drives-financial-inclusion Daniel J. Ikenson discusses aluminum and steel tariffs on KURV’s The Wall with Sergio Sanchez https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-aluminum-steel-tariffs-kurvs-wall Thu, 01 Mar 2018 12:31:00 -0500 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-aluminum-steel-tariffs-kurvs-wall Daniel J. Ikenson discusses aluminum and steel tariffs on CTV News https://www.cato.org/multimedia/media-highlights-tv/daniel-j-ikenson-discusses-aluminum-steel-tariffs-ctv-news Thu, 01 Mar 2018 12:28:00 -0500 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-tv/daniel-j-ikenson-discusses-aluminum-steel-tariffs-ctv-news Ask Huawei about The “Coming” U.S.-China Trade War https://www.cato.org/publications/commentary/ask-huawei-about-coming-us-china-trade-war Daniel J. Ikenson <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Speculation is rampant that President Trump will soon announce sanctions against China for its heavy‐​handed intellectual property and technology transfer policies, cavalierly thrusting us into a&nbsp;deleterious trade war. Huawei Technologies has news for these speculators: For over a&nbsp;decade, Washington and Beijing have been waging a&nbsp;tit‐​for‐​tat technology trade war, which is escalating and claiming victims as you read.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The latest hostilities occurred Monday when AT&amp;T, poised to deliver its long‐​gestating plan to sell smart phones produced by Chinese technology giant Huawei, instead abruptly announced that it was aborting that plan. If history is any guide, AT&amp;T likely was compelled to change course by U.S. policymakers with leverage to affect the telecom’s fortunes.</p> <p>China’s technology ambitions, which at times have been promoted and advertised with brazen disregard for intellectual property and the norms of international trade and investment, are increasingly in the crosshairs of U.S. policymakers.&nbsp;Since at least 2006, Beijing has been promoting discriminatory indigenous innovation policies, which accord preferential treatment to companies that develop or register their intellectual property in China. In 2009, the American Chamber of Commerce in China issued a&nbsp;report that exposed “a web of industrial policies,” as well as Chinese government plans to build national champions by “borrowing” Western technology.</p> <p>More recently, Beijing approved a $160 billion investment to help close the technology gap between the domestic semiconductor industry and the world’s cutting‐​edge firms. The government also implemented two new laws—the National Security Law and the Cybersecurity Law—which aim to tighten state control over information by requiring data and technology used in certain sectors of the economy to be “secure and controllable.” U.S. companies are concerned that the Cybersecurity Law’s vague objectives and ambiguous language grant too much discretion to Chinese authorities, who could require firms to share source code and other proprietary information to gain market entry. Forced technology transfer has been a&nbsp;long‐​standing complaint of U.S. companies.</p> <p>Meanwhile, China’s “Made in China 2025” initiative, which is Beijing’s roadmap for achieving technological preeminence, has put U.S. policymakers on the defensive, causing all Chinese acquisitions of U.S. (or other foreign) technology companies to be viewed with suspicion. Just last week, China’s ANT Financial’s bid to acquire U.S. MoneyGram was rebuked by the Committee on Foreign Investment in the United States (CFIUS), which has become an increasingly insurmountable obstacle to technology acquisitions over the past year.</p> <p>What does this have to do with Huawei? Well, rather than attempt to resolve these issues by bringing complaints to the World Trade Organization, the United States chose to impose de facto bans on Chinese technology firms and to make it more difficult for Chinese companies to acquire U.S. technology. Over the years, Huawei—one of the world’s most successful information and communications technology companies—has been held accountable for the Chinese government’s transgressions (both real and imagined). Huawei has been crucified for the sins of its government, standing accused of being affiliated with the People’s Liberation Army and a&nbsp;conduit for cyber‐​malfeasance.</p> <p>In 2008, Huawei’s bid to acquire U.S. software company 3Com was scuttled by opposition from U.S. policymakers and&nbsp;CFIUS on the grounds that the transaction, if consummated, would present a&nbsp;threat to U.S. national security. In 2011, the U.S. House Permanent Select Committee on Intelligence initiated an investigation into whether Huawei and ZTE (another Chinese ICT company) presented security threats to U.S. telecommunications networks. The investigation culminated in a&nbsp;report recommending that U.S. firms—especially telecoms with hopes of participating in federally funded infrastructure projects—avoid contaminating their supply chains with equipment and components produced by these Chinese companies. But the report contained no evidence to support the claims—only innuendo.</p> <p>Six months after publication of the House Intelligence Committee report, U.S. lawmakers inserted language into the Continuing Budget Resolution making it illegal for U.S. government agencies to purchase or use Chinese ICT products. Later that year, as conditions for its approval of a&nbsp;Japanese telecommunications company’s acquisition of Sprint Nextel, CFIUS required the purchaser, Softbank, to purge Chinese ICT components from its supply chain and to obtain preapproval from the U.S. government for any new vendors it wished to bring into its supply chain. Similar notification and approval conditions have been required in subsequent acquisitions.</p> <p>Although the public record is devoid of any evidence to support the assertions that Huawei is a&nbsp;bad actor, the company has essentially been shut out of the U.S. market by way of U.S. policymakers reminding the big telecoms that they have much to lose if they do business with Huawei.</p> <p>Considering that Huawei products are ubiquitous throughout the world and that the company partners with British Telecom in building and servicing telecommunications networks in the United Kingdom, might it be possible that protectionism is masquerading as a&nbsp;national security imperative in this case? Might AT&amp;T’s decision to drop Huawei have something to do with its desire to win approval for its pending merger with Time‐​Warner?</p> <p>For those wondering how the Trump administration might “retaliate” against China for any infractions it finds during the course of its Section 301 investigation, bear in mind that “pretaliation” is already underway. The U.S. government has chosen to address China’s pursuit of its technological ambitions by depriving Chinese tech companies of both U.S. technology and U.S. consumers. Along with providing a&nbsp;false sense of cybersecurity, that approach is sure to reduce the scope for innovation, collaboration, and economic growth, and it will threaten the global trading system.</p> <p>All of that might be averted if the Trump administration uses the evidence it obtains from its Section 301 investigation to file a&nbsp;formal challenge of China’s practices at the WTO and Beijing, likewise, launches a&nbsp;WTO challenge of U.S. restrictions of Chinese ICT companies. The outcomes might then be parlayed into an enduring solution devoid of debilitating unilateral sanctions.</p> </div> Wed, 10 Jan 2018 12:03:00 -0500 Daniel J. Ikenson https://www.cato.org/publications/commentary/ask-huawei-about-coming-us-china-trade-war Didn’t Republicans Use to Believe in Free Trade? https://www.cato.org/publications/commentary/didnt-republicans-use-believe-free-trade Colin Grabow <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>While U.S. politics have witnessed any number of distressing trends in recent years, one of the more disturbing is the&nbsp;<a href="http://www.pewresearch.org/fact-tank/2017/04/25/support-for-free-trade-agreements-rebounds-modestly-but-wide-partisan-differences-remain/" target="_blank">decline in support</a>&nbsp;among Republicans for free trade. The rise of Donald Trump, who regularly blamed American economic ills on China and trade deals such as the North American Free Trade Agreement (NAFTA) during the 2016 presidential campaign, is one obvious symptom of this development. Laura Ingraham’s new book,&nbsp;<a target="_blank" href="https://www.amazon.com/Billionaire-Barricades-Populist-Revolution-Reagan/dp/1250150647"><em>Billionaire at the Barricades</em></a>, and its relentless cheerleading for trade protectionism is perhaps another. Making the speculative argument that Trump is following a&nbsp;populist political trail first blazed by Ronald Reagan, Ingraham uses the book to catalog the alleged damage wrought by “globalists” and the trade liberalizing agreements they support.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>This narrative, however, faces an early and glaring problem—namely that Reagan was in many ways one of the very free trade‐​supporting globalists targeted by her repeated barbs. Indeed, those familiar with Reagan’s views on trade quickly notice a&nbsp;sharp divergence between the radio and television talk show host’s views and those of the former president. Describing NAFTA as both a “nightmare” and “disaster,” Ingraham overlooks the fact that Reagan launched his presidential campaign in 1979 by&nbsp;<a href="http://www.presidency.ucsb.edu/ws/?pid=76116" target="_blank">expressing his desire</a>&nbsp;for a “North American accord” and spoke of a “dream” in which commerce among the United States, Canada, and Mexico would “flow more freely across their present borders than they do today.” No idle rhetoric, Reagan made a&nbsp;concrete step toward the realization of this vision by signing a&nbsp;free trade agreement with Canada in 1987 that was later used as the basis for NAFTA in the early 1990s.</p> <p>Other examples of this ideological parting of ways between Ingraham and Reagan abound. In contrast to her repeated citing of the trade deficit as evidence of economic weakness, Reagan regularly downplayed such concerns in both&nbsp;<a target="_blank" href="https://www.reaganlibrary.archives.gov/archives/speeches/1985/83185a.htm">prepared remarks</a>&nbsp;and&nbsp;<a target="_blank" href="https://youtu.be/HUk4JU85nFw?t=22m">off‐​the‐​cuff</a>&nbsp;<a href="http://articles.latimes.com/1988-01-11/news/mn-23515_1_trade-deficit" target="_blank">statements</a>. While Ingraham shrugs off accusations of protectionism by asking, “Since when is it bad to ‘protect’ our nation and its workers?” Reagan considered the term one of opprobrium that he&nbsp;<a href="http://www.nytimes.com/1988/01/26/us/transcript-of-reagan-s-state-of-the-union-message-to-nation.html?pagewanted=print" target="_blank">equated with</a>“<a target="_blank" href="https://www.reaganlibrary.archives.gov/archives/speeches/1985/83185a.htm">destructionism</a>.” And although Ingraham writes of the World Trade Organization with obvious disdain, left unsaid is that the organization’s 1995 establishment can be directly traced to the General Agreement on Tariffs and Trade’s Uruguay Round of talks which U.S. negotiators joined in 1986 at Reagan’s behest.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Laura Ingraham indulges in revisionism in trying to paint Ronald Reagan as a&nbsp;protectionist.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>With a&nbsp;likely eye toward squaring this circle, the book highlights a&nbsp;<a target="_blank" href="https://www.cato.org/publications/policy-analysis/reagan-record-trade-rhetoric-vs-reality">1988 Cato Institute report</a>&nbsp;blasting Reagan’s trade record as evidence of his protectionist bona fides. As Scott Lincicome and I&nbsp;<a href="http://www.nationalreview.com/article/454171/ronald-reagan-donald-trump-perils-protectionism-history-lesson" target="_blank">have noted</a>, however, historical context—including a&nbsp;desire to head off even more dramatic moves from a&nbsp;protectionist Congress, the need to secure votes from a&nbsp;heavily Democratic House of Representatives for his broader economic agenda, and a&nbsp;substantially different international trading environment—does much to explain the use of such measures. Taking the longer view, these examples of protectionism barely detract from an enduring trade legacy found in NAFTA and the WTO. Although someone writing in 1988 could not have known the fruits Reagan’s efforts would later bear, Ingraham has no such excuse.</p> <p>A failure to note the clear lineage from Reagan is not the only example of Ingraham offering an incomplete storyline regarding NAFTA. After highlighting prophecies of doom from contemporaneous critics such as&nbsp;<a target="_blank" href="https://en.wikipedia.org/wiki/Giant_sucking_sound">Ross “giant sucking sound” Perot</a>&nbsp;and&nbsp;<a target="_blank" href="https://www.washingtonpost.com/archive/opinions/1993/11/07/america-first-nafta-never/c8450c08-b14b-4a25-abe8-0b7cfc992e11/?utm_term=.8fc479f57afe">Pat “part of a&nbsp;skeletal structure for world government” Buchanan</a>, Ingraham&nbsp;<a target="_blank" href="https://www.elgaronline.com/view/journals/roke/2-4/roke.2014.04.02.xml">cites predictable analysis</a>&nbsp;from the left‐​wing Economic Policy Institute (EPI)—whose opposition to&nbsp;<a href="http://www.epi.org/publication/briefingpapers_bp147/" target="_blank">both NAFTA</a>&nbsp;and&nbsp;<a href="http://www.epi.org/publication/infographic-free-trade-agreements-have-hurt-american-workers/" target="_blank">free trade</a>&nbsp;is well-established—as evidence their hyperbolic warnings proved “painfully prescient.”</p> <p>While Ingraham takes comfort in support for her NAFTA‐​bashing from the other side of the ideological spectrum, the rest of the economics profession is unconvinced. Indeed,&nbsp;<a href="http://www.igmchicago.org/surveys/free-trade" target="_blank">a&nbsp;2012 poll</a>&nbsp;of 41 economists, including some of the field’s most distinguished names, found&nbsp;<em>not a&nbsp;single one</em>&nbsp;willing to disagree with the statement that U.S. citizens have, on average, been better off with NAFTA than with the trade rules that preceded it. Present‐​day threats of withdrawal from the agreement, meanwhile, have&nbsp;<a target="_blank" href="https://www.politico.com/story/2017/11/09/trump-nafta-farmers-defy-244769">placed in</a><a target="_blank" href="https://www.freep.com/story/money/cars/2017/11/27/mike-pence-nafta-detroit-3/898325001/">sharp</a>&nbsp;<a href="http://www.mysanantonio.com/opinion/commentary/article/Withdrawal-from-NAFTA-would-damage-Texas-s-12399375.php" target="_blank">relief</a>&nbsp;the many costs such a&nbsp;move would impose and the benefits NAFTA provides.</p> <p>In addition to NAFTA, Ingraham portrays China and its WTO accession as another bogeyman that has wreaked havoc on the U.S. economy. For evidence, she once again dips her pail into the EPI well, citing the labor‐​funded organization’s claim that as many as 3.2 million jobs were lost due to trade with China. Even the more reputable 2016 paper from economists David Autor, David Dorn, and Gordon Hanson estimating 2.4 million job losses as a&nbsp;result of the bilateral trade relationship cited by Ingraham for good measure has been&nbsp;<a target="_blank" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2920188">subject to</a>&nbsp;<a target="_blank" href="https://www.cato.org/blog/did-china-trade-lose-24-million-factory-jobs">a&nbsp;variety</a>&nbsp;<a href="http://www.heritage.org/trade/commentary/trade-china-net-plus-americans" target="_blank">of criticism</a>. That U.S. unemployment is currently at a&nbsp;<a href="http://fortune.com/2017/12/08/november-job-report-unemployment-rate/" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=http://fortune.com/2017/12/08/november-job-report-unemployment-rate/&amp;source=gmail&amp;ust=1515596318007000&amp;usg=AFQjCNECZYxLd3ppdyktHVc-tF8BljsffQ" target="_blank">17‐​year low</a> and flirting with a&nbsp;sub‐​4 percent rate even as trade with China&nbsp;<a target="_blank" href="https://www.census.gov/foreign-trade/balance/c5700.html">reaches for new heights</a>&nbsp;is unsurprisingly not remarked upon.</p> <p>Ingraham—no dullard, armed with both a&nbsp;University of Virginia law degree and high‐​powered D.C. law firm background—also relies upon data that are incomplete or lacking in context. She notes, for example, that from 2001 to 2011 manufacturing employment decreased from 17.1 million to 11.8 million. Unmentioned is that this decline in manufacturing employment&nbsp;<a target="_blank" href="https://fred.stlouisfed.org/series/MANEMP">began in 1979</a>, when jobs peaked at 19.4 million, and that this phenomenon is seen in developed countries&nbsp;<a target="_blank" href="https://www.economist.com/blogs/buttonwood/2017/01/economics-and-finance">around the world</a>. Manufacturing employment, meanwhile, has increased by more than 650,000 jobs since 2011 and the sector’s output is now approaching&nbsp;<a target="_blank" href="https://fred.stlouisfed.org/series/OUTMS">all‐​time highs</a>.</p> <p>Head‐​scratching numbers and spurious correlations also feature as part of the scaremongering. After noting the U.S. trade‐​in‐​goods deficit with China more than quadrupled from $84 billion in 2000 to $367 billion by 2015 (bilateral trade in services is not mentioned—hardly a&nbsp;shock given the United States posted a&nbsp;<a target="_blank" href="https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china">$37.4 billion surplus</a>&nbsp;in 2016), Ingraham offers a&nbsp;few unrelated statistics. The first is that from 1999 to 2014 the U.S. share of world GDP has declined from 25.78 percent to 22.43 percent, while China’s GDP increased from $1.1 trillion to $11 trillion during roughly the same period. If China’s growth came at the expense of the United States, that might be a&nbsp;problem worth noting. However, it didn’t. U.S. GDP grew by approximately $9 trillion over the same period. Moreover, the declining U.S. share of total global GDP is to be expected in a&nbsp;world in which the United States accounts for 5&nbsp;percent (and shrinking) of global population and many other countries’ economies have been growing on account of smarter policies. This rising global prosperity is to a&nbsp;great extent attributable to the open trade and investment policies advocated by U.S. leaders over the years—including Ronald Reagan—and is a&nbsp;trend to embrace, as prosperity abroad provides lucrative markets for U.S. exports and new products for American consumers.</p> <p>Strangely noted in the same paragraph is the increase in the U.S. national debt from $5.7 trillion in 1999 to $20 trillion today. Unless Ingraham possesses evidence that China somehow forced the United States into a&nbsp;series of expensive military campaigns since 2001, or was a&nbsp;more important determinant than our aging population in the explosive increase in entitlement spending, her conflation of the trade deficit and national debt appears either astonishingly ignorant or deceitful. Given Ingraham’s sharp mind, one may lean towards the latter explanation.</p> <p>Ingraham’s ahistorical portrayal of Ronald Reagan as a&nbsp;committed protectionist, common cause with left‐​leaning groups such as the EPI, and repeated use of misleading statistics should serve as flashing warning signs to readers of her book. The vision she peddles of a&nbsp;world in which increased tariffs and new obstacles to international trade are the way forward is at odds with modern conservative philosophy, mainstream economic opinion, and possibly even President Trump whose trade protectionism has thus far consisted of&nbsp;<a href="http://thehill.com/opinion/finance/367880-tariffs-would-throw-monkey-wrench-into-humming-economy" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=http://thehill.com/opinion/finance/367880-tariffs-would-throw-monkey-wrench-into-humming-economy&amp;source=gmail&amp;ust=1515553223108000&amp;usg=AFQjCNH38Eb8bdfq9XDi_z9Eo4S6_KEFYw" target="_blank">more bark than bite</a>. Such policies may hold a&nbsp;superficial appeal but have a&nbsp;clear historical record of failure. It’s time for the Republican dalliance with protectionism to end.</p> </div> Tue, 09 Jan 2018 08:40:00 -0500 Colin Grabow https://www.cato.org/publications/commentary/didnt-republicans-use-believe-free-trade Safeguarding Policy Space in Investment Agreements https://www.cato.org/articles/safeguarding-policy-space-investment-agreements Fri, 15 Dec 2017 11:56:00 -0500 Simon Lester, Bryan Mercurio https://www.cato.org/articles/safeguarding-policy-space-investment-agreements Saving US‐​Mexico Relations from the NAFTA Renegotiation https://www.cato.org/publications/commentary/saving-us-mexico-relations-nafta-renegotiation Simon Lester <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>President Trump’s North American Free Trade Agreement (NAFTA) renegotiation has just finished round five. The talks have been contentious so far, but the parties are still projecting a&nbsp;conclusion in the first quarter of 2018. NAFTA has been great for U.S.-Mexico economic relations, and all participants in the negotiation need to make sure the benefits are not lost.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>To understand the value of NAFTA for the two countries, it’s worth recalling the state of U.S.-Mexico economic relations before NAFTA. Back in 1990, when the NAFTA negotiations started, the United States already had a&nbsp;free trade agreement with Canada, and Canada and Mexico were not particularly close. The focus of NAFTA, then, was on the United States and Mexico, beginning as informal bilateral talks between those two countries, which Canada then asked to join. Thus, to an extent it is hard to recall today, NAFTA was mainly about improving the contentious economic and political relationship the United States and Mexico had for most of their history.</p> <p>And whatever you might think of this or that NAFTA provision, NAFTA has been good for that relationship.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>It would be a&nbsp;shame if a&nbsp;misguided obsession with trade statistics undermines an agreement that has been a&nbsp;great boon for U.S.- Mexico relations.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Given recent political rhetoric, some people might find that assertion surprising. But a&nbsp;quick review of the rocky history of these two neighboring countries, marked by war, expropriation and mistrust, shows how far we have come. Today’s disagreements seem challenging, but they pale in comparison to what previous generations dealt with. Current problems are technical ones that can be handled through negotiation and drafting of trade agreements — not unbridgeable, fundamental differences.</p> <p>First, a&nbsp;fundamental and distinct aspect of NAFTA is that it involves significant liberalization (almost all tariffs have been eliminated) between neighboring large developed countries and a&nbsp;developing country. No trade agreement had gone quite so far in this regard before. It is for this reason that independent presidential candidate Ross Perot warned in 1992 of a “giant sucking sound” from U.S. factories moving to Mexico to take advantage of cheap labor.</p> <p>Perot’s concern was far too simplistic a&nbsp;take on NAFTA’s impact. It is true that some factories have moved. But the broader impact was the promotion of an integrated North American production network, through which companies could trade inputs across borders and make production more efficient, and therefore be more competitive with the rest of the world.</p> <p>Despite this, concerns about competition with cheap Mexican labor have not gone away. NAFTA was the first trade agreement to include legal obligations — through a&nbsp;side agreement — on labor rights, but critics on the left were unsatisfied and pushed for stronger ones. Today’s trade agreements include labor obligations in the main text that are as enforceable as the trade obligations. It is likely that a&nbsp;renegotiated NAFTA will have provisions similar to those of the Trans‐​Pacific Partnership. Everyone agrees that higher incomes and other labor protections in Mexico are the desired outcome. The question is just how to get there.</p> <p>On the other side of the political spectrum, what U.S. businesses want to see in Mexico is a&nbsp;stable environment for investment. Though the U.S. is the leading source of foreign investment in Mexico, with $92.8 billion invested in 2015, the situation has not always been so positive. Mexico remained highly protectionist until the late 1980s and did not open up substantially until after NAFTA. The infamous oil sector expropriation of 1938, while in the distant past, makes foreign companies nervous, and U.S. business groups wanted some guarantees that they would not be badly treated if they invested in Mexico.</p> <p>Their mechanism for achieving this was a&nbsp;set of NAFTA provisions on investment that includes substantive legal protections, such as a&nbsp;minimum standard of treatment, and a&nbsp;procedure by which foreign investors can sue host governments in an international tribunal (rather than domestic courts). This approach to investment protection in trade agreements has grown increasingly controversial in recent years. Given the change in attitude by the Mexican government toward foreign investment, as well as the prospect of good domestic law protections as an alternative, one can imagine that this part of NAFTA is not as important as it was in the early 1990s.</p> <p>Looming over all this is the U.S. trade deficit with Mexico. Economists are very clear that bilateral trade deficits are nothing to fear, but the Trump administration is worked up about them nonetheless. Somehow the NAFTA renegotiation may need to include a&nbsp;provision that at least has the appearance of addressing trade deficits, in order to satisfy Trump and a&nbsp;couple of his advisers.</p> <p>It would be a&nbsp;shame if a&nbsp;misguided obsession with trade statistics undermines an agreement that has been a&nbsp;great boon for U.S.- Mexico relations. Things have never been better. That may be hard to see right now in the face of virulent political rhetoric, but history makes clear that the United States benefits from a&nbsp;friendly neighbor on its long southern border. A&nbsp;NAFTA renegotiation failure could be a&nbsp;major setback that undermines the great progress that has been made.</p> </div> Tue, 05 Dec 2017 16:11:00 -0500 Simon Lester https://www.cato.org/publications/commentary/saving-us-mexico-relations-nafta-renegotiation To Save NAFTA, Kill Its Controversial Dispute Settlement Provisions https://www.cato.org/publications/commentary/save-nafta-kill-its-controversial-dispute-settlement-provisions Daniel J. Ikenson <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>“Mystifying.” “De facto withdrawal.” “Poison pills.” That’s how&nbsp;<em>U.S.</em>&nbsp;policymakers and stakeholders characterize recent U.S. proposals in the North American Free Trade Agreement negotiations. The Canadians and Mexicans are scratching their heads, too.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Team Trump’s demands for minimum U.S. content thresholds and a&nbsp;tightening of the rules of origin in both the automobile and apparel sectors would raise the cost of NAFTA compliance, thus driving auto production away from the region and reducing Mexican demand for U.S. textiles.&nbsp;A&nbsp;proposed sunset clause, which would effectively make NAFTA a&nbsp;provisional agreement subject to constant rule changes and the specter of summary termination, would deter investment in cross‐​border relations, as businesses looked outside the region for greater certainty.</p> <p>While it is unclear whose interests the Trump administration presumes to be representing, its unorthodox demands derive from the misguided views that trade is a&nbsp;zero sum game—where winning requires that exports exceed imports—and that trade agreements should not just establish the rules, but guarantee particular outcomes.&nbsp;Convincing Trump’s trade officials of the fundamental errors in these premises may be too heavy a&nbsp;lift, but they will have to be persuaded to drop these unrealistic demands if NAFTA’s demise is to be avoided.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>U.S. negotiators should offer to drop their rules‐​of‐​origin and sunset provision demands in exchange for agreement to expunge the controversial dispute settlement provisions under Chapters 11 and 19.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>U.S. negotiators should offer to drop their rules‐​of‐​origin and sunset provision demands in exchange for agreement to expunge the controversial dispute settlement provisions under Chapters 11 and 19.&nbsp;These provisions are unnecessary, raise fundamental questions about sovereignty and constitutionality, and fuel trade agreement opposition on both the political left and right.</p> <p>Chapter 11 deals with so‐​called investor protections.&nbsp;Investor‐​state dispute settlement (ISDS) provisions are intended to ensure that foreign investors—usually companies that have acquired or established operations abroad—are protected from actions or policies of the home government that fail to meet certain standards of treatment and that cause the investor economic harm. ISDS confers special legal privileges on foreign‐​invested companies, including the right to sue host governments in third‐​party arbitration tribunals for failing to meet those standards.</p> <p>Of course, business&nbsp;<em>wants</em>&nbsp;investor protections. But does business really need these protections? As U.S. Trade Representative Robert Lighthizer put it last week: “It’s always odd to me when the business people come around and say, ‘Oh, we just want our investments protected.’ … I&nbsp;mean, don’t we all? I&nbsp;would love to have my investments guaranteed. But unfortunately, it doesn’t work that way in the market.” He’s right.</p> <p>The fact is that governments are competing to attract investment to keep their citizens employed and their economies growing. Most find it imperative to maintain smart, transparent, predictable policies that are administered fairly and without discrimination. Asset expropriation (which is rare) and other forms of shabby treatment are unlikely to be rewarded by new investment.&nbsp;That doesn’t guarantee that policies will never go astray. Sometimes they will. But investment is a&nbsp;risky proposition. Foreign investment is riskier still. That doesn’t justify institutions that protect companies from the consequences of their business decisions. International investors are among the most successful and sophisticated companies in the world and are quite capable of evaluating risk and determining whether the expected returns cover that risk.</p> <p>Providing assurances—outside of private insurance—amounts to socializing the risks of foreign direct investment. When other governments concede to demands for investor protections in trade agreements, they may be less willing to agree to other reforms, such as greater market access, that would benefit other U.S. interests. That is effectively a&nbsp;cost borne by those who don’t benefit from the investor protections. Granting foreign companies reciprocal rights to challenge U.S. laws and regulations outside the U.S. legal system also imposes costs on outside parties, including U.S. companies that only have recourse to the domestic legal system; U.S. citizens whose laws and regulation may be challenged extra‐​judicially; and taxpayers who may be on the hook to compensate foreign companies that win judgments in these cases.</p> <p>It turns out that ISDS is a&nbsp;subsidy for some companies and a&nbsp;tax on everyone else. It subsidizes risk averse behavior at the expense of essential risk‐​taking behavior. What may be too risky a&nbsp;proposition without ISDS for Company A&nbsp;is not necessarily too risky for Company B. By reducing the risk of investing abroad, then, ISDS is a&nbsp;subsidy for more risk‐​averse companies—generally, incumbent firms—and a&nbsp;tax on younger, more dynamic, more innovative firms.</p> <p>While ISDS may benefit U.S. companies looking to invest abroad, it neutralizes what was once a&nbsp;big U.S. advantage in the competition to attract investment. Respect for property rights and the rule of law have been relative U.S. strengths. But ISDS mitigates those U.S. advantages, which encourages investment to leave or bypass the United States.&nbsp;How do we justify policies that prioritize concerns for the operations of U.S. companies abroad over the concerns of U.S. and foreign companies’ operations in the United States? While we should not denigrate, punish, or tax foreign outsourcing, neither should we subsidize it.&nbsp;ISDS subsidizes outsourcing.</p> <p>Ambassador Lighthizer has expressed the desire to win support for NAFTA from both Democrats and Republicans—a goal that has been elusive and could go a&nbsp;long way toward restoring pro‐​trade attitudes.&nbsp;Dropping Chapter 11 would certainly make the deal more appealing to the left.&nbsp;One persistent myth that resonates on the left and has proven hard to dispel is that trade benefits primarily large corporations at the expense of small businesses, workers, taxpayers, public health, and the environment. But trade is the ultimate trust‐​buster, ensuring greater competition that prevents companies from taking advantage of consumers. Lower‐​income Americans stand to benefit the most from trade liberalization, as the preponderance of U.S. protectionism affects products and services to which they devote higher shares of their spending.&nbsp;By granting special legal privileges to multinational corporations, ISDS reinforces that myth and engenders opposition to trade liberalization.</p> <p>Trade skeptics on the right often assert that trade agreements usurp U.S. sovereignty—that important matters of economics affecting countless Americans are decided by faceless, unaccountable, bureaucrats in some foreign capital.&nbsp;NAFTA Chapter 19 is a&nbsp;case in point. Its provisions govern resolution of antidumping and countervailing duty disputes arising from domestic agency decisions in binational panels composed of trade law experts from both countries, rather than in the domestic courts.&nbsp;It is almost assuredly unconstitutional.&nbsp;In our system of separated powers and checks and balances, the U.S. courts are the only institutions authorized to review and determine whether an administrative action is inconsistent with the law. There have been a&nbsp;few court challenges arguing that Chapter 19 is unconstitutional, but those cases were dismissed over matters of legal standing.</p> <p>The premise behind the advent of, and continued Canadian support for, Chapter 19 (which originated as a&nbsp;Canadian demand in the Canada-U.S. Free Trade Agreement before becoming enshrined in NAFTA) is that the U.S. courts might not be objective in adjudicating these disputes. But the evidence suggests otherwise.</p> <p>The U.S. Court of International Trade (CIT), which hears appeals of Commerce Department and U.S. International Trade Commission decisions filed by domestic and foreign interests, has done a&nbsp;good job reining in wayward agency actions over the years. A&nbsp;review of the most recent 18 months of CIT case decisions indicates that the court agrees with the plaintiff (the party challenging the agency’s actions) on 46 percent of the issues raised. When the plaintiff is the U.S. industry (objecting to DOC or ITC decisions in the underlying AD or CVD case), the CIT agrees on 43.2 percent of the issues. When the plaintiff is the foreign interest (foreign producer or exporter), the CIT agrees on 47.2 percent of the issues.</p> <p>Those results suggest that foreign industry plaintiffs have a&nbsp;slightly higher success rate than U.S. industry plaintiffs, which may reflect the fact that agency discretion is more often exercised in a&nbsp;way that is adverse to the foreign interests. An examination (published in a&nbsp;2006 Cato paper) of the 18‐​month period between January 2004 and June 2005 found that the CIT remanded 19 cases to the Commerce Department with instructions to revisit its decisions or recalculate its antidumping results. In 14 of those 19 cases, the recalculated dumping margins were smaller, suggesting a&nbsp;higher incidence at Commerce of exercising its discretion to the detriment of the foreign or importing interests.</p> <p>The U.S. courts are not the problem. The problem is with the laws’ administration at Commerce (and to a&nbsp;lesser extent at the U.S. International Trade Commission), which is given way too much discretion for an agency with an overtly protectionist agenda. Thus, Chapter 19 is a&nbsp;solution in search of a&nbsp;problem.</p> <p>Despite these facts, Canada appears unwavering in its support of Chapter 19.&nbsp;Maybe Ottawa’s concern is not that it doesn’t get a&nbsp;fair shake from the U.S. courts, but that it gets better outcomes from the NAFTA panels—a conclusion that wouldn’t sit well with those concerned about sovereignty because it suggests the panels may be using a&nbsp;less deferential standard of review than the U.S. courts.&nbsp;But, the fact is that the trade agencies are likely to be more responsive to U.S. courts than to NAFTA panels.&nbsp;Certainly, the agencies tend to invoke the sovereignty card and drag their feet when dealt remands from the NAFTA panels.&nbsp;In the longest‐​running, U.S.-Canada trade dispute of all time—Softwood Lumber—both the Commerce Department and the International Trade Commission refused to implement instructions from the NAFTA panels that would have terminated the antidumping case in 2005.&nbsp;Instead, a&nbsp;deal was struck and Canadian lumber in the United States continues to remain restricted to this day.</p> <p>These aren’t the only controversial issues in the NAFTA talks. But they are big and important and a&nbsp;good place to begin thinking about the inevitable political and economic compromises that will be needed to save and improve NAFTA.</p> </div> Tue, 24 Oct 2017 09:23:00 -0400 Daniel J. Ikenson https://www.cato.org/publications/commentary/save-nafta-kill-its-controversial-dispute-settlement-provisions