Hitting 'Em Where It Hurts [UPDATED]

One of the oft-heard criticisms of the WTO dispute settlement system - rightly or wrongly - is that it lacks real teeth.  Yes, a WTO Member could theoretically face retaliation if it refuses to comply with a WTO panel or Appellate Body ruling against its protectionist measures, but this mechanism often fails to push the Member into complying for two main reasons: (i) as Econ 101 teaches us, the primary means of WTO-sanctioned retaliation - increased duties on the Member's exports - also hurts the WTO Member(s) who originally complained, won and then received permission to retaliate, thereby eliminating any economic incentive to do so; and (ii) smaller - oftentimes developing country - Members import such insignificant amounts of goods and services that any retaliatory duties imposed against another Member (especially the big boys in Brussels and Washington) would fail to cause enough "pain" to affect the offending Member's trade behavior.

Thus, the primary reasons - in my opinion, at least - why nations comply with adverse WTO decisions are strategic (i.e., to maintain the legitimacy of WTO dispute settlement process, particularly given the fact that the "defendant" Members will be, or are already, complainants in other cases) and political/diplomatic (i.e., to avoid looking like an international trade scofflaw and facing all the bad press that comes along with such a title).  Such incentives have been pretty successful in holding the permissive WTO dispute settlement together, but they certainly aren't perfect.  Indeed, as Dan Ikenson unfortunately notes, the United States quite frequently ignores adverse WTO rulings, especially when sacred American cows like trade remedies are involved:

U.S. policies have been the subject of more World Trade Organization disputes (119, followed by the EU with 73, then China with 30) and have been found to violate WTO rules more frequently than any other government’s policies. No government is more likely to be out of compliance with a final WTO Dispute Settlement Body (DSB) ruling – or for a longer period – than the U.S. government. To this day, the United States remains out of compliance in cases involving U.S. subsidies to cotton farmers, restrictions on Antigua’s provision of gambling services, country of origin labeling requirements on meat products, the so-called Byrd Amendment, a variety of antidumping measures, and several other issues, some of which were adjudicated more than a decade ago. In some of these cases, U.S. trade partners have either retaliated, or been authorized to retaliate, against U.S. exporters or asset holders, yet the non-compliance continues as though the United States considers itself above the rules.

Despite all the official high-minded rhetoric about the pitfalls of protectionism and the importance of minding the trade rules, the U.S. government is a serial transgressor. Nowhere is this tendency to break the rules more prevalent than it is with respect to the Commerce Department’s administration of the antidumping law. Nearly 38 percent (45 of 119) of the WTO cases in which U.S. policies have been challenged concern U.S. violations of the WTO Antidumping Agreement.

Clearly, the United States (and, yes, many other countries) has for years been able to skirt WTO rules and adverse decisions when a protectionist measure's political value outweighs the WTO-sanctioned retaliation (or threat of retaliation) that the measure provoked.  That's certainly the government's prerogative, and I certainly wouldn't argue against the voluntary nature of WTO compliance (for reasons discussed at length here).

However, recent events do leave me wondering whether a new form of retaliation - against intellectual property rights rather than imports of goods or services - could tip the scales a little more towards "compliance" and away from "political expediency," especially for big, developed countries like the United States and the EU.  In particular, Antigua recently announced that - due to continued US non-compliance with a WTO ruling against a discriminatory American online gambling law - the island nation has sought and received permission from the WTO to infringe on US copyrights, instead of imposing duties on US goods:

In 2005 the WTO ruled that the US refusal to let Antiguan gambling companies access their market violated free-trade, as domestic companies were allowed to operate freely. In 2007 the WTO went a step further and granted Antigua the right to suspend U.S. copyrights up to $21 million annually.

TorrentFreak is informed by a source close to Antigua’s Government that the country now plans to capitalize on this option. The authorities want to launch a website selling U.S. media to customers worldwide, without compensating the makers.

The plan has been in the works for several months already and Antigua is ready to proceed once they have informed the WTO about their plan. Initially the island put the topic on the WTO meeting last month, but the U.S. blocked it from being discussed by arguing that the request was “untimely.” This month Antigua will try again, and if they succeed their media hub is expected to launch soon after.

Antigua’s attorney Mark Mendel told TorrentFreak that he can’t reveal any details on the plans. However, he emphasized that the term “piracy” doesn’t apply here as the WTO has granted Antigua the right to suspend U.S. copyrights. “There is no body in the world that can stop us from doing this, as we already have approval from the international governing body WTO,” Mendel told us.

Antigua's plan is indeed a crafty one - the tiny country with (I'm assuming) insignificant US imports can hit the United States where it actually hurts (namely, Hollywood and Silicon Valley) yet avoid imposing equivalent pain on its own citizens.  However, Mr. Mendel and his clients can't take all the credit: as you may recall, this kind of "cross retaliation" was first devised recently pushed [Ed. note: apparently Ecuador first used the IPR cross retaliation idea in the 1990s Banana dispute, back when I was still a beer-swilling frat guy; it remains uncommon, however.] by Brazil when the United States refused to scuttle cotton subsidy programs that had been repeatedly found to be WTO-illegal.  Of course, Brazil never went through with the threat because the US government agreed to pay hundreds of millions of taxpayer dollars in "technical assistance" to Brazilian cotton farmers.  (Insert appropriate sound effect.)

Maybe Antigua is angling for a similar payoff, but one thing's for sure: after years of getting the ol' brushoff, the little island has definitely gotten Washington's attention:

The United States warned Antigua and Barbuda on Monday not to retaliate against U.S. restrictions on Internet gambling by suspending American copyrights or patents, a move it said would authorize the "theft" of intellectual property like movies and music.

"The United States has urged Antigua to consider solutions that would benefit its broader economy. However, Antigua has repeatedly stymied these negotiations with certain unrealistic demands," said Nkenge Harmon, a spokeswoman for the U.S. Trade Representative's office.

The strong statement came after the tiny Caribbean country said it would suspend U.S. copyrights and patents, an unusual form of retaliation, unless the United States took its demands for compensation more seriously in a ruling Antigua won at the World Trade Organization.

"The economy of Antigua and Barbuda has been devastated by the United States government's long campaign to prevent American consumers from gambling on-line with offshore gaming operators," Antigua's Finance Minister Harold Lovell said in a statement.

"We once again ask ... the United States of America to act in accordance with the WTO's decisions in this matter."

USTR's rather, ahem, spirited response to Antigua's plan retaliation plan indicates that the tiny island may have finally hit a nerve.  And, regardless of whether Antigua will go through with its plan, this all leaves me wondering how many other WTO Members who are on the smelly-end of US (or EU or...) non-compliance have already started devising their own IPR schemes.  I would think that at least a few are considering it, given that (i) these countries can implement a "file sharing" service relatively easily (a big change from when cross retaliation was first conceived); (ii) compared to retaliatory tariffs, such schemes won't cost them or their citizens a penny; and (iii) as Brazil's and Antigua's experiences demonstrate, this approach seems to drive the United States government into an instant tizzy (or make Washington far more amenable to compliance and/or "technical assistance").

Given the large number of disputes in which the non-compliant United States is involved, this could all get quite serious quite quickly, don't you think?  And if it does, WTO compliance might just become a little more common - a good thing for free traders and consumers around the world.

Of course, this rosy scenario assumes that the WTO's big dogs don't just start offering more taxpayer-funded "technical assistance" to avoid IPR-related retaliation or take even more drastic action against the WTO system itself.

Hmm.  On second thought....

UPDATE: AEI's Claude Barfield emails with some excellent perspective: "[Y]ou could have added the irony that it was the US back in the 1990s that insisted that cross-retaliation be added to the arsenal of tools... we argued that was needed because in some cases merely raising tariff wouldn’t bring miscreant to heel."  Claude's right: a quick Google search finds John Croome's book on the history of the WTO's Uruguay Round, which describes the United States' "ambitious proposal" on cross retaliation. Adding to that irony is the fact that, according to Croome, the US proposal was most vehemently opposed by the very developing countries who now stand to benefit from using it today.  And to thicken the irony even more, I'd be remiss not to mention that it was - and remains - the United States government who most aggressively demands the inclusion of IPR disciplines in WTO and bilateral/regional FTA rules. 

I know hindsight's 20/20 and all (especially considering that rapid online filesharing was pretty much science fiction in the 1980s and early 90s), but that's gotta sting a little, don't you think?

Some Interesting Subsidy Headlines

Several recent headlines reinforce many of the subsidy-related things that I've been discussing over the last few weeks and the themes of my new Cato paper:

• I spent a lot of time last week talking about the US Department of Commerce's final anti-dumping and countervailing duty determinations on Chinese solar panels and how the case encapsulates all that's wrong with current US subsidy and anti-subsidy policy.  The WSJ's Tom Orlik follows up with a fantastic analysis of the solar case and copycat cases in the EU and India.  The whole thing is worth reading, but here are the key grafs:

The Commerce Department's tariffs... will neither kill China's exports nor turn around the fortunes of U.S. manufacturers. For starters, solar panels assembled in China with imported cells won't be subject to the tariff. GTM Research says that even using slightly more expensive Taiwanese cells, Chinese firms will still be able to undercut U.S. competitors on price. 

For Chinese firms, the risk is that the U.S. tariffs are a sign of things to come. Europe accounts for 50% of the global market according to GTM, far more than 10% in the U.S. If the E.U. case goes against Chinese manufacturers, the result could be a significant hit to demand for their products.

Meanwhile, competition from conventional fossil fuels—not other solar panel producers—is a major challenge for the sector. Chris Namovicz, an analyst at the U.S. Energy Information Administration, says that solar is around 20% more expensive per watt than natural gas.

Western subsidies for alternative energy drove the massive expansion of China's solar power industry. Now it is cheap gas and Western protectionism that threatens to turn out the lights on China's solar exports.

• Mexico today filed a new WTO dispute over Chinese textile subsidies.  Not only does this add yet another subsidy dispute to my running tally (and one hitting an industry that was targeted by the WTO/OECD subsidy reports noted in my paper).   Reuters notes that Mexico has challenged a wide array of government programs, including may of the alleged subsidies (e.g., loan and land programs) that Commerce has found over the last few years in its CVD investigations of Chinese imports.  As I note in my paper, some of the things that Commerce does to find "subsidies" in those cases are not exactly kosher, so - assuming this new case goes to a WTO panel and isn't settled or dropped - it'll be fascinating to see how an independent third party handles those (and other) sticky issues.

• One of my paper's main themes is that multilateral and domestic anti-subsidy disciplines are necessary because the global subsidies race is partly fueled by politicians' - even some conservatives - use of foreign subsidy practices as an excuse to advocate for more subsidies or other forms of protectionism at home.  I actually want to dive into that theme sometime soon, but for now I'll just point to a little more evidence of this subsidy finger-pointing and its attendant harms, this time in Brazil.  According to a great new WSJ editorial, Brazil has been quick to defend its depressing protectionist backsliding by pointing to, you guessed it, US subsidies and monetary policy:

Brazil is the latest country to raise its import tariffs, targeting 100 items ranging from chemicals to paper to steel, with plans to add 100 more items soon. Brasilia claims the tariffs will only last a year, but such things have a way of remaining permanent as they build domestic political constituencies. The move is technically legal under World Trade Organization rules because it doesn't target a single country and doesn't exceed the tariff ceilings Brazil negotiated when it joined the WTO.

This could nonetheless cost U.S. exporters tens of billions of dollars annually, given that Brazil is America's eighth-largest export market. Brazil is part of the Mercosur trade compact, so Argentina and Uruguay may also feel obliged to follow suit.... 

Brasilia is pointing to U.S. policy to justify its protectionist outburst. In a testy exchange with U.S. Trade Representative Ron Kirk last month, Brazil's Foreign Minister Antonio Patriota wrote that "the world has witnessed massive monetary expansion and the bailout of banks and industrial companies on an unprecedented scale, implemented by the United States and other developed countries" that harms Brazilian exporters. 

There's no doubt that the Federal Reserve's easy-money policy has pushed the dollar down against some currencies, including Brazil's real. Brazil would be wiser economically to let a rising currency raise living standards for Brazilian consumers and make its producers more competitive. But Brazil's protectionist response is further proof that the Fed's weak-dollar policy has global economic costs.

Brasilia has other trade complaints against the U.S., including the Obama Administration's "Buy America" program and agricultural subsidies, which distort domestic production and global prices. Brazil challenged America's egregious cotton subsidies at the WTO and won in 2008. The Obama Administration appealed the ruling, lost in 2009 and still hasn't changed its policies. Brazil can now retaliate legally under WTO rules.

Something to think about the next time you hear an American politician arguing that some taxpayer subsidy is desperately needed to counteract pernicious foreign protectionism.  Not only are we frequently guilty of the same offense, but we often got the ball rolling in the first place.  

And the global subsidy race rolls on.

Time for a change, don't you think?

Countervailing Calamity: The Pandora's Box of Currency Protectionism

At tonight's much-anticipated Presidential Debate, it's quite possible that the issue of China's currency will be raised by the debate moderator or one of the candidates.  I've spilled a lot of virtual ink at this blog about trade and currency issues and the legal problems with certain politicians' desire to impose countervailing duties (CVDs) on Chinese imports due to alleged currency manipulation or undervaluation.  But my forthcoming paper, "Countervailing Calamity: How to Stop the Global Subsidies Race," zeroes in on one of the most troublesome legal and economic issues surrounding the whole currency/CVD debate: it opens the door to some serious protectionism, and not just against China. 

To understand why this is requires some quick background on how a subsidy is determined to exist under the US countervailing duty law.  As I first note in the paper, "A subsidy is defined as a 'financial contribution' by a 'government' or 'public body' that confers a 'benefit' on the recipient."  While that definition seems pretty harmless, it would be, except for the fact that the US Department of Commerce does some pretty, ahem, creative things to magically find a subsidy "benefit" where none might actually exist:

Existing U.S. law gives DOC ample discretion to measure the benefit (and thus the magnitude of an alleged subsidy), including the use of external subsidy benchmarks that have no relation to the domestic market at issue. This can lead to the imposition of CVDs that exceed the actual level of subsidization in the market and thus penalize U.S. importers and consumers rather than offset the injurious subsidies at issue. As noted above, in cases of grants or tax breaks, the calculation of benefits is straightforward—it is the amount of the grant or the tax revenue foregone. However, in many other cases (particularly for government-provided loans, goods, or services), DOC resorts to external benchmarks from other markets or world-market prices, where it determines that domestic interest rates or prices—the preferred benchmark—are unusable. These benchmarks often have little to do with the unique comparative advantages of the domestic market at issue and are expressly preferred over constructed benchmarks (e.g., cost of production plus profit) based on prevailing market conditions in the country of provision.

As a result of this policy, DOC has used external benchmarks to determine the magnitude of many subsidies, including those related to government-provided loans, land, water, stumpage (wood), and metals. The calculations resulting from DOC’s use of external benchmarks have produced subsidy amounts that often have very little to do with the market value of the actual government-provided loan or good/service at issue and negate the investigated countries’ natural comparative advantages. Thus, final CVD rates for these subsidies are often much larger than the actual benefit, if any, that an exporter has received from the government transaction.

DOC’s recent CVD investigation of aluminum extrusions from China provides an example of the difficulties involved with external benchmarks. In that case, DOC used prices for raw aluminum from the London Metal Exchange and prices for land from Thailand, rather than in-country prices for these goods. Although one could reasonably argue that London Metal Exchange aluminum prices are roughly comparable to those in China because aluminum is a globally traded commodity, no such reason applies for something so uniquely country-specific as land. Thus, any “land subsidy” found to exist in this case has little relationship to the actual subsidy, if any, conferred by the Chinese government.

Ok, so how does this all relate to currency?  Well (emphasis mine)...

Legislative proposals to address “currency misalignment” would exacerbate existing concerns because they would authorize DOC to calculate the amount of a currency’s undervaluation by using a basket of other comparable countries’ currencies as a surrogate for what that currency’s value should actually be in an uncontrolled market. Such a market benchmark would not reflect the many unique circumstances surrounding the value of a nation’s currency. Moreover, because such legislation is not limited to China (such limitation would violate WTO non-discrimination rules) and because many other countries engage in similar forms of currency management, currency/CVD proposals would open the door to copycat cases against imports from many countries other than China. For example, a recent study by the Peterson Institute alleged that counties like Switzerland, Malaysia, Algeria, Russia, and others engage in “currency manipulation.” Should a currency/CVD proposal become law, there would be nothing to stop domestic industries and unions—and their lawyers—from pursuing CVD cases against all of these countries, using external subsidy benchmarks to find a benefit where none might actually exist.

In short, once our politicians open the door to a currency tariff, there will be very little to stop protection-seeking unions, industries and (of course) their crafty lawyers from asking the US government to impose duties on imports from many other countries.  And they have plenty of empirical support (whether I agree with it or not!) from well-respected think tanks to make those scary arguments. 

Oh, goody.

And, oh by the way, after the recent QE3 announcement here in the states, several countries (most notably Brazil) have angrily accused the US government of - you guessed it - devaluing the dollar to boost exports.  Most of these countries also have CVD laws too, you know.

Those currency CVD proposals ain't looking so hot now, eh?

More tidbits from my new paper are available here, if you're interested.

Countervailing Calamity: Our Abundant, Aggravating Ag Subsidies

The Hill reports today that, with House leadership punting on the 2012 Farm Bill until after the November elections, Democrats in both chambers are unsurprisingly using the bill's delay to batter their Republican opponents:

The legislation, which provides subsidy and aid to farmers nationwide, as well as authorizes funding for a number of nutritional programs, expires on Sept. 30. The Senate was able to pass a bill, but House Speaker John Boehner (R-Ohio) said late last week that the House would have to wait until after the election to pick back up on the legislation, despite a flurry of last-minute activity from lawmakers on both sides of the aisle in an attempt to bring it to the floor.

Democrats in states where agriculture plays a large role have been quick to launch attacks on their opponents that aimed to hang congressional inaction around their necks. Most recently, the Democratic Senatorial Campaign Committee launched a pair of ads targeting Republican Rep. Rick Berg, running for Senate in North Dakota, where agriculture remains the largest industry, on the failed farm bill.

The Hill goes on to detail how farm state Republicans are pushing back against this criticism by highlighting their vigorous support for the Farm Bill and their opposition to Speaker Boehner's decision to not schedule a floor vote.  But given America's growing and problematic obsession with subsidies - something detailed in my forthcoming paper "Countervailing Calamity: How to Stop the Global Subsidies Race" - it's clear that serious reform, not extension or expansion, of US farm subsidy programs is desperately needed. 

First, we spend a veritable fortune on these subsidies:

Perhaps no industry has attracted more taxpayer dollars (and global ire) than U.S. agribusiness. According to the Environmental Working Group’s compilation of United States Department of Agriculture data, the U.S. government has provided approximately $277.3 billion in subsidies to U.S. farms since 1995, including more than $15 billion in each of the last two years. Specific commodity subsidies under the current system include those for feed grains ($2.1 billion in 2011); wheat ($1.4 billion); rice ($364 million); upland cotton ($825 million); soybeans ($521 million); peanuts ($77 million); tobacco ($25 million); and dairy products ($30 million). Not all of these subsidies, however, constitute trade-distorting subsidies under WTO rules. For example, only $11.6 billion of $16.3 billion in total U.S. farm subsidies in 2009 constituted “amber box” subsidies (those considered under the WTO Agreement on Agriculture to distort production and trade), and United States reported only $4.3 billion of these to the WTO because of various de minimis exclusions—well under its $19.1 billion cap. The current Farm Bill expires this year and may receive a short-term extension, but it is unlikely that any new Farm Bill will significantly reduce total agriculture subsidy levels.

Along with straining federal coffers and breeding cronyism, America's farm subsidy obsession deligitimizes any US efforts to rein in global subsidies - something that, as explained in my paper, is a pretty big necessity these days.  In short, it's pretty much impossible to credibly complain about foreign subsidies when you're flooding the globe with subsidized farm (and other) products.  And, of course, the United States' refusal to commit to slashing farm subsidies is one of the primary reasons why the WTO's Doha Round of multilateral trade negotiations is dead in the water.

Second, many of the trade-distorting subsidies included in the Farm Bill attract major criticism from our trading partners, several of whom have filed (or threatened to file) anti-subsidy cases against the United States and American farm exports.  Perhaps the most notorious of such disputes is Brazil's successful WTO challenge to US cotton subsidies:

In 2004 and again in 2005, the Brazilian government challenged U.S. cotton subsidies at the WTO as violations of the SCM Agreement and the Agriculture Agreement. The WTO’s 2005 decision authorized Brazil to retaliate against U.S. goods and services, but Brazil opted instead to allow the United States time to reform its cotton program in line with international trade rules. The U.S. government never did reform the subsidy programs, so Brazil returned to the WTO in 2009 and won permission to impose almost $300 million in retaliatory trade sanctions against U.S. exports. The WTO also opened the door for other retaliatory measures against American patent and other intellectual property rights—a novel approach to addressing noncompliance. Although the U.S. government has not complied with the WTO ruling, Brazil never retaliated because, instead of reforming the program, the United States agreed to provide approximately $140 million in new subsidies to Brazilian cotton farmers. Despite this sordid arrangement, Congress has flatly refused to reform the United States’ WTO-illegal cotton subsidy programs, even in the context of a new Farm Bill. Indeed, Brazil has warned the WTO that it is prepared to retaliate against U.S. exports or by not enforcing U.S. intellectual property rights if the proposed 2012 Farm Bill takes effect.

Other US farm commodities that have faced anti-subsidy litigation and duties include sugar (by Canada), corn and other crops (also by Canada) and distillers grains (by China), and it seems that we're constantly hearing about threats of new cases against major US crops like soybeans.  Such disputes have the potential to negate these and other commodities' global competitiveness - the exact opposite of what struggling American exporters need right now.

So maybe the next time a campaigning Democrat criticizes some rank-and-file Republican for "letting" his or her leadership delay the Farm Bill, one of them might mention the undeniable fact that our farm subsidies are breaking the (already-broken) federal budget, exposing US exports to foreign retaliation and undermining global trade negotiations in the WTO and elsewhere.

I know, I know, I'm not holding my breath.

American Subsidy Madness

US policymakers and pundits often like to gripe about the abundance of market-distorting, anti-competitive Chinese industrial subsidies, and they certainly have a point.  But US calls for China and other countries to reduce or eliminate these subsidies likely fall on deaf ears for one very big reason....

Well, make that 100 billion reasons:

The federal government will spend almost $100 billion on corporate welfare in fiscal 2012. That includes direct and indirect subsidies to small businesses, large corporations, and industry organizations. These subsidies are handed out from programs in many departments, including the departments of Agriculture, Commerce, Energy, and Housing and Urban Development.

Oof.  That's from a brand new and very depressing Cato Institute study which provides topline numbers on US business subsidies for FY 2012.  After detailing the myriad economic and social reasons why such subsidies are a very bad idea, the paper rightly concludes:

Americans are sick and tired of "crony capitalism," and the way to solve the problem is to eliminate business subsidy programs.

Corporate welfare doesn't aid economic growth and it is an affront to America's constitutional principles of limited government and equality under the law. Policymakers should therefore scour the budget for business subsidies to eliminate. Budget experts and policymakers may differ on exactly which programs represent unjustified corporate welfare, but this study provides a menu of about $100 billion in programs to terminate.

Of course, not all of the programs identified by the new Cato study violate global trade rules and thus expose US exports to anti-subsidy measures (via WTO dispute settlement or national countervailing duty laws), but a bunch of them do.  As I noted a few days ago, US green energy exports are increasingly subject to countervailing duties in foreign markets due to state and federal subsidies, and I've repeatedly documented the abject ridiculousness that is current US policy regarding cotton subsidies.  On the latter score, you may recall that Brazil challenged US cotton subsidies at the WTO, and after winning the dispute was authorized to impose $300 billion worth of retaliation against US exports or intellectual property rights because the Bush and Obama administrations refused to comply.  However, Brazil never retaliated because, instead of reforming the program, the United States agreed to provide $140 million in new subsidies to Brazilian - yes, Brazilian - cotton farmers.

Congress (including the Republican-controlled House of Representatives) has flatly refused to reform our WTO-illegal cotton subsidies, and now has proposed a new Farm Bill that has the Brazilian government, well, extremely concerned:

Brazil's retaliation is being held off by a "framework agreement" that was negotiated by American and Brazilian officials in the spring of 2010. Among other things, the US agreed to tweak one of its most egregious subsidy programmes and donate nearly $150m every year to support Brazilian cotton farmers. Both sides agreed that the framework deal would hold until this year, when the next farm bill would be negotiated. Only then, the US officials said, would they have the chance to make far-reaching reforms to American cotton subsidies.

Fast-forward two years, and the 2012 farm bill is quickly taking shape. But will the new law do anything to bring US cotton subsidies in line with WTO rules?

If you ask Brazil, the answer is a resounding no. The new programmes under discussion "are not enough to satisfy Brazil's concerns", said Roberto Azevêdo, Brazil's ambassador to the WTO. Some of the proposed policies "would leave Brazilian farmers worse off than they are now", he says.

Both the House of Representatives and Senate versions of the bill include the stacked income protection programme – known as Stax – which was designed by the National Cotton Council, a lobby group for cotton farmers. Stax is effectively a crop insurance policy for cotton growers; it guarantees that farmers' incomes will not fall below the revenues expected in their regions. That is precisely what Brazil does not like.

"In our view, no farm programme can be WTO-compliant and cover 'shallow losses' – thereby insulating farmers from market forces – to the extent foreseen in the [Stax programme]," Azevêdo said in a letter to Congress in January...

While the US dallies, cotton farmers overseas are still struggling to compete with artificially cheap American exports. That is happening not only in Brazil, but also in poorer cotton-producing countries such as Burkina Faso, Mali, Benin and Chad. "Those are the big losers," said Azevêdo. "Their treasuries cannot compete with the US funds."

So what will happen if the 2012 farm bill is just like the previous one? Officials in Brasilia are weighing up whether to use their right to cross-retaliate. If they do – and they pull it off – then Brazil could set an important precedent for other countries that are looking to get the attention of the world's biggest national economy.

"[The Americans] seem to only engage when intellectual property comes into play," Azevêdo said.

Brazil recently told the WTO that it is ready to retaliate if the new Farm Bill takes effect, but it looks like a one-year extension of the current Farm Bill is now more likely than any new Farm Bill.  Thus, that sweet, sweet American hush money will continue to flow south, much to the detriment of poor cotton farmers around the world, particularly in Africa.

And speaking of poor African farmers, CQ reports today that New Jersey Senator Bob Menendez is preventing House and Senate consideration of the African Growth and Opportunity Act because of - you guessed it - cotton subsidies:

The bill would extend for three years preferential treatment of garments produced in Africa under the African Growth and Opportunity Act, or AGOA (PL 106-200), while adding South Sudan to that program. It also would modify language in the free-trade agreement with the Dominican Republic and Central America, and would renew for one year the import restrictions on Myanmar, formerly known as Burma, imposed by a 2003 law (PL 108-61).

Robert Menendez, D-N.J., has also placed a hold on the bill. He made clear in an interview last week that he would support the trade bill only if it moves with his legislation to reauthorize a cotton trust fund for American-based shirt manufacturers, a program that expired in 2009.

“I have no problem with [AGOA], but I have to have the cotton trust fund as part of the deal,” Menendez said, shortly before the Finance Committee approved his bill along with the trade package....

[Delaware Sen. Chris] Coons said there is “a moral argument here for not holding hostage the jobs of thousands of women in developing countries” such as Lesotho and Swaziland, two of the sub-Saharan countries that benefit under the current program allowing for duty-free exports to the United States of garments made from fabric produced in Third World countries.

Apparently Sen. Menendez cares more about funneling $16 million per year to his New Jersey constituents than poor African farmers and manufacturers.  But, hey, who knows?  Maybe the Senator will offer a "Brazilian-style" compromise and propose bribing the Africans instead of giving up his ridiculous subsidy demands.

(I know, I know: don't give them any more bright ideas.)

Is Missing American Trade Leadership Beginning to Bear Protectionist Fruit? (Hint: Kinda Looks Like It)

Over the past few years, I and several other US trade-watchers have lamented the United States' dwindling leadership on global trade and economic issues and warned of that trend's troubling potential ramifications.  It appears that at least one of our breathless predictions may finally be coming true.  Starting in mid-2009 - when it became depressingly clear that the Obama administration viewed trade in mostly political terms and thus would not be advancing a robust, proactive free trade agenda - we free traders expressed grave concern that US recalcitrance could harm not only US companies and workers, but also the entire global free trade system.  As I explained in a 2009 oped urging the President to adopt a robust pro-trade agenda (as outlined in this contemporary Cato Institute paper):

Since the 1940s, the US has led the charge to remove international barriers to goods, services and investment. The result: a global trade explosion that has enriched American families, spurred innovation, enhanced our security and helped millions escape poverty. Every US president since Herbert Hoover has championed free trade because of its proven benefits....

Because of today's rules-based multilateral trading system and the interdependence of global markets, US fecklessness on trade shouldn't lead to devastating protectionism akin to the Smoot-Hawley-induced tariff wars of the 1930s. But it's still a problem. In 2008, global trade contracted for the first time since 1982, and protectionist pressures abound. The WTO's Doha Round is comatose, even though an ambitious deal could inject US$2 trillion into the reeling global economy. Considering the US has steered every major trade initiative in modern history, any chance for significant progress on trade will disappear without strong American leadership - in word and deed.

Since that time, the President has clearly not taken free traders' advice.  The WTO's Doha Round is dead, despite a pretty good opportunity to force the issue back in late 2010.  The Obama administration took three years to implement already-dusty FTAs with Korea, Panama and Colombia and actually insisted on watering the deals down with new protectionist provisions in order to finally agree to move them.  And while countries around the world are signing new trade agreements left and right, we've signed exactly zero and have eschewed important new participants and demanded absurd domestic protectionism in the one agreement that we are negotiating (the TPP).  Meanwhile, on the home front the President has publicly championed mercantilism, as his minions quietly pursued myriad efforts to restrict import competition and consumer freedom, embraced competitive devaluation and maintained WTO-illegal policies (while publicly denouncing protectionism, of course).

Pretty stark when you lay it all out like that, huh?

Despite this depressing state of affairs, it did not appear that the United States' diversion from its long free trade legacy had resulted in a tangible increase in global protectionism (although the death of Doha certainly isn't a good thing).  Unfortunately, a new blog post from the FT's Alan Beattie indicates that those chickens may finally be coming home to roost:

One of the very few bright spots in governments’ generally grim recent performance of managing the world economy has been that trade protectionism, rampant during the Great Depression, has been relatively absent.

That may no longer be the case. The WTO, fairly sanguine about the use of trade barriers over the past few years, warns today that things are getting worrying. The EU made a similar point yesterday. And this monitoring service has been pointing out for a long time that a lot of the new forms of protectionism aren’t counted under the traditional categories, thanks to gaping holes in international trade law.

After glancing at the bi-partisan protectionism on display in the 2012 US presidential campaign, Beattie concludes that, on the global trade stage, "things are looking scarier than they have for a while."  I'm certainly inclined to agree, and one need only look South to Brazil's frighteningly rapid transition from once-burgeoning free trade star to economically-stagnant, unabashed protectionist to see a scary example of why.

And while I agree with Beattie that the world still isn't likely to descend into a 1930s-style trade war - we can thank the WTO and the proliferation of free market economics for that - the rising specter of global protectionism is undoubtedly distressing.

And, of course, it has risen just as America's free trade leadership has faded away.

Now, as we all know, correlation does not necessarily mean causation, and it's frankly impossible to know just how much the dearth of US trade leadership has actually affected global trade policies.  But I think it's pretty safe to say that it certainly hasn't helped matters.  Just ask yourself this: how can the US admonish Brazil or any other country about its distressing mercantilism when the President is himself routinely preaching - and his administration is busy implementing - similar policies?  How can we decry the global "currency wars" when we're discretely advocating a similar strategy?  How can we push back against nations' increasing use of market-distorting subsidies or regulatory protectionism when we're....

I think you get the idea.

As I've frequently noted here, it was a Democrat - Secretary of State Cordell Hull - who over 70 years ago began a global free trade movement that until very recently had been led - in word and deed - by Republican and Democratic administrations alike.  And while the distressing recent spike in global protectionism may not have been caused by a lack of American trade leadership, it is very, very likely not going to recede until the United States regains its long-held place at the front of the trade liberalization pack.

[Final note: it looks like former USTR and current World Bank chief Robert Zoellick agrees.]

Zeroing's Zombies, ctd.

When the United States first announced that it had settled WTO disputes with the EU and Japan about the Commerce Department's use of "zeroing" in anti-dumping administrative reviews, I noted that, while the policy might be "dead," its zombies would be roaming the earth for quite a while:

[I]t looks like (i) all of the pending WTO disputes unrelated to the EU/Japan agreements will continue unabated; and (ii) foreign exporters, US importers and/or foreign governments will have to bring additional WTO challenges in order to force USTR to recalculate all the duties that were illegally calculated and collected pursuant to the zeroing methodology. And, even though WTO rules (or at least the Appellate Body's interpretation of them) are abundantly clear on the illegality of zeroing, point (ii) could, of course, cost plenty of time and money before it actually produces results. (Sorry, poor developing countries with tiny trade budgets, but you're gonna have to pay a lot and threaten us before we correct our errors!)

Since that time, DOC issued its Final Rule on zeroing.  It has confirmed my initial concerns... and raised a few more, as noted in a recent Law360[$] article on the subject:

Despite a recent announcement by the U.S. Department of Commerce that it will stop using zeroing in administrative reviews of anti-dumping duties, the years-long battle over the controversial methodology is far from over, attorneys say....

[T]he notice by Commerce leaves several issues unresolved and does not completely foreclose the use of zeroing in all future cases, meaning that litigation and acrimony over the practice will continue for the foreseeable future, attorneys said.

So what are those "unresolved issues"?  Well, first, the new Commerce zeroing rule only applies on a prospective basis:

[T]he announcement by Commerce to exclude zeroing in administrative cases applied only on a prospective basis, meaning it would have no effect on duties that have already been collected based on the zeroing methodology.

“There's no possibility via the Department of Commerce for a recalculation or a refund of those duties, despite the fact that this is an admission by Commerce that what they've been doing for years and years is inconsistent with [WTO] Appellate Body decisions”....

Second, the rule doesn't actually kill off zeroing entirely because it leaves open the possibility Commerce applying the methodology in an investigation where "targeted dumping" is alleged:

Despite what the announcement says, it's also quite possible that Commerce will continue to use zeroing in some cases, attorneys said, because the U.S. has taken the position that the use of zeroing is acceptable in cases of so-called “targeted dumping.”

Targeted dumping is when a company is not dumping its products in the U.S. overall, but is instead dumping its products in a specific region or during specific time periods. For instance, if a company were selling its products at less than fair value in the southwest U.S., but at more than fair value in the northeast, it would be engaged in targeted dumping....

I first discussed Commerce's newfound love of targeted dumping back in 2010, and attorneys surveyed by Law360 earlier this week (including me) noted that, because this little loophole still exists (and because zeroing leads to higher anti-dumping duties), it's extremely likely that domestic petitioners will allege targeted dumping in most future AD cases.  It's also extremely likely that new domestic and WTO litigation will emerge as US importers and foreign exporters/countries challenge the zeroing methodology in targeted dumping cases (neither a WTO panel nor the Appellate Body has ruled on zeroing and targeted dumping... yet).  The outcome of such challenges isn't clear, but if past WTO rulings on zeroing in other contexts are any indication, the US will likely lose here too.  Eventually.

Third, and as I noted a couple weeks ago, Commerce's Final Rule doesn't end several WTO disputes and US court cases on zeroing that are already in progress, and it also doesn't foreclose additional disputes for anti-dumping reviews not covered by the rule (e.g., reviews just recently concluded or still in progress):

The new rule applies to all future dumping cases, but other countries that have challenged the use of zeroing could still impose retaliatory measures on the U.S. if they prevail at the WTO. While the U.S. has said it hopes the new rule will assuage the concerns those countries have about zeroing, it remains to be seen how they will respond, attorneys said....

The new rule also has no effect on the numerous cases pending in U.S. courts over the use of zeroing in past reviews, [attorney Lew] Leibowitz said.

“There are a lot of cases over duties that are tied up in litigation, and the rule doesn't speak to those,” he said. “It's up to the courts to decide if the U.S. violated U.S. laws.”

Last year, the Federal Circuit ruled in two cases that Commerce had failed to adequately explain its rationale for using zeroing in administrative reviews, but not in original investigations.

Those cases, which are still pending, and others at the U.S. Court of International Trade each apply only to the individual investigation at issue, so litigation over the past use of zeroing is likely to go on for some time.

Well, it no longer "remains to be seen" how countries will respond to the new zeroing rule, as well as the US-Japan and US-EU Agreements.  They are going to fight, despite USTR's "hopes" that they'll just pipe down, accept the fact their companies paid millions of dollars in additional (illegal) anti-dumping duties in "old" reviews where zeroing was used, and be happy about Commerce's much-delayed (and coerced!) change of heart.  (Shocking, I know.)  Two very recent examples make this fact very clear.

First, the WTO announced on Tuesday that its Dispute Settlement Body established a panel to address Korea's January 2012 complaint against the United States' use of zeroing in anti-dumping reviews of certain Korean steel products.  The announcement shows that Commerce's Final Rule was insufficient to address Korea's concerns (emphasis mine):

Korea explained that consultations with the US, requested on 31 January 2011, allowed for a better understanding of the parties’ positions but failed to resolve the dispute. Korea noted that the US announced it would no longer use zeroing in annual reviews and welcomed the US efforts (see also disputes DS322, DS350 and DS294 below). Korea regretted that the US plans did not go far enough to fully address its concerns. Korea noted that zeroing in administrative reviews had repeatedly been found inconsistent with the WTO Anti-dumping Agreement and that the US was expected to amend the methodology accordingly.

The US said that its Department of Commerce published on 14 February 2012 a modification to its procedure regarding the use of zeroing in anti-dumping reviews. The US said that this modification would address the matter covered in Korea’s panel request. The US added that the process of modifying its methodologies to respond to DSB rulings on zeroing had been completed and, therefore, moving forward with this dispute served no purpose.

Right, "no purpose"... other than to push the United States into recalculating "zeroed" anti-dumping duties on Korean imports that would not otherwise be recalculated pursuant to Commerce's new rule.  And if you're a Korean exporter or US importer who paid those extra duties, that's a pretty big purpose, I'd say.

(The same WTO announcement also noted that Brazil is still weighing its options with respect to its complaint against the US for zeroing in reviews of Brazilian orange juice imports.  Wanna bet on what they decide to do?)

Second, the WTO separately announced that Vietnam has filed a brand new complaint against the United States related to US anti-dumping reviews of Vietnamese shrimp.  The text of the complaint isn't out yet, but reports indicate that it's a follow-up to Vietnam's successful 2010-2011 complaint against - surprise! - the United States' zeroing methodology.  The timing of Vietnam's new complaint - about a week after the publication of Commerce's Final Rule - makes clear that they, like Korea, are not going to stop litigating past US infractions just because the United States has now promised not to commit new ones.

Well, unless targeted dumping's involved, of course.

I Swear, I Had Nothing To Do With This...

On Monday night, I recommended that, given President Obama's depressing timidity on US trade policy, WTO Members should "formulate appropriate contingency plans, such as putting the [Doha] Round on ice until, oh I don't know, 2013 when the White House will (hopefully) be occupied by someone more amenable to free trade."  Well, less than a day later, it became crystal clear that pretty much everyone in Geneva, except the Obama administration of course, agrees with me (emphasis mine):

The likelihood of the Doha round of world trade talks being declared dead this year rose on Tuesday when it became clear that even a partial deal would not be possible.  The talks, named after the Qatari capital in which they were launched in 2001, have drifted further towards oblivion in advance of a twice-yearly meeting of ministers this December.

Pascal Lamy, the World Trade Organisation’s director-general, told negotiators in Geneva on Tuesday that the WTO’s negotiating function was “in paralysis”. He urged member countries to use the December meeting to have a broad conversation about the future of Doha rather than try to make concrete progress.

Negotiators have tried to rescue a minuscule part of the talks by proposing a stand-alone “early harvest” package to be agreed in December which would extend market access to some of the world’s poorest countries and reduce cotton subsidies – a subject of particular interest to a group of west African nations.

But the US said on Tuesday that such an agreement would not be possible because of the refusal of other governments to accept other elements in the package....

Michael Punke, the US ambassador to the WTO, said on Tuesday that the stand-alone deal was impossible. “It has become clear to us and to many others that a so-called early harvest package is not happening and is not going to happen,” he said. “As we feared, participants have proven much more comfortable in talking about what others can give than in talking about what they can contribute themselves.”

A deal to give the least-developed countries (LDCs) completely free access to rich nations’ markets and reduce cotton subsidies would require difficult commitments by Washington. The US has already failed to reform its generous payments to politically powerful cotton farmers, despite having had them declared illegal by the WTO, and a deal for the LDCs would cut across the existing US scheme to give preferential access to all African countries.

Yi Xiaozhun, the Chinese ambassador, took implied aim at the US, saying that the insistence on bringing in new issues was crippling discussions. “The intention of various members to put on their own demands . . . would finally kill the core package that the LDCs really need,” said Mr Yi.

The Doha round has made no significant progress since a ministerial meeting collapsed in mid-2008 in Geneva. An increasing number of officials admit privately that the round will never conclude, but as yet no government has publicly declared it over.

We all see what's going on here, right?  Any deal on cotton and LDCs - relatively minor issues that almost all WTO Members support - would require legislative changes to US laws and, of course, the expense of political capital by the already-campaigning White House to get that done.  As I said on Monday, the President's unwillingness to spend such capital on trade issues is well-documented at this point.  Indeed, when it comes to our WTO-illegal cotton subsidies, the Obama administration is so utterly unwilling to take some political lumps and pursue necessary reforms that it's resorted to bribing Brazilian cotton farmers (with taxpayer dollars, of course) instead of modifying the offending programs.

And let's please not kid ourselves here and blame Congress for the Administration's political pusillanimity on these trade issues - the House voted to terminate the Brazilian payoffs just last month, and both the Republican-controlled House and Democrat-controlled Senate recently showed a willingness to address US preference programs by attaching them (rightly or not) to the US-Colombia FTA implementing legislation.  So if the White House really wanted to get a cotton/LDC package through Congress, it could very likely do so.

But that would require, you know, political courage and effort - something sorely lacking these days over at 1600 Pennsylvania Avenue (and not just on trade).

So, given these sad facts, what does USTR do in Geneva?  They submarine the December deal by making other demands that many nations adamantly oppose.  Who knows whether they did this to try to buy off domestic opposition to the cotton/LDC package or to just kill the chances of a final deal, but the result of their demands was the same in either case: inevitable failure.

Again.

Yes, other Members like the EU also have made additional demands, but do you really think that they would maintain their positions if the United States expressed robust support for the basic LDC/cotton package?  I sure don't.  Indeed, as Phil Levy and I argued last December, bold US leadership could have realistically secured a robust Doha package in 2011.  Certainly it could get this feeble package across the finish line.

And yet, here we are.  Sigh.

So, once again, American political cowardice has helped scuttle an important trade liberalization initiative.  And, once again, supporters of robust American free trade policy are reminded that we, like the WTO negotiators in Geneva, should just pack it all in until 2013 (hopefully).

Any optimism before that time would just be foolish.

Sunday Quick Hits

Here's a whole lot of links to get your week started off right:

• The Economist asks whether we're seeing the end of China's dominance as the world's low-cost manufacturer of first resort.

• J.E. Dyer absolutely dismantles labor lawyer Thomas Goeghegan's lame defense of NLRB's indefensible attempt to stop Boeing from opening a new manufacturing facility in South Carolina.

• GMU's Russ Roberts beautifully explains why President Obama's silly comments about ATMs taking American jobs are so darn silly.  (And Cato's Andrew Coulson piles on.)

• The AFL-CIO's use of a 13-year old photo in its latest anti-Colombia FTA smear campaign is the perfect metaphor for its trade policy more broadly - stuck in the past.  Meanwhile, Colombia hits yet another labor benchmark that was supposed to ensure passage of its FTA with the United States.  Key words: supposed to.

• AEI's Phil Levy provides a great roadmap showing how we got into the current mess re: Trade Adjustment Assistance and how we can get out of it.

• And while TAA gums up passage of pending US FTAs, our potential FTA partners in South Korea and Colombia are lining up another, rather conspicuous suitor - China.  Awesome.

• And the TAA/FTA impasse also has infected [$] ongoing US trade negotiations under the Trans-Pacific Partnership.  Double-awesome.

• AEI's Mark Perry highlights the amazing gains in US worker productivity in our allegedly struggling manufacturing sector.

• Cato's Dan Griswold shows how IBM's remarkable evolution is a perfect metaphor for the US economy.

• Is America's stupid ethanol policy on the way out the door?  If this recent Senate vote is any indication (and it might not be), yes.

• Cafe Hayek's Don Boudreuax provides some great commentary on the House's vote to cut off those embarrassing US bribes to Brazilian cotton farmers.  John Stossel has more.  (And Brazil unsurprisingly grumbles about it all.)

• Can we please, PLEASE stop labeling free traders who support practical limits on US foreign policy adventurism "isolationists"?

• Mark Perry and Dan Griswold team up to explain how people's blinkered obsession with the US trade deficit misses the other, inevitable side of the coin, our massive foreign investment surplus:

If these don't leave you sufficiently depressed about US trade policy, then nothing will. 

Caterpillar CEO on Trade and How to (Really) Win The Future

President Obama and his underlings just love to talk about improving American competitiveness in order to Win the Future.  But what does the US business community - well, those not on the milky-end of the government teet - think about the current state of American policy and its impact on our companies' future global competitiveness?  Courtesy of HotAir comes a fantastic CNBC interview with the CEO of Caterpillar - one the shining stars of America's thriving manufacturing sector - on just those issues.  It's well worth your 15 minutes:



In short, Mr. Oberhelman sees the global economy not as a threat, but as a great business opportunity.  He's smartly positioned Caterpillar to take full advantage of both foreign and domestic market conditions - through things like advocating robust trade liberalization, currency hedging and maintaining near-total control over business operations in interventionist foreign markets - and he sees competitiveness-killing US government policies, not free trade or low-cost competitors in China or Brazil, as the greatest threat to his company's viability and the future of the American economy.

And what kind of US government policies are undermining our global competitiveness and thus jepoardizing our companies and jobs?  I'll let Oberhelman explain:



My favorite quote:

We've announced three or four arguably brand-new facilities [in the United States] bringing work in from outside. And frankly we weigh all of these things in which state is the most business friendly. It's not a question of labor cost or who's cheaper. If you chase cheap labor around the world, you're never going to win. It's a lot more than that. The state's got to be competitive.  The country's got to be competitive....  You see states going the other way [from Illinois], where they're very pro-business and reducing taxes, and guess where we land our plants that are very competitive.... The latest and greatest is in Texas.  We brought a plant that in the past has assembled hydraulic excavators in Japan for shipment to the U.S.... we've moved that plant to south Texas... 5,000 to 6,000 units a year, 600 to 700 high-paying assembly jobs.

Nice.  And how exactly does Mr. Oberhelman think the current administration is doing to keep American companies strong and competitive?  Well, the answer to that is in the second video, but I'll let HotAir spell it out for you.

(Hint: it's not good.)

America's Cotton Problem

A little heralded congressional vote last week shows just how hard it will be to reform America's bloated, trade-distorting farm subsidy programs and, more generally, get the US government's insanely profligate spending problem in check.  On Friday, the US House of Representatives overwhelmingly rejected a bi-partisan amendment to the 2010 continuing budget resolution that would have ended $140 million in annual bribespayments to Brazilian - yes, Brazilian - cotton farmers.  The payoffs, which I've repeatedly blogged on, resulted from a ludicrous deal between the Obama administration and the Brazilian government to stave off Brazil's imposition of retaliatory tariffs on US exports due to the United States' refusal to amend its cotton subsidy programs so that they complied with WTO rules (the cotton subsidies had been repeatedly ruled WTO-inconsistent in dispute settlement proceedings).

Cato's Sallie James provides some good analysis (and much-needed hostility) on the amendment's failure:

Republicans -- those stalwart fiscal conservatives! -- voted 75 in favor and 164 against. The Democrats showed more courage and voted in favor of the amendment 108 to 82. (These numbers are according to C-SPAN; I will post an update if they prove to be incorrect)....

The Hill article (linked to in the first paragraph of this post) points out that some members (presumably the Republicans who voted against the amendment) were concerned that "the move [to cease the payments to Brazil] could create a trade war if Brazil decided to retaliate."  It doesn't seem to occur to those concerned members that one way to avoid a trade war would be to abide by international obligations and cease subsidizing U.S. cotton farmers. It would also shave a few million from that huge deficit about which they profess to be concerned.

Sallie's point is exactly right.  If House members are truly concerned about a trade war with Brazil, then the sane, fiscally-conservative approach is not to continue paying $140 million in Brazilian hush money but instead to eliminate the offending cotton programs (and other US farm programs that are either unnecessary or WTO-inconsistent).  That this very sensible thought didn't even register in the US Congress is a testament to just how entrenched agriculture interests are on Capitol Hill.

And unfortunately, it gets worse.

Congress' latest vote on, and apparent support for, cotton subsidies is particularly egregious given the fact that the current environment for reform is pretty much perfect.  First and most obviously, the US government is flat broke, and the new Congress has a massive new contingent of Tea Party-driven budget cutters who - one would think! - would be open to ending the Brazilian bribes and embracing significant and immediate cuts to WTO-illegal US farm subsidy programs.  Second, those bribes and the US cotton program are taking place during a period of record cotton prices and unprecedented investment in American cotton production:

[Cotton] prices hit a 150-year-high last week, more than double what it was a year ago. (What happened 150 years ago? The Civil War began, and cotton jumped to $1.89 a pound. What do you think Rhett Butler was trying to smuggle past those Union gunships?)

Also having an effect: droughts and flooding in China, Pakistan and Australia, plus restrictions on exports from India. Plus, the world’s economy looks a little better than it has in the recent past. People can afford clothes.

At the same time, the Virginia Department of Agriculture and Consumer Services announced today that cotton acreage in the state is expected to increase by nearly 27 percent, from 82,250 acres in 2010 to an estimated 105,000 acres this year. In 2007, Virginia farmers planted only 58,000 acres. The last time the state topped 100,000 acres was 2006. Part of this is smarter agriculture and innovative research. Part of it is supply and demand.

Third, the WTO's Doha Round negotiations will probably die if not completed by the end of 2011, and as Phil Levy and I wrote in December, a bold US commitment on farm subsidy cuts and cotton reforms will be essential to completing a final deal.

Given these facts, there might never be a better time than right now for cotton subsidy cuts, and yet the House - and all those new fiscal conservatives - have once again refused to address the broader cotton issue and instead prefer to continue embarrassingly paying off Brazilian cotton farmers.  Awful.

Moreover, the House's latest cotton episode reveals a far more serious problem with the future of America's inefficient, outdated farm policies and US budget-cutting efforts more generally.  If the US House of Representatives can't make some basic cuts to American cotton subsidies amidst serious budget shortfalls, a wave of new budget-conscious GOP freshmen, record high cotton prices, unprecedented private investment in American cotton, and a Doha Round on life support, then what hope is there for a serious US farm subsidy reform proposal as part of Doha or otherwise?  And if (allegedly) fiscally conservative House Republicans can't defund the WTO-illegal US cotton programs or, at the very least, stop the insanity of sending 140 million in taxpayer dollars to Brazil's farmers every year, then why should we think that they'll have the courage to tackle the much more politically-sensitive and important budget reforms that will be absolutely essential to getting our crippling budget deficit in check?

After last Friday's vote on the cotton bribes, the answers to these bigger questions don't look too promising.

My (and Your) Tax Dollars to Subsidize Brazilian Cotton Farmers Indefinitely

Great* news!  Because of an agreement reached last week between the United States and Brazil, American citizens will continue to be forced to provide hundreds of millions of tax dollars in hush money"technical assistance" to Brazilian cotton farmers!  Granted, the new agreement also delays the imposition of about $1 billion in Brazilian retaliatory sanctions against American exports due to US refusal to implement multiple adverse WTO rulings against the US cotton subsidy program.  But considering the undeniable fact that such a move was in both country's commercial interests (the sanctions would punish Brazilian consumers and American exporters alike), the big news here is the embarrassing fact that the agreement continues the aforementioned Brazilian briberycompensation.  Cato's Sallie James does a good job summing up this debacle as follows:

Notwithstanding the efforts of four brave congressmen, the belated concession to reality by House Agriculture Committee Chairman Collin Peterson, and the misgivings of trade analysts including myself, it appears that the “temporary” deal struck by Brazil and the United States in April to ward off Brazil’s retaliation for WTO-illegal U.S. cotton supports is here to stay....

You will recall that the deal includes about $147 million worth of taxpayers’ money given to Brazilian cotton farmers in the form of “technical assistance,” just so we can continue our own insane cotton support programs without fear of U.S. exporters (including holders of patents and copyrights) being hit by retaliatory trade barriers and unpunished piracy.

Brazil in some senses has the right idea, of course. They recognize, correctly, that retaliation in the form of increased tariffs on American imports only hurts their own consumers, hence their stated desire for “negotiation and reform” instead of sanctions.  But they sure do have a lot of faith in the willingness of Congress to enact reform without serious pressure from, among others, aggrieved trade partners.

I hope their faith and saint-like patience is rewarded. In the meantime, we have (at least) two more years of subsidizing Brazilan farmers in addition to our own.

What a mess.  But I would disagree with Sallie on one thing: I don't think that the trade-savvy Brazilians have any delusions about the "willingness" of Congress to enact ag subsidy reforms, with or without foreign pressure.  Instead, I think the Brazilians realize perfectly well that (a) this Congress certainly isn't going to do anything about the US cotton program, (b) a billion dollars in trade sanctions will do nothing but harm their struggling economy; and (c) their threat of sanctions loses value the longer it's dangled out there (and it's been dangling for a while now).  So they're going to keep their (remaining) powder dry until (a) the global economy improves and (b) a new Congress takes over in 2011 that will probably be more, umm, "budget-conscious" and will very, very likely be without one of "King Cotton's" biggest champions - Senate Agriculture Committee Chair Blanche Lincoln (D-AR), whose chances of getting re-elected in 2010 are currently hovering between slim and none.  So the Brazilians' move last week might not reflect pie-in-the-sky idealism, but instead some good ol' fashioned DC cynicism.

But regardless of Brazil's motivations, one thing is very clear here: the US government's unwillingness to reform its insane, illegal agricultural subsidy programs means that, for the foreseeable future, American taxpayers will be forced to not only throw billions of their hard-earned dollars at American agribusiness, but also dish out millions in bribes to Brazil's cotton farmers.

Is it any wonder why a clear majority of the American people have finally had enough?


* "Great" may or may not actually mean "crappy."

Brave Reps Fight the Congressional Ag Subsidy Machine; Machine Yawns

A couple weeks ago, I wrote about the valiant bi-partisan effort in the US House of Representatives to repeal American cotton subsidies that have been repeatedly ruled illegal under WTO rules and have caused the Obama administration to insanely subsidize Brazilian cotton farmers to the tune of $150 million in order to delay Brazil's imposition of $1 billion in sanctions on US exports pursuant to those WTO rulings.  Back then, Reps. Jeff Flake (R-AZ), Ron Kind (D-WI), Paul Ryan (R-WI), and Barney Frank (D-MA) sent a great letter to President Obama pointing out the insanity of our current farm policy and asking that the White House lead the repeal effort - a letter that apparently went straight from Capitol Hill to the Oval Office trashcan.  (Shocking, I know.)

Undaunted, these brave and lonely Congressmen gained two more colleagues, Dave Reichert (R-WA) and Earl Blumenauer (D-OR), and issued on May 4 another sternly-worded letter on the absurd American cotton subsidies and the embarrassing US-Brazil dispute.  This time, the letter went to an equally unreceptive audience, if not moreso - the Chairs and ranking members of the Senate and House Agriculture committees: Sens. Blanche Lincoln (D-AR) and Saxby Chambliss (R-GA), and Reps. Collin Peterson (D-MN) and Rep. Frank Lucas (R-OK).  The full text of the letter is printed below, and you've gotta admire the signatories' efforts - there's simply no doubt that they have a very strong argument that the current US cotton subsidy situation is obscene. 

However, you've also gotta chuckle at the idea of this letter landing on the desks of proven cotton-benefactors Lincoln and Chambliss, of "Wheat Leader" Peterson, and of farm subsidy "champion" Lucas (whose district, by the way, has received almost 3.4 billion in farm subsidies since he took office).  Yeah, I'm sure that these subsidy-loving pols are going to get right on this matter.  You know, right after they finish keynoting the next annual meeting of the National Cotton Council.

But hey, at least these guys are trying.  That's a helluva a lot more than we can say about Lincoln, Chambliss, Peterson or Lucas.  Or President Obama for that matter.

------

The Honorable Blanche Lincoln
Chairman
Senate Committee on Agriculture, Forestry and Nutrition
328 Russell Senate Office Building
Washington, DC 20510-6200

The Honorable Collin Peterson
Chairman
House Committee on Agriculture
1301 Longworth House Office Building
Washington, DC 20515

The Honorable Saxby Chambliss
Ranking Member
Senate Committee on Agriculture, Forestry and Nutrition
416 Russell Senate Office Building
Washington, DC 20510-6200

The Honorable Frank Lucas
Ranking Member
House Committee on Agriculture
1305 Longworth House Office Building Washington, DC 20515


Dear Senators Lincoln and Chambliss and Congressmen Peterson and Lucas,

With the April 6, 2010 announcement by U.S. Trade Representative Kirk and Secretary of Agriculture Vilsack of an agreement between the U.S. and Brazil over the cotton dispute, the need to overhaul our domestic commodity support programs is more apparent than ever. Among other commitments, the Administration has agreed to begin paying Brazil $147.3 million annually for “technical assistance and capacity building” to head off the threat of retaliatory tariffs on exports costing U.S. industry $560 million and unprecedented sanctions against U.S. intellectual property rights costing $260 million. We will subsidize both U.S. cotton farmers as well as Brazilian agribusiness until the issue is resolved or until the passage of the next farm bill, while Brazil retains its right to move forward with its countermeasures.

It is clear that the necessary authority to resolve this issue rests with Congress and we write to respectfully inquire about respective committee plans moving forward. Between the threat to American innovation from cross retaliation against intellectual property rights of U.S. companies and budgetary pressures that make the payments to Brazil all the more disconcerting, there is a growing need to make fundamental changes in the U.S. farm policy. Passage of the next farm bill is years away at best and at worst there is no guarantee that it will include sufficient reforms to prevent Brazil from putting into place the tariffs and sanctions they have deferred for now. We believe it is imperative that the Committees address this issue and request that your Committees consider legislation that would resolve the cotton issue in advance of the coming farm bill reauthorization. Alternatively, if the farm bill is deemed to be the appropriate process to address this issue, we urge the Committees to rank the cotton issue among your top farm bill priorities and ask that you commit to ensuring the inclusion of sufficient legislative reforms to put this matter to rest.

While the U.S. cotton program has undergone revision by both Congress and the Administration, these changes were insufficient to resolve the cotton issue. Now the stakes have been raised with a wide array of American businesses being used as a lever against the U.S. in Brazil’s authorized retaliation. It is clear that our agricultural subsidies are outdated and are quickly becoming a liability for future trade growth. We understand these matters are complex. However, without such a commitment or plans to deal with the issue in advance of the farm bill, it would unfortunately appear that the Administration’s actions will have only delayed the inevitable retaliation against American businesses and workers at the cost of $143.7 million per year.

We look forward to working with you to address the pressing need to reform the agricultural subsidy programs, and in particular the cotton programs, so that they will help rather than hinder international trade.


Sincerely,


JEFF FLAKE
RON KIND
PAUL RYAN
BARNEY FRANK
DAVID REICHERT
EARL BLUMENAUER

Bi-Partisan Opposition to US Cotton Subsidies

Easily the biggest roadblock to reforming America's bloated, irrational and (often) WTO-inconsistent farm subsidies is the overwhelming bi-partisan support for them.  Whether in Congress or the White House, Republican or Democrat, it doesn't matter - agribusiness gets some L-O-V-E from almost everyone in Washington.  For a simple example of this fact, one need only look to the awful legislation introduced this week by Sens. Chuck Grassley (R-IA) and Kent Conrad (D-ND) that would obtusely extend a bevvy of ridiculous ethanol subsidies and the 54-cent-per-gallon tariff on imported sugar ethanol.  Of course, these Senators aren't alone in their blind love for using Americans' tax dollars to line the pockets of US agribusiness; indeed, you can't fall down on the House or Senate floor without hitting at least two Congressmen/Senators who issue a near-Pavlovian "Aye" vote every time they hear the words "farm" and "support" used in the same sentence.

However, there have always been a few poor, ostracized souls in Congress who refuse to grab a ladle for the farm subsidy gravy train, but they're pretty darn rare, and they end up taking a lot of heat on Capitol Hill and the campaign trail.  (Indeed, when they run for President, they end up getting pummeled like longtime subsidy-hater John McCain did in the all-important Iowa caucus and elsewhere in the Midwest).   So when a group of Republicans and Democrats join together to scream a chorus of "STOP THE INSANITY" on US farm subsidies, they deserve kudos and support.  Thursday was one of those times, as Congressmen Jeff Flake (R-AZ), Ron Kind (D-WI), Paul Ryan (R-WI), and Barney Frank (D-MA) sent a letter to President Obama, asking him to finally resolve the US-Brazil dispute over WTO-illegal American cotton subsidies by reforming the offending farm programs (something I've been advocating for months now) rather than what the White House is currently doing - i.e., keeping the trade-distorting programs in tact, bribingsubsidizing Brazilian cotton farmers with about $150 million in hush money"technical assistance," and putting future reform in the hands of some of the biggest cotton-lovers in Congress.

The letter from the Congressmen - affectionately referred to by Cato's Sallie James as the "Four Congressmen of the Cotton Subsidy Apocalypse"- highlights the patent absurdity of the current US action in the cotton dispute.  Just how absurd you ask?  Well, absurd enough to get super-conservative Paul Ryan and ultra-liberal Barney Frank to team up to stop the policy.  The letter is available here in a PDF, and I've also pasted it below as an image because I think it deserves as much circulation as possible.  It also deserves ample public praise, so kudos, Congressmen.  Nice job.  And who knows, maybe the ridiculous US-Brazil dispute will end up being the breaking point for a few more your House and Senate colleagues, pushing them to finally wise up and call for a dramatic reform of America's truly stupid (and dirty!) agricultural policies.

(Although I'm not holding my breath.)