Attention NC Businessfolk: Learn About US FTAs in Greensboro

As you many have noticed, things have been pretty quiet around here for the last week or so.  This has mostly been due to the Labor Day holiday and a rather, ahem, spirited work schedule of late, but it's also because I've been working hard on few fun extracurriculars, including my new Cato Institute paper on American subsidy and anti-subsidy policy (more on that later) and several upcoming speaking engagements.  The first one of those events is next week: I'll be speaking at a US Commercial Service event in Greensboro, NC on how to take advantage of the new US Free Trade Agreements.  As I know you're all very curious about it, here's the skinny:

Benefiting from the Colombia and Korea Free Trade Agreements

The Colombia and Korea Free Trade Agreements (FTAs) entered into force on May 15, 2012. On the day of implementation, over 80% of U.S. industrial goods exported to these countries began duty-free entry.

• Colombia is the fifth largest economy in Latin America with the third largest population. Colombia is the 3rd largest market for U.S. exports in Latin America.  

• Korea is the United States' 7th largest trading partner. The U.S.-Korea FTA has the potential to increase U.S. exports to Korea by USD 10-12 billion.

Hear from industry and government experts about market opportunities in these two countries, and how your company can leverage the FTAs to make sales. You will learn how FTAs impact NC businesses, market opportunities, how to take advantage of the FTAs, and the importance and impact of FTAs.

A more detailed brochure on the event, including registration information, is here.  If you're in the area and are looking to get your business more involved in the international trade game, this is a good place to start.

And I'll be returning to a more normalized blogging schedule in the very near future.  (I'm sure you just can't wait!) 

Hope to see you in Greensboro.

New Op-Ed: "One Cheer (At Most) for Our New Free Trade Agreements"

The Daily Caller today published a new (and somewhat depressing) op-ed of mine.  Here's the tease:

The recent congressional passage of U.S. free trade agreements with South Korea, Panama and Colombia has elicited an outbreak of Beltway backslapping. Some congratulations are certainly warranted, but a closer look at just how these FTAs arrived on the president’s desk reveals serious problems with not only the agreements themselves, but also the current state of U.S. trade policy.

Uh oh.  Be sure to read the whole thing here.  Your thoughts, as always, are welcome in the comments.

FTA Round-up

With both the House and Senate poised to vote on, and approve, pending US FTAs with Colombia, Korea and Panama tomorrow, it seemed like a good time to provide some recent must-read items to get you caught up to speed:

• The Competitive Enterprise Institute just issued a great new study documenting the Obama administration's failed - and economically harmful - strategy of delaying ratification of our pending FTAs in order to appease US labor unions (through, for example, revised FTA obligations, side agreements and reauthorization of expanded TAA).  CEI provides good support for something that I've been saying here for years: placating anti-traders, especially unions, is a fool's errand.

• Speaking of economically harmful delay of these FTAs, the Korea Herald reports that the recently-ratified EU-Korea FTA (started years after the still-pending US-Korea FTA) is reaping major benefits for European carmakers.  Good for them.

• However, as the FT's Alan Beattie explains in this new op-ed, the economic value of these FTAs shouldn't be oversold, and their final ratification has come at a pretty big price.  He concludes: "The US, along with all countries that trade – poor and middle-income as well as rich – is presented with a complex array of interlocking issues by the operation of globalisation: technological change, migration, exchange rates, capital movements and geopolitical power politics, as well as flows of goods and services.  Reducing the globalisation debate to passing three bilateral trade deals – at the cost of adding momentum to a potentially dangerous currency bill – is a very long way from being a proportionate response. In net terms, this was a bad week in Washington for free trade and real free-traders should recognise it."

• Jagdish Bhagwati takes a different, but kinda similar, angle, lamenting that "Congress and the president apparently have plenty of time to discuss bilateral FTAs with South Korea, Colombia, and Panama, as well as the regional Trans-Pacific Partnership (TPP), but none for negotiating the non-discriminatory Doha Round, which is languishing in its tenth year of talks." 

• Not to be outdone, Australian Marc-William Palen actually goes a bit further than Beattie and Bhagwati and argues that the FTAs' price tag - TAA - shows that the President is, deep-down, a protectionist.

• Speaking of the FTAs' price tag, the CBO released its cost estimates for the Korea, Colombia and Panama implementing legislation.  The Korea report is by far the most interesting, as it shows that the FTA's implementing legislation includes almost $8.5 billion in new customs users fees - $4.1 billion in extensions and, more importantly, $4.3 billion in increased merchandise processing fees because the FTA implementing legislation raises the fee from 0.21% to 0.3464% of a shipment's value.  I've already gone over why raising taxes on American import consumers to fund a free trade agreement is really misguided, but I do think it's very interesting that the revised KORUS legislation includes an exemption from these new fees for imports from Korea.  Colombia and Panama legislation provides for a similar exemption.  So, really, Korean, Colombian and Panamanian imports into the US will get a double benefit from the respective FTAs - lower tariffs and cheaper customs fees.  Unfortunately, US consumers of non-Korean/Panamanian/Colombian imports will be left holding the tab, and the FTAs' overall trade liberalization benefits will be muted.  Sigh.

• Finally, AEI's Phil Levy explains that, although the FTAs should definitely help the US economy, their tortuous path to final implementation is indicative of the sad state of US trade leadership.  Yep.

That's all for now, folks.  

Congratulations, Canadian Exporters!

Last month, we congratulated EU and Korean exporters and consumers on the entry into force of the Korea-EU FTA.  And, much to the dismay of the US exporters and consumers who have been patiently waiting on the Obama administration and congressional Democrats to finally move the Korea-US FTA, the KOREU has already produced some eye-popping benefits.

Now, it's time for us to congratulate the lucky consumers and exporters in Canada and Colombia, as their bilateral trade agreement entered into force today.  Meanwhile, the US-Colombia FTA collects dust in the same Oval Office drawer as the KORUS:

“I’ve got a flag on my lapel, not a maple leaf,” U.S. Trade Representative Ron Kirk exclaimed at a Senate Finance Committee hearing in March. Today, as Canada’s free-trade agreement (FTA) with Colombia enters into force, it is the maple leaf that represents competitive pressures on U.S. market share and the political influence that goes with it.

Canada and Colombia are two of our closest friends in the Western Hemisphere, and their strengthened commercial ties clearly benefit their mutual interests as well as Washington’s broader goal of promoting open markets and economic development. Yet U.S. businesses and their congressional advocates are keenly aware that Canada has beat us to the punch, leaving U.S. exporters to an important emerging market at a competitive disadvantage.

The implications of delayed ratification of the U.S.-Colombia FTA are not lost on either Colombia or Canada. As Colombian President Juan Manuel Santos bluntly put it in a recent interview with Americas Quarterly, “American products are being replaced in the Colombian market because other countries have free-trade agreements. If the FTA is not approved shortly, the U.S. will continue losing market share.” Those losses will be particularly acute in the agricultural sector, where duty-free Canadian wheat will likely replace U.S. imports.

Similarly, on a visit to Bogotá last week, Canadian Prime Minister Stephen Harper lauded the leveling of the playing field for Canadian business vis-à-vis competitors who have or are seeking preferential access to the burgeoning Colombian economy. For Canadian wheat exporters, for example, this will mean the opportunity to catch up with Argentina, which has surpassed the United States as Colombia’s number one agricultural supplier. Tellingly, the president of the Canadian Wheat Board noted that the U.S. has yet to ratify its own agreement as he welcomed the competitive edge gained by Canadian grain exporters.

For both Ottawa and Bogotá, a strengthened trade relationship is also geopolitically attractive. As Harper stated on his official visit to Colombia, “diversifying trade and economic activity like this is the focal point of Canada’s renewed outreach to its hemispheric neighbors.” As in the United States, securing parliamentary approval of the FTA with Colombia was not an easy lift, given domestic opposition from labor unions and human rights groups. Nevertheless, the trade agreement was viewed an important tool in a comprehensive strategy to engage with Latin America.

House Ways & Means Chair Dave Camp (R- and Trade Subcommittee Chair Kevin Brady (R-TX) issued an unequivocal press release calling for the Congress to act "immediately by passing all three of our trade agreements before we lose any more jobs" and "stand[ing] ready to do so as soon as the President submits them to Congress."  Meanwhile, Senate Finance Chair Max Baucus (D-MT) issued an, ahem, interesting statement of his own (emphasis mine):

Canada’s trade agreement with Colombia gives our competitors a leg up and shows the importance of coming together quickly to pass America’s pending trade agreements and Trade Adjustment Assistance.  Every day our trade deal with Colombia languishes is a day U.S. ranchers and farmers can fall behind in this lucrative market, which is why we've been fighting so hard to pass the Colombia Free Trade Agreement. Approving our trade agreements with Colombia, Panama and Korea in tandem with Trade Adjustment Assistance will increase exports by $13 billion for ranchers, farmers and businesses in Montana and across the country and create jobs here at home – and that’s why we cannot afford further delay. As we open new markets for American goods with these free trade agreements, this package ensures we are fulfilling our duty to help provide U.S. workers the resources they need to succeed. Working together to enact this package into law needs to be a top priority when we return in September to help create the jobs and economic opportunities American ranchers, farmers and workers need to prosper in this global economy.

That's right, folks.  The US-Colombia FTA is such a "top priority" for the White House, Sen. Baucus and his fellow congressional Dems that they refuse to move the deal (and the Korea and Panama FTAs) unless it's done "in tandem" with TAA expansion.  And we "cannot afford further delay" - except to wait for a vote on expanded TAA, of course.  And how exactly does TAA expansion "increase exports by $13 billion for ranchers, farmers and businesses in Montana and across the country and create jobs here at home"?  Oh, that's right, it doesn't.  TAA expansion is just the $1B ransom we apparently have to pay in order to get the FTAs' economic benefits.

But other than that, Sen. Baucus has been "fighting hard" to pass the agreements, and he's ready to roll in September, baby!

(Unless congressional Republicans refuse to pass the TAA expansion, of course.)

Quick Reminder: FTA Delay Is Far From Painless

It's been pretty common knowledge for a while now that congressional consideration of pending US FTAs with South Korea, Colombia and Panama wouldn't happen before Congress' summer break (woo hoo!) August recess due to the unnecessary impasse between the White House and congressional Republicans about Trade Adjustment Assistance.  Insiders note that several different (Rube-Goldbergian) plans are circulating to secure passage of the trade agreements after the August recess, and most of the big "planners" are confident that the FTAs will be speedily passed in September.

Those of us who have been watching this comedy tragedy of errors unfold since mid-2007, of course, are taking a more cautious approach (read: we'll believe it when we see it).  But for a moment, let's just swallow the Kool-Aid and assume that the FTAs will finally get done in the Fall.  Everything will be cool then, right?  No harm, no foul, right?

Wrong.  Wrong wrong wrong wrong wrong.

As I noted when the EU-Korea FTA entered into force on July 1, the delay of pending US trade agreements is imposing serious, and unnecessary, pain for US exporters and consumers who are facing higher tariffs (and thus higher prices/costs) at home and abroad that they would be if the KORUS (and other FTAs) had been implemented at some point over the last four(!) years.  When I first mentioned this problem, however, I was speaking in hypothetical terms, as the KOREU deal had just entered into force.  Now, after a few weeks of operation, South Korea's JoongAng Daily provides us with real proof of those formerly-hypothetical gains for European and Korean consumers and businesses (and, thus, of the real losses for American consumers and businesses):

Since the free trade agreement between Korea and the European Union took effect on July 1, cheap commodities from Europe are already helping ease consumer price strains here.

Frozen pork belly, known as samgyeopsal in Korean, from the Netherlands now sells at almost half the price of local pork belly, which stands at 2,280 won ($2.17) per 100 grams. Thanks to the imports, the sky-high price of Koreans’ favorite meat dish - which spiked from the mass culling of pigs after the recent foot-and-mouth disease epidemic - has come down considerably. Pork belly products from Belgium and France have also hit the shelves at more accommodating prices of 1,000 won per 100 grams.

The downward price movement does not only apply to produce: luxury European products also have modified their price tags. As a result, Koreans can now buy a BMW 3 Series for as much as 8.5 million won less than pre-FTA prices of 45.3 million won to 51.6 million won.

And the Korea-EU FTA has not only shaved prices of European products. Japanese and American carmakers are also reducing prices to compete with European imports. They are even cutting dealership margins in order to bring down prices.

In Europe, Korean companies are making big strides thanks to the tariff benefits of the FTA. Hyundai Motor, for example, sold 336,000 vehicles in 25 European countries in the first half of the year and is expected to outpace Japanese automaker Toyota by raising its market share in the euro zone by more than 5 percent in the second half. Japanese media have begun worrying that Japan will lose its share in the European market to its Korean counterparts due to a strong yen and the Korea-EU FTA.

It is undisputable that benefits from free trade agreements are immense. During the seven years of the Korea-Chile free trade agreement, bilateral trade has surged by 287 percent. In Chile, Korean motor vehicles and electronics now outperform their Japanese competitors.

Very cool.  For Europeans and Koreans, I mean.  It's totally un-cool for American consumers and exporters who needlessly face (and in some cases have needlessly faced for over four years now) higher prices at home and tougher competition abroad due to their government's embarrassing inability to implement the pending US FTAs.  And some of the Korean (and soon, Colombian) market moves happening right now because of the "rival" FTAs will not be easily reversed if/when American companies gain equal footing with their European (or Canadian or...) competitors.

So, hey, if the US trade deals do finally get finalized in September, it'll certainly be better than if they don't move at all.  But let's please never forget that (i) American families and businesses are paying a steep price for their government's incompetence, and (ii) all of this pain easily could have been avoided if President Obama really cared enough to make that happen.

But he doesn't.  So here we are.

See you in September, I guess.


[P.S.  I've often said that FTAs are the least-good option when it comes to free trade policies (third to unilateral and multilateral liberalization), but the article above really hits the point home that FTAs, while far from perfect, are still a significant improvement over the status quo.]

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. 

Behold, the Insane (and Possibly Illegal) Bi-partisan FTA Deal!

As you may have heard, the White House and congressional Republicans are currently battling behind closed doors over a way forward for the pending US free trade agreements with Colombia, Panama and South Korea.  National Journal [$] reports on the latest developments (emphasis mine):

House Republicans retreated from their plan to begin preliminary markup on the pending trade agreements with Colombia, Panama, and South Korea, but the public stalling may signal that negotiators are making better progress behind closed doors.

Several people involved in the talks said on Monday that weekend negotiations over Trade Adjustment Assistance moved the parties closer to a deal. The White House has made clear that it wants Congress to reach a deal on TAA before beginning the markup process on the bills.

A House Republican aide said that preliminary hearings, expected to get under way this week, have not been scheduled. The move could pave the way for a deal to be announced before markups begin.

An aide to Rep. Kevin Brady, R-Texas, said in an e-mail: “While no date has been set for the mock-markups, we remain optimistic that a bipartisan solution will soon be reached.”

Some stakeholders said that the biggest sticking point has been finding enough revenue to offset the cost of the program extension. The White House originally pushed for extending a version of the worker retraining funds that was expanded in 2009 to include service employees and health care. But it appears that the deal will be significantly scaled back....

Lawmakers from both chambers have floated a wide range of frameworks in recent weeks. The chief concern has been raising enough revenue to counteract the cost of TAA and tariffs that will expire when the deals come into force.

Several of the parties involved said that a large portion of the pay-fors could come from additional customs fees, although that money would be insufficient to cover the full cost of the package. But the revenue gap may not be insurmountable....

The negotiated agreement on the trade deals may be sufficient to gain the bipartisan support needed to advance a comprehensive package before August, but it may not be enough to win the backing of skeptical Democrats in the House. Once the deals are introduced, they will need only a simple majority to pass in both chambers.

For a moment, let's ignore the fact that these agreements have been completed and signed for about four years, and that the President alone has the power to submit the FTAs for congressional consideration and approval (a simple majority vote in both chambers without amendment and pursuant to strict timelines), and that the three agreements would undoubtedly pass the House and Senate all by themselves.

And let's ignore the fact that the TAA program, in whatever form, has proven itself to be costly, ineffectual (politically and practically) and economically unjustifiable, and that, because he also really wants these FTAs to be implemented, the President is in effect holding a hostage that he's not willing to shoot.

And let's ignore the fact that, even with an eventual deal on the TAA bribe subsidy, most House Democrats (and many Senate Dems too) will never, ever, EVER support these FTAs (as the article makes clear and the Senators themselves have admitted).

Instead, for a moment, let's just focus on the big bi-partisan agreement outlined above.  Why on earth is this "breakthrough deal" even being considered?

First, it's absolutely irrational.  As noted, the parties have reportedly agreed to impose new (or higher) "Customs fees" in order to offset the cost of the TAA subsidy and the lost tariff revenue resulting from the FTAs implementation.  But "customs fees" are simply hidden taxes on import consumers.  A quick review of the US Customs website on "customs users fees" makes this clear.  They're paid (mainly) by commercial transporters bringing goods (imports) into the United States, thus raising the costs of importation.  And those higher costs, of course, are eventually passed on to American consumers through higher import prices.

Thus, pursuant to the bi-partisan deal outlined above, the FTAs' great import liberalization benefits will be immediately and tangibly undermined by new taxes on those very same imports (and others)!  Amazing.  Heaven forbid that Congress fill the tariff gap created by the FTAs and pay for TAA by actually eliminating federal spending on, oh I don't know, one of its absolutely-critical research programs into cow farts or cocaine-using monkeys.  Nope, the Obama administration's (and some congressional Republicans') big plan is to offset the elimination of taxes on import consumers by... wait for it... raising taxes on import consumers.  (It's truly a mercantilist's dream come true!)  Even worse, those new taxes will be necessarily be much larger than the amount of the FTA tax cut because they also have to fund a politically and economically dubious subsidy program that isn't even guaranteed to buy the approval of the FTAs' current congressional opposition!

Only in Washington, folks.  Only in Washington.

Unfortunately, it gets even worse: the big plan might also be illegal under global trade rules.  Granted, the description above is way too ambiguous to make any definitive conclusions about the deal's legality, but assuming that the agreement would raise US customs users fees (or implement new ones) in order to generate revenue for the federal government, it would probably violate GATT Article VIII, which governs WTO Members' imposition of "Fees and Formalities connected with Importation and Exportation" (in other words, customs fees).  The key provision of Article VIII reads:

1.(a) All fees and charges of whatever character (other than import and export duties and other than taxes within the purview of Article III) imposed by contracting parties on or in connection with importation or exportation shall be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products or a taxation of imports or exports for fiscal purposes.

WTO panels have interpreted this provision narrowly, and an old GATT panel has actually looked into the US system of customs users fees.  In these cases, the panels have ruled that Article VIII's requirement that a customs fee be "limited in amount to the approximate cost of services rendered" is actually a "dual requirement," because the charge in question must first involve a "service" rendered, and then the level of the charge must not exceed the approximate cost of that "service."  They've also found that the term "services rendered" means "services rendered to the individual importer in question," and that the fees cannot be imposed to raise revenue (i.e., for "fiscal purposes").

Interestingly, a relatively recent Customs Department notice about an increase in the amount of applicable customs users fees makes clear that the US government's customs fees are intended to approximate the costs of customs services (e.g., inspection) actually rendered (emphasis mine):

On October 22, 2004 the President signed the American Jobs Creation Act of 2004 (Pub. L. 108-357). Section 892 of the Act amended Title 19 United States Code 58c to renew the fees provided under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), which would have otherwise expired March 1, 2005, and to allow the Secretary of the Treasury to increase such fees by an amount not to exceed 10 percent in the period beginning fiscal year 2006 through the period for which the fees are authorized by law....

CBP is increasing the fees by the amounts authorized so that they more accurately reflect the actual costs of providing the services for which they are charged. On April 24, 2006, CBP published a Notice of Proposed Rulemaking in the Federal Register (71 FR 20922) proposing to amend the regulations in accordance with the current statutory provisions by increasing the fees for: (1) customs services provided in connection with the arrival of certain commercial vessels, commercial trucks, railroad cars, private aircraft and private vessels, passengers aboard commercial aircraft and commercial vessels, and barges or other bulk carrier arrivals, (2) each item of dutiable mail for which a customs officer prepares documentation, and (3) annual customs brokers permits.

But now, the US government specifically and expressly intends to raise these fees (and/or others) in order to fund TAA and offset lost tariff revenue on imports from Korea, Colombia and Panama - absolutely nothing to do with the "actual costs of providing the services for which they are charged" or, in WTO parlance, the "the approximate cost of services rendered."  So, even assuming that this plan doesn't run afoul of more general WTO non-discrimination provisions by singling out certain countries, how is the deal even remotely WTO-consistent under the most conservative reading of GATT Article VIII?

I honestly have no idea.

But, hey, even assuming the plan isn't illegal, that doesn't change the fact that it's clearly insane.  So it's got that going for it, which is nice.

Could someone again please remind me how we got into this mess?

Short Article, Big Lessons

From Colombia Reports comes a great article that, on its face, seems to be just a short piece about foreign investment, but actually provides several great lessons about the global economy:

Colombia's largest cement company Argos has bought several cement plants in Alabama, Georgia and South Carolina for $760 million, reported local media Thursday.

Argos Cements bought the plants from the French company Lafarge. Argos entered the US market in 2005 and says it plans to become the fourth largest ready mix producer in the U.S.

Chief Executive Jose Velez said in an interview as reported by Dow Jones "We are conservative in our outlook but we do expect more activity in 2010." Velez also said that he is not worried by the weak dollar or the strong peso.

"Because of the weakness of the dollar most of our inputs are cheaper now ... The net impact of the appreciation [of the peso] is zero at this time."

The purchase, which is still subject to approval from U.S. regulators, is part of an long term expansion strategy aimed at consolidating Argos' presence in the U.S. market.

So what kind of lessons can we draw from these few paragraphs?  Here's what I came up with:

• The obvious benefits of foreign investment in the US economy.  But for Argos' investment, these French-owned cement plants in Alabama, Georgia and South Carolina may have gone out of business, eliminating hundreds of American manufacturing jobs in the process.  Now, let's just hope that those "US regulators" don't foul things up.

• Where all that great foreign investment wants to go.  All of Argos' $760 million investment is going to Right to Work States. i.e., states with laws prohibiting compulsory union membership.  Of course, as I've often noted here, foreign investment in these states - particularly those in the South - is part of a growing trend.  In fact, the empirical evidence shows that RTW states attract more FDI than their forced-unionization counterparts.  Of course, the economic dominance of RTW states isn't isolated to attracting foreign investment.  As Steve Moore and Art Laffer recently noted in a great WSJ op-ed: "As of today there are 22 right-to-work states and 28 union-shop states. Over the past decade (2000-09) the right-to-work states grew faster in nearly every respect than their union-shop counterparts: 54.6% versus 41.1% in gross state product, 53.3% versus 40.6% in personal income, 11.9% versus 6.1% in population, and 4.1% versus -0.6% in payrolls."

• How global supply chains erode the conventional wisdom on trade and currency and make import liberalization increasingly important.  Velez states: "Because of the weakness of the dollar most of our inputs are cheaper now ... The net impact of the appreciation [of the peso] is zero at this time."  This means that his company is importing raw materials from the United States or from countries whose currencies are pegged to the dollar.  Either way, it's a great example of how global supply chains have made old school currency dogma irrelevant, and why a strong currency and the elimination of import barriers are important for intermediate/downstream producers like, oh I don't know, the United States.  Now, if only there were a way for the United States and Colombia to instantly lower the vast majority of their bilateral trade barriers.  Oh, wait.

• The origins of that Colombian investment capital - the US-Colombia trade deficit.  One of the constant refrains here is that trade deficits are not "bad things" because, among other things, they necessarily lead to foreign investment in the United States.  As Cafe Hayek's Don Boudreaux put it, "another name for 'U.S. trade deficit' is 'U.S. capital-account surplus' – that is, inflows of investment funds into America that supply (directly or indirectly) financing for more capital creation in America."  (Mark Perry adds more here.)  In 2010, the United States had a $3.6 billion bilateral trade deficit with Colombia, and now $760 million is coming back to the U.S. as investment in domestic cement plants.  In short, Americans gave Argos and other Colombian firms our dollars, and now they're re-investing those dollars in the US economy.  Suddenly, those trade deficits aren't so scary anymore, eh?

I'm sure I missed something.  Feel free to add your lessons in the comments.

(h/t Monica Showalter)

Monday Quick Hits

It's been a while since I last cleared the decks, so these headlines will go back a couple weeks:

• Former Chair of President Clinton's Council of Economic Advisers Laura D'Andrea Tyson systematically and correctly explains why China's currency policies should not be the focus of this week's US-China Strategic & Economic Dialogue.  (Although it all sounds awfully familiar, if you ask me.)

• AEI's Phil Levy explains the absurdity of the AFL-CIO's opposition to the US-Colombia FTA.

• Unlike most other countries, the United States isn't really interested in Chinese investment.

• Undaunted, Chinese investors are still trying to give us money and jobs, and, fortunately for us, they are occasionally successful.

• The Economist looks at the effect of trade on carbon emissions.

• The US Steel Industry is doing really well these days. (Somebody should tell steel-loving protectionist Reps. Visclosky and Murphy.)

• All of China's currency meddling is pushing the Chinese government to increase the nominal value of its currency.  (Shocking, I know.)

• World Bank study: China will become less trade-dependent over the next decade. (Good writeup of the study here.)

• Chinese study: China's exports will inevitably slow, while its imports will surge. 

• China's one-child policy is creating some serious economic pressures.

• The US-Korea FTA had a pretty ridiculous setback in Korea's National Assembly.  Unfortunately for US exporters, the National Assembly seamlessly approved the EU-Korea FTA a few days later.  (Tick tock tick tock, President Obama.)

• Art Carden explains why the iPad isn't bad for the US economy (and yes, that is apparently a necessary economics lesson for some in Congress).

• US inches closer to allowing Mexican trucks to travel on American roads; retaliatory tariffs on $1.2 worth of US exports remain in place until that actually happens.

• Heritage: The "Age of America" will only end if we let it.

• Steve Horwitz on the pernicious fallacy of the "fixed jobs pie."

That should keep y'all busy for a while. 

Barfield: The Big Downside of the Colombia FTA [UPDATED]

Claude Barfield's quick take on the big US-Colombia FTA "action plan" is dead-on and worth quoting in full (h/t Ramesh Ponnuru):

I will write more on this subject in the future, but I want to flag a big downside in the just-announced agreement to move forward with the U.S.-Colombia Free Trade Agreement: that is, the highly intrusive and largely ill-advised provisions of the so-called “Action Plan” for Colombian labor laws and regulations. Yes, I know that the Colombians—browbeaten and desperate to assure permanent access to the U.S. market—have agreed to go along. But in many ways these provisions represent a callous trampling on Colombia’s sovereignty and the right to determine for itself specific priorities and obligations in the domestic labor market.

Among the more egregious demands, Colombia has acquiesced to “criminalize” (with prison terms of up to five years) any acts that “undermine the right to organize and bargain collectively.” It must also pass a law dictating prison terms for anyone who “offers a collective pact to non-union workers that is superior to terms for union workers.” No definition of “undermine” or “superior terms,” of course, is set forth. Such vague mandates are an invitation to harassment and extortion. Further, Colombia must assume heavy administrative and enforcement obligations that will stretch resources and constrict the government’s flexibility to adjust as labor (or other) conditions change in the future—including mandates on the number of inspectors, prosecutors, and police labor investigators, a plethora of new legislative actions, programs, analyses, directives, and consultations/meetings in the labor relations area. Some of these ideas have worth, but the attempted straitjacket of mandated priorities will breed endless disputes down the road.

Two closing questions: the first, related to the above, is what will happen when Colombia, through its own democratic process, wants to adjust programs and mandates in the future? Will the United States intervene to stop or control such changes? And second: beyond Colombia, the United States in the future—starting with the TPP—will attempt to conclude more FTAs. Does the Obama administration really think that Australia or Chile (and later possibly Indonesia and India) will stand for this intrusive trampling of sovereignty and democratically established laws and regulations? Good question—with an obvious answer.

I should add that, ironically, even this is not enough for U.S. labor unions, who have unanimously announced their opposition to the Colombia FTA even with the action plan.

On that last point, I'll simply repeat my usual chorus: placating anti-traders is always - ALWAYS - a fool's errand.

On Barfield's main point, however, I'm a little curious: haven't we been doing this type of FTA bullying for a long while now?  The US-Peru FTA immediately comes to mind here:

The U.S. and Peru reached their agreement at the end of 2005, signed it in April 2006, and the Peruvian Congress ratified it a year ago. With changes pushed by Democrats this year before a vote in Congress, Peru was forced to accept tougher environmental and labor rights rules, and its legislators in June approved the agreement a second time.

In recent weeks, Peru’s labor ministry issued a decree limiting the use of non-union contract workers in mines and other unionized industries. That decree and other changes to Peru’s labor regulations address more than 60 percent of the initial concerns by unions, said Douglas Figueroa Silva, president of the Confederation of Workers of Peru.

As you may recall, the Peruvian government was "forced" to accept new labor and environmental standards and re-vote on their FTA because then-Ways & Means Chair Charlie Rangel (D-NY) and his buddy Rep. Sandy Levin (D-MI) literally traveled to Peru to condescendingly judge them demand pledges from the Peruvian government on labor and environmental issues.  And they got them.  (Levin tellingly complained about Peru's failure to implement all of his labor demands in 2009, yet subsequently bragged about his Peru-bullying prowess in 2011.)

The United States also has sought "legislative reforms" from partners of completed FTAs due to their alleged labor infractions, and is already bullying TPP members on dubious environmental provisions related to timber harvesting.

So while I totally agree with Claude that the US-Colombia "action plan" is a slap in the face of the Colombian government (and a blatant affront to their sovereignty), it's not really that surprising, is it?  The detailed plan might beprobably is a more aggressive and blatant than the many other instances of American FTA bullying, but - unless I'm missing something (always a distinct possibility) - it's not breathtakingly novel.  This bad precedent was set years ago.

Of course, Colombia voluntarily agreed to make these legal changes, and there's a very good argument that they're totally cool with doing that.  But still - the fact that we have to publicly emasculate our supposed "ally" in order to pass a totally-lopsided trade agreement is a pretty telling (and depressing) indicator of the current state of American trade policy, now isn't it?

UPDATE: Barfield ably responds to my questions - definitely worth a read.

Great News: US-Colombia FTA "Action Plan" Announced (Whatever That Means) [UPDATED]

Today, the Obama administration boldly announced that, after only 27 months in charge of US trade policy, they'd finally come to terms with the Colombian government on a path forward - or "action plan" - for the US-Colombia FTA, so that the President could eventually deem the completed-and-signed-in-2006 agreement ready to send to Congress for final approval and implementation:

President Obama is committed to pursuing an ambitious trade agenda that will help grow our economy and support good jobs for U.S. workers by opening new markets. To achieve that objective, we seek to provide a level playing field that creates economic opportunities for U.S. workers, companies, farmers, and ranchers, and that ensures our trading partners have acceptable working conditions and respect fundamental labor rights. As part of this broader trade agenda, the Obama Administration has worked closely with the government of Colombia to address serious and immediate labor concerns. The result is an agreed “Action Plan Related to Labor Rights” that will lead to greatly enhanced labor rights in Colombia and clear the way for the U.S.-Colombia Trade Agreement to move forward to Congress. The U.S.-Colombia Trade Agreement will expand U.S. goods exports alone by more than $1.1 billion and give key U.S. goods and services duty free access in sectors from manufacturing to agriculture. It will increase U.S. GDP by $2.5 billion and support thousands of additional U.S. jobs.

USTR's announcement elicited cheers of support from House and Senate leaders, pretty much all of the US business community, and most other free trade advocates out there.  And in one sense, supporters of the FTA are right to be happy: after more than two years of absurd stalling, ridiculous excuses and fake negotiations, this is the first set of concrete timelines and benchmarks to which the Obama administration has been willing to publicly commit itself.  So if/when the Colombian government jumps through all of the administration's hoops, there will be absolutely no excuse to further delay the FTA.  This is good.

But please allow me to be a Debbie Downer for a second and state the blatantly obvious, ahem, not-so-good news here: this "action plan" still leaves us all without a freakin' clue as to when President Obama will actually submit the FTA's implementing legislation for final congressional approval, and it still leaves that decision in the President's hands alone.  As this article in The Hill stated plainly: "U.S. trade officials didn't provide a timeline for ratification of the pending free trade deals, saying they would need to meet with congressional leaders to determine the path."  Yet a simple comparison of the press releases issued today by the Democrat and Republican heads of the Senate Finance Committee makes clear that this "path" is still totally up in the air, and that the folks on the Hill are still waiting for some sort of real timeline from the White House.  Here's Chairman Baucus (D-MT), being painfully vague and nonchalant about when the Agreement might reach Congress (emphasis mine):

The agreement between the Administration and Colombia on an action plan to build on the progress Colombia has made in strengthening labor rights, reducing violence and punishing violent offenders will allow us to move the Free Trade Agreement forward. The Administration should immediately begin working with Congress on the implementing legislation so the President can submit and Congress can approve the agreement in the coming months.

And here's Ranking Member Hatch (R-UT) with a lot more urgency, but still no clue as to timing (again, emphasis mine):

While long overdue and despite unreasonable delay, today’s announcement by the Administration is welcome news.... We must now start the necessary work with the Administration to prepare the U.S.-Colombia trade pact for congressional consideration - in tandem with the pending trade agreements with South Korea and Panama.... Passage of these three trade agreements will yield new economic opportunities for Americans, strengthen our international alliances, and preserve our role as the single greatest economy in the world. They deserve careful and timely consideration by Congress.

So congressional Democrats who support the FTA would be pleased to see it "in the coming months," while congressional Republicans want it "now" and "in tandem with" the Panama and Korea FTAs.  And the same folks who opposed the deal yesterday still oppose it today.

In other words, unless Presidents Obama and Santos announce tomorrow a firm, formal schedule for the submission of the FTA's implementing legislation (e.g., after Colombia has timely met half of the benchmarks listed in the plan), this action plan hasn't really changed anything.  The agreement's fate still depends entirely on the Obama administration's promises and intentions - the only difference is that those promises and intentions now must be couched in the action plan's more formal terms.  That's not really much of a difference: when the White House alone is satisfied with the action plan's implementation, the FTA will move.  If they want it to move quickly, they can move it quickly, and if they want to slow walk the FTA into 2013, they could probably figure out an excuse or ten to make that happen.  Yet with Canada-Colombia FTA on the verge of implementation, and with American exporters continuing to pay millions of dollars worth of needless Colombian tariffs, further delay is simply not an option.

In this light, today's big news is no different from me telling my wife that I have an "action plan" for taking out the garbage, when trash day is tomorrow.  Plan or not, it all comes down to whether I really care about handling my responsibilities and meeting a quickly approaching deadline.  If I don't care, then the garbage man's just going to pass us by (again), and the trash will pile up (again).

So if I'm a GOP congressman or a US business leader, and I really want to see this FTA approved by Congress in 2011, then I'll give today's announcement a polite golf-clap, but I'm certainly not going to cave on Democrat trade priorities (like TAA) or to stop publicly pressuring the President to submit the agreement right now.  Because until the Colombia FTA is actually sent to Congress, then no amount of "action plans," strong commitments or good intentions should be sufficient to get me to call off the dogs.  That approach may have been okay in 2009, but not now.

Now, it's time to take out the damn trash.

UPDATE: The Big Obama-Santos meeting clarified nothing on the FTA's timing.  Nothing.

Tuesday Quick Hits

Work's been pretty rough these last few days, but here are some quick hits to get you through the slower blogtimes:

• "Zeroing" took yet another hit last week: this time by the Court of Appeals for the Federal Circuit, which ruled last Thursday that the Department of Commerce needs to revisit its use of the WTO-illegal methodology in antidumping annual reviews because (i) DOC had abandoned the practice in investigations; and (ii) the US government had failed to offer a good (well, any) reason for the different approach in reviews.  WorldTradeLaw.net's Simon Lester offers some good commentary on the CAFC decision, and the WSJ rightfully applauds it: "thanks to statistical sleight-of-hand, American consumers have paid billions of dollars more over the years in higher prices either because antidumping duties raised prices on imports or because those duties sheltered domestic companies from downward price competition. This was bad economics, and now it turns out it was bad law, too. The World Trade Organization has dinged Washington repeatedly for zeroing. Commerce and Congress have done their best to avoid complying, at considerable expense to American credibility abroad. Most recently, Commerce attempted to stop zeroing for new antidumping investigations while keeping the practice for existing duties, to placate both the WTO and domestic protectionists. Last week's appellate court ruling puts an end to that charade by finding that under existing U.S. law Commerce has to either zero in all cases or zero in none. Since the department has abandoned zeroing for new investigations, there's reason to hope the Obama Administration will disavow zeroing entirely instead of searching for some way around a carefully reasoned and forceful appellate ruling."  Indeed.  I'd only add that the US courts have been the last refuge of America's zeroing proponents (i.e., protectionists) and their buddies in Congress, so the CAFC's latest decision must have them squirming something fierce this week.  And that thought makes me smile.

• Politicians of both parties are lining up in support of the US-Colombia FTA - a strong signal that the Obama administration could finally send the Agreement to Congress sometime soon (everybody likes a winner!).  Dem Senators Baucus and Kerry gave the FTA a nice (albeit mercantilist) plug in a recent WSJ op-ed, and the (admittedly dwindling) New Democrat Coalition in the House fired off a letter to the President calling on him to submit all three pending FTAs asap.  Meanwhile the US business community is also upping the pressure, as this US Chamber blogpost and Caterpillar ad make clear.  Eternal optimist Monica Showalter of IBD has gleefully noticed all of this news and notes something important on Facebook: "With Obama and Santos scheduled to meet Thursday, and Santos refusing up until this point to meet Obama unless there's free trade - I think it is going to happen."  A very insightful point, and I hope she's right, but I'll believe it when I see it.  (Although this announcement re: the Canada-Colombia FTA certainly adds more pressure on the USA.) [Update: Monica has more in this new IBD editorial.]

• Speaking of that Kerry-Baucus op-ed, Cafe Hayek's Don Boudreaux gives it "two cheers," and withholds the third because of something that I've been arguing here for a long time: "A third cheer would be in order had not the senators relied upon a wholly mistaken reason to justify this particular move toward freer trade. In their essay, U.S. imports and American consumers are mentioned a total of zero times, while U.S. exports and American producers (such as farmers, firms, and workers) are mentioned 23 times.... The senators’ argument for freer trade in this particular case undermines the larger effort to persuade the public that free trade is to everyone’s long-term advantage – an advantage that is measured by increases in what we’re able to consume and not by increases in what we must sacrifice."  Exactly!!

• Cato's Ted Galen Carptenter explains why China's inevitable rise to superpower status isn't so inevitable, and why the United States has a lot to say about it.

• The Mercatus Center's Veronique de Rugy explains something I already know and have known for a few years now: the Alternative Minimum Tax sucks and should be eliminated asap.  Mind-blowing fact: "Congress created the AMT in 1969 to prevent 155 wealthy taxpayers from using deductions and credits to avoid paying any federal income taxes....  According to the Congressional Budget Office, last tax season 4.5 million taxpayers were affected by the alternative minimum tax, an increase of more than 4 million taxpayers since 1970."  Sonova...

• The WSJ Asia pens an excellent editorial on how the Japan tragedies have clearly revealed just how dependent American businesses and workers are on imports in this modern era of global supply chains.  The whole thing is worth reading, but here's my favorite passage: "Despite the fears of Japanese products a generation ago, in reality those imports have allowed America to keep its place as the world's largest economy by a country mile. We hope someone on President Obama's economic team is taking note. Trade opponents can always point to the jobs they claim trade has "cost" Americans, but it's rarer to see such an obvious example of how Americans are hurt when trade is suddenly interrupted. The point extends to imports from everywhere. American auto-industry fears over car imports from South Korea have so far helped block ratification of a Korea-U.S. free-trade agreement. That bit of politics hurts Americans who would export to Korea under the deal, but it also hurts the Americans who would benefit from Korean imports. Such as, say, small businesses that use pick-up trucks and currently face higher domestic prices and less competition thanks to a 25% tariff on imported trucks."  Amen.

• Last week USTR released its annual national trade estimate (NTE) report on foreign trade barriers.  It's never anything earth-shattering (and involves a lot of cut-and-pasting from previous years), but it's still a good place to find the next US WTO dispute or two.  (If you don't mind wading through the chaff.)

• Paul Ryan: Stud.

Now that should keep you busy until I come up for air...

Valentines Quick Hits

Here are a few headlines for your romantic night with that special someone.  Maybe you could even read a few of them to him/her to get in the mood:

• For those of us out there who waited until the last minute and bought our wives some surprisingly-cheap-yet-high-quality Valentines Day roses from your neighborhood Whole Foods (a "fair trade" advocate, by the way), I hope you checked where the flowers were from.  I did: Colombia.  Heritage's Bryan Riley explains that "Americans saved more than $16 million on roses last year thanks to U.S. trade policy toward Colombia.... As Valentine’s Day approaches, with Mother’s Day not far behind, it is a good time to consider the benefits of the proposed U.S.–Colombia Free Trade Agreement not just for U.S. flower buyers but for the Colombian workforce and U.S. exporters as well."

• Don Boudreaux and David Henderson refute Ian Fletcher's ridiculous claim that, while American manufacturing is at an all-time high and remains the world's largest by value, the problem is that the sector just ain't growing fast enough.  Next up, Fletcher will argue that whether protectionism is idiotically self-destructive depends on what your definition of "is" is.  Seriously.

• Keith Hennessey provides a detailed analysis of the President's allegedly pro-trade statements before the US Chamber of Commerce and arrives at a depressing conclusion that some of us have known for a while now: "This sounds like a free trade agenda, or at least a pro-trade agenda, which would be good from a President whose party often leans heavily toward protectionism. The problem is that the U.S. already has trade agreements with Panama and Colombia. The President is in reality saying that he is undoing those deals. He also appears to be saying that 'unprecedented support from … labor [and] Democrats …' is a precondition to further progress on free trade."  Thus, we're doomed.

• Here's a telling update on that sketchy Chevron-Ecuador dispute that I mentioned a few weeks ago (and further proof that third-party dispute settlement of investment disputes is not as horrible and pernicious as some trade skeptics breathlessly allege).  The Hague is still reviewing the case, but the domestic court has ordered Chevron to pay billions.  And guess who really wins big from the domestic ruling: "The court also ruled that Chevron should pay the Amazon Defense Front, a coalition formed by the plaintiffs, an additional 10% in damages, or about $860 million. The judgment says the amount of the damages could be doubled if Chevron doesn't apologize publicly to plaintiffs by advertising in the next 15 days in newspapers in the U.S. and Ecuador.  Pablo Fajardo, an attorney for the plaintiffs, said his team was still reviewing the 200-page document and couldn't give a full opinion until Tuesday. He said that although he didn't rule out the possibility of appealing to ask for a higher amount, the fact that the judge issued a ruling favorable to the plaintiffs was a 'very positive step.'  Last summer the plaintiffs asked the court for $113 billion in damages."  Ahh, social justice.

• The Economist has a fascinating cover story on a new technology called "3D printing" and how it could totally revolutionize manufacturing.  After reading it, ask yourself this: "Is it really smart for the White House to pin the hopes of America's economic recovery on a dramatic increase in manufacturing employment?"

• I kinda pity Randy Erwin, the founder of the "Buy American Challenge."  I mean, the guy seems well-intentioned and, unlike most anti-traders, he's advocating a purely voluntary import embargo (rather than one produced by political lobbying and enforced by government coercion).  Nevertheless, he's still really, really misguided, as Don Boudreaux and Mark Perry demonstrate.

• The NYT reports that "Over the last decade, the [USDA's Market Access Program] has provided nearly $2 billion in taxpayer money to agriculture trade associations and farmer cooperatives. The promotions are as varied as a manual for pet owners in Japan and a class at a Mexican culinary school to teach aspiring chefs how to cook rice for Mexican consumers. Money also went to large farmer-owned cooperatives like Sunkist, Welch’s and Blue Diamond, which grows and sells almonds. Combined, the three companies had over $2 billion in sales in 2009."  Awesome.

• China's now the world's #2 economy (by country).  Razeen Sally explains in the WSJ that, if China ever wants to become a world leader, it needs to ditch the childish protectionism.

• Harvard professor Martin Feldstein provides a laundry list of reasons why the President needs to dramatically lower the corporate tax rate if he's serious about re-invigorating the American economy.  And he drops this little nugget: "Eliminating every loophole in the taxation of domestic corporate profits identified by the administration's own Office of Management and Budget would raise less than $60 billion of extra revenue in 2011, enough to lower the combined federal-state corporate rate to 35%. The U.S rate would still be higher than in every other country but Japan, and a full 10 percentage points higher than the average in other industrial OECD countries."  

• This is hilarious.  (In humor lies truth.)

Happy V-Day, everyone.

Tuesday Quick Hits

A lot of very interesting things have come across my (virtual) desk over the last few days, and many of them support the things I've been discussing here over the last few months.  I highly recommend reading some, if not all, of these in full:

• Harvard's Edward Glaeser discusses why the "morality" of modern economics is rooted in human freedom (h/t Fred Smalkin).  In so doing, he underscores one of the big themes of Dan Ikenson's and my new paper on the broader case for free trade, its inherent morality: "Improvements in welfare occur when there are improvements in utility, and those occur only when an individual gets an option that wasn’t previously available. We typically prove that someone’s welfare has increased when the person has an increased set of choices. When we make that assumption (which is hotly contested by some people, especially psychologists), we essentially assume that the fundamental objective of public policy is to increase freedom of choice. Our opponents have every right to contend that economists are unwisely idolizing liberty, but they err by saying we sail without a moral North Star. Economists’ fondness for freedom rarely implies any particular policy program. A fondness for freedom is perfectly compatible with favoring redistribution, which can be seen as increasing one person’s choices at the expense of the choices of another, or with Keynesianism and its emphasis on anticyclical public spending. Many regulations can even be seen as force for freedom, like financial rules that help give all investors the freedom to invest in stocks by trying to level the playing field.  The belief in freedom does, however, create a predilection for human interaction and trade.  As [Milton] Friedman wrote, 'The most important single central fact about a free market is that no exchange takes place unless both parties benefit.' For many economists, defending free trade isn’t just about gross domestic product; it’s fighting for core values of freedom and human interdependence.  As [Adam] Smith said, 'To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation.'  Economists are often wary of moral exhortation, as many see the harm so often wrought by arguments that are long on passion and short on sense. But don’t think that our discipline doesn’t have a moral spine beneath all the algebra. That spine is a fundamental belief in freedom."

• The Economist: based on a rough (but very reasonable and scholarly) esitmate, trade with China has saved American consumers approximately $780 billion(!) between 2001 and 2010.  Chinese President Hu Jintao said it was around $600 billion, and the magazine's back-of-the-envelope confirmation of Hu's claim definitely calls for more research.  Nevertheless, WOW!

• Dallas Fed further confirms what we already knew: China's currency policy is not the primary driver of the US-China current account balance: "Normally, a fast-growing economy such as China would borrow money from the rest of the world instead of lending. An obvious suspect in China’s mounting current account surplus is the fixed exchange rate between its yuan and the dollar. An undervalued yuan makes Chinese products cheaper than those of competitors in international markets. As a result, China exports more than it imports. According to this explanation, yuan appreciation could rebalance the global economy. This argument has at least two flaws. First, the durability of the U.S.–China imbalance is difficult to explain. In order for the exchange rate to affect import prices, those prices can’t adjust.... Although in reality prices cannot change instantly, they do adjust over the long run; therefore, the exchange rate has only short-term effects on import prices and the current account. China has run a significant trade surplus against the U.S. for about 10 years (Chart 2). It is hard to imagine that prices have not fully adjusted to offset the exchange rate after such a long period. Second, an appreciating yuan may only minimally reduce the imbalance. Even in the short run, the exchange rate’s impact on import prices would be quite limited, studies have shown. Exporters usually pass on only a fraction of exchange rate movements when setting prices. About 20 percent of exchange rate changes were reflected in U.S. import prices during the past decade, Federal Reserve economists Mario Marazzi and Nathan Sheets found. Profit margins usually absorb some of exchange rate movement as exporters seek to maintain market share. Additionally, the currency under which import prices are invoiced also affects the exchange rate pass-through. Most U.S. imports from China are priced in dollars, and their prices are fixed in the short run. In this case, depreciation of the dollar against the yuan has no short-run effect on import prices from China."

• The FT's Clive Crook (rightly) dismantles Obama's State of the Union Address (h/t Phil Levy).  He hits on many of the problems with "competitiveness" and "investment" that I've discussed here at length.  My favorite lines: "The metaphor of growth as a race with winners and losers – all that stuff in the speech about Sputnik moments, falling behind, winning the 21st century – is nonsense. Over the long haul, if US productivity rises, so will US living standards. Why should growth in China or India hold back US productivity? No reason at all. Once conditioned to think “productivity” whenever a politician says “competitiveness”, you look at economic policy differently. Winning begins to seem overrated. What exactly do we win, you wonder? Being number one in worldwide production of solar panels would be nice, but how would that raise economy-wide productivity? The key to improving living standards lies not in winning the race to develop showcase technologies, but in accumulating capital, diffusing knowledge and accommodating the disruption that this entails."

• China is starting to experience some pretty significant trade diversion, but (unsurprisingly) very little of the sourcing is heading to the United States: "More than half of international buyers have tended to increase their sourcing from India and Vietnam due to continuous export price hikes from China, according to a recent survey by the Global Sources, a trade information provider.... Workers in Vietnam, however, are said to need twice as much time to finish one task, the Global Sources said. 30% of respondents said they plan to increase sourcing from Thailand. However, export price may not be the polled buyers' sole consideration, for 7% of them are considering increasing imports from countries that have higher production costs than China, including South Korea, Japan, the United States and the European Union."

• Meanwhile, the NYT notices (again) that Chinese inflation may shrink the US-China trade deficit.  Color me shockedtotally and utterly unsurprised.  Although most of this article just updates what we've already known for a while now, I think it's worthwhile to note this passage about the deleterious effects of higher Chinese import prices on US consumers: "The higher Chinese prices will tend to show up mainly in products like inexpensive clothing and other commodity goods in which labor and raw materials represent a bigger part of the final value — rather than in sophisticated electronics like Apple iPads, in which Chinese assembly is only a small fraction of the cost."  In short, the pain will mainly be felt by poorer American consumers and US manufacturers.  Wealthier Americans?  Not so much.  And yet it's the politicians who claim to "care" most about America's poor and the US manufacturing sector - and who demonize America's "rich" - that have for years now been demanding more expensive Chinese imports.  Maybe they're not telling us the whole story, huh?

• WTO Director General Pascal Lamy, channeling Cato's Dan Ikenson, explains in the FT why "Made in China’ tells us little about global trade": "As recently as 30 years ago, products were assembled in one country, using inputs from that same country. Measuring trade was thus easy. 2011 is very different. Manufacturing is driven by global supply chains, while most imports should be stamped “made globally”, not “made in China”, or similar. This is not an academic distinction. With trade imbalance causing friction between leading economies, the measures we use can gravely exacerbate geopolitical tensions at a time when co-operation is more vital than ever."  Good stuff from DG Lamy, but, yes, it should all sound very familiar.  However, I did find this stat to be new and interesting: "Measures we use also change the way trade affects jobs too. Research on Apple’s iPod shows that out of the 41,000 jobs its manufacture created in 2006, 14,000 were located in the US. Some 6,000 were professional posts. Yet since US workers are better paid, they earned $750m, while only $320m went to workers abroad. Indeed, the iPod may have never existed if Apple had not known that Asian companies could supply components, while both Asian workers and Asian consumers would manufacture and buy it. Statistics that measure value added can provide a more reliable way of seeing how trade affects employment."  And speaking of the WTO and trade statistics, the trade body is hosting a big seminar on the subject this week.

• The Heritage Foundation's Anthony Kim explains just how far Colombia has come in terms of economic and political freedom.  Maybe it's time we implemented that FTA, huh?

• China expert Lee Miller explains why the conventional wisdom (and hope?) that China's banking sector will be more, ahem, reserved in 2011 may be misguided.  Bizarre stuff.

• America is silly rich and relatively equal.  Also from the NYT's Economix blog comes your chart of the day on global income inequality, which shows that (i) contrary to the breathless claims of certain lefty bloggers out there, the United States is absolutely nothing like Brazil (or other major developing countries) when it comes to income inequality;and (ii) the "bottom 5 percent of the American income distribution is still richer than 68 percent of the world’s inhabitants" and "about as rich as India's richest."  Check it out:

• The always-great Becker-Posner Blog has more on inequality here (and here).  It's nothing groundbreaking, but definitely worth a read.

• More of the same: US manufacturing sector expands for the 18th straight month. Yawn. BUT, there is this little nugget: "The ISM Employment Index increased in January to 61.7%, which is the 16th consecutive month of growth in manufacturing employment and the highest reading for the ISM manufacturing employment index since April of 1973."  Don Boudreaux has more insights, including a link to a neat new story from MSNBC on the state of US manufacturing, here.

That should keep you busy for a while.  Now get to reading!

Monday Quick Hits

There have been several interesting developments over the last few days, so let's get right to them:

• Eight weeks after the 2010 mid-term elections, the Obama administration, ahem, boldly announces that it has begun the process of looking into whether it will maybe start letting Mexican trucks onto US roads again.  The Transportation Department proposal is here.  The Teamsters are "deeply disappointed," and Mexico sounds pleased, so this is looking pretty good.  But let's be very clear here: nothing has changed yet.  Mexican trucks are still banned from US roads, and $2.4 billion worth of US exports will continue to face retaliatory Mexican tariffs - as they have since 2009 - until this agreement is finalized.  Today, USTR Ron Kirk and his Mexican counterpart Bruno Ferrari optimistically announced that it could be at least 4-6 months before the program begins (it apparently needs congressional approval), and Mexico will stop adding or removing products from its retaliation list.  Nevertheless, the tariffs will remain: "Once we have dates, time frames and the manner in which this Nafta mandate will be met, we'll present and discuss the process to lift the retaliatory tariffs," Ferrari said.

• Are things looking up for the US-Colombia FTA's prospects in the 112th Congress?  According to Inside US Trade, ranking member of the House Ways & Means Committee Sander Levin (D-MI) and Senate Finance Committee Chair Max Baucus (D-MT) separately have announced trips to Colombia over the next few weeks.  These visits will definitely give both top Democrats (and any others joining them in body or spirit) a new excuse to support the FTA, despite strong resistance from US labor unions and many, if not most, of their fellow Dems.  As you may recall, similar trips to Peru back in 2007 gave Levin and former Ways & Means chairman Rangel cover to support the US-Peru FTA.  On the other hand, supporters of the US-Colombia FTA shouldn't get too excited - the FTA remains organized labor's most-hated pending agreement; the White House still hasn't gotten behind the agreement (although the Daley Chief-of-Staff pick is a reason for optimism); and Levin and Baucus are some of the Democratic Party's more reasonable folks on trade, especially trade agreements that would boost automobile and beef exports.  Nevertheless, the Levin/Baucus trips are a good thing, and maybe, just maybe, they're a sign that the Democrats' absurd resistance to the Colombia FTA is fading.

• Martin Feldstein, former chair of Reagan's Council of Economic Advisors recently predicted that the US-China current account deficit should disappear in the next few years.  Today, China announced its 2010 trade balance, and its surplus is dramatically smaller than anyone was expecting.  "Chinese exports increased 31.3 percent last year as global demand recovered, but the extent of China's outperformance was underlined by a 38.7 percent jump in imports, fueled by its voracious appetite for oil, iron ore and other commodities." As a result, "China's full-year [2010] trade surplus was 38 percent lower than its pre-crisis peak of nearly $300 billion in 2008."  I've repeatedly cautioned that global supply chains now limit the predictive value of these trade stats.  Nevertheless, it appears - on the surface at least - that some changes are afoot.

• The Daily Caller reports that the United States is missing out on being a big exporter of, wait for it, horse meat.  But because of a 2007 USDA rule that effectively banned the slaughter of horses, the 1 billion global consumers of horse meat get their food elsewhere.  Oh, and here's a real shock: the "saved" American horses apparently suffer far worse fates than the slaughterhouse, and they're causing serious environmental problems in several Western states.  And the Law of Unintended Consequences wins again.

• Politico: "Leaders of 1,655 companies and associations sent letters this week to ever member of Congress pressing for passage of all three pending free trade agreements (Korea, Colombia, Panama). House letter: http://politi.co/gGKSkb Senate: http://politi.co/gsIam3."  Me: please note the letters' typical overemphasis on exports.  Sigh.

• New research shows that bank deregulation had a significant, beneficial effect on income inequality.  Says Cato's Mark Calabria: "[W]e need to examine banking regulation/deregulation as it actually occurs and is implemented, and not how we believe some all knowing, benevolent government would impose it. The odds seem to me that the more extensive is banking regulation, the more likely it is to be captured by economic elites and narrow interests."

That's all for now.  Happy reading.  (And Go Ducks.)

Monday Quick Hits

Lots of interesting stuff went down while everyone was vacationing.  Here's a quick rundown:

• The Wall Street Journal's editorial board explains how a US antidumping order on magnesium has destroyed American manufacturing jobs in industries that rely on the metal to produce downstream inputs.  The money lines: "In 2005, at the behest of America's monopoly magnesium producer—U.S. Magnesium of Utah—the Commerce Department imposed antidumping duties on magnesium from Russia and magnesium alloy from Russia and China. Five years later magnesium alloy is in short supply in the U.S., leading to much higher prices than in the rest of the world and a crisis for die casters, alloy producers and recyclers.... In a December 6 letter to the ITC, Arkansas Congressman Mike Ross spelled out the problem: 'U.S. manufacturers pay $2.30 per pound on average for magnesium alloy while manufacturers in Mexico, Canada and Europe pay $1.50 per pound and Chinese manufacturers pay $1.36 per pound.' Die casters who have tried shifting to aluminum have lost orders to overseas producers."  Cato's Dan Ikenson piles on by citing the magnesium case as a prime example of US trade policy's cognitive dissonance.

• The Chinese are starting to really hammer home the fact that, as your humble correspondent keeps screaming aboutcalmly mentioning, global supply chains have rendered old school trade stats obsolete tools for measuring actual tradeflows and the efficacy of existing trade policies.  Most of the information cited here is old news for readers of this blog, but here's a new one: "Sheng Guangzu, head of China's General Administration of Customs, told Xinhua in an interview in April that much of China's trade surplus was 'transferred' from foreign-funded enterprises operating in China. In the first 11 months this year, exports of foreign-funded enterprises totaled 779.14 billion U.S. dollars, accounting for 54.7 percent of China's total exports, according to China's customs authorities.  The data also showed that, during the same period, foreign-funded firms generated 112.51 billion U.S. dollars of trade surplus, accounting for 66 percent of China's total surplus."

• In case you missed it, GMU's Walter Williams deftly explains that (a) trade is among individuals, not countries, and (b) free trade is by definition "fair trade."

• The WSJ's Liam Denning discusses why "national rivalry always lurks around an industry as dependent on government support as renewable energy."  His first example: the heavily subsidized United Steelworkers's "Section 301" petition against Chinese green subsidies.  Sounds familiar, eh?

• Heritage's Jim Roberts gives us a quick reminder that free trade is a prime contributor to the dramatic increase in all Americans' living standards over the last 50 years.

• Behold, the stunning incompetence of the federal government: "The U.S. Government Accountability Office said it could not render an opinion on the 2010 consolidated financial statements of the federal government, because of widespread material internal control weaknesses, significant uncertainties, and other limitations.... [Acting Comptroller General] Dodaro also cited material weaknesses involving an estimated $125.4 billion in improper payments, information security across government, and tax collection activities. He noted that three major agencies — the DOD, the Department of Homeland Security, and the Department of Labor — did not get clean opinions. Nineteen of 24 major agencies did get clean opinions on all their statements."

• Cato's Dan Griswold destroys the canard that US multi-nationals corporations' overseas hires are responsible for high domestic unemployment.  In short, companies follow economic growth, not lower wages; and the US still benefits when they do. I'd only add that we'd be even better off if the US adopted more pro-growth tax and regulatory policies.  (More on that point in a great IBD editorial here.)

• It's time for the US to stop futzing around and implement the US-Colombia FTA.  Seriously.

• The US manufacturing sector is cranking.  Fearmongering American politicians were shockingly unavailable for comment.

• A free trader's new year's resolution.

• This is absolutely hilarious (mild content warning).  So is this.

Enjoy.