Smart Power

One of the things not covered in my Cato Institute paper on US natural gas and crude oil exports was the potential geopolitical implications of the US fossil fuel boom. This omission was due mainly to size constraints and the fact that the paper was intended to focus on the economic and trade issues raised by the United States' restrictive export licensing systems for gas and oil.  That doesn't mean, however, that these systems - and the de facto bans on US gas/oil exports that they effectuate - don't raise important foreign policy concerns, as noted in this recent article from US News and World Report:

[I]f the U.S. is allowed to export to Europe... countries such as the Czech Republic, Hungary, and Greece gain access to alternate, more stable sources of natural gas, loosening Russia's vice grip on the European natural gas supply. Incidentally, the U.S. has already played a role shifting the relationship between energy suppliers and importers in Europe.... The shale gas revolution, which has dramatically increased domestic supplies of natural gas in the United States has all but eliminated the need for imports. That, in turn, has rerouted supplies originally headed for U.S. ports to Europe, helping to ease price pressures there.

U.S. exports of natural gas could also play a role in increasing the bite of sanctions levied on Iran over its nuclear program. Turkey currently depends on Iran for 20 percent of its natural gas imports. But as with Europe, if new sources of gas imports are made available, Turkey could reduce its reliance on Iran. That would, in turn, cut into the revenues reaped by the Iranian regime.

In Asia, exporting natural gas to energy hungry allies such as Japan and South Korea could help solidify diplomatic relations. In the wake of the Fukushima Daiichi nuclear disaster, Japan—already the top importer of natural gas—has shut down nearly all of its reactors, making the country much more dependent on fossil fuels such as oil, coal, and natural gas. With high natural gas prices in Asia, Japan is looking for anything cheaper. At rock bottom prices at home, U.S. suppliers can beat the international prices and make a good profit even with expensive liquefaction and shipment....

Many other people from a wide range of political and policy perspectives have echoed these conclusions: scrapping our archaic oil and gas export restrictions and thereby permitting such exports to Europe and Asia is a geopolitical no-brainer for the United States, especially in this new "sequestration" era of tight federal budgets and reduced US spending on more traditional forms of national defense.

And it's for this reason that the following stories from the last week have me scratching my head (if not banging it against my desk):

• UK's Telegraph: "With the worst snow conditions in the country since 1981, it’s worrying, to say the least, that gas supplies are running low.... Because of a misguided faith in green energy, we have left ourselves far too dependent on foreign gas supplies, largely provided by Russian and Middle Eastern producers. Only 45 per cent of our gas consumption comes from domestic sources. All it takes is a spell of bad weather, and the closure of a gas pipeline from Belgium, to leave us dangerously exposed, and to send gas prices soaring. Talk of rationing may be exaggerated, but our energy policy is failing to deal with Britain’s fundamental incapacity to produce our own power."

• Bloomberg: "China agreed to double oil supplies and supported construction of a natural gas pipeline from Russia under 'breakthrough' agreements during President Xi Jinping’s first state trip abroad. OAO Rosneft, the world’s biggest traded oil producer by output, will borrow $2 billion from China Development Bank Corp., backed by 25 years of oil supplies, under accords signed yesterday in the Kremlin. The Russian company also offered China National Petroleum Corp. access to Arctic resources, and OAO Gazprom said it plans to conclude a 30-year gas-supply contract to China by year-end."

To recap: as the Obama administration continues to stall pending natural gas export license applications and has (apparently) no intention of reforming our current, problematic systems for gas or oil, US allies in Europe and Asia are desperate for access to cheap, stable energy supplies, and China's insatiable appetite for oil and gas has just pushed them ever-closer to Moscow.

So much for that "smart power," eh?

UPDATE: Mark Perry has more on the UK's major energy mess. If only they had a friend who could help.

Giving Obama's Free Trade Legacy Some Much Needed Perspective

Over the last several weeks, Americans have been treated to a pretty constant stream of news stories applauding President Obama's new found affection for free trade.  The impetus for this fawning coverage is obvious: since the end of 2012, the Obama administration has repeatedly thrust trade - in particular the inclusion of Japan in the ongoing Trans-Pacific Partnership talks and the launch of FTA negotiations with the EU - into the spotlight.  The administration does deserve some credit for finally, after four years of depressing inaction, putting the United States back in the free trade game (a game we not only used to dominate, but also kinda, you know, invented), but the media reaction to these announcements - i.e., assuming the FTAs' timely completion and all-but-anointing President Obama to be the greatest free trade president in the history of anything ever - has been utterly ridiculous.  Fortunately, Cato's Dan Ikenson has finally had enough and today does his best Winston Wolfe impression by throwing some much-needed cold water on the media's coronation party.  First, he quickly recites the administration's actual record on trade so far:

[B]efore anyone awards the president the Nobel Trade Prize for a job yet done, consider this: in four-plus years, this administration has concluded zero trade agreements, while launching 13 WTO cases against various trade partners. For 50 months, enforcement and domestic protectionism—not liberalization—have dominated the trade agenda....

Yep.  Next, Ikenson mentions another, ahem, minor hurdle to completing ambitious trade agreements in a rapid fashion - our totally unnecessary lack of a lead trade negotiator:

For starters, wouldn’t the president have delegated someone capable and experienced to take ownership of the trade agenda if he were really committed to leaving a trade policy legacy? U.S. trade representative Ron Kirk announced more than one year ago that he would be leaving his post early in a second Obama administration. Yet there is nobody vetted and ready to take the reins of trade policy. Kirk’s official resignation came at the end of last month—though he has been hanging around to help out on account of … “sequestration.”

The most prominent name floated for U.S. Trade Representative has been the OMB’s Jeff Zients, the person most closely associated with President Obama’s proposal to subsume the USTR under the enforcement-centric Commerce Department—again, not exactly the substance of trade legacy-building. Members from both parties in Congress have demanded a better candidate if the president expects his trade agenda to be taken seriously.

I'd be remiss not to note that the Obama administration also had a really tough time finding Kirk back in 2008-09 because at least one candidate (rightly, in retrospect) saw that trade policy would be a low priority in the Obama White House and thus turned the job down.  But I digress...

Back to the current situation.  Ikenson then points out the myriad landmines in the TPP and EU deals themselves:

Accomplishments, not rhetorical intentions, should serve as the basis for our judgments. Anyone can announce initiatives. President Obama is quite proficient at reciting litanies of initiatives. But it remains to be seen how he handles the situation when the deals require his confronting allied interests and dismantling their protectionist perches. In fairness, the administration’s trade negotiators have been working hard toward a Trans-Pacific Partnership agreement with 10 Pacific-rim nations. But let’s see where this goes before we start writing history. There’s still a lot of ham left on that bone.

The administration has verbally committed to completing the TPP negotiations by the end of this year and the just-announced Transatlantic Trade and Investment Partnership negotiations with Europe by the end of next year—both virtual impossibilities given where things stand in those negotiations and between the White House and Congress. So we already have a credibility problem.

Both sets of agreements are likely to include provisions that penetrate deeper than usual into the domestic regulatory space of all countries involved. Understandably, this is generating resistance—particularly to U.S. demands for extra investor and intellectual property protections. Some of the groups that were instrumental in defeating SOPA and PIPA legislation last Congress are beginning to mobilize in response to concerns that the TTIF could be a backdoor to IP-based restrictions that affect internet use and data sharing, among other issues. U.S. negotiators are making serious demands on matters they claim to be central to 21st century trade, yet they appear unwilling to give ground on the 18th century protectionism still afforded U.S. textile and footwear producers.

I bring attention to these details not to pick a fight about Obama’s trade record, but to emphasize that facts matter. So do characterizations. Readers should know about growing resistance to U.S. demands that threaten to prolong or derail the TPP and TTIP negotiations. Readers should know that if the talks break down or produce less ambitious outcomes, that there is probably more to the story than the official U.S. account, which will pin the blame on foreign intransigence. Readers should know that the U.S. government engages in all sorts of protectionist policies and then relies on media to characterize trade as a zero-sum contest between U.S. producers and foreign producers. Under this rubric, U.S. protectionism is presented as a necessary response and it becomes patriotic to support our own trade barriers—the very protectionism that hurts us the most....

Furthermore, the administration has barely begun to do anything substantive with respect to securing Fast Track negotiating authority from the Congress, which it will need to get any trade agreements approved by the legislature. Congress is largely in the dark about what the administration has been negotiating in the TPP. The administration’s cavalier attitude toward this potentially arduous process betrays either a lack of understanding or concern that Congress, if it grants that authority, will attach all sorts of conditions that may render moot the past couple years of negotiations on the TPP....

AEI's Claude Barfield also deftly details the many serious hurdles facing the TPP and the TTIP - definitely worth a read. (Conclusion: "The administration is misguided in bowing to the EU’s frantic plea for a crash, two-year timetable for FTA negotiations. Such a course will fail — and of much greater significance, it may well imperil a successful conclusion of the strategically and economically vital TPP negotiations."  Ouch.)

Finally, Ikenson explains what's really driving President Obama's new embrace of trade, and it's hardly flattering:

Alas, President Obama has not found religion on trade after all. He’s merely run out of options. The TPP was motivated from the outset as a means to regain some of the influence—on policy and institution-building in the Asia-Pacific—presumed to have been lost to China, as America toiled in Iraq and Afghanistan. Persistently high unemployment, despite four years of stimulus, subsidies, and bloated federal spending, had finally led the administration to its last resort: trade liberalization.

So there you have it. A president who has settled on trade agreements as a last resort to spur investment and create jobs shouldn’t inspire too much confidence that he’s in it for the long haul and that he’ll be willing to make the tough political decisions ahead, particularly if the economy starts to improve and his affection for trade agreements proves fleeting.

Oof.  I'd say that Ikenson's bitter assessment is pretty much a pitch-perfect review of President Obama's real free trade legacy (so far, at least), and it's either telling or sad that the media can't seem to grasp these easily Google-able facts.  Indeed, foreign media reports of the administration's pre-negotiations with Japan regarding its entry into the TPP hardly inspire confidence in the President's resurgent free trade bona fides:

Japan plans to agree to let the United States maintain its automobile tariffs for a certain period during preparatory talks for joining the Trans-Pacific Partnership free-trade negotiations, sources said Tuesday.

As the United States fears a possible surge in Japanese auto exports to the U.S. market under the TPP, Japan is set to agree that the United States will be allowed time to eliminate the tariffs in an attempt to extract a U.S. concession over Japan’s agricultural tariffs once it enters the TPP negotiations, the sources said.

Japan’s participation in the TPP negotiations has been opposed by the U.S. auto industry, as well as by Japanese farming groups fearful of cheaper agricultural imports. Japan currently imposes high tariffs on farm products such as rice and wheat to protect domestic farmers.

The United States currently imposes tariffs of 25 percent on trucks and 2.5 percent on cars.

To summarize: the United States is demanding the maintenance of high tariffs on imported trucks (and lower ones on cars) as the "price" of Japan's entry into free trade negotiations, and in return, Japan will get to keep high tariffs on farm products like rice and wheat.  Such a deal is sadly illiberal but it really shouldn't shock anyone: it's quite similar to the one that the administration worked out for the US-Korea FTA re-negotiation back in late 2010.  But, still, since when does vigorously protecting protectionism permit fawning reports of a president's commitment to free trade?

Seriously, man. What the...?

Thus, all the breathless media coverage of the president's free trade renaissance places the responsible journalists into one of three categories: (i) ignorant dupes fooled by savvy USTR and White House press shops; (ii) hopeless, overly-optimistic Obamaphiles blinded by their love for The One; or (iii) complicit hacks acting as the administration's unofficial PR wing.  None of these is very flattering, but - after comparing the media's Pollyannaish reports with the realities presented by Ikenson, Barfield and other trade experts - there really isn't any other option.

Fortunately, there's always foreign media.

Permitting Oil and Gas Exports Is a No-Brainer

The following entry was cross-posted at the Cato Institute's blog, Cato at Liberty:

Following today’s deadline for interested party comments, the U.S. Department of Energy will begin to consider sixteen pending applications to export natural gas to countries like Japan with whom the United States does not have a free trade agreement.  The issue is a contentious one: energy producers, many other U.S. companies and a large, bipartisan swath of Congress have urged DOE to approve all export license applications, but opposition has materialized among certain domestic consuming industries and environmental groups.  As a result, the Obama administration has delayed consideration of all but one application, and is expected to eventually permit a portion of the remaining exports in an attempt to placate both sides of the debate.

As I explain in a new Cato Institute paper, however, such a Solomonic decision might achieve the administration’s political objectives but will do nothing to fix the fundamental problems raised by U.S. export regulations for natural gas or similar rules for crude oil.  These exports continue to be governed by licensing systems adopted when the United States was a net energy importer and dependent on fossil fuels for energy production – a picture far different from the production, price, and trade realities that exist today due to revolutionary fossil fuel extraction technologies like hydraulic fracturing (“fracking”) and horizontal drilling.  In fact, domestic production of crude oil and natural gas has skyrocketed in recent years, driving down prices, boosting downstream industries, creating ample export opportunities and potentially reversing the United States’ historic position as a net energy importer.  However, our gas and oil export licensing systems – respectively governed by the Natural Gas Act of 1937 and the Energy Policy and Conservation Act of 1975 – continue to treat fossil fuel exports as a rarity and subject them to a long, opaque approval process under which the federal government retains ample discretion to approve or deny most export license applications.

Perhaps unsurprisingly, these outdated systems, and the restrictions they impose on U.S. exports, create a host of problems:

• First, by depressing domestic prices and subjecting export approval to the whims of government bureaucrats, the U.S. licensing systems retard domestic energy production, discourage investment in the oil and gas sectors, and destabilize the domestic energy market. Artificially low prices prevent producers from achieving a sustainable rate of return on the massive up-front costs required to drill and extract oil and gas, and investors lack any assurances under the discretionary licensing systems that domestic prices will not collapse when output increases.  Such concerns have led the IEA to recently warn that U.S. export restrictions put the “American oil boom” at risk.  And contrary to certain politicians’ claims, independent reports show that the exportation of oil and gas would not cause a traumatic spike in prices, thus enabling consumers to continue to benefit from hypercompetitive U.S. fuel and feedstock supplies.

• Second, restricting U.S. gas and oil exports could hurt the U.S. economy. Recent studies indicate that these exports - even in unlimited quantities - would not only benefit U.S. energy producers, but also increase real household income.

• Third, both export licensing systems raise serious concerns under global trade rules.  The General Agreement on Tariffs and Trade (GATT) prohibits WTO Members from imposing export restrictions implemented via slow or discretionary licensing systems like those at issue here.  Moreover, several nations, including the United States, impose anti-subsidy measures (called “countervailing duties” or “CVDs”) on downstream exports (e.g., steel) due to export restrictions on their upstream inputs (e.g., iron). Thus, the crude oil and natural gas licensing systems could lead to anti-subsidy duties on energy-intensive U.S. exports that negate the very price advantages created by the licensing systems – a heightened risk, given that American exporters are increasingly targeted by foreign CVD actions.

• Fourth, current policy contradicts several other Obama administration priorities.  Most obviously, restricting oil and gas exports undermines the president’s National Export Initiative and stands in stark contrast to his full-throated advocacy of other energy exports, particularly renewables like biofuels and solar panels. Moreover, the use of export restrictions to benefit downstream industries contradicts longstanding U.S. policy of using countervailing duties to discourage foreign imports that unfairly benefit from export restrictions on upstream inputs.  Finally, the U.S. government has long opposed restrictive and opaque export licensing systems in WTO negotiations and dispute settlement.  The current U.S. export licensing regulations for oil and gas contradict these positions and undermine multilateral efforts to rein in such restrictions.

If President Obama really wants to develop America’s vast energy resources, grow the U.S. economy, restore some coherence to U.S. trade and energy policy, and avoid potentially embarrassing trade conflicts, he should order DOE to immediately approve all, not just some, of the pending license applications for natural gas and crude oil.  He then should pursue, with Congress, an overhaul of our archaic licensing systems so that they reflect the new American energy landscape and the United States’ position as a global export power.  Such reforms would bolster investment, production, and employment in the oil and gas sector, stabilize the U.S. energy market and benefit the overall economy, avoid the myriad policy and legal problems raised by the current system, and produce a rare moment of bipartisan comity in Washington.  It’s a no-brainer.

Leading from Behind on Trade

Last night, I lamented the last four years of politics-driven US trade policy stagnation and the United States' abdication of its traditional role as the world's global trade leader.  My longwinded essay was admittedly light on links and examples, but did happen to finger Canada as one of several countries that have left the United States in the trade liberalization/leadership dust over the last few years.  Tonight comes a great example of just what I meant:

The Honourable Ed Fast, Minister of International Trade and Minister for the Asia-Pacific Gateway, today announced that Canada will soon begin the first full round of trade negotiations with Japan, the world’s third-largest economy and Canada’s fourth-largest merchandise export market....

Known as the Canada-Japan Economic Partnership Agreement, the first full round of official talks, which will begin on November 26 in Tokyo, will build on the recently released joint study that found a trade agreement between Canada and Japan could translate into gains of up to $3.8 billion a year in Canadian gross domestic product. The study also found that Canadian exports to Japan could increase by as much as 67 percent and lead to gains for Canadian exporters of goods and services, as well as enhanced investment opportunities. That is equivalent to the creation of more than 26,000 new jobs, and expected to bring strengthened bilateral trade opportunities in a variety of areas, including in Canadian agri-food products and natural resources....

In less than six years, the Harper government has concluded free trade agreements with nine countries: Colombia, Honduras, Jordan, Panama, Peru and the European Free Trade Association member states of Iceland, Liechtenstein, Norway and Switzerland. In addition to ongoing negotiations with the European Union and India, Canada recently joined the Trans-Pacific Partnership.

Nine FTAs concluded and three - now four - major agreements under negotiation.  Very impressive.  By contrast, since mid-2007, the United States has concluded precisely zero trade agreements, and is currently negotiating exactly one deal, the TPP.  I've repeatedly criticized the Obama administration for not getting Japan into the TPP when it had the chance, and it was great to see that Governor Romney's team announce that, as President, he'd welcome the country - one of our closest allies and largest trading partners - into the only trade negotiations that the United States is now pursuing.

But, hey, maybe if President Obama gets re-elected, we can just count on the Harper Government to push for Japan's inclusion.

Talk about leading from behind.

New Podcast on TPP (UPDATE: Team Romney Reverses Course, Supports Japan's Inclusion)

The good folks at Coffee & Markets had me on again to discuss international trade stuff.  This time, we went over the Trans-Pacific Partnership negotiations and whether a Romney administration would pursue the same course - on TPP and trade issues more broadly - as the Obama administration.  (As always, I try to be optimistic - really, I do! - but it's hard out there for a free trader these days.)

The full podcast is available to stream or download here.  Enjoy!

UPDATE: From Chris Nelson of the Nelson Report comes excellent news that Team Romney has reversed course on the Governor's earlier (and depressing) skepticism re: Japan's inclusion in the TPP.  Top Romney econ adviser Glenn Hubbard tells Japan's Nikkei[$] that the Governor is very much in favor Japan's participation in the Asia-Pacific FTA:

Q: Can you tell us about Mr. Romney's policies toward Japan and other Asia-Pacific partners? Japan is especially anxious to know what's happening with the TPP.

HUBBARD: I think Gov. Romney fully supports the TPP and Japan's participation in it. He is trying to promote a variety of free-trade initiatives around the world. The present U.S. administration has both neglected more free-trade openings and, frankly, neglected Asia in particular. And I think that's just not something Gov. Romney will do. He's spoken a lot about China, but I think his concern is really the U.S.'s standing in Asia, writ large. And, obviously, Japan is our longest-term ally in the region.

Great news here.  I mean, the China-bashing is nauseating but almost excusable from a purely-cynical political perspective. The Japan stuff, on the other hand, was truly beyond the pale.  Further proof that, China nonsense notwithstanding, a Romney administration would likely be much better for US trade policy than the last three-plus years under President Obama.

Playing with Protectionist Fire

I've frequently cautioned against supposedly free-market Republicans toying with "I'm a free trader but [blank]" protectionism on the grounds that the strategy is misguided on economic, principled and political grounds.  A new web ad from far-left Democrat Tammy Baldwin - who's running for Senate in Wisconsin - really hits this last point home, and shows that Republicans who toy with protectionism are playing with political fire:



There are a lot of substantive problems with Baldwin's anti-China demagoguery, but I'm not going to waste my time re-hashing them here.  Instead, let's just focus on the politics.  The "bi-partisan" measure which Balwdin claims she spearheaded through the House and will "punish [China] for making billions breaking trade rules" is H.R. 4105 - the legally and substantively dubious bill that overturned a US federal court ruling and allows the U.S. Department of Commerce to keep imposing countervailing duties on imports from China and other "non-market economies."  Contrary to Baldwin's claims, however, she didn't really lead the charge on H.R. 4105.  No, that inglorious distinction falls to none other than the bill's sponsor, Ways & Means Chair and sometimes-free-trader Republican Dave Camp (R-MI), who not only sponsored the bill but also, along with his fellow Republican (and mostly-free-trader) Trade Subcommittee Chair Kevin Brady from Texas loudly advocated the bill's passage and ensured its way-too-rapid passage through the U.S. House of Representatives.  Camp even went so far as to get his staff to issue a "fact" sheet which accused us critics of H.R. 4105 of peddling "myths."  As one publication wrote shortly after the House vote:

In the House – where H.R. 4105 was passed on Tuesday by a vote of 370 to 39 – the bipartisan bandwagon was driven by Representatives Dave Camp (R-Michigan), chairman of the House Ways and Means Committee, and Kevin Brady (R-Texas); as well as Sander Levin (D-Michigan) and Jim McDermott (D-Washington).

Baldwin's political fib aside, her ad remains instructive because it shows what Republican "protectionism-lite" breeds: even stronger and more onerous anti-market demagoguery from politicians - usually Republicans' opposition - who typically have no problem taking the protectionism to the next level and now have "bi-partisan" cover to do so.

In this case, Camp's and Brady's strong support for H.R. 4105 helped lay the groundwork for way-more-protectionist Baldwin's first Senate campaign ad.  And given that myriad hackish media reports emerged after the CVD/NME bill became law - here's one crediting campaigning Democratic Senator (and bigtime protectionist) Sherrod Brown for passing the Senate bill and helping save Ohio jobs - it's almost certain that we'll see more campaign ads like Baldwin's, in which anti-trade Democrats use Republican-sponsored China trade legislation to seek a "bi-partisan" advantage over their (mostly) pro-trade Republican competitors through unabashed protectionist pandering.

Thus, the Baldwin ad serves as a cautionary tale for Republican politicians who are tempted to dabble in part-time protectionism for short-term political gain: it might seem like a great, mostly-harmless idea at the time, but it could end up helping their Democrat competition - most of whom have far fewer reservations about going "full protectionist" on the campaign trail - get elected.

(Unfortunately, it doesn't appear that Governor Romney will be heeding these lessons anytime soon.  Sorry, Japan.)

Good News: Canada Joins the TPP, But At What Price?

As expected, the US and Canadian governments announced today that Canada would join the Trans-Pacific Partnership negotiations.  (To get caught up, Peter Clark has some great backstory on the recent machinations.)  First up with the good news was Canadian PM Harper:

Opening new markets and creating new business opportunities leads to jobs, growth and long-term prosperity for all Canadians," said Prime Minister Harper in a statement about the Trans-Pacific Partnership (TPP).

"A TPP agreement will enhance trade in the Asia-Pacific region and will provide greater economic opportunity for Canadians and Canadian businesses."

Then USTR made its formal announcement:

President Obama announced today that the United States and the eight other countries negotiating the Trans-Pacific Partnership (TPP) Agreement have extended an invitation to Canada to join the TPP negotiations, pending successful conclusion of domestic procedures. In addition to the United States, the current TPP countries are Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.

“Inviting Canada to join the TPP negotiations presents a unique opportunity for the United States to build upon this already dynamic trading relationship. Through TPP, we are bringing the relationship with our largest trading partner into the 21st century,” said Ambassador Kirk. “We look forward to continuing consultations with the Congress and domestic stakeholders regarding Canada’s entry into the TPP as we move closer to a broad-based, high-standard trade agreement in the Asia-Pacific region.”

Next steps will parallel those for Mexico, which was also invited to join the TPP negotiations yesterday. The Administration will shortly notify Congress of our intent to include Canada in the TPP negotiations. The notification will trigger a 90-day consultation period with Congress on U.S. negotiating objectives with respect to Canada. We also will publish a notice in the Federal Register seeking public comments.

As I said last night, the addition of the conservative, (mostly) free-market Harper government to the TPP negotiations is undoubtedly a good thing for proponents of of trade liberalization in both countries.  Hopefully its participation will reinvigorate the flagging talks and encourage more countries to jump on the TPP bandwagon.  And, as Heritage's Derek Scissors noted yesterday, Mexico's inclusion is also a very good thing - an important point that I unfortunately neglected to mention in my rush to get into the weeds of the NAFTA partners' negotiating status.  

Speaking of that status, while the benefits of adding Mexico and Canada are clear, what isn't clear at this stage is precisely what Canada conceded to the United States in order to finally - finally - get Washington to sign off on its Northern neighbor's TPP participation.  The Obama administration told Inside US Trade [$] that Mexico (and presumably Canada) would not be able to participate in any way - not even as an observer - until the full 90-day period for congressional consultations had expired, essentially meaning that neither party will join any TPP talks until mid-September or so.

But once they get the all-clear on that front, will there be any limitations on their participation?

As I noted yesterday, the Obama administration last Friday allegedly asked both Canada and Mexico to agree to some pretty onerous procedural conditions before it would agree to let them join the TPP - essentially demoting the Canadians and Mexicans to "second-class" participants.  However, before today's big announcement, Harper surrogatesmade clear that they would in no way accept such a demotion:

Canada and Mexico were told they could join if they agreed to several conditions that ensured new entrants didn’t slow down negotiations. Canada and Mexico could not reopen any agreements already reached among current TPP partner countries – unless these nations agreed to revisit them. And the two nations would not have “veto authority” over what was agreed upon by the original members.

Both countries were also supposed to agree to this before they’d even seen the latest version of negotiating texts.

A Canadian official said Monday there was no way Canada would agree to be a junior, or second-class, member at the talks.

So what exactly did they agree to?  I honestly have no idea, nor do others who are watching Canada's TPP participation very closely.  And when asked about what Canada gave up to join the talks, PM Harper and other Canadian officials weren't entirely clear:

Harper said there were no conditions attached to Canada's entry to the TPP talks when asked if he would put supply management on the negotiating table.

"Canada has not agreed to any specific measures in terms of an eventual Trans-Pacific Partnership Agreement," he said.

"Canada aims, whenever it gets into a trade negotiations, to promote and to protect all of its interests across all the range of industries ... and Canada's record in terms of dealing with those particular issues in trade negotiations under our government has been very strong and that will continue to be our position," he said.

He said Canada would not seek to undo any progress already made by existing TPP partners and that the negotiations were in very preliminary stages. "As in any negotiations, nothing is agreed to until everything is agreed to by all parties."

Canada's accession to the TPP will take a period of time, he said, without giving details....

Gerald Ked, parliamentary secretary to the minister of international trade, reaffirmed on Tuesday that Canada did not give anything away to be part of the talks.

Sounds strong, right?  Well, Harper and Ked appear to be talking mainly about substance (in particular Canada's controversial system of agricultural supply management), not about process (in particular whether Canada is a "full" TPP participant will the same procedural rights as all other countries).  On that front, the Canadians' strong statements are, well, less strong, although Harper is most definitely correct that the agreement is far, far from finished, so Canada's agreement not to harm completed FTA chapters is a very minor concession.

I'm sure that we'll find out about these details in due time.  In the meantime, let's celebrate Canada's and Mexico's entry into the TPP - it was a long and arduous path that required a lot of hard diplomatic work from both US allies (unfortunately).

Now if only we can get Japan on board.

(I know, I know, best to quit tonight while I'm still in a good mood.)

Mexico Joins TPP as a "Second-class" Participant; Will Canada Follow? [UPDATE: Looks Like Canada's In]

The big news of the day was that, as has been expected for the last week or so, Mexico has joined the ongoing Trans-Pacific Partnership negotiations.  USTR formally announced the news this morning: 

President Obama announced this morning that the United States and the eight other countries negotiating the Trans-Pacific Partnership (TPP) Agreement have extended an invitation to Mexico to join the TPP negotiations, pending successful conclusion of their domestic procedures. In addition to the United States, the current TPP countries are Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.

“We are delighted to invite Mexico, our neighbor and second largest export market, to join the TPP negotiations,” said Ambassador Kirk. “Mexico’s interest in the TPP reflects its recognition that the TPP presents the most promising pathway to boosting trade across the Asia Pacific and to encouraging regional trade integration. We look forward to continuing consultations with the Congress and domestic stakeholders as we move forward.”

After Mexico expressed its interest in joining the TPP last November, the United States briefed Mexico about the status of the TPP negotiations and the high standards and objectives that the TPP countries are seeking in the agreement. The United States also discussed with Mexico its ability to negotiate on issues that are a priority for the United States in the TPP. Mexico has assured the United States that it is prepared to conclude a high-standard agreement that will include issues that were not covered in the North American Free Trade Agreement (NAFTA).

Conspicuously missing from today's announcement was any mention of Canada, the other NAFTA signatory that expressed interest in joining the TPP - and has been furiously lobbying for it - at the same time as Mexico back in November 2011 (and shortly after Japan made a similar request).  As I noted back in April, it had become quite clear that the United States was blocking Canada's entry into the TPP, but rumors began swirling last week that the accession of both NAFTA partners was possible during this week's G20 summit, leading some to fearlessly predict that Canada would be joining Mexico in the TPP this week.

Those predictions clearly haven't come true (yet), but after learning the stringent negotiating conditions that the Obama administration demanded Mexico and Canada accept before agreeing to let them join the TPP negotiations, I gotta say that I really can't blame the Canadians for balking.  According to Inside US Trade [$], the Obama administration essentially demanded that the two countries accept "second-class" status in the negotiations before the US government would let them join.  In particular:

Last Friday (June 18), the Obama administration sent a letter to both Canada and Mexico that made clear that the U.S. could support both of them joining the talks if they agreed to at least two conditions. These conditions appear designed to ensure that these potential new entrants do not slow down the pace of the negotiations.

The first condition stipulated that Canada or Mexico would not be able to reopen any agreements that have already been reached among the current nine TPP partners, unless those nine members agreed to revisit something to which they had previously agreed, sources said.

One source said Canada and Mexico would have to agree to this condition without even having seen the negotiating texts in their current states.

In addition, the letter made clear that Mexico or Canada, if they were to join, would not have "veto authority" over closing out chapters in the future. In essence, this means that if the nine original members reached agreement in a chapter, Canada and Mexico would have to go along with it, one source said.

This source said that, in essence, this condition means that Canada and Mexico would be something less than full negotiating partners if they were to join.

The US letter raises concerns on several levels.  Procedurally, it's clear that Canada and Mexico would have less negotiating authority than all other TPP participants with respect to completed and future FTA provisions.  While, as noted below, the TPP's extremely-unfinished state limits the impact of the former issue (even though that had to be agreed sight-unseen!), the latter issue could be significant where, for example, all TPP partners agree on FTA text that would disproportionately benefit themselves and disproportionately harm Mexico or Canada.  Such limitations could not only hamstring Canadian and Mexican negotiators on these and other FTA provisions (kinda hard to demand concessions when everyone knows that you can't really hold up the agreement if you don't get your way), but also create serious political pain at home.  Just how do you explain to domestic constituents that you are absolutely powerless to prevent their pet issues from being on the TPP chopping block?  Would the United States ever agree to such conditions? (Stop laughing.)

On principle, the US demands are just as unpalatable - if not more so.  As noted above, Canada and Mexico requested admission to the TPP more than eight months ago, but the United States is only now agreeing to consider each nation for admission and is using time constraints as the primary reason for imposing onerous negotiating restrictions on each nation.  If the United States had agreed to admit Canada and Mexico back in November when they first requested it, the negotiations would've been far less advanced, and such limitations would have been groundless.  (And it's not like admission to the TPP automatically requires a long, drawn-out process.  For example, Malaysia, which unlike Canada and Mexico does not have an FTA with the United States, requested admission to the ongoing negotiations in 2010 and was admitted very shortly thereafter.)  In short, the United States needlessly delayed Canada's and Mexico's admission for eight months, and then demanded that each country accept "second-class" status because the negotiations were too far along.

Talk about chutzpah.

Perhaps worse is the fact that, even though the TPP parties have been going at it since late 2009, the negotiations really aren't all that advanced.  And as Greg Rushford recently explained in a must-read piece on the precarious state of the TPP, US negotiating positions are partly to blame for the TPP's slow pace:

Meanwhile, US trade negotiators in the TPP have been playing small ball, acting as if Uncle Sam can continue to get away with just about anything. One veteran trade observer calls the American game: "ad hoc mercantilism." You don't have to look far to see why.

New Zealand is being asked to reform its pharmaceutical-procurement practices (which it really should), while being informed that there will be no talk --- at least before the Nov. 6 U.S. vote --- of giving the Kiwis more access to protected American dairy markets. The U.S. has informed the Australians that Uncle Sam is not interested in talking about increasing Aussie access to U.S. sugar markets. The Canadians are pressed to demonstrate their willingness to dismantle some of their protectionist agriculture schemes as one price of entry into the TPP talks. Can anyone imagine the reaction in Washington, should the Canadians say that to prove their good faith, the Americans should first agree to make the U.S. farm program more market-oriented? But Washington doesn't mind telling Ottawa such things.

There's even talk that Obama has positioned himself to be the anti-smoking advocate, by proposing that cigarettes be excluded from tariff cuts in the TPP --- while the same Obama wants to promote the export of U.S. tobacco leaf, an obvious sop to voters in the politically important battleground states of North Carolina and Virginia. While it's difficult for outsiders to know how serious the president is on tobacco issues, the White House pressures on Vietnam and Malaysia are at least transparent, if embarrassing.

The Vietnamese (and Malaysians) are being bullied --- there's no better word for that --- into accepting a complicated and economically unwise scheme where they would agree to buy American yarn and fabric to make apparel --- if they have any hopes to get around high U.S. tariffs on imported clothing and footwear.

Meanwhile, Obama is demanding that Prime Minister Nguyen Tan Dung reform that Southeast Asian country's state-owned enterprises. The Vietnamese agree that their SOEs need long-overdue reforms to make them more transparent and market-oriented. Still, imagine the political heavy-lifting required to restructure nearly 40 percent of the Vietnamese economy. But while he asks a lot of Hanoi, the American president doesn't like being asked to cut tariffs on clothing that isn't made in America anyway.

Barack Obama was 13-years old when Hanoi won the Vietnam War in 1975. Does the president really understand how determined the Vietnamese can be, when their core interests are involved?Today, Prime Minister Dung has the welfare of more than two million Vietnamese clothing and footwear workers to consider. Many of these people are women who come from poorer parts of the country --- and their prime minister is supposed to sell them out to please the U.S. textile lobby? U.S. Trade Representative Ron Kirk was born in 1954, the year the Vietnamese Communists defeated the French in the battle Dien Bien Phu. Mr. Kirk has said that Vietnam is only a "small country" that will give in to U.S. pressure in the TPP. Perhaps he will be proven right. Still, does the U.S. trade negotiator appreciate that history suggests otherwise?

The U.S. insistence on ad-hoc mercantilism --- making demands upon other countries to summon the political will to open their markets, while stonewalling suggestions the Americans might do more of the same --- explains why the TPP process is nowhere nearly ready to be completed by the end of this year.

Yet the United States is proposing significant procedural conditions on Canada's and Mexico's TPP admission to ensure that the nations "do not slow down the pace of the negotiations."

Seriously, how much slower can they get?

Despite these concerns, Mexico has apparently agreed to the United States' conditions and will now join the ongoing negotiations.  Good for them, although I do wonder whether the pressure of hosting the G20 summit and the mounting expectation that Mexico would join the TPP were just too much for the Calderon government to resist.  On the other hand, the conservative Harper government - and its long history of butting heads with the, ahem, less-conservative Obama administration - has yet to cave to the United States' demands and has instead merely expressed "delight" in being offered a chance to join the talks.  So one of the United States' biggest trading partners and closest allies (and one of the world's better trade liberalization proponents) remains excluded from the only proactive US trade liberalization effort currently ongoing.

"Delightful," indeed.

Certain TPP-watchers, like Canada's Peter Clark, tell me that "it ain't over till it's over," and that Canada could still end up a TPP participant before the G20 adjourns.  Canadian news reports echo Clark's sentiments and suggest that a big Canadian announcement will arrive tomorrow (Tuesday) morning.  I'll believe it when I see it, but there's simply no question that free-market Canada's entry - in any capacity - would be a welcome boost to the flagging negotiations (if only Japan were as close).  But if Harper and Obama leave Cabo San Lucas without any formal TPP announcement, it would be extremely difficult to blame Canada for not wanting to bow to the United States' unreasonable demands.

[UPDATE: The Wall Street Journal tweets Tuesday morning that "Canada's Invitation Into TPP To Be Announced Later Tuesday - Source".  Good.   More to come, I'm sure.]

VIDEO: Six Former USTRs Speak Frankly About US Trade Policy

CSIS held a cool event last week with six former US Trade Representatives speaking about US trade policy.  The whole video is posted below, and I highly recommend a full viewing for anyone who's interested in better understanding US trade policy (especially you foreigners out there who don't obsess over it like I do):

If you don't think you have time to view the whole video, AEI's Claude Barfield provides a nice summary on his organization's blog of some of the USTRs' more interesting points.  The title of the post - "Why the Doha Round is dead and much more" - gives a bit of the game away, but here's the more-robust accounting:

First, there was almost unanimous agreement that the Doha Round is dead and the US and other major trading nations should move on. Coming from fervent supporters of the WTO, this judgment is an important message for the trade community, and mirrors the judgment of the US business community. Only Carla Hills, the most dedicated multilateralist, expressed misgivings about jettisoning Doha negotiations.

Of more immediate interest, the group had much to say—partly in response to high interest from the audience—on the only serious negotiations now on the table: the nine-nation Trans-Pacific Partnership Agreement. The Obama administration wants to conclude these negotiations this year, but the USTRs all doubted this was possible. The question that has arisen then is what to do about the desire of Canada, Mexico, and Japan to join the negotiations. At a trilateral summit this past week, both Canadian PM Harper and Mexican President Calderon pressed Obama hard on this decision—with inconclusive results.

Interestingly, the USTRs almost unanimously supported the quick inclusion of both nations into the negotiations (on Japan there was more skepticism that the political situation in Japan itself would allow entrance this year). The group took this position for two reasons: one, to their credit, the trade leaders view the TPP not only as an economic agreement but also as part of a larger US diplomatic push to retain leadership in the Asia-Pacific. From this, they are convinced that only with the heft that will come from additional large economies (Canada, Mexico, Korea, and later, Japan) will the TPP emerge as a real vehicle for a trans-Pacific economic architecture. The administration will have to bite the bullet and respond over the next few months. It is hard to know what weight the USTRs collective judgment will have—but if the president does respond affirmatively he will clearly have this group at his back.

One final partisan note: at the end of the session came a political question: to wit, why had trade policy virtually stopped when the Obama administration came into office. Barshevsky gave a general answer pointing to the economic crisis in 2009. Fair enough, but what was missing here and often in these sessions is a clear statement of political reality: on trade issues, a Democratic president for at least two decades has faced a deeply divided party. In general, a majority of House Democrats oppose new trade liberalizing agreements. A Republican president, on the other hand, in general has a united party on trade, backed strongly by the business community.

This makes a huge difference on White House calculations—not least when elections loom every two and four years.

Barfield then added one more interesting point over email:

[N]ot a single USTR supported the president’s reorganization plan — or at least folding USTR into Commerce or a new department.

Ouch.  I'm happy to note that the esteemed USTRs' consensus views closely mirror my own, less-esteemed opinions.  (I promise that I will try not to tear a rotator cuff patting myself on the back.)  

That critically-important point aside, I hope that the few summary points above will convince you to take the time to watch the video and learn a good bit about the current - and frustrating! - state of US trade policy.

Enjoy.

Guess Who's Blocking Canada's Participation in the TPP [UPDATED]

Back when Japan announced that it was interested in joining the ongoing Trans-Pacific Partnership negotiations - which currently include the United States, current US FTA partners Australia, Chile, Peru, and Singapore, as well as new FTA partners Brunei, Malaysia, New Zealand and Vietnam - I noted that admitting the economic power and close US ally was a no-brainer.  Certain TPP participants (and their political allies at home), however, weren't so gung-ho about Japan's inclusion in the agreement, and Japan has its own internal politics to sort out, so our friends in Tokyo are still waiting around to see if they're on the TPP VIP Guest List.  Joining Japan on the wrong side of TPP's velvet rope are Canada and Mexico, who announced their interest in joining the agreement shortly after Japan.  Readers of this blog know my affinity for the Harper Government's pro-market, pro-trade reforms over the last few years, so of course I think that Canada's inclusion in the TPP would be a very welcome development.

Unfortunately, however, it appears that certain members of the Obama administration don't agree, and thus the United States might just be the last holdout on Canada's TPP participation.  My source for this juicy gossip, you ask?  Well, none other than PM Harper himself:

Harper sat down with Obama and Mexican President Felipe Calderón for their first such meeting in almost two years -- and the last before Calderón leaves office this fall -- and for all the jovial friendship on display for the cameras in the Rose Garden, some issues clearly rankled.

The meeting, which came up considerably short of the advertised three hours, ended without Canada getting an invitation to join negotiations for a new Trans-Pacific Partnership....

Canada's system of supply-management of eggs, milk and other farm products is seen as a stumbling block to participation in the new free-trade zone.

In scripted remarks, Harper emerged from the meeting to say he was "especially pleased" Obama had welcomed Canada's interest in the trade talks.

But he later pointed the finger squarely at the White House for holding up Canada's formal inclusion. "Our strong sense is that most of the members of the Trans-Pacific Partnership would like to see Canada join," Harper told an audience at the Woodrow Wilson Center. "I think there's some debate, particularly within the (Obama)  administration, about the merits of that."

For his part, Obama did not duck a question that specifically asked if Canada's dairy and egg marketing boards would have to go in order for Canada to join the party.

"Every country that's participating is going to have to make some modification," Obama said, flanked by Harper and Calderón at a news conference in the Rose Garden. "That's inherent in the process because each of our countries has their own idiosyncrasies, certain industries that in the past have been protected."

The prime minister did not answer a direct question on whether he was prepared to abandon the marketing boards, but said his government would do what is needed to protect industries. "Canada will attempt to promote and to defend Canada's interests, not just across the economy but in individual sectors as well," said Harper.

Although some of Canada's agriculture policies are undoubtedly suspect, the idea that its marketing boards - which have been in place for several decades and haven't impeded NAFTA (as a new IBD editorial helpfully notes) - are preventing the United States - one of the largest agriculture-subsidizers on the planet - from signing off on Canada's TPP participation is laughable.  The laughs get even louder when one considers that the "too protectionist" Canada has been unilaterally opening large swaths of its market to imports, while the "free trade" Obama administration has been working hard, in FTA negotiations and via US trade law, to keep ours closed (and to keep those US farm subsidies firmly in place).  Or when one considers the Obama administration's long history of playing the "you're too protectionist on issue [X]" card to justify FTA-related delays (just ask South Korea or, as noted above, Japan).

Then again, if I were in the White House (stop laughing) and had to choose between (1) admitting into the TPP the unilaterally-liberalizing, corporate tax-cutting, FTA-completing Harper Government (and its directly-competitive Canadian farmers, manufacturers and service providers), or (2) just making up some silly "protectionist" excuse in order to stall Canada's admission and cover for my own government's trade/tax policy ineptitude, I'd probably be pretty darn tempted to choose Door #2 too.

Of course, if I were in the White House (seriously, stop laughing), the United States wouldn't be in this embarrassing position to begin with.

UPDATE: A reader passes along this great 2010 op-ed from Peter Clark on the United States, ahem, recalcitrance re: Canada's admission to the TPP.  Clark focuses on one reason for the White House's exasperating Canada-TPP position that I glossed over last night but deserves direct mention: rampant US mercantilism.  US exports already have mostly-duty-free access to the Canadian market through NAFTA, and, as mentioned above, if Canada is allowed into the TPP, competitive Canadian exporters would gain equal footing with their US counterparts in the rapidly-developing, high-demand TPP (especially Asian) markets.  Clark further notes that Canada would likely not support the United States' mercantilist push to retain all the sweet, sweet carveouts and import protection that are embedded in its existing FTAs with TPP participants like Australia.  His arguments seems quite logical - and depressing - to me.  Alas.  (Clark raises other issues in another good, detailed op-ed from earlier this year.)

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.

Zeroing May Be Dead, But Its Zombies Still Roam the Earth (UPDATED)

I've long lamented the United States' almost-decade-old refusal to comply with numerous WTO Appellate Body rulings (and a US appeals court decision) against the Commerce Department's "zeroing" methodology in anti-dumping investigations and reviews.  (Plenty of background here.)  DOC terminated the practice - which artifically inflates dumping margins (and thus anti-dumping duties) - in original investigations in 2007 and announced in December 2010 a "preliminary rule" intended to cease zeroing in annual reviews and 5-year "sunset" reviews.  But since 2010, there's been nary a peep from DOC with respect to the Final Rule needed to actually stop the practice and get the United States into compliance with all those adverse WTO decisions.  Thus, US exports remained vulnerable to potential retaliation from aggrieved WTO Members who had brought and won challenges to DOC's use of zeroing in reviews involving their imports, and the United States zeroing delinquency sullied its good name (stop laughing) in international trade negotiations and undermined its incessant fingerwagging about "enforcing global trade rules." 

Well, it appears that the retaliation threats (not the policy embarrassment or good will) have finally forced the US government to act:

The US has reached deals with the European Union and Japan to drop a contentious practice in its anti-dumping calculations known as “zeroing”, ending a longstanding international trade dispute in order to prevent retaliation against American products.

The agreements, signed in Geneva, will close the books on a fight that began in 2003 when the EU first filed a case against the US at the World Trade Organisation. The WTO eventually found that the “zeroing” applied by the US was in violation of global trade laws, authorising the EU and Japan, which had joined the case, to punish the US with higher tariffs on certain goods.

“We have finally put these burdensome and potentially damaging trade disputes behind us,” said Ron Kirk, US trade representative. “American farmers and businesses can invest in job-creating export markets without the uncertainty of possible trade retaliation.”

Anti-dumping measures are imposed in the event that a product is being exported at a lower price than it costs in the domestic market. But in the case of “zeroing”, a country would ignore instances in which that product was being sold at a higher price internationally than at home, which critics see as unfair and protectionist.

The full USTR press release and more background on the settlement are available here.  What caught my attention are the following passages:

Under the agreements signed today, the United States will complete the process – which began in December 2010 – of ending the zeroing practices found in these disputes to be inconsistent with WTO rules. In return, the EU and Japan will drop their claims for trade retaliation....

The United States will continue to press in ongoing WTO negotiations for affirmation that zeroing is consistent with WTO rules. Nonetheless, in these circumstances and at this time, the compliance actions announced today are important in confirming U.S. support for the rules-based system that the WTO provides. Moreover, as Ambassador Kirk explained, “the Administration is committed to vigorous enforcement of U.S. antidumping and other trade remedy laws. I am confident that we will continue to enforce these laws effectively, as was shown, for example, in our successful defense of the President’s imposition of duties on tires from China.”

The EU first requested WTO consultations with respect to zeroing in June 2003, and Japan requested WTO consultations in November 2004.  In October 2006, the EU initiated a second zeroing dispute covering additional proceedings. In each of these disputes, the WTO Dispute Settlement Body (DSB) found that the use of zeroing in certain antidumping proceedings was inconsistent with WTO rules. Detailed information may be found at www.wto.org, under dispute numbers DS294, DS322, and DS350....

After the DSB found that the United States had not come into compliance with the DSB findings, the EU and Japan made separate requests for authorizations to impose trade retaliation against the United States. These requests were referred to WTO arbitrators. The parties subsequently agreed to suspend the arbitrations to allow additional time for discussions.

Under the terms of today’s agreements, the U.S.-Japan and U.S.-EU trade arbitrations will remain suspended and will be terminated – without the issuance of awards – after the United States completes its implementation of the agreements.

The text of the bilateral agreements is not publicly available, but it would appear that USTR is signaling not only the end of zeroing in the reviews at issue in the Japan and EU disputes (via a recalculation of anti-dumping duties) but also the end of zeroing altogether.  And, indeed, word on the street is that DOC will announce in the next week or so a Final Rule terminating the practice on a prospective basis.  If so, that's good - albeit very long overdue - news. 

However (you just knew that was coming, didn't you?), beyond the seemingly interminable delay and USTR Kirk's bizarre praise for the China tires case, today's news is far from ideal.  Most notably, it appears that DOC will not recalculate duties in the hundreds of reviews in which the agency has illegally used zeroing over the last several years.  (Indeed, DOC is still vigorously defending the practice in US courts.) 

So, admittedly without seeing the bilateral agreements or DOC's Final Rule, it 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!)

Did I mention that this decision had nothing with good will and everything to do with avoiding direct retaliation against US exports?

UPDATE: A friendly commenter directed me to the text of the US-EU Agreement.  As expected, it calls for the recalculation (via a "Section 129" determination) of duties only for EU imports, as specified in the Annex.  I understand that the US-Japan Agreement takes the same approach.  Not much more in there about DOC's Final Rule, so I guess we'll have to wait until next week for that.

Obama Administration Votes Present on Japan and the TPP

As had been rumored for about a week now, Japanese Prime Minister Yoshihiko Noda announced today that his country will formally seek to join the ongoing the Trans-Pacific Partnership, which now includes the United States, current US FTA partners Australia, Chile, Peru, and Singapore, new FTA partners Brunei, Malaysia, New Zealand and Vietnam.  It's undeniable that Japan's membership in the TPP would provide immense economic benefits for US exporters and consumers and cement relations with one of the United States’ closest allies (and a country that could really use our help right now).  Japan's inclusion also would transform the relatively minor agreement into a serious platform for even greater trade and economic growth and an important counterweight to China’s growing influence in the region, thus giving the slow-moving TPP just the kick in the butt it needs to hasten completion.

Despite these economic and strategic benefits, Noda's decision didn't come easy: free trade faces serious political obstacles in Japan, particularly from domestic farm and other groups who have long opposed further liberalization initiatives.  So, given all of this, the United States responded to Noda's big, politically-risky announcement with excitement and encouragement, right?

Err, take it away, USTR Kirk:

The United States welcomes Prime Minister Noda’s important announcement expressing Japan’s intention to begin consultations with Trans-Pacific Partnership countries towards joining the TPP negotiations....  In close consultation with Congress and our domestic stakeholders, we look forward to engaging with the Japanese in these discussions. To join the negotiations, Japan must be prepared to meet the TPP's high standards for liberalizing trade and to address specific issues of concern to the United States regarding barriers to agriculture, services, and manufacturing trade, including non-tariff measures.  Japan’s interest in the TPP demonstrates the economic and strategic importance of this initiative to the region.

Translation: "Yeah, umm, thanks.  We'll be in touch."

Gee, I wonder what could be holding back the Obama administration from openly and warmly embracing one of the largest economies in the world and one of our biggest allies?

Oh, right.  That.

Tuesday Quick Hits

Happy belated early St. Patty's Day.  Here are some links to keep your lucky streak going:

• AEI's Phil Levy writes a great column about the likely economic aftershocks of the Japan tragedies caused by, among other things, global supply chains.  The WSJ follows (intentionally or not) Levy's lead with an interesting report on how Japan's problems should affect its exports to China (and thus Chinese exports of goods typically made from the imported Japanese inputs).

• Speaking of Levy, he provides a very good explanation of why China's Indigenous Innovation policy can't achieve China's long-term policy goals but should be a priority for the United States because of the significant near-term pain it'll cause American companies.

• The absurd, needless expiration of the US Generalized System of Preferences cost American manufacturers $54.4 million in January alone.  Awesome.

• Last week's BEA release of the US trade deficit stats elicited a typically awful write-up from the AP.  The forces of good appropriately correct the journalist responsible here, here, here and here. 

• The Heritage Foundation's Walter Lohman and Derek Scissors deftly analyze something that I noticed about a year ago: Australia's China policy is very, very sound.  And, as if on cue, the Aussies provide even more proof of this fact.

• I selfishly hate the relatively new starting date for Daylight Savings Time because it makes getting out of bed to go for a jog excruciatingly difficult, but now I have a more altruistic, economic reason to hate it.  Bonus.

• In reporting on the latest developments in the longstanding US-Canada softwood lumber dispute, the Economist provides another great lesson on the fleeting benefits and long-terms costs of protectionism. 

• The Washington Post confirms what we already knew: the White House, not USTR, drives American trade policy. 

• More excellent destruction of self-avowed protectionist Ian Fletcher's public "arguments" by Cafe Hayek's Don Boudreaux here, here, here and here.  To my knowledge, Fletcher has yet to respond directly to any of Boudreaux's killer critiques.

• And finally, this is absolutely hilarious (h/t Radley Balko).

Enjoy!

If You Read Only Two Things Today, Read These Two Things

I'm sure I'll be found guilty of overselling these two articles, but alas.  First up is Kevin Williamson's hilarious, deadly-accurate critique of the administration's wrongheaded China currency scapegoating.  My favorite lines:

Obama and the Sinophobe wing of the Democratic party have seized upon what is for them a nearly perfect issue: the valuation of China’s currency, the renminbi. The issue is complicated enough to accommodate the intellectual vanity of the president and his coterie while consigning most voters to a state of rational ignorance, and the narrative is flexible enough to be used to explain away a great many varieties of bad economic news. It’s the all-purpose phlogiston of the self-consciously cerebral policy set. Massive trade deficits? Blame the renminbi. Investment in decline? Blame the renminbi. The fact that Obama’s reckless State of the Union promise to double American exports is starting to look like the sort of thing a luckless gambler says to himself before putting his Greyhound-ticket money on the craps table in Vegas? Blame the renminbi. Persistent levels of historically high unemployment? Chinamen are stealing our jobs and using their artificially devalued currency to do it....

The People’s Republic of China is a for-profit police state, and we should not be under any illusions about the chances of its reforming its ways and further liberalizing its economy and politics, or the possibility of its chauvinistic rulers’ acting with regard to anything other than the ruthless pursuit of their national interest, in whatever distorted way they define that. While Deng Xiaoping’s much-vaunted economic-liberalization program worked undeniable wonders, the thawing of the Chinese economy came to a halt years ago, and if there is any political progress in sight, it is not obvious. All of which really ought to be of interest only to full-on Sinologists, because, the Obama administration’s populist fist-shaking notwithstanding, China’s economic policy is not what ails America — any more than Japan’s economic policy was what ailed America during the Carter years, that awful interlude during which Honda and Toyota viciously conspired to dump affordable, reliable, fuel-efficient automobiles on unsuspecting Americans who really wanted to buy an AMC Gremlin but were duped into an upgrade by those inscrutable Orientals and their long-game industrial policies. China’s economic policy is what ails China. Fortunately, today as in the 1970s, most of what is troubling the U.S. economy is the result of decisions taken in the United States, not in faraway Asian capitals. The American problem is in Washington, not in Beijing....

How Japan went wrong is a big and complicated and contested story, and it is really beside the point: What most matters right now is what Beijing thinks happened to Japan. In the Chinese version, the United States forced Japan to allow the yen to appreciate, with Washington orchestrating the Japanese catastrophe with malice aforethought. So when Barack Obama comes around saying, in effect, “Pump up that renminbi — or else!” the guys in Beijing are pretty sure they’ve heard that story before, and they do not plan to be played for chumps the way they think the Japanese were. They drive tanks over people who don’t see the world the way they do, and they are not going to be bullied by Professor Obama....

So what should the United States “do” about China? Nothing. Nada. Sit on our national hands. Economists who have looked at the renminbi situation conclude that the currency is indeed undervalued, but that it could climb as much as 6 percent with basically no effect on the U.S.-China trade relationship. Even if the renminbi were allowed to climb the full 20 or 30 percent by which the most fearful China hawks believe it to be undervalued, it is extraordinarily unlikely that this would have the effect of causing manufacturing employment to shift from China to the United States. If that $5 plastic toy at Wal-Mart goes up to $6, is that suddenly going to make California, Ohio, or New Jersey more attractive to low-end manufacturers than China, India, or Bangladesh? Doubtful. In all likelihood, the result would simply be that the United States would pay more for its imports than it does today — meaning that our trade deficit would get worse, not better. Paying more money for the same amount of stuff would not make us any richer, nor would replacing Chinese imports with imports from Vietnam, Mexico, or Honduras.

As a matter of pure economic calculation, the costs of trying to force Beijing to act in accordance with Washington’s desires almost certainly are greater than the value we would derive from whatever marginal success we might have in the endeavor. For all the talk about our “competitiveness” vis-à-vis China, the complexities of the relationship, the differences in comparative advantage, and the fundamental unknowability of the future all make it difficult even to define “competitiveness” in this context, and more difficult to cultivate it intelligently — and much more difficult to cultivate it intelligently by pressuring Beijing to act in ways Beijing is not inclined to act.

Washington probably cannot get Beijing to change its ways, but Washington can change its own ways, which would be considerably more productive and a heck of a lot less likely to lead to a trade war — or a war war. We can start with acknowledging what has made our competitors stronger over the years: savings, investment, and innovation — the things that lead to productivity, the only economic measure that really matters, being as it is the factor that enables high levels of employment, high wages, and general prosperity. A recent report from the nonpartisan and excruciatingly sober-thinking Brookings Institution offered four main things the United States should do in response to the rise of China. Three of them were content-free: “Blah, blah, blah, be more assertive, elicit support of other emerging blah, blah, blah, high-level engagements.” But the first one was: “Get real on deficit reduction.”

Under Obama-Pelosi-Reid, we have been levying a heavy tax on the future to fund today’s spending. Republicans now have a chance to change that, and it is essential that they do, because everybody can do the math on this question: As the expatriate investor and Asia bull Jim Rogers put it in an interview with National Review earlier this year, “If you look at the huge creditor nations in the world, they’re all in Asia: China, Hong Kong, Singapore, India. Saudi Arabia, if you want to go that far west. This is where the money is — and you know where the debts are.” But taking the necessary steps would put President Obama at odds with his fellow Democrats and cause Professor Krugman and Robert Reich to keen like veiled women at a Levantine funeral procession. Obama would still rather be at odds with the Chinese, who don’t get to vote in 2012 and haven’t been big campaign donors since the Clinton administration.

Amen, Kevin. Amen.  There's a lot more juicy goodness in the article (it's long and worth it), so be sure to read the whole thing.

Next up is my sometimes-colleague* Dan Ikenson who, it appears, has finally given up on the faint hope that President Obama could be America's next great free trade president, and fires off a stinging criticism of the President's big NYT op-ed on India and his hopes for US-Asia trade.  His comments are similar to my my own on the op-ed, but he adds a lot of meat to the bones that I (lazily) threw out there:

At the beginning of the Obama administration, I had the audacity to hope that the new president would defy conventional wisdom and become a proponent of trade and a good spokesman for its benefits. Scott Lincicome and I even wrote a 20,000-plus word Cato analysis explaining why the economic, geopolitical, and domestic political environment offered the president a unique opportunity to steer his party back to its pro-trade roots....

Alas, our study, “Audaciously Hopeful: How President Obama Can Restore the Pro-Trade Consensus,” was just a little too. It fell on deaf ears. It was ignored. In fact, it’s almost as if the past two years of trade policy were conducted to spite the recommendations in that paper...
Despite all that, I remained audacious (or gullible) enough to hold a glimmer of hope that the president would finally see the wisdom in our advice—given the new political landscape. That glimmer was snuffed out with publication of an oped in the New York Times this past Saturday, in which President Obama betrays profound misunderstanding of trade and its purpose. The president portrays trade as an enterprise that is won or lost at the negotiating table, where only the most savvy or most committed negotiators can succeed in bringing home the spoils. The president promises to fight hard to get Americans their fair shake from this dog-eat-dog process, while actual producers, consumers, workers, and investors are relegated to tertiary roles.

The central dysfunction between Americans and trade is the assumption—reinforced in the president’s op-ed—that exports are good, imports are bad, the trade account is the scoreboard, and our trade deficit means that we are losing at trade. That dysfunction resides comfortably within a zero-sum worldview, which the president touts in a purposeful cadence throughout the oped....

By opining about trade without understanding that its real benefits are manifest in imports (here’s Don Boudreax’s elaboration of that process), the president is simply reinforcing myths that will continue to confuse and divide Americans. As long as politicians insist that our trade account is a scoreboard and that a surplus is a trade policy success metric, Americans will continue to be skeptical about trade.

As with Williamson's piece, be sure to read all of Ikenson's much-warranted diatribe here.  It's a fantastic example of (a) why mercantilist policies or rhetoric don't advance (and often retard) free trade, open markets and public support therefor; (b) how many of us - even sorta-partisans like me! - had genuine hopes that Obama would be pretty good on trade; and (c) based on Obama's two-years in office, just how silly we were to harbor those hopes.