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.  

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.]

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?

Senators Try to Use Logic to Advance Pending US FTAs, but Logic Has Nothing to Do with It

On June 1st, seventeen Republican Senators sent a letter to President Obama asking his administration to provide a "a well-defined and finite list of those outstanding issues they need to accomplish” in order for the White House to finally submit implementing legislation on pending FTAs with South Korea, Panama and Colombia.  The text of the letter is available here, but here are a few choice parts:

Despite your comments on April 16th, reiterating your support for the completion of the Korean, Colombian and Panamanian Free Trade Agreements (“FTA”), there has been little substantial progress in the enactment of these critical accords. In fact, Luis Plata, Colombia’s Trade Minister, said his nation still had not received a “concrete list” of actions which Colombia must take before your Administration supports Congressional action on these agreements. Therefore, we respectfully ask your Administration provide, on an expedited basis, to Korea, Colombia and Panama, a well-defined and finite list of those outstanding issues they need to accomplish. Given Congress’ role in approving these agreements, we also request you propose a specific timeline for the enactment of these FTAs.

The immediate consideration of these FTAs has never been so important. The European Union has negotiated trade agreements with a number of Central American countries, including Panama. This is in addition to the FTA the Europeans have reached with Korea. The impact of our inaction is already being felt....

Ratification by the Congress of the Korean, Colombian and Panamanian FTAs would be the catalyst for significant economic growth and job creation in the United States. Based on figures by the United States International Trade Commission (“USITC”), the Korean FTA will facilitate the growth of our economy by up to $11.9 billion. US exports of goods to Korea would grow by $9.7 to $10.9 billion, primarily in the areas of agricultural products, machinery, electronics, and transportation equipment.

Implementing the Colombia FTA will increase our nation’s gross domestic product by $2.5 billion. The benefits of the Panamanian FTA are similar....

The choice is clear. In a time of diminished prosperity, it is in the United States’ best interest to stimulate our economy by opening new foreign markets to our nation’s products and services, creating countless jobs....

The letter's signatories are Sens. Orrin Hatch (R-Utah), Kit Bond (R-Missouri), Pat Roberts (R-Kansas), Robert Bennett (R-Utah), Mike Crapo (R-Idaho), Mike Enzi (R-Wyoming), Scott Brown (R-Mass.), James Inhofe (R-Oklahoma), Jon Kyl (R-Arizona), Sam Brownback (R-Kansas), Jim Bunning (R-Kentucky), Tom Coburn (R-Oklahoma), George LeMieux (R-Florida), Roger Wicker (R-Mississippi), John Cornyn (R-Texas), and John Ensign (R-Nevada).  And you gotta give them credit: the FTAs' economic and foreign policy benefits are pretty undeniable, as is the concern that American companies will lose foreign market share to their European, Canadian and other competitors as those countries sign their own FTAs.

But all this talk about a "well-defined and finite list" of issues is just silly.  I mean, if the administration and congressional Democrats ever did that, then it'd be impossible for them to once again move the goalposts when Colombia, Panama and Korea actually, you know, completed each menial task assigned to them.  For example, congressional Democrats used to swear up and down that the utterly harmless US-Panama FTA would be submitted and approved by Congress once Panamanian President Pedro Miguel Gonzales Pinzon - who is wanted in the United States for the alleged 1992 murder of US serviceman in Panama - either stepped down or completed his one-year term.  Well, his term was up in 2008, and - surprise!! - "other concerns surfaced," most notably some ambiguous nonsense about Panama being a nefarious tax haven (or something).  The story has been pathetically similar for Colombia and Korea - each time they bend over (umm, backwards) for the United States on some silly issue, another one pops up to take its place and further delay consideration of obviously beneficial agreements that were signed years ago and should have been ratified shortly thereafter.

So spare me your airtight "finite list" logic, Senators. Such sanity might work in the real world, but you're barking up the wrong tree here.

Well, at least until November.

Maybe.