New Article: "America’s Horrible, No Good, Messed-Up Trade Policy (and How to Fix It)"

[Ed. note: This article was first published in The Federalist, which you really should be reading by now.]

Americans currently pay high taxes on food, clothing, automobiles, industrial inputs and other goods and services, and their own United States Trade Representative is vigorously fighting other countries to keep it that way. Even worse, the government’s efforts all but ensure that removing such taxes – and easing the artificial burdens they place on American families and businesses – will remain unnecessarily, and irrationally, difficult for years to come.
 

This is the awful state of American trade policy, and serious reform is long overdue.
 

Americans tend to think of the United States as some sort of free trade bastion in which unfettered globalization is – for better or worse – simply a way of life. However, while many U.S. tariffs were lowered decades ago, several tariff “peaks” remain in certain politically-connected areas like food, clothing, footwear and automobiles. Moreover, “non-tariff barriers” to trade – subsidies, regulations, etc. – have proliferated in recent years, and many “trade remedies” duties – based on allegations of “unfair” trade – also remain in place, particularly for industrial inputs like steel and chemicals.

The pros and (mostly) cons of these government measures vary, but one thing remains constant: their staunch and unflinching defense by the U.S. government in global free trade agreement negotiations. In these venues, gains are viewed as coming only from new access for U.S. exports and investment, while imports are the unfortunate price that America must pay for such “victories.” For example, as negotiations in both the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) gained momentum earlier this year, blubbering American journalists were quick to proclaim President Obama’s supposed “free trade renaissance” and strong support for expanding U.S. exports, but uniformly failed to report on the fact that his firm resistance to negotiating partners’ calls for lower U.S. trade barriers was a major reason for the agreements’ continuing difficulties. Nor did any such reports delve into the fact that those barriers, while certainly good for certain well-connected companies in the United States, injured the vast majority of American individuals and firms. And when TPP negotiators inevitably miss their much-ballyhooed and over-promised 2013 deadline for completing the agreement, you can bet that these facts will not receive top billing (or maybe even passing mention). Instead, only trading partners’ refusal to heed U.S. export demands will be blamed.

Trade and Reciprocity

The Obama administration, of course, is not the first to engage in such negotiating tactics and instead is simply the latest White House to do so. In fact, since the 1930s, American trade policy has utilized a “reciprocity” model of trade negotiations in which the United States treated any trade liberalization (e.g., the reduction of tariffs), no matter how smart or moral, as a “concession” that is only to be traded for another nations’ own acceptance of new U.S. exports or investment. Moreover, the diplomatic origins of the reciprocity model have ensured that trade liberalization is treated as a foreign, rather than domestic, policy area in which trade negotiations take on a zero-sum, war-like mentality where benefits are “won” or “lost”, instead of mutually achieved. Put most simply, exports are an unquestioned good to be pursued, while imports are an unmitigated bad to be resisted. Full stop.

Even though U.S. foreign and domestic policy – as well as economics, politics and society more broadly – has changed dramatically in the intervening decades, U.S. trade policy remains mired in this 20^th century, cold-war framework, as the current TPP and TTIP negotiations make abundantly clear. Unfortunately, some things to not get better with age, and U.S. trade policy is certainly one of those things. In fact, there are at least five fundamental problems with the United States’ mercantilist, reciprocity-based approach to international trade.
 

First and most basically, it is economically ignorant. Since Adam Smith first penned The Wealth of Nations, there has been a near-universal economic consensus in support of the elimination of trade barriers regardless of whether other nations do likewise. For this reason, there is quite literally no policy issue on which more economists – left, right and center – agree more, and the supposed death of the “free trade consensus” in academia has been wildly exaggerated.
 

This support, however, goes far beyond mere economic theory: there is also an endless array of empirical and historical evidence demonstrating the value of free trade and free markets. In fact, just last week the Heritage Foundation rounded up a lot of the latest data in order to (once again) resoundingly conclude that trade and investment liberalization is awesome, and that Congress should unilaterally eliminate tariffs on a wide range of products in order to boost the U.S. economy (including U.S. manufacturers). Heritage is certainly not alone: policy shops across the political spectrum, including Brookings, AEI and my colleagues at the Cato Institute, have produced similar studies in the past. And, as Dan Ikenson and I explained in a 2009 paper for Cato, the facts not only support free trade, but also destroy the various myths used by protectionists to undermine public support for such policies, including the greatly-exaggerated “death” of American manufacturing; the alleged link between imports, the trade deficit and U.S. jobs; and the idea that foreign companies and governments routinely cheat in order to gain an “unfair” advantage over their American counterparts.

Second, the reciprocity model has proven increasingly ineffective in producing tangible trade liberalization gains for U.S. businesses and consumers. The biggest example of this failure is WTO’s Doha Round of multilateral trade negotiations, which remains comatose after 12 years of missed deadlines, unkept promises and angry finger-pointing among stubborn nations that refuse to make further “concessions” to finalize the multi-trillion-dollar deal. Even the WTO’s “mini package” of supposedly-low-hanging fruit – intended to jump-start Doha during this December’s ministerial meetings in Bali, Indonesia – appears in doubt.
 

Smaller, regional/bilateral deals aren’t faring much better. Indeed, according to a recent report from the Asian Development Bank, the entire TPP is at risk of collapsing due to nations’ demands for various protectionist exceptions (or “carve-outs”) from the deal’s general free trade and non-discrimination rules:

The need to provide exemptions, or “carve outs,” to avoid a collapse in negotiations also raises concerns over the final form the TPP will take. The secrecy surrounding the negotiations makes it difficult to assess progress, but—from what is known—there is the risk of degenerating into a series of loosely tied bilateral deals. Indications are that the two largest TPP members—the U.S. and Japan—are proceeding along bilateral lines, threatening the demanding single-undertaking approach the TPP is supposed to adopt. 

Although the number of countries involved in these negotiations is much lower than at the WTO, for instance, it does not translate to a commensurate reduction in diversity in terms of disparate interests. These interests often conflict, especially in a context where the agenda is far more ambitious than any other proposed thus far. The recent round of negotiations that took place in Brunei Darussalam in August 2013 was reported to have made very little progress, highlighting the difficulties being faced as the TPP moves toward finding common ground on the more difficult issues.

Bloomberg has more on the ADB report and the TPP’s current problems here. Among the carve-outs demanded by TPP participants are Japan’s agricultural protectionism and Malaysia’s imposition of discriminatory regulatory barriers to tobacco, but many such demands originate in Washington, including three of the negotiations’ most contentious issues:

• Sugar protectionism. The United States has not only resisted calls to liberalize archaic tariffs and quotas on sugar imports, but also refused to reopen the current U.S.-Australia FTA, which completely excludes sugar from the Agreement.
• Textiles, apparel and footwear. The Obama administration has repeatedly refused requests from Vietnam and other large exporters to lower U.S. tariffs on textiles, clothing and shoes, and has demanded complicated “rules of origin” that will dramatically narrow the goods that could qualify for preferential access to the U.S. market.
• Automobiles. The United States also has vigorously fought Japan over U.S. tariffs on automobiles (2.5% for cars and a whopping 25% for light trucks) – a nearly-identical request that delayed the implementation of the U.S.-Korea FTA for several years after it was originally signed by the Bush Administration.

Each of these issues not only hurts U.S. consumers (more on that below), but threatens the completion of the TPP itself – an absolutely dumbfounding prospect, given these sectors’ relative insignificance for both the agreement and the U.S. economy.

The third flaw in the current system is that it’s needlessly messy and archaic. Every U.S. FTA, from NAFTA to KORUS, contains a different “schedule” which dictates the level and timing new market access for individual FTA partners’ goods and services. Rules of origin and other commitments also vary widely across agreements, thus creating an impenetrable web of rules and regulations and making the U.S. tariff code look like the Rosetta Stone. As a result, the exact same product will be subject to different taxes and rules based solely on its origin and the year in which it enters the country, and U.S. businesses often make sourcing decisions based on FTA rules rather than a product’s actual value. (And, of course, they must spend millions of dollars annually to determine those rules!)

Not only is this process costly and inefficient, but it is wholly out of step with the 21^st century world of seamless and ever-changing global supply chains. Today, product components are often sourced from multiple countries and assembled in another, and sourcing patterns routinely change based on market developments. (See, e.g., the evergreen “origins” of the iPhone and its competitors.) Arcane trade rules prevent such dynamism and thus hurt U.S. companies and consumers. Put another way, goods today are “made on earth,” but our trade agreements reflect a bygone era of vertical manufacturers, simplistic designs and old-fashioned notions of bilateral trade among individual nations. It makes no sense. None.

Fourth, the United States’ “free trade” policy has proven to be a horrible tool for actually achieving and sustaining public support for trade liberalization and free markets. For one thing, focusing on exports, FTAs and arcane market access issues (e.g., pharmaceutical patent protections) gives many Americans the not-totally-unwarranted impression that our trade policy is little more than a tool of large multinational exporters and investors at the expense of American workers. That is hardly a way to achieve grassroots support for important economic policy!

More importantly, the constant focus on exports and resistance to any type of import liberalization actually breeds public misunderstanding and distrust of trade liberalization. As Dan Ikenson and I explained in 2011:

The pervasive view that exports are good and imports are bad is a central misconception upon which rests the belief that trade negotiations and “reciprocity” are essential to trade liberalization. Under this formulation, an optimal trade agreement, from the perspective of U.S. negotiators, is one that maximizes U.S. access to foreign markets and minimizes foreign access to U.S. markets. An agreement requiring large cuts to U.S. tariffs, which would thus deliver significant benefits to consumers, would not pass political muster unless it could be demonstrated that even larger export benefits were to be had. This misguided premise that imports are the cost of exports and should be minimized lies at the root of public skepticism about trade. Ironically, it is also a prominent feature of the favored pro-trade argument.

There is nothing, of course, wrong with exports or pursuing new market access for U.S. businesses. The political appeal of that message is obvious, and exports do contribute to economic growth and, thus, job creation. However, the U.S. government’s relentless obsession with exports and reciprocity not only confuses the public and reinforces bad economics, but also creates a large and unnecessary opening for misleading protectionists:

[The mecantilist] message invites the following retort: if exports help grow the economy and create jobs, then imports must shrink the economy and cost jobs. In failing to explain why that conclusion about imports is wrong, trade proponents have yielded the floor to trade skeptics, who have been more than happy to manufacture talking points about the “deleterious” impact of imports on the U.S. economy. Most of those talking points are misleading or plain wrong, but there has been inadequate effort to correct the record. As a result, too many Americans accept the mercantilist fallacy that exports are good, imports are bad, and the trade account is a scoreboard.

Birdcages across the country are lined with op-eds from protectionist union leaders, businessmen and “consumer protection” groups that turn FTA proponents’ mercantilist message against them. Indeed, just this month I was treated to a piece in my hometown paper from the NC AFL-CIO, arguing that the U.S.-Korea FTA – and U.S. free trade policy more broadly – was a clear disaster for North Carolina because imports from Korea increased in the agreement’s first year, while U.S. exports declined. (Nevermind the fact that Korea’s economy was struggling mightily in 2012 and thus represented a low-demand export market, or that free trade resoundingly benefits the Tarheel state.) Sadly, using the Obama administration’s own misguided metric for gauging an FTA’s success (i.e., exports and the trade balance), the union had a point and thus capably hoisted the administration on its own mercantilist petard. And until the U.S. government changes this shortsighted, incorrect approach to trade policy and messaging, this rhetorical weapon will be readily available to protectionists, and public opinion will remain subject to the whims of meaningless statistics instead of economic consensus and actual historical fact.

Trade and Morality

Finally, the current approach to U.S. trade policy is manifestly immoral. Government intervention in voluntary economic exchange on behalf of some citizens necessarily comes at the expense of others and is inherently unfair, inefficient, and subverts the rule of law. At their core, trade barriers like those for sugar, clothing, footwear and automobiles are the triumph of coercion and politics over free choice and economics. The protectionist policies that USTR fights to maintain are the result of productive resources being diverted to achieve political ends and, in the process, taxing unsuspecting consumers to line the pockets of the special interests that succeeded in enlisting the weight of the government on their side.
 

This immorality has a clear and tangible cost. In 2011, Americans paid over ten billion dollars in tariffs on clothing alone, and another two billion each for shoes and automobiles – $29 billion total that year and $40 billion total in 2012. These taxes also raise the prices of goods made here at home and, as a result, American families pay much more for everyday staples like butter, milk, ice cream, sugar, tuna, apparel and shoes than their foreign counterparts. And American companies do the same for industrial inputs like ball bearings, steel and cement.
 

Protectionism is akin to earmarks, but it comes out of the hides of American families and businesses instead of the general treasury. And under the current trade negotiations system, our government is essentially choosing certain U.S. businesses and workers – those seeking protection and those seeking new export markets – over everyone else in America. As a result of these taxpayer-funded efforts, U.S. families pay higher prices for everyday essentials, and import-consuming companies struggle to remain globally competitive. (See, for example, U.S. candy makers who have moved their operations, and thousands of jobs, overseas due to sky-high sugar prices here.) Why on earth should our government pursue such an obviously immoral approach to international economic policy? Obvious answer: it shouldn’t.

A Better Path Forward

Fortunately, there is a much better, simpler way forward for U.S. trade policy. Most obviously, the United States should (i) immediately and unconditionally eliminate tariffs on basic human necessities like food, clothing, shoes, as well as industrial inputs that U.S. manufacturers rely upon to remain globally competitive; and (ii) phase out all other tariffs over a relatively short transition period. This change, coupled with matching rhetorical shift about the domestic benefits of trade liberalization, would instantly put the United States back at the forefront of global economic policy and in line with longstanding economic doctrine, fundamental fairness and modern business practices.
 

And, contrary to popular belief, such moves are politically possible: not only have countries like Australia, Chile, China, New Zealand, Canada, Mexico and Colombia pursued unilateral import liberalization in recent years in order to boost their economies, but the U.S. government also has done so via more limited initiatives like the Generalized System of Preferences and the Miscellaneous Tariff Bill (and sold such policies by – rightly – emphasizing their benefits to U.S. businesses and consumers). These policies would resonate with policymakers on the right and left, particularly in this era of increasing bipartisan disdain for corporate welfare. They would be consistent both with conservatives’ principled opposition to higher taxes and big government interventionism, and with liberals’ opposition to regressive taxation.
 

Furthermore, the unilateral elimination of tariffs would not lead to a flood of “unfair” imports that destroy U.S. industry because we already have trade remedy laws designed to address such situations and, due to years of domestic industry lobbying, are extremely biased towards protection. (Not to mention the fact that the vast majority of imports are already “fairly traded.”)
 

Speaking of which, the United States also should pursue fundamental reforms of its trade remedy laws to ensure that they actually address unfair and injurious imports (rather than domestic lobbying) and take into account the broader public interest – including U.S. consumer concerns. Our government should be ever vigilant of the fact that American consumers, not foreign exporters or governments, pay U.S. “unfair” trade duties, and these measures should therefore be a last resort.

Other regulatory reforms also are necessary, such as the elimination of most U.S. subsidy programs and various forms of “regulatory protectionism,” such as the Lacey Act and Dodd-Frank rules on “conflict minerals,” all of which thwart competition, raise prices and distort domestic and global markets.
 

Finally, the United States should complement these important changes by coupling them with “American competitiveness agenda” in order to give U.S. workers and companies what they really need to compete in today’s global economy: lower individual and corporate taxes in order to reflect new global norms, limits on lawfare and professional/occupational licensing, energy deregulation, etc. Such changes would boost economic growth, eliminate most domestic demands for protection from low-cost foreign competition, and, combined with the aforementioned tariff liberalization, boost U.S. exports without the need for slow and messy reciprocal trade negotiations. (Remaining trade barriers could be addressed via more aggressive litigation of existing rights and obligations under WTO rules and a “name and shame” approach to the most egregious transgressors.)

The global economy is advancing at a breakneck pace, but U.S. trade policy is stuck in neutral. Our elected leaders ignore basic facts and economics and pursue negotiations that not only benefit a well-connected cabal of businesses and lobbyists at the expense of U.S. consumers, but also undermine long-term public support for free trade. This archaic, immoral approach has produced diminishing returns in recent years and has called into question almost 70 years of U.S. leadership in the global economy. Meanwhile, other countries press ahead with agendas that better serve their citizens and reflect the realities of modern global supply chains, multinational investment and other key aspects of the 21^st century economy.

It’s time America did the same.

2012 GOP Platform on Trade: the Good, the Bad, and the Really Ugly

The Republican Party has released its 2012 Platform, and it's pretty much what you'd expect given the past few months of campaign and congressional rhetoric: it mostly supports free trade, yet does so in a mercantilist way and contains some pretty harsh - and indeed protectionist - words for today's trade bogeyman, China.  In fact, the platform seems like it was almost entirely lifted from Gov. Mitt Romney's 2011 economic plan, for the better and the worse.  Although there are various trade-related elements throughout the platform, the main "international trade" section can be found on pages 6-7 and I'll focus on it tonight:

International Trade:
More American Jobs, Higher Wages, and A Better Standard of Living

International trade is crucial for our economy. It means more American jobs, higher wages, and a better standard of living. Every $1 billion in additional U.S. exports means another 5,000 jobs here at home. The Free Trade Agreements negotiated with friendly democracies since President Reagan’s trailblazing pact with Israel in 1985 facilitated the creation of nearly ten million jobs supported by our exports. That record makes all the more deplorable the current Administration’s slowness in completing agreements begun by its predecessor and its failure to pursue any new trade agreements with friendly nations.

This worldwide explosion of trade has had a downside, however, as some governments have used a variety of unfair means to limit American access to their markets while stealing our designs, patents, brands, know-how, and technology—the “intellectual property” that drives innovation. The chief offender is China, which has built up its economy in part by piggybacking onto Western technological advances, manipulates its currency to the disadvantage of American exporters, excludes American products from government purchases, subsidizes Chinese companies to give them a commercial advantage, and invents regulations and standards designed to keep out foreign competition. The current Administration’s way of dealing with all these violations of world trade standards has been a virtual surrender.

Republicans understand that you can succeed in a negotiation only if you are willing to walk away from it. Thus, a Republican President will insist on full parity in trade with China and stand ready to impose countervailing duties if China fails to amend its currency policies. Commercial discrimination will be met in kind. Counterfeit goods will be aggressively kept out of the country. Victimized private firms will be encouraged to raise claims in both U.S. courts and at the World Trade Organization. Punitive measures will be imposed on foreign firms that misappropriate American technology and intellectual property. Until China abides by the WTO’s Government Procurement Agreement, the United States government will end procurement of Chinese goods and services.

Because American workers have shown that, on a truly level playing field, they can surpass the competition in international trade, we call for the restoration of presidential Trade Promotion Authority. It will ensure up or down votes in Congress on any new trade agreements, without meddling by special interests. A Republican President will complete negotiations for a Trans-Pacific Partnership to open rapidly developing Asian markets to U.S. products. Beyond that, we envision a worldwide multilateral agreement among nations committed to the principles of open markets, what has been called a “Reagan Economic Zone,” in which free trade will truly be fair trade for all concerned.

I've been over most of these ideas before, so there's no need to get long-winded tonight.  Instead, here's a quick summary of the good, the bad and the ugly in the GOP platform's international trade section:

The Good. The platform expresses unequivocal support for international trade and free trade agreements.  Especially noteworthy is (i) formal party support for the Trans-Pacific Partnership - something we've suspected but not really heard from the GOP's top dogs; and (ii) a loud call for restoration of Trade Promotion Authority - an absolutely critical legal tool for the President's ability to effectively negotiate new trade deals.  Although I'll start complaining in just a second, the GOP's embrace of international trade is definitely a good thing, especially given the economic anxiety out there right now and the strong anti-outsourcing and anti-trade stuff we've been hearing from most Democrats.  Maybe the Dem Platform will surprise us and not contain similar protectionist positions this time around, but until then, the GOP remains the better party when it comes to public support for good trade policy.

The Bad.  The platform continues the failed approach of selling free trade through a single-minded focus on exports and reciprocal trade (i.e., only opening our market if others open theirs).  As I've repeatedly discussed, this strategy is not only economically ignorant, but it also undermines public support for free trade by reinforcing the erroneous notion that imports - and by extension the US trade deficit - are somehow bad for the US economy.  The platform also errs in its support for Romney's "Reagan Economic Zone" - a silly idea from a practical perspective (I've yet to read serious, apolitical trade policy expert express even lukewarm support) and one that implicitly abandons the existing multilateral negotiating framework at the WTO.  That, in my opinion, is a serious mistake - the WTO is and will remain the only real mechanism for broadbased, multilateral trade liberalization, and any alternatives are dangerous non-starters.  The GOP certainly isn't abandoning the WTO altogether - the text above promotes the use of WTO dispute settlement, and the platform on page 49 supports Permanent Normal Trade Relations with Russia in order to reap the benefits of Russia's WTO accession - but the Reagan Zone strongly implies that the GOP no longer sees multilateral negotiations through the WTO as viable.  And that, in my opinion, is a mistake, regardless of the big mess that is the Doha Round.

The Ugly.  I guess it shouldn't be a surprise, but it's really a shame that America's "free market" party has warmly embraced Romney's zealous contempt for all things China trade-related.  This includes support for (i) countervailing duties on Chinese imports due to currency manipulation; (ii) mysterious "punitive measures" on foreign firms found engaging in IPR theft; and (iii) support for a "Buy AmericanAnything-But-Chinese" procurement policy.  Leaving aside for the moment the fact that each of these proposals raises serious legal and practical concerns (see, e.g., here on currency; there's not really a vehicle under US law for the second; and the third could violate WTO rules if it singled out China), there are much bigger problems with such talk: 

• First, the scary chest-thumping overshadows far more legitimate gripes about bad Chinese trade policies (like subsidies and IPR enforcement).  When you're screaming about attacking imports and investment, people tend not to notice your more subtle gripes about real problems in the Chinese market. 

• Second, and more importantly, these proposals expressly condone self-destructive retaliatory protectionism that defies economic sense and free market principles.  As I've repeatedly warned, there is absolutely no reason why such "logic" couldn't be applied to other "offending" countries, and the protectionist slope is very, very slippery.  Saying "we only meant it for China" is likely not going to serve as an adequate defense when the well-funded protectionists come knocking on the White House door.  And, by empowering these anti-trade forces, such proposals also won't help improve tepid American support for free trade.  In short, Pandora's Box has been opened, and it remains to be seen whether Republicans can control the nastiness inside.  The Democrats - who once supported things like NAFTA, China trade and the WTO (see, e.g., Bill Clinton) - sure couldn't.

Granted, each of the GOP's China trade proposals allows for ample wiggle-room, and it's very likely that a President Romney would pursue a much less aggressive approach (indeed, the platform later on page 49 states that the GOP "welcome[s] the increase in trade and education alliances with the U.S. and the opening of Chinese markets to American companies").  Regardless, "Commercial discrimination will be met in kind" is a recipe for heightened protectionism and possibly a trade war, not a responsible, economically and legally sound policy from the supposed "adult in the room" on US international trade policy and politics.  And the sign that such rhetoric - in GOP's defining policy document, no less - sends to the rest of the world is nothing short of embarrassing.  The only bright side for Republicans, I guess, is that the Democrats' platform promises to be even worse.

Hooray, lesser of two evils!

More to come, I'm sure.

China CVD, ctd: The Wasted Opportunity

Yesterday, I took the first of what will likely be many looks at the Appellate Body's new "US-China CVD" decision and concluded that, from a legal perspective, the decision would have pretty significant (and likely adverse) implications for the United States Government.  From a policy perspective, however, it appears that Friday's ruling has cost the US as much, if not more, and the Obama administration only has itself to blame.

I stated yesterday that the Appellate Body's decision could have the following effects on the United States' current policy with respect to simultaneously imposing anti-dumping (AD) duties and countervailing duties (CVDs) on imports from "non-market economies" (NMEs) from China:

Finally, the AB's ruling could - could - effectively end [the Department of Commerce's] messy 5-year "CVD NME" experiment altogether. As you'll recall, the US Court of International Trade (CIT) has already ruled that DOC's CVD NME methodology, as applied in a case against Chinese offroad tires (which was also one of the cases at issue in the WTO dispute), violated US law. That case is currently under appeal at the Court of Appeals for the Federal Circuit, and if the CAFC upholds the CIT's very aggressive decision, you'll now have both the US courts and the WTO's Appellate Body finding major problems with DOC's current CVD NME policy (which, again, has been followed in many completed and pending AD/CVD investigations against China and other NMEs like Vietnam). The result of all of these adverse rulings could be one of three things: (i) DOC adopts a new CVD NME methodology that dramatically limits (or offsets altogether) the concurrent application of anti-dumping and countervailing duties against Chinese and other NME imports (although the CIT seemed to preclude this option); (ii) DOC no longer allows for concurrent AD/CVD investigations of NME imports; or (iii) DOC deems China to be a "market economy" and thus uses standard AD/CVD methodologies in all future cases. This last option seems pretty unlikely because domestic petitioners just love the NME methodology, but it's actually the simplest and most reasonable solution (especially when you consider the silly fact that Russia is a "market economy," while China isn't).  Regardless of the (hypothetical) option chosen, however, the end result would be pretty much the same: the diminished (or eliminated) value of petitioners' shiny new CVD NME weapon against Chinese imports.

The effects of this diminished (or eliminated) CVD NME tool are not just limited to petitioners in trade remedies cases; they also affect the broader trade negotiating positions of the US and Chinese governments when it comes to the NME issue altogether.  Before Friday, all of those existing AD/CVD orders against China as an NME, as well as the threat of future cases, were a very big pain for China and a very big weapon for the United States (especially considering that it had an extremely favorable WTO panel ruling in its back pocket).  Thus, the removal of China's NME designation (thereby "graduating" it to "market economy" status for anti-dumping cases) was a very big carrot that the United States could have used to negotiate Chinese concessions on important market access issues like China's indigenous innovation policies, its problematic stance on intellectual property rights, or its reluctance in the Doha Round.

Now, the Appellate Body's ruling will force major changes to the United States CVD NME policy and has totally flipped-the-script (as the kids say) on the US-China negotiating dynamic.  As I noted yesterday, there is no easy fix for the United States to comply with the AB's decision - there are dozens of AD/CVD determinations that will need to be re-done; USTR and the Commerce Department are going to have to do some serious legal gymnastics to develop and defend any new CVD NME methodology; and full compliance might even require an act of Congress (which should just go swimmingly).  So now, China's graduation to a market economy is in both its own and the United States' interest.  China would benefit by ditching the "non-market economy" stigma, and its exporters (and US consumers, natch) would benefit from the predictability of the market economy methodology for AD/CVD investigations and reviews.  But the United States also will benefit by forgoing all of the pain that will inevitably accompany its WTO compliance efforts.

Put simply, United States held on to its NME negotiating stock too long, and it just crashed.  It's certainly not worthless, but it'll never again be as valuable as it was last week.  Never.

And, not to rub any salt in the Obama administration's wounds with yet another I-told-you-so, but here's what Dan Ikenson and I tried to advise them on this issue back in 2009:

The time has come to seriously consider carrots and not just sticks—particularly since the pain from the sticks is not limited to its intended targets, but is felt in the United States and in other countries, given the transnational nature of supply chains. President Obama would invigorate the relationship if he were to grant China “market economy” treatment in anti-dumping cases.While such a reform would take very little out of petitioning industries’ hides, the gesture would win vast sums of goodwill from the Chinese—goodwill needed to resolve more important issues going forward. Indeed, repeal of the non-market economy (NME) designation presents a “win-win” scenario for several reasons. 

First, graduation from NME status is one of the Chinese government’s top international trade priorities. China wants to be treated like all other major economies, and accordingly, the Chinese government is likely willing to make important concessions in other contested areas of trade policy to achieve market economy status.  But the longer we wait to grant market economy status to China, the less valuable that concession becomes. Under the rules governing China’s accession to the WTO, the United States must repeal China’s NME designation by 2016. Thus, the value of that “concession” will be greater in 2009—seven years early—than it will be in 2010 or 2012. Much beyond 2012, and the concession looks a bit like Confederate money.

Second, China’s NME designation has drawn intense criticism from domestic consuming industries, trade policy experts, and U.S. trade partners because of its incongruous application (for example, Russia was deemed a “market economy” in 2002, yet still is not a WTO member, while China became a WTO member in 2001) and the latitude for abuse of administrative discretion it affords. Also, the relatively recent change in policy that opened the door to countervailing duty cases against China has sparked controversy about whether NME treatment in anti-dumping cases should still be permissible. U.S. revocation of China’s NME status would alleviate many of those domestic concerns at virtually no cost to domestic petitioning industries, but petitioners value NME because of the trade-suppressing uncertainty the process
engenders.

It is important that President Obama understand that our trade relationship with China has been mutually beneficial, that the rhetoric about the impact of unfair Chinese practices has been highly exaggerated, and that unnecessary provocation could open a Pandora’s Box of economic problems.

Alas.

Selling Trade in the 21st Century

Frequent readers of this blog (all six of them!) know that one of my many pet peeves is the attempt by supporters of free trade to try to sell it to the general public using a mercantilist, exports-only approach.  As I've explained ad nauseam, not only is this approach unnecessary in a 21st century global economy, but it's also self-defeating:

This approach - championed by Republican and Democrat administrations alike - is one that focuses almost entirely on expanding US exports, while completely ignoring the proven benefits of imports and foreign investment for US businesses and consumers. And it is manifest in America's insistence on "reciprocal" trade negotiations with other countries - a decades-old system in which the United States only agrees to open its markets if our trading partners open theirs too. Of course, this outdated system (and the United States' blind commitment to it) reinforces the idea that exports are good, and imports are the bad things that we must reluctantly accept in order to gain new export markets.

The reality, of course, is that both exports AND imports are good, and there are mountains of empirical and anecdotal evidence supporting this central truth - especially in this modern era of global supply chains and multinational investment. But when our leaders' attempts to sell trade focus only on exports, and when "reciprocity" becomes the central tenet of national trade policy, the obvious, yet completely wrong, implication is that the trade balance (exports minus imports) is a "scorecard," and that a trade deficit (more imports than exports) means that we are "losing" at trade. And, sadly, this false implication is readily manipulated by protectionists seeking to restrict global trade (and, by extension, individuals' right to voluntarily engage in, and benefit from, it).

More discussion of this fact is here, here, here and here - did I mention this was a pet peeve?  Thus, you can imagine my consternation when the well-intentioned folks at the US Chamber of Commerce released their Top 10 Reasons Trade is Good for America, and it focused almost entirely on exports.

Here we go again.

Fortunately, Cato's Dan Ikenson saved me a lot of time and effort and provided a fantastic amended version of the Chamber's top 10 list.  Dan's edits are in bold:

1. The United States is the number one manufacturing nation in the world, and that success depends on exports. And since over half of the total value of U.S. imports consists of “intermediate goods” (products that are used as inputs for further value-added activity), manufacturing success also depends on imports.

2. The United States is the world’s number one services exporter and has been since services trade data have been tracked. And one of the reasons that foreigners are able to purchase American services is because they have been able to earn dollars by selling goods to American businesses and consumers.

3. U.S. agricultural exports support nearly a million jobs in the United States. And, agricultural and manufactured imports have made life’s necessities and conveniences more affordable to hundreds of millions of Americans.

4. 95 percent of the world’s consumers lives outside the United States... as do 95 percent of the world’s workers, who produce many of the goods Americans consume as imports less expensively than Americans can, freeing up U.S. resources for investment, innovation, and consumption of the higher value products and services that Americans produce.

5. FTA countries purchased more than 40 percent of U.S. exports in 2009. And imports from those countries have helped extend families’ budgets and reduced the costs of production for U.S. business relying on inputs from those countries.

6. Since the creation of the WTO in 1994, U.S. exports of goods and services have doubled to more than $1.5 trillion. And real U.S. GDP has increased by 50 percent.

7. Imports support millions of U.S. jobs in retail, research, design, sourcing, transportation, warehousing, marketing and sales... and in manufacturing.

8. U.S. exports to China have quadrupled over the past 15 years, and China is now the 3rd largest market for U.S. exports. And U.S. imports from China, too often wrongly portrayed as evidence of U.S. profligacy or decline, have enabled U.S. industries that require access to lower-cost labor for economic viability to be born, to blossom, and to spark the advent of new products and industries.

9. U.S. companies with overseas investments account for 45 percent of all U.S. exports. And foreign companies operating in the United States employ 5.6 million Americans, support a payroll of $408.5 billion, provide compensation that is 33% higher than the U.S. average, account for 18% of U.S. exports, pay U.S. taxes, support local charities, and act as investment magnets in communities across the country.

10. Trade supports 38 million jobs in the United States–more than one in five American jobs. And most Americans enjoy the fruits of international trade and globalization every day: driving to work in vehicles containing at least some foreign content; talking on foreign-made mobile telephones; having extra disposable income because retailers like Wal-Mart, Best Buy, and Home Depot are able to pass on cost savings made possible by their own access to thousands of foreign producers; eating healthier because they now can enjoy fresh imported produce that was once unavailable out-of-season, etc.

Great stuff, and certainly worth repeating at every possible opportunity.  But if you ask me, what's as great or greater is Dan's rock-solid reasoning for trumpeting his amended top-10 list (beyond the basic economics, of course):

Informing new members and reminding old of the benefits of exports to U.S. businesses and workers is clearly a worthwhile objective of the Chamber, the business community, and really anybody interested in economic growth. But in some respect there’s a preaching-to-the-choir element in that approach. You’re not going to find too many policymakers opposed to exports, and the administration has constructed a whole new bureaucracy devoted to the proposition that exports should double in five years.

Where the trade agenda has stalled (and where it always has problems) is on the rough terrain that—for lack of a better catchphrase—might be called “rationalizing” imports. That’s been the hard part of trade adovcacy over the years: “We had to cede some access to our markets, but look what we got in exchange!”

In pitching the very same bilateral trade agreements two and three years ago that the business community is pitching today, then-USTR Susan Schwab liked to remind Congress that the United States had an aggregate trade surplus with the countries with whom the Bush administration had concluded free trade agreements, as though that were the appropriate success metric. “We export more to them than we import from them; let’s call this a triumph!” But anyone inclined to accept that statistic as conclusive could simply visit the Commerce Department’s website and see that, at the time, our overall trade account was in deficit by about $800 billion. Thus, if “exports minus imports” is the measure by which we judge the benefits of trade, then America should shun trade entirely. That sales approach doesn’t seem to be in short- or long-run equilibrium. Mercantilist arguments only ensure that every step forward on trade requires a full-fledged battle. We need better—that is, more comprehensive—salesmanship of trade for the new Congress.

Yes, yes, yes and yes.  As Dan notes, and as I've said repeatedly here, a winning trade sales pitch includes the economic benefits of both exports and imports, as well the basic and obvious morality of free trade (and, by extension, the immorality of protectionism).  Indeed, in a modern political climate increasingly skeptical of Big Government and crony capitalism, the latter moral arguments are probably the most compelling of all.  Otherwise, we're just repeating the same old losing arguments which cede almost the entire playing field to the other side.

Until the well-intentioned folks in Congress, the US business community and elsewhere understand these very simple facts and begin to embrace a smarter trade marketing strategy, a majority of Americans will never buy what free traders are selling.  And after decades of trying - and failing - to market free trade through mercantilism, it's not like we could do any worse.

The Perils of "Reciprocal" Trade Policy

A few days ago, I opined that the United States' use of "Buy American" protectionism as a negotiating crowbar to pry open Canada's own procurement market was a "very, very dangerous" move.  Little did I know that it was actually a precedent-setting event.  Here's Inside US Trade (subscription) with the depressing details:

Following a meeting with Mexican officials, U.S. Trade Representative Ron Kirk this week announced that he has offered Mexican officials to explore a reciprocal procurement deal by which Mexican firms would have access to U.S. government procurement contracts subject to Buy American provisions, provided that Mexico offers reciprocal access to U.S. firms.

This would be akin to an arrangement that the U.S. worked out with Canada last week, Kirk said in a Feb. 9 press conference following a two-day visit to Mexico with Deputy U.S. Trade Representative Miriam Sapiro.

He described the U.S.-Canada arrangement as reciprocal, giving U.S. businesses access to provincial procurement in exchange for Canadian firms bidding on procurement subject to Buy America provisions in the 37 states covered by the Government Procurement Agreement....

“We have committed to work with Mexico in a similar way [as Canada] if Mexico believes that is something that Mexican businesses are interested in pursuing,” Kirk said. “We would welcome the opportunity to have further dialogue and negotiations with the minister of economy to fashion the right program if Mexico so desires.”...

I've commented a few times about why "reciprocity" should not be the goal of free trade policies or trade negotiations, but it's mostly been in the context of "selling trade": the model reinforces the dangerous public misconception that imports are bad, because it - against all empirical evidence to the contrary - posits that our markets should be liberalized only if we get new export market access in return.

But the US-Canada and the US-Mexico negotiations also raise another serious problem with the "reciprocity model" - it implicitly justifies, and even advocates, protectionism.  In this case, we have the United States Trade Representative loudly trumpeting a blatantly protectionist measure - Buy American - because his team was able to use it to open Canada's procurement market, and now they're moving on to Mexico.  The logical extension of this policy is as simple as it is dead wrong: if this Buy American protectionism opened Canada's market, we should raise other barriers to foreign goods and services as a way to get other countries to give us market access!  Never mind that such barriers - as did Buy American - would punish US businesses and consumers and harm the US (and global) economy. And never mind that domestic liberalization benefits the economy regardless of what other countries do.  Nope.  We only open our markets when you open yours.  Ugh.

Of course, the absurdity of Kirk's "reciprocal protectionism" logic is easily exposed when one simply extends it to the Nth degree (Bastiat would be proud).  Just ask: Would the USTR ever advocate raising all US tariffs to their maximum allowable ("bound") rates under WTO rules as a way to then "negotiate" lower tariffs or other market access from our trading partners?  Just as with Buy American, the plan would be consistent with America's "international obligations."  And just like the US-Canada deal, those negotiations could result in "reciprocal arrangements."  But the new protectionist bargaining chips also would mean massive tax increases for American families, dramatic cost increases for American businesses, huge declines in foreign investment (as we commit economic suicide), and probable retaliation from our trading partners.  So USTR Kirk would never propose that.  He'd be laughed out of the room (unless that room was full of union leaders, of course).

And yet he justifies, and even praises, a little Buy American horse-trading because it's "reciprocal" and is now looking for other "reciprocal negotiations" with Mexico?  That's just silly.

As I said last week, "Buy American has been a complete debacle. It has stymied economic growth here at home and encouraged tit-for-tat protectionism abroad. To applaud anything but its complete dissolution is absurd, and to applaud its use as a tool in trade negotiations is very, very dangerous."

Unfortunately, it looks like that "danger" is also very, very real.

POTUS' Trade Pitch Misses the Plate

Speaking to House Republicans during their annual retreat (in sunny Baltimore!), President Obama spoke publicly and off-script about his plans for the future of US trade policy (starts at about 4:20):



At this point, it's utterly unsurprising that Obama's remarks evince a wholly mercantilist outlook - exports are what's good about trade, and imports are the bad thing that we must reluctantly accept in order to secure new markets for US goods and services.  Of course, as readers of this blog (and anyone who's taken a basic macro-econ class in the last, say, 75 years) know, mercantilist trade policy is nonsense.  Indeed, I think Adam Smith settled this debate a few hundred years ago, but even if he didn't, Japan's years of economic stagnation and ever-present trade surpluses should do the trick.

There are plenty of smart people in the White House who of course know these facts, but it's clear that they have ceded their knowledge of rudimentary economics to the in-house politicos who think that the only way to "sell trade" is to (i) focus on exports; (ii) explain how the rest of the world is illegally blocking those exports; and (iii) never, ever mention imports.  And the President - not really versed in any of this econ stuff and most definitely not a reader of this blog - is dutifully carrying out that messaging strategy.

But is Obama's sales pitch effective?  Can he really "sell trade" by focusing on the things he laid out in his talk with the House GOP?  Let's review a few of his comments to find out, shall we?

Obama states that "the suspicion about trade agreements is that they're all one way."  Ok, that's true, but what's feeding that suspicion is not the FTAs themselves, or most Americans' real-world experiences with imports and free trade, but rather political demagoguery and media misreporting on imports, the trade deficit  and the state of US manufacturing. (See discussion here.)  Until these myths are corrected - until the American people understand that imports are good for US businesses and consumers, that US manufacturing output is still the world's largest, and that the US trade balance is not some "free trade scorecard" - any attempt to sell free trade through an exports-only focus will actually enhance Americans' suspicions, rather than alleviate them.  Americans simply will look at the trade deficit (which the US has held since the 1960s, so it's not like it's going away anytime soon) and think that we're "losing" at trade, and that our supposedly "reciprocal" FTAs stink.  Why?  Because the President told them that exports are the only thing that matter, and that the only reason that American companies aren't exporting more is because our trading partners are cheating by illegally denying US companies access to their markets (more on that below).

This is also the problem inherent in the President's attempts to build confidence that "trade is going to be reciprocal, that it's not just going to be a one-way street."  "Reciprocity" in a trade agreement implies that FTAs are "win-lose" endeavors.  We "win" by getting new export markets and "lose" by opening up our own.  And we need a balance between winning and losing for the FTA to be "fair."  Of course, nothing could be further from the truth - domestic liberalization is as big a "win" for the US economy, as is foreign market access for US exports.  And in a world of global supply chains, internet sales and lightning fast logistics, bilateral trade balances are increasingly meaningless (more on that here).  Yet through a demand for "reciprocity" and "balance" with our trading partners, bilateral trade balances ridiculously become "free trade report cards" - if, for example, a trade balance with an FTA partner doesn't result in total parity or a US trade surplus, then the American people will think that the FTA caused us to "lose" more than we "won."  And not only is that wrong, but it also guarantees that US support for free trade continues to stink.

Finally, the President's focus on increased enforcement reinforces two huge myths about global trade policy: (i) it's currently the Wild West out there, and (ii) our trading partners are cheating with impunity.  In closing his remarks, President Obama says that he supports trade, but that "it's gonna have to be trade that combines with an enforcement mechanism as well as just opening up our markets."  This is wrong in two key ways.  First, it clearly implies that there are no "enforcement mechanisms" in place right now, despite the fact that we have domestic "unfair trade" laws (antidumping, countervailing duty, safeguards, etc.), WTO dispute settlement procedures, and even bilateral dispute mechanisms in all of our FTAs.  Second, it implies that we're currently not enforcing the rules that are in place, when in reality there are literally hundreds of duties in force against "unfairly traded" foreign imports as a result of our domestic trade laws, and the US has successfully litigated or otherwise resolved dozens of cases at the WTO.

The President's statement also implies that our trading partners are cheaters, and that the only reason we're not exporting more is because they're illegally denying US exports access to their markets.  Yet while it's undeniable that some countries are engaging in illegal behavior, the reality is that such chicanery affects a tiny fraction of overall global tradeflows.  In our 2009 paper, Dan Ikenson and I calculated that the combined trade volumes affected by the current US anti-subsidy cases against China represented less than one percent of the entire US-China trade deficit.  So while "China cheats" made for a great soundbite, it certainly wasn't the driving force behind the bilateral trade relationship.  The same holds true for other markets - cheating simply doesn't define or drive global trade.

Because of this reality, relying on "enforcement" to sell free trade to the American people is a very, very bad idea.  Beyond the distressing fact that increased enforcement actions will antagonize trading partners (we're no market access angels, you know) and likely close markets rather than open them (retaliatory sanctions are often the end-result of unfair trade cases or WTO disputes), more cases and more "mechanisms" simply can't have a big effect on global trade balances.  So even if our trade deficits shrink a little because of heightened enforcement (unlikely), Americans will believe that our trading partners are still cheating (and that the United States stinks at enforcement) because the deficits won't have disappeared entirely, and because they've been told that cheating is the root cause of those deficits (and, of course, that those deficits are bad).

So we'll have increased trade tensions, decreased tradeflows, and maintained or even emboldened a still-suspicious electorate. A protectionist trifecta!

So where does this all leave us?  Well, I'm not going to indulge in any silly conspiracy theories implying that all of these missteps are the President's sneaky intent - I simply don't believe that the White House has developed a "free trade strategy" for the secret purpose of actually undermining free trade.  However, I think the above analysis makes it abundantly clear that the White House's politically-driven decision to sell trade through a focus on exports and enforcement is doomed to fail because it reinforces, rather than resolves, Americans' misconceptions about free trade and FTAs.

Unfortunately, I don't think that this strategy is going to change anytime soon.

It's Time to Take Doha Out Back and Shoot It

The WTO's Doha Round once held the promise of increasing global welfare by hundreds of billions of dollars and lifting millions of the world's poor out of abject poverty. Today it's become little more than a travel subsidy program for international diplomats and a tired punchline for trade geeks like me. And it needs to finally be put out of its misery.

It pains me to say this. For the last few years, I've resisted my colleagues' time-of-death declarations, most recently pointing to the near-breakthrough at last year's "mini-ministerial" as evidence that the Doha Round, while imperfect, was salvageable.  But last week's Ministerial Meeting in Geneva has finally settled it for me: Doha is dead.

As a doornail.

Now, true believers will argue that WTO Members are still trying, and that the Geneva Ministerial meeting was never intended to include formal Doha Round negotiations, and they'd certainly be right on both counts.  But three things were made very clear during last week's meeting, and each alone provides a strong indication that the Doha Round is in trouble.  Combined, however, they make it clear that the negotiations are a lost cause, and it's time to pull the plug.

(1) The apparent abandonment of the Round by much of the developing world.  To little fanfare, a group of 22 developing countries, including Brazil, India, Argentina and South Korea (but not China), announced the completion of a "South-South" trade agreement that would reduce tariffs on trade in manufactured goods between all signatories. The agreement, expected to be expanded to more countries and finalized by September 2010, does not formally conflict with the Doha Round - indeed, GATT Article XXIV, GATS Article 5 and the WTO's Enabling Clause each allow for regional trade agreements.  Informally, however, the agreement clearly signifies a lack of developing country confidence in Doha. First, the agreement was spearheaded by Jorge Taiana, foreign minister of Argentina and a longtime Doha critic who was quoted as saying that the agreement "is a clear demonstration that the developing countries are willing to continue working on strengthening South-South trade and in a process of liberalisation compatible with development." (Translation: we don't need no stinking Doha.)

Second, the timing of the announcement - smack-dab in the middle of the Geneva Ministerial Meeting - also is a clear signal of developing country disapproval for the current Doha Round process (often excluding developing Members from high-level negotiations), focus and outcome.  (Apparently, DG Lamy and other developed country ministers were extremely peeved upon learning that the Agreement's completion would be announced mid-Ministerial.)  Finally, the completion of the agreement will certainly diminish the signatories' incentives to complete a Doha Round Agreement that would undermine any tariff preferences/benefits that the South-South Agreement would provide them, particularly vis-a-vis non-signatories.  For example, Brazilian imports would have a significant tariff advantage over Chinese (or American or European) imports in, say, the Argentinian market, so why would Brazil want to ruin that sweet deal with a Doha Round Agreement that forced Argentina (and all other WTO Members, including South-South signatories) to liberalize its market for all WTO Members?  The obvious answer: it wouldn't.

So when the Doha Development Round is publicly undermined/opposed by the very targets of that "development," you know you have problems.

(2) The mirage of United States' involvement.  Developing countries aren't the only ones who have moved on.  I've complained for months now about how the Obama administration's lack of real involvement was hurting the Doha Round, and this fact was a constant theme of the Geneva Ministerial.  Indeed, in the last two weeks we saw developing Members, developed Members and industry groups all openly kvetching about the United States' (i) lack of Trade Promotion Authority (aka "fast track" negotiating authority); and (ii) refusal to make concrete commitments on agricultural and industrial market access, and the retarding effect of these things on the negotiations.  Personally, I think a lack of TPA is a surmountable obstacle because the US has completed trade negotiations (albeit few) without TPA.  But the last few months have made it very, very clear that one of the worlds richest countries, biggest subsidizers and supposed "free trade leaders" simply can't sit on the sidelines expressing vague "support" for the round, making demands of its trading partners, yet refusing to make real commitments of its own.  Such childish behavior might be acceptable by China or Argentina or even India or Brazil, but not the United States.  And past Doha Round breakthroughs have proven that when the US plays the "adult" in the room - e.g., being the first to make a strong farm subsidy commitment at last year's mini-ministerial - it can generate momentum and get things done.  When it sits back, however, everybody just points fingers, and nothing gets done.  Nada.

Either the White House doesn't understand this reality, or they understand it all-too-well.  In other words, the Obama Administration naively thinks that Doha can be completed with the United States being - to mangle an old saying - just another country on the WTO rollcall between Albania and Zimbabwe.  Or they think that the Doha Round is dead (or not going anywhere anytime soon) and have decided that there's simply no point in angering the farm lobby, domestic labor unions, certain manufacturers and the anti-trade greens in 2010 by offering formal liberalization commitments for a Doha Agreement that isn't going to materialize soon (or ever).  Instead, they'll just sit back, express "support," try to force things through secret bilateral meetings, and fail.  Happily.

Given the significant international trade experience at USTR - Ron Kirk notwithstanding (natch) - I find it impossible to believe the former scenario.  On the other hand, the latter, "politics-first" stance seems very plausible, given (i) the myriad other examples this year of this administration sacrificing trade to advance political priorities; and (ii) the United States' blatant refusal (subscription) last week to commit to a ministerial-level "stock-taking" session in March 2010.  The stock-taking brushoff is especially damning, as it's a crystal clear sign that the United States isn't planning to make formal negotiating offers anytime soon and just doesn't want to get publicly lambasted (again) by most other WTO Members in less than four months. Who needs that, right? Ugh.

Of course, this might be smart politics, but it's dreadful policy.  As I've already pointed out above, things at the WTO just don't move without US leadership, so if Doha wasn't already dead, the Obama administration's political calculations pretty much ensure that it is now.

(3) The Round's complete lack of credibility.  For the last several years, business groups and other Doha Round observers have been treated to a silly five-step dance: (i) set deadline; (ii) breathless, optimistic urgency by WTO leadership (most recently DG Lamy); (iii) missed deadline; (iv) finger-pointing; and (v) stock-taking.  (Over and over and over and....)  Only twice since 2005 has there been significant movement: November-December 2005 (with the agriculture offers of the US and EU) and last year's mini-ministerial.  Other than that, nothing has moved - it's been eight years, and we're still negotiating agriculture and industrial modalities! - and yet the deadlines, baseless optimism and finger-pointing continue.  Indeed, although one must feel sorry for DG Lamy and certainly can't fault his enthusiasm, the "deadline dance" has caused his calls for completion of the Round in (now) 2010 to be met with chuckles, instead of urgency.  And while this diplomatic stagnation is kinda humorous, it's also created a complete lack of confidence in the global business community - the primary lobbying force behind any final deal - that a Doha Agreement is forthcoming.  Without that confidence, business groups simply won't spend the time and money necessary to engage in a major pro-Doha lobbying effort.  And without strong business support, WTO Members (who are always politicians first, and free traders second or third) have little motivation to confront their protectionist constituents with a major trade liberalization agreement.  In Geneva last week, the key business groups were there, but their efforts were pretty minimal compared to years past.  Sure, they'll swear up-and-down to the contrary (except for the occasional moment of candor), but deep down everyone knows better.

Each of these three problems was on full display at Geneva last week, and they're the key reasons that I'm throwing in the towel on a comprehensive free trade agreement to emerge from the Doha Round.  Yet while this is a somewhat depressing realization, there are a couple reasons for hope.  First, if WTO Members could ever bring themselves to admit that Doha's dead, they could quickly complete the Round's uncontroversial negotiations, such as those on trade facilitation, that could improve global welfare by billions of dollars.

Second, and as I discussed recently, the collapse of the Doha Round might cause nations truly interested economic growth and development to take a hard look at the efficacy of reciprocal trade liberalization and maybe, just maybe, seek a better way forward.  In an era of global supply chains, foreign investment and multinational corporations, current "free trade" negotiations - which incorrectly treat liberalization as a zero-sum game and deem market access offers to be "concessions" - are proving increasingly antiquated and difficult.  (Why should doing something that's undeniably in your interest be so darn painful?)   Now more than ever, open markets and improved capital flows are beneficial in their own right, and the Doha's failure could accelerate the process of transitioning away from the old-school "reciprocity model" to a system in which nations engage in unilateral trade liberalization in order to better compete for global capital and talent.

I know, I know, that's some Lamy-esque optimism there, but it's all I got right now.  I'm in mourning afterall.

Now somebody give me the gun, and let's get this over with.

Rethinking Protectionism and Reciprocal Trade Policy

Cato Institute scholar (and coauthor) Dan Ikenson has a new paper out this week that examines whether globalization - in particular the interconnectedness created by modern investment patterns and global supply chains - has rendered protectionism and reciprocal, tit-for-tat trade policy obsolete.  (By "obsolete protectionism," of course, I mean "utterly ineffective in protecting domestic jobs and production," not "ineffective as a political tool to scare-up votes" (see, e.g., Schumer, Chuck).)

Dan and I grazed this subject in our paper when we said, among other things, "The fact is that U.S. labor and Chinese labor are better characterized as complements in a transnational production supply chain rather than competing substitutes in a zero-sum world.  That is a relatively new reality of international commerce that trade policy, trade negotiations, and too many trade commentators have yet to fully grasp."  I also rubbed up against the issue when I noted how Ford Motor Company was ripping seats out of its imported vans in order to secure preferential tariff access and proclaimed that "protectionists play Atari 2600 while the world now plays Wii."

Well, Ikenson's new paper takes a much deeper look at the relatively new phenomena of foreign investment and integrated supply chains and their impact on not only old school protectionism, but also classic trade negotiations based on reciprocal market-opening "concessions":

During the past few decades, a truly global division of labor has emerged, presenting opportunities for specialization, collaboration, and exchange on scales once unimaginable. The confluence of falling trade and investment barriers, revolutions in communications and transportation, the opening of China to the West, the collapse of communism, and the disintegration of Cold War political barriers has spawned a highly integrated global economy with vast potential to produce greater wealth and higher living standards.

The factory floor is no longer contained within four walls and one roof. Instead, it spans the globe through a continuum of production and supply chains, allowing lead firms to optimize investment and output decisions by matching production, assembly, and other functions to the locations best suited for those activities. Because of foreign direct investment, joint ventures, and other equity-sharing arrangements, quite often "we" are "they" and "they" are "we." And because of the proliferation of disaggregated, transnational production and supply chains, "we" and "they" often collaborate in the same endeavor. In the 21st century, competition is more likely to occur between entities that defy national identification because they are truly international in their operations, creating products and services from value-added activities in multiple countries. There is competition between supply chains, but only after there is cooperation and collaboration within supply chains.

But trade and investment policy has not kept pace with these remarkable changes in commercial reality. Our globally integrated economy requires policies that are welcoming of imports and foreign investment and that minimize regulations or administrative frictions based on misconceptions about some vague or ill-defined "national interest." To nurture the promise of our highly integrated global economy, governments should commit to policies that reduce frictions throughout the supply chain–from product conception to consumption–as well as in the flow of services, investment, and human capital.

There's plenty more of that great food for thought in Dan's paper, so go read the whole thing here.

One final note: once you understand the cool phenomena that Dan lays out, you're going to start noticing that instances of globalization confounding protectionist shenanigans have become very common.  For example - and not to pile on Senator Schumer (although it's often hard to resist) - the Peterson Institute's Jacob Funk Kirkegaard noticed last month that the good Senator received quite the smackdown by today's economic realities when he tried to protest a Texas wind energy project that used Chinese turbines paid for by Stimulus* dollars:

The issue of from where and when the government assistance comes in, Senator Schumer seems a little astray on his fixation with China.

The turbine in question—A-Power’s 2.5 megawatt turbine—is German technology, not Chinese, produced by the German company Fuhrländer, from which A-Power licensed it in 2007. The wonders of globalization make it even more complicated than that. In March, A-Power entered into another joint venture, that one 75 percent owned by none other than the US company GE Drivetrain, to operate a wind turbine gearbox assembly and testing plant in Shengyang.

Therefore, the gearboxes going into A-Power’s Chinese-made turbines that are heading to Texas will be produced by an entity majority-owned by the US corporation GE Transportation and hence US technology.

Such economic revelations make Schumer's simplistic jingoism seem downright silly.  However, I must admit that I feel a tad sorry for the Senator and other antiquated politicians like him.  I mean, it must be really tough on them when one of their go-to political moves becomes totally obsolete and often self-defeating.

(Ok, ok, I don't feel sorry for them.)

The Idiocy And Immorality of American Tariffs

From the United States International Trade Commission (ITC) comes further proof that US tariff policy is, as the the kids say, freakin' whack.

(Ed. note: the kids haven't said that in a decade, if ever.) 

In a new report (PDF) released last week, the ITC estimated "changes in U.S. welfare, output, employment, and trade that would result from the unilateral elimination of significant import restraints, specifically U.S. tariffs and tariff-rate quotas on certain agricultural products, textiles and apparel, and other manufactured products."  In non-nerdspeak: the ITC examined what would happen to the US economy if the government just woke up one day and decided to remove all major barriers to trade in goods.  Their results are probably surprising to many people, particularly those lost souls who listen to their elected officials' demands for reciprocal, tit-for-tat, tariff reductions in global trade negotiations.  Most broadly, the ITC projected that:

U.S. economic welfare, as defined by total public and private consumption, would increase by about $4.6 billion annually by 2013 if all significant restraints quantified in this report were unilaterally removed. Exports would expand by $5.5 billion and imports by $13.1 billion....

For most liberalized sectors, prices faced by households and domestic producers would both fall.

Put simply, by just removing trade barriers, the US Government could improve the lives of American families and businesses by $4.6 billion per year over the next four years.  This "free stimulus" also could expand US exports by $5.5 billion over the same period.  Crazy, huh? 

Granted, $4.6 billion isn't a lot of money in the grand scheme of things, but it's still nothing to sneeze at. And unlike all the other economic "stimulus" nincompoopery out there, these benefits would cost the US government, and thus us taxpayers, nothing!  Yet these self-defeating trade barriers remain in place and our trade negotiators and politicians demand reciprocal "concessions" from other countries before even considering eliminating them.  Indeed, compared to the last version of the ITC report, most of these restrictions are exactly the same as they were two years ago when the economy was still humming along.  How does this make sense? (Hint: It doesn't.)

Now, critics of free trade and defenders of the "reciprocity model" of trade negotiations could argue that the ITC's projections are unsound, and they may well have a point.  Projecting the impact of tariff reductions or increases is nearly impossible because the changes themselves will directly and indirectly affect all sorts of economic behavior.  Fortunately, the most common critics of free trade have been singing the ITC's praises for months now, ever since it recommended the imposition of 55% tariffs on Chinese tire imports under Section 421 of US Trade Law.  For example, Congressman Sander Levin (D-MI) recently lauded the economic analysis of the "independent, bipartisan" ITC in the tires case, and United Steelworkers President Leo Gerard had similarly complimentary things to say.  So I'm sure that now the same ITC analysis demonstrates the overall economic benefits of unilateral tariff elimination, these guys will continue their praise and support of the Commission's findings, right? 

Riiiiiiiiight.

Anyway, even if the ITC's modeling is off, their new report remains highly valuable because it spotlights where the biggest US barriers to trade remain and the effects of those barriers on everyday Americans. And it's these incontrovertible findings that should have most Americans pretty ticked off. 

The table below is from the 2009 ITC report (click to enlarge).  It shows the products that face the highest import and export tariffs in the United States, as well as the US-world price difference caused by those import barriers.

As you can see, some of the highest trade barriers in the United States are on things that American families use everyday - food (cheese, butter, milk, sugar, tuna, etc.), clothing (including thread, fabric and textiles) and shoes.  The taxes on these necessities range from a few percent to almost 48 percent, and these trade barriers result in US prices that are up to 57 percent higher than prices for the same goods in other markets.  So, for example, US trade policies force American families to pay $1.57 for a stick of butter, while Canadian families pay only a dollar for the exact same thing.  Nothing like a 57% butter tax to help the Joneses really tough-out the recession, huh?  Awful.

Unfortunately, because these goods are necessities, it's not like Americans can protest the policies by boycotting the protected products.  We all need shoes, clothing and food, and these are across-the-board price increases.  Worst of all, this "necessities tax" is highly regressive, as it forces the poorest Americans to fork over the largest share of their paychecks in order to buy the protected/taxed products.

And the US government is taxing American families and businesses for what?  To help the American butter/sugar/textile/whatever industry?  Actually, yes, that's exactly what our tariff policies are doing and have done for decades - regressively taxing American consumers and businesses in order to line the pockets of well-connected special interest groups like the US sugar lobby.  Seen this way, American tariff "peaks" are just like earmarks: legislative creations championed by in-the-bag politicians that force you and me to pay higher prices for the stuff we need in order to subsidize the pols' cronies.  (And disproportionately harming the neediest of Americans in the process!)

Considering the current economic malaise, I'd say it's about time that such an idiotic, immoral system is overhauled, wouldn't you?  (And maybe we could ditch our outdated reciprocity model of trade negotiations while we're at it.)

Now who's with me?