Scott Lincicome

Welcome to the Whimsy-conomy, Energy Trade Edition

noreply@blogger.com (Scott Lincicome) — Wed, 22 May 2013 23:45:00 +0000

This entry was cross-posted on the Cato Institute's blog, Cato at Liberty.

The AP reports some bad news for anyone seeking a little security and predictability in the US and global energy markets:

Energy Secretary Ernest Moniz said Tuesday he will delay final decisions on about 20 applications to export liquefied natural gas until he reviews studies by the Energy Department and others on what impact the exports would have on domestic natural gas supplies and prices.

Moniz, who was sworn in Tuesday as the nation’s new energy chief, said he promised during his confirmation hearing that he would “review what’s out there” before acting on proposals to export natural gas. Among the things Moniz said he wants to review is whether the data in the studies are outdated.

A study commissioned by the Energy Department concluded last year that exporting natural gas would benefit the U.S. economy even if it led to higher domestic prices for the fuel.

The AP adds that Secretary Moniz justified this delay as his “commitment” to Senate Energy Committee Chairman Ron Wyden (D-Ore.) who opposes natural gas exports and has criticized the DOE study. Moniz’s statement comes just days after his department (quietly, on a Friday) approved one pending export application—moving the grand total of approvals to two out of 20 total applications, most of which have been sitting on DOE’s desk for several years now.
And who says the U.S. government isn’t swift and efficient?

Government sloth aside, these two recent announcements raise a host of serious concerns. As I explained in a recent blog post summarizing my Cato Institute paper on crude oil and natural gas exports, the immediate approval of all natural gas export license applications, as well as broader reform of the system itself, is an economic and political no-brainer. This is because the current licensing systems—and the de facto export restrictions that they create—raise a raft of economic, legal and political problems. For example, the discretionary restrictions on exportation—reinforced by the last week’s developments—likely violate the United States’ WTO obligations and directly contradict longstanding U.S. government support for American exports and opposition to other countries’ export restrictions.

Moreover, and contrary to Moniz’s assertions, the evidence of the economic benefits of fossil fuel exports isn’t isolated to a single DOE study, but has been repeatedly and thoroughly established by government, think tanks, and industry and consumer groups. For these reasons, there is wide, bipartisan support in Congress and the U.S. business community for immediately approving all pending natural gas export applications. The only groups that oppose these exports are the strange bedfellows of misguided environmentalists (who fear that additional exports will lead to increased fracking) and self-interested, gas-consuming industries (who want that cheap gas all to themselves, regardless of the broader economic or trade policy harms).
More broadly, these recent developments demonstrate the government-created uncertainty plaguing not only American energy producers, investors, and workers, but many other of their fellow Americans. As I noted in February:

By depressing domestic prices and subjecting export approval to the whims of government bureaucrats, the U.S. licensing systems retard domestic energy production, discourage investment in the oil and gas sectors, and destabilize the domestic energy market. Artificially low prices prevent producers from achieving a sustainable rate of return on the massive up-front costs required to drill and extract oil and gas, and investors lack any assurances under the discretionary licensing systems that domestic prices will not collapse when output increases. Such concerns have led the IEA to recently warn that U.S. export restrictions put the “American oil boom” at risk.

In short, current uncertainty retards highly capital-intensive domestic energy investment, production, and hiring, thereby destabilizing the market and curtailing economic growth. And what better example of such uncertainty is the surprise approval of one gas export application quickly followed by a single bureaucrat’s announcement that—in order to keep a “commitment” to a single U.S. Senator—no others will be approved until he personally is satisfied with widely-supported data that have been before his agency for months?

Unfortunately, this type of uncertainty pervades U.S. trade and economic policy. Whether it’s bailing out Detroit and the UAW at the expense of certain private investors, or heavily subsidizing green energy through supposedly temporary tax breaks, or negotiating restrictions on Japanese auto imports as Japan’s “entry fee” into the Trans-Pacific Trade Negotiations, or implementing last-minute tax hikes or spending increases, the U.S. government seems intent on substituting the whims of politicians and bureaucrats for predictable, constitutional, free market fiscal policy. As a result, our American “whimsy-conomy” sputters along.

It would be crazy to think that U.S. policymakers can eliminate this rampant uncertainty overnight, but they could at least begin the process by reforming our archaic and problematic energy export laws to freely permit the exportation of all energy products, regardless of type or origin. Such a policy change would help the economy, bring U.S. policy into compliance with our trade commitments, have strong political support, and take America’s energy future out of the hands of unelected bureaucrats like Secretary Moniz.

If they can’t undertake these simple and obviously necessary reforms, the rest of the whimsy-conomy doesn’t stand a fighting chance.

Unilateral Import Liberalization Is Helpful, Egalitarian and - Yes - Politically Possible

noreply@blogger.com (Scott Lincicome) — Mon, 29 Apr 2013 23:56:00 +0000

The Heritage Foundation's Bryan Riley has a great new study out today arguing in favor of the unilateral elimination of all - yes, all - US barriers to imports. Here's the summary:

Congress routinely makes targeted, short-term tariff cuts through “miscellaneous tariff bills.” While conventional wisdom is that unilateral tariff cuts are politically impossible, these bills show that it is possible to reduce tariffs. Proponents of such tariff cuts argue that the cuts support U.S. jobs; critics argue that the economic value of miscellaneous cuts is modest, and that the process is open to abuse. While it is healthy to discuss ways to maximize the benefits provided by miscellaneous tariff bills, the United States would see the most economic benefit from across-the-board tariff reform. The best possible reform would be for the U.S. Congress to eliminate all remaining import tariffs and quotas.

After noting that the United States rates a dismal 38th place in Heritage's ranking of trade freedom (and would jump to first if if eliminated all barriers), Riley explains that import liberalization is one of the few things on which economists - left, right and center - can actually agree, with over 85% of them repeatedly favoring the policy in recent surveys. The reasons for this are obvious:

Tariffs make Americans poorer by transferring dollars from the country’s most competitive industries to the industries that have the best political connections.

Countries with low tariffs, such as New Zealand and Singapore, are more prosperous than countries with high, protective tariffs, such as India and Venezuela. The latest rankings of trade freedom around the world, developed by The Heritage Foundation and The Wall Street Journal in the 2013 Index of Economic Freedom, demonstrate how citizens of countries that embrace free trade have higher average incomes than citizens of countries that do not.

Riley then looks at several examples of countries - including Australia, Chile, China, New Zealand, Canada, and Mexico - unilaterally liberalizing import barriers to great economic success. And while all of this historical and economic data are great, I think the following passage is my favorite because it really hits home just how obscenely immoral our current tariff/quota system really is, as it disproportionately punishes both poor countries and poor Americans:

Former WTO Director-General Mike Moore observed: “You know, the least-developed countries account for less than 0.5 percent of world trade, yet where they have areas of excellence, they’re not allowed to export to the United States or to Europe.”

In the United States, the average tariff on products from developing countries is much higher than on products from developed countries. For example, imports from Bangladesh faced an average U.S. tariff of 15 percent in 2012, but imports from Belgium faced an average tariff of just 0.7 percent. The overall U.S. average tariff on products from the U.N.’s Least Developed Countries list in 2012 was 3.9 times higher than the average tariff on products from other countries.

Imposing tariffs on imports from developing countries makes it more difficult for people in those countries to escape poverty, and keeps them dependent on U.S. aid dollars. In 2011, the U.S. government sent Bangladesh $218 million in economic aid, and collected $746 million in tariffs. If the U.S. government cut the 15 percent effective tariff on imports from Bangladesh, it could keep some aid dollars at home.

In 2011, U.S. the government collected $28.6 billion in tariff revenue, and spent $31.7 billion on foreign economic aid....

Although some people argue that it is politically impossible to cut tariffs unilaterally in the United States, in fact most U.S. tariffs are already close to zero. The United States’ tariff problem stems from the country’s two-tier regime consisting of shoes, clothing, and related items on one tier, and everything else on the other.

Tier One items including shoes and clothing account for less than 6 percent of total imports, but tariffs on these items account for 47 percent of U.S. tariff revenue.[28] As the liberal blog ThinkProgress observed, tariffs are highly regressive: “The kinds of goods where freer trade would mostly benefit the poor are exactly the kinds of goods where trade is least-free.” A study in the Journal of Diversity Management found that tariffs are higher for clothing purchased by low-income consumers, and also higher for women’s clothing than for men’s clothing....

So not only does our tariff/quota system hurt the US economy, but it also benefits rich, politically-connected US industries (like these guys) at the expense of developing countries and the most vulnerable American citizens. Now if that isn't a good enough reason to reform the system, then I don't know what is.

Riley concludes by making several great recommendations for reform and by noting that import liberalization isn't nearly as radioactive as some politicians and political hacks claim because the United States government routinely passes import liberalization bills in the form of temporary, small scale programs like the Generalized System of Preferences and the Miscellaneous Tariff Bill. The same economic and moral principles supporting these bills - eliminating cronyism and helping the economy, US consumers and less-developed countries - obviously would apply to broader liberalization measures (and, of course, to much greater effect). Indeed, when Congress failed to reauthorize GSP in 2011, one champion of import liberalization got on his high horse and explained what's at stake:

The exclusion of the Generalized System of Preferences from the package means that this important program will lapse on December 31, hurting American consumers and businesses as well as workers and farmers in many of the world's poorer countries....

U.S. businesses and consumers benefit from the GSP program through cost savings on imports. Also, according to a 2005 U.S. Chamber of Commerce study, the program supports over 80,000 American jobs associated with moving GSP imports from the docks to farmers, manufacturers and ultimately to retail shelves. U.S. imports under GSP exceeded $20 billion in 2009 and are on pace to exceed $27 billion in 2010. GSP saved U.S. importers nearly $577 million in duties in 2009. The program was instituted on January 1, 1976, by the Trade Act of 1974. In addition to its benefits to American families, GSP is designed to promote economic growth in the developing world by providing preferential duty-free entry for about 4,800 products from 131 designated beneficiary countries and territories.

This is exactly right, and it echoes many of the findings in Riley's study. So who, you might ask, is this great, economically-literate champion of free trade?

The typically mercantilist and import-skeptical Obama administration's USTR, that's who.

So with all of the economic benefits and moral arguments for import liberalization so clear, it kinda makes you wonder what's keeping President Obama from supporting a bigger, better, more permanent version of GSP, eh?

So USDA Is Pondering a "Sugar-for-Ethanol" Program. No, Really.

noreply@blogger.com (Scott Lincicome) — Sat, 13 Apr 2013 13:31:00 +0000

From earlier this week comes news of what could quite possibly be the most cronytastic US government program of all time:

The White House will decide in coming weeks whether to attempt to blunt low prices in the U.S. sugar market by buying hundreds of thousands of tons of surplus sugar and selling it at a loss to ethanol makers.

If approved, it would be the first time the sugar-for-ethanol program, created in 2008 and known as the Feedstock Flexibility Program, has been put into operation....

Large crops in the United States and Mexico have pushed New York futures prices below the trigger price for potential forfeiture by processors of sugar to the government.

The sugar is used as collateral on USDA price-guarantee loans.

Forfeitures could begin in July, with the expiration of USDA loans that guarantee growers will get at least 20.94 cents per lb for sugar. The remainder of the loans expire in September.

"We're doing it because it's the law," U.S. Agriculture Secretary Tom Vilsack said on Monday at the North American Agricultural Journalists meeting. The tonnage purchased "is still not decided," he said....

The 2008 farm law directs USDA to make surplus sugar available to ethanol makers, a provision penned in the early days of the biofuel boom with the goal of creating feedstocks in addition to corn.

"The law makes the Feedstock Flexibility Program the first line of defense. The other main option is to reduce the volume of imports through negotiation or by buying back certificates of quota eligibility," said Tom Earley, economist and trade policy specialist with consulting firm Agralytica.

Some $864 million in loans was in danger of forfeiture, by one estimate. The USDA forecasts the sugar stockpile at the end of this marketing year at 2.4 million tons.

At 20 percent of annual use, it would be the largest carryover since 2001. The USDA will update its forecast of the sugar surplus on Wednesday....

So a 2008 law forces USDA to (i) subsidize US sugar growers by buying their product at above-market prices and then (ii) subsidize US ethanol producers by selling them the exact same sugar at below-market prices.

Ladies and Gentlemen, the United States Government.

On a more serious note, insanity like this provides a perfect example of why it's just so darn tough to eliminate US subsidies - politicians shilling for the sugar growers form an unholy, subsidy-loving alliance with their colleagues shilling for the ethanol (mostly corn) producers. These "public servants" concoct mutually-beneficial programs like the "Feedstock Flexibility Program" to line their cronies' pockets, and they agree to oppose any attempts to trim those programs or any other subsidies that they've secured.

They win; taxpayers (and markets) lose; rinse; repeat.

Tackling Regulatory Protectionism, Finally

noreply@blogger.com (Scott Lincicome) — Tue, 09 Apr 2013 23:55:00 +0000

I've occasionally peered into the abyss that is the barriers to international trade imposed by the US regulatory regime, but I've never been courageous enough to tackle the very important - yet mind-numbingly difficult - task of rigorously documenting these non-tariff barriers and their deleterious effects on the US economy. Fortunately, Cato's Sallie James and Bill Watson have proven up to the task with a brand new paper:

Despite the impressive success of trade liberalization, domestic industries continue to find ways to use the power of government to protect themselves from foreign competition. The practice of using domestic environmental or consumer safety regulation as a way to disguise protectionist policy has become a serious and growing problem in the United States. This regulatory protectionism harms the U.S. economy and violates our trade obligations.

A number of factors combine to explain the rise in regulatory protectionism. Economic globalization has provided Americans with access to a wide range of imported products. This has enabled consumers to demand not only high-quality products at low cost but also products that are produced according to consumers’ philosophical or ethical preferences. Simultaneously, domestic producers seeking protection from this influx of imports must find alternative shelters now that the use of tariffs and quotas is constrained by international law and economic good sense. The consequence is a perfect storm in which social welfare activists and special commercial interests join forces to promote regulatory regimes that unfairly and unnecessarily restrict imports.

There is already a system of laws in place to prevent regulatory protectionism. The rules of the international trading system recognize that domestic laws can be just as protectionist as tariffs. Many of the disciplines of World Trade Organization (WTO) law are embedded in the rules U.S. administrative agencies follow when setting new regulations.

But the U.S. government must take its WTO obligations more seriously. Prior to implementing a new regulation, federal agencies should be required to evaluate the possibility that less trade-restrictive alternatives could meet regulatory goals as effectively as their preferred proposal. Also, the U.S. government should not dilute or bypass the multilateral rules of the WTO through bilateral or regional negotiations that accept managed protectionism.

This paper uses a number of recent examples of protectionist regulations to show that the enemies of regulatory protectionism are transparency and vigilance. Policymakers should be skeptical of regulatory proposals backed by the target domestic industry and of proposals that lack a plausible theory of market failure. These are red flags that the proposal is the product of privilege-seeking special interests disguised as altruistic consumer advocates.

James and Watson examine such regulatory boondoggles as the Lacey Act, catfish inspection, Dodd-Frank's provisions on "conflict minerals", the long-running ban on Mexican trucks, mandatory food labeling, prohibitions on certain flavored cigarettes, and supposed environmental protections for cute, cuddly little dolphins and sea turtles. They demonstrate that, although these regulations might sound (or even start out as) benign or well-intentioned, they often end up undermining free trade and benefiting discrete domestic special interest groups that are, deep-down, seeking to use non-tariff barriers to thwart international competition at US consumers' expense. They also offer up a sound critique of various anti-trade groups' criticisms of global trade (i.e, WTO and FTA) rules that discipline this discriminatory, regulatory protectionism, and offer up a nice litmus test to ensure that future regulatory adventurism doesn't thwart free trade in the process.

My favorite line comes from James' new blog post on the paper:

As we discuss in our paper, tariffs and other conventional trade barriers have fallen over the years, so the barriers that remain are more regulatory in nature, and more sensitive to negotiate. What we’re essentially left with is the difficult issues. They get to the heart of national sovereignty and, on a practical level, require the participation of regulatory administrators who may have very little or no trade negotiation knowledge or experience. They also have little incentive to concede their power. Whereas trade negotiators are paid to, well, negotiate, regulators are paid to inhibit commerce.

Indeed. Be sure to read the whole paper here.

Need Unnecessary

noreply@blogger.com (Scott Lincicome) — Thu, 28 Mar 2013 23:44:00 +0000

This just in from the GAO on US wind energy subsidies (emphasis mine):

GAO identified 82 federal wind-related initiatives, with a variety of key characteristics, implemented by nine agencies in fiscal year 2011. Five agencies--the Departments of Energy (DOE), the Interior, Agriculture (USDA), Commerce, and the Treasury--collectively implemented 73 of the initiatives. The 82 initiatives incurred about $2.9 billion in wind-related obligations and provided estimated wind-related tax subsidies totaling at least $1.1 billion in fiscal year 2011, although complete data on wind-related tax subsidies were not available. Initiatives supporting deployment of wind facilities, such as those financing their construction or use, constituted the majority of initiatives and accounted for nearly all obligations and estimated tax subsidies related to wind in fiscal year 2011. In particular, a tax expenditure and a grant initiative, both administered by Treasury, accounted for nearly all federal financial support for wind energy.

The 82 wind-related initiatives GAO identified were fragmented across agencies, most had overlapping characteristics, and several that financed deployment of wind facilities provided some duplicative financial support. The 82 initiatives were fragmented because they were implemented across nine agencies, and 68 overlapped with at least one other initiative because of shared characteristics. About half of all initiatives reported formal coordination. Such coordination can, in principle, reduce the risk of unnecessary duplication and improve the effectiveness of federal efforts. However, GAO identified 7 initiatives that have provided duplicative support--financial support from multiple initiatives to the same recipient for deployment of a single project. Specifically, wind project developers have in many cases combined the support of more than 1 Treasury initiative and, in some cases, have received additional support from smaller grant or loan guarantee programs at DOE or USDA. GAO also identified 3 other initiatives that did not fund any wind projects in fiscal year 2011 but that could, based on their eligibility criteria, be combined with 1 or more initiatives to provide duplicative support. Of the 10 initiatives, those at Treasury accounted for over 95 percent of the federal financial support for wind in fiscal year 2011.

Agencies implementing the 10 initiatives allocate support to projects on the basis of the initiatives' goals or eligibility criteria, but the extent to which applicant financial need is considered is unclear. DOE and USDA--which have some discretion over the projects they support through their initiatives--allocate support based on projects' ability to meet initiative goals such as reducing emissions or benefitting rural communities, as well as other criteria. Both agencies also consider applicant need for the support of some initiatives, according to officials. However, GAO found that neither agency documents assessments of applicant need; therefore the extent to which they use such assessments to determine how much support to provide is unclear. Unlike DOE and USDA, Treasury generally supports projects based on the tax code's eligibility criteria and does not have discretion to allocate support to projects based on need. While the support of these initiatives may be necessary in many cases for wind projects to be built, because agencies do not document assessments of need, it is unclear, in some cases, if the entire amount of federal support provided was necessary. Federal support in excess of what is needed to induce projects to be built could instead be used to induce other projects to be built or simply withheld, thereby reducing federal expenditures.

Full GAO Report is available here.

To recap: 82 wind subsidy programs; 9 different federal agencies; 2.9 billion taxpayer dollars in 2011 alone; "fragmented," "overlapping," and "duplicative" subsidies; and no formal indication that any of that taxpayer money was actually needed to get these projects off the ground or keep them afloat.

One last note: the US National Debt as of today is $16,753,612,387,626.67.

Smart Power

noreply@blogger.com (Scott Lincicome) — Tue, 26 Mar 2013 00:59:00 +0000

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

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

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

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

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

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

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

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

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

So much for that "smart power," eh?

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

Perspective, Ctd.

noreply@blogger.com (Scott Lincicome) — Thu, 14 Mar 2013 01:01:00 +0000

Just as I was drafting last night's blog post on the supposed "American free trade renaissance", a detailed - and totally depressing - dispatch on the Trans-Pacific Partnership arrived in my inbox from foreign policy gadfly Chris Nelson of "the Nelson Report." Nelson collected various quotes from US and foreign business reps (aka the people who are paid to be eternal trade optimists) on the latest round of TPP negotiations in Singapore, and, boy, does it paint a different picture than the pretty one being paraded around by USTR today. I won't bore you - and steal all of Nelson's intellectual property - by cutting and pasting the entire download, but here are the some of the lowlights (bold are Nelson's commentary; italics are quotes from his anonymous, in-the-know sources):

...the background story at Singapore TPP. Not a happy group of campers. Mexico is just saying no to everything, apparently...in contrast to Canada which is being lovely. Viets totally focused on their one chapter...textiles/apparel and shoes, and US not giving them anything to work with. No one excited about Japan, because it's really not true many chapters finally closed...nearly all still open thru brackets. So if Japan joins, the deal gets kicked further and further down the road. Oct/Bali as a deadline...a joke, and Indonesia's not in TPP anyhow. And Kirk hanging on really depressed folks. US negotiators can't show any flex, even if they wanted to, until the new guy named. Zients? Zero industry/biz support...just WH.

...

"Mexico seems only to have defensive issues, nothing positive except for beef. We'd thought Mexico would play a sort of supportive role as a member of the 'US bloc'. My god if we're having this hard a time now with Mexico, which is mainly fixated on its own ag and apparel issues, what will happen when Japan comes in across the board, it's one of the world's most complex economies!"

...

In fact, as a practical matter Japan won't be compelled to "swallow" all the already-settled chapters, for the basic reason that so many "difficult issues" remain in brackets, and thus remain to be negotiated, perhaps at the Leadership level. A related problem for the outside business observers not allowed in the room:

"We're not even allowed to know the names of the chapters at this point. It's a really stupid parlor game. That made the so-called 'stakeholder briefings' an exercise in frustration".

...

Vietnam? Not negative like Mexico, but very, very, very focused on "just one thing...textiles and apparel, and shoes", and making no bones about it. But here's the problem...so far, in the absence of new guidance from the White House (including no successor to Ron Kirk) USTR negotiators have no flexibility on textiles, apparel and shoes, even if they were so inclined, observers feel.

"So Vietnam has every right to be angry and frustrated, and in the corridors, they made no bones about it!"

Thailand has similar concerns prompting it to lay back and not decide whether to join, it's agreed.
...

Business observers frankly confess to "not being sure what to make of the SOE [State-Owned Enterprise] issue. The Vietnamese tell us it's no longer a big problem, with SOE's now only involved in a small percentage of their economy. So we don't know what's 'reality'."

...

Finally, a big impediment we kept hearing about could really be called the "third problem" from above...

"we have no USTR nominee, and that was on everyone's lips"...

Going forward, the issue is that so long as Kirk's replacement isn't even named, much less confirmed, neither USTR negotiators, nor US trading partners, can have an intelligent discussion on possible deals on anything "sensitive", including all those pesky brackets. Business reps cite as sample problems which cannot even be approached, much less resolved until a new USTR is in place...what about US pharmaceuticals and patent protection? What about US tobacco, very important in Asia, if no longer here?

"With Kirk just hanging-on, no US negotiator or any trade partner can make any concessions until a replacement is confirmed, presumably also with TPA instructions, yet the US keeps pushing everyone else to put concessions on the table. How can they?"

Not a pretty sight, eh? Maybe all of this gets worked out over the next few months, but, after reading the above, it seems that at least a little skepticism and caution is warranted. So isn't it about time that the real TPP negotiations, the Obama administration's questionable handling of them, and the President's real trade policy get reported by the mainstream press here in the states?

Maybe that's just too much to ask.

Giving Obama's Free Trade Legacy Some Much Needed Perspective

noreply@blogger.com (Scott Lincicome) — Wed, 13 Mar 2013 01:55:00 +0000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Seriously, man. What the...?

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

Fortunately, there's always foreign media.

China's "Ghost Cities" Go Mainstream, But Will Anyone Actually Notice?

noreply@blogger.com (Scott Lincicome) — Tue, 05 Mar 2013 01:26:00 +0000

From Business Insider comes news that 60 Minutes has done an in-depth profile of China's ghost cities - only a couple years after many of us started noticing this creepy and telling phenomenon, but, hey, better late than never. BI has plenty of good screenshots worth perusing, but here's the whole video for your viewing pleasure:

After seeing this crazy video (or any of the others that have been floating around since 2009), how can anyone steadfastly declare the inevitability of China's future economic dominance or take headlines like the following seriously?

BREAKING: China sets 7.5% goal for 2013 growth with 3.5% inflation target
— Bloomberg News (@BloombergNews) March 5, 2013

(Hint: they can't.)

New Podcast re: License to Drill

noreply@blogger.com (Scott Lincicome) — Fri, 01 Mar 2013 01:54:00 +0000

The good folks at Coffee & Markets had me back on today to discuss my new Cato Institute paper on natural gas and crude oil export restrictions. The podcast is available for listening or downloading here. Enjoy!

Speaking of Distortions...

noreply@blogger.com (Scott Lincicome) — Wed, 27 Feb 2013 14:29:00 +0000

In my new Cato paper, I discuss the distortions and economic loss caused by current US export restrictions on natural gas and crude oil - one of the big reasons why fundamental reform of our export licensing systems is desperately needed. Most of the current policy debate has focused on the natural gas market, but the economic distortions are just as prevalent for crude oil. Case in point: this new Bloomberg article (emphasis mine):

A glut of shale oil in fields from Texas to North Dakota is forcing producers to find ways around the U.S.’s three-decade-old ban on crude exports in order to seek higher prices in foreign markets.

Kinder Morgan Energy Partners LP (KMP) is among companies setting up mini-refineries to process certain grades of crude just enough to qualify them as refined fuels, which are legal to export.

The industry’s best hope is ultra-light oil, which is so abundant in shale rock that it has flooded the Gulf Coast and traded for a record discount to global benchmark Brent crude last quarter. Potential revenue for exports is $40 billion a year based on global prices, or about $9.7 billion more than what the same oil fetches in the U.S....

Because there are not enough buyers where it’s pumped, the easy-to-refine crude has become the vanguard of an effort by the oil industry to get Congress to further weaken U.S. limits on most crude oil and natural gas exports that have been in place since the early 20th century....

Valero Energy Corp. (VLO), Kinder Morgan and Marathon Petroleum Corp. (MPC) are spending $850 million to build mini-refineries or upgrade existing plants to process the ultra-light crude. The soonest to come online is Kinder’s, set for the first quarter of 2014.

The plants will do little more than heat oil and condensate to a boiling point and distill them into separate fluids. Prices for condensate average about $4.57 less per barrel than heavier U.S. crude, crimping producer profits by as much as $1.7 billion a year, according to calculations based on RBN Energy data....

The units, called splitters, may be able to process as much as 300,000 barrels of crude a day, Luaces said. The mini- refineries being built “split” the condensate into naphtha, a feedstock for making plastic and other chemicals, and kerosene, which can be exported to markets in Asia and Latin America, he said.

Those chemically simpler products may not fetch as much as finished gasoline or diesel fuel, but the lower cost of running the splitter makes it attractive to sell them on international markets, said Judith Dwarkin, chief economist at ITG Investment Research Inc. in Calgary.

“It’s a cheap way around the export limitation,” Dwarkin said in an interview.

There are no limits on refined products. U.S. fuel exports reached an all-time high last year of an average 2.6 million barrels a day, according to Energy Department data. U.S. fuel imports from OPEC have fallen 37 percent, and the country’s petroleum deficit, the difference between the cost of its hydrocarbon imports and exports, fell to $18.7 billion, the lowest since 2004, according to data compiled by Bloomberg.

“Some molecules are painted with a no export sign,” said Braziel, of RBN. “Other molecules are painted with the OK to export sign, and there doesn’t seem to be any rhyme or reason as to why some molecules are OK and some aren’t.”

So because of US crude oil export restrictions, domestic oil producers are spending billions of dollars to construct mini-refineries that produce a slightly-refined product that may be freely exported but sells at a discount to crude on the international market. Meanwhile, simply getting the US government out of the way and permitting unlimited crude oil exports would generate $40 billion per year for US energy producers and their workers.

That seems... inefficient.

So isn't it time we established some rhyme and reason to the system?

Permitting Oil and Gas Exports Is a No-Brainer

noreply@blogger.com (Scott Lincicome) — Mon, 25 Feb 2013 20:37:00 +0000

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

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

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

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

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

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

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

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

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

License to Drill: The Case for Modernizing America’s Crude Oil and Natural Gas Export Licensing Systems

noreply@blogger.com (Scott Lincicome) — Thu, 21 Feb 2013 22:26:00 +0000

That's the pun-tastic name of my new briefer for the Cato Institute. Here's introduction:

Revolutionary extraction technologies have helped increase the supply of fossil fuels in the United States, driving down prices, spurring economic activity, and potentially reversing the longtime status of the United States as a net energy importer to a significant exporter. Impeding that transition are outdated federal regulations—in particular discretionary export licensing systems for natural gas and crude oil—that restrict exports, distort domestic energy prices, deter investment, and encourage graft. They also subvert some of the Obama administration stated policy objectives and could run afoul of U.S. international trade obligations.

Despite the potential economic windfall, opposition to exporting natural gas and crude oil has materialized among certain domestic consuming industries and environmental groups, causing the administration to delay any approvals on pending export-license applications. But there are compelling reasons to approve those applications and to overhaul our disjointed, anachronistic, export license systems to properly reflect the new energy landscape. This paper describes those reasons and provides a basic roadmap for reform.

The full paper is available on Cato's website here. Probably my favorite part is the section on the inconsistency between the Obama administration's use - intentional or otherwise - of archaic licensing systems to restrict oil and gas exports and various other White House policies:

First, the restrictive export licensing systems undermine the National Export Initiative (NEI) and its goal of doubling U.S. exports between 2009 and 2014. Second, the administration’s reticence with respect to fossil fuel exports stands in stark contrast to its full-throated advocacy of other energy exports, particularly renewables like bio fuels and solar panels. Indeed, the September 2010 White House report setting forth the NEI’s priority recommendations calls for increased government support for renewable and nuclear energy exports—but never mentions oil or natural gas. A November 2012 follow-up report lauds the U.S. government’s efforts to achieve these objectives, yet continues to ignore American fossil fuels, despite the massive increases in production and export potential that occurred between 2010 and 2012. Furthermore, increased fossil-fuel exports could actually spur domestic production of renewable energy through higher oil and gas prices. According to the EIA, the role of renewables in electricity generation would be “greater in a higher-gas-price environment.”

Third, the use of export restrictions to benefit downstream industries contradicts longstanding U.S. policy with respect to export restraints and illegal subsidies. The Commerce Department repeatedly has imposed anti-subsidy duties on imports to countervail subsidies resulting from foreign export restrictions on upstream inputs. The administration’s embrace of similar restrictions would not only be hypocritical, but would also expose U.S. exports of energy-intensive products (e.g., fertilizer) to “copycat” duties in key foreign markets.

Fourth, the U.S. government has long opposed restrictive and opaque export licensing systems in WTO negotiations and dispute settlement. For example, in China—Raw Materials (DS394), the U.S. government challenged China’s “non-automatic” export licensing systems for various raw materials as impermissible restrictions on exportation in violation of GATT Article XI. In March 2009, the United States and several other countries submitted a proposal to the WTO Negotiating Group on Market Access calling for increased disciplines on Members’ use of export licensing. The current U.S. export licensing regulations for oil and gas contradict these positions and undermine laudable efforts to rein in such restrictions globally.

Be sure to read the whole thing. And I'd be remiss not to note some of the other recent work on this topic:

Heritage's Nicolas Loris on the economic benefits of natural gas exports and empowering states to control their own energy policy.

The Peterson Institute's comments urging DOE approval of pending natural gas export license applications.

Enjoy!

Hitting 'Em Where It Hurts [UPDATED]

noreply@blogger.com (Scott Lincicome) — Fri, 01 Feb 2013 00:32:00 +0000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hmm. On second thought....

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

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

The Next Chapter...

noreply@blogger.com (Scott Lincicome) — Mon, 21 Jan 2013 22:49:00 +0000

Apologies for the long silence after my new year's post, but I've been traveling and waiting for some things to get settled before writing here again. Now that they are, it's with much excitement that I can announce that I've officially become an Adjunct Scholar for the Cato Institute. As a former Cato intern-turned-research-assistant-turned-co-author-turned-author, this probably seems like the next logical step, but a quick look at Cato's roster of adjuncts reveals just how far out of my depth I really am here. (Shhh, don't tell them!) Seriously, to be listed on the same web page as some of my intellectual idols is a pretty awesome honor, and I hope I can live up to the designation in the coming months and years.

So what does this mean for me and the ol' blog, you ask? Good question. Well, as an "official" adjunct, I'll be blogging at Cato's blog on the issues on which I've written for them over the last few years - for example, trade rhetoric and politics, subsidies and trade remedies. I'll also continue to write the occasional policy paper for them (and actually have a short one in the works right now), and will speak on these and related issues when invited to do so. As always, all of this work will be done in a personal capacity and not on behalf of my employer. See giant disclaimer to the right --->.

Given this new opportunity, my full-time job and the birth of my first child in only a few short weeks(!), this blog will become a little quieter for the foreseeable future - basically a place for the occasional posting of quick links, random musings (including, yes, monkeys/robots/pirates) and long-form stuff that's not really appropriate for Cato's blog because it's too long/legalistic, too profane or just not in my area of expertise. I'll also cross-post things from Cato's blog when I write there. None of this will happen too often - maybe once or twice a week, max - so unless you enjoy swinging by here just for fun, I'd recommend subscribing via email or an RSS feed in order to save yourself a few clicks. Subscription information is below my giant head on the left side of this page, if you're interested.

And, if you just can't bear to be without me for such long periods, you can - after seeking psychological help, of course - always follow or visit me on Twitter, where I'll be tweeting a pretty-frequent (mainly before/after business hours, of course) stream of interesting links and 140-character thoughts. In fact, many of those tweets will be a preview of longer stuff that ends up in a future blog post or paper.

So, that's about it for now. For those of you who were kind enough to mention your hope for my swift return to regular blogging, I'm sorry to disappoint. Hopefully you and the rest of the folks out there will enjoy the next chapter in my fun little side project. There's certainly more to come - just in a slightly different, more respectable (ha), and less frequent format.

p.s. Here's a recent radio interview that I did for American Radio Journal on my October 2012 Cato paper. (After January 23, you can download it in the ARJ archives.)

Happy New Year (and Some Updates)

noreply@blogger.com (Scott Lincicome) — Thu, 03 Jan 2013 02:55:00 +0000

Happy New Year! I hope you and yours had a happy holiday season and are looking forward to a great 2013. As for me, I have really enjoyed my time away from the ol' blog (sorry, it's true), but I will definitely start blogging again in some capacity. Not quite yet, however - there are some exciting things in the works, but they haven't quite been finalized yet. In the meantime, I'll be posting a few random things here over the next couple weeks, and will then provide a complete update once I'm able. For tonight, here are a couple reminders that, for better or worse, US subsidy and anti-subsidy policy in 2013 is already shaping up to be a lot like it was in 2012 (thus keeping my Cato paper relevant!):

On December 28, 2012, the US shrimp industry filed a new petition seeking a countervailing (anti-subsidy) duties on frozen warmwater shrimp from pretty much every major shrimp exporter on the planet (i.e., China, Ecuador, India, Indonesia, Malaysia, Thailand, and Vietnam). Even though there are already anti-dumping duty orders on shrimp from China, Ecuador, India, Thailand and Vietnam, this promises to be a pretty huge case - according to the US International Trade Commission, US consumers purchased more than $4.8 billion worth of these imports in 2011, most of which came from the countries targeted by the new CVD petition. Sorry, American shrimp lovers!

As I warned in October, the fiscal cliff deal - which raised taxes on those evil American "millionaires" (aka people making more than $250,000 (exemption caps) or $400,000 (rate hikes) per year) - also included a bevvy of new subsidies for green energy producers. This includes a one-year extension of the wind production tax credit (cost: $12 billion) and the retroactive application (for 2012) and extension (for 2013) of a tax subsidy for biodiesel. As you may recall, US biodiesel is currently the subject of countervailing duty (anti-subsidy) orders in Australia, Peru and the EU. The Joint Committee on Taxation estimates that the fiscal cliff bill will dole out $18.1 billion in new energy subsidies over the next 10 years (almost all of which are of the "green" variety), and $4.7 billion in 2013 alone. Impressive work, K Street. (The Farm Bill - which includes a ton of agriculture subsidies, including those pesky, WTO-inconsistent ones for cotton - also was extended as part of the fiscal cliff deal. Of course it was.)

And, once again, my paper on the total mess that is US subsidy and anti-subsidy policy - perfectly encapsulated by the two events above - is still available here.

In other news, I finally uploaded video my October 2012 talk on "China Myths and Realities" for the National Committee on US China Relations' "China Town Hall". It's below in two parts. Enjoy!

And do stay tuned. More to come....

Announcement

noreply@blogger.com (Scott Lincicome) — Tue, 27 Nov 2012 00:00:00 +0000

After three-plus years and a frightening 794 posts (795 if you count this one), this blog will be on temporary hiatus until (at least) the new year. During my much-needed vacation, I came to the realization that - as much as I enjoy screaming into the interwebs about trade, monkeys and other important stuff - my little (unpaid) hobby was seriously distracting from my more-than-full-time job, my increasingly-pregnant wife, more formal public policy endeavors and the many other joys and obligations that exist outside of my den. Blogging also had begun to feel like a chore rather than a hobby, and - let's face it - that's not good for an activity that neither pays the bills nor keeps Stately Lincicome Manor in good working order.

Thus, I'm going to take a little break to realign my priorities and determine if a more "balanced" blogging approach is possible or necessary. There's a very good chance that I will end up feeling bored and/or repressed in under a week, and therefore resume blogging in 2013. In the meantime, I'll still be tweeting on the same issues covered here (at @ScottLincicome) and might even post a random link or two here over the next month (but no promises).

Thanks much for reading over the past few years. It's been a pretty wild ride - one that I never, ever expected when I started doing this back in July 2009.

And happy holidays.

-SL

Hostess Brands: A Case Study in Government Burdens and Global (Un)competitiveness

noreply@blogger.com (Scott Lincicome) — Mon, 19 Nov 2012 23:34:00 +0000

As most people know by now, Hostess Brands - the maker of such American ~~junk~~ food staples as Twinkies, Ding Dongs and Wonderbread - announced last week that it had failed to come to terms with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union and its 5000 striking members, and thus would enter Chapter 11 bankruptcy to unwind the company, sell off its assets and eliminate 18,500 US jobs. The latest news is that Hostess and the union have agreed to enter into mediation in an attempt to prevent the company's dissolution, but Hostess Brands' story remains a very useful example of how government regulations can impose huge costs on US businesses and either drive them offshore or out of business entirely.

Last week, I focused on how the United States' unreasonably high corporate taxes can hinder American companies' global competitiveness, and Hostess Brands' monthly operating report (required for bankruptcy proceedings) shows at page 15 that the beleaguered company was/is responsible for not only state, local and federal corporate income taxes, but also millions of dollars in other taxes, including (i) Federal Insurance Contributions Act (FICA); (ii) Federal Unemployment Tax (FUTA);(iii) State/Local Unemployment Tax (SUTA); (iv) State/Local Business Licenses; (v) State/Local Sales Taxes; (vi) State/Local Use Taxes; (vii) State/Local Mileage Taxes; (viii) State/Local Real Property Taxes; (ix) State/Local Personal Property Taxes; (x) State/Local Vehicle Personal Property Tax; (xi) State/Local Accrued Franchise Taxes; and (xii) State/Local Accrued Operating Taxes.

Gee, is that all?

Of course, taxes aren't the only thing that can kill a company's bottom line - regulations hurt too, and as Henry Miller notes in a recent op-ed, they're getting increasingly worse:

Stultifying, job-killing regulation has been a hallmark of the Obama administration. An analysis by Susan Dudley, director of the George Washington University Regulatory Studies Center, reveals that with respect to "economically significant" regulations, defined as impacts of $100 million or more per year, Obama has been an outlier. While Presidents George H.W. Bush, Bill Clinton and George W. Bush "each published an average of 45 major rules a year ... the outliers are Reagan, who issued, on average, a mere 23 major regulations per year; and Obama, who has published 54 per year on average, so far."

And there are many more in the pipeline: According to Dudley, fully a third of the final major rules with private-sector impacts have been postponed. And the government's spring 2012 "Unified Agenda of Federal Regulatory and Deregulatory Actions," which provides a preview of and transparency with respect to agency and OMB planning for the coming year, still has not been published.

In the case of Hostess Brands, the most obviously relevant regulations are those laws which permit or favor "closed shop" rules that force workers to join a union and pay dues (as opposed to states with Right-to-Work laws that prohibit closed shops). It's difficult to quantify the costs that such closed rules impose on businesses and workers, but a recent examination of US job creation demonstrates that they could be significant (h/t Mark Perry):

Since the recession ended in June 2009, almost three out of every four jobs added to U.S. payrolls have been in Right to Work states (1.86 million out of 2.59 million), even though those 22 states represent only 38.8% of the U.S. population (120 million). In contrast, only about one of every four new jobs were created in forced-unionism states (730,000), even though more than 61% of Americans live in those 28 states (189 million). Relative to their population, the Right to Work states have been job-creating powerhouses during the recovery, and forced union states haven’t even come close to “carrying their weight” in terms of their share of the population. Adjusting for differences in population, Right to Work states created four new jobs for every one job added in forced union states, because those 21 RTW states created 2.54 times more jobs even though forced union states have 1.6 times as many people.

Hostess Brands' problems provide anecdotal support for the above data on right-to-work versus closed shop states. According to the press release announcing Hostess' bankruptcy, existing union arrangements had crippled the ability to continue its business operations:

The [union] in September rejected a last, best and final offer from Hostess Brands designed to lower costs so that the Company could attract new financing and emerge from Chapter 11. Hostess Brands then received Court authority on Oct. 3 to unilaterally impose changes to the BCTGM’s collective bargaining agreements.

Hostess Brands is unprofitable under its current cost structure, much of which is determined by union wages and pension costs. The offer to the BCTGM included wage, benefit and work rule concessions but also gave Hostess Brands’ 12 unions a 25 percent ownership stake in the company, representation on its Board of Directors and $100 million in reorganized Hostess Brands’ debt.

These views find further support in several news reports which indicate that Hostess Brands' bankruptcy will likely attract several bidders for iconic labels like Twinkies because the new owners won't have to deal with existing union obligations:

Daren Metropoulos, a principal of the Greenwich, Connecticut-based private equity firm, said of Hostess in an e-mail yesterday that ``shedding the complications of the unions and old plants makes it even more attractive.”

Tom Becker, a spokesman for Hostess, declined to comment on potential asset bids. While Hostess has seen interest in pieces of the business, its labor contracts and pension obligations have deterred offers for the whole company, Chief Executive Officer Gregory F. Rayburn said yesterday.

In short, the company is only an attractive investment without the unions. Shocking, I know.

Unfortunately, even if Hostess Brands resolves the current union impasse through mediation, onerous labor regulations and obligations aren't the only thing raising the company's costs and hindering its competitiveness. In fact, US sugar protectionism is also putting a serious crimp in the company's (and other American bakers' and confectioners') bottom line:

Since 1934, Congress has supported tariffs that benefit primarily a few handful of powerful Florida families while forcing US confectioners to pay nearly twice the global market price for sugar.

One telling event: When Hostess had to cut costs to stay in business, it picked unions, not the sugar lobby, to fight.

“These large sugar growers ... are a notoriously powerful lobbying interest in Washington,” writes Chris Edwards of the Cato Institute in a 2007 report. “Federal supply restrictions have given them monopoly power, and they protect that power by becoming important supporters of presidents, governors, and many members of Congress.”

Such power has been good for business in the important swing state of Florida, but it has punished manufacturers who rely on sugar in other parts of the United States, the Commerce Department said in a 2006 report on the impact of sugar prices.

Sugar trade tariffs are “a classic case of protectionism, pure and simple, and that has ripple effects through other sectors of the economy, and, for all I know, the Hostess decision is one of them,” says William Galston, a senior fellow at the Brookings Institution in Washington....

[Congressional] refusal to address tariffs that neither support infant industries nor provide national security has come despite damning reports from the Commerce Department about the impact on US jobs, including the fact that for every sugar job saved by tariffs, three confectionery manufacturing jobs are lost.

Some of those job losses came when candy companies like Fannie May and Brach’s moved the bulk of their manufacturing to Mexico and Kraft relocated a 600-worker Life Savers factory from Michigan to Canada, in order to pay global market prices for sugar.

The impending mass layoffs from 33 Hostess plants scattered around the US, economists say, might force Washington to take a more serious look at how public policy affects the ability of corporations to make money – especially in an economy where even iconic brands like Twinkies and Wonder bread aren’t safe.

“I think there are policy implications here,” says Mr. Edwards, an economist at the conservative Cato Institute. “The Department of Commerce, the Obama administration, and [Congress] need to look at Hostess as a case study: Why did this company have to go bankrupt? Why were its costs higher than it could afford? Are there regulatory issues with import barriers on sugar or unionization rules that we need to look at and change? We’ve got to understand why manufacturing in a lot of cases doesn’t seem to be profitable anymore.”

Unfortunately, congressional repeal of US sugar subsidies and protectionism doesn't look to be happening anytime soon; for example, the Senate in June voted 50-46 to maintain the sugar program in the new Farm Bill. Thus, even if mediation saves Hostess Brands in the short term, American sugar protectionism, as well as other onerous US regulations and taxes, could still prevent the company from regaining profitability and competing at home and abroad over the long term. As a result, Hostess - or a buyer of its most famous brands - could end up following many other US manufacturers facing competitiveness-crippling taxes and regulations:

[A]nother possible bidder hints at the future of Twinkies and maybe the US bakery business as a whole: Mexico’s Grupo Bimbo, the world’s largest bread baking firm, which already owns parts of Sara Lee, Entenmann’s and Thomas English Muffins.

Bimbo has already sniffed around the bankruptcy proceedings that have haunted Hostess for a decade, in a bid to further expand its North American portfolio and pad its $4 billion net worth. Bimbo reportedly put in a low-ball bid of $580 million a few years ago, Forbes reports, and may be rewarded for that move since the Hostess kit-and-kaboodle may fetch more like $135 million today.

But the big question is whether the same problems that haunted Hostess – high sugar prices tied to US trade tariffs, changing consumer tastes, and union pushback against labor concessions – will squeeze whatever profit is left in the brands.

Especially if a Mexican buyer is involved, production may go the way of the Brach’s and Fannie May candy concerns: south of the border. With US sugar tariffs set artificially high to protect Florida sugar-growing concerns, a non-unionized shop with access to lower-priced sugar in Mexico could be the Twinkie lifeline, economists suggest.

If Hostess or its new owners move offshore in order to avoid onerous sugar tariffs and other US regulations/taxes, Twinkies might indeed get that lifeline. Unfortunately, the thousands of Americans who used to make them won't be so lucky.

Global Competitiveness, Ctd.

noreply@blogger.com (Scott Lincicome) — Thu, 15 Nov 2012 01:51:00 +0000

Two very timely updates since last night's post on US corporate taxes and global competitiveness:

Cause. First, the National Federation of Independent Business, the main trade association for small businesses in the United States, highlights other aspects of the Ernst and Young study that I mentioned last night: "New data released today by Ernst and Young shows tax increases shows that allowing the top two tax rates to increase, as has been proposed by President Obama and many Members of Congress, would greatly impact small businesses. The preliminary results of the study show business owners paying the top two rates account for: 72 percent of all S corporation income; 61 percent of all partnership income; and 13 percent of all sole proprietorship income. Subchapter S corporations, partnerships, LLCs, and sole proprietorships are all considered "pass-through' businesses for tax purposes, in which business income is taxed at the individual rates. NFIB research shows three-quarters of small businesses are organized in such a manner. In addition to this week's Ernst and Young data, the Congressional Joint Committee on Taxation recently published research that estimates around 53 percent of business income would be impacted allowing tax relief to expire on the top two individual brackets, impacting an estimated 940,000 who earn business income.

Effect. Second, we see the real world effects of the US government's inability to reform its painful, arcane tax and regulatory policies: "Cisco CEO John Chambers says there’s one place in the world where doing business is easy – and it’s not the U.S. Canada, he told analysts during a Tuesday conference call, is “the easiest place to do business." "It doesn’t matter which party is in power, even in their provinces, i.e. their states... leaders in Ottawa get it,” he said. “They drive down through and make it very easy to do business there. You’re going to see us grow our business there as well as invest overall." In case you've forgotten, Canada has repeatedly lowered its corporate tax rate over the last several years, and it now stands at 15% - a full 20 percentage points lower than the federal statutory corporate tax rate in the United States. Oof.

So What Now? (Global Competitiveness Edition) [UPDATED]

noreply@blogger.com (Scott Lincicome) — Wed, 14 Nov 2012 00:38:00 +0000

In the coming weeks, I'm going to look ahead to the next few years of US international economic policy and examine (i) what the United States should emphasize; and (ii) whether I think the Obama administration will do so. This series will cover a wide range of subjects, including things like trade agreements; unilateral trade liberalization; regulatory protectionism; energy; and subsidies policy. Tonight's first installment, however, will focus on something I briefly discussed last week: how federal policies, particularly those related to business taxes and regulations, affect US companies' global competitiveness. This subject seems particularly timely, given that US tax policy is dominating the current "fiscal cliff" negotiations in Washington, and that the future of the struggling US economy will depend, at least in part, on whether American businesses can compete in the global economy. (And, as I've repeatedly explained here, outsourcing and protectionism would be far less common political themes if US companies became more globally-competitive due to lighter government tax and regulatory burdens.)

Unfortunately, in terms of business-friendly policies and global competitiveness, things aren't too good for the United States right now:

As I detailed in July, the United States has declined - in some cases significantly - in every independent study of global economic strength and competitiveness since President Obama took office. These studies reflect a failure by the Obama administration to implement tax, trade and regulatory policies that could help US businesses and workers compete and prosper in the global economy. Since July, the World Economic Forum's latest Global Competitiveness Index has dropped the United States another two places (now 7th, from 2nd in 2009, 4th in 2010 and 5th last year); respondents' top three problems with the US economy are inefficient government bureaucracy, tax rates and tax regulations - all things that the Obama administration could've addressed (especially when Democrats had total control of the US government in 2009-2010) but instead completely ignored. The United States also has dropped from 10th to 12th in the Legatum Institute's Prosperity Index, with the US economy a mediocre 20th overall. This is not good at all.

Not good, indeed. Unmentioned in my note above is the World Bank's latest Doing Business survey which came out a few weeks ago and measures a wide range of regulatory policies in order to determine which countries are the best places to - unsurprisingly - do business. While the United States remains fourth overall in the report, a closer look at the World Bank rankings shows a decline in seven of ten categories and no change in the other three:

TOPIC RANKINGS	DB 2013 Rank	DB 2012 Rank	Change in Rank
Starting a Business	13	12	-1
Dealing with Construction Permits	17	16	-1
Getting Electricity	19	19	No change
Registering Property	25	15	-10
Getting Credit	4	4	No change
Protecting Investors	6	6	No change
Paying Taxes	69	65	-4
Trading Across Borders	22	21	-1
Enforcing Contracts	6	4	-2
Resolving Insolvency	16	15	-1

As you can see, by far the worst area for the United States is tax policy, where the United States ranks a depressing 69th overall, down four spots from last year. A breakdown of this ranking shows that the United States struggles not only with respect to total corporate tax rate (46.7%, well above the OECD average), but also in terms of tax complexity (taking a mind-boggling 175 hours - over four workweeks! - for the average New York business to prepare and file its taxes).

Adding fuel to this fire is AEI's Jim Pethokoukis, who today notes a new report from Ernst & Young on US business tax policy, including taxes on corporate income and investment (i.e., dividends and capital gains). And things are gonna get much, much worse next year if the fiscal cliff talks fail:

- Taking into account both the corporate and investor level taxes on corporate profits and state level taxes, the United States has among the highest integrated tax rates among developed countries and these integrated tax rates will rise sharply in 2013:

- The current top US integrated dividend tax rate of 50.8 percent will rise to 68.6 percent in 2013, significantly higher than in all other OECD and BRIC countries.

- The current top US integrated capital gains tax rate of 50.8 percent will rise to 56.7 percent in 2013, the second highest among OECD and BRIC countries.

Pethokoukis next clips the section of the E&Y report which explains why these taxes are such a bad thing for economic growth and business competitiveness (and why most countries keep them relatively low):

Most developed countries provide relief from the double tax on corporate profits because it distorts important economic decisions that waste economic resources and adversely affect economic performance:

– It discourages capital investment, particularly in the corporate sector, reducing capital formation and, ultimately, living standards.

– It favors debt over equity financing, which may result in greater reliance on debt financing and leave certain sectors and companies more at risk during periods of economic weakness.

– A tax policy that discourages the payment of dividends can impact corporate governance as investors’ decisions about how to allocate capital are disrupted by the absence of signals dividend payments would normally provide.

Given these facts, it's really no surprise that tax policy remains one of the biggest areas of concern American business owners and managers who are struggling to compete against companies that reside in more accommodating countries (e.g., the 68 countries that rank better in the World Bank's "paying taxes" list and all of those to the left of the United States in the E&Y charts above). And it all begs the question: what does President Obama intend to do about this problem?

Well, as you may recall, the President did release a tax reform plan last February that would lower the statutory federal corporate tax rate from 35 percent to 28 percent (32% with state taxes included), but that plan has gone nowhere and, beyond a glancing debate reference or two, hasn't been discussed in months. And as I mention above, Obama didn't touch the issue during his first three years, even in 2009-10 when he and his party had total control of the US government. So it's really anyone's guess as to whether the President intends to pursue corporate tax reform now that the election's over and he no longer needs the talking point.

Moreover, simply lowering the statutory rate a few points wouldn't really solve the tax problem that American companies now face. First, as Cato's Dan Mitchell explains, 28 percent is still well above the rates of most industrialized countries in the world, and Obama's plan actually increases the tax burden on certain types of common corporate activity.

Second, as Pethokoukis notes, the plan also--

would leave the integrated capital gains rate more or less unchanged and the dividend rate sharply higher. As E&Y point out, a) the top federal income tax rate on dividends will increase from its current level of 15 percent to 39.6 percent in 2013; b ) the top federal income tax rate on long-term capital gains will rise from its current level of 15 percent to 20 percent in 2013; c) For many taxpayers, both dividends and capital gains will also become subject to the additional 3.8 percent Medicare tax in 2013 due to changes under the Affordable Care Act of 2010.

Finally, I'd add that it's highly unlikely that the President would significantly reform the tax code's troubling complexity by, for example, eliminating the hundreds of tax breaks (aka "subsidies") for certain types of manufacturing and green energy production. Indeed, Obama's "old" corporate tax plan celebrates and expands these types of subsidies (more on that here).

(There's also the little problem of the fact that the vast majority of American businesses pay under the individual rates, which the President wants to raise. But since we're talking corporate tax reform, we'll leave that little issue for another time.)

Add all of this up, and it seems highly unlikely that the United States will be surging in the global competitiveness rankings anytime soon due to serious reforms of our corporate/investment tax system or any other business regulations. I'd be thrilled to be proven wrong next year, but I'm certainly not holding my breath.

UPDATE: This just in:

President Barack Obama will begin budget negotiations with congressional leaders Friday by calling for $1.6 trillion in additional tax revenue over the next decade, far more than Republicans are likely to accept and double the $800 billion discussed in talks with GOP leaders during the summer of 2011.

Mr. Obama, in a meeting Tuesday with union leaders and other liberal activists, also pledged to hang tough in seeking tax increases on wealthy Americans....

The president's opening gambit, based on his 2013 budget proposal, signals Mr. Obama's intent to press his advantage on the heels of his re-election last week.

In case you're wondering, the President's 2013 Budget paid lip-service to corporate tax reform (at p. 38) but provided no actual details.

"Green Airline War" Ends (For Now) with a Whimper, Not a Bang

noreply@blogger.com (Scott Lincicome) — Mon, 12 Nov 2012 23:08:00 +0000

Even though the domestic and international backlash has been significant, today's news that the EU has suspended its airline carbon emissions tax remains pretty surprising:

The EU will suspend for one year a controversial policy of charging foreign airlines for their carbon emissions on flights to and from Europe, citing progress in negotiations towards a global regime to tackle pollution by the aviation industry.

Connie Hedegaard, the EU climate commissioner, announced the suspension on Monday of a policy that had united the US, China, Russia, Brazil, India and several other countries in their opposition to it.

The EU carbon emissions trading scheme had also drawn complaints from European airlines and Airbus, the Toulouse-based aircraft manufacturer, which feared being caught up in a global trade war....

The suspension will apply only to flights to and from the EU – not between the 27 countries that make up the bloc – and must still be approved by member states and the European parliament.

The EU law was part of its broader policy to curb the greenhouse gas emissions linked to global warming. It requires airlines to buy permits from its carbon market to cover their emissions on all flights to or from the EU.

You may recall that when the EU's emissions scheme was first announced, I opined that the global "trade war" was possible in this sector because the majority of airline services were exempt from WTO rules. Thus, the EU could apply the policy - and others could retaliate against European airlines - without much fear of WTO litigation (or WTO-sanctioned retaliation). Some trade experts raised very theoretical WTO claims, but clearly no WTO Member governments were, as is typical, willing to file a WTO complaint on based on mere theories.

Instead, it appears that some ol' fashioned strong-arming by the US, China and others - forbidding their airlines from complying with the EU system or threatening retaliation - has done the trick:

Airbus, owned by EADS, called in March for a suspension of the EU scheme against airlines after claiming that it was being prevented from finalising contracts worth $14bn to supply jets to Chinese carriers....

The Association of European Airlines also welcomed Ms Hedegaard’s statement, adding that some of its member airlines had already experienced problems resulting from non-EU countries’ objections to the bloc’s carbon emissions trading scheme – such as European carriers struggling to secure traffic rights to fly into airports.

“We already had signs we were moving towards a trade war [because of the EU scheme],” said the AEA. “We welcome for that reason [the proposal] to put a moratorium on [the scheme] and wait for the outcome of the [ICAO] debate.”...

Foreign airlines, led by US carriers, complained the scheme amounted to a form of extraterritorial taxation for flights that originated outside the EU and were largely conducted in international airspace.

Airlines for America, the US airlines’ trade body that tried unsuccessfully to stop the EU scheme in the courts, said it was “cautiously optimistic” about the European Commission’s proposal....

The future of US legislation that could ban domestic airlines from complying with the EU carbon emissions scheme is unclear.

The EU, however, refuses to admit that global pressure caused the Commission to suspend the emissions scheme. Instead, the Europeans point to global talks on airline emissions that are - allegedly - going just great:

European Commission officials insisted that they had not buckled to international pressure in proposing to defer enforcement of the scheme against flights into and out of Europe until the end of 2013. Instead, they attributed the move to positive results last week in talks at a UN aviation body about a potential international agreement after years of frustration.

The body, called the International Civil Aviation Organisation, agreed to establish a high-level group to develop a global system to tackle airlines’ carbon emissions by the time of its next general assembly in September 2013....

“For the first time in years, a global deal on aviation should be in reach,” said Ms Hedegaard. She called the ICAO high-level group “very good news”.

However, Ms Hedegaard also warned that the EU policy would be reactivated “automatically” if the ICAO talks proved fruitless. “It is very important for our opponents to understand this,” she told journalists in Brussels.

Ms Hedegaard’s proposal marked a softening from previous declarations that she would not amend the EU law affecting airlines and their carbon emissions because of threats of a trade war.

I don't know about you, but Ms. Hedegaard's confident statements about an international agreement on airline emissions certainly raised my eyebrow, as any such agreement would require the support of the very nations who raised a giant stink about the EU program to begin with. I could perhaps see the second-term Obama administration pushing for such a deal, but is it realistic to assume the same motivation - especially for a deal with the same level of ambition as the EU scheme - from China, Russia, Brazil, India and others?

Color me skeptical.

Instead, it seems to me that the ICAO deal has provided the European Commission with sufficient cover to shelve the poorly-thought-out emissions scheme and let it die on the vine over the next year as the ICAO talks continue behind closed doors. The Europeans then can express support for anything that comes out of the ICAO next September (regardless of the final deal's scope and effect), and this two step will save face and the EU airlines and aircraft companies.

But, hey, maybe I'm wrong and a big, ambitious global emissions agreement it right around the corner. I guess we'll find out in 10 months.

The Green Subsidies Mess Continues Apace

noreply@blogger.com (Scott Lincicome) — Thu, 08 Nov 2012 00:14:00 +0000

I'm sure I'll have plenty to say about last night's election results (other than an admission that my groundless prediction was obviously wrong), but tonight I'd like to focus on the latest reminders that the global mess surrounding green subsidies waits for no one man or election.

First, the US International Trade Commission unanimously found today that dumped/subsidized Chinese solar cells are injuring US solar manufacturers:

The United States International Trade Commission (USITC) today determined that a U.S. industry is materially injured by reason of imports of crystalline silicon photovoltaic cells and modules from China that the U.S. Department of Commerce (Commerce) has determined are subsidized and sold in the United States at less than fair value.

All six Commissioners voted in the affirmative.

As a result of the USITC's affirmative determinations, Commerce will issue antidumping and countervailing duty orders on imports of these products from China.

As you may recall, DOC last month released its final determination of pretty high antidumping and countervailing duties on Chinese imports, and DOC now will instruct Customs to start collecting those duties on a prospective basis. And, of course, US solar panel prices will inevitably rise (if they haven't already).

While US consumers and the Chinese government will inevitably grouse about today's decision, I see several reasons why Beijing might not directly retaliate against the United States. First, given the massive trade volumes at issue in this case and the ITC's unanimous vote in the preliminary phase, today's final vote shouldn't have come as a surprise to anyone. Second, Chinese exporters and US consumers actually scored a couple minor victories in this case: (a) DOC refused to expand the scope of the duties to include panels assembled in China but made from third-country inputs, and several Chinese producers have (apparently) already made contingency plans to export solar panels that are outside of the scope of the new US duty order; (b) the ITC today disagreed with DOC that "critical circumstances" exist in this case, and the duties will therefore not be assessed retroactively to 90 days before DOC issued its preliminary AD/CVD determination. If the ITC had agreed with Commerce, US importers could've been on the hook for millions of dollars in retroactively-applied duties. Third, this case is far from over: DOC's conduct in this investigation (and several others) is the subject of two new WTO disputes filed by China, and I wouldn't be surprised to see a US court appeal or two also emerge.

So maybe, just maybe, the US-China green subsidy fight won't be expanded dramatically in the wake of today's ITC vote.

On the other hand, it looks like the EU's own fight with China over green goods and subsidies is just cranking up. In response to the EU's September initiation of separate anti-dumping and anti-subsidy investigations of Chinese solar panels, China initiated its own AD/CVD investigations of EU polysilicon. If that sounds familiar, it should: in July China began similar cases against US (and Korean) polysilicon in apparent response to the US solar panels case. However, unlike the US, the EU polysilicon case wasn't the end of China's response to Europe's solar investigation. China also has filed a new WTO dispute targeting EU solar subsidies:

China has filed a WTO complaint over local content requirements under renewable energy feed-in-tariff programmes in certain EU member states, officials announced earlier this week. The surprise move comes just days after Beijing launched anti-dumping and countervailing duty investigations domestically over EU exports of solar polysilicon components to the Chinese market.

On the Chinese Ministry of Commerce website, ministry spokesperson Shen Danyang said that the People’s Republic had requested consultations with the EU and certain member states - including but not limited to Italy and Greece - under the WTO’s dispute settlement proceedings regarding allegedly unfair EU trade practices in the solar sector. According to Shen, electricity produced by EU-made solar components benefited from favourable feed-in tariffs in some countries, which in turn hurt the interests of Chinese producers locked out from such subsidies.

Interestingly, the Chinese WTO claim appears to be similar to one brought by - you guessed it! - the EU (and Japan) against Canada in relation to Ontario's "feed-in tariffs" for renewable energy. The final Panel report in that case is due out soon, but rumors indicate that the Canadian government lost on most, but not all, aspects of the dispute.

So is a new Chinese dispute or polysilicon-like retaliation against the US in the works because of today's ITC announcement? As mentioned above, I don't think so, but it's not out of the question. Indeed, China already has a dispute teed-up in a final report by China's Ministry of Commerce (MOFCOM) which found that several US states provide prohibited subsidies to US manufacturers of solar panels and other green goods. That report hasn't resulted in any formal action, but a WTO dispute would appear to be the logical next step if or when Beijing decides to respond to US green protectionism. Maybe that won't happen tomorrow, but it'll keep hanging over Uncle Sam's head until those subsidies go away.

Regardless of what happens next, all of the stuff above makes clear that the global green subsidy mess - the duties, the litigation, the uncertainty and, of course, the economic problems - is showing no signs of abating any time soon. While this might be good news for my paper on the subject, it's undoubtedly bad news for the many people urging the proliferation of environmental technologies, including US consumers and the struggling solar industry - in the United States, China and elsewhere.

The Last Four Years and the Next

noreply@blogger.com (Scott Lincicome) — Mon, 05 Nov 2012 01:07:00 +0000

With the election only two(!) days away and with every "pundit" with an internet connection offering his/her views on President Obama's first term, there's no better time than now to provide my opinion on the United States' trade and related policies in the Obama years. Unfortunately, there's simply no way to sugarcoat it: the President's international economic policies have fallen short on almost every level.

This conclusion will likely come as no surprise to readers of this blog, and I'm not going to spend all night reiterating the many criticisms that I've explored here since mid-2009. Instead, I'd like to keep this (relatively) short, so if you want more support for anything said below, feel free click the hyperlinks below at your leisure.

But before I start kvetching, let me quickly note the "good" things that the Obama administration has done since they took over US trade policy in 2009:

First, and most importantly, they have avoided serious backsliding into protectionism, particularly with China. As I explained the other night, the President and his team have resisted the strong calls from their Democrat allies in Congress to label China a currency manipulator or to impose duties on Chinese imports on the basis of alleged currency manipulation. Each of these policies is economically, legally and strategically wrongheaded, so it's good that the administration ignored them. Moreover, they have avoided the imposition of broad-based protectionism, although they have implemented (or failed to stop Congress from implementing) many discrete anti-trade policies (discussed below). However, as I've repeatedly explained, there is a big difference between pushing good trade policies and not destroying the economy (and US diplomatic relations) through protectionism. In other words, "Obama 2012: Not Totally Horrible" is hardly a good campaign slogan. We deserve - and really need - better.

Second, I think the administration has done a reasonably good job of using WTO dispute settlement to advance US and broader free trade interests. They are on pretty solid ground to brag about the number of cases that they've initiated to end other WTO Members' anti-trade practices. Dispute settlement is a legitimate and effective way to curtail foreign protectionism, and it's good that, instead of imposing unilateral measures, the administration went to the impartial WTO. However, it's important to note that (1) three of those disputes (challenging Chinese trade remedies actions against US chicken, automobile and steel exports) are the direct result of US protectionism (China retaliated after President Obama imposed tariffs on Chinese tires); (2) the administration didn't have much of a choice: dispute settlement is what WTO Members are supposed to do when faced with foreign protectionism, and most unilateral alternatives violate global trade rules; and (3) as discussed below, the administration's stubborn non-compliance with adverse WTO rulings and continued imposition of WTO-inconsistent trade and subsidy policies has undermined the moral force of the United States' anti-protectionism efforts at the WTO. So the disputes are good, but bad policy prevents them from being much, much better.

Unfortunately, these reasonably-good things are significantly outweighed by the following policy failings:

A dramatic decline in global competitiveness. As I detailed in July, the United States has declined - in some cases significantly - in every independent study of global economic strength and competitiveness since President Obama took office. These studies reflect a failure by the Obama administration to implement tax, trade and regulatory policies that could help US businesses and workers compete and prosper in the global economy. Since July, the World Economic Forum's latest Global Competitiveness Index has dropped the United States another two places (now 7th, from 2nd in 2009, 4th in 2010 and 5th last year); respondents' top three problems with the US economy are inefficient government bureaucracy, tax rates and tax regulations - all things that the Obama administration could've addressed (especially when Democrats had total control of the US government in 2009-2010) but instead completely ignored. The United States also has dropped from 10th to 12th in the Legatum Institute's Prosperity Index, with the US economy a mediocre 20th overall. This is not good at all.

A dramatic decline in economic freedom. The United States' drop in global competitiveness has - perhaps not surprisingly - coincided with a decline in economic freedom. According to the Heritage Foundation's Index of Economic Freedom, the United States now ranks a depressing 10th in the world overall (down from 6th in 2009) and an even-more-depressing 37th in trade freedom. The Fraser Institute's 2012 Economic Freedom of the World Report shows a similar decline, ranking the United States only the 18th(!) freest economy in the world, down from 8th in 2005. I won't debate here whether economic freedom means economic prosperity (despite strong correlations among the two), but you can draw your own conclusions.

Trade policy stagnation. As I explained last week, US trade policy has slowed to a crawl during the Obama years, and American leadership - a staple of the global trading system since the 1940s - has all but disappeared. There is no better indicator of this stagnation than US involvement in free trade negotiations. The President spent the first three years of his term letting the WTO's Doha Round of multilateral trade talks die on the vine and working up the "courage" to face down his own party and submit implementing legislation for FTAs with Colombia, Panama and South Korea that had been completed and signed by President Bush in 2006-07. And when Obama finally did get around to these deals, he made the most economically-significant one - the Korea free trade agreement - less free by raising or extending tariffs on automobiles in both the United States and Korea, and he refused to send them to Congress unless he received a billion dollar extension of the problematic Trade Adjustment Assistance worker subsidy. (For details on the FTA debacle, go here.) Furthermore, the only new trade negotiations that the Obama administration has formally initiated are those for the Trans-Pacific Partnership - talks that were actually started by the Bush administration, have moved interminably slowly due to US recalcitrance on various issues, and, because most TPP members are already US FTA partners, will only produce significant economic gains if other countries - like Japan or China - end up joining down the road. Meanwhile, other countries are liberalizing at a breakneck pace (for example Canada, which has concluded nine FTAs since mid-2007 and is currently negotiating four more).

Rampant proliferation of trade-distorting subsidies. Starting with the Stimulus* bill in 2009 and snowballing ever since, the dramatic expansion of federal subsidies on President Obama's watch has hurt the US economy, bred cronyism, distorted trade and investment patterns, undermined US efforts to push needed trade reforms in other areas, and raised diplomatic tensions. Need proof? Just read my paper or related blog posts (or take a look at Solyndra). 'Nuff said.

Trade remedies malfeasance. Just as the United States has cranked-up the subsidies and screamed about Chinese subsidization, it has also employed trade remedies - particularly anti-subsidy (countervailing duty) measures - against foreign imports. As I explain in my new paper and elsewhere, the application of CVDs can, in theory, help curtail foreign and domestic subsidies, but the administration's current anti-subsidy policies - particularly those related to China - reflect capture by domestic industries and unions, often violating US law and WTO rules and leading to taxes on US businesses and consumers that are far in excess of that needed to remedy foreign subsidization. Meanwhile, the administration has also proposed numerous changes to US anti-dumping policies, again targeting China, that also will likely lead to more and higher duties. And let's not forget the utter debacle that was the President's decision to impose tariffs on Chinese tires pursuant to the "special safeguard mechanism" (Section 421) of US trade law. Thus, while support for trade remedy-based protectionism is undoubtedly a bi-partisan affliction, President Obama has proven himself to be especially ill over the last few years.

Discrete protectionism. The administration hasn't totally avoided protectionism over the last few years. Beyond the tire tariffs, we saw, among other things, bans on Chinese chicken and Mexican trucks, as well as the proliferation of "Buy American" policies. We also saw significant increases in "regulatory protectionism," including through the Lacey Act and Dodd-Frank's conflict minerals provisions. Most of these anti-trade actions (and many others) were the result of the administration's consistent view that trade policy is a political tool to buy votes or to secure other, more important policies, regardless of the harms imposed on US businesses and consumers. All of these actions are deserving of scorn.

WTO non-compliance. The Obama administration also has failed to comply with various adverse WTO rulings against, for example, US aircraft and cotton subsidies and several AD/CVD measures on Chinese imports. You may remember that the cotton case is particularly galling, as the administration has agreed to pay $130 million per year to Brazilian - yes, Brazilian - cotton farmers in order to avoid formal retaliation from Brazil. The federal government is also still paying out money - and facing retaliatory tariffs - under the Byrd Amendment, which was ruled WTO-inconsistent in 2003(!). And we still haven't fully resolved the ongoing mess of zeroing in anti-dumping investigations. (All that campaign bragging about WTO disputes doesn't look so hot now, eh?)

Trade rhetoric and advocacy. Finally, the Obama administration has promulgated some of the most problematic rhetoric on trade and international economics of any presidential administration of the last 30 years. Yes, President Obama and his staff occasionally speak well of free trade (typically in theory or outside of DC), and every administration unfortunately advocates "fair trade" and overemphasizes exports. But this President and his staff have been pretty darn awful, particularly during election years, as they have vocally pushed mercantilism, attacked outsourcing, treated our trading partners as adversaries, and routinely decried foreign "cheating." As I've repeatedly explained, the Executive Branch is politically and legally positioned to be the US government's foremost advocate for trade liberalization, and when the President shirks this duty, it can have serious repercussions at home and abroad. And here we are.

These points make clear that "Not Totally Horrible" really is the best thing you can say about US international economic policy in the Obama years. This is hardly a ringing endorsement, and as I noted the other night, I see very little chance that the President and his team will ditch their political cynicism and dramatically improve US trade and related policies during a second Obama term. And since there's no chance that Gary Johnson will be the next President of the United States, that leaves Mitt Romney, who - as I explained previously - is much more likely than the current President to actively pursue trade liberalization and reassert US leadership in the global trading system. It's by no means guaranteed, but - considering just how far US trade policy has fallen over the last few years - it simply can't get any worse.

Indeed, the President's record goes beyond the discrete trade, tax and regulatory policies outlined above; it's indicative of his administration's political worldview and why I think Obama's not deserving of another four years. As I have repeatedly explained, a politician's - particularly the President's - views on trade and protectionism speak volumes about his or her broader political principles:

A candidate's stance on trade is predictive of whether he, once elected, will put facts and principle before politics and self-interest. Politicians who reject protectionism turn down eager corporate and union campaign donations from unseemly rent-seekers trying to thwart international competition at the expense of American families and companies.

They ignore demagogic attacks on their patriotism. And they openly support policies which, despite their overwhelming economic and historical support, are met with public hostility or disinterest and an unethical opposition willing to take full advantage thereof.

On the other hand, politicians who peddle protectionism are either ignorant of history and economics or are willing to discard their... ideals and prey on voter fears for short-term political advantage.

Viewed through this lens, the aforementioned trade policy failings look even worse, wouldn't you say?

Of course, it didn't have to be this way. Until the middle of the last decade, American trade and global economic policy wasn't really a partisan issue - just look at Bill Clinton, who not only championed NAFTA and the WTO but also forcefully pushed for China's entry into the World Trade Organization. And for a few fleeting moments in 2009, President Obama and his team looked to be following in Clinton's free trade footsteps. Heck, Cato's Dan Ikenson and I even gave them a pretty detailed road map on how they could do it. But then Obamacare happened, and Chinese tires, and Dodd-Frank, and green subsidies/protectionism, and Mexican Trucks, and "Make It in America," and Bain Capital and so on and so on. For political gain, they willfully turned away from decades of bipartisan, pro-trade consensus; they made their choice.

And on Tuesday we get to make ours.

P.S. I honestly have no idea what will happen in this week's election; my gut says narrow - 15 electoral votes or so - Romney win, but I could easily see it going the other way. I sincerely hope that, regardless of who wins, the next four years of international economic policy are better than the last. This economy, and global trade policy, can use all the help they can get.

Campaign Jeep Shots

noreply@blogger.com (Scott Lincicome) — Sat, 03 Nov 2012 22:41:00 +0000

Because I long ago gave up on the 2012 campaign's horrible trade debate, I've been desperately trying to avoid wading into this week's dumbest trade-related controversy: the Romney campaign's commercial claim that bailed-out (and now Fiat-owned) Chrysler plans to resume Jeep manufacturing operations in China. Fortunately, AEI's Claude Barfield took one for the team and summed up my ~~angry, depressed~~ thoughts pretty perfectly:

In this campaign, economic “truthiness” has long since disappeared. The latest evidence of this is the flap over Governor Romney’s claim on the campaign trail and in ads running in Ohio that Chrysler is planning to ship jobs to China by opening a plant to make Jeeps in that country. Another ad makes a similar claim for General Motors. This produced sharp rejoinders from GM and Chrysler, and earned Romney four Pinocchios from the Washington Post’s factchecker, Glenn Kessler. My cynical side mainly deplores the ineptitude of Romney’s timing: He should have waited until later in the week before the election in order to avoid the blowback from the Obama team and zealous factcheckers.

But more seriously, there is a depressing, deeper irony in all of this. On the one hand, Romney long ago should have stepped up to the plate with a full-throated defense of offshoring/ outsourcing as a key element of the competitiveness of US (and other nations’) corporations—and ultimately as a force for generating additional jobs back in the US. These ads undercut the larger economic message on the imperatives of global competition his campaign has fitfully attempted to mount.

But not to fear. Help has come from an unlikely source: The eye-opening defense of Chrysler and GM mounted by Obama’s surrogates. Last evening on the Chris Matthews show (I know, hardly the place for economic wisdom or even literacy), Matthews and Steven Rattner (backed by NY Times reporter Bill Vlasic) ridiculed Romney by pointing out that offshoring/outsourcing by corporations was a positive good for the US in that in today’s global economy, in order to survive and succeed, US corporations had to produce their products in the markets they wanted to serve.

Rattner stated that this is a basic fact of life for the automobile industry. Jeeps made in China would feed a growing Chinese consumer demand for this iconic car, and would not come back to the US. This basic fact flies in the face of Obama dogma, which largely equates foreign investment by US corporations as the work of “Benedict Arnolds,” as John Kerry asserted in 2004.

I suppose it’s too late to demand that the Obama guys pull down all those ads condemning Romney as the “Outsourcer-in-Chief”; but maybe the Romney team can quickly flood a few Ohio TV markets with the “Rattner defense.”

Barfield's point about the economics of outsourcing/offshoring is something I've discussed here many times: the vast majority of this routine economic practice is undertaken to satisfy foreign demand, not to ship foreign-made goods back to the United States, and it typically leads to more US employment, not less. The FT's Alan Beattie reiterates these facts in a nice blog post that also belittles the whole Jeep kerfuffle:

More sympathy might be due to the Obama campaign if it didn’t itself routinely equate foreign investment with sending jobs overseas, particularly its ill-advised attacks on the idea that a territorial corporation tax system would reward US companies for offshoring employment. As informed opinion on the subject routinely points out, the overall evidence is that foreign investment is a complement rather than a substitute to domestic expansion. If you want the specifics, read this.

If Beattie's links don't convince you about the economic benefits of outsourcing/offshoring for the US economy, go here or here. Or if you want to understand the abject absurdity of political ploys to curb outsourcing, go here.

Of course, none of these truths will change the last few days of the 2012 campaign's moronic trade discourse, but the Jeep controversy does leave me wondering one thing: why didn't Kessler, Matthews, Vlasic and their media colleagues (particularly at the Washington Post) mount such a rational defense of outsourcing when the President and his PAC were spending millions of dollars to demagogue the "evil" outsourcing of Bain Capital and Mitt Romney?

Oh, right.

Man, I can't wait for this campaign to be over.

Leading from Behind on Trade

noreply@blogger.com (Scott Lincicome) — Fri, 02 Nov 2012 00:40:00 +0000

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

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

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

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

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

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

Talk about leading from behind.