International Economic Law and Policy Blog

Too Neoliberal, or Not Neoliberal Enough?

Over at Eyes on Trade, Travis McArthur links to an article about Bill Clinton's views on free trade, which states:

Former U.S. President Bill Clinton says the free-trade agriculture policies he supported as president were a mistake. Many critics blame these policies for contributing to Haiti's hunger problems.  As president, Clinton backed trade policies that opened developing world countries to farm products from the United States. 

Critics say the subsidies industrialized countries pay to their farmers create unfair competition for developing-world farmers, driving many out of business and leaving those countries at risk of hunger. 

At a news conference in Port-au-Prince Monday, Clinton said when he helped Haitian President Jean Bertrand Aristide return to power in 1994, Clinton also signed legislation that increased the flow of cheap American rice into Haiti. 

But now, he says, "I think it was a mistake. I think it was part of a global trend that was wrong-headed." 

Clinton says the theory behind that global trend was that wealthy countries could provide poorer countries with cheaper food than their farmers could grow.  That would lead poor countries to skip directly to industrialization. But Clinton says, once he left office and saw the effects of that policy on farmers in developing countries, he changed his mind. 

"It is unrealistic to expect that a country can totally obliterate its capacity to feed itself and just skip a stage of development," he says. "It seems almost laughable now that we ever thought it." 

McArthur then says:

It’s heartening to see one of the strongest proponents of the neoliberal economic model come to realize just how damaging that model has been. For Mexico, though, this realization has come about 16 years too late.

When NAFTA entered into force in 1994, cheap subsidized American corn from corporate farms flooded the Mexican economy, forcing hundreds of thousands of small corn farmers to leave their farms.  Many of these farmers, faced with corn prices below their cost of production, often had no choice but to emigrate to the U.S. to escape economic disaster.  During the 2007-2008 global food price crisis, poor Mexicans found out exactly how costly the destruction of the Mexican corn industry could be when tortilla prices, propelled by U.S. corn prices, skyrocketed by 60 percent within a few months.  

Now that Clinton has seen the flaws of the unfair trade model epitomized by NAFTA, could he press Obama to renegotiate NAFTA to make it fair for consumers, workers, and farmers in all three NAFTA countries?

This is probably obvious to most readers of this blog, but just for the record, let me note that exports of subsidized U.S. rice (and corn) are neither "free trade" nor the "neoliberal economic model."  What Clinton and McArthur should be arguing, in my view, is that by subsidizing rice, the U.S. failed to practice free trade/neoliberal economic policies, and this failure was very harmful to Haitian rice producers.  While regional agreements like NAFTA can't do much about agriculture subsidies, the WTO tries to rein them in.

As to how non-subsidized U.S. rice would compare to Haitian rice in terms of price, I would guess that the price of the U.S. rice would be higher, but I'm not really sure.  If it were the case that even non-subsidized U.S. rice was hurting Haitian rice producers, I'll just mention that WTO rules allow developing countries to maintain a good deal of protection (and for that matter, they provide developed countries plenty of flexibility for protection, too).

Oh, and one more thing.  The article describes Clinton as saying the following:  "the theory behind that global trend was that wealthy countries could provide poorer countries with cheaper food than their farmers could grow.  That would lead poor countries to skip directly to industrialization."  I've read a decent amount on development over the years (though certainly not everything, of course), and I've never heard that theory.  To me, that seems like a horrible mangling of something that an economist might have actually said.

Electric Vehicle Pricing

From the AP:

Nissan Motor Co. said Tuesday its new electric car will cost just over US$25,000 in the U.S., a move that could force rivals to lower prices on similar vehicles.

The Leaf, a four-door hatchback due in showrooms late this year, will have a base price of $32,780, but buyers can get a $7,500 electric vehicle tax credit, Nissan said.

...

Nissan says the Leaf will cost 3.76 million yen (US$40,000) in Japan. It will price the car lower in the U.S. because it wants to sell more of them in that market. The automaker says it is confident it can still make money at that price.

So that's $40,000 in Japan (the home market) and $32,780 in the U.S. (the export market).  Hmm, I hope they've talked to some anti-dumping specialists about all this!

GATT Article I:1 (MFN) and "Conditions" for Lower Tariffs

From a recent article in The Australian:

China yesterday raised the prospect of tariffs and new policies to stem growing uncertainty in its steel industry, which faces iron ore price hikes of up to 90 per cent this year.

China's Commerce Ministry said yesterday it was preparing a "new policy" to deal with the issues and would support its world-leading steel sector in its bid to keep the iron ore price -- which has recently hit record spot levels -- lower and less volatile.

Ministry of Commerce spokesman Yao Jian told media in Beijing that commerce and industry ministries would provide necessary support to steelmakers, which could include trade measures and policies.

He repeated China's mantra that its position as the world's largest buyer of iron ore meant it should get lower prices.

China wants to stick with annual price contracts, but the world's main iron ore producers want to move to a quarterly system more closely aligned with market spot prices.

Analysts predicted the government would introduce preferential tariffs for long-term contracts.

...

"There are not many or radical measures the Commerce Ministry can take, without possibly violating WTO regulations," one analyst close to the China Iron and Steel Association, who asked not to be named, told The Australian .

"My personal guess is that since the ministry stressed that it strongly supports long-term prices, it may issue preferential tariffs for long-term contracts," the analyst said.

So if I understand this correctly, China might grant lower tariffs on iron ore imports where long-term contracts with suppliers have been signed.

This proposal has me thinking about the scope of GATT Article I:1, which I just recently taught a class about.  Article I:1 states:

With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any WTO Member to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other WTO Members.

One of the issues we discussed was the meaning of "unconditionally" towards the end of the provision.  We talked about cases such as Indonesia - Autos, Canada - Autos, EC - Tariff Preferences and Belgium - Family Allowances.  In all of those cases, there were circumstances under which some entities paid a lower duty than others.  These different circumstances could be thought of as "conditions" -- if certain conditions are fulfilled, a lower tariff rate applies.  Without going into too much detail, there seems to be a split among the various panels as to how the differential application of tariffs should be considered in this context.  In Canada - Autos, the panel seemed to think the issue was purely whether discrimination exists, and rejected an argument relating to "conditions."  (See paras. 10.18-50)  (The recent Colombia - Ports of Entry panel cited to Canada - Autos and took the same approach.  See paras. 7.358-366)  By contrast, the EC - Tariff Preferences panel appears to have taken the view that the existence of any "condition," in and of itself, violates Article I:1 (although it talked about non-discrimination as well).  (See paras. 7.58-60)  It's less clear what the Indonesia - Autos and Belgium - Family Allowances panels thought of this issue.  Arguably, their statements could be taken either way.  (See paras. 14.143-147 of Indonesia - Autos and para. 3 of Belgium - Family Allowances).

Getting back to the iron ore example, let's say that China grants lower tariffs for iron ore imports where there are long-term contracts.  In a sense, long-term contracts could be deemed a "condition" for the lower tariffs.  Thus, under one view, such a measure would violate Article I:1 for that reason alone.

In the alternative, taking the Canada - Autos / Colombia - Ports of Entry approach, you could look at whether establishing lower tariffs on this basis has a discriminatory effect on certain countries.  I'm not sure where all of China's iron ore imports come from, and what the impact on specific countries would be, so the result under this approach is more uncertain. 

Excerpts from the House Ways and Means China Currency Hearing

I couldn't find video of the House Ways and Means hearing on China's exchange rate policy, but I did get my hands on a transcript.  Here are some interesting tidbits:

What should the U.S. do about the China currency issue?

BERGSTEN:

You don't want to launch a trade war. But as I said, it's the Chinese who are being protectionist here.

If we can fashion a sensible strategy, be anti-protectionist. So between now and April 15th I hope you will be strongly urging the Treasury to designate the Chinese, and the other four countries I mentioned.

But also, simultaneously and based on the promise they're going to do that, to go to their allies, the Europeans, some of the other emerging markets, and many developing countries. We've all made the point that bad as the U.S. is hurt by the Chinese misalignment, other countries are hurt worse. This is setup for multilateral alignment. I mentioned the earlier cases, 1971, 1985. Then it was the U.S. versus the world. The U.S. had a big deficit, everybody had a surplus. We wanted everybody else to revalue. Now it's different. It should be the world against China.

...

We should be able to mobilize a coalition of not just the willing, but almost everybody, to join in the IMF and in the WTO to bring multilateral pressure to bear. And if that happens, the Chinese cannot ignore or resist it, as long as it's bilateral U.S., they can't.

As long -- if it becomes multilateral, as it should and can be, I believe that changes the whole game. But I do not believe we can launch that multilateral initiative unless we're willing to follow the law of the land, call a spade a spade, stand up ourselves. And then on that basis, go to the potential allies and mobilize themultilateral approach.

Will the U.S. label China a currency manipulator soon?

BERGSTEN:

I actually think there is a reasonable chance this time that the Treasury will designate China as a manipulator. The economic situation has changed. The U.S. is still facing high unemployment, but we're now sufficiently out of the crisis so that an effort with the Chinese I think would not be viewed as a wrecker to the world economy or even to the market. I think people understand and actually expect the United States to pursue an initiative of this type.

How will the U.S. look if it does not label China a currency manipulator:

PRESTOWITZ:  

I would say in terms of the immediate questions, should China be labeled a currency manipulator? I don't see how the president can avoid doing so. Everybody knows that Chinais manipulating its currency. If the president fudges that, he looks weak, and -- and dishonest. And so I don't see how he can really avoid that.

FERGUSON:

Well, I think if we don't label China a currency manipulator, we will look like the wimps of the Western world. So it's our credibility that will really be the -- the biggest problem, and I think that's the -- the most powerful argument.

What are the implications of bringing a WTO complaint:

BERGSTEN:

We want to go through the WTO rules as you said. There is a clear provision -- Article 15 of the WTO that proscribes the kind of practices that China is now carrying out.

Would it be effective to take a case? Would we win the case? It's never been tried. We don't know. I'm not optimistic we would win the case in a legal sense. But using it to multilateralize the issue, and publicize, name and shame the Chinese causing the problem I think ought to be part of our strategy.

LEVY:

... There is a serious downside risk to taking a case to the WTO, which is we do not have clear language at the WTO delineating exactly which conditions are acceptable and which are unacceptable. The U.S. could lose either way.

If we lose the case, we'll never hear the end of it from China about how their practices have been justified. If we win the case, we will have established the precedent of panel overreach that we are counting on dispute settlement panels to essentially legislate and come up with rules.

The importance of keeping this issue multilateral rather than singling out China:

Rep. Boustany: ...

I think Dr. Bergsten, you mentioned in your -- your paper -- your testimony -- your written testimony Hong Kong, Taiwan, Singapore,Malaysia. Would that be a more prudential approach for Treasury rather than just simply labeling China? And I would throw that question out for discussion.

BERGSTEN: As I said, those other countries de facto track the Chinese currency . And they have also experienced huge increases in their reserves they manipulated. So it would be perfectly legitimate to name them. I think it would be much in the U.S. economic interest to name them, and get them to revalue. Because as I said when you add them up, they almost double the ante in terms of interms of trade flows and potential pay off.

I think it would also be politically good to group China with some others, and not be singling out China. De facto you would be singling out what I would call a China block. You wouldn't call it that. But de facto, you would do it. I don't actually think you have to do it, because if the Renminbi rises, the others will shadow it and go up along with it in practice.

What's the relative value of the IMF and the WTO in resolving the issue?

FERGUSON:

I don't think there's any harm in going to the IMF, but I don't think any much will come of this. The IMF is only able to exert leverage over countries that are in deficit and in crisis, and they're usually smallish countries, and there are plenty of those it has to concern itself with right now.

The difference is that the WTO is a body quite differently constituted that is able to impose decisions on the biggest countries, including the United States when it's violated its WTO obligations.The WTO is the most powerful of all the international economic institutions, and that's why it's actually our best channel.

The role of the trade deficit in all of this:

[Someone whose name was not picked up in the transcript]:

... if we had a trade surplus with China, this would still be a problem. The real issue here is a distortion of trade.

How did the last Chinese currency revaluation happen:

Rep. Kind:

... it's not unprecedented for China to takesome revaluation in their currency. From '05 to '08, they had about a 20 percent increase alone. What made it possible then, the conditions then, that make it hard for them to do something comparable today? ...

LEVY: I think that they did recognize the difficulties that came with the -- what was really an unwise currency policy. And I think there was constructive U.S. diplomacy to help address some of the concerns that they had.

Some general thoughts on U.S. - China relations:

FERGUSON:

I think we also need to be very wary of the more aggressive and the pugnacious attitude of the Chinese today. Not only with respect to Google, but also, I believe, across a broad range ofissues from Taiwan to Tibet. The Chinese authorities are spoiling fora fight and the United States Congress must be very, very careful about giving it to them.
 

Clyde Prestowitz on Expanding the Trade Regime

From his written testimony at the House Ways and Means hearing on China's exchange rate policy:

We have a WTO, but what we really need is a world globalization organization.

...

Over the longer term, the currently prevailing half-free trade, half-mercantilist system of globalization must be replaced by the establishment of a one economy-one system regime. To do this the WTO will have to be completely revamped with new standards, rules, and authority. Most Favored Nation and National Treatment standards are no longer sufficient. There must be just one kind of WTO Treatment in all economies. Global rules must be created to break up and regulate cartels. Distribution and marketing channels must be equivalently open in all markets not only de jure but de facto. It must be possible to appeal on such issues not just to national courts but to objective international dispute settlement bodies. Sovereign investment funds and state controlled enterprises must be subject to international scrutiny and to transparency and rules that assure they are operating completely outside the political realm. Likewise, tax holidays, capital grants, and other financial incentives used to bribe global corporations with regard to location of plants, labs, and headquarters must be subject to common WTO and IMF discipline. Nor should the WTO and other international bodies wait for complaints to address these issues. Rather, they should maintain continuous monitoring of real market developments and apply discipline wherever and whenever necessary.

At first glance, I thought he was proposing a major expansion of WTO rules, but I now realize the references to cartels and distribution channels are not all that new, as they are issues that have come up in various contexts before.  Similarly, state enterprises and subsidies are already covered; he just wants to expand the rules.

On the other hand, if I'm reading the last two quoted sentences correctly, he seems to be proposing a kind of "world trade prosecutor," who can take action indepently of a complaint by a government.  Now that would be a radical transformation of trade rules!

Jim Bacchus on Responses to Chinese Currency Practices

He is skeptical that a WTO complaint under GATT Article XV would be useful.  From a WSJ op-ed:

The second possibility is that the U.S. would—as the new Congressional proposals also contemplate—sue China in the WTO alleging that China's exchange actions are inconsistent with China's international obligations under the WTO treaty. A provision in part of that treaty, the General Agreement on Tariffs and Trade, states that WTO Members "shall not, by exchange action, frustrate the intent of the provisions of" the treaty. This provision has been part of the GATT for more than 60 years, but it has never been the subject of dispute settlement. There is no clear understanding among WTO Members of what it means.

The legal challenge for the U.S. in bringing such a suit would be two-fold. The Obama administration would have to convince the WTO judges that the word "frustrate" in this provision means what the U.S. thinks it means. Furthermore, the U.S. would have the burden of proving that China has, by its exchange actions, caused such frustration.

And he also worries about the ramifications of a case:

... Does the U.S. want other members to claim that the new U.S. push for exports, coupled with low U.S. interest rates, is another form of currency manipulation?

CRS Report on Currency Manipulation: Analysis of WTO Legal Issues

From a recent Congressional Research Service (CRS) report by Jonathan Sanford on Currency Manipulation: The IMF and WTO, here is some brief analysis of WTO legal issues.

SCM Agreement Articles 1-3:

Whether currency disputes fall under the WTO’s jurisdiction is a debatable issue. The WTO rules specify that countries may not provide subsidies to help promote their national exports. Most analysts agree that an undervalued currency lowers a firm’s cost of production relative to world prices and therefore helps to encourage exports. It is questionable, however, where currency undervaluation is an export subsidy under the WTO’s current definition of the term.4

The term “subsidy” has a precise definition in the WTO. It requires that there must be a financial contribution by a government to the exporter or some other form of income or price support. Government financial support can take a variety of forms, such as direct payments to the exporter, the waiver of tax payments or special government purchases or the provision of low-cost goods or services (other than general infrastructure) that lowers the cost of production. Currency manipulation would not appear to qualify under the WTO definitions.

In addition, an export subsidy is a subsidy that is “contingent on export performance.” In the case of an undervalued currency, everyone who exchanges money will be affected by the current exchange rate no matter whether they are buying or selling and no matter whether or not they are involved in international trade. While subsidies must be “specific to an industry” to be actionable in the WTO, a prohibited subsidy, such as an export subsidy, is considered to be specific per se.

GATT Article XV:

As it is used in GATT Article XV, the term “exchange arrangement” refers to issues that are the sole province of the IMF. Thus, one could argue that the meaning of the term in the GATT should reflect its current meaning at the IMF and not the meaning prevalent in 1947. An undervalued currency encourages exports by reducing their cost and it discourages imports by making them more expensive than they might be otherwise. Consequently, one might argue that countries with this type of exchange arrangement are engaging in “exchange action” that may have the effect of frustrating “the provisions of the [GATT] agreement.”

There has never been a definitive ruling by the GATT or WTO on the meaning of Article XV,
including how provisions of the GATT agreement might be frustrated by exchange action. Some might argue that currency undervaluation raises the price of imports in a way that unilaterally rescinds tariff concessions approved during multilateral trade talks.

Accordingly, a case could be made that the WTO should use the broader meaning of the term “exchange arrangements” and take currency valuation arrangements into account in its dispute settlement process. There has also been increased interest, in recent years, in the issue of currency manipulation and its impact on world trade and financial relationships. It could be argued, therefore, that this might be an appropriate and perhaps auspicious moment for issues relating to the trade impact of currency manipulation to be raised in the WTO dispute adjudication process.

House Ways and Means China Currency Hearing

It's going on right now, and it's fascinating.  There's so much being said that it's hard to summarize.  Not sure I'll be able to, at least not right now.  You can watch it here [ADDED: Now that it's over, the video link seems to have disappeared, but I'll add a link again if I can find one].  Some brief excerpts from the written testimony:

Niall Ferguson:

It is for these reasons that I would urge the United States to pursue currency realignment on a multilateral rather than solely on a bilateral basis, using the G20 rather than just a Sino-American “G2” as the appropriate forum. After all, we should not fetishize the renminbi-dollar exchange rate.6 The U.S. trade deficit is growing again not only because of China but also because of relatively high oil prices. The rise of China as an exporter of manufacturers has probably hurt other Asian exporters as much as, if not more than, it has hurt the United States. And if China were to increase its imports, the United States would not be the principal beneficiary.

Phil Levy:

Many of the policies currently under discussion would, in fact, be harmful. Other policies that stand a reasonable chance of doing good are likely to take a frustrating amount of time. We would be wise to show patience and pursue an approach that relies upon multilateral diplomacy.

Clyde Prestowitz:

Negotiations similar to those of the Plaza Agreement of 1985 should be launched immediately to coordinate a substantial (40 to 50 percent) revaluation of a number of managed Asian currencies versus the dollar and the euro over the next two to three years. This would also have to entail an agreement to halt strategic currency management activities. A second longer term objective of the deal would be a reversal of savings and consumption patterns in the United States and Asia.

...

If starting such discussions proves difficult, the United States in concert with other affected countries could initiate unfair trade actions under their domestic laws and also under the anti-subsidy and nullification and impairment provisions of the WTO. It could also formally call for official consultations by the IMF with certain of its members regarding their currency management practices. This, of course, would be strong medicine, but it would surely stimulate discussion, and it is all perfectly legal and in keeping with both the rules and spirit of open, rules based trade.

Fred Bergsten:

Hence I would recommend that the Administration adopt a new three-part strategy to promote early and substantial appreciation of the exchange rate of the RMB:

1. Label China as a “currency manipulator” in its next foreign exchange report to the Congress on April 15 and, as required by law, then enter into negotiations with China to resolve the currency problem.9

2. Hopefully with the support of the European countries, and as many emerging market and developing economies as possible, seek a decision by the IMF (by a 51 percent majority of the weighted votes of member countries) to launch a “special” or “ad hoc” consultation to pursue Chinese agreement to remedy the situation promptly. If the consultation fails to produce results, the United States should ask the Executive Board to decide (by a 70% majority of the weighted votes) to publish a report criticizing China’s exchange rate policy.10

3. Hopefully with a similarly broad coalition, the United States should exercise its right to ask the World Trade Organization to constitute a dispute settlement panel to determine whether China has violated its obligations under Article XV (“frustration of the intent of the agreement by exchange action”) of the WTO charter and to recommend remedial action that other member countries could take in response. The WTO under its rules would ask the IMF whether the RMB is undervalued, another reason why it is essential to engage the IMF centrally in the new initiative from the outset.

U.S. - Poultry from China: WTO Panels Examining Domestic Law

For those who are into this sort of thing, the U.S. - Poultry from China (DS392) dispute has a very interesting issue related to the examination of domestic law.  In this case, one of the arguments made by the United States was that the statutory provision at issue, which is part of some appropriations legislation, is designed to provide Congressional "oversight" of a U.S. regulatory agency through the appropriations process.  (DSC subscribers can see this post for more background). The U.S. first written submission has some detail about how U.S. appropriations law works, both in general and in this case.  As a result, the WTO panel may have to examine the relationship of the legislative branch to the executive branch in the context of U.S. law-making.  No doubt the panel will tread very carefully in addressing this issue.

A WTO Litigation Strategy Question

Let's say you are a government who is concerned about the WTO-consistency of a particular measure of a trading partner.  You'd really like for that measure to be found in violation of WTO rules. Does bringing additional, less convincing, claims against other measures (perhaps related to the first measure, perhaps not) increase the chances that you'll win the claim you really care about?  The theory is that the panel can "split the difference" by finding a violation for the claim you really want to win, but rejecting the other claims, thereby seeming to give both sides something.

I'd be curious to hear if somebody has ever tried to answer this question, empirically or otherwise.

The China Currency Issue: The Savings Gap

It has been suggested that the main cause of the U.S. trade deficit with China is the savings gap between the two countries, involving some combination of China saving too much and the U.S. saving too little.  From Morgan Stanley Asia Chairman Stephen Roach:

Morgan Stanley Asia Chairman Stephen Roach said that Paul Krugman’s call to push China to allow a stronger yuan is “very bad” advice and that increased Chinese spending is a better way of reducing trade imbalances.

...

“We’re lashing out at China rather than tending to our own business,” which is raising U.S. savings, Roach said.

...

The U.S. trade deficit is due to a shortfall of savings, and any attempt to address the bilateral gap with China would just cause a shift to another country as Americans kept up their spending, according to Roach. ...

“What the world needs is a shift in the mix of saving,” Roach said in a further e-mail. While China has a “major surplus saving imbalance,” it’s “highly debatable” whether it’s because of the yuan stance. Efforts to boost Chinese consumer spending will be a more effective way to address the issue, he said

See also this old (2006) piece from the Economist:

The main reason why neither a revaluation of the yuan nor trade restrictions will slash America's external deficit is that the real cause of that deficit is that the country consumes too much and saves too little. A change in the yuan's exchange rate will not by itself alter this fact. Indeed, from this point of view, China's exchange-rate policy has arguably helped America in recent years, rather than hurting it.

In reaction to this, here are some quick thoughts on the issue of savings and the trade deficit.

In all likelihood, there is something to the argument about the impact of the "savings gap."  If the U.S. saved more, and China consumed more, the trade deficit would almost certainly go down.  But does this mean that the savings gap is a more important issue for U.S.-China trade issues than the exchange rate?

I prefer to focus on the exchange rate rather than differential savings, for the following reasons.  First, there are aspects of the savings rate that are mostly outside of government control.  For example, people in different countries have different attitudes about long-term and short-term spending, and these various attitudes are, in my view, equally valid.  It is simply different preferences about when and how to spend money.  Buy a new car now, or save the money to live better during retirement or pass along to future generations?  Both are perfectly fine choices.  While government can influence these choices, I'm not sure it can do all that much to change the underlying attitudes.  And even if it could, should it?  It seems to me that Americans (myself included) spend too much on things we don't really need.  But that's just my view of things, and I don't want to impose that view, or any other view, on others.  Let each individual/country decide how much to spend/save.  Yes, there are trade implications from these different attitudes, but there are also non-trade implications from trying to change people's consumption/savings preferences.

Second, regardless of the existence of a savings gap, exchange rates can be manipulated in a manner that is protectionist (e.g., favoring domestic companies at the expense of foreign ones).  So even if the savings gap were to narrow or disappear, the trade friction is likely to continue to some degree as long as there is a currency peg, although it could be less of a concern.

Third, I'm not all that concerned about a trade deficit or surplus with particular countries.  I'm more concerned with protectionist measures.  With regard to the deficit/surplus, in the long run, it should probably be the case that a country's overall current account is not too far out of balance.  But I would prefer to let floating (at least partially, anway) exchange rates achieve this, rather than trying to influence people's spending/saving patterns.

As I said, those were some quick thoughts, which may have strayed far enough from the law to lose the interest of many of this blog's readers, so I'll wait and see if anyone wants to discuss this before going into any more detail.

More on GATT Article XV:4

A few months ago, I tried to do a quick analysis of one aspect of GATT Article XV:4, in the context of a possible WTO claim related to China’s currency peg. The issue I raised was whether, when arguing that an “exchange action” “frustrates the intent” of GATT Article II, and thus leads to a violation of XV:4, the “intent” of Article II should be characterized as (1) preventing duties/charges from exceeding the concessions or (2) the broader notion of providing market access. When writing the post, I knew there was an Ad Note to Article XV:4, but I just crossed by fingers and hoped my analysis of XV:4 would work without trying to sort through the Note. Unfortunately for me, commenter anon99, who always has good insights, made a persuasive case that the Note is very important here and cannot just be ignored. So, I’m now going to take another shot at this, taking into account the Note this time, although to be honest my focus is now less on “intent” and more on the relationship between Article XV:4 and the Note, which is a quite perplexing one.

Let’s start with Article XV:4, which states:

[WTO Members] shall not, by exchange action, frustrate* the intent of the provisions of this Agreement ...

It seems to me that on its face, Article XV:4 provides a fairly straightforward obligation: WTO Members can’t use “exchange actions” to “frustrate the intent” of other GATT provisions. anon99 analogizes this language (by itself, without the Note) to the “non-violation” obligation, and that seems like a fair characterization to me. Basically, you can’t undermine, through exchange actions, the obligations you have taken on in other provisions.

Now we turn to the Note, which is indicated by the asterisk after “frustrate.” The Note says:

The word "frustrate" is intended to indicate, for example, that infringements of the letter of any Article of this Agreement by exchange action shall not be regarded as a violation of that Article if, in practice, there is no appreciable departure from the intent of the Article. Thus, a [WTO Member] which, as part of its exchange control operated in accordance with the Articles of Agreement of the International Monetary Fund, requires payment to be received for its exports in its own currency or in the currency of one or more members of the International Monetary Fund will not thereby be deemed to contravene Article XI or Article XIII. Another example would be that of a [WTO Member] which specifies on an import licence the country from which the goods may be imported, for the purpose not of introducing any additional element of discrimination in its import licensing system but of enforcing permissible exchange controls.

As anon99 explains, this Note seems to say that alleged violations of other provisions are subject to an "additional condition/hurdle" where they involve an exchange action: A violation of the other provision will only be found if the measure leads to an “appreciable departure from the intent” of that provision. Thus, rather than Article XV:4 being an obligation, the Note means that Article XV:4 instead mitigates violations of other provisions!  In essence, through the Note, Article XV:4 gives special protection to “exchange actions,” making it harder to prove violations for them than for other measures.

My first reaction here is that this all seems very odd. There is a provision in the GATT which appears to set out an obligation (it even uses the word “shall“). But then there is an interpretative note, attached to a particular word in the provision, which suggests that the provision is not, in fact, an independent obligation. Rather, it reduces the impact of other GATT obligations. I’m not sure I have ever run into something quite like this before and I don’t see a good way to resolve this apparent conflict between the text of the provision and the interpretative Note.

I do have one thought, but it seems odd as well, and a bit of a stretch. Here goes anyway. In the beginning of the Note, the lead in to the substantive part uses the phrase “for example” and it later refers to “[a]nother example.” Based on the references to “examples,“ it could be argued that in clarifying the term “frustrate,” the drafters of the Note have not been setting out a comprehensive definition, but rather just giving us some illustrations. Is it possible, then, that the Note provides these “additional conditions/hurdles” as examples of what “frustrate“ can mean, but still leaves open the possibility of other “examples” in which Article XV:4 establishes an independent obligation? (And thus my earlier questions about “intent“ in the context of Article II would take on greater importance?) Perhaps the rules governing “exchange actions” would differ based on the type of claim being brought. If the main claim were under a provision other than XV:4, the “additional hurdle” mitigating factor approach would apply. By contrast, if it were a pure XV:4 claim, the “non-violation”-type claim approach would be used.

There’s no question that it would be strange to have the explicit examples be so different from other, unspecified, examples. One set of examples (the unspecified ones) constitutes an obligation, while the other set (the explicit, additional hurdle ones) mitigates other obligations.

On the other hand, I’m not sure how else to deal with the “examples” here. If these are two examples, what are some other examples? Are all other examples supposed to be like these? If so, in what ways are they supposed to be comparable?  Do they all relate to Articles XI and XIII?  How would exchange actions relate to a provision such as Article II?

I don’t have any good answers to all of this, so I’m going to leaves this where I left the earlier post, with an “Any thoughts?“, and see if anon99 or others want to jump in here.

A Summary of China Currency Views

I thought it might be interesting to gather up the various views that have been expressed on the China currency issue.  I have two key questions in mind:

1)  Is the Chinese currency peg at an (allegedly) undervalued rate bad for the U.S. economy/global economy?

2)  If it is bad, what is the appropriate response?

Here's a brief rundown of some views expressed by prominent bloggers/op-ed writers/others on each point, in no particular order.

Is the Chinese currency peg bad for the U.S. economy / the global economy?

Don Boudreaux says it's good for the U.S. and bad for China:

A low-priced yuan certainly shifts business to some Chinese producers and away from American producers who compete with them, just as genuine efficiency improvements in Chinese industry take some business away from American producers who compete with Chinese producers. But contrary to protectionists’ claims, Beijing’s efforts to lower the price of the yuan harms the Chinese economy and benefits the economies (including that of the United States) whose people trade with the Chinese.

Scott Lincicome thinks a change in the policy would be bad for U.S. manufacturing:

the results of the currency protectionists' demands - a weaker dollar and a stronger RMB - would actually harm US manufacturing trade as global investment flees the United States for more stable fiscal ground.  Thus, not only would the RMB's appreciation not shrink the US-China trade deficit, but it also would cripple America's once-unmatched ability to attract domestic and foreign capital.  This is an awful double-whammy, and a critical flaw in the protectionists' arguments for direct US action on China's currency.

Gary Becker thinks it's an overall plus for the U.S. economy:

I am dubious about the wisdom of both America's complaints about China's currency policy and of China's responses. On the whole, I believe that most Americans benefit rather than are hurt by China's long standing policy of keeping the renminbi at an artificially low exchange value. For that policy makes the various goods imported from China, such as clothing, furniture, and small electronic devices, much cheaper than they would be if China allowed its currency to appreciate substantially in value. The main beneficiaries of this policy are the poor and lower middle class Americans and those elsewhere who buy Chinese made goods at remarkably cheap prices in stores like Wal-Mart's that cater to families who are cost conscious.

To be sure, US companies that would like to export more to China are hurt by the maintenance of the Chinese currency at an artificially low value relative to the dollar. As a result, employment by these companies is lower than it would be, so that this may contribute a little to the high rate of US unemployment. But I believe the benefits to American consumers far outweigh any loses in jobs, particularly as the US economy continues its recovery, and unemployment rates come back to more normal levels.

...

So my conclusion is that the US in its own interest should not be urging China to appreciate its currency- countries like India have a much greater potential gain from such an appreciation. On the other hand, I see very little sense at this stage of China's development in maintaining a very low value of its currency, and accumulating large quantities of reserves. 

Paul Krugman thinks it's bad for the global economy:

Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.

...

And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.

Dan Drezner (via email, no link) thinks it's a serious problem:

Post-Great Recession, China's manipulation of the yuan is really bad.  I'm completely with Krugman/Bergsten that there's a serious problem.

Martin Wolf thinks it's bad for the global economy:

 the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world.

Economist Robert Aliber says it hurts U.S. jobs:

Americans have been patient – too patient – in accepting the loss of several million US manufacturing jobs because of China’s determined pursuit of mindless mercantilist policies.

Arvind Subramanian says it's protectionism (and is thus bad):

undervalued exchange rates are de facto protectionist trade policies because they are a combination of export subsidies and import tariffs.

And he says it's particularly bad for the developing world:

China’s exchange rate policy is really mercantilist trade policy. It has a currency policy that makes imports very difficult to come into China and it has a policy that subsidizes exports. That’s what the exchange rate policy does. Now, if it does that, who are the victims of that? Those countries that compete with China in trade terms. And who are those countries? Other emerging market and developing countries and not the United States and the European Union.

If it is bad, what is the appropriate response?

Some want to impose a tariff on Chinese imports:

Economist Robert Aliber:

The US can help China make the necessary adjustments toward a reduction in imbalances by adopting a uniform tariff of 10 per cent on all Chinese imports, based on their values when they enter the US. Six months after the establishment of this tariff, the rate would increase by one percentage point a month until the Chinese trade surplus with the US declines to $5bn a month.

Paul Krugman:

In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

Some want countervailing duties applied to Chinese imports in the amount of the undervaluation:

Various members of congress:

we urge the Department of Commerce to apply the U.S. countervailing duty law in defense of American companies who have suffered as a result of the currency manipulation. The U.S. is permitted to respond to subsidized imports where the elements of a subsidy are met under the countervailing duty law. The countervailing duty law outlines a three-part test to identify the presence of a countervailable subsidy: 1) that it involves a financial contribution from the government; 2) that it confers a benefit; and 3) that is specific to an industry or a group of industries. China’s exchange rate misalignment meets all three parts of this test and therefore merits the WTO-permitted application of countervailing duties.

Some want the Department of Treasury to declare China a currency manipulator:

Paul Krugman:

So what are we going to do?

U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?

Various members of congress:

we ask the Department of Treasury to include China in its bi-annual agency report on currency manipulation. Since 1994 Treasury has not identified China as a country that manipulates its currency under the terms of the Omnibus Trade and Competitiveness Act of 1988 (“Trade Act of 1988”), but Secretary’s Geithner testimony to the Senate acknowledging that fact surely justifies the inclusion of China in the report. After labeling the country as a currency manipulator, Treasury should enter into negotiations with China regarding its foreign exchange regime. These combined actions will signal the government’s willingness to take decisive action against China’s currency manipulation, including the potential filing of a formal complaint with the World Trade Organization.

Some want IMF surveillance or a WTO complaint:

Fred Bergsten:

Any serious US effort to curb the United States' international imbalance will thus have to counter the beggar-thy-neighbor policies of other countries. The most desirable route would be multilateral surveillance and "name and shame" efforts by the IMF to identify currency misalignments and induce the perpetrators to make prompt adjustments. However, the IMF has no effective leverage over creditor countries; in fact, it has recently abandoned any serious effort to bring China's and other countries' currency imbalances under control. An alternative would be to enforce the provisions of the World Trade Organization that prohibit competitive currency action and authorize trade sanctions against violators

Some want a new WTO agreement (working with the IMF) on exchange rate undervaluation:

Arvind Subramanian:

What is needed is a new rule in the WTO proscribing undervalued exchange rates. The irony is that export subsidies and import tariffs are individually disciplined in the WTO but their lethal combination in “an undervalued exchange rate” is not.

Some want to get the WTO involved in some undefined way:

Simon Johnson:

But the mainstream consensus is starting to shift toward the idea that the World Trade Organization (W.T.O.), not the I.M.F., should have jurisdiction over exchange rates. The W.T.O. has much more legitimacy, primarily because smaller and poorer countries can bring and win cases against the United States and Western Europe in that forum. It also has agreed upon and proven tools for dealing with violations of acceptable trade practices; tailored trade sanctions are permitted.

Some want to focus less on trade, and also prefer the multilateral to the unilateral:

Dan Drezner (via email, no link):

I prefer a multilateral or club-based response, and I'd prefer intervening on the capital account side rather than on the trade side.  There might be a moment down the road when the unilateral option is necessary, but I don't think we're there yet.

Some want the U.S. to set its own peg:

Dean Baker:

the US doesn't have to "pressure" China to boost the yuan. Contrary to what you may have read in the paper, Washington is not helpless in this story.

Just as China can set a value of its currency against the dollar, the US government can set a value of the dollar against the yuan. The Chinese government currently supports an exchange rate at which the dollar can buy 6.8 yuan. This high value of the dollar makes US goods uncompetitive relative to China's. To make US goods more competitive, the US could adopt a policy through which it will sell dollars at a much lower price, say 4.5 yuan.

************************

Have I missed anything?  Feel free to add it to the comments.

Personally, I think an intentionally undervalued currency can be a form of protectionism.  I'm not qualified to determine whether a particular currency peg qualifies as "intentionally undervalued," but a lot of smart economists and others seem to think that is what is going on here.  Of course, there are always winners and losers from any particular trade policy.  I agree that some U.S. consumers are better off with the current situation.  But on balance, I think it would better for the world economy if production decisions were based on market forces.

As to the response, the proposal for a new agreement related to currency undervaluation is my preferred option.  But I recognize that will be difficult to achieve.  In terms of specific action by the U.S. (and others), it seems to me that a WTO complaint is the least confrontational, in the sense that it would mean submitting the issue to a neutral arbitrator.  But the effectiveness of such a strategy is uncertain.

Paths to Economic Development: Is Services (Part of) the Answer?

Over at vox, Ejaz Ghani of the World Bank argues that services can play a more important role in development than is generally thought:

The story of Hyderabad – the capital of the Indian state of Andhra Pradesh – is truly inspiring for late-comers to development. Within two decades, Andhra Pradesh has catapulted itself straight from a poor and largely agricultural economy into a major service centre. Fuelled by a 45-fold increase in service exports between 1998 and 2008, the number of information technology companies in Hyderabad increased 8-fold, and employment increased 20-fold. Service-led growth has mushroomed in other parts of India too. India has acquired a global reputation for exporting modern services.

India and China have both been recognised for rapid economic growth. But India’s growth pattern is dramatically different. China has a global reputation for exporting manufactured goods. It has experienced a manufacturing-led growth. India has side-stepped the manufacturing sector, and made the big leap straight from agriculture into services. Their differences in growth patterns are striking. They raise big questions in development economics. Can developing countries jump straight from agriculture into services? Can services be as dynamic as manufacturing? Can late-comers to development take advantage of the globalisation of service? Can services be a driver of sustained growth, job creation, and poverty reduction?

...

... The old idea of services being non-transportable, non-tradable, and non-scalable no longer holds for a range of modern impersonal services. Developing countries can sustain service-led growth as there is a huge room for catch up and convergence.

...

India’s development experience offers hope to late-comers to development in Africa. The marginalisation of Africa during a period when China and other East Asian countries grew rapidly has led some to wonder if late-comers to development like Africa are doomed to failure. Many considered the “bottom billion” to be trapped in poverty (Collier 2007). The process of globalisation in the late 20th century led to a strong divergence of incomes between those who industrialised and broke into global markets and a bottom billion” of people in some 60 countries where incomes stagnated for twenty years. It seemed as if the bottom billion would have to wait their turn for development, until the giant industrialisers like China became rich and uncompetitive in labour-intensive manufacturing.

The promise of the service revolution is that countries do not need to wait to get started with rapid development. There is a new boat that development late-comers can take. The globalisation of service provides alternative opportunities for developing countries to find niches, beyond manufacturing, where they can specialise, scale up and achieve explosive growth, just like the industrialisers.

This all sounds right to me.  Due to the vast improvements in technology and communications over the past two decades, there are many new opportunities for people in poor countries to offer services exports to those in rich countries.  This is very good news, because even if the infant industry manufacturing model works, not everyone can take advantage of it at the same time.  So, it's nice to have other options.  It's a particularly good option for Africa, which has some logistical problems with shipping traditional manufactured goods.

Tobacco and Trade/Investment Agreements

Tobacco and trade/investment issues are heating up.

Philip Morris is suing Norway:

Philip Morris Norway (PMN) has announced it’s going to sue the Norwegian state. They claim the ban against displaying tobacco products that came into force on 01 January is illegal.

“These regulations prevent adult consumers from seeing the available product range. We have raised these issues with the government to no avail, which has regrettably left us with no choice but to litigate,” says Anne Edwards, spokesperson for PMN.

Edwards goes on to say the company isn’t seeking any other changes to the Norwegian tobacco law. They only want the ban overturned because it overly restricts competition.

...
The lawsuit will be filed at Oslo District Court. As part of the filing, PMN is seeking referral of the case to the European Free Trade Agreement (EFTA) Court in Luxembourg.

More here from Luke Peterson, as well as a piece on a similar Philip Morris claim under an investment treaty between Switzerland and Uruguay (subscribers-only).

Over at the WTO, we are awaiting a panel ruling on a customs valuation issue related to tobacco products:

Manila claims that Bangkok has been ignoring the declared customs values of Philip Morris’ shipments, preferring instead to set higher "predetermined values" since 2006. 

This meant higher duties and value-added taxes on imported cigarettes were also allegedly higher than those slapped on Thai counterparts.

These policies were said to unfairly favor the state-owned Thai Tobacco Monopoly which corners 80% of the domestic market.

Oh, and there is still the Jim Bunning issue:

Sen. Jim Bunning, the Kentucky Republican who held Senate hostage over an unemployment bill earlier this month, is now causing trouble for the Office of the U.S. Trade Representative.

Bunning is blocking the confirmation of two trade nominees because, according to an aide, the USTR hasn’t done enough to defend Bunning’s home state against a Canadian antismoking law that “unfairly discriminates against Kentucky-grown tobacco.” Bunning said Tuesday he’s seen no progress in his talks with U.S. Trade Representative Ron Kirk about Canada’s policy.

 

Today's Chinese Currency Post

I don't mean to overdo things with the China currency issue, but it's a hot topic and there's a lot to say about it.  So here's today's post, which is about an argument made by Arvind Subramanian in the FT:

What is needed is a new rule in the WTO proscribing undervalued exchange rates. The irony is that export subsidies and import tariffs are individually disciplined in the WTO but their lethal combination in “an undervalued exchange rate” is not.

The IMF would continue to be the sole forum for broad exchange rate surveillance. But in those rare instances of substantial and persistent undervaluation, we envisage a more effective delineation of responsibility, with the IMF continuing to play a technical role in assessing when a country’s exchange rate was undervalued, and the WTO assuming the enforcement role.

How would this new rule be incorporated in the WTO? Essentially through negotiation. China would have to agree with its other trading partners in the WTO to negotiate new rules aimed at disciplining undervalued exchange rates. In return for such a commitment, the US Treasury secretary would desist from branding China a currency manipulator next month. To sweeten the pill for China, its major trading partners could pledge to grant China the status of a “market economy” in the WTO. This would have value because anti-dumping and countervailing duty actions are easier to take against non-market economies such as China.

Such an approach has several advantages. China would not be seen as a victim of bilateral targeting, but part of a co-operative approach to settle an issue that could well go beyond its currency. The remedy would be new broad-based rules rather than just renminbi revaluation. There would be a large collateral benefit too. Negotiating new and important rules would help revitalise the WTO, which has languished because of the unfinished Doha Round of trade talks.

I like this all a lot in theory.  I like the part about getting ridding of "market economy" status, and the part about making this a multilateral rather than a bilateral issue, and the part about the IMF and WTO working together on it.  I also like the part about revitalizing the WTO.

In practice, though, a new agreement in this area may be quite difficult to achieve.  Consider that the Doha round negotiations have been going on for many years, with no end in sight.  How long would it take to negotiate new rules on exchange rates?  It might be quite a while.  It's not just China that has to agree to something.  Everyone else has to agree as well.  (Perhaps it could be done as a plurilateral agreement, involving only the major trading countries, which would make things a little easier).

That doesn't mean it's not worth trying, though.  Perhaps this alone won't solve the dispute, but it could be a part of the solution.

Climate Labelling under WTO Rules

From SSRN, here is the asbtract of Climate Labelling and the WTO: The 2010 EU Ecolabelling Programme as a Test Case Under WTO Law, by Erich Vranes

Environmental labelling is increasingly used as an instrument of climate protection. This is underlined, for example, by the EU climate change programme, in which various labelling schemes are employed. Cases in point are the EU’s oft-discussed voluntary ecolabelling scheme, which takes a life-cycle approach, and its mandatory labelling scheme for cars. After the dubious outcome of the multilateral 2009 Copenhagen Climate Conference, the importance of instruments of this type may augment even further.

Both mandatory and voluntary labelling schemes risk contravening WTO law: while mandatory labels restrict market access for non-complying products, labels that are granted under a voluntary scheme are meant to improve the perceived attractiveness of products that are awarded the label; hence, such labels may negatively affect the competitive conditions of other products, possibly disadvantaging imported products.

Labelling schemes according to which information on a product’s environmental impacts over its life-cycle is included in a pertinent label fall into the category of process-based labels. It is well-known to WTO experts that such labelling schemes – in particular those based on ‘non-product-related processes and production methods’ – raise a considerable number of issues under WTO law.

This contribution examines the EU’s voluntary eco-labelling scheme which was revised in 2000 and 2010. Due to its life-cycle approach, which since the scheme’s inception has taken into account e.g. energy consumption during production and use (besides further environmental impacts), this scheme has been intensely debated in trade and academic circles since its first version was introduced in 1992. The new 2010 EU scheme similarly considers the whole life cycle of products, including ‘the most significant environmental impacts, in particular the impact on climate change’. Therefore, and in view of the broad range of issues raised by it, this scheme presents a model test case under WTO law also for other climate-related labelling schemes and ecolabelling schemes more generally.

There is lots of good discussion of issues related to non-discrimination (including likeness, disparate impact, the product/process distinction, and the individual versus group approaches), GATT Article XX, the TBT Agreement, and the relationship between the GATT and the TBT Agreement.

Workshop on Global Law and Economic Policy at Harvard

From June 2-11, 2010:

The Workshop is an intensive ten day residential program designed for doctoral and post-doctoral scholars. The Workshop aims to promote innovative ideas and alternative approaches to issues of global law, economic policy and social justice in the aftermath of the economic crisis.  The initiative will bring young scholars and faculty from around the world together with leading faculty working on issues of global law and economic policy for serious research collaboration and debate.   Hosted by Harvard Law School, The Workshop aims to bring together specialists from across the arts and sciences as well as the professional schools who are interested in the intersections between law, economics and global policy. 

Details here.

Film Production Subsidies

From The Economist:

California has been worrying about “runaway production” since 1998, when Canada began luring producers and their crews away from Los Angeles with tax breaks. Other places followed, and all but seven American states and territories and 24 other countries now offer, or are preparing to offer, rebates, grants or tax credits that cut 20%, 30% or even 40% of the cost of shooting a movie.

I'm convinced that some day this battle over film subsidies will turn into a big trade dispute (well, I guess I should say bigger, as there has already been a Section 301 petition, which was rejected.)  I'm not sure when, though.  More here and here. 

Trade in Everything: Rush Limbaugh Edition

No, we're not trading Rush Limbaugh.  Rather, he may be engaging in trade in medical services:

Conservative talk-show host Rush Limbaugh said this week he’d go to Costa Rica for medical treatment if Congress passes proposed reforms to the US healthcare system.

That might sound like an unusual choice, since this is a country with one of the longest standing socialized healthcare systems on the planet. Everyone here (including resident foreigner), are required to pay into the government-run health system, whether they use it or not.

But Limbaugh’s choice may also serve to advertise what many Americans traveling here for medical treatment already know: Costa Rica is a fabulous place for medical tourism.

Life expectancy in this little Central American country surpasses that of the United States and at one point, back in the early 2000s when the World Health Organization rated countries’ general health, Costa Rica ranked higher (No. 36) than its northern neighbor (No. 37), despite spending 87 percent less on health care per capita.

Some who’ve studied Costa Rican health care consider it better overall, and attribute that to the fact that free coverage extends to 86.8 percent of the population.

But the Cadillac-style private hospitals at Chevy Aveo prices are what really draw 25,000 Americans to Costa Rica every year.

“People travel to Costa Rica (and) receive the same quality of medical services for a fraction of the cost,” said Jorge Cortés, president of the Council for International Promotion of Costa Rica Medicine and medical director of Hospital Biblica, one of three internationally-accredited private hospitals in Costa Rica. “When people see they can get the same surgery for three or four times less, they decide to get medical care abroad.”

Lower labor costs and fewer malpractice suits keep the prices down here. In Costa Rica’s private system, a teeth-cleaning might run $40 and a general check-up costs $50.

...

On Tuesday, Mr. Limbaugh clarified his comment about leaving the United States, after “the liberal media” celebrated his vow of self-imposed exile, viewing healthcare reform as a way to rid themselves of theconservative talk show host.

“If I have to get thrown into this massive government health care insurance business and end up going to the driver's license office every day when I need to go to the doctor, yeah, I'll go to Costa Rica for treatment, not move there,” he told listeners Tuesday, according to a transcript on his website.

So will David Beckham, apparently:

David Beckham arrived in Finland on Monday for surgery on his torn left Achilles' tendon, an injury that will keep him out of the World Cup.

...

A Finnish doctor set to operate on Beckham said there's a "glimmer of hope" the midfielder will recover in time for the World Cup, which begins in June.

 

The Proposal for Two Separate Legal Proceedings for AD/CVD Injury Determinations

Last week I mentioned Senator Specter's proposal to allow AD/CVD injury determinations to be made by federal district courts rather than the ITC.  At the time, I said I didn't see any WTO violations in such a proposal.  However, having now seen the text of the bill, I wonder if perhaps there is an area of inconsistency.  The relevant text is as follows:

SEC. 791. CIVIL ACTION.

`(a) Injury Determination- Notwithstanding any other provision of this title, in an antidumping or countervailing duty investigation initiated under section 702 or 732, a petitioning party, may, not later than 30 days after the date an investigation is initiated under such sections, elect to bring a civil action in a United States district court, for a determination that--
`(1) an industry in the United States--
`(A) is materially injured, or
`(B) is threatened with material injury, or
`(2) the establishment of an industry in the United States is materially retarded,
by reason of imports, or sales (or the likelihood of sales) for importation, of the merchandise subject to the investigation, and that imports of the subject merchandise are not negligible.

...

(c) Effect of Election; Relief-

...

  (3) SPECIAL RULES- The following rules shall apply to actions initiated under subsection (a) or (b):

...

    (C) PRECEDENTIAL EFFECT OF DECISIONS OF THE INTERNATIONAL TRADE COMMISSION-

The decisions of the Commission in other investigations initiated under this title shall not be binding on the court.

If I'm reading this all correctly, the proposed legislation would allow petitioners to have the injury determination made either by the ITC or a federal district court.  Presumably, some petitioners would go to the ITC and some to the courts, depending on various circumstances.  In this regard, the legislation specifies that ITC decisions (in cases not going to the courts) "shall not be binding" on the courts.

I'm wondering whether this part about the absence of precedential effect could lead to divergent interpretations of the law, and thus violate the GATT Article X:3(a) requirement that "laws, regulations, judicial decisions and administrative rulings of general application" be administered "in a uniform, impartial and reasonable manner."  I suppose uniformity is the main issue here.  If you have two separate judicial/quasi-judicial systems hearing the same kind of cases, and one is told it is not bound by the other, aren't the two likely to follow different interpretive paths?  Perhaps an "as such" claim would not work here, but if there was actual divergence, an "as applied" claim might succeed.

Scott Lincicome has additional thoughts on the legislation here.

More Currency Stuff

UNCTAD is not a fan of a floating exchange rate for China:

Amidst continued financial crisis, the question of the global trade imbalances is back high on the international agenda. A procession of prominent economists, editorialists and politicians have taken it upon themselves to “remind” the surplus countries, and in particular the country with the biggest surplus, China, of their responsibility for a sound and balanced global recovery. The generally shared view is that this means permitting the value of the renminbi to be set freely by the “markets”, so that the country will export less and import and consume more, hence allowing the rest of the world to do the opposite. But is it reasonable to put the burden of rebalancing the global economy on a single country and its currency? This policy brief contends that the decision to leave currencies to the vagaries of the market will not help rebalance the global economy. It argues that the problem lies in systemic failures, and as such, requires comprehensive and inclusive multilateral action. 

What they propose instead:

As proposed by UNCTAD in its Trade and Development Report 2009, a number of crucial targets aimed at governing global trade and finance can be met through one measure: a “constant real exchange rate rule”. Since the real exchange rate is defined as the nominal exchange rate adjusted for inflation differentials between countries, a constant real exchange rate (CRER) can be maintained if nominal exchange rates strictly follow inflation differentials. With a CRER rule, higher inflation is automatically offset by the devaluation of the nominal exchange rate.

More details at the link.

The House Ways and Means Committee will be holding hearings on the issue of China's exchange rate policy on March 24.  Could be some fireworks.

Finally, yet more from Paul Krugman:

Here’s how the initial phases of a confrontation would play out – this is actually Fred Bergsten’s scenario, and I think he’s right. First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does.

Suppose that China then digs in its heels, and refuses to budge. From the US-EU point of view, that’s OK! The problem is China’s surplus, not the value of the renminbi per se – and countervailing duties will do much of the job of eliminating that surplus, even if China refuses to move the exchange rate.

And precisely because the United States can get what it wants whatever China does, the odds are that China would soon give in.

Look, I know that many economists have a visceral dislike for this kind of confrontational policy. But you have to bear in mind that the really outlandish actor here is China: never before in history has a nation followed this drastic a mercantilist policy. And for those who counsel patience, arguing that China can eventually be brought around: the acute damage from China’s currency policy is happening now, while the world is still in a liquidity trap. Getting China to rethink that policy years from now, when (one can hope) advanced economies have returned to more or less full employment, is worth very little.

I admit that I'm a little confused by all this.  When he was talking about a 25% tariff yesterday, I thought he just meant a 25% tariff on all Chinese imports.  But now he is referring to a 25% "countervailing duty."  Does he mean that in response to CVD petitions by various U.S. industries, 25% countervailing duties will be imposed on the foreign producers of the like product?  Or is he just using the term "countervailing duty" loosely to mean a 25% general duty on Chinese products that "countervails" the currency manipulation?  The latter would clearly violate WTO rules.  With the former, there's at least an argument that it is consistent.  I'm not really sure what he has in mind and whether he cares about WTO-consistency.

China Currency Times Two

Both the Financial Times and New York Times (hence the post title) have recent articles which refer to the Chinese currency issue.  From the FT:

True, Washington and Beijing are trading heated accusations over whether China’s continued policy of holding down the renminbi is responsible for global imbalances. But for the moment, as Gary Horlick, Washington lawyer, says: “There seems to be an implicit deal between the US and China not to start a [legal] fight on currencies and to let the lawyers litigate everything else.”

...

And so to currencies. As Sunday’s intervention from Wen Jiabao, the Chinese premier, underlined, this is undoubtedly the most serious flashpoint in global trade. But it is worth remembering just how hard it is for the US to do anything about it.

One much discussed option is naming China a currency manipulator in the twice-yearly currency report, the next of which is due by mid-April. But even this would do nothing more than compel the US Treasury secretary to negotiate with the Chinese, which he is doing anyway. It resembles the old Robin Williams stand-up routine about an unarmed British policeman trying to apprehend a fleeing suspect: “Stop! Or . . . I’ll shout stop again!”

Taking a legal case over exchange rate misalignments to the WTO would probably fail, and take years in any case. The only real route left is to unilaterally slap tariffs on Chinese imports to compensate for alleged currency undervaluation. That would be a nuclear option that really could spark the destruction of the postwar world trading system, and it doesn’t look like the US is quite desperate enough for that yet. A second dip in the US recession and a further sharp unemployment rise might do it, but it is not imminent.

And from the NYT:

Seeking to maintain its export dominance, China is engaged in a two-pronged effort: fighting protectionism among its trade partners and holding down the value of its currency.

China vigorously defends its economic policies. On Sunday, Premier Wen Jiabao criticized international pressure on China to let the currency appreciate, calling it “finger pointing.” He said that the renminbi, China’s currency, would be kept “basically stable.”

To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.

...

An undervalued currency keeps a country’s exports inexpensive in foreign markets while making imports expensive. That makes a trade surplus more likely, reducing unemployment for that country while increasing unemployment in its trading partners.

...

If China is found to be manipulating its currency, it could be a political and economic challenge for the Obama administration. President Obama called on Thursday for China to introduce “a more market-oriented exchange rate.” China’s defiant response keeps the administration in a difficult position.

Over at the Conglomerate, David Zaring has the following take on the NYT piece, in particular the part about the lack of international currency rules:

•The implication is that we should have some sort of global currrency discipline, as the EU had before it moved to the Euro, I suppose. Such a discipline could be had by the lamented-by-few gold standard, I suppose. But ... really? Gold?
•More to the point, I, like the Times, believe in international law and institutions - maybe we should have an international currency union! But story that suggests that what China has going for it is membership in the iron-disciplined WTO and rogue-state status as a currency provider suggests that international law has much, much more power than it probably really does. If the US and EU wanted to invoke safeguards and slap massive tariffs on Chinese goods, they could do it. If they want to trade Taiwan arms sales for massive currency deflation, they could possibly do that as well. Even without a WTO for the world's currencies.

Let me just add another option.  My suggestion would be for something different than a currency union or currency band or gold standard.  As I have said before (somewhere -- there are too many posts at this point to seach for it!), I think international rules limiting the use of currency manipulation to favor domestic over foreign products would be a good thing.  In essence, it would be a limited commitment to let the market determine exchange rates.  So while the other proposals would be for fixed currencies (to some extent), mine would be for a commitment to floating currencies.

In addition, I'm not completely convinced that a WTO claim "would probably fail," as one of the articles notes.  Which reminds me that I have a follow-up post on GATT Article XV that I've been meaning to get to for some time.  I'm going to aim for next week.

As a final China currency news items, Paul Krugman (of the NY times -- coincidence?) argues:

Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”

But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

To which Dan Drezner replies:

Whoa there, big fella!!  That's a nice but very selective reading of international economic history you have there. 

It's certainly true that the dollar was overvalued back in 1971.  What Krugman forgets to mention -- and see if this sounds familiar - is that the Johnson and Nixon administrations contributed to this problem via a guns-and-butter fiscal policy.  They pursued the Vietnam War, approved massive increases in social spending, and refused to raise taxes to pay for it.  This macroeconomic policy created inflationary expectations and a "dollar glut."  Foreign exchange markets to expect the dollar to depreciate over time.  Other countries intervened to maintain the dollar's value -- not because they wanted to, but because they were complying with the Bretton Woods system of fixed exchange rates.  Nixon only went off the dollar after the British Treasury came to the U.S. and wanted to convert all their dollar holdings into gold.  

In other words, the United States was the rogue economic actor in 1971 -- not Japan or Germany. 

It's only on rare occasions that I'm sure of things in relation to trade policy, but I'm fairly sure that the U.S. will not impose a 25 percent tariff on Chinese imports.  Putting the obvious WTO violation aside, I think it is highly unlikely such an action would cause China to let its currency appreciate.  If anything, China would be more relectant to change its current policy if the U.S. did this.

Trade in Natural Resources: The Bluefin Tuna Ban under the TBT Agreement

In the spirit of the discussion of trade in natural resources that Melaku has been leading, I thought I would do a post on a very technical aspect of the proposed trade ban on bluefin tuna, which may soon be imposed pursuant to the United Nations' Convention on International Trade in Endangered Species (CITES).

I had thought about going through a full analysis of such a ban (GATT Articles I, III, XI and XX, etc.), but I realized that would be too much for a blog post, and that I was better off focusing on the narrow issue that had occurred to me when I first read about the ban:  Would a domestic ban on bluefin tuna imports (implemented pursuant to the CITES ban) constitute a "technical regulation" that is subject to the TBT Agreement?

TBT Agreement Annex 1.1 defines "techical regulation" as follows:

Document which lays down product characteristics or their related processes and production methods, including the applicable administrative provisions, with which compliance is mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method.

At first glance, you might think that such a ban would not be covered, as it does not regulate the "product characteristics", "related processes and production methods," or "terminology," etc. of bluefin tuna.  Rather, it simply bans all trade in it.  However, according to the Appellate Body in EC - Asbestos, a ban on asbestos was a technical regulation because it regulated all products, by requiring that all products not contain asbestos.  In this regard, the Appellate Body said:

72. ... It is important to note here that, although formulated negatively – products containing asbestos are prohibited – the measure, in this respect, effectively prescribes or imposes certain objective features, qualities or "characteristics" on all products. That is, in effect, the measure provides that all products must not contain asbestos fibres. Although this prohibition against products containing asbestos applies to a large number of products, and although it is, indeed, true that the products to which this prohibition applies cannot be determined from the terms of the measure itself, it seems to us that the products covered by the measure are identifiable: all products must be asbestos free; any products containing asbestos are prohibited. ...

...

75. Viewing the measure as an integrated whole, we see that it lays down "characteristics" for all products that might contain asbestos, and we see also that it lays down the "applicable administrative provisions" for certain products containing chrysotile asbestos fibres which are excluded from the prohibitions in the measure. Accordingly, we find that the measure is a "document" which "lays down product characteristics … including the applicable administrative provisions, with which compliance is mandatory." For these reasons, we conclude that the measure constitutes a "technical regulation" under the TBT Agreement.

Along the same lines, a ban on trade in bluefin tuna could be seen as regulating all products, or at least products such as sushi and sashimi which sometimes contain bluefin tuna, by requiring that all products not contain bluefin tuna.  (One objection might be that the measure doesn't ban bluefin tuna entirely, but rather its import and export.  While this is true, in a situation where a country does not produce any bluefin tuna of its own, an import ban is effectively a ban on the product.)

Just to be clear, I don't expect any WTO claim relating to a bluefin tuna ban, so this is just an intellectual exercise.  It only occurred to me because I just taught a class on the TBT Agreement and was thinking about this particular Appellate Body finding.

Natural resources and non-WTO rules of international law

 The discussion is nicely leading to the next question: what other international rules are relevant to trade in natural resources and how do they relate to WTO rules?

a.    do regional agreements have any specific rules that could be relevant at the multilateral level?

b.    how about international commodity agreements? (note that the old concept of international commodity agreements is back on the WTO agenda; the Dec. 08 draft agriculture modalities text devotes a whole section of 12 paragraphs (paras. 91-102))

Then let me bring back Julia’s three questions:

a.      Is the principle of "permanent sovereignty over natural resources" still a generally accepted principle of international law? If so, what is the content of such permanent sovereignty?

b.     Is there any international norm that obligates a resource-rich nation to share its resources (including production) with resource-poor nations?

c.     Is there an international regime that restricts nations from exploring their own natural resources, such as destroying their own forest?

Trade in natural resources: are there any gaps in the rules?

Related to the issues we have been discussing on this Blog: what are the most important gaps in the rules with respect to trade in these sectors?

 

This question already assumes that there are gaps in the rules, which is probably a defensible assumption. Many issues come to mind here, such as the imbalance in the rules between import restrictions and export restrictions (i.e. the fact that they make it less difficult for governments to impose export restrictions compared to import restrictions – unlike for example the even-handed approach to such measures under EU law), dual pricing (in the sense of internal prices in producing countries lower than export prices), the application of WTO rules to internal taxes, e.g. excise taxes on fuel in countries with little domestic fuel production, and so on.

 

In this connection, I was reading the WTO working paper written by Professors Paul Collier and Anthony Venables, which I found truly refreshing. (available here: http://www.wto.org/english/res_e/reser_e/ersd201006_e.pdf) I liked particularly the fact that it is written in very original language (e.g. WTO rules and disciplines are called “commitment technologies”) and free of our traditional conceptual boundaries. Many of the issues they address are what many of us might easily exclude as outside the WTO system – many of their trade issues are our investment law issues, competition law issues, and so on. However, there is nothing in this conceptual compartmentalization that prevents members from bringing any of these into the WTO system.

While I do not intend to summarize their paper here – not least because I would not be able to; there is even a graph! – Collier and Venables start by identifying what they call the “distinctive features” of the natural resource sector that give rise to “non-standard arguments for trade policy and for the design of international rules: … the fixed location of resource endowments, the presence of resource rents, the fact that resource stocks are finite, issues to do with the long run discovery and development of resources, and the fact that resources are a predominant share of economic activity in some producing countries.” (p. 3) After an explanation of each feature, they identify the trade policy implications and how new rules could be designed within the WTO to address them. Let me mention a couple of examples, which I put under my own headings:

Investment? Investment dispute settlement?

 

On natural resource projects, they argue that “investors enter a long term relationship with the host country government. The relationship is based on contracts signed when the licenses to explore and extract are granted, and on the accompanying fiscal regime under which investors operate. This relationship means that trade policy is not just about the market for the resource, but is also about the market for licenses – their terms and their allocation.” (p. 7) They then discuss the challenges that arise in the management of relations between investors and governments, often following the ups and downs in the price of commodities on the world market.

A possible “commitment technology”:

“the internationalization of contract enforcement through ad hoc approaches such as foreign courts and arbitration arrangements is already common. However, they are often mistrusted by the governments of low-income countries, while lacking enforcement mechanisms that reassure investors. There may be scope for the WTO to extend its role in the enforcement of agreements between sovereign governments to enable governments to commit themselves to resource extraction agreements. Sometimes these would be between a government and a company, as with ALCOA, and sometimes they would be intergovernmental, as with Guinea and Liberia.” (p. 13)

 

Further down, they also identify the current fear of “peak oil”, which they argue, could be mitigated if resource rich countries were to allow investment in exploration and development. On this, they suggest: “As a near-global organization the WTO has the authorizing space in which to codify rules and standards that might mitigate these political impediments to investment.” (p. 16)

 

Possible competition law issues?

 

Discussing the interests of importing countries particularly in supply risk situations, they fear that “the international trading system is going to be bypassed by secretly negotiated bilateral deals between importing and exporting governments that withdraw huge blocks of the earth’s surface from the international market.”

A possible “commitment technology”:

“There is a reasonable basis for the WTO to require that future sales of the rights to extraction and related exploitation of natural assets should not lock-in the sale of output to particular markets. The sale of output can be detached from the exploitation of the resource, and conducted according to normal commercial practices for the sale of products.” (p. 16)

 

Taxes and subsidies

 

They also discuss the effect of taxes and subsidies, using the petroleum sector as an example: “Heavy permanent taxes in most importing countries reduce world demand for oil and hence lower the world price, thereby shifting the rents from producers to consumers. In producer countries consumer subsidies or export taxes have an analogous opposing effect, raising demand and tending to increase the world price.”

A possible “commitment technology”:

“because the efficiency losses arise from differences in domestic prices, whereas the shifting of rents arises from the effect on the world price of taxation in some countries and subsidy in others, it is potentially possible to reach a mutually beneficial deal in which the distribution of rents is unaffected while the efficiency losses are eliminated. Reaching such a deal, in which world prices were gradually harmonized, would be entirely analogous to the mutual de-escalation of tariff wars which has been the core function of the WTO since its foundation.” (p. 19)

I wonder what the views of the lawyers would be on such issues: is there a need for any of these to be brought within the WTO? Or do we have other international law rules that take care of such issues adequately?

International Trade in Natural Resources

The WTO Secretariat is currently preparing the World Trade Report 2010. This year's topic is trade in natural resources, covering fuels, mining, fish, and forestry. Further information about the WTR is provided at: http://www.wto.org/english/res_e/publications_e/wtr10_ruta_e.htm. 

 

The WTO has sought input from the general public by organizing a discussion on the topic on the WTO website (see http://www.wto.org/english/res_e/publications_e/wtr10_e.htm).

 

They are also keen to engage the international economic law community and suggested a discussion on this Blog; they will closely follow the discussions and might publish them on the WTO website.

 

This is surely a timely topic, and for all I know, there is little written on the subject by international trade lawyers. In the course of this discussion, I will be raising several key questions, but also hope many others will join in the debate with their own questions as well as perspectives.

 

So let’s start with our first question: to what extent are WTO rules relevant to trade in natural resources? Related to this:

1. what makes trade in natural resources different from trade in other products?
2. what do we mean by trade in natural resources anyway – i.e. at what point does a natural resource cease to be a natural resource and become a tradable product, and does this matter in legal terms?

Let me start off by offering some general thoughts on this just to stimulate discussion.

 

In an article I published in 2003 (I have to admit immediately that my views on one key issue have changed since), I distinguished between access to markets (producers’ interests) and access to supplies (consumers’ interests) and concluded that (1) the major issue in the natural resources sector (e.g. crude oil) is access to supplies rather than to markets; (2) the GATT/WTO system is designed to advance market access more than access to supplies; and (3) the trading system will need to undergo radical changes in order to address issues of supply access.

How to get rid of a trade deficit/surplus?

The answer is simple: bring in a new set of bean-counters (sometimes from a different country). This is essentially what the MOFCOM of China and DOC of US did in their new “Report on the Statistical Discrepancy of Merchandise Trade Between the United States and

China

”, which was issued on March 4^th (English version here; Chinese version here). After accounting for the differences created by transshipment through HK and other intermediaries, mark-ups, and customs valuation, the discrepancy in the statistics have shrunken from a whopping 84.3 billion USD to a (still large but not so extreme) 24.2 billion USD. 

While this report adds nothing new to the intellectual debate as it has largely confirmed the works by KC Fung and Larry Lau (see this and this) on the topic, this is probably the first time that the US government openly admits that part of the growing deficit with China might simply be statistical rather than substantive.

Now the question is: Does this mean that the US government will soften its stand on the currency issue?

The Great Trade Debate: Fletcher - Reply #3 to Dan Griswold on Free Trade

by Ian Fletcher

Dan has again dragged irrelevant issues into this debate; I shall let the reader judge whether I am guilty of Maoism!

Dan’s conflation of protectionism with communism and related economic pathologies is telling: free traders of Dan's variety (ideologically-committed libertarians) habitually roll up all economic questions into one big homogenous ball.  For them, all economic questions are the same—because abstract ideology tells them so—and the answer to every question is 100.0% economic freedom, 100.0% of the time. This is an extremist position belied by America’s experience in our domestic economy, where we rejected pure laissez faire a long time ago.  It is also symptomatic of a larger inability to understand the complex reality that China, for example, is not a 100% capitalist economy, but a hybrid of central planning and free markets.  According to Dan’s ideology, China should be broke by now.

Dan disputes that the U.S. historically succeeded by means of protectionism.  But if free trade had been the winning move in the era of America’s industrialization from the Civil War to World War One, free-trading Britain would have outpaced protectionist America and Germany rather than declining in relative terms.  American tariffs indeed raised the prices of industrial machinery et cetera in the short run, but encouraged the development of a domestic machinery sector that liberated the U.S. from dependence on foreign suppliers.  If not for this, we'd quite possibly still be the commodities-dominated economy we once were and other New World nations remained.

Dan is correct that there is nothing new about my arguments; the problems with free trade have been known for centuries, which is why every single developed nation got that way by means of protectionism and industrial policy.  For the details,  please see Chapter Six of my book Free Trade Doesn’t Work, which is entitled “The Deliberately Forgotten History of Trade.”

Dan’s assertion that China’s policy in recent years has been “to unilaterally lower its barriers” is Soviet false.  Dan has been taken in by paper tariff reductions belied by the more fundamental real-world fact of gargantuan Chinese trade surpluses against the U.S.  A low tariff at the border means nothing if non-tariff barriers exist behind it.  These range from currency manipulation to the inbred cross-shareholding relationships between corporations that freeze out foreign suppliers.

Many of Dan’s arguments, like those of free traders generally, continue to be valid—but they are arguments for trade, not free trade.   This is the same logic that was once used to prove that because labor is beneficial, unregulated labor must be best: no minimum wage, no child-labor ban, no limits on hours or working conditions.

Any happy income figures Dan quotes from the last few years largely reflect an unsustainable financial bubble.  And if you take out government employment, there is no improvement in service industry incomes. 

The myth that the Great Depression had anything to do with protectionism has been debunked by economists from Paul Krugman on the left to Milton Friedman on the right, the latter a card-carrying libertarian.  The official State Department evaluation at the time found no sign of a trade war, and the tariff changes in question were actually quite small.

Dan’s and my differing contentions about world poverty derive from using absolute vs. relative measures. (See http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI08supplement1216.pdf , p. 10.)  What even Dan’s data do not deny, however, is that what progress against poverty there has been, has been concentrated in nations like China which employ neomercantilist trade policies as a development tool, not free trade.

**********************

Ian Fletcher is an Adjunct Fellow at the U.S. Business & Industry Council, a Washington-based think tank founded in 1933, and author of the new book Free Trade Doesn’t Work: What Should Replace it and Why, available on Amazon.com. USBIC’s web site is at americaneconomicalert.org; the website for Ian’s book is at freetradedoesntwork.com; Ian’s page at USBIC is at usbic.net/ianfletcher; he may be contacted at [email protected].

(For the free trade view, see Dan Griswold's post here) 

The Great Trade Debate: Griswold - Trade barriers rob from the many to benefit a few special interests

by Daniel Griswold

As we wrap up our debate, let me grant Ian’s point that free trade alone is not a magic bullet that by itself delivers prosperity. Economic success also depends on secure property rights, the rule of law, stable money, functioning domestic markets, and moderate levels of taxation and regulation.

Where Ian and his protectionist friends go wrong is their belief that we Americans can make ourselves more prosperous by making ourselves less free to engage in business with people beyond our borders. We are not children who need government elites to save us from ourselves. Americans should be free to decide how we spend and invest our own hard-earned money, whether across the street or across an international border.

 

Protectionism at its core is a tool of income redistribution. It takes from the many and distributes the booty to politically connected special interests, while leaving our economy weaker and less productive.

 

Consider the U.S. sugar program, the poster boy for what is wrong with protectionism. The sugar program uses a system of quotas to restrict imports to about 15 percent of the domestic market. In some years this means U.S. consumers and sugar-using industries pay two or three times the world price for sugar.

 

 Sugar quotas have raised prices for American families, while raising costs for candy-makers, cereal companies, and bakeries. The U.S. Commerce Department calculated in a 2006 report that the sugar program had caused the loss of 6,000 manufacturing jobs. In fact, for every job saved in the sugar-producing industry, the quotas had eliminated three jobs in sugar-consuming industries.

 

A General Accounting Office study found that the sugar program cost U.S. consumers $1.9 billion a year. Of that, $1 billion went straight into the pockets of a relatively small number of sugar beet and sugar cane producers. Another $400 million went to certain foreign producers lucky enough to have quota rights to sell into the protected U.S. market at artificially high prices. The other $500 million simply disappeared each year in lost production, what economist call “deadweight” loss. This in microcosm is what protectionism does to our economy as a whole.

  

America’s remaining trade barriers fall especially hard on low-income American families. In fact, our highest trade barriers are aimed at products that are made and grown by poor people abroad and disproportionately consumed by poor people at home. We are talking about the staples of life—food, clothing, and shoes—that loom largest in a poor family’s budget. Import duties are the most regressive tax our federal government imposes.

 

Repealing our remaining trade barriers would make the basics of daily life more affordable for American families. It would reduce costs for American producers, allowing them to compete more effectively in domestic and global markets. Free trade would bless us with a more efficient and just economy.

 

Americans understand instinctively that competition is good. We benefit when more rather than fewer producers compete for our business. Domestic anti-trust laws are designed to protect consumers from price fixing, bid rigging, and cartels that divide markets among competitors. Yet that is exactly what trade barriers do—they protect a few favored producers from competition, at the expense of consumers and the general welfare.

 

Free trade is not just a matter of sound economics, although it is certainly that. Free trade is also a matter of justice, fairness, and social equity. In contrast, protectionism is a conspiracy against liberty and the public good—a conspiracy encouraged, enabled, and joined by our own government.

 

***************

 

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute, a non-profit, non-partisan think tank in Washington. He is author of the new Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, available at Amazon.com and major bookstores. More information about Cato and Mad about Trade can be found at freetrade.org and danielgriswold.com. His email is [email protected].

(For the protectionism view, see Ian Fletcher's post here)