International Economic Law and Policy Blog

Measuring Trade Flows

In the comments, Susan Aaronson says:

In the 1/25 Financial Times, World Trade Organization director-general Pascal Lamy argues that the way we calculate trade flows is inaccurate and is exacerbating tension over imbalances. The problem, he says, is an outdated system that assigns a given good only one country of origin:

Apple’s iPhone illustrates this clearly. It is assembled in China, then exported to the US and elsewhere. Yet the components come from numerous countries. According to a recent Asian Development Bank Institute study, the phone contributed $1.9bn to the US trade deficit with China, using the traditional country of origin concept. But if China’s iPhone exports to the US were measured in value added – meaning the value added by China to the components – those exports would come to only $73.5m.

I welcome a discussion of this...........

It's an interesting issue, but one on which I don't have any particular insights.  If anyone else has something to say, feel free.  I think the issue will be talked about in some detail here.

A Better Way to Argue for Free Trade?

In a new Cato Institute paper, Dan Ikenson and Scott Lincicome question the approach taken by many people who argue for free trade, and propose an alternative.  They start things off with a critique of the existing pro-trade arguments:

... in an atmosphere where demagogues peddle myths to mislead the public into believing that it is preferable for government to limit their choices and direct their resources to chosen ends, it is crucial that the case for free trade be made more clearly, comprehensively, and consistently than it has been in the past.

... advocates of trade in Congress, the administration, the business community, think tanks, academia, and among the general public should update their arguments and invest in the process of winning the trade debate once and for all. Some of the most compelling arguments for free trade have been only modestly summoned or absent from the discussion for too long.

 ...

... Many of trade's most vocal and active proponents in government and the private sector have relied too heavily and for too long on a faulty marketing strategy, which posits that more trade and more trade agreements mean more export opportunities, and more exports mean more economic growth and more jobs. The political appeal of that message is obvious, and there is nothing dishonest about it. Exports do contribute to economic growth, which is essential to job creation.

However, that message invites the following retort: if exports help grow the economy and create jobs, then imports must shrink the economy and cost jobs. In failing to explain why that conclusion about imports is wrong, trade proponents have yielded the floor to trade skeptics, who have been more than happy to manufacture talking points about the "deleterious" impact of imports on the U.S. economy. ...

...

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

...

If proponents want to avoid the perennial disruptions to the trade agenda caused by the perceived need to tiptoe around the electoral calendar, we will need better selling points. We must articulate a more resonant message, so that the benefits of trade need not be rationalized or couched in defensive rhetoric. ...

Then they set out their case for free trade:

The most principled case is a moral one: voluntary economic exchange is inherently fair, benefits both parties, and allocates scarce resources more efficiently than a system under which government dictates or limits choices. Moreover, government intervention in voluntary economic exchange on behalf of some citizens necessarily comes at the expense of others and is inherently unfair, inefficient, and subverts the rule of law. At their core, trade barriers are the triumph of coercion and politics over free choice and economics. Trade barriers are the result of productive resources being diverted to achieve political ends and, in the process, taxing unsuspecting consumers to line the pockets of the special interests that succeeded in enlisting the weight of the government on their side.

...

Beyond the moral case for free trade, when people are free to buy from, sell to, and invest with one another as they choose, they can achieve far more than when governments attempt to control their decisions. Widening the circle of people with whom we transact brings benefits to consumers in the form of lower prices, greater variety, and better quality, and it allows companies to reap the benefits of innovation, specialization, and economies of scale that larger markets afford. Free markets are essential to prosperity, and expanding free markets as much as possible enhances that prosperity.

What do our readers think of this?  Would these arguments help sell free trade to the public?  Would an appeal to moral arguments help the free trade cause?  How about the references to freedom to buy and sell and the resulting benefits?

What about this simple and direct approach:  Free trade is good because imports are good for U.S. consumers, who get more choices and lower-prices.

National Treatment in the Renco Investor-State Complaint

And here's the final non-discrimination post of the day.  U.S. company Renco Group, on its own behalf and on behalf of its affiliate Doe Run Peru (DRP), has brought an investor-state claim against Peru under the U.S.-Peru Trade Promotion Agreement.  The Notice of Intent to Commence Arbitration is here, and this is the National Treatment claim:

2. Peru's Pattern of Treating DRP Less Favorably than it Treats Centromin/Activos Mineros Violates Article 10.3 of the Treaty.

54. Peru's unfair treatment of DRP is in direct contrast to its treatment of Centromin, a company owned by Peru, in violation of Article 10.3 of the Treaty. As described above, DRP went through an extensive request process for each of the PAMA extensions that it received. This process included conducting detailed studies, submitting the reports of the studies to the Ministry of Energy and Mines, providing the public with notice and conducting public hearings. With respect to the first of the extensions that Peru begrudgingly granted, Peru imposed upon DRP obligations to complete more projects and to satisfy additional environmental standards. Peru also subjected DRP to continuous daily inspections by an inspector living in La Oroya. With respect to the second extension that Peru granted, Peru subjected DRP to financial conditions so onerous that DRP could not possibly complete its last remaining PAMA project.

55. Meanwhile, Centromin requested a PAMA modification in 2000 that included an extension of its time to complete its PAMA projects. Centromin did not even notify DRP. DRP had no opportunity to object or participate in the process. Peru did not require Centromin to conduct any studies or submit any reports or notify the public or conduct public hearings. Peru granted Centromin's request for a PAMA modification without imposing any additional obligations or more stringent environmental standards on Centromin.

56. Moreover, while Peru subjected DRP to rigorous inspections, Peru seemingly imposed little quality control over Centromin. For example, one of Centromin's PAMA projects was the abandonment of the arsenic trioxide deposit that Centromin used during its operations of the Complex. While Centromin claims to have completed this project and Peru seems to be satisfied that this project is complete, studies completed by DRP indicate that the deposit still leaks substantial amounts of arsenic into the river. In addition, even though its PAMA was modified to extend its deadline to remediate the soil in and around La Oroya until 2010, Centromin has yet to make any substantial progress toward completing this project.

Here is Article 10.3: 

Article 10.3:  National Treatment

1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.

2. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.

3. The treatment to be accorded by a Party under paragraphs 1 and 2 means, with respect to a regional level of government, treatment no less favorable than the most favorable treatment accorded, in like circumstances, by that regional level of government to investors, and to investments of investors, of the Party of which it forms a part. 

So for Renco, as stated in the Notice of Intent, all that matters for its National Treatment claim is the treatment it received in comparison to that of Peruvian company Centromin.  In other words, it appears to take an individual investor/best treatment approach, although if these are the only two investors in the industry, perhaps in effect they also constitute the relevant foreign and domestic "groups."

Non-Discrimination under GATT Article III:2, first sentence

Here's the third non-discrimination post of the day.  Looking over the U.S. responses to the Panel's questions in Philippines - Spirits (DS396/403), it was striking how little discussion of intent/effect issues there was, in comparison with Clove Cigarettes and Tuna, the subject of several recent posts.  Instead, the focus in Spirits, which is an Article III:2 tax case, was on likeness and competitiveness/substitutability of the products (with the exception of Question 61, which dealt with the relevance of government officials' statements).  The language of Article III:2 is different, of course, but the same issues are still lurking around in there.  This was just the first set of questions; I'm hopeful that the next round will address some of the other points.  The issues are even more difficult under Article III:2, first sentence, in my view, than they are under Article III:4.

National Treatment: Imports from Complainant versus All Imports

For today's non-discrimination post number 2, here's something from the U.S. - Tuna II (DS381) panel's questions to the U.S.:

149. To the United States: You have referred to the treatment afforded to “imported products” under the measures in the context of your arguments concerning “less favourable treatment”.   In light of your position that the “like products” at issue are US and Mexican tuna products,  please clarify whether you consider that the existence of less favourable treatment must be assessed with reference to imported tuna products in general, rather than to Mexican tuna products? If so, please explain why this should be the case.  Please clarify also how the relative situation of imports of different sources may be accounted for under this assumption.

That's a good question:  Are the imports to be considered in a national treatment analysis only the imports from the complaining country, or is it imports from all countries?  Here was the U.S. response:

94. The United States considers that the existence of less favourable treatment must be assessed with reference to imported tuna products in general versus domestic tuna products in general because Article III:4 prescribes no less favorable treatment of imported products as compared to like domestic products. Article I:1 of the GATT 1994 — not Article III:4 — addresses circumstances in which a measure is according less favorable treatment to imports from some Members as compared to others. 

...

97. The United States has put forward extensive evidence in this dispute showing that the U.S. provisions do not in fact use fishing technique or location as a proxy for origin.  The fact that tuna product imports from other nations – in fact the vast majority of all tuna imports – are eligible to receive the dolphin safe label is one piece of evidence that U.S. provisions do not use origin to distinguish between tuna products that are eligible to be labeled dolphin safe.

So according to the U.S., national treatment is about all imports worldwide, and concerns about one country's imports are more of an Article I:1 MFN issue.

The Role of Effect in Non-Discrimination: The Clove Cigarettes Case

There's so much to say about the non-discrimination issue right now that I'm not quite sure where to begin.  I've got four posts here today, and for DSC subscribers I also did one on the DSC blog for the Tuna case.  To start things off, here's a quick post on the individual product/best treatment/asymmetric impact issue.

This is from the U.S. second written submission in the Clove Cigarettes (DS406) case:

119. Indonesia would have the Panel consider the “less favorable treatment” claim without respect to the context of the relevant Agreements and based on an extreme view that has been squarely rejected by the Appellate Body. Indonesia submits that all different types of cigarettes are a single “like product”, and that if any domestic cigarette is permitted under section 907(a)(1)(A), the measure accords less favorable treatment to Indonesian products. ...

...

121. ... the “best treatment” approach advocated by Indonesia is inconsistent with the language of GATT Article III:4 and Article 2.1 of the TBT Agreement. The relevant comparison is the treatment accorded to imported “products” and like domestic “products” – not single imports and compared to single like domestic products. There is no textual basis to interpret either national treatment provisions as providing for treatment of “an imported product” that is no less favorable than the treatment of “a domestic product.”

122. Nor is it consistent with the Article III principle that measures should not be applied so as to afford protection to domestic production and the TBT affirmation that Members may take measures to protect the public health, including by laying down product characteristics. Were Indonesia’s view to prevail – and if national treatment obligations were violated when a single import is restricted by a measure and a single like domestic product is not – Members’ ability to regulate for the protection of human health or any other purpose would be seriously encumbered. Any measure that distinguished between products for legitimate reasons – for example to protect public health – could be construed as resulting in national treatment violations.

123. Further, in EC – Asbestos the Appellate Body has rejected the “best treatment” approach Indonesia advances. The Appellate Body affirmed that the relevant comparison for purposes of the “less favorable treatment” is not between an import as compared to the “best” treated likedomestic product, but rather “a complaining Member must [...] establish that the measure accordsto the group of ‘like’ imported products ‘less favorable treatment’ than that it accords to the groupof ‘like’ domestic products.” In referring to the “group of ‘like’ imported products” and the“group of ‘like’ domestic products,” the Appellate Body reflected that the type of distinctions with which Article III:4 is concerned are those that distinguish between products based on wether they are domestic or imported, or said another way, based on origin.

So the U.S. takes a strong stance against the individual product/best treatment approach.

Obama's State of the Union Speech: Free Trade and Competition

Here's the speech.  I saw a tension between two parts of it.  

First, Obama makes the point that it's a competitive world out there:

Many people watching tonight can probably remember a time when finding a good job meant showing up at a nearby factory or a business downtown. You didn't always need a degree, and your competition was pretty much limited to your neighbors. If you worked hard, chances are you'd have a job for life, with a decent paycheck and good benefits and the occasional promotion. Maybe you'd even have the pride of seeing your kids work at the same company.

That world has changed. And for many, the change has been painful. I've seen it in the shuttered windows of once booming factories, and the vacant storefronts on once busy Main Streets. I've heard it in the frustrations of Americans who've seen their paychecks dwindle or their jobs disappear — proud men and women who feel like the rules have been changed in the middle of the game.

They're right. The rules have changed. In a single generation, revolutions in technology have transformed the way we live, work and do business. Steel mills that once needed 1,000 workers can now do the same work with 100. Today, just about any company can set up shop, hire workers, and sell their products wherever there's an Internet connection.

Meanwhile, nations like China and India realized that with some changes of their own, they could compete in this new world. And so they started educating their children earlier and longer, with greater emphasis on math and science. They're investing in research and new technologies. Just recently, China became the home to the world's largest private solar research facility, and the world's fastest computer.

So, yes, the world has changed. The competition for jobs is real. But this shouldn't discourage us. It should challenge us. Remember — for all the hits we've taken these last few years, for all the naysayers predicting our decline, America still has the largest, most prosperous economy in the world. No workers — no workers are more productive than ours. No country has more successful companies, or grants more patents to inventors and entrepreneurs. We're the home to the world's best colleges and universities, where more students come to study than any place on Earth.

So is the answer to protect ourselves from foreign competition?  No, it's to embrace the challenge of competing for jobs:

To help businesses sell more products abroad, we set a goal of doubling our exports by 2014 — because the more we export, the more jobs we create here at home. Already, our exports are up. Recently, we signed agreements with India and China that will support more than 250,000 jobs here in the United States. And last month, we finalized a trade agreement with South Korea that will support at least 70,000 American jobs. This agreement has unprecedented support from business and labor, Democrats and Republicans — and I ask this Congress to pass it as soon as possible.

Now, before I took office, I made it clear that we would enforce our trade agreements, and that I would only sign deals that keep faith with American workers and promote American jobs. That's what we did with Korea, and that's what I intend to do as we pursue agreements with Panama and Colombia and continue our Asia Pacific and global trade talks.

The balance between competing for jobs and practicing free trade could be a delicate one.

One final note, about the good old days, when jobs were easy to get: 

Many people watching tonight can probably remember a time when finding a good job meant showing up at a nearby factory or a business downtown. You didn’t always need a degree, and your competition was pretty much limited to your neighbors. If you worked hard, chances are you’d have a job for life, with a decent paycheck, good benefits, and the occasional promotion.

I'm with Ann Althouse on this one:  "When was that true? Who is he talking about? I'm 60 and I don't remember that ever being true."  Perhaps it was the case for a handful of people here and there, but by and large I suspect it is a myth.

U.S. NAFTA Secretariat Job

There's an opening for the head of the U.S. NAFTA Secretariat:

Are you interested in assisting U.S. businesses compete globally? The International Trade Administration is the largest federal agency helping U.S. firms to succeed in the world economy.  You can help us create opportunities for U.S. workers and firms by promoting international trade and fostering a level playing field for American business.  Join us in opening foreign markets, ensuring compliance with trade laws and agreements, and lowering barriers to U.S. competitiveness.  Join a winning team helping U.S. industry to meet and beat foreign competition, both at home and abroad.

This position is located in Market Access & Compliance, NAFTA Secretariat office.  The incumbent will serve as the U.S. Secretariat and will lead a team responsible for coordinating with both the Mexican and Canadian sections to carry out the terms of the NAFTA agreement.

...

The NAFTA Secretariat is responsible for overseeing the impartial administration of the dispute settlement provisions of the North American Free Trade Agreement. The Secretariat is accountable to the NAFTA Free Trade Commission, which comprises the ministers responsible for international trade in the three NAFTA partner countries.  The Secretariat shall be an expert in international trade policy and serve on both inter-agency and inter-government work groups to enhance and streamline the process.  S/he will be responsible for briefing senior officials on the trade agreement.  S/he will also be responsible for managing the office, overseeing the budget and disbursement of funds.

Are We Living Under a "Pro-Corporate Global Governance System"?

Todd Tucker refers to the current trade regime as a "pro-corporate global governance system."  Is that a fair characterization?  Aren't just as many corporations opposed to the system as are for it?  There are winners and losers from every policy -- some corporations are hurt and some are helped.

Also, if it is an accurate description, is there anything wrong with that?  Corporations employ workers, so if it is pro-corporate, isn't it also pro-worker?

And is "global governance" itself too strong?  Are trade agreements powerful enough that they can be said to be "governing" things?

Intra-National Free Trade: Super Bowl Edition

This story has a similar feel to the concerns about producing the U.S. flag abroad:

A Wisconsin towel maker is smack-dab in the middle of the Green Bay Packer-Pittsburgh Steeler Super Bowl matchup.

McArthur Towel and Sports, a WinCraft company, has been producing officially licensed sports towels for years, including the Steeler fans’ beloved Terrible Towel. Now, the company is busy creating a Super Bowl version.

But the company’s president, Gregg McArthur, says he loves the Packers. He’s working on a Super Bowl towel for the green and gold, too.

Will someone in Pittsburgh start complaining about the towel-making jobs being lost to Wisconsin?

Legal Protectionism: Tariffs vs. Other Measures

Todd Tucker of Global Trade Watch recently complained that the WTO Government Procurement Agreement restricts the ability of the U.S. government to favor domestic solar panel producers through its Buy America procurement policies:

... dig a bit deeper into the NYT story to understand what the phrase "subject to the exceptions..." means in plain English:

Two prominent trade lawyers said in e-mails over the weekend that the law’s language meant that in practice, the Defense Department must buy solar panels from any country that signs the W.T.O.’s side agreement on government procurement. Earlier American trade laws require compliance with that agreement.

Virtually all industrialized countries have signed the side agreement, which requires free trade in government purchases. China vowed to sign it as soon as possible when it joined the W.T.O. in November 2001, but still has not done so.

The two trade lawyers said that the United States was within its rights to discriminate against Chinese solar panels in military procurement.

It's true. We have to exempt the 39 members of the WTO's Government Procurement Agreement from Buy America rules, which includes Korea and other major competitors. These exemptions also apply to an additional 13 countries with whom the United States has so-called "free trade agreements." They would apply to Panama and Colombia if President Obama adopts those Bush-negotiated pacts as his own.

All that's keeping the U.S. Buy America program from giving advantages to Chinese solar panels is a piece of paper (signing the WTO's procurement agreement). China could sign that piece of paper tomorrow, and get those benefits.

Why did U.S. negotiators ever agree to give away the store like that? So much for our bright future of domestic solar panel production.

His point seems to be that the Government Procurement Agreement prevents us from developing a domestic solar panel industry through the use of Buy American provisions.  In his view, these international constraints are a bad thing, as procurement could be a useful way to achieve this goal.  A similar issue came up in response to my post on the U.S. complaint against Chinese wind power equipment subsidies, which (allegedly) involve a subsidy contingent on the use of local content.  In the comments there, I quoted an article from Kevin Gallagher which states:  "Every nation should be given all the policy space they need to develop technologies to mitigate and adapt to climate change in a manner that creates jobs and harnesses development. Included in that space should be precisely these types of conditional requirements that have allowed China (like the US before it) to build its domestic capacity for economic development."  In addition, Julia and I also recently discussed these issues in the comments to this post, and Aaron Cosbey and I discussed them in the comments here.

Let me try to clarify my thinking about this issue, which might not have been clear enough in the linked discussions.  I thought it was fairly well accepted that the WTO allows for protectionism, but simply requires that it be carried out through tariffs, a more transparent mechanism than protectionism incorporated into internal laws (of whatever sort -- regulations, subsidies, government procurement, etc.)  Thus, it's fine if you want to use tariffs to develop the solar panel or wind power industries.  You just need to negotiate with your trading partners on the issue.  No doubt your partners also have plenty of industries they would like to protect, so it shouldn't be too difficult to achieve your goals, as long as they are within reason (that is, you are not looking to protect every industry).

In contrast to tariffs, protectionism buried deep in complex statutory and regulatory language at all the different levels of government is difficult to track.  Hidden protectionism of this sort may let countries cheat and use more protectionism than they negotiated for.  As a result, WTO rules prohibit it for the most part, so as to force protectionism out into the open.

Here's what I can't figure out.  Are the arguments in favor of the use of discriminatory measures -- such as local content requirements or Buy American provisions -- based on the view that there should no international limits on protectionism, and that countries should have unlimited discretion here?  Or is there a more modest goal of allowing for additional forms of protectionism beyond tariffs, but still keeping it constrained somehow?  If the latter, how would those constraints work?  And what about the transparency issue?

Related to all this is the issue of whether governments should engage in "industrial policy," and whether WTO rules allow it.  As I understand it, industrial policy is generally thought of as much broader than protectionism.  There are many things that governments can do in this regard that don't necessarily constitute discrimination against foreigners, and are likely to be permissible under WTO rules.  The problem with evaluating the permissibility of industrial policy, I think, is that there is such a wide range of measures that could be taken, it is hard to say anything definitive about their consistency with WTO rules.  If they are discriminatory in nature, it's relatively easy to assess.  For measures that are not discriminatory, however, I think you would need to look at the specific details of each measure before deciding on their consistency.

Korea FTA Hearing Going on Now

The House Ways and Means Committee is holding a hearing on the Korea FTA.  Todd Tucker is live blogging it here.  You can view the live stream here.  

Balancing Trade and the Environment

From a European Commission press release:

Korean Co2 Legislation – European Commission statement

On Monday 24 January, the Korean Ministry of Environment made a public announcement of a number of adjustments that will be introduced in a new regulation on car CO2 emissions and fuel efficiency.

These follow consultations launched by the Korean Government on a draft regulation published on 29th September 2010.

The Commission is supportive of the Korean draft regulation as it will contribute to world-wide efforts to reduce greenhouse emissions. It also welcomes these adjustments, as they aim at achieving a fair distribution of the efforts by domestic and foreign car makers to reduce emissions. These changes include an adjustment of the formula applied to determine the CO2 reductions, as well derogations for car makers selling a small number of cars in Korea, and credits given for the use of innovative technologies reducing emissions or improving fuel efficiency. The amended Korea regulation will, whilst retaining its ambitious emission reduction objectives, address satisfactorily a number of concerns expressed by European car makers on the draft regulation.

The European Commission appreciates the constructive attitude adopted by the Korean Government on this issue, which corresponds to the cooperative approach with which potential market access obstacles or regulatory issues will be addressed in bilateral trade relations under the EU-Korea Free Trade Agreement.

Basically, the Commission says we support the Korean environmental goals, and appreciate the flexibility shown by Korea in taking into account the concerns of European car-makers who sell only a few cars in the Korean market and in making adjustments to the regulation accordingly.

Is this a good way to deal with domestic environmental regulation and its impact on foreign companies?   With the caveat that there are a lot technical details not explained here, does it seem like the right balance has been struck?  It is quite possible that in their initial form, domestic environmental regulations will discriminate against (or excessively burden) foreign producers.  As a result, lobbying of this sort by the foreign interests for better treatment may be necessary.

Applicability of the NAFTA "Prudential Carveout" to Capital Controls

I wonder if readers would agree with the following preliminary analysis of whether the NAFTA "prudential carveout" applies to except capital controls from the provisions regarding free transfer of investments. Capital controls for limited purposes are becoming more popular among economists, including those at the IMF. 

First, using a post-financial crisis evolutionary interpretation of "for prudential reasons" in Article 1410.1 of NAFTA, it seems possible, although not certain, that “for prudential reasons” could include capital controls.  But we still must examine the specific context in which the prudential carveout appears. 

  First, Article 1410.1 of NAFTA specifies that “nothing in this Part” shall be construed to prevent a party from adopting measures for prudential reasons.  Part 5 of NAFTA (“this Part”) includes Chapters 11-16:  investment, services, telecoms, financial services, competition, and temporary entry for business persons.   So from a practical standpoint, the prudential exception initially applies at least to investment and services liberalization and protection provisions.  However, we must examine Article 1410.1 in context, which includes Article 1410.2.

The existence of Article 1410.2 suggests an understanding that the prudential carveout of Article 1410.1 does not include monetary policy.  This is because Article 1410.2 specifically excepts monetary policies, which would seem to include capital controls.  But  it specifically provides that its exception does not extend to the obligation to permit transfers under Article 1109.  Using this context, and also considering the interpretive principle that the specific controls the general, this would tend to suggest that Article 1410.1 does not include an exception for capital controls that would violate Article 1109.  An alternative, but less plausible, reading would say that because Article 1410.2 contains an explicit exclusion of Article 1109, and because Article 1410.1 does not, we can infer that Article 1410.1 was intended to cover, and provide an exception to, Article 1109.  This is less plausible because the inference would be that discriminatory capital controls are excepted under Article 1410.1, while non-discriminatory ones are not. 

So, while it is not free from doubt, the better argument appears to be that the prudential carveout of Article 1410.1 does not apply to except capital controls from the free transfer requirements of Article 1109.  A next step might be to review the negotiating history of these provisions. 

On the other hand, it may be that the exception of Article 1410.2 would apply to except capital controls from any free trade in financial services provisions that might otherwise restrict capital controls.  This is because Article 1410.2 does not exclude from its exception any provision of Article 14.  So, much would depend on the scope of the definition of investment, and the definitional boundary between “investment” and “trade in financial services.”  Article 1101.3 states that “this Chapter does not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter Fourteen (Financial Services).”  Note, however, that under Article 1401.2, Article 1109 is incorporated by reference in Chapter 14.  Thus, it is possible that a panel might understand the exclusion of Article 1109 from Article 1410.2 to exclude the version of Article 1109 that is incorporated by reference in Chapter 14.  A panel might use a purposive interpretation to reach this conclusion. 

In sum, although it is not free from doubt, it is possible, and perhaps plausible, that an arbitral panel would determine that neither Article 1410.1 nor Article 1410.2 provides an exception for capital controls.   

What John Bolton Doesn't Know about International Law

. . . could fill an international law library.  See his statement against "pooling sovereignty" in the Washington Examiner (is that a newspaper?).  This seems to be a general position against all international law, including presumably trade, investment, IP, etc.  To add insult to ignorance, he refers to President Obama as a post-American president.  Googling this phrase, I see that he is not the first, but in my naivete I find this shockingly uncivil coming from someone who actually has held responsibility, not to mention the scurrilous innuendo regarding Obama's American-ness. 

Yes, I understand that this is not central to our topic, that this is not new for Bolton, and that it is more political than our usual commentary.  However, Bolton's views challenge U.S. participation in all international law, including international economic law.  I promise a doctrinal international economic law post very soon. 

The Role of Intent in WTO Non-Discrimination Obligations

I thought this was a good question from the panel in the U.S. - Tuna Labeling (DS381) dispute:

111. To the United States: Please clarify the relevance of your arguments relating to the justification of the measure in terms of dolphin protection, such as the arguments related to the effects of setting on dolphins and the absence of recovery, for the Panel's consideration of Mexico's claims under Articles III:4 and I:1 of the GATT 1994 and 2.1 of the TBT Agreement. 

Here was the U.S. response:

32. The U.S. dolphin safe labeling provisions treat imported and domestic products the same; the distinctions drawn by the provisions are not based on origin. Any different treatment (in the sense of Article III:4) or advantage (in the sense of Article I:1) accorded by the U.S. provisions is based on whether the tuna products contain tuna caught in a manner harmful to dolphins.  The facts showing the harm to dolphins caused by setting on dolphins demonstrate why the U.S. measures draw a distinction between setting on dolphins and other methods of catching tuna. The evidence presented by the United States clearly shows that setting on dolphins causes significant harm to dolphins, and the purse seine tuna fishery in the ETP is the most likely reason that the populations remain depleted. These facts show that the conditions under which tuna products may be labeled dolphin safe are based on whether the tuna was caught in a manner harmful to dolphins and are not based on origin.

33. In addition, the facts regarding the harm caused to dolphins by setting on dolphins to catch tuna help to show a clear relationship between the objectives of the measure, which are to reduce the harm to dolphins and ensure consumers are not misled by dolphin safe claims, and conditions under which tuna products can be labeled dolphin safe under the U.S. provisions.  As elaborated in the U.S. response to Question 147 below, the general principle under Article III is that measures shall not be applied so as to afford protection to domestic production.  The clear relationship between the objective of the U.S. measure and the conditions under which tuna products may be labeled dolphin safe supports the conclusion that the U.S. measures do not use fishing technique as a means to afford protection to U.S. tuna products.  Instead, the U.S. dolphin safe labeling provisions help to prevent the serious harm to dolphins, including in populations that remain depleted, caused by setting on dolphins to catch tuna.   

Basically, the U.S. seems to be saying that the non-discriminatory intent here (dolphin protection) shows that the measures are "not based on origin"; and that the measures are not applied to "so as to afford protection," under Article III:1.

More on this in the response to Question 147.  Here's the question:

147. To the United States:  During the second substantive meeting, Mexico observed that the US arguments concerning any objectives that the United States may have are irrelevant to the claims Mexico is making under Articles I and III of the GATT and Article 2.1 of the TBT Agreement, and are only relevant to its claims under Article 2.2 of the TBT Agreement.   Please comment.

And here's the U.S. answer:

80. The United States disagrees with Mexico’s assertion. As the Appellate Body has stated, the general principle set forth in Article III:1 informs the rest of the Article III and is a “‘guide tounderstanding and interpreting the specific obligations contained’ in the other paragraphs of Article III, including paragraph 4.” The general principal under Article III is that measures shall not be applied so as to afford protection to domestic production.  In that regard, the United States has reiterated in its arguments under Article III that the objectives of the dolphin safe labeling provisions are dolphin protection and ensuring consumers are not misled or deceived about whether dolphins were harmed when the tuna was caught. It has explained that there is a clear relationship between these objectives and conditions under which U.S. measures allow tuna products to be labeled dolphin safe.  This clear relationship, among other evidence, counters Mexico’s assertion that the U.S. measures use fishing technique as a means to discriminate against Mexican tuna.  In contrast, in Chile – Alcohol there was no such relationship between the stated criteria on which products were subject to a higher tax rate (alcohol content) and the stated objectives of the Chilean tax measure, and the Appellate Body consider this as a factor in concluding that the Chilean tax measures were applied so as to afford protection to domestic product.

81. The clear relationship between the objectives of the U.S. measures is also relevant to Mexico’s claims under Article I:1 of the GATT 1994 and Article 2.1 of the TBT Agreement. In both cases, the clear relationship between the objective of the U.S. measure and the conditions under which tuna products may be labeled dolphin safe is evidence supporting the conclusion that the U.S. measures do not use fishing technique as a means to discriminate against Mexican tuna products.

82. Thus, the objective of a measure and whether there is a clear relationship between that objective and the treatment the measure accords is relevant when analyzing a claim that a measure discriminates against imported products, in particular when the claim is that a measure uses a seemingly origin-neutral criterion to in fact discriminate against imported products.

83. In this regard, it is important to emphasize that the U.S. argument is not that a determination of whether a measure accords less favorable treatment to imported products should turn on the objective of the measure. The objective of a measure discerned from its architecture, structure and design is one piece of evidence among others.  In this dispute, not only are the objectives of the U.S. measure aimed at ensuring consumers are not misled and protecting dolphins, and not protectionism, but more importantly the U.S. measures are structured and designed to fulfill their objectives of ensuring consumers are not mislead and protecting dolphins.  In particular, the U.S. measures set out conditions for labeling tuna dolphin safe that ensure that tuna products labeled dolphin safe do not contain tuna caught by setting on dolphins (a fishing technique that is harmful to dolphins) and that contribute to dolphin protection by ensuring the U.S. market is not used to encourage a fishing technique that is harmful to dolphins. Further, the facts on record in this dispute do not support Mexico’s contention that, although the measures are on their face origin-neutral and do not have protectionism as their objective, they in fact accord less favorable treatment to imported products  

Just to be clear, the U.S. seems to be arguing for intent to play a role in GATT Article I:1 and TBT Agreement Article 2.1, not just GATT Article III:4.

Questions 146, 148, 149, 150, 151, 152, 153, 154, 157 and 160, and the U.S. responses, are all very interesting in relation to various aspects of non-discrimination.  I will try to come back to some of the issues raised in the other questions soon.  The panel is asking great questions, and the U.S. is offering detailed responses.  I suddenly feel hopeful that we are getting close to resolving some long-standing uncertainty about GATT/WTO non-discrimination issues.

"China’s Currency Isn’t Our Problem"

That's from Mark Wu, writing in the NY Times.  But just to be clear, he is not saying that China's currency policies are not a problem, but rather that they are everyone's problem, not just a problem for the U.S.:

China’s currency policies have led to unhealthy artificial distortions in the Chinese and world economy. They also fuel currency wars that threaten to undermine the cooperation needed to sustain a global recovery. And while the effect on American workers is far less than imagined, workers in the developing world stand much to gain from a faster renminbi appreciation.

We should discuss currency issues with China, but the exchange rate should not be at the top of the bilateral agenda. The issue is best left to the Group of 20, for this is as much the rest of the world’s problem as it is ours. ...

Of course, there's also the WTO and the IMF to deal with multilateral issues.

At some point, will we see a coordinated effort to take action on this issue?

H/T Scott Lincicome

 

WTO Dispute Submissions: USTR Posting of Other Government's Submissions

I don't know if this is new, but it's the first time I have noticed it.  USTR seems to be posting the non-confidential version of other governments' submissions in disputes against the U.S.  The executive summary of the Philippines' first written submission in Philippines - Distilled Spirits is here.  (There was also a link to Viet Nam's submission in DS404 (AD Measures on Shrimp), but it didn't seem to work.)

Another positive development in transparency at the WTO!

"there is not a system of precedent within the WTO dispute settlement system and panels are not bound by Appellate Body reasoning"

That's from the panel in U.S. - Zeroing (Korea) (DS402), circulated today.  Here's the full context (without footnotes):

7.29 Korea relies upon the Appellate Body report in US – Softwood Lumber V  to argue that the United States acted inconsistently with the first sentence of Article 2.4.2 of the Anti-Dumping Agreement.  In particular, Korea relies on the Appellate Body's finding that, under the weighted average-to-weighted average methodology provided  for under the first sentence of Article 2.4.2, "dumping ... margins must be, and can only be, established for the product under investigation as a whole".  Therefore, model-specific results are only intermediate calculations and "[i]t is only on the basis of aggregating all such intermediate values that an investigating authority can establish margins of dumping for the product under investigation as a whole".  A proper aggregation of the intermediate results of model-specific comparisons must reflect the result of all such comparisons.

7.30 In relation to the reliance by Korea on the Appellate Body's report in  US – Softwood Lumber V, both the United States and Korea agree that  the Panel is not bound by the reasoning in prior Appellate Body reports.  However, the United States recognizes that prior adopted panel and Appellate Body reports may be taken into account by a panel.  According to Korea, adopted reports create legitimate expectations among WTO Members and that, where the  issues are the same, following Appellate Body conclusions is what would be expected from panels.  In contrast, in its third party submission, the European Union argues that the "Panel should follow the rulings of the Appellate Body".  The European Union supports this position by referring to Appellate Body statements in US – Stainless Steel (Mexico),  including that "absent cogent reasons, an adjudicatory body will resolve the same legal question in the same way in a subsequent case".

7.31 In our view, there is not a system of precedent within the WTO dispute settlement system and panels are not bound by Appellate Body reasoning.  However, we agree with Korea that adopted reports create legitimate expectations among WTO Members and that "following the Appellate Body's conclusions in earlier disputes is not only  appropriate, but is what would be expected from panels, especially where the issues are the same".

The U.S. Record in NAFTA Chapter 11 Cases: Still Undefeated

Over the week-end, the State Department announced the following:

On January 12, 2011, a three-member NAFTA arbitration tribunal rejected a claim against the United States filed by Grand River Enterprises Six Nations, Ltd., a Canadian corporation, and Jerry Montour, Kenneth Hill and Arthur Montour Jr., members of Canadian First Nations, challenging certain legislative measures taken by various states related to the landmark 1998 Master Settlement Agreement (“MSA”) between multiple states and major U.S. tobacco companies. Claimants had sought as much as $664 million in damages. The Office of the Legal Adviser of the Department of State represented the United States in the case.

The Claimants submitted their claim to arbitration in 2004, alleging that certain legislative measures taken by states relating to the MSA caused them material harm and substantially impaired the value of their investment in violation of NAFTA investment protections. The Tribunal unanimously rejected the claim, and ruled in favor of the United States.

This means the U.S. is still undefeated as a respondent in NAFTA Chapter 11 cases.  Why is that?  Are the U.S. government lawyers simply too good?  Are investors choosing weak cases to bring?  Are tribunals afraid of the consequences for NAFTA Chapter 11 if the U.S. were to lose?  Something else entirely?

Location Subsidies for Solar Panel Production

From the NY Times:

Aided by at least $43 million in assistance from the government of Massachusetts and an innovative solar energy technology, Evergreen Solar emerged in the last three years as the third-largest maker of solar panels in the United States.

But now the company is closing its main American factory, laying off the 800 workers by the end of March and shifting production to a joint venture with a Chinese company in central China. Evergreen cited the much higher government support available in China.

...

China’s real advantage lies in the ability of solar panel companies to form partnerships with local governments and then obtain loans at very low interest rates from state-owned banks.

Evergreen, with help from its partners — the Wuhan municipal government and the Hubei provincial government — borrowed two-thirds of the cost of its Wuhan factory from two Chinese banks, at an interest rate that under certain conditions could go as low as 4.8 percent, Mr. El-Hillow said in August. Best of all, no principal payments or interest payments will be due until the end of the loan in 2015.

By contrast, a $21 million grant from Massachusetts covered 5 percent of the cost of the Devens factory, and the company had to borrow the rest from banks, Mr. El-Hillow said.

Banks in the United States were reluctant to provide the rest of the money even at double-digit interest rates, partly because of the financial crisis. “Therein lies the hidden advantage of being in China,” Mr. El-Hillow said.

Location subsidies are complicated, in terms of both the law and the policy.  With regard to the law, there is no inherent violation of WTO rules in using location subsidies.  However, if there are certain conditions attached (e.g. export) there will be a violation.  And there is always the possibility that particular subsidies will cause "adverse effects" to trading partners and violate the rules for that reason.  But each measure will differ, so you have to look at the terms and effects of each one individually.

What about the policies?  Do these kinds of subsidies cause economic harm, and thus governments should come up with additional rules to deal with them?  One obvious point is that there are easily identifiable winners and losers arising from specific competitions for factories.  China "won" the solar panel factory described in the article, and the U.S. "lost" it.  But what are the implications of that?  Are the winners confident that they will continue to win these competitions, and thus think that the existing system (of a lack of rules) should be preserved?  Do the losers hope to learn how to compete better so as to win the next round, or would they rather develop international rules that eliminate the competition entirely?  Should objective policy-makers in all countries step back from the specific contests and think about whether the system makes sense?  Would we all be better off if local, sub-national and national governments focused their competition on strong education and infrastructure programs, instead of competing by giving money to large corporations?  Do the winners actually win anything except for the opportunity to provide subsidies until the company leaves for higher subsidies (or for some other reason) elsewhere?

Institutional Balance at the WTO

The idea of an "institutional balance" between the legislative, executive and judicial organs of the WTO came up in the India - Quantitative Restrictions and Turkey - Textiles cases.  On this issue, see Frieder Roessler's piece entitled "The Institutional Balance between the Judicial and the Political Organs of the WTO," in New Directions in International Economic Law, Essays in Honour of John H. Jackson.  Roessler's paper is not available online as far as I can tell, but here's a summary by Chakravarthi Raghavan.  Some key excerpts:

The World Trade Organization must ensure that its judicial organs (panels and the Appellate Body) exercise their powers with due regard to the jurisdiction assigned to other parts of its institutional structure, according to the former head of the GATT legal division, and a leading figure in the design of the Dispute Settlement Understanding (DSU) during the Uruguay Round.

In a critique of the functioning of the WTO's Dispute Settlement system, and particularly the way panels and the Appellate Body have made use of the procedural rights in the DSU to virtually nullify the substantial rights and obligations of members under the agreements, Mr.Frieder Roessler said that the competence of panels and the Appellate Body could not be determined by themselves exclusively on an interpretation of the DSU, but in the context of the complex institutional structure of the WTO and the division of decision-making among different organs, set out in the Marrakesh treaty and which reflect legitimate, negotiated policy objectives.

WTO panels, Roessler said, should respect the competence and discretionary powers of the political bodies established under the agreements, and should not reverse their determinations. And if a competent WTO body has not yet made its determination, panels should not step in and pre-empt that determination.

The role of panels, he added, should be limited to protecting Members against an abusive resort to provisions governing, for e.g., the balance of payments measures and regional trade agreements -- against measures that fall outside the discretionary authority of the BOP Committee or the Committee on Regional Trade Agreements.

...

In establishing the WTO, a more complex institutional structure, separating the judicial and political bodies, were set up, and empowered to take binding decisions confirming, defining or altering the rights and obligations of members.

The membership of the WTO, through the amendment and rule-making provisions functioned as the legislative branch. Various political organs -- the Committee on Regional Trade Agreements (CRTA), the Committee on Subsidies and Countervailing Measures, the Safeguards Committee and the Committee on Balance-of-Payments (BOP) functioned as "executive authorities". The panels, arbitrators and the Appellate Body were the 'judicial organs'.

...

The WTO too, he argues, should ensure that its judicial organs exercise their powers with due regard to the jurisdiction assigned to other parts of the institutional structure. Roessler examines this issue in terms of the GATT and now the WTO jurisprudence on the relationship between the procedures of the dispute settlement system and the special procedures of review set in respect of the BOP measures or the RTAs.

In a nutshell, the issue in the two cases was whether certain issues are to be decided by WTO panels and the Appellate Body, or whether instead they should be decided by the relevant WTO Committees, with panels and the Appellate Body deferring to the Committee decisions.

I always thought this was an issue worthy of more discussion.  (Not by me, as I have no particular expertise, but by someone!)  It has not come up much in recent years, though.

This might be a bit of a stretch in some respects, but I came across someting in last year's panel report in U.S. - Poultry (China) that might trigger some thinking about this issue, and on WTO "decision-making" more generally.  The following passage relates to the interpretation of SPS Agreement Article 4:

7.134 ... There is however, a decision from the SPS Committee entitled "Decision on the Implementation of Article 4 of the Agreement on the Application of Sanitary and Phytosanitary Measures" (the Decision).  This Decision was adopted under the authority of the SPS Committee to carry out the functions necessary to implement and further the objectives of the SPS Agreement under Article 12.1. Its preamble provides that the Decision was adopted "[d]esiring to make operational the provisions of Article 4" of the SPS Agreement.

...

7.136 The Panel notes, that while this decision is not binding and does not determine the scope of Article 4, we do consider that this Decision expands on the Members' own understanding of how Article 4 relates to the rest of the SPS Agreement and how it is to be implemented. [FN. 345] ...

Fn. 345 We note that typically, decisions of the SPS Committee indicate that they are not meant to affect the rights and obligations of the Members under the SPS Agreement. Such language is not present in this particular Decision.

The Panel then considered how the substance of the SPS Committee Decision affects the interpretation of Article 4.

I can't recall a Decision of this type playing such a role in WTO treaty interpretation before.  (If someone is aware of it, feel free to mention it in the comments.  It's the kind of thing I might not have noticed while reading cases 10 years ago). 

Granted, the "institutional balance" issue here is not quite the same as those arising in the QRs and Textiles cases.  Those cases were, in a sense, about which "branch" of the WTO gets to decide an issue.  Despite some differences, though, the executive-judiciary relationship does appear to be involved, as the U.S. - Poultry (China) panel's reasoning seems to say that the WTO "executive" branch has some power to influence the WTO "judiciary's" interpretation of WTO obligations.

Of course, this all ties in to the broader notion of WTO "decision-making," which is provided for in WTO Agreement Article IX (and X, if you think about the concept more broadly).  There is also the question of how the various WTO Committees relate to the WTO Membership as a whole acting through the Ministerial Conference or the General Council.  This could be thought of as the relationship between the "Executive" and the "Legislative" branches, I suppose.  Again, I have no great expertise here.  I'm just hoping this triggers some thinking by people who follow this issue.

Dani Rodrik Wants to Restrict Policy Space

Well, for the most part he doesn't.  He says:

When international cooperation does “succeed,” it spawns rules that are either toothless or reflect the preferences of only the more powerful states. The Basle rules on capital requirements and the World Trade Organization’s rules on subsidies, intellectual property, and investment measures typify this kind of overreaching. We can enhance the efficiency and legitimacy of globalization by supporting rather than crippling democratic procedures at home.

and:

We should ... accept that countries may uphold national rules – tax policies, financial regulations, labor standards, or consumer health and safety rules – and may do so by raising barriers at the border if necessary, when trade demonstrably threat­ens domestic practices enjoying broad popular support.

and:

Using restrictions on cross-border trade or finance to uphold values and regulations at home must be distinguished from using them to impose these values and regulations on other countries. Globalization’s rules should not force Americans or Europeans to consume goods that are produced in ways that most citizens in those countries find unacceptable.

But then he says this:

But nor should [globalization's rules] allow the US or the EU to use trade sanctions or other pressure to alter foreign countries’ labor-market rules, environmen­tal policies, or financial regulations. Countries have a right to difference, not to imposed convergence.

So if I'm reading that correctly, there should be policy space for subsidies, IP, investment measures, domestic practices enjoying broad popular support, and values and regulations at home.  By contrast, no policy space should be allowed for (most?) trade sanctions and similar measures.  Basically, no policy space for telling others what to do with their own laws.

Tuna-Dolphin: The NAFTA-WTO Dispute Settlement Conflict

I've mentioned the NAFTA-WTO dispute settlement conflict aspect of the U.S. - Tuna II (DS381) case before (see here and here).  Unfortunately, I'm in a little over my head on that issue.  I prefer to focus on the substantive aspects (DSC subscribers only) of the case.  But here's a paper from PhD student Josué F. Mathieu on the NAFTA-WTO issues.  From the abstract:

This paper takes an interest in a current trade dispute between the United States and Mexico known as the US-Dolphin II case. The case is still pending before the Dispute Settlement Body (DSB) of the World Trade Organization (WTO) and raises procedural questions of utmost importance for the settlement of disputes pertaining to the jurisdiction of the DSB and the mechanisms of dispute settlement of Free Trade Areas (FTAs). The object of this paper is precisely to shed light on these thorny procedural aspects. First, the legal basis of the complaint introduced by the United States will be reviewed to outline the procedural obligations under NAFTA and assess the contending claims. Second, obligations under the WTO will be analyzed to broaden the picture of obligations related to the settlement of disputes involving competition with the dispute settlement mechanism of a FTA. The willingness of the parties will be articulated with its translation into practice by studying how analogous cases have been previously addressed by the DSB. This step will provide tools for assessing the compatibility between NAFTA and WTO obligations regarding trade dispute settlement. As it will be shown, there are tremendous tensions between these obligations. Thus, a third time will be devoted to determining whether positive international law provides rules allowing to resolve such potential conflicts between parallel and contradictory obligations.

Trade in Everything: Replicas of the Royal Engagement Rings

From Reuters:

Britain may be on the other side of the world, but Chinese manufacturers are cashing in on the British royal wedding as they churn out tens of thousands of replica royal engagement rings.

Last November, Prince William and his beaming fiancee Kate Middleton showed off the blue sapphire ring, surrounded with diamonds, which had belonged to William's mother, the late Princess Diana.

Dozens of factories located in the eastern Chinese city of Yiwu in Zhejiang province, home to the world's largest wholesale market for a wide range of small items from pencils to socks to cups, have been rushing to produce knockoffs of the ring to meet surging global demand.

Jewelry manufacturer Zhou Mingwang said he jumped at the opportunity of making the replica rings as soon as the royal engagement was announced.

"When they announced their engagement, it was just by chance that I saw their ring on the internet. I felt that this had a great commemorative value and thought there was a good market for the product," Zhou added.

Zhou said that his company decided to put the on their website on Alibaba.com, China's largest e-commerce site, and that inquiries began to come in.

Zhou's factory offers four different models of the ring with slightly different designs and color tones.

The cheapest is made of acrylic and metallic alloys while the best in his range is made from zircon and silver-coated copper.

Zhou said factories like his which were producing the rings had to make slight alterations in size or design from the original in order to avoid trademark infringement issues.

 "For example, if the original ring has fourteen indentations, we can change it to be ten or four. So we made slight modifications in order to tackle this problem so that there are no trademark issues," he added.

The cost of the original ring was estimated to be around 30,000 pounds but the imitation rings are selling for a wholesale price of as little as 3 yuan ($0.45) for the cheapest models and up to 50 yuan ($7.56) for rings made with better materials.

Orders are coming in fast and Zhou said his rings were being sought by customers in the United Kingdom and the United States as well as other countries in Western Europe.

Besides the rings, Chinese factories are also producing other wedding memorabilia replicas such as cups, plates and key chains associated with the soon-to-be wed royal couple.

Current Account Imbalances: Part 2 (Martin Feldstein)

Here's post #2 on the current account imbalances issue.  Martin Feldstein thinks these imbalances will, for the most part, take care of themselves, without any grand international plan to fix them.  He leads off his paper this way:

The high level of current account imbalances has been a major focus of international concern for a considerable number of years. In these remarks I will suggest why public and private actions in the United States and China are now likely to cause the current account imbalances in those countries to shrink and perhaps even to disappear in the next few years. If that happens, it will eliminate the largest current account imbalances in the global economy. ...

Although natural market forces should resolve such imbalances without the need for specific government policies, the government actions in both countries have actually contributed to their persistence and prevented market forces from correcting the problem. That may be about to change.

He then sets out some details:

What Needs to Be Done

There is no mystery about what has to be done to shrink or eliminate current account imbalances. The basic national income accounting identity tells us that a countryʼs current account surplus is the difference between national saving and national investment. Countries with current account surpluses can reduce those surpluses only by reducing public and private saving and/or increasing investment. Similarly, countries with current account deficits can shrink those deficits only by increasing national saving and/or reducing national investment.

So, it's mostly about savings and investment levels.  But what about exchange rates?

That is true regardless of what happens to exchange rates. The saving investment imbalance is fundamental and it alone determines a countryʼs current account deficit or surplus.

But changes in the current account deficit or surplus must be accompanied by changes in the countryʼs real exchange rate in order to maintain domestic macroeconomic balance -- i.e., noninflationary full employment. ...

For the United States, the shift to increased exports and reduced imports needed to maintain aggregate demand while raising national saving requires a decline in the value of the dollar relative to the currencies of our trading partners. The natural market forces that would cause the dollar to decline relative to our major trading partners is prevented by the Chinese policy of managing the exchange rate between the Chinese renminbi and the dollar.

For a country with a current account surplus, a rise in private consumption or in government spending designed to reduce that surplus will create inflationary pressures unless the exchange rate adjusts to reduce exports or increase imports. An increase in private or public spending matched by an equal reduction in exports or increase in imports would prevent such an inflationary increase in domestic demand. That reduction in exports or increase in imports generally requires a rise in the value of the currency to make exports less attractive to foreign buyers and imports less costly and therefore more attractive to domestic buyers. 

Turning now to what caused the problems to begin with, he says:

Government Policies vs. Market Forces

The persistence of large current account imbalances reflects government policies that alter the savings-investment balances in both the United States and China.

The large current account deficit of the United States reflects the combination of large budget deficits (negative government saving) and very low household saving rates. ...

In contrast, Chinaʼs large current account surplus reflects the worldʼs highest saving rate at some 45 percent of GDP. Some of this high national saving is caused by the very high retained earnings of state-owned enterprises. Chinese households are also high savers because the country lacks reliable social insurance programs for retirement, health care and unemployment.

The Chinese maintain aggregate demand and growing urban employment by channeling these savings into public and private investment and by encouraging high levels of exports by preventing an appreciation of the renminbi.

The result of this combination of policies in the U.S. and China is large current account deficits in the United States and large current accountsurpluses in China. ...

So it's a mix of government and market forces to blame, in his view.

What about other proposed solutions:

Attempts at International Policies to Limit Current Imbalances

Reducing these large current account imbalances has been a focus of international negotiations and of the activities of the International Monetary Fund. The United States and China have had bilateral discussions about policy changes, including changes in Chinaʼs exchange rate policy. These have focused too much attention on the exchange rate rather than on Chinaʼs saving and investment policies. They did not succeed in changing those policies and may have caused China to resist an exchange rate adjustment more strongly to avoid the impression that China was forced by the U.S. to alter its policy.

The International Monetary Fund has tried in several ways to persuade China to reduce its current account surplus. Chinaʼs large trade and current account surplus has been a subject of the IMFʼs annual article four review with the Chinese government. In 2006 the IMF launched a series of discussions focused on the five countries with the largest current account imbalances. When that failed to produce results, the IMF shifted to a policy that it labeled a “multilateral surveillance process” in which countries were supposed to collectively monitor each otherʼs behavior. That also failed to produce any effects on the policies and current account imbalances of either China or the United States.

More recently, the action has shifted from policies explicitly directed by the IMF to policies developed by the G20 countries at their periodic meetings on the theory that, for domestic political reasons, countries might be more willing to make changes that they had designed themselves rather than policies that appeared to be imposed by the IMF. The United States government came to the November 2010 meeting of the G20 in Seoul with a proposal that would require countries to agree to limit current account surpluses to no more than 4 percent of their GDP. This policy was rejected by China and Germany and was not adopted by the G20.

Any such plan to limit current account surpluses and deficits to a specific percent of GDP cannot be an operational policy because governments do not control their current account balances in the short term or even in the medium term. Shifts in the world price of oil and food cause substantial shifts in the values of imports and exports. When that happens, these external forces cause a temporary change in domestic saving and investment. For example, a rise in import prices can cause an increase in a current account deficit by causing a reduction in domestic saving, something that happened in the United States in 2007. Large market driven fluctuations in exchange rates of countries that do not actively manage their exchange rate can also produce large unintended fluctuations of the value of imports and exports. Spontaneous decisions of household sand firms to change saving and investment will also lead to changes inimports and exports that are not due to changes in government policies.

The result of the most recent G20 summit meeting was therefore a rather vague statement that the individual G20 countries would “commit” to specific policies that would shrink current imbalances. The role of the IMF would be limited to assessing the global compatibility of these national policies and suggesting ways in which individual countries might benefit from taking into account the policy commitments of other countries.

My judgement is that such “commitments” to change domestic policies in the context of G20 negotiations are not likely to have any significant effects. The president of the United States cannot really commit to changes inpolicies that alter national saving since he cannot control the actions of theCongress or of the Federal Reserve.

In a nutshell, he doesn't think these types of approaches will have much impact.

Finally, how will the savings/investment adjustment solution work?

If the saving rate now continues to rise from todayʼs 6 percent of after tax income to 9 percent, that would raise national saving by about two percent of GDP. That is not a prediction but current conditions and past history indicate that it is a change that might very well happen.

The fiscal deficit is now 8 percent of GDP and is projected on the basis of current policy to decline to between 5 percent and 6 percent of GDP. That would raise the national saving rate by two percent of GDP. While political forecasting is even more difficult than economic forecasting, my crystal ball indicates that budget deficits are likely to decline even more than that. A fiscal deficit of five percent of GDP would cause the national debt to rise from the current 60 percent of GDP to a politically unacceptable 100 percent by the end of the decade, a ratio not seen since the end of World War II. To stabilize the debt at todayʼs 60 percent of GDP -- a much higher ratio than we have experienced in recent decades -- would require reducing the deficit to three percent of GDP.

I am optimistic that that is likely to be achieved or even bettered. The recent election and public opinion polls indicate a substantial increase in public concern about the size of the deficit and the growing national debt. The crisis in Europe associated with excessive deficits has increased that concern in the United States. In the recent report of the fiscal commission appointed by President Obama, a bipartisan group of senior political figures most of whom are current members of Congress, proposed very bold policies to reduce the budget deficit in the current decade by cutting specific government outlays and by radical reductions in tax expenditures.

...

The implied fall in public and private consumption would depress aggregate demand and prevent a return to full employment if it is not accompanied by a fall in the relative value of the dollar that causes a shift to increased spending on American made goods and services. An important part of that exchange rate adjustment is under way because of the rise of the real value of the renminbi. The next several years may also see a return of the euro to its previous higher level once the current eurozone crisis is resolved.

...

The reduction of the U.S. current account deficit implies that the current account surplus of the rest of the world must also decrease.  While this need not mean a lower current account surplus in China, I believe that the policies that the Chinese have outlined for their new five year plan are likely to have that effect. These include raising the share of household income in GDP, requiring state owned enterprises to increase their dividends, and increasing government spending on consumption services like health care, education and housing. It is important that these policies are motivated by domestic considerations as China seeks to raise the standard of living of the population more rapidly that the moderating growth rate of GDP.

Basically, savings and investment will rise in the U.S. and decline in China, for the reasons he sets out. This, he says, should fix the imbalance:

It is not hard to imagine that a few years from now the current account imbalances of the US and China will be very much smaller than they are today or even totally gone.

I have a harder time imagining all this then he does.  Some of the savings/investment changes might happen in the coming years, but I'm skeptical they will be as significant as he expects.  In the U.S., the debt may come down slightly, and people may save a bit more than they used to.  But barring some new economic catastrophe, I don't see the coming changes as substantial enough to get rid of the imbalances by themselves.  Similarly, in China, some of what he predicts may happen, but I'm just not sure the pace will be as fast as he expects.  

As to the various proposals mentioned in the last post, my guess is that actions will be taken to reduce tensions before any such proposals are fully implemented.

My prediction:  Five years from now we will still be talking about solutions to the problem, the extent of the problem, whether there is a problem, etc.

Current Account Imbalances: Part 1 (John Williamson)

There is lots of talk about trade imbalances these days, with surplus countries pitted against deficit countries.  There is the U.S. versus China, of course, but there is also Germany versus Greece.  The U.S.-China issue gets more press attention (at least here in the U.S.), and the situations are different because Germany and Greece share a currency.

So what, if anything, should be done about these imbalances?  In this post and the next one, I quote from two papers that suggest various options for actions that might be taken in this regard, focusing on the U.S.-China situation but with occasional references to euro zone issues.

First up is John Williamson of the Peterson Institute, who has a new policy brief which discusses various proposals for the adjustment of trade imbalances.  The second post is based on a recent paper by Martin Feldstein.

Williamson begins by talking about two much older proposals (by Keynes and the Committee of Twenty), and then turns to some recent propoosals dealing with today's problems:

Morris Goldstein

proposes  that any country that runs a current account surplus greater than (say) 4 percent of GDP over a one-year period should automatically receive an ad hoc consultation by the Fund [the IMF]  (meaning the staff) to discuss its exchange rate policy. The Fund (meaning its Executive Board) would summarize its views at the end of the process by issuing a verdict, or ruling, as to whether the member in question is fulfilling its international obligations on exchange rate policy. He writes that in broad terms “the test should be whether the country’s real effective exchange rate is seriously misaligned, whether the country’s policies—intentionally or not—contribute materially to that misalignment, and whether the misalignment harms significantly the country’s trading partners.”

...

Penalties should be graduated to the size of the failing. For misalignments of under 10 percent and up to a year’s duration, Goldstein envisages only intensive (but private) consultations with the Fund. For misalignments of 10 to 25 percent and a duration of one to two years, the Fund should go public and ask for a specific plan (and the country would not be able to veto publication of the report). For countries with even larger misalignments that refuse to commit credibly to a proposed plan of action to improve the situation, he proposes that the WTO approve trade policy retaliation.

Mattoo and Subramanian

[propose] that a country that felt threatened by another country’s exchange rate policy could refer its complaint to the WTO. The WTO could then ask the IMF for expert advice on the facts of the situation, just as for many years the GATT askedthe Fund for advice on whether a developing country had a balance of payments deficit that might justify the imposition of import restrictions. Specifically, the WTO should ask the IMF two questions: (1) whether an exchange rate is substantially undervalued, and, if so (2) whether the undervaluation is demonstrably attributable to government action.

C. Fred Bergsten

has recently proposed that a reserve currency country should be able to engage in counterintervention to push up the value of a currency that is being deliberately held down to an undervalued rate through intervention. If the counter-intervention was equal to that of the intervention that induced it, the presumption is that the exchange rate would be unchanged; correction of the rate would require larger intervention (or a policy change in the country with the undervalued currency). Thus correction of the rate by the reserve currency country would face the issues of deciding upon the scale of the intervention or the target rate toward which it was aiming. The immediate motivation is clearly to enable the United States to retaliate against China, but this faces an additional difficulty in that the renminbi is not a convertible currency and therefore the United States would not be able to invest any renminbi it acquired. 
...

There are at least two versions of the proposal presented in Bergsten’s op-ed. In the first, a reserve currency country takes the initiative but can be challenged in the IMF; if the IMF takes the side of the surplus country, the reserve currency country has to back off. In the second version, the IMF authorizes a reserve currency country to act.

Secretary Geithner

proposed at the Gyeongju meeting of the G-20 Finance Ministers that each of the G-20 countries should aim at limiting the size of its imbalance below 4 percent of GDP  ... . He acknowledged that there would need to be exceptions for countries exporting natural resources but urged the others to agree that they would pursue structural, fiscal, and exchange rate policies consistent with a maximum imbalance of 4 percent of GDP. This was presented as an alternative to exchange rate targeting, but that can be questioned.

Daniel Gros

has proposed that the main Western countries invoke the principle of reciprocity and declare that they will henceforth sell public debt only to official institutions from countries  in which they have a reciprocal right to purchase public debt.

Gary Hufbauer

proposes the use of taxation to penalize Chinese accumulation of dollars. He envisages the United States giving notice that it would terminate the US-China Tax Treaty, and then following this up by Congress allowing the Treasury secretary to impose a 30 percent withholding tax on the income accruing to a foreign government that maintains a seriously undervalued currency. 

********

Williamson then offers some thoughts on these proposals, coming out in favor of a combination of the Goldstein and Mattoo-Subramanian proposals:

The Bergsten proposal seems to me to assume that the rest of the international community would be happy to go along with giving a special position to the United States. I have just argued that the Geithner proposal is not adapted to this particular role. The Gros proposal would be ineffective because it ignores the possibility of China holding private assets. I in fact think it likely that some version of the Hufbauer proposal will ultimately be implemented by the United States, if China maintains its current policy, but I take it that an ideal policy would work through an international mechanism rather than reliance on national action. That leaves two of the proposals for consideration.

The first point is that it is not clear that the Goldstein and Mattoo-Subramanian proposals have to be considered as alternatives. Why not require that the Fund examine the policies of any country with a surplus above a certain level (presumably relative to GDP) and also allow any member to initiate action in the WTO?

...

It has been argued that both of the past two proposals to hold surplus countries responsible for initiating adjustment suffer from the same problem: the impossibility of devising a suitable test of whether a country needs to adjust on the basis of its reserve holdings in the contemporary world. In many ways the Mattoo-Subramanian proposal represents an attractive alternative: It focuses attention on the exchange rate rather than reserve holdings, it seeks to use the IMF in an area where it undoubtedly has expertise, but it also seeks to exploit the greatest success in international cooperation in recent years, namely the dispute settlement mechanism of the WTO.

This proposal suffers from two limitations, however: It requires agreement by the Chinese government, and it is unable to address the problem created when a member of a monetary union runs an excessive surplus. It is argued that the best chance of addressing the first limitation is by adding a threat of additional taxation of Chinese government-held securities unless China were to agree to the Mattoo-Subramanian proposal (in addition to the incentives they propose, WTO guarantees that their sovereign wealth fund would have right of investment plus US recognition of market economy status for China). The second could be addressed by running the Goldstein proposal (perhaps operated by the ECB rather than the IMF) in parallel to the Mattoo-Subramanian proposal. This could enable the international community to address this problem also, although it would be necessary to tweak the Goldstein proposal so that in this case it was not focused on the exchange rate issue but was prepared to recommend demand expansion even at the cost of faster national, as opposed to eurowide, inflation.

The division of the burden of adjustment between surplus and deficit countries is an issue that has been with us for at least 70 years. It is doubtful if the world can wait another 70 years before the international community addresses it.

So Williamson suggests a number of very proactive approaches.  In the next post, Martin Feldstein thinks the problem will be solved with much less effort. 

Inter-National versus Intra-National Protectionism

Here's an excerpt from an old post by economist Don Boudreaux (via recent posts from Mark Perry and Scott Lincicome): 

If it’s true that theory and evidence in favor of protectionism are sufficiently strong to warrant economists abandoning their conclusion that free-trade policy is generally sound, then why shouldn’t economists — led by [free trade skeptic] Dani Rodrik — also start exploring the potential benefits of intra-national protectionism?  Surely a scholar not benighted with the free-trade "faith" ought to take seriously the possibility that, say, Tennesseeans could be made wealthier if their government in Nashville restricts their ability to trade with people in Kentucky, Texas, Rhode Island, and other states?

Indeed, such an objective scholar should be open also to the possibility that residents of Nashville can be made wealthier if their leaders restrict their ability to trade with people in Knoxville, Memphis, Chattanooga, and other locales in that state.

I suspect that if someone proposed to Dani Rodrik [or Ian Fletcher] that he explore the wealth-creating potential of state-level protectionism, he would refuse.  He would likely (and correctly) say that it’s ridiculous on its face to suppose that such protectionism would make the people of Tennessee as a group wealthier over time.  If my suspicion is correct, then to what would Rodrik himself attribute his out-of-hand dismissal of the notion that Tennessee tariffs might well make Tennesseeans richer?  

I recently had a conversation with someone (not in the trade field) where I made this same point.  He had argued for the benefits to the U.S. of protection against products from China, so I said, what about the benefits to people from Michigan from protection against imports from Tennessee?  I don't think he had ever heard the argument before, and he didn't have a clear response.  From what I could gather, the answer was that he cared more about the welfare of Americans than non-Americans.  As a result, Michigan losing jobs to Tennessee was not that bad, but Michigan losing jobs to China was bad.  I asked him why he cared more about people from Tennessee than people from China.  I thought perhaps he would say that he knew people there.  He didn't say that exactly, but my sense was that, in very general terms, he saw the issue in an "us" versus "them" sort of way.  People from both Michigan and Tennessee are Americans whereas people from China are not, and we should favor the interests of Americans over those of non-Americans.  He seemed a little thrown off when I put it this way, as if he did not want to think of it in these terms.

I don't know what this says about anything -- just thought it was interesting! 

Making GSP More "Rule-Oriented"

Lorand Bartels and Christian Haeberli have an interesting article on GSP in the latest edition of the JIEL, in which they propose two ways "to increase the security and predictability of these preferential schemes, permitting decisions by investors and traders to be taken without fear of an arbitrary withdrawal of preferences."

The first proposal is "to make tariff preference schemes, which are currently voluntary, binding obligations using the mechanism provided in Article II of the GATT."  There are two aspects to this.  First, they suggest binding the tariff preferences themselves.  That is, rich countries offering tariff preferences to developing countries would make commitments in their GATT Schedules to continue these preferences as promised.  So, if you promise a 0% tariff on certain goods from certain countries, you cannot later revoke this preference.  Second, any "qualifications" to these preferences would also be bound.  They note that existing tariff preference programs "are limited in a number of ways, including ex ante product and country exclusions, graduation, safeguards and non-trade conditionality."  All of these qualifications would also be bound, in the sense that whatever limitations there are on the preferences would not be made less favorable to the developing countries than what was committed to.  Thus, if you promised graduation would be conducted under certain terms, you could not change the terms so that they are worse for developing countries.

The second proposal is "to establish and bind objective and transparent criteria for when developing countries and their products can be excluded from tariff preference programs."  They note that current exclusions of this kind are of "unclear legality."  They explain that currently, there are a number of reasons for these exclusions:

One reason is that a developing country as a whole, or a particular industry, is considered not to have any relevant need for preferences, or that they have lesser needs than other developing countries or their industries. A different reason for excluding certain imports is to protect domestic industry: this can be done by a priori product and country exclusions, or by means of a temporary or permanent sector or country ‘graduation.’ And finally, some preference programs apply exclusions based on the compliance of beneficiary countries with non-trade conditions, such as compliance with human rights and environmental standards.

They propose that "objective and transparent product and country graduation criteria be established."

I'll offer a few brief thoughts.

First, I always like the idea of bringing greater certainty to the law, and this seems to be an area with a lot of uncertainty.  While an exporter can never be completely sure what the future will bring for a particular product, there are varying degrees of security and predictability, and the current GSP system arguably does not do very well in this regard.  So, in principle, this sounds to me like a great idea.

Second, it's hard to imagine rich countries binding the preferences they have offered without getting something in return.  But if they could bind the qualifications as well, as the authors propose, perhaps this could work.  It seems to me that there are a number of aspects of existing preference programs that likely violate WTO rules in this area (as interpreted by the Appellate Body in the EC - GSP case).  If these likely violations could be legitimized through this kind of binding commitment process, that would provide certainty for rich countries which may counterbalance the loss of flexibility with regard to the preferences themselves.

Third, as to the criteria for country/product exclusions, this sounds like the most difficult part of the negotiating process, but perhaps something could be achieved here.  Graduation is one thing.  I can imagine that some rules or guidelines could be worked out.  Conditionality seems more difficult, though.  I would guess the starting points on the U.S./EU side would be "unlimited conditions," with developing countries countering with "no conditions."  I'm not sure where the middle ground lies.

Generally speaking, it seems to me that this is a great issue to be talking about.  There are many subjects that arise in trade negotiations for which I often think, why is everyone wasting so much time on that?  By contrast, this issue seems to me to address a real problem in a core area of trade law, for which new rules would be extremely valuable.  As to whether any progress could actually be achieved, well, that one is beyond me.  But I think it's worth a try.

(As a final point, it's worth noting that the authors are not claiming that tariff preferences are good policy, noting: "we do not suggest that preferential schemes are a necessary or even a useful tool of development.")

The China wind power WTO complaint - failure to translate

The US complaint (DS419) also includes a new claim under the China Accession Protocol: China has not made available a translation of the measures at issue into one or more official languages of the WTO. As part of its accession commitments on transparency, China agreed to make such translations available within 90 days of the implementation of any measure affecting trade. Given the sheer number of trade-related measures issued in China on a daily basis, this obligation was bound to be breached. Now it has actually become a target in a WTO complaint!

Does anyone know whether any other acceding country has undertaken a similar translation obligation?