Author: Simon Lester

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

…

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

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

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

…

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

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

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

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

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

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

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

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

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

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

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

If it is bad, what is the appropriate response?

Some want to impose a tariff on Chinese imports:

Economist Robert Aliber:

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

Paul Krugman:

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

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

Various members of congress:

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

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

Paul Krugman:

So what are we going to do?

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

Various members of congress:

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

Some want IMF surveillance or a WTO complaint:

Fred Bergsten:

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

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

Arvind Subramanian:

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

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

Simon Johnson:

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

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

Dan Drezner (via email, no link):

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

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

Dean Baker:

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

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

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

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

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

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

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

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

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

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

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

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

Tobacco and trade/investment issues are heating up.

Philip Morris is suing Norway:

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

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

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

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

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

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

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

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

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

Oh, and there is still the Jim Bunning issue:

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

From June 2-11, 2010:

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

Details here.

From The Economist:

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

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

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

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

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

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

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

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

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

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

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

…

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

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

So will David Beckham, apparently:

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

…

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

 

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

SEC. 791. CIVIL ACTION.

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

…

(c) Effect of Election; Relief-

…

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

…

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

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

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

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

Scott Lincicome has additional thoughts on the legislation here.

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

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

What they propose instead:

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

More details at the link.

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

Finally, yet more from Paul Krugman:

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

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

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

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

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

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

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

…

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

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

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

And from the NYT:

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

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

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

…

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

…

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

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

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

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

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

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

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

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

To which Dan Drezner replies:

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

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

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

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

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

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

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

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

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

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

…

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

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

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

by Ian Fletcher

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

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

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

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

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

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

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

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

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

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

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

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

by Daniel Griswold

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

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

 

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

 

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

 

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

 

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

  

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

 

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

 

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

 

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

 

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

 

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

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

Remember a few weeks ago when Senator Arlen Specter asked Obama the following:

The first part of my question is, would you support more effective remedies to allow injured parties — unions which lose jobs, companies which lose profits — by endorsing a judicial remedy, if not in U.S. courts perhaps in an international court, and eliminate the aspect of having the ITC decisions overruled by the President — done four times in 2003 to 2005, at a cost of a tremendous number of jobs on the basis of the national interest. …

I was a little confused about which "international courts" he wanted to get involved, but perhaps a proposal he made last week clarifies some of his concerns (although the specific point about the President overruling the ITC may not be relevant here):

U.S. Senator Arlen Specter (D-Pa.) has introduced legislation that seeks to help domestic manufacturers by enforcing trade remedy laws. The Unfair Foreign Competition Act of 2010 provides a private right of action for domestic manufacturers injured by illegal subsidization or dumping of foreign products into U.S. markets. 

Senator Bob Casey (D-Pa.) and Senator Sherrod Brown (D-Ohio) are cosponsors. The bill has been referred to the Senate Committee on Finance. 

…

The Unfair Foreign Competition Act of 2010 would allow petitioning parties to bring a civil action in a U.S. district court for an injury finding in lieu of a determination by the International Trade Commission (ITC). Allowing petitioners to choose between the ITC and their local U.S. district court for the injury determination would give injured domestic producers the opportunity to serve as private plaintiffs in seeking enforcement of trade remedy laws. The nonpolitical venue would also alleviate the potential for inconsistencies and partisanship in enforcement remedies.

When I heard "private right of action," my first thought was that this would be a repeat of the 1916 Act, which was found to violate WTO rules.  But at least from Specter's floor statement (I haven't seen the actual text yet), it seems to be something different:

Because current administrative remedies have not been consistently and effectively enforced, I am introducing private right of action legislation to enforce the law. My legislation would allow petitioners to choose between the ITC and their local U.S. district court for the injury determination phase of their investigation. Doing so gives injured domestic producers the opportunity as private plaintiffs to control the litigation in seeking enforcement of our trade laws. If injury is found, U.S. Customs and Border Protection would then assess duties on future importation of the article in question. The legal standard for determining dumping margins, established by the Commerce Department, would remain unchanged.

This legislation is similar to legislation I have introduced as far back as 1982 when I originally sought injunctive relief. But this bill has been modified to comply with World Trade Organization rules.

In December 2004, the United States took action to comply with WTO rulings on the Antidumping Act of 1916 which provided a private cause of action and criminal penalties for dumping by prospectively repealing the act. The United States also took action in February 2006 to comply with WTO rulings on the Continued Dumping and Subsidy Offset Act which requires the distribution of collected antidumping and countervailing duties to petitioners and interested parties in the underlying trade proceedings. In both cases, the WTO panel found that U.S. law allowed an impermissible specific action against dumping and subsidization.

The legislation I introduce today has been adapted to these changes in law and allows for a determination of injury in accordance with our international obligations. Aggressive policy measures, such as this legislation, are necessary to prevent foreign producers–China in particular–from causing a major crisis for our domestic producers.

In a nutshell, it seems that he wants anti-dumping/countervailing duty petitioners to have the option to bring the injury part of the case to a U.S. court, as opposed to the ITC, with the normal injury standards still applying.  I suppose the thinking is that the ITC hasn't been tough enough with enforcement.

Is there really any reason to think that federal courts would be tougher?  I suppose one key point is that companies would be able to go to their "local U.S. district court."  Presumably the thinking is that some local favoritism would help achieve a positive result for the domestic industry.

At first glance, I don't see anything in the AD or SCM Agreements that prohibits this approach.  As long as the district courts follow the relevant WTO rules, it should be OK.  I suppose there could be an argument that it is problematic to shift decision-making to local authorities with a specific goal of getting a greater number of affirmative determinations (i.e., determinations that injury exists).  And if the decisions that result turn out to exhibit a pattern of bias, that would also be a problem, although I'm not sure you could condemn the whole process on that basis (you may have to go after individual decisions).

I have no idea whether this proposed law has any real chance of passing.

Ian Fletcher

Some of Dan’s arguments continue to be  mere distractions.  Taking  North Korea and Burma as proof of the harm of a no-trade (or close to it) policy falls down on the fact that North Korea has a communist economy and Burma a quasi-socialist state-controlled one, economic defects so profound as to guarantee their economic failure regardless of their trade policies.

A more relevant comparison, if one wishes to look at a low-trade economy, would be to the United States in our own pre-WWII tariff era.  We had the world’s highest standard of living despite the fact that imports were well under five percent of GDP.  (They are 17 percent today.) The average American was roughly twice as well-off as the average Englishman, despite the fact that Britain in this era had imports roughly three times this scale.

It is simply not empirically true that trade per se makes nations rich: not today, not historically.  Today, in fact, some of the world’s highest trade-to-GDP ratios are found among impoverished exporters of raw materials, which are neither wealthy nor fast-growing economies.

Dan’s argument for international specialization is valid, but it is not an argument for free trade at all.  It is just an argument for trade, which is not the same thing.

Dan claims that the U.S. ranks only 28th in the world in freedom to trade.  This is a legalistic paper assessment, which ignores the far more fundamental fact that the U.S. has for decades tolerated annual trade deficits on the order of five percent of GDP. What other continent-sized economy with ample capability for self-sufficiency can even come close to this record?"

That imposing a tariff would violate America’s commitments to the WTO means nothing: we made these commitments and have the legal right to withdraw from them, just as we withdrew from the anti-ballistic missile treaty with Russia in 2001.

As for the threat of foreign retaliation: thanks to America’s huge trade deficit, it is foreign nations, not the U.S., who have the surpluses to lose.  Our weakness is actually a position of strength here.  Some retaliation is inevitable, but there is no reason to expect it to get out of control. 

Dan asserts that protectionism is motivated by nostalgia for an industrial past which ignores the supposed reality that our economic future lies in high-technology and service jobs.  But the U.S. has been running a deficit in high technology since 2002.  So high-tech jobs are not going to save us.  Neither, given the rise of offshoring, are service jobs, given that service jobs immune to off-shoring (because they must be performed in person) are either too elite to help most people (surgeons) or low-paid (waitresses and security guards).

When Dan observes that “most of the net new jobs created in the United States in the past two decades have been middle-class service jobs that actually pay more than the average manufacturing job,” all this means is that the wages of service jobs have not yet been decimated by imports as badly as the wages of manufacturing jobs.  This is unsurprising, as Internet-based offshoring began later than the tidal wave of Toyotas and other manufactured goods.

It is no accident that, according to the Census Bureau  (see http://www.census.gov/prod/
2009pubs/p60-236.pdf, p.7), real median family income in 2008, the last year for which complete data are available, was actually slightly lower than in 1999.  Free trade is not generating rising prosperity, but a relentless economic headwind which “caps” American income growth by competitive pressure from foreign nations, some of which suppress their own wages by undemocratic means.

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

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

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

by Daniel Griswold

Free Trade has endured since Adam Smith as a robust theory, and it has proven itself in practice across the decades as being superior to government restrictions.

There is nothing new in Ian’s theoretical critique of free trade. In a 1996 book, Against the Tide: An Intellectual History of Free Trade, Douglas Irwin of Dartmouth shows that Ian is just the latest in a long line of critics who have claimed that we can make ourselves wealthier by restricting trade. As Irwin demonstrates, economists keep coming back to free trade as the best policy because it has proven durable in theory as well as practice.

As for free trade in practice, Ian’s selective story telling is at odds with the cumulative evidence. For example, it is simply not true that all or even most job growth in recent years has been in lower-paying occupations such as “waitresses and security guards.” BLS data show that most net new jobs since 1991 have been created in those service sectors—education, health care, financial activities, business and professional services—where the average wage is higher than in manufacturing. Expanding trade has helped Americans move up to occupations that are more productive and better paying.

Ian claims that America expanded in the 1800s because of protectionist policies. That’s another myth. The sectors that lead America’s productivity growth in the latter 19th century were not the protected industries, but services such as transportation, distribution, utilities, communications, and construction. Growth was further spurred by mass immigration and foreign investment, accommodated by a string of annual trade deficits after the Civil War.

The high trade barriers back then that Ian yearns to restore actually damaged the productivity of U.S. industry by driving up the cost of capital machinery. It exposed consumers to domestic oligopolies, spurring the rise of anti-trust laws. Those trade barriers did nothing to protect Americans from frequent boom and bust cycles. As I document in my book, economic downturns were longer, deeper, and more frequent during the protectionist era. And let’s not forget that the Great Depression occurred on the protectionists’ watch.

As for the decline of the global poverty rate since 1981, does Ian really believe that China’s rapid growth in the past 30 years is because of communism and protectionism? If so, why didn’t China grow even faster under Mao, and why isn’t that formula working now for North Korea? In reality, China’s growth has been spurred by its reforms away from a closed and centralized economy.

China has not been the only developing country to unilaterally lower its barriers and reap the rewards. According to the World Bank, the poverty rate in developing countries excluding China fell from 40 to 28 percent between 1981 and 2005. Rising levels of trade and foreign investment have been far more effective than foreign aid in reducing poverty.

Trade has played a role in spreading freedom more broadly by expanding the middle class and empowering individuals with new ideas and tools of communication. According to Freedom House, the share of the world’s people who enjoy full political and civil liberties has risen from 35 percent in the early 1970s to 46 percent today.

America’s “greatest generation” learned from the Great Depression and World War II, dumped protectionism, and embraced more open trade as an instrument of peace as well as prosperity. Those wise policies knit us closer to our allies and virtually eliminated the threat of war within Western Europe. Today, in our more globalized world, fewer people are dying in wars than at any time since World War II.

Returning to a mythical protectionist past would put all those gains in jeopardy.

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

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

Speaking of investor-state disputes, as I was yesterday, it looks like many of the big names in the field will be assembling for a conference soon:

On March 29, 2010, Washington and Lee School of Law will host a Joint Symposium with the United Nations Conference on Trade and Development (UNCTAD) to explore the prevention and efficient management of investment treaty disputes.

The event will bring together academics, governments, practitioners, investors, representatives from international organizations and non-governmental entities from around the world. Professor W. Michael Reisman, the Myres S. McDougal Professor of International Law at Yale University, will deliver the keynote address. Other prominent investment and dispute resolution experts involved include Meg Kinnear, Secretary General of the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID), William K. Slate II, President and CEO of the American Arbitration Association (AAA), and Wolf von Kumberg, Legal Director and Assistant General Counsel at Northrop Grumman Corporation.  There will also be representatives from States such as Argentina, the Dominican Republic, Ecuador, Japan, Rwanda, Thailand and the United States.

I didn't see anything explicit on the conference agenda regarding my point about "individual" versus "group" theories on non-discrimination, but with that many investment treaty specialists in one place, I bet it will come up in conversation at least once.