Relevant and even prescient commentary on news, politics and the economy.

Trade and the Great Recession

The Trade Deficit is among the rarely discussed causes of the Great Recession; yet, to this observer, it is the primary cause.  The Deficit plummeted further as deregulated banks peddled bad debt and allowed homeowners to use homes as ATM machines.  Everything was done to keep the consumer on a buying spree, buying more and more imports, while manufacturing shrank and exports dwindled. These imports, ironically enough, were products of American and Western multinationals now exporting goods from third world countries.

No wonder income inequality soared; the real winners of trade policy and the subsequent buying spree were the top echelons of the multinationals.  Those who insist that CEO billionaires share the wealth with American workers should understand that American workers often had little to do with making the products the multinationals were peddling.

A plummeting trade deficit revealed the profound flaws in a poorly conceived and foolishly implemented plan to globalize the world economy.  Globalization failed.   The proponents of globalization are now strangely silent, preferring to discuss other topics.

The question is: What went wrong with American Trade Policy?

Trade Data 1960-2012X

 

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Latest World Trade Organization Lunacy

Dan Becker’s post Trans Pacific Partnership: A new Constitution gained a lot of traction because once again the public media is beginning to pay attention to trade policy. Angry Bear has carried a number of posts on the World Trade Organization intent and structure…here are several on the particular issue between Antigua and the US. The issue is not earthshaking in amounts of money, but offers a look at the potential conflicts that can play out between nations. Perhaps coming later further exploration of the World Trade Organization (from past Angry Bear posts) will be warranted.

Price of free trade or the price of protectionism,
Antigua update Part 1 WTO GATS,
Update about Antigua,
WTO and Antigua follow up

From The Huffington Post by Lori Wallach comes this note:

Internet pirates of the Caribbean

On Monday the World Trade Organization (WTO) officially authorized Caribbean nation Antigua to sell $21 million in “pirated” U.S.-copyrighted music, films and computer programs in retaliation for the United States failing to comply with a 2005 WTO order to allow online gambling here. Say what? (And, no, this news was not sourced from a parody in The Onion.)

The case is an illustrated guide to much of what is wrong with the WTO. And, it should spotlight the lunacy of Obama administration plans to expand this dangerous “trade” agreement model via the Trans-Pacific Partnership (TPP) “free trade” agreement. More on that later. Let’s tour what is now a full coop of WTO chickens that have come home to roost on this WTO case.

First, the backstory: in 2003, Antigua filed a case at the WTO claiming that U.S. laws banning Internet gambling violated WTO rules. The case, which some say was in fact the brainchild of an American attorney, Mark Mandel, who is handling the WTO litigation for Antigua, was joined by the European Union and other countries with major gambling industries. Antigua won a final ruling in 2005 and yesterday’s “sanctions” announcement was retaliation for the United States failing to change its domestic laws to comply with the WTO.

Why does the WTO have anything to say as to whether or not the U.S. Congress can ban Internet gambling, especially when the ban applies to domestic and foreign firms alike? Unlike past trade agreements, which focused on cutting tariffs, the WTO imposes expansive constraints on signatory governments’ non-trade policies and establishes new corporate rights. The WTO’s General Agreement on Trade in Services (GATS) limits how the U.S. government may regulate foreign service firms operating here and cross-border “trade” in services too. The WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement requires countries to provide expanded monopoly patent and copyright terms. (That’s how U.S. drug patent monopolies got expanded from 17 to 20 years in 1994 when Congress OK’d U.S. WTO accession, overruling decades of congressional opposition to such patent extensions and costing us billions in higher drug prices, pocketed by WTO booster Big PhRMA.)

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Measuring trade deficits and trade flows value

The Washington Post calls attention to changes in measuring international trade values:

The U.S. trade deficit with China may be much smaller than thought according to new trade measurements that capture the flow of raw materials and intermediate goods as they work their way around the world into final products.

In a significant revision to economic record keeping the Organization for Economic Cooperation and Development and the World Trade Organization have patched together international databases that show not just the value of final goods trading hands between countries – the traditional method of measuring imports and exports.

Rather, they have tried to unpack each step that a good takes through what has become an increasingly fragmented global system – with raw materials from one country becoming steel in another, becoming a car part in a third, becoming a finished auto in a fourth that is then exported to a fifth.

[snip]

In releasing the study, the WTO and OECD highlighted how the data could influence the world trade agenda. They argue, for example, that the impact of tariffs around the world can’t be fully understood without looking at value chains, since a final product may include import duties from several different stops.

Officials from the WTO and OECD plan to discuss their findings at a press conference on Wednesday.

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NYT economic reporting week of 9th

Upcoming reports and meetings from the NYT

ECONOMIC REPORTS: Data will include consumer credit for May (Monday); the trade deficit for May and wholesale trade inventories for May (Wednesday); weekly jobless claims and import prices for June (Thursday); and the producer price index for June and the Thomson Reuters/University of Michigan consumer sentiment index for July (Friday).

…On Wednesday, the Federal Reserve will release minutes of its June 19-20 meeting.

…OVERSEAS On Monday, Paul Tucker, the deputy governor of the Bank of England, will testify before a Parliamentary committee investigating Libor rates

…a World Trade Organization dispute settlement body will hold a special meeting at which the United States, the European Union and Japan will request the establishment of a panel to rule on the legality of Chinese curbs on rare earth exports; and Russian lawmakers will vote on the country’s entry to the World Trade Organization.

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Retaliating Against Currency Manipulation: A Primer

Kash at The Streetlight points us to other aspects of the world, touching upon the WTO and the IMF roles in global trade and China in particular:

Retaliating Against Currency Manipulation: A Primer

You’ve probably heard that this week the US Congress has been addressing the issue of how China controls its exchange rate with the US dollar. In particular, many have argued that China’s policy of only allowing the yuan (CNY) to appreciate very gradually against the dollar has kept Chinese products unreasonably cheap to American consumers, and American products unreasonably expensive to Chinese consumers. (See for example Paul Krugman’s column on Monday.)

And indicates a source worth reading:

if you’re interested in more details regarding the legal options and implications of possible US retaliation against Chinese currency manipulation, you can’t do better than this paper by Jonathan Sanford of the Congressional Research Service: “Currency Manipulation: The IMF and WTO“.

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WTO ruling: ‘free trade’ and ‘state capitalism’ needs broader discussion

A recent ruling on countervailing duties and anti-dumping duties by the World Trade Organization:
(bolding is mine)

Senior Economist Ian Fletcher for the Coalition for a Prosperous America offers one point of view:

The American position is that we are entitled to apply what are called “countervailing duties” against products that are subsidized by foreign governments. And on top of that, we are also entitled to apply duties designed to counteract the practice of dumping, or selling a product below cost in order to destroy foreign competitors.
Both these responses on our part have long histories of being accepted as legitimate, both under international trade law and in economics. (This is why the WTO had originally accepted our position; the new ruling is actually the result of an appeal by China.)

In terms of international law, one can trace the legitimacy of our policies at least as far back as the founding of the General Agreement on Tariffs and Trade, the WTO’s predecessor, in 1947.
In terms of economics, their justifying logic is very simple.
In the case of subsidies, free trade only makes sense if it really is free, which means that a thumb on the scale at one end of the transaction justifies a tariff, or counter-subsidy, at the other end.
In the case of dumping, free trade is not justified if one side sells below cost in order to wipe out the other and thus eventually grab the market (or most of it) for itself. Even if the attempt fails, the damage done to our industries will be real, and by then it will be too late.
There’s no serious question about whether China engages in subsidies and dumping. That’s why, in this case, we imposed duties of up to 200 percent to offset their subsidies, plus up to 265 percent to counteract their dumping.
Enter state capitalism. The flashpoint of the current dispute centers on the vexed question of what price constitutes dumping in a non-free-market economy.
In a free-market economy like our own, dumping is considered to occur when a product is sold abroad for either less than its production cost, or less than what it is sold for domestically. Unfortunately, in an economy like China’s, which is so tightly controlled by the government that many prices are essentially whatever the government says they are, this logic doesn’t work. There are no normal prices to observe in order to figure out how big the subsidy is. So the U.S. Government has been using various statistical techniques to calculate the relevant prices.
The WTO has ruled that our techniques are not legit. Bottom line? We’re supposed to overlook the vast panoply of subsidies—ranging from free land to cheap loans and a million different tax credits—because state capitalism makes them tricky to calculate.

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WTO upholds tire tariff

The Washingtington Post notes:

The World Trade Organization has upheld the stiff duties that President Obama imposed on car tires imported from China last year, an important victory released on the eve of trade talks between the two countries.

A panel at the Geneva-based trade group on Monday said it agreed that the United States was justified in slapping a 35 percent tax on Chinese tires under WTO provisions that let countries protect local industries and workers from sharp increases in Chinese imports.

The provision was part of the agreement under which China joined the WTO a decade ago. Chinese tire imports to the United States tripled between 2004 and 2008, to 46 million tires worth an estimated $1.7 billion.

Update: Ken Houghton reminds me of Tom Bozzo’s September, 2009 post Travels of a cheap tire in global economy covering part of the issue.

Update two: WTO panel report on the tires dispute linked.

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World Trade Organization ruling, IMF to rule

rdan

The New York Times carries a story that is actually probably of more import than Fed announcement of not renewing the Treasury Bond program.

Wednesday’s ruling goes to the heart of one of the biggest trade issues pending between China and the West: whether intellectual property, like copyrighted songs, books and movies, should be granted the same kind of protection from discriminatory trade practices as manufactured goods.

In its petition to the W.T.O., the United States particularly criticized China’s requirement that most copyrighted material be imported through a few government-designated companies, which tend to be wholly owned or majority-owned by the government.

The panel condemned this, saying in its report that “it also appears that foreign individuals and enterprises, including those not invested or registered in China, are accorded treatment less favorable than that accorded to enterprises in China with respect to the right to trade.”

China in particular has been an enthusiastic supporter of the W.T.O. since its admittance in 2001, because the group’s free-trade rules have made it hard for other countries to impose antidumping and antisubsidy limits on Chinese exports. But the Chinese government has not removed heavy taxes on imported auto parts that were condemned by another W.T.O. panel in July 2008.

Economic planners in Beijing have ordered government agencies not to buy imported goods for the country’s nearly $600 billion stimulus program except when no domestically produced goods are available. The government has set high domestic content requirements for the wind and solar power industries, and has rejected bids even by multinationals that erected factories in China to supply the local market.

The panel stopped short of endorsing an American requests for a ruling on whether Chinese censorship had unfairly restricted imports. The panel said that this question was outside its purview; for the same reason, the panel also declined to rule on whether China’s approval processes were too onerous for would-be distributors of imported entertainment.

Another example of a trade issue is noted that is recurring as well:

As the International Trade Commission considers comments on its recommendation to impose tariffs on Chinese tire imports, President Obama stands at a crossroads in the fight to rebuild the American economy.

President Obama has made a commitment in the past to uphold previously signed trade agreements. China, however, is violating these agreements by flooding the market with a massive 300 percent increase in tire imports in an attempt to wipe out American tire manufacturers. In 2004, China sent 14 million tires to the U.S. valued at $453 million. By last year, that had increased to 46 million tires valued at $1.7 billion.

This affects Canada as well, since many tires are made up north. Is the climate different enough from ‘no tariffs’ days to make for a different response? How does a trade policy respond to deal with these issues as we make adjustments in people’s livelihoods? What are the rules of this market situation?

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WTO and Antigua follow up

Arstechnica had thoughts on WTO mediation and US indignation about IP rights.

The second case concerns Antigua and Barbuda, a small Caribbean country home to all sorts of online vices, including gambling and DRM circumvention. Antigua took the US to the WTO years ago over charges that the US was unfairly criminalizing access to Antiguan gambling websites while still allowing US-based horse racing sites to function. The WTO ruled against the US on several occasions, including a 2007 ruling that found the US had not yet bothered to comply with previous rulings.

In retaliation, Antigua has announced a radical plan in an attempt to force its larger neighbor to play ball. The Antiguan government has recently stated that it will allow piracy of US intellectual property such as movies and movies unless the US changes its gambling policy (though this move has yet to be authorized by the WTO).

Apparently, it’s easy to get hot and bothered when it’s industries from your country that claim to be badly affected by rules elsewhere. When it comes to the claims of other countries, though, even claims that have been validated by the WTO, it’s much easier to see the complexity of the situation, to spend years arguing those complexities before judges, and to do nothing even when compelled by rulings.

This sort of behavior makes it that much harder to assert some kind of moral high ground when China, Russia, and others pick and choose which of their WTO obligations they are going to comply with.

Certainly a David and Goliath situation, but moral symbols have a way of boomeranging when trying to make your case in another arena. Just in case you were wondering.

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The Latest Skirmish at the WTO

As reported by The Globe and Mail, on behalf of European and U.S. financial services, Europe and the U.S. have registered a complaint with the WTO that China is “breaking international trade law.”

The European Union and the United States filed a complaint with the World Trade Organization (WTO) yesterday, concerned that China is trying to freeze out foreign competitors in an effort to build a state monopoly in the $100-million financial information sector

China’s state-owned company, Xinhua, is at the center of the controversy. Financial services such as Bloomberg LP, Reuters LP, and Thomson Corp are required to go through Xinhua, their major competitor, to reach their customers.

“Our members are complaining that they can’t reach their customers in China because they’re required by regulations to go through Xinhua,” said Ken Wasch, president of the Software and Information Industry Association. The Washington, D.C., group represents the financial information industry, including, Bloomberg, Dow Jones, and a combined Thomson-Reuters, following the Thomson takeover from last year.
“We want to have direct access to our customers, we don’t want to have to go through our competitor in order to reach them,” Mr. Wasch said.

Financial services sell data, in real time, to their customers, such as banks and brokerage firms. Their customers then use the data to make financial decisions.
While money is certainly at stake, I would differ with the thrust of the article that this complaint differs substantively from China’s attempt to control the media.
Despite what China’s defenders say, China is a command economy. Whoever controls the flow of information, controls what happens. If Xinhua stays between foreign financial services and their customers, a number of consequences ensue:

  1. The flow of information slows.
  2. Xinhua becomes a de facto regulator of financial information. As the Herald Tribune points out:

    The new regulations make Xinhua both a competitor and regulator to its foreign rivals, requiring that data, videos and photos be funneled through Xinhua-approved distributors. The only currently approved distributor is a Xinhua subsidiary.

In some ways, this controversy is similar to the one surrounding Sovereign Wealth Funds. Both are extensions of a centralized government. Both create problems concerning transparency. Both can be used to forward a government’s political agenda. In the market place, both can be used to pick winners or losers.

What we are witnessing is a struggle between two radically different modes of governance, two antithetical types of economies. Those who celebrate globalization as the triumph of the free, democratic market place perhaps should look more closely at precisely the nature of what is happening. Sovereign Wealth Funds–both in China and the Middle East–are in ascendance. In both the Middle East and in China, information is tightly controlled in order to advance political or religious agendas.

This latest skirmish, while seemingly just about money, is part of the larger battle that is being waged. Oil and cheap labor have been “lures.” Just as the smart fisherman dangles colorful enticements before his unsuspecting prize so too have China and the Middle East lured us with promises of cheap energy and abundant, cheap labor. Now, weaken by our own economic folly and greed, are we ready for the struggle that is to come?

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