• A very good editorial on Bloomberg.com on farm subsidies, and why the “let’s swap direct payments for crop insurance” proposal is a bad deal for taxpayers.
• American Farm Bureau Federation President Bob Stallman isn’t exactly a poster child for the farm program reform movement, but here he writes something I didn’t think would ever flow from his pen: “Not only would ["shallow loss"] programs be a nightmare for local Farm Service Agency offices to administer, but farmers would have the ability to cherry-pick which program works best for them. Because of distortions in price, we’d have a system of farmers deciding what to produce based on government payments rather than market signals.” [emphasis added] Uh, ok, but doesn’t that happen already, Mr Stallman?
• I’m not quite sure the LA Times gets the concept of federalism.
• United States Trade Representative Ron Kirk complains that “countries need to do a better job of explaining the benefits of trade in order to help sell ambitious trade deals to a skeptical public” [$]. I must have missed the part when Obama gave a detailed, principled endorsement of free trade in his SOTU address last week. Or, you know, ever.

Agriculture and Trade Links is a post from Cato @ Liberty - Cato Institute Blog

President Obama’s State of the Union address last night was, in my opinion, pretty awful (although James Pethokoukis at the American Enterprise Institute thinks it could have been worse). I know SOTUs are political theater at its worst, and I watch them always with something not unlike disgust, but I found almost nothing to like in the substance last night. The electioneering, partisan, self-aggrandizing tone didn’t help.

Let me turn specifically to trade policy, which was more thoroughly covered last night than in recent SOTUs. In an election year, and from a president who is ambivalent (at best) on trade, a trade-heavy speech is not always a good thing: trade policy can get caught up in broader political arguments about inequality, unemployment and economic growth. And rarely does that combination work well for those of us who want and promote free trade between people regardless of the political borders behind which those people happen to live.

But first, the Good news from last night’s speech. President Obama did make a passing and veiled reference to the need for Congress to extend Permanent Normal Trade Relations to Russia, necessary for the United States to treat Russia as any other member of the World Trade Organization when it joins the body later this year (i.e., allowing Americans to access Russian goods and services more readily). And at least he painted the recent passage of the trade agreements with Colombia, South Korea and Panama as a positive development, albeit on mercantilist grounds (more on this later).

The Bad? The president said precisely nothing about the Trans Pacific Partnership negotiations currently underway with nine other Asia-Pacific countries (with Canada, Mexico and Japan interested in joining in the future). The TPP is supposedly the crowning achievement of his administration’s trade efforts and a deal that he was itching to complete in 2012. What does it say about his priorities that it warrants not a mention in his main speech of the year? Maybe his political supporters in organized labor aren’t buying this “21st century trade agreement” stuff any more than I am and he sees merit in keeping it quiet. But that then raises worrying questions about the ability of the negotiations to be completed on schedule if they don’t have full-throated political support at the highest level. The president made no mention of the World Trade Organization or its struggling Doha round of trade liberalization negotiations, either, although maybe there he is simply showing acceptance of the round’s (near) death, an assessment he would share with most trade watchers.

And the Ugly? Once again the president displays no appreciation for the true benefits of free trade – the benefits from specialization and exchange. They include the economic benefits that come from increased competition, and from access to cheaper and more variable goods and services for Americans. From his silly (and, I suspect, futile) goal to “double exports in five years” to his rhetoric about how America can “win” if the playing field is level (what does “winning” mean in that context anyway?), the speech was peppered with nationalistic, misguided and quite frankly inflammatory rhetoric that will not help trade relations – let alone lead to enhanced trading opportunities for Americans – one bit. Creating yet another government agency, this time to “investigat[e] unfair trade practices in countries like China”, will just add to tensions. Claiming the tires debacle as a model of trade enforcement success is yet another example of how the concept of unintended consequences is apparently lost on this president.

Matthew Yglesias has some excellent things to say on the mercantilist nonsense in Obama’s message, and the ill-conceived manufacturing fetish he conveyed. And Obama managed to combine both economic illiterate concepts when wailing about the unfairness of having to compete with “foreign manufacturers [who] have a leg up on ours only because they’re heavily subsidized.” (He then, inevitably, went on to include all sorts of subsidies or tax breaks that he would like to extend to certain American firms/industries – Chris Edwards has amply covered the tax stuff here). Overall, I give this speech a “D” on trade. Must try harder.

SOTU and Trade: the Good, the Bad and the Ugly is a post from Cato @ Liberty - Cato Institute Blog

Politico yesterday reported that Agriculture Secretary Tom Vilsack is upset. According to him, the USDA just don’t get no respect:

Agriculture Secretary Tom Vilsack wants to spread the message to anyone who’ll listen: The U.S. Department of Agriculture isn’t just about farming anymore.

“This department is not appreciated,” the former Iowa governor told POLITICO in a recent interview. “We are engaged in virtually every issue and always can provide some support and some meaningful solution to a problem that is vexing folks.”

To prove the point, he challenges anyone to name an issue that doesn’t touch the department’s portfolio, from bolstering national security by helping wean Afghan farmers from growing opium — a cash crop that funds Islamic insurgents fighting U.S. troops — to providing USDA-backed home loans as a way to repopulate the sparse countryside. [emphasis added, with disgust]

Not bad for an agency that shouldn’t even exist.

The USDA: Your One-Stop Shop is a post from Cato @ Liberty - Cato Institute Blog

Some disturbing news indeed reached my inbox today (HT: David Boaz). Apparently honey is entering the United States under assumed identities. Chinese honey, once ubiquitous, was largely shut out of the American market through anti-dumping measures. So, this article from NPR.org alleges, it started to be sold through a third country (perhaps Indonesia, Thailand, or Malaysia) and was falsely labelled to evade the duties. (Apparently we know this because the honey can be tested for peculiar types of pollen.) The U.S. government wasn’t having any of that of course, and so they held up suspicious shipments through regulations, inspections, and documentary requirements.  So now the Chinese honey is allegedly being sold through India.

The domestic honey industry is now starting to worry that all of this nefarious, subversive honey-related activity will suppress the market for all types of honey, including their own, and are starting a fair trade-esque system called True Source Honey, which will trace the honey to a proper, ‘merican source. None of that Chinese muck.

Eric Wenger is president of True Source Honey. Soon, he’s going to Vietnam to help with the first audit of a Vietnamese honey exporter.

“The question we want to answer is: Does that exporter only purchase honey from beekeepers in that country?” he says.

The exporter will give the True Source auditor a list of the beekeepers from whom it buys honey. “Then the auditor will randomly select a number of those beekeepers, go out to that beekeeper’s apiary, and evaluate the capacity of that beekeeper to produce the volume that that exporter claimed was purchased and shipped,” says Wenger.

If everything checks out, that exporter is certified. But even after that, True Source will take samples from every shipment of honey and send those samples to a lab in Germany to see if the pollen matches the flowers that are actually blooming in Vietnam.

True Source wants to expand this system globally. One exporter in India is already certified.

Jill Clark, from Dutch Gold Honey, says these sorts of audited, verified supply chains are getting more common throughout the food business. In some cases, governments are requiring it.

“With all the food safety and food security issues, knowing where your food comes from right now is incredibly important,” she says.

Shouldn’t consumers be the ones to decide that? Removing the anti-dumping duties and discriminatory regulations will reduce the incentive for Chinese honey to be labelled falsely, and then we can decide for ourselves what is “incredibly important.” Or maybe we don’t care, and True Source will be a massive flop.

On a positive note, there are an encouraging number of libertarian comments to the article.

Citizens! Do You Know the Source of Your Honey? is a post from Cato @ Liberty - Cato Institute Blog

I know it’s unseemly to brag, but I just couldn’t help but feel vindicated when I read this article in the Wall Street Journal today about recent complaints by the Air Transport Association to the Export-Import Bank of the United States regarding their loan guarantees to foreign airliners.

On page 15 of my recent Trade Policy Analysis, “Time to X Out the Ex-Im Bank“, I warn: “…the billions of dollars the bank authorizes each year in financing to foreign airlines to buy American aircraft could be seen as a way of helping foreign airlines compete against American ones.”

Behold, buried on page B4:

In a letter to Ex-Im Bank Chairman Fred Hochberg earlier this month, the Air Transport Association, a trade group for America’s biggest carriers, called on the federal agency to slash subsidies to all overseas buyers of Boeing jets.

“The bank’s support for foreign airlines injures U.S. carriers,” said ATA outside counsel Michael K. Kellogg…

</smug>

Ex-Im Bank Pits U.S. Industry Against Industry is a post from Cato @ Liberty - Cato Institute Blog

Forced to cut its budget, the Agriculture Department has decided to eliminate dozens of reports, including the annual goat census (current population: three million), and the number of catfish on the nation’s fish farms (177 million, not counting the small fry).

[New York Times, Business Day section]

The End of Civilization? is a post from Cato @ Liberty - Cato Institute Blog

Some interesting links on agriculture in the news today.

First, a terrific front-page article in the New York Times, about what my friend Vince Smith so accurately calls the “bait-and-switch” farmers are proposing in their offer to give up direct payments (subsidies that flow to farmers regardless of prices or production) in exchange for a new revenue insurance program.  As Vince so rightly points out, because the new revenue targets will be based on today’s current record crop prices, “If farm prices move back towards what are widely viewed as more normal levels than their current levels, farmers will be compensated for going back to business as usual.”  Vince blogs here about the proposed new revenue assurance program, and how it could end up costing us just as much as the current set of programs.

Farmers and their congressional sponsors are still blathering about “proportionality,” essentially saying that they should not have to contribute any more to budget cuts than any other area of the federal government. Here, for example, is a corn farmer, towing the party line:

“We are very much aware of the budgetary constraints of the federal government,” said Garry Niemeyer, an Illinois farmer who is president of the National Corn Growers Association. “We want to do our part as corn growers to help resolve those issues, but we only want to do our proportional part. We don’t want to have everything taken out on us.” [emphasis added]

This is wrong-headed. I’ve said it before, I’ll say it again: “proportionality” implies that everything the federal government currently does is equally valid. That is nonsense.  Some programs are legitimate, some less so. Some—like farm subsidies—not at all. Spending cuts should be made on the basis of legitimacy, not by some abstract formula equally applied. We should be reshaping (in a downward direction) the federal government here, not trimming a topiary hedge.

Second, Bloomberg.com has a good overview on the current state of the negotiations between the Congressional agriculture committees and the deficit-reduction supercommittee regarding the cuts to farm programs. The leaders of the agriculture panels have written a letter to the supercommittee, saying that cuts to agriculture programs should be limited to $23 billion and those cuts ”should absolve the programs in our jurisdiction from any further reduction.” So there.

Finally, here are Senators Mark Kirk (R-Ill.) and Sen. Jeanne Shaheen (D-N.H.)  on the wasteful and expensive sugar program.

Tuesday Agriculture Links is a post from Cato @ Liberty - Cato Institute Blog

My colleagues Tad DeHaven and Jerry Taylor and Peter Van Doren (among others) have given us enough details about the Solyndra affair to know that it stinks to high heaven.  But now we smell that the rot is spreading, as over 1,000 former employees of the failed solar panel firm seek to obtain Trade Adjustment Assistance. So, in addition to the over $500 million worth of federal loans thrown down that hole, taxpayers will now be on the hook for retraining expenses, extra unemployment benefits and health insurance subsidies for workers in a firm that probably should not have existed — indeed, would not have existed — absent federal cash.

As this IBD editorial makes clear, if the White House and Congressional Democrats succeed in their goal to expand the Trade Adjustment Assistance program beyond its current funding and scope (a goal for which they are willing to risk passage of trade agreements they mostly claim to support), the cost to the taxpayer will go even higher. 

Let’s give the last word to my friend and trade blogger Scott Lincicome:

So to recap: massive government subsidies created 1,100 “green jobs” that never would’ve existed but for those massive government subsidies.  And when those fake jobs disappeared because the subsidized employer-company inevitably couldn’t compete in the market, the dislocated workers blamed China (instead of what’s easily one of the worst business plans ever drafted) in order to receive… wait for it… more government subsidies.

Behold, the Circle of Government Life. [links in original]

The Solyndra Saga Spreads to Trade Policy is a post from Cato @ Liberty - Cato Institute Blog

After much back-and-forth on sequencing and strategy [subscription required], and many fine words from both sides about how the long-pending trade agreements with Panama, Colombia and South Korea are a bipartisan priority (President Obama’s failure to send the agreements for a vote notwithstanding), Senate Majority Leader Harry Reid (D-Nev.) finally laid all his cards cleanly on the table yesterday.

A deal reached in August seemed to imply that the House would merely have to put Trade Adjustment Assistance to a vote before passage of the trade agreements, but yesterday Senator Reid said that the Senate would not vote on the trade agreements unless and until the House PASSES (not merely “considers”, as the Republican House leadership was always careful to specify) an extenstion of Trade Adjustment Assistance. (By the way, just to clarify, the stimulus-enhanced version of TAA is the main issue here. The basic TAA program has been running without authorization since the start of the year, when OMB ruled that it could continue unauthorized, so long as it was funded.  So while the entire program “needs” reauthorization, the 2009 version is the most urgent priority for TAA advocates and their political supporters.)

So there you have it, folks, with all the niceties stripped away:  If TAA doesn’t pass, then Harry Reid will ensure the trade agreements won’t even see the Senate floor. Pay the bribe, or pay the price.

Senator Reid Comes Clean is a post from Cato @ Liberty - Cato Institute Blog

Last week I blogged about Sen. Dianne Feinstein’s (D-CA) proposal to devote $20 billion of the Export-Import Bank’s funds to promoting manufacturing exports, and why that was a bad idea.

But I realize that my recent call to “X Out the Ex-Im Bank” will be facing some very entrenched interests in Washington, and some well-funded lobby groups. The Bank has historically attracted bipartisan support, and a renewal of its charter sailed through the House Committee on Financial Services earlier this year. The Washington establishment loves this program.

My friend and long-time Ex-Im Bank supporter Gary Hufbauer of the Peterson Institute for International Economics published a critique a few weeks ago of my analysis, and calls for a doubling of Ex-Im’s authorization cap (from $100 billion to $200 billion). His piece is a fair characterization of my arguments, and at least Gary tries to counter them with actual facts and analysis (not always a given in an increasingly poisonous trade policy environment).  But it seems to me that Gary focuses his critique on my assessment of the effectiveness of the Bank. That’s fair enough, of course, but I tried in my paper to make the point that the efficiency or efficacy of the Ex-Im Bank’s activities is kind of irrelevant. The important point, which Gary did not address, is that it is simply not the proper role of the federal government to be in this business at all, even if they can operate “efficiently” (which I do not concede in any case). Where in the Constitution is the federal government authorized to be involved in the export credit business (a business, by the way, that benefits mainly large, profitable companies)?

My opposition to the Bank, in other words, is at a more fundamental level.  On an empirical level—and this is where Gary’s critique is focused—can markets work well enough in trade finance, and if not, can government intervention work better? Gary points to the Bank’s low default rate as evidence that private markets are missing good opportunities:

These figures suggest that the Ex-Im Bank plays a large role in facilitating exports to countries that encounter reluctance from private banks but nonetheless are not ‘bad risks.” Judging by its low default rate, the Ex-Im Bank’s risk assessment seems more correct than the private market.

But I would argue that its low default rate suggests the Ex-Im Bank’s backing is unnecessary. We don’t know that private credit wasn’t available to finance those exports. And even if it wasn’t, private credit not always being available on terms that the trading partners would like does not necessarily signify market failure. So a finance company missed an opportunity that may have paid out. So what? Maybe they had even better opportunities available to them that we (and bureaucratic Washington) don’t know about, or they simply wanted to hold on to their capital for future investment or to meet new reserve standards. The would-be exporter might miss out, but government intervention to direct that private capital (either through mandates, or siphoning it through the Ex-Im Bank) would come at another producer’s or bank shareholders’ expense.

Gary argues that:

Ex-Im’s capability should be strengthened so that the United States can respond when official finance offered by other countries violates the principles of fair competition…Successful multilateral negotiations…are certainly a superior option to tit-for-tat retaliation…[but]…without sufficient leverage…it is difficult to see what will bring China and India to the negotiating table.

But will China and India (and others) see higher Ex-Im funding as “leverage” to bring them to the table, or will it be seen as just the next step in the escalating arms race of subsidized export credit? I suspect, and fear, the latter.

Gary rejects my call to dismantle the Ex-Im Bank, and in fact suggests the government increase the scope of Ex-Im financing to cover 5 percent (rather than the current 2 percent) of total U.S.exports. That seems pretty arbitrary to me. Why stop at 5 percent? Heck, with the Ex-Im Bank being “self-financing” and all, why not go for 100 percent?

Lastly, Gary repudiates my “orthodox free-market reasoning” and the suggestion, attributed to me, that “… the dollar exchange rate alone determines the volume of U.S. exports or the size of the U.S. trade deficit.”  Exchange rates do not equilibrate to keep trade balances at zero, but to keep them in line with the savings and investment balance. The United States has been running persistent deficits because savings has fallen short of investment for many years.

Similarly, Gary takes issue with my analysis on the net effect of Ex-Im financing on jobs:

 …nor do we agree that free markets are sufficiently self- regulating to ensure a constant and low rate of unemployment…If [that proposition] described the American economy, the United States [unemployment would not be stuck at 9 percent-plus.

Here Gary seems to ignore the many interventions in labor markets that can keep unemployment high, no matter what the exchange rate. I’m certainly not under any illusions that the U.S. economy would be totally free market were it not for the existence of the Ex-Im Bank, and I don’t think my paper implied that, either.

Gary and I, not to mention others who study the Ex-Im Bank, will no doubt continue to debate these issues as the Ex-Im Bank’s charter expiry date comes closer.

More on the Ex-Im Bank is a post from Cato @ Liberty - Cato Institute Blog

Congressional Quarterly reported on Monday [subscription required] that Sen. Dianne Feinstein (D, Calif.) has called for $20 billion worth of increased lending to U.S. manufacturers through a new targeted program of the Export-Import Bank of the United States (“the Ex-Im Bank”).

Sen. Dianne Feinstein called Monday for a new initiative to promote lending to U.S. manufacturers in an effort to spur job creation and shrink the U.S. trade deficit.

The California Democrat proposed authorizing the U.S. Export-Import Bank to use $20 billion of unobligated authority to lend directly to domestic manufacturing companies that are competing with foreign competitors subsidized by their own governments…

Feinstein said her proposal would not be costly because of the offsetting collections priced in to the structure of the bank’s transactions.

To be eligible for the lending program, companies would be required to demonstrate the number of jobs that would be created; that they are competing directly with subsidized, foreign firms; that the project would contribute to the expansion of the domestic workforce and manufacturing capability; and that it would have a net positive impact on the U.S.trade balance.

“In today’s global economy, the federal government must more actively partner with the business community,” Feinstein wrote. “Manufacturing is a proven source of well-paying jobs for those of all educational levels and we must have a thriving manufacturing sector in order to address our chronic trade imbalance and return our economy to sustainable growth.” [emphases added]

Where to begin? First, there is no earthly reason why “we must have a thriving manufacturing sector in order to address our chronic trade imbalance.” We could bring our trade account into balance through services or agricultural exports if “addressing our chronic trade imbalance” is what keeps you awake at night. (Here’s more on the trade deficit from my colleague Dan Griswold.)

But let me turn to Senator Feinstein’s rosy view of the Ex-Im Bank. My recent trade policy analysis, “Time to X Out the Ex-Im Bank,” addressed many of the rationalizations that the bank’s supporters routinely trot out to justify the use and redirection of resources toward corporate welfare. I question why taxpayer dollars should be put at risk supporting some of America’s most profitable countries (does Boeing really need your money?) and draw attention to the inefficiencies and distortions caused by export credit programs. Senator Feinstein shows a narrow understanding about the “cost” of things when she suggests that because Ex-Im is “self-financing” (i.e., its activities are funded out of fees and collections from its previous loans) it is not costly. In theory the government could take 100% of the economy’s production and give all of it away again at “no net cost to the taxpayer” (just like the sugar program!). Could one seriously argue that such an approach would not be enormously costly in terms of economic prosperity  (not to mention, you know, personal freedom and stuff)?

I should point out here that Senator Feinstein is not alone in wishing to direct the activities of the bank toward ends that she deems worthy: the bank operates under various congressional mandates that have little if anything to do with strict financial criteria — for example, requirements that a certain percentages of the bank’s resources go to small- and medium-sized businesses, or toward exports of renewable energy products. Even the bank’s supporters will occasionally argue that the conditions Congress attaches to the bank’s activities sometimes run counter to the bank’s core mission of promoting exports and jobs (now there’s a surprise). I’ll have more on the Ex-Im Bank soon.

Why Stop at $20 Billion, Senator? is a post from Cato @ Liberty - Cato Institute Blog

Presidential Candidate Ron Paul has a decidedly mixed record on trade policy. He often votes against trade agreements because he sees them as “managed trade” and  an interference with true free trade. Well, ok, but that’ s like voting against income tax cuts because you think the IRS shouldn’t exist. I get the point, but c’mon…

In any event, he was the only participant in Thursday night’s debate between the Republican presidential candidates who spoke about trade with any sense at all. As Inside US Trade [subscription required] points out, trade policy was not a prominent theme of the debate, but that didn’t stop Mitt Romney from (again) spouting nonsense about balanced trade:

Former Massachusetts governor Mitt Romney late last week took a swipe at the trade policies of the Obama administration in a debate of the Republican presidential candidates by implying they are unbalanced in favor of other nations.

As part of a seven-point list of actions to turn around the economy, Romney said the U.S. should “have trade policies that work for us, not just for our opponents,” as the third point…

(I’ll just interject here to say that by “opponents” I believe Mr Romney is referring to our trade partners. You know, the folks who sell us stuff and buy stuff from us. But I digress…)

Trade was only raised one other time during the debate. Prompted by a moderator, Rep. Ron Paul (R-TX) defended his earlier criticism of Obama’s sanctions against Iran for its nuclear program.

Saying it was “natural” that Iran would pursue nuclear weapons—given that India, Pakistan, China, and Israel also possess them—Paul attacked the sanctions policy as steering the U.S. toward conflict.

“Countries that you put sanctions on, you are more likely to fight them,” he said. “I say a policy of peace is free trade. Stay out of their internal business.”

Paul also suggested it was time for the U.S. to engage in a trading relationship with Cuba and “stop fighting these wars that are about 30 or 40 years old,” an apparent reference to the Cold War. [emphasis added]

(My friend Scott Lincicome has more on the economic illiteracy flowing from the debate here)

Mr Paul is right on this one. He and I no doubt disagree on a few issues, and on trade I have more tolerance than he does for multilateral (and, albeit to a lesser extent, bilateral and regional) trade agreements as the only likely avenues for trade liberalization in the foreseeable future. But the link between trade and peace is an important one, and often overlooked.

Speaking of Ron Paul, the following clip shows Jon Stewart at his devastating best, calling out the mainstream media—and particularly Fox News—for ignoring and/or outright mocking Ron Paul’s candidacy. Watch to the very end, you won’t regret it. (HT: RadleyBalko)

Ron Paul Talks Sense on Trade is a post from Cato @ Liberty - Cato Institute Blog

I don’t know which part of this truly dismaying interview is more upsetting: the joy in their voices as these girls describe the “fun” they are having at the riots and their hope that they continue the next day, the class-warfare-based justification they feel for the looting and burning of shops, or their almost comic ignorance of which party holds control of the government (“Conservatives. Yeah. Whatever who it is. I dunno…”).

Listen and Weep, courtesy of the Beeb.

Disgraceful Soundbite from the London Riots is a post from Cato @ Liberty - Cato Institute Blog

I was going to write a blog post on the myriad follies of Mark Bittman’s op-ed in Sunday’s New York Times about all the ways the federal government could and should intervene in people’s dietary choices , but Jacob Sullum has already done it for me. Brilliantly.

HT: Radley Balko

Taking on the Food Police is a post from Cato @ Liberty - Cato Institute Blog

Between the lines of a front-page Wall Street Journal article about farm subsidies [$] is an instructive example of the ratchet effect:

Land prices are way up and so are bank deposits, as high corn and soybean prices mean local farmers are making the most money in their lives…An exception to the boom is the local office of the U.S. Agriculture Department, the dispensary of federal payments to farmers from an array of arcane programs with names like ‘loan deficiency’ and ‘milk income loss.’ On a recent afternoon, the parking lot in front of the squat brick building behind a Chinese restaurant was nearly empty.

The reason: Payments from America’s primary farm-subsidy program, dating from the 1930s, have stopped here. Grain prices are far too high to trigger payouts under the program’s ‘price support’ formula. The market, in other words, has done what decades of political wrangling couldn’t: slash farm subsidies.

Though the subsidy payments always ebbed and flowed with crop prices, many economists are convinced that what is happening now is different. A fundamental upward shift in crop prices is creating the real possibility that Midwestern farmers won’t ever again qualify for the primary form of farm subsidy.

There remain other types of subsidies, which continue to pay out because they aren’t linked to market prices. But high prices are undermining political support for those programs…

Well, there’s some good news. Maybe we can start downsizing the USDA, including by closing some of those local offices? Not so fast. The last two paragraphs of the article (on page A10) leave us with this cheery thought [emphasis added]:

Meanwhile, workers in the USDA’s county offices, seeing the handwriting on the wall, are campaigning for new things to do, now that there aren’t any price-support payments to dispense. One idea is to give them responsibility for federally subsidized crop insurance, currently handled by private companies.

Heck, why not? Heaven knows the federal government is flush with cash.

The Ratchet Effect, Agriculture Edition is a post from Cato @ Liberty - Cato Institute Blog

Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee,  Rep. Dave Camp (R-MI)*, chairman of the House Ways and Means Committee, and the White House have just announced that they have made a deal to extend Trade Adjustment Assistance (TAA, the program that extends extra unemployment and health care benefits to workers who lose their jobs because of globalization) until 2013, as part of a broader deal that would see passage of the three outstanding preferential trade agreements with Korea, Colombia, and Panama. The extension of TAA would be included in the legislation to implement the US-Korea Free Trade Agreement, “improved” (i.e., made less liberalizing) by the administration in December.

Interestingly and alarmingly, because implementing the FTAs (which will lower tariff revenue) and paying for the billion-dollar-plus TAA extension “requires” offsets, the draft language specifies in Sec. 601 that revenue should be raised by increasing customs user fees.  This solution was first aired publicly last week, and my friend, trade lawyer (and former Cato-ite) Scott Lincicome pointed out then that raising customs user fees is probably against WTO rules (not to mention counterproductive to the goal of liberalizing trade):

“[C]ustoms fees” are simply hidden taxes on import consumers.  A quick review of the US Customs website on “customs users fees” makes this clear.  They’re paid (mainly) by commercial transporters bringing goods (imports) into the United States, thus raising the costs of importation.  And those higher costs, of course, are eventually passed on to American consumers through higher import prices.

Thus, pursuant to the bi-partisan deal outlined above, the FTAs’ great import liberalization benefits will be immediately and tangibly undermined by new taxes on those very same imports (and others)!

…[I]t would [also] probably violate GATT Article VIII, which governs WTO Members’ imposition of “Fees and Formalities connected with Importation and Exportation” (in other words, customs fees).  The key provision of Article VIII reads:

1.(a) All fees and charges of whatever character (other than import and export duties and other than taxes within the purview of Article III) imposed by contracting parties on or in connection with importation or exportation shall be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products or a taxation of imports or exports for fiscal purposes.

WTO panels have interpreted this provision narrowly, and an old GATT panel has actually looked into the US system of customs users fees.  In these cases, the panels have ruled that Article VIII’s requirement that a customs fee be “limited in amount to the approximate cost of services rendered” is actually a “dual requirement,” because the charge in question must first involve a “service” rendered, and then the level of the charge must not exceed the approximate cost of that “service.”  They’ve also found that the term “services rendered” means “services rendered to the individual importer in question,” and that the fees cannot be imposed to raise revenue (i.e., for “fiscal purposes”).[emphasis in original]

Raising customs user fees for fiscal purposes may even go against U.S. law (subparagraph 9B of 19 U.S.C. chapter 1 ss58c).

It’s unclear how far this draft will advance at the “mock mark-up,” scheduled for Thursday afternoon in the Senate Finance Committee, as the ranking member of that committee, Sen. Orrin Hatch (R-UT), is one of the leading critics of trade adjustment assistance.  Senator Hatch has already sent out a press release opposing the inclusion of the TAA renewal in the Korea FTA implementing bill:

This highly-partisan decision to include TAA in the South Korean FTA implementing bill risks support for this critical job-creating trade pact in the name of a welfare program of questionable benefit at a time when our nation is broke. This is a clear breach of Trade Promotion Authority and threatens the ability of American exporters and job creators who stand to benefit from the largest bilateral trade agreement in more than a decade.  TAA should move through the Congress on its own merit and should stand up to rigorous Senate debate. President Obama should send up our pending trade agreements with Colombia, Panama, and Korea and allow for a clean vote.

Senate Minority Leader Mitch McConnell (R-KY) is also apparently critical of the decision to include the TAA renewal in the Korea legislation, preferring instead to consider it only in exchange for something new, i.e.,  a deal on fast track (or trade promotion) authority for further trade deals. As the American Enterprise Institute’s Phil Levy points out, “It is problematic to “buy” the [existing] FTAs with an expanded version of TAA, since those were already “purchased” as part of a May 10, 2007 deal.” [link added] The Republican House leadership is also keen to separate TAA from the FTA implementing bills, in contrast to the opinion and efforts of their colleague Representative Camp.  So the fight is far from over.

If you are interested in hearing more about the trade deals, and how TAA renewal fits in with their passage, Senator Hatch will be speaking at an event at the American Enterprise Institute on Thursday (just hours before the mock mark-up is scheduled to begin). Howard Rosen of the Peterson Institute for International Economics and yours truly will be debating the merits of TAA after Senator Hatch has spoken. More information on the event, including access to the streaming video, here.

*UPDATE: Contrary to what I suggested in my orginal post, Chairman Camp did not in fact join an announcement with the White House and Chairman Baucus about the trade deal Tuesday. He did issue a statement Tuesday evening indicating that although he finds it “regrettable that the White House has insisted on Trade Adjustment Assistance in return for passage of these job-creating agreements,” he has “been willing to work with the White House to find a bipartisan path forward on TAA in order to secure passage of the trade agreements.” So it appears he has agreed to the deal broadly, even if he was not formally part of the announcement, and is still reviewing the details. Chairman Camp’s full statement is available here.

Dirty Deal Done Not So Dirt Cheap is a post from Cato @ Liberty - Cato Institute Blog

We’re another step closer to putting a shameful chapter of America’s trade policy behind us, with the good news that the House today approved (by a margin of 223-197, roll call here) an amendment offered by Rep. Ron Kind (D-WI) and Rep. Jeff Flake (R-AZ) to prohibit the use of funds in the appropriations bill to provide payment to the Brazil Cotton Institute: the administration signed a deal last year with Brazil to send $147 million a year of taxpayers money to Brazil so they would look the other way while the United States continued to subsidize our cotton farmers illegally. Mr Kind and Mr Flake rightly argued that was an egregious use of taxpayer money. Some lawmakers agitated against stopping the payments in case it sparked a trade war, but the answer to that, of course, is to bring U.S. cotton policy into compliance with WTO rules (and rulings). More background here.

Good News on Cotton is a post from Cato @ Liberty - Cato Institute Blog

A recently posted article from Reuters contains quotes that are worth sharing, because they perfectly encapsulate what I think is the flawed logic behind trade adjustment assistance, the program that extends enhanced benefits to workers who lose their jobs because of import competition. There are many reasons to oppose this program, as I have outlined before.  And the fact the Obama administration is choosing to hold trade agreements hostage unless a stimulus-enhanced version of TAA is renewed is a strong indication that the grand bargain of trade policy — special benefits in exchance for trade liberalization — has broken down.

But one of the most important reasons to oppose TAA is that its very existence implies that “damage” is done when trade is liberalized:

“In large part, workers who lose jobs because of trade do so because of a policy decision by government. The government decided to allow imports, the government decided to allow a liberal investment policy,” [lobbyist Greg] Mastel said.

“I happen to agree with those policies, but you can’t deny they sometimes disadvantage groups of workers,” he said.

Howard Rosen, a visiting fellow at the Peterson Institute for International Economics and executive director of the TAA Coalition, argued the roughly $1 billion annual cost for the program is tiny compared to large benefits the U.S. economy gets each year from trade liberalization.

Workers displaced by foreign competition have a harder time adjusting than other laid-off workers because they tend to be older and less educated and have higher earnings, Rosen said. [emphasis added]

A few things. First, a “policy decision” is made when government decides to respond to special pleading from domestic industry and protect the market by raising taxes on imports. The innocent consumers foot the bill for this, and the fact the tax is hidden and diffuse does not make it morally acceptable. Second, trade liberalization policies may “disadvantage groups of workers” but so do many other policy decisions — the decision to allow the growth of, say, e-commerce, for example. I happen to agree with those policies, too, but I don’t see Mr. Mastel lobbying for special benefits for bricks-and-mortar retail workers (actually, I shouldn’t give him any ideas). Governments make policy decisions every day about which industries die or survive, sometimes by policy commission, and sometimes by letting certain policies expire. There is nothing special about trade policy in that sense.

Similarly, Mr. Rosen’s objection can be countered by pointing out that perhaps the “higher earnings” trade-displaced workers received were artificially inflated by granting their industry a false, consumer-funded monopoly (in fact, by definition they almost certainly are). Why do we have to compensate them when that monopoly finally expires?

I was speaking to a trade policy wonk friend last week at a lunch about TAA, and he pointed out that “plenty of innocent people are harmed by trade liberalization.” I said to him, and I will repeat here, that plenty of innocent consumers have had their pockets picked for decades so that certain groups can collect rents. So you’ll excuse me if my sympathies are, to say the least, conflicted.

The Flawed Logic of Trade Adjustment Assistance is a post from Cato @ Liberty - Cato Institute Blog

Heartening news from the Appropriations Committee yesterday: they voted to cut aid to farmers generally, and to make significant changes to an egregious cotton program. But first, some background.  You’ll recall the embarrassing deal made by the Obama administration last year to head off Brazil’s right to impede American exports in retaliation for WTO-illegal cotton support. The United States is, in other words, now sending almost $150m worth of “technical assistance” and “capacity building” funds to Brazil, just so we can continue to subsidize American cotton growers without penalty (so much for U.S. promotion of the rule of law in international commercial relations). Rep. Ron Kind (D-WI) tried to end that deal earlier this year, but to no avail. Big Ag’s friends in Congress argued, unfortunately successfully, that any changes to the cotton bribes should be dealt with in the context of the 2012 Farm Bill, and by the agriculture committees (good luck with that).

But yesterday, the Appropriations Committee approved by voice vote an amendment from Rep. Jeff Flake (R-AZ) to take the fiscal 2013 payment to Brazil from funds that would normally go to supporting U.S. cotton growers. According to an article [$] in the Congressional Quarterly, Rep. Flake argued that “American cotton growers should pay the bill since the United States was making the payment on their behalf.” Well played, sir.  Rep. Rosa DeLauro (D-CT) filed an amendment that would send the FY2012 cotton payment to the Women’s, Infants and Children nutrition program instead.

The Committee also voted to lower the income eligibility cap to $250,000 AGI.

The CQ article did contain this worrying footnote, however:

Support for the amendments may be tenuous — especially if lawmakers cannot hide behind the anonymity of a voice vote. After winning the voice vote in committee, Flake sought a roll call, prompting appropriators of both parties to suggest that he did not need the recorded vote. Flake took their advice and demurred.

 Leglislators are usually shy about publicizing their positions only when they think it could get them in political hot water, so let’s not uncork the champagne yet.

The (Beginning of the) End of the Shameful U.S. Cotton Deal? is a post from Cato @ Liberty - Cato Institute Blog

On Monday, a group of 41 Senate Democrats, led by Sen. Debbie Stabenow (MI) sent a letter to President Obama, praising his administration’s recent decision to abandon its erstwhile promotion of the three pending trade deals as “job creators” and instead warn Congress it won’t submit the pacts for a vote unless they can be assured that a stimulus-enhanced version of trade adjustment assistance will be renewed.

The letter contains much about the benefits of the program, with little mention of its costs to taxpayers and even less concern shown for the innocent consumers whose pockets have been picked for decades to maintain the jobs lost when trade is allowed to flow more freely. That’s pretty standard fare for protectionists, who rely on the hidden and dispersed nature of the costs to get support for their policies. What’s new about this situation is the ratchet effect — the base TAA program is still in place, so what they are asking for is a renewal of part of the stimulus as a pre-condition for supporting trade liberalization. Note that the stimulus changes included a removal of the requirement that job losses be linked to a trade agreement (a feature, not a bug of the program, according to the Senators).

Wait, did I say a renewal of TAA-plus would be a pre-condition for supporting trade agreements? Not necessarily. Note this telling paragraph of the letter:

While we the undersigned may have differing views on elements of the trade agenda – with some of us looking forward to supporting the pending trade agreements with South Korea, Colombia, and Panama, and others skeptical of the impact of the agreements -we are unified in our belief that the first order of business, before we should consider any FTA, is securing a long-term TAA extension.  [emphasis added]

As I’ve said repeatedly, I understand (even if I don’t support) the political calculation that TAA is necessary — and worth it– if it secures votes for trade liberalization. But reading between the lines, some of the letter signers have no intention voting for the trade agreements, even if the mega-TAA is approved.  What we have here is a reversal of the grand bargain on trade liberalization, that gave extra welfare to workers who lost their job because of freer trade in exchange for support for trade agreements that lowered trade barriers. That ‘grand bargain’ has been tenuous for years now, of course — witness the complete lack of movement on the trade agreements even after the 2009 enhancement of TAA, at least until recent months. But now, rather than using TAA to buy votes for trade liberalization, the administration and their allies appear to using pretty-much-assured votes for trade liberalization to buy TAA. As a Wall Street Journal editorial said on Friday, it’s extortion.

TAA Reversal on Grand Bargain is a post from Cato @ Liberty - Cato Institute Blog