As President Obama flies from Brazil to Chile today and then on to El Salvador later this week, trade and jobs have been a major theme of his trip. So far the tour has been a public relations success, but it also highlights the contradictions in the president’s trade policy toward our Latin American neighbors.

One contradiction is that the president says nice things about trade agreements in the abstract, but he has so far refused to show leadership when it really matters. In an op-ed in USAToday on Friday, as he was about to depart for Brazil, the president wrote:

Thanks in part to our trade agreements across the region, we now export three times as much to Latin America as we do to China, and our exports to the region — which are growing faster than our exports to the rest of the world — will soon support more than 2 million jobs here in the United States.

Yet nowhere in the 900-word article did the president even mention “Colombia” and “Panama,” two countries that have already signed trade agreements with the United States but are waiting for the president to ask Congress to actually vote on them. The Colombia agreement alone would stimulate an extra $1 billion a year in U.S. exports. (See our recent Cato study.)

Yet because his labor-union allies oppose both agreements, President Obama could not bring himself to even mention them in a major article on Latin American trade, exports, and jobs. More than passing strange.

A second contradiction is that the president talks a lot about reducing barriers to trade in other countries, but hardly ever acknowledges remaining trade barriers in the United States. No other country would like to hear that acknowledgment more than Brazil, whose producers face high U.S. barriers to some of their most important exports.

In a speech yesterday in Rio de Janeiro, the president told his hosts:

In a global economy, the United States and Brazil should expand trade, expand investment, so that we create new jobs and new opportunities in both of our nations. And that’s why we’re working to break down barriers to doing business. That’s why we’re building closer relationships between our workers and our entrepreneurs.

Our commercial relations with Brazil could be even closer if the United States did not maintain high trade barriers against such major Brazilian exports as sugar, ethanol, steel, and orange juice. Brazil would also export more cotton and soybeans if the U.S. government did not so heavily subsidize our own production.

If President Obama has been working to break down those U.S.-imposed barriers to U.S.-Brazilian trade, I somehow missed the news.

President Obama’s Cognitive Dissonance on Trade with Latin America is a post from Cato @ Liberty - Cato Institute Blog

President Obama will release his budget blueprint for fiscal 2012 next week. If an op-ed penned by his budget director, Jacob Lew, in Sunday’s New York Times is any indication, the administration intends to continue fiddling while the government’s finances burn.

The title of the piece, “The Easy Cuts Are Behind Us,” is a real head-scratcher. Lew’s “easy cuts” are an apparent reference to the $20 billion in savings the president proposed in his previous budgets. Considering that the president proposed total spending of $3.8 trillion last year, $20 billion in gross cuts was an insignificant gesture to say the least. In reality, the Bush administration passed the spending baton to the Obama administration two years ago and it promptly sprinted off like Usain Bolt.

Lew says:

In a little over a week, President Obama will send Congress his budget for the 2012 fiscal year. The budget is not just a collection of numbers, but an expression of our values and aspirations.

Perhaps the current budgetary state of affairs is an expression of the administration’s values and aspirations. But while an unhealthy number of Americans have become accustomed to living at the expense of their neighbor via the government, which the budget does reflect, there is growing popular recognition that saddling future generations with back-breaking debt is morally bankrupt.

Lew says:

As the president said in his State of the Union address, now that the country is back from the brink of a potential economic collapse, our goal is to win the future by out-educating, out-building and out-innovating our rivals so that we can return to robust economic and job growth. But to make room for the investments we need to foster growth, we have to cut what we cannot afford. We have to reduce the burden placed on our economy by years of deficits and debt.

This zero-sum take on the global economy is ignorant. Economic growth in “rival” countries creates opportunities for economic growth in the United States and vice-versa. My trade colleagues can better cover this ground, but the idea that our government needs to export more debt in order to out-anything is preposterous. The U.S. already out-spends its “rivals” on education and what do we have to show for it?

If the administration is concerned with our economic competitiveness, it should be looking to restrain the federal government’s heavy-hand in the economy. The federal government alone now sucks up a quarter of the country’s economic output. More government “investments” for building fancy trains might provide Joe Biden with lots of ribbon-cutting photo-ops, but such gross misallocations of taxpayer resources are not a recipe for “robust economic and job growth.”

Lew says:

We cannot win the future, expand the economy and spur job creation if we are saddled with increasingly growing deficits. That is why the president’s budget is a comprehensive and responsible plan that will put us on a path toward fiscal sustainability in the next few years — a down payment toward tackling our challenges in the long term.

According to Lew, the administration plans to do this by freezing non-security discretionary spending for five years. But several paragraphs later he acknowledges that “Discretionary spending not related to security represents just a little more than one-tenth of the entire federal budget, so cutting solely in this area will never be enough to address our long-term fiscal challenges.”

Does Lew give even a hint as to how the administration plans to “address our long-term fiscal challenges”? Nope.

In the intervening paragraphs Lew does give us a taste of the “deeper cuts” that the president will propose next week. One cut would be $300 million, or 7.5 percent, in the Community Development Block Grant program, which funds critical federal concerns like funding facade renovations for a wine bar in Connecticut and expanding a brewery in Michigan.

The Community Service Block Grant program (change one word and, voilà, a new program) would be cut in half to save a whopping $350 million. Lew says this cut was not easy for the president because “These are the kinds of programs that President Obama worked with when he was a community organizer.”

The Great Lakes Restoration Initiative would get chopped by 25 percent, or $125 million, which Lew calls “another difficult cut.” If that’s a “difficult” cut, one can only wonder what Lew would call the cuts needed to actually “address our long-term fiscal challenges.”

After punting on the long-term fiscal challenges and pretending that the relatively insignificant cuts the administration will propose represent “tough choices,” Lew begins his wrap up by warning against cutting spending:

We must take care to avoid indiscriminate cuts in areas critical to long-term growth like education, innovation and infrastructure — cuts that would stifle the economy just as it begins to recover.

The country cannot afford business as usual. And it certainly can’t afford business as has been conducted by this administration. Unfortunately, while the exact details of the president’s latest budget proposal remain to be seen, Lew’s op-ed indicates that this tiger isn’t about to change his stripes.

OMB Director Lew on the New Budget is a post from Cato @ Liberty - Cato Institute Blog

In his speech at the U.S. Chamber of Commerce yesterday, President Obama tried to make nice with U.S. business. While the speech contained some positive elements about promoting trade and a lower corporate tax rate, the president also pounded the tired theme that we are locked in a battle with other countries over a fixed number of jobs.

Notice how the president framed the otherwise good news of expanding domestic production:

Right now, businesses across this country are proving that America can compete. Caterpillar is opening a new plant to build excavators in Texas that used to be shipped from Japan. … A company called Geomagic, a software maker, decided to close down its overseas centers in China and Europe and move their R&D here to the United States. These companies are bringing jobs back to our shores. And that’s good for everybody.

The strong implication is that U.S. companies add jobs at home by closing production facilities abroad and thus “bringing jobs back to our shores.” This kind of win-lose, zero-sum accounting is out of step with the reality of our global economy. More often, when U.S. multinationals ramp up production and hiring abroad, they do the same at their factories and offices in the United States, and vice versa.

Take Caterpillar, the global equipment company based in Peoria, Ill. According to its recent quarterly earnings report, the company added 19,000 jobs to its global workforce in 2010, 7,500 of those in the United States. This is common practice among U.S. multinationals.

As I noted in my 2009 Cato book Mad about Trade, studies show that the jobs added by U.S. multinationals at home and abroad are strongly and positively correlated. More production and sales abroad typically require the hiring of more managers, accountants, engineers and production workers at the parent company’s facilities in the United States.

Despite the president’s rhetoric, the creation of jobs in today’s global economy is a win-win, positive sum proposition.

President Delivers Same Zero-Sum Message on Jobs to U.S. Chamber is a post from Cato @ Liberty - Cato Institute Blog

Steven Pearlstein’s ready for the nuclear option.  With the conviction of a man who knows he won’t be held accountable for the consequences of his prescriptions, Pearlstein says the time has come for action against China.  Hopefully, those whose fingers are actually near the button will recognize Pearlstein’s suggestion for what it is: an outburst of frustration over what he considers China’s insubordination.

In his Washington Post business column yesterday, Pearlstein criticizes U.S. policymakers for blindly adhering to the view that China will inevitably transition to democratic capitalism, while they’ve excused market-distorting protectionism, mercantilism, and state dominance over the economy in China.  Pearlstein writes:

Up to now, a succession of administrations has argued against directly challenging China over its mercantilist policies, figuring it would be more effective in the long run to let the economic relationship grow deeper and give the Chinese the time and respect their culture demands to make the inevitable transition to democratic capitalism.

What we have discovered, however, is that the Chinese don’t view the transition as inevitable and that, in any case, they really aren’t much interested in relationships. If anything, they’ve proven to be relentlessly transactional. And their view of business and economics remains so thoroughly mercantilist that they not only can’t imagine any other way, but assume that everyone else thinks the way they do. To try to convince them otherwise is folly.

Pearlstein’s suggestion that the Chinese “aren’t much interested in relationships” strikes me as frustration over the fact that China is no longer a U.S. supplicant.  Perhaps the truth is that China isn’t much interested in a one-way relationship, where it is expected to meet all U.S. demands, while seeing its own wishes ignored.  Calling them “relentlessly transactional” is accusing them of naivety for missing the bigger picture, which, for Pearlstein, is that the U.S. is still top dog and China ignores that at its peril. 

Pearlstein is not the first columnist to criticize the Chinese government for putting its interests ahead of America’s (or, more accurately, putting what it believes to be its best interests ahead of what U.S. policymakers believe to be in their own interests).  In a recent Cato policy paper titled Manufacturing Discord: Growing Tensions Threaten the U.S.-China Economic Relationship, I was addressing opinion leaders who have staked out positions similar to Pearlstein’s when I wrote:

Lately, the media have spilled lots of ink over the proposition that China has thrived at U.S. expense for too long, and that China’s growing assertiveness signals an urgent need for aggressive U.S. policy changes….

One explanation for the change in tenor is that media pundits, policymakers, and other analysts are viewing the relationship through a prism that has been altered by the fact of a rapidly rising China.  That China emerged from the financial meltdown and subsequent global recession wealthier and on a virtually unchanged high-growth trajectory, while the United States faces slow growth, high unemployment, and a large debt (much of it owned by the Chinese), is breeding anxiety and changing perceptions of the relationship in both countries….

Of course, the U. S. is the larger economy and the chief designer of the still-prevailing global economic architecture.  But the implication that that distinction immunizes the U. S. from costly repercussions if U.S. sanctions were imposed against China is foolish.  But that’s exactly where Pearlstein’s going when he writes:

Getting this economic relationship back into balance is the single biggest challenge to the global economy, not just because of its direct effects on China and the United States, but the indirect effects it has on the rest of the world. The alternative is a return to living beyond our means, a further erosion of our industrial and technological base and a continued loss of ownership of business and financial assets.

By balancing the economic relationship, presumably Pearlstein is speaking about the need to reduce the bilateral trade deficit, which spurs a net outflow of dollars to China, some of which the Chinese lend back to Americans, who in turn can then buy more imports from China, and the cycle continues.  But to tip the scales in favor of the blunt force action he recommends later, Pearlstein characterizes Chinese investment in the United States as living beyond our means, losing ownership of “our” assets, and eroding our industrial and technological base.  That is a paternalistic and inaccurate characterization of the dynamics of capital inflows from China.

First, let’s remember that the Chinese aren’t holding a gun to the heads of the chairs of our congressional appropriations committees demanding that politicians borrow and spend more on senseless programs.  It’s absolutely priceless when spendthrift members of Congress, oblivious to the irony, blame the Chinese for having caused the U.S. financial crisis for providing cheap credit to fuel asset bubbles when it was their own profligacy that brought the Chinese to U.S. debt markets in the first place.  Stop deficit spending and the need to borrow from China (or anywhere else) goes away. 

Likewise, it is a sad commentary on the state of individual responsibility in the U.S. when a prominent business writer thinks the only way to keep consumers from living beyond their means is to deprive their would-be-creditors of capital.  It sounds a bit like the same tactics deployed in the U.S. War on Drugs.  Blame the suppliers.  The fact that U.S. savings rates have been rising for two years suggests that responsible Americans are interested in rebuilding their assets without need of such measures.

There are other destinations for capital inflows from China, which (despite Pearlstein’s disparaging allusions) should be entirely unobjectionable.  Chinese investment in U.S. corporate debt, equities markets, real estate markets, and direct investment in U.S. manufacturing and services industries does not erode our industrial and technological base.  It enhances it.  It does not constitute a loss of ownership of business and financial assets, but rather a mutual exchange of assets at an agreed price.  When Chinese investors compete as buyers in U.S. markets, the value of the assets in those markets rises, which benefits the owners of those assets when there is an exchange.  Chinese purchases of anything American, with the exception of debt, do not constitute claims on the future.  Accordingly, the economic relationship can achieve the much vaunted need for rebalancing without need of attempting to forcefully reduce the trade deficit by restraining imports.

Pearlstein continues:

So if the urgent need is to rebalance the global economy by rebalancing the U.S.-China economic relationship, we are probably going to have to begin this process on our own. And that means establishing some sort of tariff regime that will increase the cost of imports not just from China, but other countries that keep their currencies artificially low, restrict the flow of capital or maintain significant barriers to imports of goods and services. The proceeds of those tariffs should be used to encourage exports in some fashion…

This relationship, however, is one that must be actively managed by the two governments. It should be obvious by now that their government is rather effective at managing their end of things. It should be equally obvious that we cannot continue to rely on free markets to manage our end.

So Pearlstein comes full circle.  He wants the U. S. to impose tariffs on Chinese imports, subsidize U.S. exports, and institute top-down industrial policy.  In other words, he wants the U.S. to be more like China. 

Of course, I would argue, we already have something that encourages exports.  They’re called imports.  Over half of the value of U.S. imports are intermediate goods—capital equipment, components, raw materials—that are used by American-based producers to make goods for their customers in the U. S. and abroad.  Furthermore, foreigners need to be able to sell to Americans if they are going to have the dollars to buy products from Americans.  And finally, if the U.S. implements trade restrictions on China to compel currency revaluation or anything else, retaliation against U.S. exports is a given.

In short, imports are a determinant of exports.  If you impede imports, you impede exports.  So Pearlstein’s idea that we can somehow subsidize exports by taxing and reducing imports is not particularly well-considered.  And though it may be tempting to look at China’s economic success as an endorsement or vindication of industrial policy, it is difficult to discern how much of China’s growth can be attributed to central planning, and how much has happened despite it.  But in the U.S., where one of our unique and core strengths has been the relative dynamism that has produced more inventions, more patents, more actionable industrial ideas, more freeedom, and more wealth than at any other time in any other nation-state in the world, it would be imprudent bordering on reckless to suppress those synergies in the name of industrial policy.

In the end, I rather doubt that Pearlstein is truly on board with the course of action he suggests.  In response to a question presented to him on the Washington Post live web chat yesterday about how the Chinese would react if his proposal were implemented, Pearlstein wrote:

They’d make a huge stink. They’d cancel some contracts. They’d slap on some tariffs of their own. They’d launch an appeal with the World Trade Organization. It would not be costless to us — getting into fights never is. But after a year, once they saw we were serious, they would find a way to begin accomodating [sic] us in significant ways, and if we respond with a positive tit for tat, things could finally improve. They’ve been testing us for years and what they discovered was that we were easy to push around. So guess what — they pushed us around.

I’m willing to chalk up Pearlstein’s diatribe to pent-up frustration.  But let me end with this admonition from that May Cato paper:

 [I]ndignation among media and politicians over China’s aversion to saying “How high?” when the U.S. government says “Jump!” is not a persuasive argument for a more provocative posture.  China is a sovereign nation.  Its government, like the U.S. government, pursues policies that it believes to be in its own interests (although those policies—with respect to both governments—are not always in the best interests of their people).  Realists understand that objectives of the U.S. and Chinese governments will not always be the same, thus U.S. and Chinese policies will not always be congruous.  Accentuating and cultivating the areas of agreement, while resolving or minimizing the differences, is the essence of diplomacy and statecraft.  These tactics must continue to underpin a U.S. policy of engagement with China.

Pearlstein Wants Tough Trade Measures Against China…and the U.S. is a post from Cato @ Liberty - Cato Institute Blog

This has not been a good week for the national Democratic Party. Along with losing the Massachusetts Senate seat, the party took another step toward making hostility to trade liberalization a plank of party orthodoxy.

As my Cato colleague Sallie James flagged earlier today, the Democratic Congressional Campaign Committee issued a press release yesterday criticizing a Republican candidate in upstate New York for contributing to the Cato Institute. And, of course, everyone knows that Cato is “a right wing extremist group that has long been a vocal advocate for extremist, unfair trade policies that would allow companies to ship American jobs overseas.”

Among our sins, in the eyes of the DCCC, is that Cato research has supported tariff-reducing trade agreements, such as the North American Free Trade Agreement (NAFTA). Our work has also advocated unilateral trade liberalization—getting rid of self-damaging U.S. trade barriers regardless of what other countries do—which violates the conventional Washington wisdom that we can’t lower our own barriers without demanding “reciprocity” and “a level playing field” from other nations

There is nothing extreme about our work on trade. It fits comfortably within mainstream economics expounded not only by Adam Smith and Milton Freidman but by such liberals as Paul Samuelson and Larry Summers.

In fact, for decades, the Democratic Party embraced lower barriers to trade:

• In the 1930s and ’40s, President Franklin Roosevelt and his Nobel-Peace-Prize-winning Secretary of State Cordell Hull lead the United States away from the disastrous protectionism of President Hoover and a Republican Congress.
• Democratic Presidents Kennedy, Johnson, and Carter all supported successful agreements in the General Agreement on Tariffs and Trade to reduce trade barriers at home and abroad.
• Bill Clinton, the only Democrat to be re-elected president since FDR, persuaded a Democratic Congress to enact NAFTA in 1993 and the Uruguay Round Agreements Act in 1994, which created the World Trade Organization. Clinton also championed permanent normal trade relations with China in 2000, which ushered that nation into the WTO.
• In the previous Congress, scores of House Democrats co-sponsored “The Affordable Footwear Act,” which would have unilaterally lowered tariffs on imported shoes popular with low-income Americans. Liberal Democrat Earl Blumenauer of Oregon visited the Cato Institute in July 2008 to speak in favor of the bill. (Will he be the next target of a DCCC press release for cavorting with “extremists”?) In the current Congress, a similar bill in the Senate is currently co-sponsored by such prominent Democrats as Dick Durban (Ill.), Chuck Schumer (N.Y.), and Mary Landrieu (La.).

To learn more about why Democrats (and Republicans) should support free trade, I highly recommend two books: Mad about Trade: Why Main Street America Should Embrace Globalization, by yours truly; and Freedom From Want: Liberalism and the Global Economy, by Edward Gresser, a trade expert with the Democratic Leadership Council.

Was Bill Clinton Also an “Extremist” on Trade? is a post from Cato @ Liberty - Cato Institute Blog

Three items in the news this week remind us why we should be glad we live in a more global economy. While American consumers remain cautious, American companies and workers are finding increasing opportunities in markets abroad:

• Sales of General Motors vehicles continue to slump in the United States, but they are surging in China. The company announced this week that sales in China of GM-branded cars and trucks were up 67 percent in 2009, to 1.8 million vehicles. If current trends continue, within a year or two GM will be selling more vehicles in China than in the United States.
• James Cameron’s 3-D movie spectacular “Avatar” just surpassed $1 billion in global box-office sales. Two-thirds of its revenue has come from abroad, with France, Germany, and Russia the leading markets. This has been a growing pattern for U.S. films. Hollywood—which loves to skewer business and capitalism—is thriving in a global market.
• Since 2003, the middle class in Brazil has grown by 32 million. As the Washington Post reports, “Once hobbled with high inflation and perennially susceptible to worldwide crises, Brazil now has a vibrant consumer market …” Brazil’s overall economy is bigger than either India or Russia, and its per-capita GDP is nearly double that of China.

As I note in my Cato book Mad about Trade, American companies and workers will find their best opportunities in the future by selling to the emerging global middle class in Brazil, China, India and elsewhere. Without access to more robust markets abroad, the Great Recession of 2008-09 would have been more like the Great Depression.

Global Markets Keep U.S. Economy Afloat is a post from Cato @ Liberty - Cato Institute Blog

That is one of the conclusions in my new paper, “Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete.”

For hundreds of years, trade policy has been premised on the assumptions that exports are good, imports are bad, and the interests of domestic producers are tantamount to the “national interest.” Though that mercantilist worldview has never been accurate, its persistence as a pillar of trade policy into the 21st century is especially confounding given the emergence and proliferation of disaggregated production processes, transnational supply chains, and cross-border investment. Those trends have blurred any meaningful distinctions between “our” producers and “their” producers and speak to a long chain of interdependent economic interests between product conception and consumption.

Still, trade policy places the interests of domestic producers above all else even though the definition of a domestic producer is elusive and even though actions on behalf of producers often harm interests along the product continuum, which include engineers, designers, financiers, processors, assemblers, marketers, shippers, retailers, consumers, and others.

In 2008, foreign nameplate automobile producers, employing American workers, paying American taxes, and supporting American businesses, communities, and charities, accounted for almost half of all U.S. light vehicle production. The largest “U.S.” steel producer, Arcelor-Mittal, is a majority-Indian-owned company with headquarters in Luxembourg and Hong Kong. The largest “German” producer, Thyssen-Krupp, is completing a $3.7 billion green-field investment in steel production facilities in Alabama, which will create an estimated 2,700 jobs in that state.

So, who are “we”? And who are “they”?

Are these foreign-named or –headquartered companies not “our” producers because some of the profits they earn are repatriated or invested in operations outside the United States? If so, then shouldn’t we consider U.S. Steel Corporation, which earned 25 percent of its revenue last year on steel produced in Slovakia and Serbia, and General Motors, which has had success producing and selling cars in China, to be “their” producers? Why should U.S. Steel, General Motors, and the unions that organize workers at those companies dictate the parameters of U.S. trade policy, while Toyota, Thyssen and their non-union workers have no input? Why should trade policy reflect a bias in favor of producers—or worse, particular producers—at all? That bias hurts other interests—both foreign-based and domestic—in the supply chain.

Global commerce isn’t a competition between “us” and “them.” It is instead a competition between entities that defy national identification because of cross-border investment or because the final good or service comprises value added from many different countries. This reality demands openness in both directions, which flies in the face of conventional trade policy wisdom, which seeks to maximize access for domestic producers abroad while minimizing access for foreign producers at home.

It is only for simplicity’s sake that a container full of iPods shipped from China and unloaded in Seattle registers as imports from China. But the fact is that only a few dollars of the $150 cost to produce an iPod is Chinese value-added. The rest is mostly value attributable to Japanese, Korean, Singaporean, Taiwanese, and American components and labor. Then iPods retail for about $300 and most of the mark-up accrues to Apple, which uses the profits to support innovation and higher paying jobs in the United States.

From a trade policy perspective, each iPod imported from China adds $150 to our bilateral deficit in “high tech” goods. It is regarded as a problem to solve. The temptation is to restrict.

But from a commercial perspective, each imported iPod supports U.S. economic activity up the value chain. Without access to lower-cost labor abroad—if rudimentary component manufacturing and assembly operations were required to take place in the United States—ideas hatched in American labs would be far less likely to make it beyond the white board. Much higher costs would make it far more difficult to create these ubiquitous devices that have, in turn, spawned new ideas and industries.

Essentially, the factory floor has broken through its walls and today spans borders and oceans, making Chinese and American labor complementary in this and many other industries. Yet, despite all of this integration, despite the reliance of producers in the United States and abroad on imported raw materials, components, and capital equipment, trade policy still pretends that access to the domestic market is a favor to grant or a privilege to revoke. Trade policy is officially ignorant of commercial reality.

Openness to trade in both directions is an imperative in the 21st century. Policies that do not try to channel incentives for the benefit of specific groups but rather provide the greatest opportunities for citizens to participate most effectively in our increasingly integrated global economy are the ones that will maximize economic growth and national welfare. People in other countries should be thought of more as customers, suppliers, and potential collaborators instead of competitive threats.

In the 21st century, instead of serving the exclusive interests of domestic producers, trade policy should be about welcoming investment and attracting and cultivating the human capital necessary to make the United States the location of choice for the world’s highest value economic activities.

Is Trade Policy Obsolete? is a post from Cato @ Liberty - Cato Institute Blog

World governments should be careful not to play politics with the Mexican swine flu outbreak. The health consequences should of course be rigorously addressed—but without adding economic consequences, which is what several countries appear poised to do.

Public health scares have a history of seeping into trade policy without anything resembling sufficient consideration of the evidence. Governments in Russia and East Asia are already banning pork exports from Mexico, even though there is zero evidence that they pose a health hazard. It hearkens back to unfounded bans of U.S. beef in recent years by the European Union and South Korea.

If the U.S. government jumps on board, U.S. exports could be targeted for retaliatory trade actions. One quarter of U.S. pork production is exported, as well as billions of dollars of our soybeans used as feed by foreign hog farmers.

Exploiting this crisis could turn what is so far a manageable health problem into an unnecessary trade and diplomatic conflict. Obviously the global economy does not need the extra strain.

The Global Economy Is Not Immune to Swine Flu is a post from Cato @ Liberty - Cato Institute Blog

There was a revealing colloquy during President Obama’s press conference last night.

I’ve edited it for brevity, leaving in the relevant sections. See if you can pick out the most interesting tidbit. The President called on ABC News’ Jake Tapper:

OBAMA: Jake?

QUESTION: Thank you, Mr. President.

Right now on Capitol Hill, Senate Democrats are writing a budget. And according to press accounts and their own statements, they’re not including the middle-class tax cut that you include in the stimulus, they’re talking about phasing that out, they’re not including the cap-and-trade that you have in your budget, and they’re not including other measures.

I know when you outlined your four priorities over the weekend, a number of these things were not in there. Will you sign a budget if it does not contain a middle-class tax cut, does not contain cap-and- trade?

OBAMA: Well, I’ve emphasized repeatedly what I expect out of this budget. I expect that there’s serious efforts at health care reform and that we are driving down costs for families and businesses, and ultimately for the federal and state governments that are going to be broke if we continue on the current path.

[President highlights other policy priorities]

Now, we never expected, when we printed out our budget, that they would simply Xerox it and vote on it. We assume that it has to go through the legislative process. I have not yet seen the final product coming out of the Senate or the House, and we’re in constant conversations with them.

[more on policy priorities]

Our point in the budget is: Let’s get started now. We can’t wait. And my expectation is that the Energy Committees or other relevant committees in both the House and the Senate are going to be moving forward a strong energy package. It will be authorized. We’ll get it done. And I will sign it.

OK?

QUESTION: (OFF-MIKE) willing to sign a budget that doesn’t have those two provisions?

OBAMA: No, I — what I said was that I haven’t seen yet what provisions are in there. The bottom line is, is that I want to see health care, energy, education, and serious efforts to reduce our budget deficit.

And there are going to be a lot of details that are still being worked out, but I have confidence that we’re going to be able to get a budget done that’s reflective of what needs to happen in order to make sure that America grows.

Hey, Jake? The President doesn’t sign the budget resolution. Here’s one of many budget process primers you can look over.

The Fourth Estate is pretty weak on budget process, which contributes to the poor results that come out of Congress. Since the passage of omnibus legislation completing spending for this fiscal year (2009), WashingtonWatch.com has begun to highlight how the administration and Congress are falling behind schedule for fiscal year 2010. I’ve not seen anything in the mainstream media about the impending collapse of the budget process for the coming fiscal year.

Update: Jake Tapper contacted me about this post to explain that he was using the term “budget” as a shorthand for the reconciliation legislation that Congress often produces in the budget process. It’s clear to me now that Jake Tapper knows the budget process — and that he handles criticism well.

This Is Who’s Minding the Store? is a post from Cato @ Liberty - Cato Institute Blog

Monday, March 23, 2009

BOOK FORUM- The Tie Goes to Freedom: Justice Anthony M. Kennedy on Liberty
12:00 PM (Luncheon to Follow)
The Cato Institute

Author Helen Knowles examines how Kennedy’s background as a law student and classroom teacher has influenced his judicial philosophy. The book begins by examining Kennedy’s judicial thought in the context of libertarian thought. Knowles does not call the justice a libertarian. Instead, in a sympathetic but not uncritical analysis, she uses libertarian philosophy, focusing on privacy, race, and speech cases, to draw out Kennedy’s views about limited government and individual liberty. Please join us for a discussion of Justice Kennedy’s “modest libertarianism,” with comments by one of the nation’s foremost constitutional scholars, Professor Randy Barnett.

Watch live online here.

CAPITOL HILL BRIEFING- Tax Havens Should Be Celebrated, Not Persecuted
12:00 PM (Lunch Included)
B-340 Rayburn House Office Building

Join Cato scholar Dan Mitchell and former member of the Cayman Islands Monetary Authority Richard Rahn to review the myths and realities about the role of tax havens in the global economy.

POLICY FORUM- Georgia’s Liberal Institutions In the Wake of War and the Global Economic Crisis
12:00 PM (Luncheon to Follow)
The Cato Institute

Featuring David Bakradze, Speaker of the Georgian Parliament; Kakha Bendukidze, Former Minister of the Economy and Reform Coordination, Georgia; and Andrei Illarionov, Senior Fellow, Center for Global Liberty and Prosperity, Cato Institute.

Register to attend or watch live online here.

Events This Week is a post from Cato @ Liberty - Cato Institute Blog

The World Bank issued a press release on Tuesday announcing the results of a study published March 2, which concludes that 17 of the 20 so-called G-20 countries have invoked at least some protectionist measures since pledging last November to avoid protectionism for at least one year.

Of course the Washington Post—which now specializes in printing run-of-the-mill stories about trade that rarely come close to justifying the sensational headlines, provocative subheads, or gripping leads — jumped all over the report as evidence that: “Trade Barriers Could Threaten Global Economy: World Bank Finds Protectionist Trend.”

Well, we all know that trade barriers do threaten the global economy — in times of economic expansion and contraction. But most of the measures cited in the report are not particularly spectacular or unusual from a trade perspective. For better or worse, most WTO member countries do have some latitude to raise trade barriers — sometimes unconditionally. But also, in any given year, governments institute policies that happen to have adverse affects on trade (even if the measure wasn’t intended to be protectionist).

Sometimes aggrieved interests in affected countries prevail upon their governments to protest or otherwise seek resolution. And more often than not, under those circumstances, resolution is achieved. But sometimes, a protectionist measure doesn’t even provoke any kind of protest. So, quantifying protectionist measures is one thing, but qualifying them is quite another, more important exercise, if one is interested in making judgments about protectionist trends.

The by-line of the WP story belongs to Anthony Faiola, who last week wrote story titled: “U.S. to Toughen Its Stance on Trade: New Policy Reflects Growing Dissatisfaction With Global Markets.” The lead paragraph of the story read:

The Obama administration is aggressively reworking U.S. trade policy to more strongly emphasize domestic and social issues, from the displacement of American workers to climate change.

But nothing in the story supports the assertion that anyone is “aggressively reworking U.S. trade policy.” Nothing supports the subhead that there is a growing dissatisfaction with global markets. Trade policy may be in for some changes simply because there’s a new sheriff in town, who is beholden (to what extent we shall see) to interests that oppose competition, but not because of dissatisfaction with global markets.

Certainly there is no evidence of dissatisfaction with global markets in the story, which was occasioned by Ron Kirk’s confirmation hearing as U.S. Trade Representative. Kirk testified—before a Senate that already has before it legislation to make enforcement, rather than negotiation, the priority of trade policy for the next couple years—that he intends to focus on enforcement, rather than negotiation. Well, duh! What else is a nominee whose fate depends on the blessing of the people who want more enforcement going to say? For the record, it’s been known for quite some time that the administration would focus on systematizing enforcement efforts, so that’s not really news.

What is newsworthy, however, are the parts of Ron Kirk’s testimony that went unrevealed in Faiola’s reporting. For example, Kirk said that “at an appropriate time and with proper congressional input and concerns addressed,” the administration would ask Congress to grant the president fast-track trade negotiating authority, which is a tool required only by presidents interested in negotiating and expanding trade.

Kirk also said that “We are mindful that the benefits of trade are diffuse, while its pain is often concentrated. It is within that context that we seek to restore and build new bipartisan support for a progressive trade agenda for America.”  Where, then, is the reporting that the Obama administration does not reject trade? Where is the headline that Obama seeks support for a progressive trade agenda? (Cato is publishing a paper next month by Scott Lincicome and me that explains how President Obama can help restore the pro-trade consensus, which includes a large section on the role the media has played in perpetuating destructive myths about trade and globalization).

Where is the reporting that Democrats in Congress are not all opposed to trade liberalization? Senate Finance Committee chairman Max Baucus told Kirk during the hearing: “I also want to find a way to begin consideration of the three pending trade agreements. We should start with Panama. That’s the agreement that’s most ready for action. And it’s the agreement that will win the greatest level of support.” Reporting on these matters would be newsworthy and constructive since so few in the media seem to be willing to publish stories that contravene conventional wisdom about trade.

The fact of the matter is that there isn’t any discernible trend toward protectionism in the United States or in the world right now. World leaders issue warnings about the consequences of protectionism, but there are not trends. There are incidences, but no trends. The ballyhooed World Bank paper cites 78 trade measures “proposed and/or implemented,” 66 of which involved trade restrictions, 47 of which eventually took effect. The long footnote associated with the presentation of these numbers (footnote 1) includes the following sentence: “It is important to note that it is difficult to distinguish the trade policy measures that are taken in response to the current crisis from measures that might have been taken anyway.”

Most of the 47 measures cited in the report happened in November and December of 2008, and Faiola already ranted about them in the WP on December 22, 2008:

Moving to shield battered domestic manufacturers from foreign imports, Indonesia is slapping restrictions on at least 500 products this month, demanding special licenses and new fees on imports. Russia is hiking tariffs on imported cars, poultry and pork. France is launching a state fund to protect French companies from foreign takeovers. Officials in Argentina and Brazil are seeking to raise tariffs on products from imported wine and textiles to leather goods and peaches, according to the World Trade Organization.

There may be nothing necessarily incorrect about the facts reported. But the tone and implications are possibly misleading. It is hard to accept the otherwise marginally significant facts without also accepting the provocative metaphors and sense of impending doom. Those actions have less antagonistic explanations and more benign interpretations.

For example, the actions of Indonesia, Argentina, and Brazil are consistent with their rights under the WTO agreements and will have a negligible collective impact on world trade. Russia is not even a member of the WTO and frequently behaves outside of international norms, so its actions have very limited representative value. And France has intervened to block foreign takeovers of French companies on other occasions this decade, so its actions are not particularly noteworthy.

At least the World Bank study is careful enough to report some of the positive trade developments and reasons for optimism that I discuss in more detail in this paper that Cato published last week. The World Bank notes 10 instances of trade liberalization around the world, which presumably includes Mexico’s admirable decision to reduce tariff rates on 70 percent of the products listed in its tariff schedule; Brazil’s decision to scrap tariffs on certain raw materials, components, capital goods; China’s decision to forego inclusion of Buy China provisions in its own massive spending bill; and the signing of new free trade agreements between Australia, New Zealand, and the ASEAN countries.

The WB study, like my paper, points out that the sturdy legal and institutional infrastructure of the GATT/WTO system combined with the fact of growing interdependence between countries that are now linked by transnational supply chains will likely diminish prospects for more consequential protectionist indulgences.

Of course Anthony Faiola is not the only person at The Washington Post guilty of hyping protectionist rhetoric and war metaphors in trade stories (and the WP is not the only media outlet engaging in hype). But one of the more egregious disconnects between headline/subhead/lead and the body of the story is found in an article on U.S.-China trade relations by Faiola’s colleague, Ariana Eunjung Cha (which is dissected and analyzed here).

World policymakers and policy watchers do need to be vigilant about ensuring that the world doesn’t descend into a protectionist abyss. They will have plenty of help from their domestic constituencies who rely on open trade in both directions. But some vigilance must be reserved for a media that, if left unchallenged, could provoke a trade war on its own. The more reporting there is about protectionist measures—even if it is just more reporting about the same protectionist measures (as today’s WP article is)—the more justified or compelled policymakers will eventually feel in turning to that poison. If a Congressman’s aide can point to articles that cite rising protectionism, even if the measures cited don’t justify the label of protectionism, it becomes less taboo to propose or support protectionist policies. That kind of fear mongering needs to be identified as such.

Yes, some countries are likely to dabble in some degree of protectionism—either with border measures or the more camouflaged regulatory variety. But the costs of that protectionism will quickly become apparent in a world where capital and talent flow to the jurisdictions with the fewest physical and administrative frictions.

Maybe that story will be written as the economy is on its way back up.

Too Much Hysteria about Trade is a post from Cato @ Liberty - Cato Institute Blog

The G-20 Summit in London on April 2 will feature politicians from around the world jockeying to promote bad ideas. Thankfully, there is a silver lining to this dark cloud since the United States and Europe do not agree on which bad idea deserves the most prominence. As the Wall Street Journal explains, the United States wants more nations to squander money of Keynesian-style schemes (see here to understand why bigger government is not stimulus). The Europeans, meanwhile, want to persecute tax havens and give the Keystone Cops at the IMF more money:

The U.S. will press world leaders to boost emergency government spending to lift the global economy, risking a rift with European nations more concerned with revamping financial regulation. In President Barack Obama’s first foray into economic diplomacy, Washington will urge the shift at a summit next month in London, U.S. officials say, as markets look for a unified plan of action from the world’s most economically powerful nations. Washington’s focus is at odds with France, Germany and other European nations that want the Group of 20 summit on April 2 to focus on rewriting rules governing financial markets. … U.S. officials, who could receive support from China and other countries with big stimulus programs, contend additional government spending is needed to reduce the depth and length of the downturn. Britain also may have an easier time seeing eye-to-eye with the U.S. than other European countries because both London and Washington are concerned that tighter financial regulation could harm their financial centers. Administration officials also say the G-20 isn’t ready to put new regulations in place, so focusing in that area would be counterproductive. … Even if the U.S. gets its way, the G-20 won’t ignore financial regulation. The G-20 has approved the concept of regulating the world’s largest financial institutions through international “colleges” of regulators.

The International Herald Tribune has more details on the misguided European proposals. At no point, though, is there any explanation of why the global economy would benefit from a bigger and more powerful IMF. The IMF certainly did not correctly predict the current financial turmoil. Nor has the IMF either correctly identified the government policy mistakes that caused the crisis or proposed policies that would help resuscitate the global economy. So why reward the bureaucrats with more money and power? The attack against tax havens is even more dubious. Desperate politicians like Gordon Brown are seeking scapegoats to distract voters, but it is unclear why tax havens should be blamed for asset bubbles caused by weak monetary policy and housing subsidies in “onshore” nations:

European finance ministers intend to push for a doubling of resources for the International Monetary fund to $500 billion, and to back the use of sweeping new sanctions against tax havens, according to a draft document. Confronted by a deepening global economic crisis, the top financial officials in the 27 European Union member countries are expected to agree in principle Tuesday to provide additional temporary funding for the IMF if necessary, and to support significant tightening of financial regulation. At a meeting in Brussels, the EU finance ministers are due to endorse a draft document, already approved by senior officials from national capitals, that will align the positions of European governments before the meeting of the heads of the Group of 20 developing and emerging economies in London next month. “It is essential,” the document says, “that the IMF has the appropriate financial means to assist countries particularly affected by the current crisis. EU member states support a doubling of IMF resources and are ready to contribute to a temporary increase if needed.” … The draft document…calls for the definition of a set of criteria by which to judge those that do not comply with international standards. “A tool box of sanctions” would be used to deal with such tax havens, the draft adds. These would include “the capacity to prohibit sales of financial products generated in these jurisdictions and the capacity to restrict companies’ operations into and from these jurisdictions.”

Gridlock generally is a good thing in Washington. If Republicans and Democrats are fighting, it slows the pace of legislation – which almost always protects liberty and prosperity. On the international level, where politicians scheme to set up cartels for the benefit of governments, gridlock is even more desirable.

The Joys of Global Gridlock is a post from Cato @ Liberty - Cato Institute Blog