The Brutal Impact of North Korean Statism
One hopes that the dictator of North Korea suffered greatly before he died. After all, his totalitarian and communist (pardon the redundancy) policies have cause untold death and misery.
But let’s try to learn an economics lesson. In a previous post, I compared long-term growth in Hong Kong and Argentina to show the difference between capitalism and cronyism.
But for a much more dramatic comparison, look at the difference between North Korea and South Korea.
Hmmm… I wonder if we can conclude that markets are better than statism?
And if you like these types of comparisons, here’s a post showing how Singapore has caught up with the United States. And here’s another comparing what’s happened in the past 30 years in Chile, Argentina, and Venezuela.
North Korea: Kim Jong-il’s Death and the Coming Succession Struggle
North Korea’s “Dear Leader” Kim Jong-il is dead. There is now no prospect of negotiating and implementing a new nuclear agreement with the North in the near future. The so-called Democratic People’s Republic of Korea is likely to be consumed with a power struggle which could turn violent. Washington’s best policy option is to step back and observe.
After his stroke three years ago, Kim anointed his youngest son, Kim Jong-un, as his successor. However, the latter Kim has had little time to establish himself. The previous familial power transfer to Kim Jong-il took roughly two decades. There are several potential claimants to supreme authority in the North, and the military may play kingmaker.
Some observers hope for a “Korean Spring,” but the DPRK’s largely rural population is an unlikely vehicle for change. Urban elites may want reform, but not revolution. If a North Korean Mikhail Gorbachev is lurking in the background, he will have to move slowly to survive.
During this time of political uncertainty no official is likely to have the desire or ability to make a deal yielding up North Korea’s nuclear weapons. The leadership will be focused inward and no one is likely to challenge the military, which itself may fracture politically.
Nor is China likely to play a helpful role. Beijing views the status quo as being in its interest. Above all else, China is likely to emphasize stability, though it may very well attempt to influence the succession process outside of public view. But China does not want what America wants, preferring the DPRK’s survival, just with more responsible and pliable leadership.
Washington can do little during this process. The United States should maintain its willingness to talk with the North. American officials also should engage Beijing over the future of the peninsula, exploring Chinese concerns and searching for areas of compromise. For instance, Washington should pledge that there would be no American bases or troops in a reunited Korea, which might ease Beijing’s fears about the impact of a North Korean collapse.
Most important, the Obama administration should not rush to “strengthen” the alliance with South Korea in response to uncertainty in the North. The Republic of Korea is well able to defend itself. It should take the steps necessary to deter North Korean adventurism and develop its own strategies for dealing with Pyongyang. America should be withdrawing from an expensive security commitment which no longer serves U.S. interests.
Kim Jong-il imposed unimaginable hardship on the North Korean people. However, what follows him could be even worse if an uncertain power struggle breaks down into armed conflict. Other than encourage Beijing to use its influence to bring the Kim dynasty to a merciful end, the United States can—and should—do little more than watch developments in the North.
Kim Jong-il Is Dead
The AP and others are reporting that North Korean leader Kim Jong-Il has died at the age of 70. This has long been expected, but what comes next is unclear. The best case scenario would be a smooth transition to new leadership, one that is committed to opening up North Korea’s ossified political system and reforming its decrepit economy. That is unlikely, however. If a power struggle ensues, the North Korean people will be caught in the middle. The countries with the most at stake in the event of a complete collapse of the DPRK — especially South Korea and China — should take the lead in helping the North Koreans to sort out their future.
Obama-Lee Summit: Time for New Thinking on the Korean Peninsula
Three issues are likely to dominate the talks this week between President Obama and South Korean President Lee Myung-bak. On the economic front, the two leaders will emphasize the extensive potential benefits of the bilateral free trade agreement.
On the security front, there will be considerable discussion of both North Korea’s nuclear-weapons program and the future of the U.S.-South Korean alliance. Unfortunately, leaders of the two countries are locked into increasingly obsolete and dysfunctional policies with respect to both issues. New thinking on those security matters is badly needed.
Seoul and Washington routinely contend that they will not tolerate North Korea having a nuclear arsenal. But other than the long-standing attempt to isolate Pyongyang internationally, U.S. and South Korean officials present no plausible strategy for preventing Kim Jong-il’s regime from expanding its nuclear capabilities. The much-touted six-party talks clearly have not worked. Moreover, without China’s active cooperation to deny crucial food and energy aid to North Korea (and there is no indication that Beijing is willing to take that step), North Korea cannot be truly isolated. Obama and Lee need to consider the possibility of learning to live with a nuclear North Korea, since the current U.S.-South Korean strategy for dealing with the nuclear issue is hopelessly ineffectual.
Policy regarding the bilateral security alliance is no better. Predictably, Lee and Obama will reaffirm the importance of that alliance. But from the standpoint of American interests, this commitment makes little sense. The principal effect of Washington’s security blanket for South Korea is to enable that country to shamelessly free-ride on America’s military exertions. Despite being located next to perhaps the most dangerous and unpredictable country in the world—Kim Jong-il’s North Korea—South Korea continues to spend an anemic 2.5 percent of its gross domestic product on defense. That is woefully inadequate, and the only reason Seoul can get away with such irresponsible behavior is that South Korean leaders believe they can rely on the United States to take care of their country’s security—at the expense of American taxpayers.
That arrangement was dubious even when South Korea was a weak, traumatized country facing a North Korea strongly backed by both the Soviet Union and Communist China. Today, South Korea is a wealthy country, and Moscow and Beijing regard North Korea as an embarrassment, not a crucial ally.
President Obama should inform Lee that an America whose government is hemorrhaging red ink at the rate of $1.5 trillion a year can no longer afford to subsidize the defense of free-riding allies—especially those that are perfectly capable of providing for their own defense. This summit meeting creates an opportunity for Washington to begin phasing-out the obsolete military alliance with South Korea.
Finally, a Vote on the Three Trade Agreements
Almost a thousand days into his term, President Obama has at last submitted the trade agreements with South Korea, Colombia, and Panama for an up or down vote in Congress.
All three agreements appear to have majority support in both the House and the Senate. Organized labor is putting up its usual anti-free-trade fight against all three, with AFL-CIO boss Richard Trumka coming out swinging in a Politico op-ed this week. He makes the standard union argument that Colombia is an unworthy free-trade partner because of ongoing violence against union members in that country.
In a Free Trade Bulletin earlier this year, my Cato colleague Juan Carlos Hidalgo and I examined the commercial benefits of the agreement with Colombia as well as the hollowness of the union charge. In the past decade, Colombia has made tremendous progress against violence in general, and especially violence aimed at union members. In fact, as we write in the FTB:
The statistics on the number of killings against union members vary depending on the source, with the figure from the government’s Ministry of Social Protection being lower than that of the National Union School (ENS for its acronym in Spanish), a Colombian nongovernmental organization affiliated with the labor movement. However, both sources show a steep decline in the number of killings since 2001. Moreover, when compared with the total number of homicides in the country, killings of union members clearly have dropped at a faster rate than those of the general population (see Figure 1).
Critics of the FTA fail to recognize that violent crime affects all levels of Colombian society, not only trade unions. What is more, the statistics show that union members enjoy more security than the population at large.
Looking at the homicide rate as defined by the number of murders per 100,000 inhabitants, the rate for the total population in 2010 was 33.9 per 100,000, whereas the rate for union killings was 5.3 per 100,000 unionists that same year (using the statistics of the ENS). That means that the homicide rate for the overall population is 6 times higher than that for union members.
Having just returned from a speaking trip last week to Medellín, Colombia, I can vouch that, after a difficult period of battling Marxist guerrillas and drug cartels, Colombia has once again become a normal country with a growing economy. Medellín is a bustling, business-oriented city with the usual challenges of traffic congestion. The students I spoke with at EAFIT University seemed eager for closer ties with the United States, and they do not understand why it has taken almost five years since the signing of the agreement for Congress to schedule a vote on it.
As I explained in an interview with the city’s leading newspaper (conducted in English, but translated here in Spanish), the politicians in Washington have run out of excuses for not establishing free trade between our two countries.
[Our Cato colleague Doug Bandow made the case for a trade agreement with South Korea in a study we released last year.]
Trade Agreements Promote U.S. Manufacturing Exports
Do trade agreements promote trade? The answer appears to be yes. In a new Cato Free Trade Bulletin released today, I examine the record of trade agreements the United States has signed with 14 other nations during the past decade.
The impact of those agreements on U.S. trade is a timely subject because Congress may soon consider pending free-trade agreements (FTAs) with South Korea, Colombia, and Panama. Opponents of such deals often argue that they open the U.S. economy to unfair competition from low-wage countries, displacing U.S. manufacturing. Advocates argue the agreements do open the U.S. market further to imports, but they open markets abroad even wider for U.S. exports.
Based on actual post-agreement trade flows, I found that both total imports and exports with the 14 countries grew faster than overall U.S. trade since each agreement went into effect. For politicians obsessed with manufacturing exports, the study should be especially encouraging. Here is a key finding:
Politically sensitive manufacturing trade with the 14 FTA partners has expanded more rapidly than overall U.S. manufacturing trade, especially on the export side. U.S. manufacturing exports to the recent FTA partners were 10.5 percent higher in 2010 compared to our overall export growth since each agreement was signed. That represents an additional $8 billion in manufacturing exports.
I’ll be discussing the three pending trade agreements alongside William Lane of Caterpillar Inc. at a Cato Hill Briefing on Wednesday of this week. Along with the new study on the past FTAs, I’ll be talking about our recent studies on the Columbia and Korea agreements.
TAA Reversal on Grand Bargain
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.
Wednesday Links
- Osama bin Laden’s death gives us a chance to end what might have become an era of permanent emergency and perpetual war.
- The Cold War ended–what are we doing in Korea?
- Two cheers for President Obama for ending eight (well, three) tax breaks to oil companies.
- Does Osama bin Laden’s death mean an end to U.S.-Pakistan relations?
Please join us next Tuesday, May 10 at 4:00 p.m. Eastern for a Cato Book Forum on America’s Allies and War: Kosovo, Afghanistan, and Iraq, by University of Mary Washington political scientist Jason W. Davidson. Council on Foreign Relations senior fellow and Georgetown University international relations professor Charles Kupchan will join Professor Davidson in a discussion of the book and its themes, particularly U.S. relations with NATO allies, moderated by Cato director of foreign policy studies Christopher A. Preble. Complimentary registration is required of all attendees by Monday, May 9 at noon Eastern. We hope you can join us in person, but we encourage you to watch online if you cannot attend personally.
Finally, a Breakthrough on the Colombia Trade Agreement
To no great surprise, the Obama administration announced today that it has cut a deal with the government of Colombia to address concerns about labor protections and to finally move toward enacting the long-stalled free-trade agreement between our two countries. This is welcome news for trade expansion and for strengthening our ties to a key Latin American ally.
Colombian President Juan Manuel Santos is expected to arrive later this week in Washington to cement the deal. In exchange for the agreement, Colombia has reportedly agreed to expand its efforts to protect union members from violence and to more vigorously prosecute those responsible.
As my Cato colleague Juan Carlos Hidalgo and I documented in a Cato study earlier this year, concerns about labor protections were never a valid reason for holding up this agreement. The overall murder rate in Colombia has declined dramatically in the past decade, and the murder rate against members of labor unions has declined even more rapidly. A union member in Colombia today is one-sixth as likely to be a victim of homicide as a fellow citizen who does not belong to a union. Meanwhile, the Colombia government has increased convictions for homicides against union members by eight-fold in the past three years.
As Democratic Senators John Kerry and Max Baucus pointed out in an op-ed this week that endorsed the agreement, the International Labor Organization has certified that Colombia is complying with its international labor agreements.
The obstacle of labor violence was just a political smokescreen that had been raised by labor-union leaders in the United States looking for any shred of an argument to oppose the agreement. Even the agreement announced this week is not going to win over the AFL-CIO. The Colombia government could have raised a hundred murdered union members from the dead, and organized labor in American would still chant that not enough was being done.
The breakthrough this week clears the path for Congress to approve, by what I predict will be comfortable bipartisan majorities, the pending trade agreements with Colombia, Panama, and South Korea.
Who Should Defuse the Korean Bomb?
Fear of war has become a new constant for the Korean peninsula. On Monday South Korea initiated a military exercise in the Yellow Sea and North Korea threatened to retaliate. Seoul went ahead without any response from the North, but the region retains the feel of a bomb with an unstable fuse.
In the short term Washington has no choice but to uphold its alliance obligations to the South. However, Pyongyang’s increasingly erratic behavior offers a dramatic reminder of the most important cost of the unilateral security guarantee: the threat of war.
The alliance was created at a different time in a different world—1953, after the conclusion of a war which had devastated the peninsula. Only U.S. military support preserved South Korea’s independence. Since then the South has developed economically and is well able to protect itself. The U.S. should begin turning over defense responsibilities to Seoul, with an expeditious withdrawal of all American troops. The defense treaty, with America’s promise to forever guard the South, irrespective of circumstance, should be turned into a framework for future cooperation in cases of mutual interest.
The U.S. no longer can afford to maintain Cold War alliances as if the Cold War still existed. Commitments like that to South Korea are expensive, since they drive America’s military budget. More important, as we see in Northeast Asia, alliances also increase the possibility of war for the U.S. It is time to update America’s military commitments to reflect today’s world.
Lies, Damned Lies, and Trade Statistics
If you want to understand how global integration and cross-border investment have left U.S. trade policy in need of a new purpose, check out today’s Wall Street Journal article about the Apple iPhone’s complex production-supply chain. (And then see this analysis for more depth and detail.) The story is both testament to the benefits of globalization and the latest indictment of a decrepit international trade flow accounting system that nourishes misleading trade skeptics and misinforms policy.
Following in the footsteps of a groundbreaking and widely-cited 2007 UC-Irvine study, which disaggregated the components of a Chinese-assembled Apple iPod and assigned its constituent value to the companies and countries responsible for their production, two researchers at the Asian Development Bank Institute applied a similar analysis to the Apple iPhone. Like the UC-Irvine iPod study before it, the ADBI analysis found that just a tiny fraction of the cost of producing the iPhone is Chinese value-added. The only Chinese input is labor, which is used to assemble the components manufactured in other countries. The value of that labor accounts for $6.50 or 3.6 percent of the total cost of $178.96 to produce an iPhone (about the same percentage as the iPod). The other 96.4 percent of that total is the cost of components produced (and the labor and overhead employed to produce those components) in Japan, Germany, South Korea, the United States, and several other countries. This breakdown is very similar to that found for the iPod in 2007, and the punch lines are identical.
While firms in Japan and Germany account for the most expensive parts (and quite obviously benefit from the advent of the iPhone), most of the value of the iPhone (like the iPod) accrues to Apple, which reaps the lion’s share of the approximately 100 percent markup. When iPhones sell for $399 in the United States, the difference between that retail price and the $178.96 cost of production goes to retailers, distributors, marketers, other firms in the supply chain, and to Apple, which distributes some earnings to its shareholders and retains some for research and development, supporting engineering and design jobs higher up the value chain so that the virtuous circle can continue.
Rather than appreciate how this complementary process harnesses the benefits of our globalized division of labor, some begrudge iPod and iPhone sales in the United States for adding to the bilateral trade deficit. Technically, for every $399 iPhone sold in the United States, the U.S. bilateral trade deficit with China increases by $178.96. Even though only $6.50 of that iPhone is Chinese value, under our antiquated, pre-globalization, method of tallying a nation’s imports and exports, the entire $178.96 is chalked up as an import from China because that was the product’s final point of assembly. According to the authors of the ADBI study, iPhones added $1.9 billion to the politically volatile U.S. trade deficit with China in 2009. Alas, this is the basis of the claim—popular among the most shameless trade critics—that America has a “high-tech” trade deficit with China.
Should we lament a trade deficit in iPhones or any other products assembled abroad, particularly when those products comprise U.S. value-added and support high-paying U.S. jobs? I think not. As I wrote last year:
U.S. factories and workers are more likely to be collaborating with Chinese factories and workers in production of the same goods than they are to be competing directly. The proliferation of vertical integration (whereby the production process is carved up and each function performed where it is most efficient to perform that function) and transnational supply chains has joined higher value-added U.S. manufacturing, design, and R&D activities with lower-value manufacturing and assembly operations in China. The old factory floor has broken through its walls and now spans oceans and borders. Though the focus is typically on American workers who are displaced by competition from China, legions of American workers and their factories, offices, and laboratories would be idled without access to complementary Chinese workers in Chinese factories. Without access to lower-cost labor in places like Shenzhen, countless ideas hatched in U.S. laboratories—which became viable commercial products that support hundreds of thousands of jobs in engineering, design, marketing, logistics, retailing, finance, accounting, and manufacturing—might never have made it beyond conception because the costs of production would have been deemed prohibitive for mass consumption. Just imagine if all of the components in the Apple iPod had to be manufactured and assembled in the United States. Instead of $150 per unit, the cost of production might be multiple times that amount.
Consider how many fewer iPods Apple would have sold; how many fewer jobs iPod production, distribution, and sales would have supported supported; how much lower Apple’s profits (and those of the entities in its supply chains) would have been; how much lower Apple’s research and development expenditures would have been; how much smaller the markets for music and video downloads, car accessories, jogging accessories, and docking stations would be; how many fewer jobs those industries would support; and the lower profits those industries would generate. Now multiply that process by the hundreds of other similarly ubiquitous devices and gadgets: computers, Blu-Ray devices, and every other product that is designed in the United States and assembled in China from components made in the United States and elsewhere.
The Atlantic’s James Fallows characterizes the complementarity of U.S. and Chinese production sharing as following the shape of a “Smiley Curve” plotted on a chart where the production process from start to finish is measured along the horizontal axis and the value of each stage of production is measured on the vertical axis. U.S. value-added comes at the early stages—in branding, product conception, engineering, and design. Chinese value-added operations occupy the middle stages—some engineering, some manufacturing and assembly, primarily. And more U.S. value-added occurs at the end stages in logistics, retailing, and after-market servicing. Under this typical production arrangement, collaboration, not competition, is what links U.S. and Chinese workers.
The proliferation of cross border investment and global production-supply chains is a major reason the world averted a global trade war of 1930s proportions during and in the wake of the recession, as described in this paper; it explains why Chinese currency appreciation between 2005 and 2008 did not reduce the U.S. trade deficit with China during that period, and why Yuan appreciation, alone, going forward will have no discernible impact on the deficit in this paper; and, it explains why the world should rejoice in China’s becoming the world’s largest exporter in 2009, in this oped.
Global integration requires new thinking about trade statistics, which should be reported on a constituent value-added basis, if at all. It also requires that trade policy get with the times and consist of goals that are not mired in the old “Us” versus “Them” way of thinking. Relying on old-fashioned trade statistics for 21st century policy decisions is a recipe for disaster.
Are Tea Partiers Anti-trade?
Where will the new Tea-Party-backed members of Congress come down on trade issues, such as the newly revised trade agreement with South Korea or the next farm bill?
Those elected to the House are the biggest question marks because very few of them have had to think much about trade, never mind actually cast a vote on it. In an op-ed in the Philadelphia Inquirer this week, I try to discern what direction the new members will take the generally pro-trade Republican Party, and which direction they should take it in light of the movement’s free-market, limited-government principles.
For my full take, see “Are Tea Partiers Anti-trade?”
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