All Politics Is Local

In Poli 150 -- Intro to International Politics -- we are transitioning from studying the politics of the global security apparatus to studying the politics of the global economy. So I was pleased to see a current case with some local flavor described on the front page of the NYT's web site:

There are still a few textile mills in the Carolina piedmont, making futuristic fabrics that cover soldiers’ helmets and the roofs of commercial buildings. 

There is also a new threat on the horizon. A proposed free trade agreement with South Korea, which the House and Senate are scheduled to consider this week, would open the American market to a manufacturing powerhouse that has its own high-technology textile industry. ... 

“We are very much in favor of global trade, but we’re just not about having agreements that are unfair to the U.S. textile industry,” said Allen E. Gant Jr., chief executive of Glen Raven, a family-owned company that employs 1,500 people in the United States. “The U.S. needs every single job that we can get.” ... 

Economists generally argue that free trade agreements benefit all participating countries by creating a larger market for goods and services. But that benefit derives in part from the movement of some activities to the lower-cost countries. In other words, even if the deal is good for the United States as a whole, it is likely to create clear losers.

The North Carolina textile industry was hit pretty hard by NAFTA, and the new FTAs will likely batter the sector further. I like the article -- written by the excellent Binyamin Appelbaum -- because it neatly lays out the politics of the deal: the country as a whole will benefit, but smaller groups will suffer. Those groups have a strong incentive to lobby the government for protection. Sometimes they will be successful, sometimes they won't. The Obama administration renegotiated parts of the pact it inherited from the Bush administration under pressure from autoworkers' unions and other powerful groups. Textile workers evidently don't have the same sway.

The article also goes a long way towards describing preference formation and aggregation. Allen Gant reveals more than he realizes in that short statement. What he's saying is that he supports market exchange except when his firm is the one facing new competition. And he's saying that in this case trade would hurt both capital and labor in the textile industry. This statement illustrates materialist conceptions of trade politics, and supports the view that attitudes over trade fall along sectoral, rather than factoral, lines. It's a nice little article, and I'll be giving it to my students.

Trade Developments

Some of this is already old news, but there were some developments on trade over the past week.

-- The US looks set to ratify FTAs with Columbia, South Korea, and Panama. I've been pondering a longer post about the value of FTAs, which I'll try to get to in the future. For now it's just worth noting that these deals are pretty small beer.

-- Russia's going to try to get into the WTO. Again. This is potentially important for Europe (and Russia); not so much for the US.

-- Obama's going after China on violating WTO rules by not reporting subsidies -- 200 of them, apparently -- some of which are probably WTO-illegal. I think this is important. China's trade policies are incredibly distorting, and the global economy needs a rebalancing. Adjustment is occurring, but perhaps not quickly enough. Going through the WTO is much better than risking a trade war by unilaterally imposing tariffs in response to currency manipulation.

-- So, of course, Congress is also risking a trade war by considering unilateral tariffs in response to Chinese currency manipulation.

And some new research:

Why Do Some Countries Get Better WTO Accession Terms Than Others? 

Krzysztof J. Pelc

International Organization 65 (4)

The process by which countries accede to the World Trade Organization (WTO) has become the subject of considerable debate. This article takes a closer look at what determines the concessions the institution requires of an entrant. In other words, who gets a good deal, and who does not? I argue that given the institutional design of accession proceedings and the resulting suspension of reciprocity, accession terms are driven by the domestic export interests of existing members. As a result, relatively greater liberalization will be imposed on those entrants that have more valuable market access to offer upon accession, something that appears to be in opposition to expectations during multilateral trade rounds, where market access functions as a bargaining chit. The empirical evidence supports these assertions. Looking at eighteen recent entrants at the six-digit product level, I find that controlling for a host of country-specific variables, as well as the applied protection rates on a given product prior to accession, the more a country has to offer, the more it is required to give. Moreover, I show how more democratic countries, in spite of their greater overall depth of integration, exhibit greater resistance to adjustment in key industries than do nondemocracies. Finally, I demonstrate that wealth exhibits a curvilinear effect. On the one hand, institutionalized norms lead members to exercise observable restraint vis-à-vis the poorest countries. On the other hand, the richest countries have the greatest bargaining expertise, and thus obtain better terms. The outcome, as I show using a semi-parametric analysis, is that middle-income countries end up with the most stringent terms, and have to make the greatest relative adjustments to their trade regimes.

Re-examining NAFTA

Did the free trade agreement live up to expectations? Not for Mexico:

In one key way, Nafta did deliver as expected: Exports and foreign direct investment tripled from the early 1990s as Mexico became a leading supplier of cars, electronics and a broad variety of industrial parts to the United States. Productivity in Mexican manufacturing rose 80 percent.

But annual economic growth averaged only 1.6 percent per capita between 1992 and 2007 — low even by Mexican standards until the 1980s. ...

The oversupply of labor, along with government policies that succeeded in keeping wages low, has led to a slight increase in the gap between average wages in the United States and Mexico — precisely the opposite of what Nafta was expected to do.

Two things. First, it's not clear what the counterfactual here is. Would Mexico's growth rate have been higher or lower without NAFTA? How about wages? Just because the country's economic performance has not been as good as hoped does not mean that things would be better without NAFTA. Since NAFTA poverty in Mexico has decreased, and there has been some growth. Second, NAFTA isn't the only thing that's happened in Mexico in the past 16 years. There was the Tequila crisis in 1994 and significant political upheaval, and new competition in manufacturing from China and other countries. Moreover, Mexico has not made investments in education and skills development that would help them move into high-value-added industries, nor has the expected political reform -- especially purging of corruption -- ever materialized. Is NAFTA to blame for any of that? Perhaps. But I can't see how.

Nevertheless, despite the non-existence of a "giant sucking sound", NAFTA cannot be considered much more than a qualified success. If that. Which is the conclusion that Brad DeLong came to a few years back:

ASEAN: More Like NAFTA or EU?

The Association of Southeast Asian Nations (ASEAN) met last week in Thailand to continue work on Asian economic integration. They continued lowering tariffs and expanding investment into each other's countries. Meanwhile, China and Japan jockeyed for position as the leading power in Asia.

There are several proposals for a future East Asian free-trade zone — the Japanese version is called the East Asian Community — but all are vague, and leaders say they are a long way from reality.

The proposals are often compared to a European Union-style single market, but analysts say a pan-Asian economic bloc would be unlikely to have open borders, free movement of labor and common security policies.

China did not publicly offer its vision of an East Asian community, but a statement issued after a meeting of what is known as Asean plus three — the leaders of Asean, China, Japan and South Korea — said those 13 countries would form the “main vehicle toward the long-term goal of building an East Asian Community.” That would seem to exclude a role for the United States.

Japan still wants the U.S. to be involved. (Unlike Emmanuel ASEAN isn't my area of expertise, but I have a feeling that China wins this battle for regional influence. That doesn't mean that the U.S./Japan go away completely -- we're too big to ignore -- but it does mean a greater role for Beijing in maintenance of the Asian economy. In my view, this isn't necessarily a bad thing for the U.S.)

I'm not surprised that ASEAN will stay away from labor and security arrangements. These policies have been controversial in Europe, which is much richer, less competitive, and more ideologically similar than SE Asia. Most of these countries still have tons of unemployment, so it would be politically impossible to have open labor markets. And could you imagine Japan and China agreeing on a security arrangement? China and S. Korea? Burma and Singapore? Me either.

So it's unlikely that we'll see E.U.-style integration in Asia any time soon. But that doesn't mean that NAFTA-style trade and investment arrangements wouldn't be beneficial.

Did CAFTA Cause the Honduran Coup?

That's the allegation of a post at Eyes on Trade:

The situation in Honduras has a number of important implications: Fair traders have long argued that NAFTA-style deals promote instability and now Honduras, a signatory to CAFTA, has suffered Central America’s first coup since the Cold War. CAFTA was approved in Honduras by local elites, the same interests who are threatened by Zelaya’s progressive policies. The instability in Honduras is an illustration of how NAFTA-style trade agreements can undermine democratic governance in member nations.

What's the evidence for this claim? Honduran "elites" supported CAFTA and opposed Zelaya's populism, so obviously the two must be linked.

Except... not so much. Zelaya was deposed because he wanted to alter the Constitution to allow himself to stay in office. Honduras' Congress, Supreme Court, and even Zelaya's own party (Partido Liberal) opposed this move, and it was ruled illegal. Zelaya was undeterred and scheduled the referendum anyway. So the Supreme Court ordered the Honduran military to remove Zelaya from office (and from the country). There is no indication that this had anything to do with CAFTA.

Ironically, one of Zelaya's biggest supporters since the coup has been the United States, a CAFTA signatory. Oh, and Zelaya himself was a "vocal proponent" of CAFTA, much to the chagrin of Latin American leftists. And the U.S. and Dominican Republic are considering using CAFTA-legal sanctions to force Zelaya back into office.

Zelaya's ousting had nothing to do with CAFTA, and CAFTA might actually help him get back to power. This kinda undercuts the argument that "NAFTA-style trade agreements can undermine democratic governance" doesn't it?

Congress Votes on the Peru FTA

The Times has a pretty cool interactive map depicting House votes on the US-Peru Free Trade Agreement. The map depicts every district, shows party, vote for and against, and allows you to look at votes in "high" and "low" income districts.

Pretty cool, though, I wish they would have meaningful district demographic characteristics--education level, for example, or economic structure.

Oh, the agreement passed. Who would have thought?

Car Imports, Gas Prices, and Counter-productive Protectionism

Americans are again buying lots of imported cars. The graphic on the right suggests that Americans care more about the fuel efficiency of the cars they buy when gas prices rise (gee, who would have thought?).

Two additional facts of interest. One, the first figure (which excludes imports from Canada and Mexico) reflects increased imports from Japan and South Korea. Two, the cars that Japan and Korea produce and export from home are smaller and more fuel efficient (think Prius) than the cars and trucks they produce inside the U.S.

Conclusion? Americans have responded to higher gas prices by shifting away from large gas guzzling cars and trucks that happen to be produced in the U.S. toward small and more fuel efficient cars that happen to be produced overseas. The solution for American auto producers would thus seem to be, shift production to the small fuel efficient cars that Americans now want to buy.

Yet, in a non sequitur of massive proportions, "Senator Carl Levin, a Michigan Democrat, is...vexed," because this trade imbalance reflects a lack of market openness in Asia. "Citing Census Bureau data and his staff’s calculations, Mr. Levin argues that “immense barriers” erected by Japan and South Korea keep down vehicle exports from the United States to those countries. Car, truck and parts imports from Japan, for example, reached $60.2 billion last year, he said, while similar exports to Japan from the United States were a tiny $2.3 billion. He put the Korean imbalance at $12.4 billion versus $751 million."

Does anybody who does not represent Michigan in Congress really think that the desire of Japanese consumers to drive Hummers, Suburbans, and Excursions through Tokyo is being foiled by trade barriers? That is, do we really expect Asian consumers to behave differently than Americans when it comes to buying cars? And with Americans less eager to buy large gas guzzling American cars, wouldn't one think that Asians would also be less eager?

The broader concern is the following: Levin and other congressional trade skeptics focus on this imbalance in auto trade as reason to oppose the FTA with So. Korea. Yet, free trade with Korea (and Japan, for that matter) would, by reducing the cost of more fuel efficient cars, promote environmental objectives that Democrats favor. Restricting this trade would thus increase emissions relative to what is possible. Hence, more trade is also good for the environment (though to be sure one would have to compare the extra emissions generated by shipping from Asia to the emissions saved via the shift to more fuel efficient cars).

Restricting trade in autos, therefore, is not only bad trade policy, it is also bad environmental policy given the Dems' stated environmental goals.

US-South Korea Free Trade Agreement

I am kind of surprised by the lack of chatter about the US-South Korea Free Trade Agreement. Without question this is the most important FTA the U.S. has signed since NAFTA. As the International Herald Tribune summarizes, "The United States has reached its biggest free trade agreement since NAFTA, clinching a last-minute deal with close security ally South Korea that it hopes will bolster bilateral ties and provide added spark to global trade talks.

"The free trade agreement...is a historic accomplishment," Deputy U.S. Trade Representative Karan Bhatia told reporters on Monday after eight days of talks. "It is an agreement for the 21st century."

Prominent American legislators are already criticizing the agreement; Max Baucus, D-Mont. is unhappy about Korea's treatment of American beef (do you think Montana is a large beef producer?) while Sander Levin, D-Mich. is unhappy about Korea's apparent reluctance to buy American cars (do they still produce cars in Michigan?). The big auto companies are none too pleased either.

"Levin, who chairs the House Ways and Means Trade Subcommittee, said the deal faces certain defeat in Congress. "The U.S. did not get what was needed - an agreement that assures that the U.S. automotive industry will no longer face the barriers to their products, that trade will be truly a two-way street," Levin said, noting that South Korean companies export 700,000 vehicles to the U.S. annually while the U.S. sells less than 5,000 in South Korea. Earlier this month, Levin had proposed that USTR offer South Korea a tariff-rate quota that would grant a zero tariff for a number of autos that would grow only as U.S. auto exports to South Korea increased in the future. "

Seeing how a lot of Americans prefer Hyundais to Hummers these days, I am not sure why our ability to buy small, reliable, and fuel-efficient cars should be dependent upon Koreans' willingness to buy gas guzzling SUVs. But that's just me--I drive an import.

The agreement seems to go a long way toward accommodating American auto producers' concerns. According to the USTR, the agreement "will eliminate discrimination in engine displacement-based taxes, long a significant impediment to market access in Korea. The agreement contains strong commitments to addresses the specific standards-related concerns raised by U.S. auto manufacturers and to create a working group to review auto-related regulations being developed as an early warning mechanism to prevent new problems from arising and to promote good regulatory practice in Korea. The agreement also contains a special enhanced dispute settlement mechanism for auto-related measures, with strong remedies to deter actions on autos that are inconsistent with the agreement."

The vote should give an early indication of the prospects for getting a WTO agreement through Congress. Initial signs are not encouraging...