Sunday, June 30, 2013

Distributional Politics of the Ice Cream Parable

. Sunday, June 30, 2013

Tyler Cowen is thinking out loud:

This parable assumes that [monetary] injection effects are important, namely where the new money goes first. This Austrian-like view is unfashionable, has weak theoretical foundations, and violates the Modigliani-Miller theorem, but at the moment markets seem to believe it. Should we believe it too?
Yes we should. Or at least we shouldn't let Modigliani-Miller stop us. In his 2011 Presidential Address to the American Finance Association, John Cochrane said the following:
Discount rates vary a lot more than we thought. Most of the puzzles and anomalies that we face amount to discount-rate variation we do not understand. Our theoretical controversies are about how discount rates are formed. We need to recognize and incorporate discount-rate variation in applied procedures.
If discount rates are varying a lot -- across time, space, and actors -- then a representative agent model such as Modigliani-Miller is not going to perform very well. And, as it turns out, it doesn't. I have paper, while I'll be sending out for review soon, which drills down at banks' activities (at the firm level) across countries and time. It turns out that there is all kinds of variation being driven by a whole host of variables at multiple levels of analysis. Which, you know, we all know intuitively... but it's not what our models expect. So let's ditch Modigliani-Miller. Capital structure is clearly not irrelevant in the real world.

Going back to Cowen, here's something with which we might be concerned. Central banks act by trading debt instruments for others at price. In normal times the swap is either short-term sovereign debt for cash or present dollars for future dollars plus interest. In our current environment, it's practically anything for cash. Who benefits from this situation? Those who can create debt that can be sold to the central bank for cash. In normal times this has primarily been governments, but governments are doing everything they can to stop creating debt. So who does that leave? Banks.

Because central banks want to be active they have been broadening the range of debt instruments that they will conduct business in. So here's a worrisome dynamic: governments are trying to reduce debt, while banks are being encouraged by central banks to create debt instruments which they can trade for cash. Karl Whelan may be correct that traditional solvency concerns don't apply to central banks, but that doesn't mean that there aren't knock-on effects from this.

The upshot is that expansionist central bank policy requires somebody to lever up. If governments won't do it and households can't do it then banks and large corporations pretty much have to. The more activist the central bank wants to be and the less indebted the government wants to be, the more banks have to create debt instruments however they can. Possibly that could mean loans to individuals and smaller firms, which could be stimulative, but households and firms are deleveraging. Meanwhile, bank regulators are telling banks to stop lending to risky groups. So where's the debt going to come from?

Banks and big credit-worthy firms are going to do very well. They're getting debt finance for free, so their equity can be deployed elsewhere or held in reserve. This is why stock markets are up so much. This is why Apple and other corporations are taking out loans when they don't even need the cash and have no real plans to do much of anything with it in the short run. Everyone else is not going to do very well, because the traditional mechanisms for distributing from central banks to the citizenry -- fiscal policy plus bank loans to individuals and small firms -- is being cut out of the story. In one sense that might be okay if the future costs of debt servicing are higher than the expected return folks would get from borrowing. But the distributional implications of this are clear: the economy is going to become more unequal and less efficient. Credit is not being allocated to facilitate productive investment -- there might not be many -- but to create debt instruments to sell to central banks for cash. The policy mix we have right now practically requires inequality to go up, which is a sign that the economy is seriously imbalanced.

One alternative is to let risk back into the system but I don't hear anybody calling for that right now.

At some point central banks will be pressured to tighten. It looks very likely that this will be under conditions of steady but slowish growth. This is where the Big Unknown comes in. When that day comes will banks (and corporations) start using their cash productively or keep hoarding it? Given the experience of the past decade or so, will there be many people who even want to borrow in order to build a McMansion or buy a luxury car or MBA? If they did, will regulators let banks lend to them? Will the originate-securities-and-distribute-to-surplus-countries market come back as strong as before?

Thursday, June 27, 2013

Plus ça change, plus c'est la même chose

. Thursday, June 27, 2013

Dan Drezner is kicking Britain -- and the American foreign policy commentariat -- while they're down. The essay is mostly good, although regular readers of this blog probably won't find much of it new, but I must disagree with part of his conclusion:

There is no denying that the relative power of the United States is less now than it was a decade ago.
I think that is deniable. A decade ago the U.S. had alienated many of its allies, the United Nations, and all of the BRICs by invading Iraq with a "coalition of the willing" led by a president which half of the country believe did not actually win the 2000 election. Some suggested that American democracy was at risk at home, while its foreign partnerships -- especially NATO -- were similarly endangered. A decade ago the U.S. was still recoiling from the 9/11 attacks and was braced for a very dangerous future. A decade ago the European Union was resurgent, Iran was less isolated (and more recalcitrant), and China was building up its "Beijing Consensus". All of the talk in IR/FP circles was about decoupling, anti-American balancing, the end of legitimacy of American economic leadership via multilateral institutions like the IMF, WTO, and World Bank, and the end of security leadership via the UN and NATO. For all of George W. Bush's posturing, the U.S. faced some very severe challenges, and handled almost all of them pretty poorly.

Some of these persist, but Drezner is correct to note that at this point all of the potential challengers to U.S. primacy have faltered, while the U.S. is picking itself back up. We're talking about "relative" power, remember, so let's just ask who is on the other side of the U.S. in this equation. The E.U.? The BRICs?

Sean Starrs has a very interesting paper out on "early view" in International Studies Quarterly making the case that American economic superiority hasn't slipped at all since the crisis. Here's the abstract:
This paper argues that a fundamental failing in the debate on the decline of American economic power is not taking globalization seriously. With the rise of transnational corporations (TNCs), transnational modular production networks, and the globalization of corporate ownership, we can no longer give the same relevance to national accounts such as balance of trade and GDP in the twenty-first century as we did in the mid-twentieth. Rather, we must summon data on the TNCs themselves to encompass their transnational operations. This will reveal, for example, that despite the declining global share of United States GDP from 40% in 1960 to below a quarter from 2008 onward, American corporations continue to dominate sector after sector. In fact, in certain advanced sectors such as aerospace and software—even in financial services—American dominance has increased since 2008. There are no serious contenders, including China. By looking at the wrong data, many have failed to see that American economic power has not declined—it has globalized.
This paper is interesting in two ways. First, it recasts the discussion away from monadic attributes -- GDP share, say -- towards global categories -- market share of American multinational corporations. Second, it suggests that the old "relative power" discussions, which tend to be cast in dyadic terms, is also inappropriate. Instead we need to think globally. If China increases its GDP share relative to the U.S. but does so by importing American technology, adding a small amount of value, then exporting a finished product, the statistics will show a big GDP boost from exports but can we really say China has gained on the U.S. in any meaningful way? As Susan Strange once wrote, becoming a blue collar worker in service to American white collar management does not make you more powerful than the Americans. The old dependency theorists understood this quite well even if they got some other things wrong. Add to this Benjamin Cohen's recent work (with Tabitha Benney) showing that the US dollar has not slipped in importance in the monetary system (recent events have demonstrated this), and my dissertation (recently defended) showing that American prominence in global banking has increased since the crisis, and the overall picture looks clear: relative to recent history, the U.S.'s power position has not changed and has in some ways improved.

At the same time, China's immaturity has made many of its neighbors nervous. Japan, Korea, and Australia have increased security and economic ties with the U.S. which had slipped a bit a decade ago. The Transpacific Partnership will likely extend these gains. China's inability to encourage others to bandwagon with it is evidence that it has not gained much, if any, leverage on the United States. China's increasing reliance on the world's baddies -- which are increasingly under threat -- as sources of raw materials and markets for trade and FDI is not an indication that it is moving it into a position at the core of the global system. The inability of China to make ASEAN+3 a meaningful institution -- or develop any other -- is another weak spot, as is its recent growth slowdown, financial instability, and the fact that it faces 250-500 domestic protests per day.

Or perhaps I could put it another way. If, in 2003, I had told you that the Iraq and Afghanistan wars would be a disaster, the U.S. would propagate the worst global financial crisis since the 1930s, the Middle East would be in utter turmoil, the biggest development in American politics is the rise of right- and left-wing protest movements, China would grow at 10%/year over the course of the decade and that the net result of all of this is that the U.S. has become more prominent in the global economic and security systems... you'd probably think I was insane.

But that's what's happened.

Wednesday, June 19, 2013

UNC Everywhere

. Wednesday, June 19, 2013

A friend of mine -- a student at the Kenan-Flagler Business School -- is profiled in the Financial Times.

Monday, June 17, 2013

Expecting the Unexpected

. Monday, June 17, 2013

Here's David Beckworth explaining a "foolproof" mix of monetary and fiscal policy (bold added):

In other words, if the public believes the Fed will do whatever it takes to maintain a stable growth path for NGDP, then they would have no need to panic and hoard liquid assets in the first place when an adverse economic shock hits. ...

If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed. ...

What is there not to like about it?
I have eliminated most of the substance of his post because those 'ifs' are just too big for it to really matter what comes after. The public does not, cannot, and will not understand why an NGDP target is superior to an inflation target. Hell, most economists don't buy this, a big percentage of financial market actors don't either, and plenty of central bankers are at best skeptical. Meanwhile, 30% of the public doesn't know who the Vice President is. (I couldn't easily find a statistic on the % of Americans who know who Ben Bernanke is, but it's gotta be less than 20%.)

I think academics and maybe some policymakers vastly overstate the value of the expectations channel. People are not so forward-looking as they are in models. Here's what they (sometimes) know: Do I have a job? Does it pay well? Is that job threatened? Do I have a bunch of debt? Can I service that debt? If the answers to any of these questions (and perhaps many others) is "no" then the public will "hoard cash", where "hoard cash" actually probably means using any excess income to pay down debt.

It gets even worse. The Paradox of Thrift is a paradox because what is individually rational is not collectively rational. The expectations channel doesn't make that go away even if there is a functioning expectations channel. Which there isn't, or at least not one that the Fed can so easily manage.

We can't base policies on the presumption that people are 100% informed and intelligent. If we want folks to spend money we have to just find a way to give them a bunch of money. If they have money, they'll spend it. If they don't, they won't. I personally think that monetary mechanisms are generally better for this than fiscal mechanisms, but I also think the jury is still out on that one.

More importantly, monetary policy benefits banks while fiscal policy (in the form of spending) benefits subcontractors, unions, urbanites, and public sector employees. Fiscal policy in the form of tax cuts benefits the top 10%, i.e. the ones who overwhelmingly pay the federal tax burden. So these questions are political.


Sunday, June 16, 2013

Atomic Bombs and Audiences

. Sunday, June 16, 2013

LFC points to an article by Ward Wilson suggesting that the Japanese did not surrender in WWII because of the bombs dropped on Hiroshima and Nagasaki, but because the USSR dropped its neutrality with Japan. This argument presumes that the USSR's policy change was independent of the US's decision to drop the bombs, and the US's decision to drop the bombs when it did was independent of any consideration other than motivating Japanese surrender. Given what was going on in Europe (and China) at the time this seems exceptionally unlikely. Stalin had bigger fish to fry than securing marginally better terms of surrender for the Japanese Emperor, and he had agreed at Yalta to declare war on Japan within three months. The US had already conceded half of Europe but was determined to keep the USSR out of Asia. Given the rapidly-expanding US/USSR rivalry and the US's technological advantage it was in Stalin's interest to mollify the US at least until the USSR could also develop atomic weaponry.

I.e., just move the question back a step: why did the USSR pick precisely that moment to revisit their position as a potential intermediary between the US and Japan? There are two candidates. First is the Yalta agreement. Second is the deployment of the atomic bombs. Here the timing of the US dropping the bombs becomes important. The US could have dropped the bomb at any time from July 15th forward. August 8th was the deadline for the Soviets to enter the Pacific theater per the Yalta agreement. Hiroshima was August 6th. The USSR entered on August 8th by invading Manchuria (it was still the 7th in Moscow, but the time difference meant it was the 8th in Tokyo). Nagasaki was August 9th.

There is quite a lot of evidence that Stalin did not recognize the significance of atomic weaponry until it was used, and some good reasons to think that the bombs were in fact dropped primarily for the benefit of Soviet audiences, not Japanese. Stalin believed this anyway. The bombs -- or at least the second one -- were probably dropped to keep the Soviets out of E. Asia. There is no other good explanation for why the first bomb was dropped just before the deadline for Soviet intervention on the terms agreed at Yalta, or for why the second bomb was dropped at all.

From hindsight this makes the use of atomic weapons less justifiable on strategic as well as moral grounds. The Soviets obviously took from this experience that the Americans were quite dangerous and were in fact imperial. The dropping of the bombs hardened Stalin and perhaps made the Cold War more dangerous than it needed to be. This was made clear by the Bolshoi speech in 1946. Whether or not the bombings had any deterrent effect from 1945-1949 (the period before the USSR successfully detonated a bomb) is difficult to discern, but once the Soviets had achieved nuclear parity (or close enough to it) competitive brinksmanship was probably inevitable. It may have been anyway, but the U.S. took the first step by bombing Hiroshima and Nagasaki. Any other possible paths of history were cut off at that moment.

Another example of why we should be wary of Ceteris Paribus Theories of International Relations.

Friday, June 14, 2013

A Brief Theory of the Great Stagnation

. Friday, June 14, 2013

World War II left industrialized societies with two main features: a lot of industrial capacity, and a lot of dead men. These combined to drive up wages for workers, and for cultural and pragmatic (high wages mean no need for dual income households; high fertility was encouraged to replenish the population) reasons workers were overwhelmingly men. The marginal unit of labor was thus very valuable and labor supply was restricted since the baby boom generation needed twenty or so years to grow up.

By the end of the 1960s the baby boomers were entering the workforce but industrial capacity had not grown at the same rate as the population. Thus, new entrants into labor markets -- which increasingly included women and minorities as well as young white men -- put downward pressure on wages. The marginal unit of labor was no longer very valuable. Median wages began to stagnate at the same time that over-crowding of cities was leading to social unrest. Governments did not do a good job of managing these duel pressures. The 1970s are a period of stagflation and urban decline.

The post-baby boom economy has lots of labor, so income gains are not broadly shared. Who benefits? Those who can sell the product of their labor into the biggest markets. That means the heads of major corporations, financiers, professional atheletes. The rise of information technology increases these opportunities, but only for a minority. Think of these as the prominent nodes in a network.

This isn't so much capital-versus-labor anymore. The beneficiaries aren't the landed elite or the factory owner. Instead, the beneficiaries are those in managerial positions in large corporations, those who are able to leverage technical education to create consumer products that are popular, and those who are very good (or not so good, as the case may be) at managing peoples' money. That is... it's labor. It's labor that has put itself in a central position in the economic network of late-capitalism. Michael Jordan didn't become a multimillionaire by extracting the surplus value of anyone else's labor. He did it by selling his own labor to millions of people simultaneously, and then leveraging his celebrity to move into high positions in the corporate hierarchy. Mark Zuckerberg became a billionaire by giving his product away for free. Steven Spielberg gets rich on volume, not margin, and has made more from Dreamworks than from directorial fees. And some dude at Goldman Sachs gets rich by making sure all of their money doesn't go away.

The political left and right do not understand this. This is not a dynamic that will lead to wealth trickling down, nor will increasing the strength of labor unions be able to alter it. This is a new economy, but we're treating it like it's the old economy.

Wednesday, June 12, 2013

Tree Don't Care What A Little Bird Sings

. Wednesday, June 12, 2013

I have not read much of Robert Fogel's work, not much at all, but I may need to read more of it. A Fine Theorem, one of the more under-appreciated blogs, has a summary of Fogel's Without Consent or Contract. Here's part of it:

... the paradox rests on the widely held assumption that technological efficiency is inherently good. It is this beguiling assumption that is false and, when applied to [American] slavery, insidious.”  

Roughly, it was political change alone, not economic change, which could have led to the end of slavery in America. The plantation system was, in fact, a fairly efficient system in the economic sense, and was not in danger of petering out on its own accord.
Here's the rest.

There are multiple views of the politics of technology. (Technology is, at its core, information aggregation.) One says that technology is liberating. Another says that technology is enslaving. Another says that technology is fueled by the state for purposes of control. (Oddly, skeptics of markets often make the first point of that point without understanding that the second point is the corollary.) Technology can destabilize the political equilibrium (but does that only apply if it goes in one direction? I doubt it). It's worth googling a bit for the views of Farrell, Drezner, and Lynch on this. It's worth noting that modern authoritarian regimes try to get to the technological frontier as rapidly as possible but they tend to have a tough time managing it. Francis Spufford's Red Plenty is on sale at Amazon right now, if you don't mind probably giving some of your metadata to the NSA.

Sarah Jaffe (on Twitter) asked for a political economy of the surveillance state. (Here's a short take, not very good.) I haven't got the time or background knowledge to build a real model, but if I was going to I'd start with Tilly and Scott and Weber at the foundation and ask what purpose this really serves. Knowledge is power, is it not? Power is needed for protection (in the Tillian sense), is it not? After that I'd go to Orwell like everyone already is, but not the dystopian cliches. Remember in 1984 that Winston Smith was pretty much the only one in society bothered by Big Brother. (Probably not, if you've read your Timur Kuran, but as far as Smith could tell he nearly enough was.) Everybody else just got on with it. The proles sang their songs and read their magazines. Sure, Julia was a bit inconvenienced by the whole thing, but it's not like she really had principles.

Now think about Havel. Now think about samizdat. Is information so easily controllable? Can the state not oppress on the basis of allegation, innuendo, or missing data? Can the citizenry not resist simply by living? Does the state need all information to "keep the locals in line" or just a vague threat -- the vaguer the better? Corey Robin addresses this and gives a precis of his book on the politics of fear. Stalin didn't have Bukharin's metadata... just the ability to credibly say "we know where your kids are". That hasn't changed. Yglesias is right: the biggest thing to fear from the surveillance state isn't the state, per se. But that's a micro story, and micro stories can dictate macro policies.

The U.S. public is not concerned about this. To the extent they are it's for partisan reasons, not out of principle. Note that this is not new. Note that, so far, it appears that these programs are legal at least in broad terms. Intellectuals are more concerned that the median pollee, as they should be, since they are much more likely to be targeted than a randomly-selected person. (If I was Glenn Greenwald I'd go back to snail mail and pay phones for a good long while.) But so? Democratic politics does not guarantee puppies and roses. As we debate whether or not this is constitutional we should remember that James Buchanon's insights do not only apply to economic policy. We should also remember that politicians and celebrities have been subject to heavier levels of scrutiny than this for as long as there has been human society.

Data, even metadata, can be used for ill. (Or good, as the case may be, since the 21st century version of Paul Revere is probably someone Healy wouldn't meet for a beer at Ye Olde Tavern. Possibly this isn't what Healy's driving at.) But let's not get carried away. The U.S. government is sophisticated in many ways, but this program has only $20mn in funding. Let's say they spend $5mn of that on high-powered computers (that's probably less than what the supercomputer I ran a bunch of my dissertation on cost), and the rest on twenty-somethings making $200k/year each (as Snowden apparently did). That's 75 guys trying to make sense of the 2.5 quintillion bytes of data created each day. Good luck with that. (No I don't believe only $20mn was funneled into this. Not for a moment do I believe that. But I'm not sure how much $20bn could really do absent some good old fashioned police work.)

So after you've read the Spufford (or even before) you might want to read some of the discussion at Crooked Timber on the book. See especially this wonderclass by Shalizi which has as much to say about social science theory and methods as it does about historical political systems or the contemporary political economy of the surveillance state or novels. The key question is Shalizi's first one: what is being optimized?

Then recall that Hayek's slippery slope is a logical fallacy to which the historical record is not kind. Should we be less concerned? Probably depends on how concerned you were in the first place... anonymity is a myth.

Remember too that the government oppresses and kills and makes terrible decisions when it doesn't have good intelligence. Given that, is the expected utility of (American or other) society better or worse with PRISM or without it? Apparently this program stopped one or more attacks at the London Olympics. What would the cost of those attacks have been? Was preventing them worth $20mn dollars plus some false positives? (The TSA spends $6.5 billion a year and probably gets almost nothing for it.) Could PRISM have stopped Nidal Hasan had it been better-implemented? If it could have, would it be worth it? We are quite literally behind the veil of ignorance at the moment (just a bit less in the wake of Snowden's leaks), but if we take engaged citzenry to be a desirable normative end in itself we need to put our Bayesian caps on now and start updating our priors.

What tail event has a greater probability: that this program is abused in such a way that it devastates liberal society, or that it prevents a significant attack the fallout from which would devastate the same society?

In the end the biggest repercussions of NSA spying might be felt in the US-EU trade negotiations.

Nevertheless, I oppose PRISM and related programs very strongly. I do so because I am not risk-averse.

I believe this is the most Cowen-esque thing I've ever written. I also believe that every link in this post is worth clicking on.

Monday, June 10, 2013

Canadian (and maybe Mexican) Trade Retaliation?

. Monday, June 10, 2013

I often think that retaliatory measures taken by aggrieved parties in the WTO dispute settlement process are among the most interesting aspects of trade politics.*  US industry/policymakers may have to deal with retaliation from Canada, after the WTO ruled against the US in a dispute over mandatory meat labeling requirements.  Canada (and Mexico too, see here) has suggested that the US has not complied with the WTO’s ruling, justifying authorized trade retaliation against US products.
This kind of policy response is far from arbitrary or scattershot.  Countries deliberately identify industries that are politically important, and then they target them for retaliation by threatening to impose higher tariffs on their products.  The idea, of course, is that these industries will complain to the offending government to convince their representatives to implement the WTO decision, thus preventing the imposition of the punitive tariffs.  Here, because the Canadian government has determined that the US failed to implement the WTO ruling, it released a list of potential commodities that it might select for trade retaliation, including beef, pork, cheese, corn, steel pipes, wood furniture, cherries, rice, potatoes, maple syrup, chocolate and others (see here and here and here).**  Absent steps by the US to implement the WTO decision, or otherwise come to a settlement with Canada, the new tariffs could (eventually) come into effect.  The value of this disrupted trade would be pretty substantial, as one estimate sugggests that Canadian livestock producers have "lost $640 million annually because of COOL [i.e., the US labeling regulation], with similar losses in pork- approximately $500 million per year." (Here).
This list contains a lot of products that probably sound familiar if you follow trade disputes between the US and other countries.  Many of the products have previously been the subject of various “trade remedies” such as antidumping orders.  That such sensitive industries are being targeted is not surprising . . . after all, that’s kind of the point.  But what is also pretty interesting is that trade representatives might even target specific legislators at particular times.  As the US Congress debates amendments to the 2013 Farm Bill, we might see legislators that are instrumental to this process targeted -- maybe in an effort to get them to add an amendment to the Bill modifying the current US labeling regime.  In any case, it’ll be fun to watch this play out the next 18+ months to see if/how tariffs end up getting imposed on these products. 

* A while back I noted that Antigua threatened to ignore copyright protection to the detriment of US firms in response to the US failure to abide by a WTO ruling.  
**  full list from Canadian Ministry of Int'l Trade: 

Thursday, June 6, 2013

The Tiananman Square Protests Weren't Liberal

. Thursday, June 6, 2013

One of my favorite blogs is Echoes, subtitle "Dispatches from Economic History", at Bloomberg. There isn't a unifying theme other than contextualizing current events by looking to past episodes. The authors are experts on each topic -- i.e. there aren't just one or several folks writing every day -- and I almost always learn something from the post.

For example, that the Tiananman Square protests weren't exactly liberal. The author of the piece is a sociologist as Kansas State who has studied Chinese development since 1949, and he says that the protesters were "radical reactionaries". This atypical conjunction means that they were anti-authoritarian but also anti-capitalism.

The story goes like so. The early reforms economic reforms in China benefited rural farmers and initially urban consumers as well, but after awhile industrialization efforts and a plateau in farm production increased price inflation. At the same time corruption increased. This hit urbanites particularly hard. They demanded more political access, but mostly so that they could reverse economic reforms. Thus, they urbanites were "radical reactionaries". I guess that means the rural farmers were "conservative revolutionaries".

Deng refused to yield, but had the protests been successful China might've ended up with the opposite of what they've had over the past generation: political reform without economic reform. Ironically this would have hurt urban dwellers in the long run, since the economic reforms Deng undertook eventually benefited them the most.

Anyway, it's certainly not the textbook version of the story. But elements of this still resonate, as this Dissent article about the contemporary anti-reform movement in China illustrates.

Wednesday, June 5, 2013

Another ISD Follow Up

. Wednesday, June 5, 2013

Since I seem to only blog about investor-state dispute related issues, I thought I pass along a recent UNCTAD policy note about reforming the ISD system.

UNCTAD's summary of the report's key findings:

Concerns with the current ISDS system relate, among others things, to a perceived deficit of legitimacy and transparency; contradictions between arbitral awards; difficulties in correcting erroneous arbitral decisions; questions about the independence and impartiality of arbitrators; and the length and the costs of arbitral procedures. These challenges have given rise to a broad discussion about the need to reform the current system of investment arbitration. To give shape to this debate, the Note puts forward five main reform paths:
  1. Promoting alternative dispute resolution.
  2. Tailoring the existing system through individual IIAs.
  3. Limiting investor access to ISDS.
  4. Introducing an appeals facility.
  5. Creating a standing investment court.
Each of the five proposed reform options comes with its specific advantages and disadvantages and responds to the main concerns in a distinctive way. Some of the options can be implemented via actions by individual governments, while others require joint action by a larger group. The options that require collective action would go further in addressing the existing problems, but would also face more difficulties in implementation. The Note calls for a multilateral policy dialogue on ISDS to search for a consensus about the preferred course for reform and ways to put it into action.

Follow Up to Acryonym Monday - ISD and TTIP


On Monday Will pointed to some indication that an investor-state dispute clause may be a sticking point in the much anticipated Transatlantic Trade and Investment Partnership (TTIP). As Simon Lester points out, it's not quite clear from the EU TTIP negotiating mandate whether the EU wants to strengthen any ISD or weaken it (ungated version here). Civil society groups are already decrying any ISD as an "assault on democracy, human rights, and the public interest," citing a rise of "expropriation trolls" and that an ISD would prevent the eurozone from having the policy flexibility needed to effectively deal with crises. (see also similar critiques of the Trans Pacific Partnership here)

Typically, discussions of ISDs focus on the preferences and bargaining power of potential investors and potential host governments. The stereotypical case of a potential treaty with an ISD is between an advanced industrialized country and an emerging economy. Therefore most commentators focus on the extent to which host governments are able to resist pressure from rich countries to cede jurisdiction of investment matters to an international arbitral board. Developing countries that need foreign investment are typically in weak bargaining position vis-a-vie large multinationals who have great powers negotiation on their behalf.

Of course, the power asymmetries that so clearly define most ISD negotiations do not obtain in the US-EU case. What is particularly interesting about these negotiations is the relative parity of negotiation partners. Simon wonders if the EU wants a weak ISD or a strong one. I'd argue that it depends on what sorts of rules an ISD would enforce. Business interests in the EU want the TTIP to export European standards to the US, as this would provide them with an advantage. Of course, US firms want an ISD to protect American investors from European regulations. There's a bunch of political science work that examines how the US and EU compete over regulatory authority: see here, here, here, and here for examples. The bottom line, I think, is that an ISD is going to be a very, very tough sell in the context of a US-EU deal. The EU negotiating mandate still maintains its preference for the inclusion of an ISD clause, but I would not be surprised if a final deal severely restricts the ISD mandate or removes it entirely.

Monday, June 3, 2013

A Bunch of Acronyms and Some Trade Politics

. Monday, June 3, 2013

Last February Sarah and I* speculated in a short National Interest article that a EU-US trade deal (Transatlantic Trade and Investment Partnership, or TTIP) could put pressure on the recent prevalence of investor-state dispute clauses (ISDs):

While ISD clauses are widespread, they usually exist within the context of treaties between states characterized by economic asymmetries. For instance, of the more than 2000 bilateral investment treaties (BITs) worldwide, none exist between two advanced industrial countries. The United States generally embraces investor-state dispute clauses; both their model free-trade agreement (FTA) and BIT contain such language. However, it is far from certain that a US-EU treaty would include an ISD clause. Generally, advanced industrial countries have shown they are more interested in promoting legal regimes that protect "their" multinationals while they are less willing to cede jurisdiction over investment disputes in which they might be defendants.
Today, via Simon Lester, we see that the EU is not super-thrilled with the idea of having an ISD in TTIP that is typical of US ISDs, although it's tough to know from the formal language exactly what the EU is after. Or as Lester puts it: 

What are the authors saying here? Are they saying: 
1. Investment protection and investor-state will only be included if high EU standards for investment protection, as opposed to the weaker U.S./Canadian standards, are met? 
or are they saying: 
2. Investment protection and investor-state will only be included if the usual provisions are weakened so as to ensure that public policy objectives can be pursued? 

I don't know the answer (perhaps Sarah could chime in?), but it seems clear that any ISD in TTIP will have to be different than that in the model US bilateral investment treaty. So far our article is holding up pretty well.

Meanwhile, Eyes on Trade doesn't like Obama's secrecy on another potential trade deal, the Trans-Pacific Partnership (TPP)**. They also nail the reason for the secrecy:
So why keep it a secret? Because Mr. Obama wants the agreement to be given fast-track treatment on Capitol Hill. Under this extraordinary and rarely used procedure, he could sign the agreement before Congress voted on it. And Congress’s post-facto vote would be under rules limiting debate, banning all amendments and forcing a quick vote.
Eyes on Trade think all of this is severely crippling democracy. In a way it is, it by "democracy" you mean legislators favoring parochial interests over the good of the nation as a whole. The Congress has often given the President fast-track authority. Clinton had it for part of his terms. George W Bush had it for most of his. The reason for this is so that individual Congresspeople can't fiddle with the deal in order to privilege local constituencies after its been agreed to by the negotiators of both sides. It's basically a legal way to curtail rent-seeking exceptions and other Congressional shenanigans. These are generally questionable on welfare grounds when things like tax bills are being debated, but when negotiating a trade deal they can be deadly: each new Congressional exception has to be approved by the foreign party, which will likely demand further concessions in exchange, which would have to be approved by Congress in turn, etc. Each iteration of this lowers the chance of any deal being reached. Fast track authority cuts that process out. Interested groups can still lobby the US Trade Representative, and Congress still has to approve any deal, so it's not exactly undemocratic. But fast track makes the policy process more efficient.

Obama hasn't been given fast track authority. Democrats have typically been skeptical of trade deals -- remember that renegotiating NAFTA was a big issue during the 2008 Democratic primary -- and Republicans seem intent on blocking anything Obama chooses to do on grounds of principle. It doesn't seem to have been a major priority for Obama until now, as he's preferred to focus on health care, immigration, and other issues first. But without fast track trade deals are much more difficult to complete. So much so that foreign countries often prefer not to negotiate at all because they know that whatever agreement they reach will end up being altered by Congress. Given that, what's the point of negotiating in the first place?

Although they are fairly obscure these issues are quite important. I continue to think there's a decent chance that Obama gets fast track, and if he does that some deals will get done. The business community is very interested in seeing agreements made, so they will likely push the GOP to give in to Obama. Democrats are a bit less enthusiastic, but are more likely to give Obama authority than they would be to lengthen Romney's leash. And if Sarah and my article is correct, there are not many important interest groups that oppose a EU-US deal. The TPP makes sense in a number of ways as well.

All of this remains to be seen of course, but I'm still pretty optimistic that we'll see some movement on trade during Obama's second term.

*Really Sarah. She knows much more about ISDs than me and wrote that part of the article more or less on her own.

**Yes I know. TPP and TTIP and ISDs, oh my.

International Political Economy at the University of North Carolina: June 2013




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