Apropos of my recent article with SBD in The National Interest is this, (via Jonathan Dingell):
UPDATE: There's some good discussion of our article over at the always-excellent International Economic Law and Policy Blog (my go-to source for information on trade disputes and agreements-under-negotiation). (ht: Simon Lester)
I've blogged repeatedly* that if we are to understand recent developments in the US and global economies pertaining to inequality, stagnation, regulatory capture, and electoral influence we need to do two things at least:
1. Embed the financial system within the broader US economy.
2. Embed the US economy within the broader global economy.
If we do these two things we will likely conclude, as I did in one recent post, that:
The cumulative effect of [opening of capital accounts and trade developments via GATT/WTO] bothSome people, e.g. a commenter on that post, seem to have difficulty grasping this point. But Emmanuel recently noted something interesting:forcedencouraged the US to pursue its comparative advantage in high-skilled service labor (e.g. finance) and increased the market into which the US could sell its comparative advantage. The result is thus entirely predictable: finance becomes a bigger size of the US's economy, while comparatively disadvantaged sectors shrank.
the WTO has for the most part ruled in favour of the United States in its case against China over discrimination against international payment card transaction firms in the RMB-denominated arenaI.e., US financial firms -- in this case credit card companies -- want access to the Chinese market. The Chinese blocked them. The US government took China to the WTO and won. This is precisely the behavior we would expect if the US was trying to open up a market for its comparatively-advantaged sector, while China was trying to close off that market to protect its comparatively-disadvantaged sector.
Foreword: I have promised a fair few posts on other topics, but I caught the bug for this one and felt like getting it out first. More stuff on finance and politics TK, when I can find the time.
In 2000, in a fit of pique, I briefly became politically active. Disgusted by the cynical triangulations of the Clinton administration, and turned off by Dubya's anti-intellectual populism (and young enough to believe that both were something other than typical), I marched in a few rallies in support of opening up American politics to alternative parties. One of them became a touch violent -- and I was nearly pepper-sprayed by the police, and was nearly impaled by them as well... unfortunately for this story I narrowly escaped all harm -- and it was a great deal of fun.
One of the chants of the day was "Bush! Gore! Same fucking difference!" This was put only slightly less crassly by Ralph Nader, then Green Party candidate for president, as "The only difference between Republicans and Democrats is the speed with which they get on their knees when corporations come calling." Even in my piquedness I cringed at that one, although not as much as I did when my fellow protestors, in violation of multiple laws and menacing in numbers, began bellowing "This is what democracy looks like! That is what a police state looks like!" while gesturing to the men and women in blue who were doing nothing even remotely police-state-ish, but who did intend to maintain rule of law in protection of the actual majority of the population, which we did not represent. The cops did just that, with very little excessive force and that little bit in direct response to intentionally provoked duress. My fellow members of the mob had little sense of irony, apparently. They seldom do. It was more than just a bit off-putting.
(That reminds me to again refer to Milos Forman's surprisingly good essay on how people who lazily make reference to authoritarianism without real knowledge of what actual authoritarian regimes do and have done do a disservice not only to their own reputations but also to wider cultural memory.)
That was when I was a lowly journalism student at a community college. I had never heard of Duverger's law. I had never heard of the median voter theorem even, much less directional models or any further complication. Because things didn't make a ton of sense to me, in my ignorance and at that moment, I thought very much that the forces at work in politics must be sinister. Adbusters made quite a lot of sense, at the time. The WTO was sort of threatening, really, what with its internationalism and its governments and their suits. Who was controlling all of this? Weren't corporations going to profit from all of this? And wasn't that ipso facto a terrible outcome? I'd never heard of comparative advantage, all I know was that people -- people who looked like me -- were pissed right off. Plus we had cool people on our side. Fugazi sang (see above) "Never mind what they're selling... it's what you're buying." All politics is local, man. It starts at home. Far out.
When I was a child I spake as a child, I understood as a child, I reasoned as a child. When I became a man I put away childish things. I'll still consider myself part of the "left", but it's a "left" that mostly only exists in my mind. It's a "left" that believes that the redeemable parts of Marx reveal him as one of the first public choice thinkers; so he's of the "right" too, in his way, in my mind. It's a left that believes that had Marx witnessed the 20th century -- not even the bits of it done in his name -- his writings might have taken a different tone. It's a left that is dedicated to the idea that the best hope for an internationalist emancipatory movement is found in secular capital social democracy. I.e., it's a left that thinks that the Gotha program had something like the right idea after all. It's certainly not a left that is embodied in any actually-existing internationalist political movement of which I'm aware. So I'm not so politically active these days. I'm content to sort of shrug, think that the American "right" and "left" both embody a certain bastardized bit of truth, and take the long view that things in 21st century America are probably gonna end up far better than they generally have in the course of human history.
But. But! What about that "Same fucking difference!"? Well we hear every election that "this election is the most important election since" like 1932, or 1864, or 1776, or something. Every go round we hear it and we're hearing it again. But if Nader was right in 2000, if the only real choice we have is marginal rather than categorical, then we could either agree with my younger self that things are pretty sinister at the moment, or we could take the more restrained view that politics stays fairly close to the median as a matter of necessity. So which is it? Is there a difference between Romney and Obama worth getting up for? Is this election a clash of the mediocre, or will it decide the eternal course of the Republic?
Steven Landsburg provides one answer. He notes that Ezra Klein has published the following picture, purportedly showing the vast differences between the platforms of Obama and Romney on the issue of income taxation:
What we actually have is an election in which both candidates are proposing massive redistributions from the top downward, one slightly less so than the other. You’d never know this from looking at Klein’s chart because it illustrates changes in rates, whereas what actually matters is the rates themselves. It makes no sense to ask whether any particular group ought to be paying more or less without reference to how much they’re already paying.Maybe you could quibble with Landburg's use of the word "massive", but he does a quick-and-dirty correction of Klein's graph by plugging in the relevant pre-existing points, and comes up with this (tacky Stata-template) graphic:
Indeed, this is a classic example of what I once called the “Grandfather Fallacy” — by focusing on changes instead of absolutes, Klein’s chart conceals any existing inequities and hence treats them as “grandfathered in”.
Guesting at Noah Smith's place, Dan Murphy seeks to explain why the financial sector grew to be such a large component of the US's economy during the 2000s. He offers three possibly explanations: finance became better at "making markets" by matching buyers and sellers, the need to manage risk became more important, and that people became convinced that employing financiars would help them boost their investment portfolios. Murphy suggests that the first two are not good explanations because they are static variables unable to explain change. He doesn't seem to think the third is as well, although it seems that way to me.
I don't think this is the right way to think about this. Instead, I'd rather embed finance into the broader US economy and then embed the broader US economy into the broader global economy. What changes have been taking place in the global economy over the past decade-plus that could help explain this? Two prominent things immediately come to mind:
1. The opening of capital accounts around the world, which began in the 1990s but accelerated dramatically during the 2000s.
2. Changes in the global trading system, particularly the expansion of the GATT -- which added many new members following the end of the Cold War -- and the transition from the GATT to the WTO.
The cumulative effect of these two factors both forced encouraged the US to pursue its comparative advantage in high-skilled service labor (e.g. finance) and increased the market into which the US could sell its comparative advantage. The result is thus entirely predictable: finance becomes a bigger size of the US's economy, while comparatively disadvantaged sectors shrank. Factor in positive feedback dynamics in global financial markets and this isn't much of a mystery at all.
It's been awhile, but I used to tussle with Public Citizen a some. I kind of stopped paying attention to them, however, as I found their knee-jerk approach to the political economy of trade to be intellectually unsatisfying. It is satisfying, on the other hand, to see someone else knock them down as well as Daniel Ikenson at the shell that used to be Cato does here:
Contrary to the characterization that Wallach and other anti-globalistas have been trying to paint for years, the WTO is not some faceless bureaucracy issuing edicts that run roughshod over national sovereignty and local laws. The WTO has no special power to compel any member state to do anything. Contrary to Wallach’s claim that a WTO “Tribunal” (sounds like a military junta, no?) “ordered” the United States to “dump” a “landmark” anti-smoking law, the WTO Appellate Body merely requested (see above) that the United States bring a specific clause of the law into conformity with U.S. treaty obligations. WTO Panels and the AB only recommend or request. ...
The WTO did not rule that the United States cannot have an anti-smoking law – only that that law was not being applied evenhandedly to domestic as well as foreign companies. By banning clove cigarettes, which have been sourced principally from Indonesia over the years, but not menthol cigarettes, which are produced primarily in the United States, the U.S. law discriminates against producers from another country – namely, Indonesia.I understand why people are opposed to trade. I understand why people are skeptical of the WTO. Trade creates winners and losers, interest groups (and governments in thrall to them) try to game the system, etc. The WTO was set up largely by powerful states that were seeking to further their interests. I do not, however, understand why people are opposed to trade or skeptical of the WTO as a general principle that leads to opposing trade or the WTO in any and every context. Particularly for folks on the left making reference to WTO rulings like this one, which is clearly good for producers in developing countries. And, if they lead the U.S. to change anti-smoking laws to be more inclusive, may be good from the perspective of public health as well.
Matt Yglesias starts with a cute little point about trade politics -- the Marvel corporation has defined the X-Men as mutants rather than humans so as to exploit the difference in tariffs between human dolls and non-human "toys" -- but then, I think, misses an opportunity to explain something more significant about how the world works:
It's remarkable, incidentally, the extent to which the politics of "trade deals" have gotten away from the fundamental issues of free trade as seen in an economics textbook. What we have here is a federal 12% sales tax on dolls, but only if the dolls are made in foreign countries, and a different -- arbitrarily lower -- 6.8% federal sales tax on toys, but again only if the toys are made in foreign countries. There's no good reason to have special higher sales taxes on toys made in foreign countries, and there's certainly no good reason to tax dolls and non-doll toys at different rates. It's nuts and it could and should be addressed by a unilateral acts of congress. The amount of revenue that would be lost to the federal government by repealing these taxes would be tiny, and it's trivial to think of better ways to raise the money. And yet this core -- and quite simple -- trade policy issue is a world away from the incredible complexity of the trade deals of the past decade.This goes back to what I was driving at in my old post arguing that "The Problem with Economics Is the Economists". The standard welfare case for trade assumes that through specialization in comparative advantage each country can consume more via trade than they can via autarky. That's where economics stops, unless they go on to mutter about something about "distributional consequences blah blah politics blah". In other words, economics books don't spend much time noticing that those employed in the sector/factor that does not have a comparative advantage all get put out of business.
Some of these I may blog properly later, but time is scarce these days.
-- Ikenberry responds to Walt.
-- Good discussion of Herbert Simon and complex social systems.
-- Bernanke on how central banking has changed post-crisis, including on the interplay between regulatory and monetary policies.
-- Problems with Basel III implementation. This is what Jamie Dimon is referring to when he says Basel is "anti-American".
-- Vladislav Surkov, "Putin's Rasputin".
-- Interactive description of the eurozone crisis, as a series of weighted, directed networks. (ht Alex)
-- US attacks China's "Great Firewall" at WTO.
-- Ambrose Evans-Pritchard says world power is swinging back to the US. I hadn't realized it had gone.
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.
China is celebrating its first ever victory at the World Trade Organisation after the European Union was found to be discriminating against Chinese nuts and bolts.
And it marks a victory for China -- the main target of anti-dumping measures, or duties on imports judged to be sold for less than they cost at home -- in its first trade dispute against the European Union since joining the WTO in 2001.
"The trade war between China and Europe will not break out over manufacturing industry, customs duties, dumping or the yuan exchange rate, but on a front that no one expected: in the sky," writes La Stampa, in the wake of a threat voiced by the Beijing representative at the IATA (International Air Transport Association) Conference to simply close Chinese air space "if the EU, as it has already decided, introduces an emissions tax on all intercontinental flights leaving the EU on 1st January." The European Commission plans to grant a "license to pollute" similar to those already esablished for other industrial sectors to every airline operating in Europe, explains Le Monde: 82% of emissions rights will be free, but a 18% will have to be purchased on "carbon credits market."
In fact the competitive playing field is highly tilted. Rorden Wilkinson looks at the history of the GATT/WTO at concludes:
The article argues that if WTO performance is measured as the institution’s capacity to act as a strategic device to maintain and exacerbate the advantages of a group of industrial states over their less powerful and developing counterparts (an aim that is much closer to the institution’s intended purpose), then it has actually been quite successful, albeit undesirably so.
Richard Baldwin says the Doha round of WTO negotiations will succeed this year:
The paralysis of the last two years was primarily due to the Obama administration’s unwillingness to engage the issue, according to my discussions with more than a dozen WTO ambassadors and WTO leaders since August 2010.
Obama needed every Democratic vote to get his domestic agenda through Congress. As trade liberalization is deeply opposed by some Democrats, the administration treated “trade” as a four-letter word – not to be mentioned in any way in any situation. America, the argument went, needed healthcare reform, financial reform, and a stimulus package far more urgently than it needed a trade deal. ...
And then Obama lost his majority in the lower house. Plan A was out; Plan B was in – and this includes the Doha Round. Obama supports multilateral governance in general, is broadly in favour of free trade (his anti-trade remarks on the campaign trail were directed at bilateral deals with low-wage nations, Council of Foreign Relations 2008), and believes that Doha could create US jobs. ...
But beware. While likely to conclude, nothing is sure about this deal. To drive the point home, Germany, Britain, Indonesia, and Turkey created a “High Level Trade Experts Group” in the run-up to the Seoul G20 Summit. The Group’s remit is to identify priority actions on trade, including Doha. The Group, which consists of nine trade experts[iii] appointed by the four sponsoring governments (I was appointed by the Cameron administration), today released an interim report in Davos where trade ministers are meeting informally to take political readings and identify blockages. The key points are threefold, in my view:
1. Doha is doable this year; rapid progress is being made in closing the negotiating gaps; this started in November 2010.
2. Getting the deal done requires head-of-state attention; they must authorise, or personally negotiate the last trade-offs framed by the draft agreement that their WTO ambassadors hope to have ready for April.
3. The window for this deal is the first half of 2011; after that all bets are off until 2013 at the earliest.
I don't have a whole lot to say about this, except that whenever we discuss increasing the amount of research for green technologies, or consider subsidizing production or consumption of green energy, we almost never consider the fact that those policy tools often violate international trade law. That's not the purpose of this suit, which is intended to protect American steelworkers (again), but it is a very real implication.
I also found this interesting:
The United Steelworkers, which had protested the Chinese wind power fund as part of a larger, 5,800-page trade complaint it filed with the American government on Sept. 9, said the administration’s decision was only a first step in addressing a “vast web of protectionist policies” by Beijing.
A new reasearch paper calculates that because of the way trade statistics are calculated - the full value of an iPhone is considered an export to the U.S. from China by both countries, even though only about 1% of the value was created during the final assembly process in China - just the iPhone alone added almost $2 billion to America's trade deficit with China in 2009. The authors find that if a "value-added approach" was used to calculate trade statistics, the iPhone would have instead generated a $48 million trade surplus for the U.S. in 2009, instead of the $1.9 billion trade deficit reported using the conventional methodology. ...
[I]f trade statistics were adjusted to reflect the actual value contributed to a product by different countries, the size of the U.S. trade deficit with China—$226.88 billion, according to U.S. figures—would be cut in half.
This doesn't have much of anything to do with IPE[1], but I need to blow off a bit of steam anyway. When Barney Frank is the loudest defender of keeping the government out of my life, conservatism is well and truly dead. Get with it, Mama Grizzlies and Papa Bears, or else it's all over.
In other "What Gives You the Right to $*%# with My Life?" news[2], my tobacconist in Illinois is now legally prohibited from shipping my favorite blend (or any cigarette blend, although pipe blends are somehow okay) to North Carolina. I'm pretty sure this is an Illinois law, even passing that sort of law makes no sense[3].
Fortunately, I found a decent-enough replacement brand at a local shop. Not as good as my preferred blend, but it'll do until I can get back to Illinois and bring some of the good stuff back with me. The irony? This new brand is imported from... wait for it... drum roll please... DENMARK!
So it is now illegal for a North Carolinian to buy tobacco from Illinois, but perfectly fine for a North Carolinian to buy tobacco from Denmark. Of course, once I get it from Denmark I can't smoke it in any privately-owned establishments (e.g. bars) whether the owners like it or not, but that's true in Illinois too.
I'm annoyed.
[1] Actually it does, in more ways than one, but I don't feel like tracing the lines right now. Connect the dots if you like, or maybe I'll return to the theme later. There is a WTO case about this, tho.
[2] Swedish pop singer Robyn has a new single that speaks to this pretty well, but it's probably NSFW (language) so I won't embed it. Link here. The quote is from this Stars song.
[3] Illinois is beyond bankrupt, and willingly forgoing sales taxes in that situation seems really dumb. It could be a NC law, but based on the response of my tobacconist, I don't think so. If I'm wrong, I assume someone will correct me.
UPDATE: It appears to be a federal law. Why?
Well. I type up a late-night blog post to give myself a temporary break from paper-writing, and wake up to find it the weekend topic du jour in the IPE blogosphere.
First, Drezner builds me up ("rising young blogger"... I'm not that young, and not rising that much either) before tearing me down:
Hmmm.... no, I don't think Winecoff is correct. Even if it's true that the kids today care more about environmental degradation than labor abuses, this shouldn't stop them from protesting at economic summits. Indeed, from the mid-nineties onwards, protests against labor and emvironmental abuses have gone together like racism/sexism/homophobia accusations.
Also, I would dispute the empirics of Winecoff's assertion. The protests didn't die out with the change in the decade -- they were pretty robust at G-8 summits in the first part of the naughties, as well as the 2003 Cancun WTO Ministerial and the 2005 Hong Kong Ministerial. This is a more recent phenomenon.
During boom times, antiglobalizers score political points by stoking fears of cultural debasement and environmental degradation. During leaner years, naked self-interest becomes the salient concern: in the current economic climate, American opponents of globalization talk less about its effect on the developing world and more about the offshore outsourcing of jobs.
Another indictment of the U.S. Farm Bill:
American goods will face about $295 million in annual sanctions as a result of the United States’ failure to eliminate illegal subsidies to domestic cotton growers, the World Trade Organization ruled on Monday.
The size of the penalty was disappointing for Brazil, which had sought $2.5 billion worth of economic retaliation against American goods and drug patents.
The W.T.O. ruled that the sanctions should vary depending on American payments each year. Arbitrators used 2006 as a base year for the ruling, and said United States payments would have to increase significantly for Brazil to be allowed to punish American drug patents.
It is the fifth major decision since the Brazilian government brought the case in 2002, claiming that the United States was able to retain its place as the world’s second-largest cotton producer by paying out some $3 billion to American farmers each year. China is the largest exporter of cotton, while Brazil is fifth. ...
In response to the legal defeats, Congress has scrapped some export credits and in 2006 repealed the “Step 2” cotton-marketing program that made payments to exporters and domestic mill users as compensation for buying higher-priced American cotton.
But last year it approved a farm bill worth nearly $300 billion that left a number of other contentious cotton programs intact.
The World Trade Organization’s top court rejected on Tuesday an American appeal in a long-running case on antidumping measures, clearing the way for Japan to threaten trade sanctions against Washington.
The final ruling by the Appellate Body of the W.T.O. in the case, which Japan started in 2004, dealt another setback to a controversial American method of dealing with unfairly priced imports.
But it also highlighted sensitivity about antidumping measures. The measures impose additional duties on imports that are sold for less abroad than they cost at home, but can be abused for protectionist purposes. ...
The case turned on a controversial method known as “zeroing” used by the United States to calculate duties on goods imported for less than they cost in the originating country.
The way the United States handles its antidumping measures was also at issue. Washington argued that it could continue to levy duties on goods that entered the country before a W.T.O. ruling finding such duties illegal — a stance rejected by the court.
The United States is the only one of the W.T.O.’s 153 members to back zeroing, which the Appellate Body has ruled against consistently.
The case revolves around US exports of creative property, especially digital media, that China had insisted be distributed through Chinese firms. US firms wanted to offer their products directly to Chinese consumers, and China was clearly in violation of WTO rules by preventing them from doing so. So while this ruling was not surprising, it does speak to a broader friction: China wants the benefits from global trade that membership in the WTO ensures, but does not want to be fully integrated into the global economy: they still want to be able to control what information is available to Chinese citizens. This is obviously more difficult in the internet age, and rulings like this one from the WTO explain why.
Now I'm not saying that giving Chinese citizens the freedom to buy the new Jay-Z/Kanye/Rihanna track direct from iTunes is going to bring down the Chinese regime. But increasing integration into the global economy will bring increasing exposure to outside ideals and influences. China worries that those influences will gradually mutate into popular reformist movements that challenge the Communist Party.
As expected, Emmanuel is already all over this.
Apologies if the title is all wrong; it came from Babel Fish.
France has angered, well, most of the rest of Europe in the past few days. First, French President Sarkozy blasted British Prime Minister Brown for lowering the value-added tax in the U.K., and for not coordinating more on stimulus plans, misconstruing the nature of the British economy in the process (see link). Then, Sarkozy bailed out France's major auto manufacturers without bothering to coordinate with the rest of Europe first. This angered a few in the EU, notably the Czechs. Then Slovakia (Slovakia!) decided to play hardball:
Fico, the Slovak prime minister, joined in the criticism of Sarkozy's remarks about a possible return of French car factories to France.
"If one country starts behaving like this - for example, France - then we will send Gaz de France home," Fico said, referring to the state-controlled utility.
