Dan Drezner points to a WaPo story about the 2002 farm bill and its role in winning votes for trade promotion authority.

Joe Stiglitz’s suggestion that countervailing duties apply to exports from countries not participating in the Kyoto protocol has been rejected by Peter Mandelson:

The European Union’s trade commissioner will on Monday dismiss French proposals for a “green” tax on goods from countries that have not ratified the Kyoto treaty as not only a probable breach of trade rules but also “not good politics”…

“Not participating in the Kyoto process is not illegal. Nor is it a subsidy under WTO rules,” Mr Mandelson will warn in a podcast speech to 50,000 subscribers. “How would we choose what goods to target? China has ratified Kyoto but has no Kyoto targets because of its developing country status. The US has not ratified but states like California have ambitious climate change policies.”

Above all, he says, it would undermine the international co-operation required to combat climate change…

Mr Mandelson backs a plan, to be unveiled this week, to include in the EU’s carbon emissions trading scheme all airlines landing or taking off in the EU, even though it is likely to antagonise the US and Asian countries.

Mr Mandelson, who favours a positive rather than punitive approach, is also writing to Pascal Lamy, WTO director-general, to suggest talks on scrapping tariffs on renewable energy and clean power generation equipment worldwide.

Here’s an interesting story following up on yesteryear’s Brazilian cotton subsidy case:

The future loomed bright for Brazilian cotton growers after their government won a headline-grabbing victory at the World Trade Organization, which declared some U.S. cotton subsidies illegal… And there were predictions that Brazil’s cheaper labor and land would make it even more competitive on the world market.

It hasn’t worked out that way. Some Brazilian farmers, including former top producers, have quit cotton altogether. The WTO frowned on several U.S. cotton subsidies but singled out only “Step-Two” payments, those made to exporters and domestic mills for buying higher-priced American cotton. That represented just about 7 percent of the $3.7 billion that Washington planned to spend on cotton programs this year…

On top of the subsidy issue and the drop in Chinese purchases, Brazil also has a poor road system and high transportation costs. And India has emerged as a competitive threat, with its better transport network. India has also embraced genetically modified cotton, which requires less insecticide. Brazilian farmers will soon be able to plant genetically modified cotton, but it won’t be enough incentive for some.

Although Brazil grabbed much of the spotlight in recent years, the real competitive threat to Texas cotton producers is India, a Texas Tech University agricultural economist says. “We don’t see a big expansion for Brazilian cotton in the future,” Samerendu “Sam” Mohintu said. “It’s going to grow, but at a very slow rate. China is buying from India, which has a transportation advantage” over the United States and Brazil. India’s cotton quality “isn’t as good, but it’s cheap,” Mohintu said.

Joe Stiglitz calls for trade liberalization by the United States:

Americans like to think that if poor countries simply open up their markets, greater prosperity will follow.

Unfortunately, where agriculture is concerned, this is mere rhetoric. The United States pays only lip service to free market principles, favouring Washington lobbyists and campaign contributors who demand just the opposite. Indeed, it is America’s own agricultural subsidies that helped kill, at least for now, the so-called Doha Development Round of trade negotiations that were supposed to give poor countries new opportunities to enhance their growth.

Subsidies hurt developing country farmers because they lead to higher output – and lower global prices. The Bush administration – supposedly committed to free markets around the world – has actually almost doubled the level of agricultural subsidies in the US.

Cotton illustrates the problem. Without subsidies, it would not pay for Americans to produce much cotton; with them, the US is the world’s largest cotton exporter. Some 25,000 rich American cotton farmers divide $3 to $4 billion in subsidies among themselves – with most of the money going to a small fraction of the recipients. The increased supply depresses cotton prices, hurting some 10 million farmers in sub-Saharan Africa alone.

I support Stiglitz’s prescription and would love to see the US drop its agricultural trade barriers. But I must continue tradition here at Trade Diversion by noting that agricultural subsidies do not hurt the poorest of the poor as badly as advocates say. Preferential access programs, notably the EU’s Everything But Arms regime, mean that LDCs import agricultural commodities at subsidized prices while exporting them at high prices. Cotton does not accurately illustrate the broader agricultural picture:

The common assertion that agricultural liberalization in rich countries would bring large benefits to LDCs is mistaken. These states — many of them poor African countries — benefit from the current regime because they can sell their exports at the high EU prices and buy imports at the low world prices. (Cotton is perhaps the sole exception: U.S. subsidies hurt poor countries because the EU tariff on cotton is zero and therefore its internal price for cotton is the same as the world price.) Gains to those developing countries not in the Cairns Group would accrue principally from their own liberalization. The principle of comparative advantage applies just as much to agriculture as to industry. Moreover, because developing countries do not currently enjoy trade preferences in one another’s markets, they stand to gain from access there. [“Liberalizing Agriculture,” Foreign Affairs, 12/05]

I apologize for quibbling, but I have yet to see anyone refute Arvind Panagariya on this point. (emphasis added in each article)

Good riddance, MFA:

Quota restrictions on United States imports of apparel and textiles under the multifibre arrangement (MFA) ended abruptly in January 2005. This change in policy was large, predetermined, and fully anticipated, making it an ideal natural experiment for testing the theory of trade policy. We focus on simple and robust theory predictions about the effects of binding quotas, and also compute nonparametric estimates of the cost of the MFA. We find that prices of quota constrained categories from China fell by 38% in 2005, while prices in unconstrained categories from China and from other countries changed little. We also find substantial quality downgrading in imports from China in previously constrained categories, as predicted by theory. The annual cost of the MFA to U.S. consumers was about $100 per household.

Joe Stiglitz has suggested imposing countervailing duties on the “hidden subsidies” provided to US firms by America’s non-participation in the Kyoto Protocol. The EU wants to do something like that:

Commission advisors are considering slapping a tax on imported goods from countries which do not impose a CO2 cap on their industry, according to a draft paper seen by European Voice (5-11 October). The paper will be presented to a top group of industrialists, member-state and civil- society experts who help the Commission shape policies in the field of environment and energy – the high-level group on competitiveness, energy and the environment. The idea, known in academic circles as a “border tax adjustment”, is understood to have emerged from expert discussions on long-term energy scenarios at a September meeting of the competitiveness sub-group.

Note that the Commission didn’t take Kyoto as the climate change gold-standard and decided to suggest slapping tariffs on imports from any country without CO2 caps. This means the EU can target nations that have weaker obligations under Kyoto:

Cembureau President Paul Vanfrachem welcomes the idea, saying that the tax would help offset the competitive disadvantage that the ETS forces on the European cement industry. “What we are seeing today is [cement] imports increasing a lot, especially imports from China where there is no carbon constraint,” says Vanfrachem.

Dan Drezner predicted China-bashing to be a likely outcome of declaring war on “hidden subsidies.”

Now, what the heck is a “border tax adjustment” and how does it differ from Stiglitz’s countervailing duty?

Brief definition: “Rebate of indirect taxes (taxes on other than direct income, such as a sales tax or VAT) on exported goods and levying of them on imported goods. May distort trade when tax rates differ or when adjustment does not match the tax paid.”

If you think “border tax adjustment” sounds ugly, you could use “tax adjustments applied to goods entering into international trade” as suggested by a GATT working party in 1970.

Here’s some more info (pdf; hat tip to Jonathan Alder):

Under the “destination system” of border tax adjustments (BTAs), traded goods are subject to the taxes of the importing (“destination”) country and exempted from the taxes of the exporting (“origin”) country. For instance, gasoline trucked from Toronto to Buffalo is exempted from
paying gasoline tax in Canada and subject to gasoline tax in New York, at the combined New York/federal tax rate. BTAs are a necessary part of a tax on national or in-state consumption, and are a nearly universal feature of sales, excise, value added and other taxes. Because BTAs are required for consistent treatment of a consumption tax base they are regarded as a normal part of the tax and not as a form of local favoritism…

BTAs should be distinguished from tariffs and other forms of industry protection. Energy-intensive manufacturers (e.g. basic chemicals, aluminum) already undertake large investments in developing countries that sometimes displace American production and jobs. Various factors make such investments attractive including lower resource costs and the prospect of winning large new markets. A BTA ensures that job displacement is not accelerated by the FCCC, but does not favor domestic over foreign production or otherwise alter underlying market conditions. Aluminum or ethylene production that already would have been shifted overseas, for example, will still be shifted. But it won’t be shifted because of climate protection policies.

Relevant literature on BTAs to counter non-participation in emissions permit trading schemes:

* Javier de Cendra “Can Emissions Trading Schemes be Coupled with Border Tax Adjustments? An Analysis vis-à-vis WTO Law” 2006
* R. Ismer & K. Neuhoff “Border Tax Adjustments: A feasible way to address nonparticipation in Emission Trading” 2004
* Philippe Quirion & Damien Demailly “Leakage from climate policies and border tax adjustment: lessons from a geographic model of the cement industry” 2006

Having learned what a BTA is about fifteen minutes ago, I have no opinion on this topic and will leave the punditry to others.

Today, in the third installment of “With Water in Mind,” the Star Tribune editorial page begins a five-day series on the way that farmers are polluting the Mississippi River — and the way federal farm policy rewards them for it.

Today’s editorial:

The outrage is that most farmers would readily change their cultivation practices, reducing erosion and nutrient runoff, if they weren’t tied to traditional crops and production patterns by federal farm subsidies. Congress has created several important conservation programs in the last two decades, but the majority of federal farm subsidies still reward farmers for planting the wrong crops in the largest possible quantities.

I thought that TRIPS brought intellectual property (arguably a non-trade issue) into the realm of international trade, but it seems that the uneasy marriage has a much older heritage in the United States: Smoot-Hawley, everyone’s favorite tariff legislation.

The ITC was established in 1916 as the U.S. Tariff Commission. Smoot-Hawley gave it the authority to review claims of “unfair trade practices” based on patent infringement. If a company with U.S. operations believes a competitor is importing a product that infringes on its intellectual property, it can bring a Section 337 claim to the ITC. An administrative law judge then hears the case, and he can issue an exclusion order barring imports of the infringing product for the duration of the patent. The order is also subject to the review and approval by the six-member, bipartisan ITC board.

Incredibly, all of this takes place separately from normal judicial proceedings on patent infringement or validity. Most of the cell-phone cases mentioned above are also in court on patent-infringement grounds, but these cases can take years and are subject to lengthy appeals. The ITC tries to discharge Section 337 cases in about a year, and will not wait for the courts. Once the ITC votes on the judge’s order, there is only one avenue of appeal: The President has 60 days to override the ITC’s order. If he doesn’t act, the import ban takes effect… [WSJ]

More at Against Monopoly.

A recent IMF discussion paper by Stephen Tokarick:

The current round of multilateral trade negotiations-the Doha Round-presents an opportunity for countries to reap the benefits of trade liberalization. Unfortunately, a number of misconceptions about the likely impact of trade reforms has, in part, impeded more rapid progress toward completion of the Round. This paper addresses some of the most egregious of these misconceptions and presents results from IMF research that sheds light on these issues. In particular, this paper argues that: (i) developing countries have much to gain from their own trade liberalization; (ii) preference erosion could be significant for some countries, but it is not a justification for postponing tariff reductions; (iii) tariffs applied against agricultural products in rich countries actually harm developing countries more than subsidies; and (iv) a disproportionate share of agricultural subsidies in rich countries goes to large wealthy farmers.

Those four arguments are well-known to those that follow the subject closely, but I have no doubt that misconceptions are widespread.

[Hat tip: Truck & Barter]

Oh boy, here comes the “agricultural subsidies enhance national security” argument again:

“I would hate to think of a day where the United States of America becomes hostage to other countries (that export food to the U.S.), in a way that we are held hostage over our energy needs,” [Senator Ken] Salazar said.

I think Sallie James’ interpretation of the statement is unfair, however:

I know of only two other countries that pursue a policy of total self-sufficiency in food(which seems to be what the senator is advocating): North Korea and Zimbabwe.

I think the actual position taken by advocates of “food security” is that the United States should not be so “dependent” upon imports as to lose significant bargaining power. Whether that means that imports should be less than xx% of total consumption or that the domestic production capacity should be able to provide all domestic consumers with minimal nutrition within xx months’ notice, I don’t know. But it doesn’t imply agricultural autarky, per se.

Nonetheless, I’ve argued against such justifications for ag subsidies. America will not become “dependent” upon agricultural imports if it liberalizes.