There’s been legislative action on the renewal of trade promotion authority… in Montana!

The Montana State Senate fired a shot across the bow of current U.S. trade policy today, overwhelmingly passing (45 to 5) a resolution calling on Congress not renew the President’s “Fast Track” trade promotion authority.

Here’s the bill.

I’m not sure how often state legislatures express opinions regarding trade policy, which is obviously handled by the federal government, but this isn’t the first time. Utah’s legislature opposed the FTAA in 2005.

Echoing Dani Rodrik’s observations, Brad Setser discusses China’s export profile.

James Galbraith calls for a shift in progressive trade policy focus:

The facts are clear: NAFTA is a done deal, and China is a success story we have to live with. Progressives need a trade narrative that moves past these two issues. Broadly, this means accepting manufactured imports and dropping the idea that we can control–or that it matters much–who assembles television sets or stitches shirts. Standards to guard against flagrant abuses such as child and prison labor are fine, but it’s an illusion to think they will, or should, dent the flow of goods from China. A progressive trade agenda should focus, instead, on building stronger world markets for our exports, and in ways that do not trample on the needs and rights of poor people in poor countries. That should provide plenty of room for future fights with free-trade absolutists.

Is Galbraith advocating that progressives oppose agricultural liberalization and TRIPS implementation by developing countries because he thinks those are poor policy choices or because he is just looking for a fight?

[HT: Mankiw]

Shubham Chaudhuri, Pinelopi K. Goldberg, and Panle Jia:

Under the TRIPS agreement, WTO members are required to enforce product patents for pharmaceuticals. The debate about the merits of this requirement has been extremely contentious. Many low-income economies claim that patent protection for pharmaceuticals will result in substantially higher prices for medicines, with adverse consequences for the health and well-being of their citizens. On the other hand, research-based global pharmaceutical companies argue that prices are unlikely to rise significantly because most patented products have therapeutic substitutes. In this paper we empirically investigate the basis of these claims. Central to the ongoing debate is the structure of demand for pharmaceuticals in poor economies where, because health insurance coverage is so rare, almost all medical expenses are met out-of-pocket. Using a detailed product-level data set from India, we estimate key price and expenditure elasticities and supply-side parameters for the fluoroquinolones sub-segment of the systemic anti-bacterials (i.e., antibiotics) segment of the Indian pharmaceuticals market. We then use these estimates to carry out counterfactual simulations of what prices, profits, and consumer welfare would have been, had the fluoroquinolone molecules we study been under patent in India as they were in the U.S. at the time. Our results suggest that concerns about the potential adverse welfare effects of TRIPS may have some basis. We estimate that in the presence of price regulation the total annual welfare losses to the Indian economy from the withdrawal of the four domestic product groups in the fluoroquinolone sub-segment would be on the order of U.S. $305 million, or about 50% of the sales of the entire systemic anti-bacterials segment in 2000. Of this amount, foregone profits of domestic producers constitute roughly $50 million. The overwhelming portion of the total welfare loss therefore derives from the loss of consumer welfare. In contrast, the profit gains to foreign producers in the presence of price regulation are estimated to be only around $19.6 million per year.

Suggested background reading on TRIPS:
Arvind Panagariya – TRIPs and the WTO: An Uneasy Marriage (pdf)
Razeen Sally – Whither the WTO? A Progress Report on the Doha Round (pdf, pp. 5-6, 21-2)
T.N. Srinivasan – Developing Countries and the Multilateral Trading System after Doha (pdf, pp. 9-12, 22-4)
Keith Maskus – Intellectual Property Rights in the Global Economy

[HT: David K. Levine]

Representative Barney Frank (D-MA) says

My own view is that if they were in fact to come to an agreement in the Doha round that the resulting agreement – if they reach it as they are currently talking about – would not pass the House of Representatives… We are at a very sensitive moment in the making of economic policy in our country.

Brad Setser highlights five stories told by the data describing US trade flows in 2006.

The European Commission is irked by Swiss tax federalism:

Canton Obwalden, in central Switzerland, slashed its corporate tax rate to just 6.6% at the start of 2006; it attracted 376 new companies in just 11 months. The European Commission has warned that this may constitute an unfair subsidy under the European Free Trade Agreement.

“Talk to any tax expert,” said Michael Reiterer, the commission’s new ambassador to Switzerland. “This is recognised as a subsidy. And there we think Switzerland should think a bit whether behaviour which is clearly outlawed in the EU is the best policy to follow in such a close relationship between two partners.” [BBC]

I am not a tax expert, but I’ll comment anyway. Here is the only article in the EEC-Switzerland FTA of 1972 pertaining to taxation:

Article 18

The contracting parties shall refrain from any measure or practice of  an internal fiscal nature establishing, whether directly or indirectly, discrimination between the products of one contracting party and like products originating in the territory of the other contracting party.
Products exported to the territory of one of the contracting parties may not benefit from repayment of internal taxation in excess of the amount of direct or indirect taxation imposed on them.

I am unable to find any literature suggesting that tax federalism has resulted in export tax rebates for firms located in particular cantons. Summaries of the policy shift (such as this one) simply describe variations in the corporate income tax rate. So I doubt that Article 18 is violated.

The European Commission appears to be arguing that another article is relevant:

On top of cut-price corporate tax for all, that vary from region to region, some cantons offer additional concessions for foreign firms that do not have direct business activities in Switzerland. 
These kind of Domiciliary foreign companies can pay no tax or just one-tenth of their regular net income in some cantons, according to the Swiss Economic Ministry.
European Commission officials allege that the practice amounts to an unfair subsidy, violating a free trade agreement between the EU and Switzerland. [Portugal News]

The 17-page document gives detailed information about the tax regimes of cantons Zug and Schwyz in central Switzerland and the privileges they give to holding companies and other firms. But the argumentation on the main issue is vague. The draft claims that these tax practices distort trade between Switzerland and the EU, and therefore contravene the bilateral free trade agreement… According to article 23 of the free trade accord, it is enough if a privilege “threatens to distort” trade. [<A href=”SwissInfo]

Here’s Article 23:

1. The following are incompatible with the proper functioning of the agreement in so far as they may affect trade between the Community and Switzerland:

i. all agreements between undertakings, decisions by associations of undertakings and concerted practices between undertakings which have as their object or effect the prevention, restriction or distortion of competition as regards the production of or trade in goods;

ii. abuse by one or more undertakings of a dominant position in the territories of the contracting parties as a whole or in a substantial part thereof;

iii. any public aid which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods.

2. Should a contracting party consider that a given practice is incompatible with this article, it may take appropriate measures under the conditions and in accordance with the procedures laid down in article 27.

I read that article as pertaining to anti-trust practices and competition policy, not tax levels or subsidization, but I have no legal training, so I hope someone from the International Economic Law and Policy Blog tackles this story.

If free trade agreements can be reinterpreted more than three decades after the fact to have behind-the-border implications such as tax harmonization, then one can only imagine the dangers associated with signing TIFAs and PTAs addressing non-trade issues today.

[Hat tip on this story: Daniel Mitchell

Classic reference on harmonization: Bhagwati & Hudec]

Emmanuel, a guest at Brad Setser’s blog, provides a primer on China’s export incentives and rebates, some of which the US will challenge at the WTO.

In the comments section, there’s a link to this interesting piece:

Li Deshui, the outspoken former chief of the National Bureau of Statistics (NBS), recently remarked that a considerable part of China’s trade surplus is not real, but in fact comes from “fake” exports by enterprises that fraudulently obtain export rebates from the government… A popular practice is to export certain goods to get tax rebates and then smuggle or import the goods back to sell in the domestic market.

Ben Muse links to a number of stories describing the Bush administration’s farm bill proposal.

Today, I had the pleasure of hearing Holger Breinlich present his most recent work, which introduces new evidence about the reactions of heterogeneous firms to trade liberalization:

This paper analyzes mergers and acquisitions (M&A) as a previously neglected channel of industrial restructuring in the face of trade liberalization. Using the Canada-United States Free Trade Agreement of 1989 as a source of exogenous variation in trade barriers, I show that trade liberalization leads to a significant increase in M&A activity. I also provide evidence that resources are transferred from less to more productive firms in the process and that the magnitude of the overall transfer is quantitatively important. Taken together, these results suggest that M&As are an important alternative to the previously studied adjustment channels of firm and establishment closure and contraction.

Full paper here (pdf).