Hot air is dirt cheap

After reading that the US-Korea FTA has caused the Japanese to talk about a FTA with the US, Tyler Cowen asks: Why are FTAs contagious?

Given the likelihood of a US-Japan deal in the near future, I think the real question is: Why are FTA rumors and press releases contagious?

See my contributions in the comments section for more detail.

Daniel Altman confuses me

Daniel Altman explains global economic governance by grouping together the IMF-WB-WTO trio and extending the “chairs and shares” IMF story to apply to the WTO in an IHT article. The result is nonsense:

The World Bank, the International Monetary Fund, the World Trade Organization – the United States manages to dominate all three groups and more, thanks to its economic might, or at least the economic might it had when those organizations were conceived. But how much of that power will it have to cede to China when that country outweighs U.S. productive capacity?…

In September, China was granted a quarter more votes in the IMF as an acknowledgment of its growing economic importance…

The World Trade Organization is an even tougher nut to crack, since it works on a consensus system; each member has a veto. Still, the United States has found other ways to dominate its operation, for example by initiating more trade disputes (and being the respondent in more trade disputes) than any other member. And only the United States and the European Union participated in the backroom negotiations at both the Uruguay round of trade talks in the 1990s and the Doha round that is currently under way.

Being the respondent in WTO dispute cases is a sign of dominance?!? Hats off to the US for ruling the globe by losing cases to Antigua and Brazil. I suppose China ought to welcome a flurry of cases against it.

Similarly, Altman’s characterization of trade negotiations is misleading. First, the green room meetings of the 1990s often included 25-30 participants, not merely the US and EU. Second, the US failure to enter into productive dialogue with important trading nations is a sign of its incompetence and inability to complete the Doha round, not dominance. Third, the EU and US have sought to increase Chinese participation in the Doha round of negotiations, but China has been satisfied to rest on the laurels of its 2001 accession.

Altman is a solid journalist and very smart guy, but I think he has mischaracterized the American and Chinese roles in the WTO.

KORUS: A test of competitive liberalization theory

Ben Muse, the blogosphere’s chief KORUS correspondent, has posted a wealth of links and information about the impact of the agreement in terms of trade diversion and competitive liberalization.

My favorite paragraph (rhetorically, not substantively) is from a FT editorial:

Karan Bhatia, the deputy US trade representative, described the deal as a “real shot in the arm” for the US trade agenda. Maybe, but it is a shot in the kneecaps for the multilateral trading system, which remains the only way to agree and enforce workable trade deals. Unilateral reform always works, of course, but failing that, what we really need instead is some kind of “World Trade Organization”. There’s an idea.

Another paragraph worth highlighting comes from a February op-ed by Fred Bergsten.

Political developments within the United States suggest that Korea has a unique historic opportunity to achieve a preferred trade and indeed overall relationship with the United States that is unlikely to be available to any of its main competitors for a prolonged period of time. This will be realized if Korea can conclude its negotiations for a comprehensive and balanced free trade agreement (FTA) with the United States within the next two to three months so that the deal can be approved by Congress under the “fast track” provisions of President George W. Bush’s current trade promotion authority. Since that authority is unlikely to be extended when it expires next July, or even when a new administration takes office in the United States in 2009, Korea’s key competitors such as Japan and Taiwan will probably be unable to receive similar treatment in the foreseeable future and thus Korea will achieve preferred status for a considerable period.

Locking in preferential advantages for a considerable period doesn’t sound like the cascading freeing of trade that competitive liberalization is supposed to encourage.

Bad explanations for the state of play in American trade policy

The Economist applauds Bush’s “great efforts” on trade and blames Democrats for Friday’s imposition of CVDs on Chinese paper:

Despite a dispiriting start that saw the imposition of steel tariffs, the Bush administration has made great efforts on trade, pushing forward with both multilateral and bilateral deals. Its biggest goal, a substantive deal from the Doha round of World Trade Organisation negotiations, is currently on life support. But the administration has managed to secure a variety of smaller deals, while letting steel tariffs die a death at the hands of the WTO. Now even progress of that sort may end.

Already, the Democratic influence is showing on the administration’s trade team. On Friday March 30th it announced that it was imposing countervailing tariffs on Chinese manufacturers of high-gloss paper to offset indirect subsidies they get from the state. America has usually steered clear of this sort of action against state-run economies, saying it is prohibitively difficult to calculate excess subsidies. But the gaping trade deficit with China, and growing protectionist forces, have altered the political calculus. New tariffs of up to 20% will be imposed immediately. The American economy will survive without cheap Chinese paper products. But this could open the way to tariffs on a wide variety of critical products and signals an unwelcome shift in American trade policy.

Kash Mansori (via DeLong) calls them out:

The Bush administration has made great efforts on trade?!? The Bush administration’s imposition of tariffs on China are due to “Democratic influence”?!?

Please. With the imposition of tariffs on China last Friday, the Bush administration acted in exactly the same way that they’ve acted for their entire 6+ years in office: being in favor of free trade whenever and wherever it helps important friends industries, and being more than happy to impose trade protection whenever and wherever it helps important friends industries. The Bush administration enacted a host of tariffs, quotas, and subsidies during the six years when it had a compliant Congress, and last week’s action was just more of the same.

Furthermore, the Doha Round (the round of multilateral trade negotiations that is intended to finally take serious steps toward helping the developing world) is “on life support” in no small measure because the Bush administration has never seriously tried to make it work, instead focusing on small bilateral agreements that make no difference to anyone in the US except for a few individual corporations. And there are good theoretical reasons to think that a bunch of small bilateral trade deals may actually make it harder to conduct multilateral trade negotiations, putting a world-wide level playing field further out of reach than ever before.

The Bush administration’s record on trade policy is a hodge-podge of opportunism and indifference, and owes nothing to Democratic pressures or desires. For the Economist to pretend otherwise is a sad continuation of their baffling tolerance of Bush’s long record of incompetence and misplaced priorities.

This echoes what I wrote in reaction to November’s election:

[I]f public opinion of trade liberalization is so low, would Republican victories have made a difference? Sen. Charles Grassley recently noted that “even if the Republicans continue to control the Congress we’ve already moved into a more protectionist atmosphere.”

President Bush imposed steel tariffs a few months before the 2002 mid-terms in order to win TPA and the election, and free traders were told that a bit of protectionism up-front would buy them much greater liberalization in the future. It didn’t pan out. Then, in 2004, we were told that the Doha round needed to wait until after the presidential election so that Republicans wouldn’t lose critical farm state votes. But the administration didn’t make any serious push at the WTO in 2005, and by the Hong Kong ministerial in December, you could look ahead to Tuesday’s mid-terms. Moreover, the July 2005 pork-laden passage of CAFTA exposed the President’s limited ability to pressure Congress on even the most watered-down trade deals and made me pessimistic about the future of trade liberalization long before a Democratic takeover of Congress seemed likely.

That’s why I disagree with Bronwen Maddox, who wrote that “if the Democrats win back the House of Representatives today, that is the end of the enthusiasm in the US for free-trade deals.” There never was any enthusiasm. Congressional staffers tell me that no one in Washington has considered TPA renewal to be feasible for a couple of years, and Chuck Grassley told Pascal Lamy that it had no chance back in February. While the Democratic Congress will “probably be marginally more protectionist than the current one,” I don’t think that means much difference in terms of further liberalization.

I agree with the Economist that the CVD decision “could open the way to tariffs on a wide variety of critical products and signals an unwelcome shift in American trade policy,” and I do agree that the election brought in a number of new representatives hostile to trade, but granting so much favor to Bush and acting as if partisanship is the best explanation for recent developments is a bit naïve.

Where are Commerce's Chinese subsidy calculations?

Dan Drezner is sympathetic to the imposition of countervailing duties on Chinese coated paper exports, since “this policy shift seems to make sense within the context of what those duties are supposed to accomplish.” He links to a NY Times piece describing the Department of Commerce’s previous position on non-market economies: “[I]t is impossible to determine what a subsidy is in a state-controlled economy… Today, that reasoning is regarded as out-of-date as China has moved from a faltering economy two decades ago to an export superpower.”

Is there good reason to believe that the calculation of the countervailing duties has become feasible? The GAO backgrounder I quoted suggested that Commerce’s calculations might rely upon third-country data. The department’s press release (pdf) and fact sheet (pdf) say nothing about how they determined the subsidization rates. (If you know where to find that information, please let me know.)

The specific allegations I’ve seen in the press are low-interest loans, tax breaks, and other subsidies. Given the structure of China’s financial system, I doubt those were easily identified. That means I’m unable to refute Zhou Shijian, a former trade negotiator for China, who says “the U.S. Department of Commerce hasn’t produced substantive evidence.”

Below the fold, I’ve reproduced a few paragraphs from two segments of the USITC’s December determination on coated sheet paper from China, Indonesia, and Korea. (I don’t recommend reading the full 198 pages (pdf).) The first portion is the ruling on the volume of imports. The second is the chairman’s dissent. I think the dissenting opinion, which focuses more greatly on product differentiation, is the preferable interpretation, but the more intriguing aspect is the degree to which the determination depends on the interpretation of a single data point.

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