The US Election & Trade

What will Democratic control of the US Congress mean for trade policy? Opinions vary. In short, I don’t think the legislative shift implies much for the WTO negotiations, which were going to be quiet for a while regardless.

Even prior to Tuesday, the majority of analysts expected the Doha Round to lay dormant for some time. The most notable dissident is Jagdish Bhagwati, who wrote last week:

But Doha is far from dead. Pascal Lamy, World Trade Organisation director-general, has only “suspended” the talks… George W. Bush is deeply committed to the success of Doha: it would be a rare multilateral triumph for a US president who never wavered in his support for free trade, even as John Kerry, his opponent in the last presidential election, was condemning US companies that outsource as traitors. With the elections to the US Congress pending, and with Democrats out to exploit every opportunity, he simply could not make the necessary concessions in agriculture and risk losing his own “farm belt” support. But with the elections behind him, he can return to act forcefully on his convictions.

In contrast, Brad DeLong says that “free trade does not appear to be a priority for the types of Republicans who get elected president–and definitely not for their staffs.” Nonetheless, so that we can focus on the legislative branch, let’s assume that Bush would like to renew trade promotion authority (TPA) and use it to achieve a meaningful Doha round outcome. What do the mid-terms spell for the US in the WTO negotiations?

Pat Buchanan welcomes the election results as hailing a “new era of economic nationalism”:

Among the more dramatic events of this election year was one that has been little debated: The return of the trade-and-jobs issue, front and center, to American politics. Note: Almost no embattled Republican could be found taking the Bush line that NAFTA, or CAFTA with Central America, or MFN for China, or globalization was good for America and a reason he or she should be re-elected. But in Ohio, Pennsylvania and Michigan, attacks on free trade were central elements of Democratic strategy…

With the 2006 election, America appears to have reached the tipping point on free trade, as it has on immigration and military intervention to promote democracy. Anxiety, and fear of jobs lost to India and China, seems a more powerful emotion than gratitude for the inexpensive goods at Wal-Mart.

While I dissent from Buchanan’s enthusiasm, it’s true that free trade was not a platform plank likely to attract many swing voters on Tuesday. But if 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. The WTO talks were dormant already, Bhagwati’s “far from dead” optimism notwithstanding, and no one expects them to go anywhere without TPA after it expires on July 1.

When might the Doha round resume? Richard Baldwin previously commented that EU CAP reform in 2008/2009 may revive the round. Last Friday, Alan Beattie described the negotiations as in a “deep freeze.” He said they wouldn’t have a chance until after the next US presidential election, and some analysts have even said 2012. I haven’t seen anyone predicting substantive action prior to 2008.

So don’t blame Democrats for hurting Doha, which had already collapsed and wasn’t going anywhere soon even if Republicans kept control of Congress. The interesting question: do the election results increase the risk of protectionist backsliding that we’ve managed to avoid thus far?

Razeen Sally surveys Asian PTAs

The freshly launched European Centre for International Political Economy (ECIPE) has posted its first working paper, “FTAs and the Prospects for Regional Integration in Asia” by Razeen Sally (pdf). The paper surveys FTAs that countries in the region have pursued. Here are some highlights I found interesting:

The predictable results of foreign-policy-driven FTA negotiations light on economic strategy are bitty, quick-fix sectoral deals… These FTAs hardly go beyond WTO commitments, deliver little, if any, net liberalisation and pro-competitive regulatory reform, and get tied up in knots of restrictive, overlapping rules of origin. Especially for developing countries with limited negotiating capacity, resource-intensive FTA negotiations risk diverting political and bureaucratic attention from the WTO and from necessary domestic reforms…

It is already apparent that China’s FTAs are driven more by “high politics” (competition with Japan to establish leadership credentials in east Asia; securing privileged influence in other regions) than economic strategy. The latter is barely evident in China’s seeming readiness to negotiate (economically nonsensical) PTAs outside east Asia. This contrasts with China’s engagement in the WTO. In the latter, its approach is clearly linked to national economic policies that have a single-minded focus on growth. Commercial realities are front and centre in what China does in the WTO…

Thailand provides a better indicator than Singapore of FTAs in southeast Asia and beyond. Its FTAs have been rushed: careful preparation has been conspicuously lacking. Too many negotiations have been launched, and they have proceeded too fast. High-level policy direction to negotiators has been lacking… This trade-light approach has resulted in weak FTAs that will make little positive difference to competition and effi ciency in the Thai economy, but will create complications in the process (not least with a bewildering array of ROO requirements). The US-Thai FTA is likely to be the sole exception due to American demands for wide and deep commitments (though it will add to Thailand’s ROO noodle bowl). But negotiations have run into serious domestic opposition in Thailand, which threatens to derail them altogether…

India’s approach to FTAs outside south Asia is mostly about foreign policy, with little economic sense or strategy… The India-Thailand FTA is intended to be comprehensive, but is to date limited to an early-harvest that has eliminated tariffs on just 82 products, with very restrictive rules of origin imposed by the Indian government. ASEAN-India negotiations have also been bedevilled by India’s insistence on exempting swathes of economic activity and on very restrictive rules of origin for products covered…

Japan was the last major trading nation to hold out against discriminatory trade agreements, preferring the non-discriminatory WTO track instead. This has changed decisively in the past five years… The Japan-Thailand FTA is indicative of Japan’s overall approach to FTAs. It is a weak agreement born of mutual defensiveness. Thailand has long transition periods for phasing out tariffs in steel and auto parts; and it has exempted large passenger cars from the agreement. In agriculture, Japan has exempted rice, cassava, beef, dairy, sugar and some other products, and agreed to limited tariff liberalisation in other products. Rules of origin are very restrictive on agricultural and fisheries products – at Japanese insistence…

Japan calls its FTAs “economic partnership agreements” (EPAs) – to indicate that they go beyond traditional FTAs in goods and have comprehensive coverage of trade and investment-related issues in goods and services. That is misleading. EPAs are euphemisms for weak and partial FTAs. In essence, Japan seems to be reacting to China’s FTA advance, but without a real strategy…

APEC’s heyday was when it was a cheerleader for non-discriminatory unilateral and multilateral liberalisation in the early-to-mid 1990s. It has lost its way since the Asian crisis: its membership is too diverse and unwieldy for there to be any meaningful trade-policy consensus; its agenda has become impossibly broad and unfocused; and attention has shifted to bilateral and plurilateral FTAs (Scollay, 2001: 1144; Ravenhill, 2000: 322, 324-325). APEC’s vaunted Open (i.e. non-discriminatory) Regionalism is dead in the water; and these days it is driven by shallow conferencitis and summitry. It cannot be expected to contribute anything serious to regional economic integration…

The heart of the matter is that within and across south, southeast and northeast Asia, cross-border commerce is throttled by the protectionist barriers that developing countries erect against each other. The type of FTAs that are being negotiated do not presage a return to 1930s-style warring trade blocs. But they are highly unlikely to make a big dent in existing barriers and thereby spur regional economic integration. They might complicate east-Asian intra-regional production networks (the Factory Asia phenomenon), and distract attention from further unilateral liberalisation and domestic reforms. These FTAs have the hallmarks of trade-light agreements. Some might even come close to being “trade-free” agreements…

More fundamentally, trade policy matters more than trade negotiations. Governments in the region, however, are acting as if it were the other way round. They are relying too much on trade negotiations – particularly FTAs – while neglecting sensible trade-policy reforms at home. This is a reversal of pre-Asian crisis reliance on (non-discriminatory) unilateral liberal- isation. What might change this picture is the mind-concentrating effect of faster unilateral reforms in China and India – China in particular. The Chinese engine of unilateral freer trade might just induce a fresh spurt of liberalisation and structural reform elsewhere – but perhaps largely outside trade negotiations. Only with such market-based reforms at home do FTAs make sense – not least to minimise the effects of trade diversion.

Alan Beattie on the WTO negotiations

I saw Alan Beattie speak about the WTO negotiations this afternoon. He covered a great number of trade-related topics in his hour-long discussion, many of which would be familiar to those who read his columns (e.g. 1, 2, 3). Here are a few of his remarks that caught my attention:

“No one agrees what development is or what’s good for developing countries.” So the Doha Development Round has translated into each country defining “development” to favor its own interests.

“We’re very sorry about that two centuries of subjugation. Got any sugar?” — on Europe’s trade preferences for former colonies, which result in African LDCs having “the best market access in the world.”

“No one in the system cannot afford to have Doha fail.” Therefore no country will make it happen.

“[Customs reform] is more important than anything at Doha.” Apparently many countries’ ports now process exports more quickly due to the US imposition of security standards after 9/11, which granted political leverage to those seeking customs reform.

“They’re the ones coming out with exciting new acronyms.” — on why journalists tend to focus on institutions

“Three part-time amateurs make up the law as they go along.” — on the WTO’s dispute settlement mechanism, where in some cases the panelists are also trade negotiators.

“I have never come across a truly consumer-led free trade campaign.
‘What do we want?’
‘Marginally cheaper sugar!’
‘When do we want it?’
‘Phased in over seven years!'”

I’ll have more on Beattie’s predictions about the Doha round later.

The Future of APEC

Jagdish Bhagwati in the FT on APEC:

As the 21-member Asia-Pacific Economic Co-operation organisation (Apec) meets later this month (November 16) in Hanoi, the central question its leaders must confront is their response to the stalemate in the multilateral negotiations launched at Doha. Two options are competing for attention.

First, that Apec should continue to embrace “open regionalism”, acting as a forum where members undertake trade liberalisation in concert and extend it worldwide on a “most favoured nation” basis. Many in the region, led by Ross Garnaut and Peter Drysdale, the Australian economists, argue Apec should maintain this tradition and work actively for the cause of multilateralism by pushing for the conclusion of the Doha round.

Second, that Apec should instead launch a Free Trade Agreement of Asia and the Pacific (FTAAP), converting Apec into a “regional” free trade area…

The proposal to turn Apec into a free trade area runs into insuperable political and technical difficulties… Can anyone seriously believe that an FTAAP – requiring free trade among countries as diverse as China, Japan and the US – can be agreed more easily than Doha can be concluded?

Bhagwati never passes on the opportunity to deploy a metaphor:

These create what I have called the “spaghetti bowl” problem of criss-crossing bilateral agreements that create a chaotic system of discriminatory tariffs depending on source. Optimists such as Koichi Hamada, professor of economics at Yale University, believe merging them would turn the bilateral spaghetti into a (regional) lasagna. But lasagna cannot be made from spaghetti: it needs flat pasta! We would face the impossible technical problem of folding several FTAs together that have different tariff rates and innumerable rules of origin (often defined differently by product) for preferences to kick in.

Impossible technical problem or a tangle that may be tamed?

US-Taiwan FTA

Pundits have an inexplicable love affair with preferential trade agreements. Doug Bandow advocates that the US and Taiwan negotiate a free trade agreement for foreign policy reasons. The economic arguments he tosses in are not compelling:

Taipei is America’s eighth biggest trading partner (and America is third on Taiwan’s list), with two-way trade running about $60 billion annually, and is a high-income consumer and high-technology producer. The U.S. exports more to Taiwan than to Australia, Chile and Singapore, all of which now enjoy FTAs.

Estimates of the likely increase in U.S. exports through an FTA run from about 15 percent to 30 percent. An FTA would position U.S. enterprises to take advantage of Taiwan’s ongoing transition toward a service-oriented economy.

The island, with widespread economic penetration throughout Asia, would provide a base for U.S. enterprises to expand their reach. More important, Taiwan’s proximity to China and increasing economic integration with the mainland would indirectly boost American ties with the PRC. Since Beijing views Taiwan as part of one China, U.S. firms operating in Taiwan and investing in Taiwanese concerns might find improved access to the larger China market.”

How is the fact that the US and Taiwan are already such active trading partners an argument in favor of a PTA? Isn’t that an indication that their bilateral trade barriers are relatively low? Moreover, where does that 15 to 30 percent increase in exports come from?

A US-Taiwan FTA would appear to be mostly trade diverting, not trade creating, primarily because the gains to Taiwan would derive almost entirely from increased exports of apparel, a sector in which the island’s production and exports have been declining for years in the face of competition from lower-cost producers… While preferential access to the US apparel market under an FTA would provide short-term economic benefits, it almost certainly would have adverse consequence for Taiwan’s long-term economic growth and welfare.

For the United States, the biggest anticipated gains from an FTA with Taiwan are in the auto sector, although these gains also would almost certainly reflect trade diversion.

As for economic integration with the mainland, why should we expect lower import tariffs and quotas to increase the number of “U.S. firms operating in Taiwan and investing in Taiwanese concerns”? It sounds like Bandow wants an investment agreement, not a trade deal, since I doubt that many US businesses will set up shop in Taipei to capitalize on the opportunity to export textiles and apparel to the United States. Moreover, as of May 2006 the deputy USTR wasn’t too enthusiastic about Taiwan as a route to the mainland:

Echoing positions long held by the business community, Mr Bhatia said globalisation required integrated cross-border supply chains, in which China played an increasingly important role. Against this background, Taiwan’s restrictions on the transfer of commercial technology, imports of certain goods from the mainland, cross-Strait travel, investment in China and direct transport links across the Strait put the island at a disadvantage, he said.

The economic case for a US-Taiwan FTA looks weak. I’ll leave the geopolitical issues to more qualified commentators.

Dissent from trade pessimism

Fretting about the failure of the WTO’s Doha round of negotiations? Fallen off your trade liberalization bicycle? Fearful of rising protectionist sentiments? Relax, says Douglas Irwin:

The fashionable answer among many academic observers and prognosticators is to express concern (and perhaps even fret) about the current state of trade relations, to issue a warning about impending protectionism, and to suggest that the world trading system could collapse without renewed efforts on its behalf. In this paper, I offer a mild dissent. I do not think that there has been or will be a serious backlash against globalization. Indeed, I am surprised by the lack of ‘push back’ or resistance to greater economic integration in the United States and other industrial countries over the past 20 years, even as such integration has accelerated…

Indeed, barring a global war or a major depression, globalization today is probably irreversible as the steady march of technology brings economies together. The technology behind increased international communications, from the telephone and internet to the Boeing 747 and Airbus A-380, cannot be undone. Even if trade policies were to be used in an attempt to offset this shrinkage of the world, they cannot put the globalization genie back into the bottle because the toothpaste is out of the tube (to mix metaphors). To use a historical analogy, when railroads ran deep into the Midwestern United States and Russia in the late nineteenth century, grain prices fell across Europe. Agricultural tariffs rose somewhat in response, but this policy response failed to offset the rapid decline in transport costs. In the end, grain markets were integrated to a much greater degree than before.

Furthermore, the momentum of global economic policy is toward the continued opening of markets, more through bilateral and regional arrangements than through the multilateral process, an issue to which I will return shortly. This makes it difficult to see a revival of protection on the horizon, but economists have not refrained from crying wolf on this score for many years…

The lack of progress in the Doha Round is lamentable, but not surprising. Multilateral trade liberalization has never, ever, been easy. We seem to think of the 1950s and 1960s as the halcyon days of trade liberalization, when there was consensus and political will, and everything was easy. This is a false reading of history. Each of the GATT negotiating rounds was an extremely difficult task. From about 1947 until the end of the Kennedy
Round in 1967, the GATT accomplished virtually nothing. History indicates that progress at the multilateral level should be measured in terms of decades, not years. Doha may be behind schedule; so what else is new? Most trade rounds take about a decade to conclude, and as this text is being written (2005) it has only been less than four years since the commencement of the Doha round…

Let me conclude by saying that, despite the challenges ahead, we should view the pervasive pessimism about world trade negotiations with some degree of scepticism. At the risk of being accused of complaisance, I take comfort from the fact that policy efforts—however erratic—are being made largely in one direction: the opening of world markets. There is globalization fatigue, but not globalization backlash. And it simply takes time to recover from fatigue.

Read the full piece (pdf), which packs plenty of historical perspective into five pages.

What would a Democratic victory mean for trade?

Contrasting views.

Jonathan Martin in National Review:

At stake? The free-trade consensus in the Senate that has ensured easy passage of every measure liberalizing trade put forth by the past two administrations… Should seats currently held by free-traders in Ohio, Vermont, Pennsylvania, Virginia, Rhode Island, and Missouri go to “fair traders” — and should the sour environment for Republicans prevent them from gaining any seats from Democrats — the bipartisan commitment to free trade in the Senate would almost certainly end, torpedoing the prospects for any significant legislation in President Bush’s final two years and perhaps longer while fundamentally altering the character of the upper chamber.

Anatole Kaletsky in the Times:

What about global trade? The Democrats are ideologically more protectionist than the Republicans, but this is mitigated by the geographic concentration of the two parties’ support. The South and West of America, where Republicans attract most of their votes, is also the heartland of American protectionism. The Democrats tend to represent the East and West coasts, where voters are more liberal and cosmopolitan, so that a Democratic victory could actually increase the influence in Washington of the liberal economic establishment. In any case, President Bush’s “fast-track” authority to negotiate a global trade agreement expires next July and he has almost no chance of an extension. Thus, whatever happens next Tuesday, a global trade deal is not going to happen before the next president is in office in 2009.

Cotton subsidies, again

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)