American hostility to inward FDI: Virgin America

We all know about Unocal and Dubai Ports World. Ray Seilie points to the latest case of US hostility to inward FDI: a ban on foreign ownership of U.S. airlines is being used by legacy carriers to impede the establishment of Virgin America.

The LA Times editorial on this story is pretty good. Having flown Virgin Atlantic and enjoyed it very much, I wish it were legal for Richard Branson to enter the airline business in the US. Instead, he’s merely licensed the Virgin name to a group of American investors. But the legacy airlines are doing their best to bury the start-up in red tape.

“For the first time in six years roughly, the airlines are starting to experience some profitability, and the last thing that the domestic carriers want to see is new competition,” said Dan Petree, dean of the college of business at Embry-Riddle Aeronautical University. [CNN]

Virgin shoots back:

Instead of focusing on actual facts that show we are an American-owned and -controlled company, they have created irrelevant conspiracy theories about our application. It is farfetched to argue that U.S. citizens are somehow foreign, that debt is equity or that standard provisions protecting minority investors constitute ‘actual control’ of a U.S. airline that is clearly managed by U.S. citizens and 75-percent owned by U.S. citizens.

I think the phrase “regulatory capture” implies that the regulation initially had a legitimate purpose. A blanket prohibition of foreign ownership strikes me as an extremely crude method of reducing security risks. As Ray notes, “sadly, domestic airlines have every incentive to inflame this nationalistic fear-mongering.”

Ag Subsidies Misconceptions

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]

FTAAP & Political Goodwill

Alex Singleton:

It’s a good thing, therefore, that today progress is being on the Free Trade Area of the Asia-Pacific because, in the long run, that will help get the WTO back on track. As far as bilaterals go, it’s a good proposal because it takes the complicated spaghetti bowl of existing bilaterals and simplifies them…

The truth is that for the time being, the WTO is the Plan C for world trade, certainly for the next couple of years, and if the protectionist sentiments continue in the US Congress, much longer. President Bush lacks the political goodwill to regain trade promotion authority, necessary for a WTO deal.

Protectionist sentiments in Congress and a lack of political goodwill? Mr. Singleton’s Plan B is a trade deal with China!

PTAs after Doha

Guy de Jonquieres thrashes “competitive liberalization” enthusiasts:

The Doha debacle has exposed that theory for what it is. In practice, bilateralism has fed off itself, intensifying the rush into preferential deals while draining energy from the Doha talks, polarising the US Congress and further diminishing its appetite for trade initiatives of all descriptions.

The belief that faster progress can be made in regional groupings than in the World Trade Organisation also defies abundant evidence to the contrary. Apec’s dreams of freeing by 2020 trade and investment in the Pacific rim remain dreams. Plans for a free trade area of the Americas are moribund. South America’s Mercosur is in trouble, as are its talks on closer links with the European Union. Disputes between the 10 members of the Association of Southeast Asian Nations have dogged their efforts to implement even limited liberalisation. South Asia’s plans for a customs union look like a joke, as they exclude trade between India and Pakistan. Regionalism’s only big successes are the EU and the North American Free Trade Agreement – and the former is too sui generis to be replicable.

Profits at the bottom of the pyramid?

I have not read C.K. Prahalad’s The Fortune at the Bottom of the Pyramid, but I’ve caught a few newspaper columns like this one summarizing his position. The message, that entrepreneurial MNCs are discovering that they can profit by significantly improving the consumptive well-being of the impoverished, is good news for fans of both markets and helping the poor. Unfortunately, it may be too good to be true.

Aneel Karnani, a colleague of Prahalad at Michigan’s Ross Business School, has posted a working paper attacking the thesis:

Poor people – at the bottom of the pyramid (BOP) – represent a very attractive market opportunity. The ‘BOP proposition’ argues that selling to the poor can simultaneously be profitable and help eradicate poverty. This is at best a harmless illusion and potentially a dangerous delusion. This paper shows that the BOP argument is riddled with fallacies, and proposes an alternative perspective on how the private sector can help alleviate poverty.

I have not read Prahalad’s work, but it seems that Karnani has a good case. The first sentence of the book is:

Turn on your television and you will see calls for money to help the world’s 4 billion poor-people who live on far less than $2 a day.

You don’t have to believe we’ve already achieved the MDG poverty reduction goal to find that number a bit high. It implies that more than half the world lives in moderate or extreme poverty. The real number is certainly below three billion.

That’s just the first sentence. Dive into the rest of the debate by reading the paper.

[Update: Prahalad’s response is here.]

Agricultural subsidies aren’t key to food security, redux

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.

The Origins of Article XXIV

I just stumbled across an article by Kerry Chase of Tufts that describes what he calls the “mysterious origins” of GATT Article XXIV. It appeared in World Trade Review in March 2006. The abstract:

The GATT treaty’s loophole for free trade areas in Article XXIV has puzzled and deceived prominent scholars, who trace its postwar origins to US aspirations to promote European integration and efforts to persuade developing countries to endorse the Havana Charter. Drawing from archival records, this article shows that in fact US policymakers crafted the controversial provisions of Article XXIV to accommodate a trade treaty they had secretly reached with Canada. As a result, the free trade area exemption was embedded in the GATT-WTO regime, even though neither the Havana Charter nor the US-Canada free trade agreement was ever ratified.

Intriguing. Anyone familiar with this claim?

[The author’s book on the political economy of trading blocs also looks interesting.]
[Table 1 summarizes what Ben discussed here. The WTO has not adopted a single report on FTAs or CUs.]

Antidumping “Zeroing” Struck Down

Thanks to Dan Ikenson’s latest Cato blog entry, I learned what “zeroing” is and why the WTO Appellate Body struck it down last week:

In determining margins of dumping (which dictate the prospective antidumping duties applied to affected imports), the Department of Commerce typically compares a foreign exporter’s U.S. and home market prices. There are usually dozens or hundreds (sometimes thousands) of comparisons made, each generating a margin of dumping, which can be positive, negative or zero.

Before averaging the individual dumping margins to produce an overall antidumping duty rate, the DOC perpetrates some sleight of hand by setting all of the negative dumping margins to zero. This, of course, has the effect of seriously inflating the overall rate and dissuading subsequent importation.