And you thought Iran needed preconditions

I was baffled upon learning that the U.S. and Japan did not have a formal free trade agreement with each other, considering how many Japanese goods flow into the U.S. But both countries are partly to blame for this. After all, as of last month, the U.S. was still unwilling to drop tariffs on Japanese vehicles, and Japanese farmers won’t let tariffs on foreign agricultural products disappear without a fight. Yet Japan is the country that doesn’t have a seat at the Trans-Pacific Partnership (TPP) table yet.

Sen. Debbie Stabenow (D-MI) is one of several lawmakers and business lobbyists who are encouraging President Obama not to give Japan the green light to joining TPP discussions. Other participating countries, including Canada, Mexico and Singapore, have welcomed them; Australia and New Zealand, along with the U.S., have not. For his part, Japanese Prime Minister Shinzo Abe and most of his citizens are open to the idea, even if farmers aren’t; for his, Obama has said Abe does not have to meet any preconditions before joining talks.

Despite his openness to the agreement in principle, Abe and his government are promising to fight for tariff exemptions for agricultural products, with the possibility that they may be lowered as a compromise. Congressional Democrats, meanwhile, might be open to dropping U.S. vehicle tariffs if Japan drops theirs first. As for the TPP at large, the agreement calls for all participating nations to drop all tariffs that affect each other’s exports. By the logic of these Democrats, the U.S. should also be left out of talks until they agree to eliminate their auto tariffs. It’s only fair, right?

It wouldn’t be the first time the U.S. has participated in a free trade agreement with exemptions. Despite its membership in the North American Free Trade Agreement (NAFTA), Canada still imposes tariffs on foreign dairy, poultry, eggs and sugar, much to the chagrin of every Canadian who has felt the need to go over the border for cheaper groceries. It’s entirely possible that the TPP will agree to a few exemptions of their own for the good of otherwise free trade. But they can’t do that without all hands on deck.

I happen to believe the elimination of trade barriers does more economic good than harm, and it’s the responsibility of a country’s domestic producers to maintain domestic demand. But the TPP nations will benefit from a good agreement, even if they can’t reach a perfect agreement. The only way to determine which kind of agreement they will get is to allow every Asia-Pacific nation to get involved in talks. That ensures a pathway to change from both the U.S. and Japan.

Of course, if we were talking about human rights abuses or state sponsorship of terrorism or anything of the sort, then I’d accept serious preconditions, as should we all. But tariff exemptions are nothing new.

The waiting is the hardest part

My handy copy of the United States Constitution (what do you mean, you don’t have one? Loser) tells me that, according to Article I, Section 8, paragraph 3, “Congress shall have Power . . . to regulate commerce with foreign nations . . .” Yet this Congress is certainly eager to give more authority over foreign trade to the White House. Not so much that it would create legal challenges, but certainly more than the White House has had since 2007. Amazing the efficiencies people can find after months of nothing.

The idea is that the U.S. would have “trade promotion authority,” which would enable them to have Congress hold an up-or-down vote on new trade agreements within 90 days, and without adding any new amendments. U.S. Trade Representative Ron Kirk made the case for this authority to the House Ways and Means Committee, although nobody has made a formal request yet. Congressional Republicans are happy to provide it; Democrats, less so.

Anyone with cursory knowledge of the two parties’ modern approaches to trade should be able to figure out why. Labor groups are well-known for opposition to foreign trade, often as a matter of principle. Indeed, opening up a certain market to more foreign competition does pose a risk to domestic jobs. The inability to add amendments to new agreements would seriously harm the ability of their Democratic defenders to add related protections during the legislative process.

This isn’t as simple as competition between businesses of comparable size and share in the same jurisdiction. Assuming one of them isn’t getting a ridiculous amount of subsidies or engaging in anti-competitive practices, they’re playing on a fairly level field; they’re subject to the same laws. This is typically not the case between two different countries. Let’s say one of them had more than twice the population of the U.S. and operated under a state capitalist system with scant workers’ rights . . . oh, wait.

In the absence of global trade laws, which would probably make everyone uneasy, there ought to be a way for the U.S. to ensure this while a) speeding up the congressional approval process and b) avoiding outright protectionism. The voices of trade in any given administration must factor “ways to level the playing field” in all of their discussions with foreign counterparts. History is the only way to see whether or not they do this, but ultimately Congress decides if their work is up to snuff – and Americans decide if people with these concerns make it to Congress. It’s all a competition.

So what will we import from Australia, New Zealand, Vietnam and Chile under the next agreement? They’re not quite economic heavyweights; might want to look elsewhere.

To market, to market, to buy some state tires

Last week’s edition of The Economist featured a fascinating cover story on the rise of state-controlled capitalism, ending with their position that (I’m paraphrasing) companies as successful as those in China should, in theory, be as successful without intervention. Their point is that, while China may have some qualities of a capitalist economy, it is ultimately not a free market. So why does U.S. economic policy keep approaching it as such?

In a rare show of unity, the White House and Congress are resorting to legislative means to undo a judicial ruling, GPX International Tire Corp. v. United States, in which a U.S. tire company blamed its bankruptcy filing on the government for not imposing countervailing duties on Chinese imports. You’ll recall that a countervailing duty is applied to exports that are subsidized by their country of origin and can be shown to cause material harm to competitors. The court ruled that these standards do not apply to a non-market economy like China.

First-year business students learn that there is, and has never been, no such thing as a purely capitalist economy. There is always some government ownership somewhere, i.e. infrastructure. As this beauty of a film taught us, though, there are specific criteria for a market generally regarded as “free”: private property, the profit motive, competition, freedom of contract and legal guarantees of all of the above.

What isn’t said is the assumption that these can only be enjoyed by individuals and individually-owned companies to add up to capitalism. You can’t fit exports from state-controlled companies under this paradigm, even if they are engaged in international trade for profit and have competitors. They are not privately owned and do not enjoy freedom of contract from the government. This creates far more distortion than can be recognized in an export that was merely subsidized, as many U.S. exports are.

The White House and Congress may not like it, but their own predecessors encouraged trading with China and similar economies before they either became “market” or decided they would at some point. China is getting plenty rich, not because of state capitalism in and of itself, but because real market economies don’t understand the rules of their game. Allowing China into the World Trade Organization (WTO) was a big, juicy carrot without a stick, and American businesses are getting prodded.

GPX International Tire Corp. was at least partly right to blame the government for its problems. But it wasn’t because they didn’t impose duties on Chinese tires. It was because they put themselves into a position in which they couldn’t.

Very abnormal trade relations

You’d think that entry into the World Trade Organization (WTO) is the surest sign that a country once characterized by political corruption, human rights abuses and centralized economic planning had, somehow, been saved from itself. Of course, it didn’t turn out that way with China in the early 90′s. And if last week’s disputed election results are any indication, it hasn’t turned out that way with Russia, either.

Russia is set for entry into the WTO next week. For their trade relations with the United States to be completely normalized, though, there’s a certain provision that will have to be repealed. The Jackson-Vanik amendment, a relic of the Cold War, ties permanent normal trade relations (PNTR) between the U.S. and state economies “to the rights of religious minorities to emigrate freely.” My mom’s family was in the religious minority while they lived in Soviet Latvia, and they were denied emigration five times.

Of course, refuseniks haven’t been an issue since the Gorbachev years, so I suppose this provision in particular was due for a repeal – as is every policy that assumes the Russians want to infiltrate our security systems and spread Communism to the children. And if Congress denied to repeal it, the U.S. would essentially be shut out of the benefits of trade with Russia. We’ve largely gotten past the idea that new trade deals are inconsequential to any future economic gains.

In fact, Rep. Kevin Brady (R-TX), who chairs a House subcommittee on trade, is so convinced about the need for increased trade relations that “he said he was not willing yet to endorse the need to create some kind of mechanism within the PNTR legislation to put pressure on Russia over human rights and other issues.” I won’t go so far as to accuse him of disregarding human rights issues, as some might. But he did highlight a void that need not be filled by Congress.

The WTO has no mandate to ensure respect for human rights within its member nations; that role has largely been left up to the UN, which has so many rights abusers within its ranks that their mandate’s relevance is decreasing by the day. (I’m for the UN in theory, but not this version in particular.) Such an end would be more effective if it were tied to market entry, as opposed to international law. That may seem cynical, but when hasn’t money been the best motivator? Embrace that early.

If the U.S. can take the lead on this, it would not only restore their position of international leadership, but make it more appealing for companies to stay in the U.S. where they don’t have to pay for rights protections and transportation. Hopefully the WTO goes for it. If Russia doesn’t, that’s what happens when you trade with non-capitalists.

Hey, Congress, what drugs are yuan?

Senate Majority Leader Harry Reid (D-NV) finally got one right when it comes to jobs: trade with China is indeed the most important factor. Way to go, Harry, now see if you can figure out what the most important factor in Nevada’s job market is. (Breasts. Just saying.) Most other senators appear to agree, with bipartisan support currently behind a bill to crack down on China’s currency practices. How can they do this when even American monetary policy is independent of Congress? It’s easy.

It’s believed that the Chinese yuan has been pegged (again) to the American dollar, allowing the two currencies’ values relative to one another to remain roughly the same amid fluctuations. That means China can charge for its exports at about the same rate all the time. The largest currencies on the planet, including the greenback, are “floating”; they move with the foreign exchange market. The Senate wants to punish China for this by allowing companies to apply for countervailing duties – an estimated $125 million worth over ten years.

Now when we’re talking about jobs bills in the hundreds of billions and spending cuts in the trillions the rest of the time, $125 million is nothing. Assume that no more than 125 companies apply for these duties. On average, that’s only a million apiece. Now assume every penny of that $1 million pays for new jobs averaging $30,000 in salary. That’s 33.33 jobs per company. Multiply that by 125 companies. That’s 4,166 new jobs in America. Total. Over ten years.

In short: not the magic bullet. But that’s pretty much the best Congress can do when it comes to another country’s economics, short of revising trade agreements. So let’s discuss the principle of the legislation. While I would not be the least bit surprised if China were manipulating its currency, nobody has established that this is their policy. Is a global trade war worth just 4,166 jobs?

I hate to say it, but whichever Chinese official advised the U.S. not to politicize the yuan because of its own economic problems, well, was right. I have always been skeptical of the power of monetary policy to make a substantial positive economic impact in the hardest of times. If the U.S. pushes China too hard on its own, the impact could be much stronger, but in the opposite direction. That seems to have been lost in discussions of this piddly little bill.

The one thing both countries can agree on is that massive federal spending over decades got the U.S. into this pickle. Systematic fiscal and trade changes may be the best way out of it. This is not one of those changes.

Are you clinging to your guns and religion yet?

I had a feeling that President Obama’s bus trip through the Midwest wouldn’t go perfectly for him. Turns out, I’m right, according to The Guardian: The rural residents of the three states on his itinerary – Minnesota, Iowa and Illinois – aren’t buying his pro-free trade message, which they view as a surefire way to export more jobs. That The Guardian, based in the UK, is reporting this instead of a local outlet may be the perfect illustration of their disappointment.

While existing free trade agreements may have yielded some short-term benefit, the North American Free Trade Agreement (NAFTA) has cost the U.S. over 600,000 jobs, mostly manufacturing jobs, as well as its once-$1.6 billion trade surplus. Mexico’s trade surplus last year was 60 times that amount, to put it in perspective. As well, support for free trade stands at 35 percent among all Americans, and 28 percent among the generally pro-trade Republicans. Clearly mistakes have been made on the way.

Obama understood why the tide has turned against trade on the campaign trail, when he came out with that “guns and religion” crack. But after stimulus, investment and attempted trade (“Do they give a Nobel Prize for attempted chemistry?”), he still hasn’t found a way to do what I insisted he do two months ago: devise a comprehensive manufacturing strategy. The business of America’s Wall Street may be business, but the business of America’s Main Street must be manufacturing.

To keep Midwest voters on his side, Obama’s mission can be summed up as thus: Demonstrate that Americans can benefit from free trade agreements without seeing their jobs leave the country. They may benefit by spending less at Wal-Mart than they would at Target, but maybe some of them want to shop at Target once in a while. Here are a few suggestions:

• Through regulatory and tax adjustments, create a more cost-effective environment for U.S. multinationals than they’d find elsewhere.
• If more investment is necessary, invest in the stuff that can be built on a production line, often, and would sell.
• Require countries on the other end of trade agreements not to make their operations artificially cheap.
• Stop blaming the GOP and do stuff.

As was proven in the Depression, trade is necessary to keep the economy in motion. Obama’s objective should be to restrict the word “motion” from applying to jobs.

The District and Colombia

Yesterday yielded another example of President Obama taking heed of the lessons of Clinton-era economic policy, by signing off on a trade deal between the U.S. and Colombia. No word on exactly what would be traded, though. Colombia’s top exports are coal, petroleum, coffee “and other agricultural produce” and cut flowers; the U.S. can produce the first two, and it has no major need for the last two. But that’s not important right now.

What’s important is that this trade deal is actually an improvement upon the aforementioned Clintonomics, because of the process by which it was reached. For several weeks, the U.S. has insisted upon improved labor protections for Colombians. Republicans had been clamoring for the deal to go through quickly in the interests of job creation, but U.S. Trade Representative Ron Kirk wasn’t willing to make haste.

I’m as fervent a believer in trade as a source for new jobs as anyone, but it has to be smart trade. The administration’s pressure on Colombia to agree to their labor demands will give them a permanent leg up in any future negotiations. The Colombians know full well what they could be losing if they screw up – and they have the world’s biggest checkbook at stake as well. The U.S. has no such advantage over China.

Here’s a summary of the U.S.-China Relations Act of 2000, which established their trade agreement. It contains multiple references to the need for China to respect the rights of its workers and all other citizens, including a provision to bar federal funds from going to China if there have been rights violations. I don’t think anyone can look back on recent news out of China and say there has been a revolutionary shift in terms of human rights. Either this law had no teeth to begin with, or nobody’s biting.

There’s only so much you can do when your trading partner is a Communist nation. Perhaps that’s the real problem. Colombia is a presidential republic, automatically making them a more agreeable partner. What has the U.S. really gained from trading with China besides cheap crap and cheaper labor? What have the Chinese gained besides bad jobs instead of no jobs?

The West Wing says: “The President knows Chinese political prisoners are going to be sewing soccer balls with their teeth whether we sell them cheeseburgers or not, so let’s sell them cheeseburgers.” Which pretty much sums up former President Bill Clinton’s efforts to gain the leverage the U.S. now has over Colombia. Sell cheeseburgers.

Intro to Clintonomic theory

I don’t normally have a good deal of faith in Weekly Standard writer Matthew Continetti, whom I described as a “Palin ass-kisser” two days ago. But he impressed me with this op-ed, which detailed why President Obama’s economic policies have resembled the wrong Democratic predecessor. Instead of former President Franklin Roosevelt, Continetti says, Obama would do well to emulate former President Bill Clinton.

I know. A writer for a conservative magazine thinks someone should be like Clinton. Does this mean this niche market has abandoned voyeuristic, irrelevant personal attacks in favor of truly vital policy debates, and with reasonable points, no less? It’s too early to say for certain, but this is a good sign. I’ll predict right now that this will be a trend among conservative writers until Obama starts listening to arguments like this one.

The Clintonian ideas favored by Continetti are as follows: Free trade; balanced budgets; welfare reform; capital gains tax cuts; lower government spending; and, my personal favorite, “opening new markets and spurring innovation,” which is exactly what I’ve been demanding both parties bring about for months. Although the credit for that last one can largely be given to former Vice President Al Gore, who did not “invent the Internet,” but spearheaded the legislative movement to make it a nationwide reality.

I still maintain that green technology will be the new Internet. Continetti is skeptical of “government-directed ‘green jobs,’” as evidenced by the second-last paragraph of the article; he prefers “privately funded start-ups.” Suppose a Gore-style effort was made for the green tech industry? Would he lose some of that disdainful tone then? (If this does not happen, we’ll need an aggressive marketing campaign to convince entrepreneurs to get on this. I’ll round up my classmates to start writing ad copy.)

I wish I could address Continetti’s comments on Obama’s efforts to appreciate the yuan; however, I don’t know enough about currency issues to have an opinion. His central point is that even if Obama does not have an abiding belief that trade and free enterprise are bad – and he doesn’t – his rhetoric and his initiatives have given off that impression. Meanwhile, Clinton’s blatantly pro-trade actions should be copied, not so much because they suit an ideology, but because they led to enormous growth.

Basically, Continetti says, Clinton was unapologetic of his support of globalization and made it about more than diplomacy in defense matters. Democrats have abandoned this for the “pursuit of income equality.” They forget that Clintonomics, a term I just thought of, may be the best route to it.

U.S. automakers and their Seoul brothas

At least one good thing came out of last weekend’s otherwise pointless G20 summit in Toronto: President Obama and South Korean President Lee Myung-bak are now in talks to sign a free trade pact. Unfortunately, some congressional Democrats fear that free trade would be too risky for the American auto industry, whose participants are finally “back on their feet,” according to Rep. Phil Hare (D-IL). Economic theory posits that it could work wonders if implemented properly.

The deal would require the U.S. to eliminate an existing 2.5% tariff on South Korean cars and another 25% tariff on their pickup trucks. (An American driving a pick-up truck built outside of America? I have a really hard time wrapping my head around that.) This would mean vehicles manufactured by Hyundai, Kia, GM Daewoo, and a couple of other companies you’ve never heard of. Meanwhile, South Korea would eliminate an 8% tariff on U.S. cars and a 10% tariff on pickup trucks. The current ratio is 83.3 cars exported to the U.S. for every single import.

On paper, a free trade pact would open up the possibility of more South Korean cars being manufactured in U.S. factories, resulting in more jobs for Americans. It would also result in more U.S. manpower being needed to make the imports. But that ratio suggests that South Korea would be uncomfortable letting this happen, especially compared to a U.S. company’s likelier inclination to ship some of their operations overseas. It’s natural, as South Korea is clearly less accustomed to trade and might not fully grasp its benefits.

Politically, the approach for U.S. Trade Representative Ron Kirk to take with his South Korean counterpart is carrot (explaining how it will be mutually beneficial) and stick (“Lift the ban on our beef or no deal for you“). Whatever the gains will be to the U.S., they should not come if South Korea is still holding out on them in other markets. No sense in letting them get too comfortable with their existing attitude.

If I were calling the shots in South Korea, I would want to open up the market temporarily and measure consumer demand before signing anything permanent. Barring protectionist propaganda, I bet plenty of South Koreans would enjoy tooling around in an F150 if the market wasn’t as closed as it is. This is a possibility for the “results-oriented trade deal” sought by Steve Collins, president of the American Automotive Policy Councils, who favors a “well-negotiated” deal.

And as for Democrats who are scared of losing votes from auto workers: Grow up and deal with it. It’s not all about you.

And then there’ll be two

Disposal Day will be cancelled today so we can discuss some rather alarming news. Rep. Gene Taylor (D-MS), with the backing of approximately 28 other House members from both parties, has recently put forward legislation that would remove the United States from the North American Free Trade Agreement (NAFTA). They say this must be done to save American jobs.

I’ll admit that when I first started writing commentaries on trade issues, getting rid of NAFTA seemed like a very good idea. It wasn’t because I was one of those Chicken Littles who constantly waxed fearful of a North American Union. It was simply because I believed jobs originating in American companies should be given to Americans, same for Canadians and Mexicans. I still do. But that doesn’t mean NAFTA should go.

At any time of high unemployment, you will find at least one otherwise reasonable person who has become seduced by the concept of trade protectionism. It doesn’t sound too bad on paper: Slap tariffs on another country’s suppliers so your own country’s suppliers can make stuff, which will mean they can hire more of your own countrymen. (And women, for all you gutless PC cops out there.) But I have said numerous times that this is not viable now that we have something worth calling a “global economy.”

President Obama has had his own criticisms of NAFTA and made threats to leave it, but he backed that stick up with the necessary carrot of encouraging Canada and Mexico to agree to new labor and environmental provisions. It’s not a flawless agreement, and those flaws are worth addressing, especially when green products can provide such enormous economic opportunities. I don’t know about Mexico, but you’ll have to wait a while for us; right now we’re busy arguing over Prime Minister Stephen Harper’s budget.

Obama has also recommended revoking tax breaks for American companies that export jobs in order to protect their bottom lines. I would tentatively agree with this, although that ought to wait until the unemployment rate drops significantly. You’ll find that many of these companies could do a better job of cutting costs by examining their executive salaries. The maquiladoras may not like it, but it’s high time for Mexico (and Canada) to develop more industries of its own.

Perhaps we can’t trust the aforementioned executives to do right by their workers, but putting tariffs back onto their materials may mean the difference between a business that outsources and no business at all.