New FDIC Rules, Offshore Hedge Funds and WTO Rules

The AP reports on new FDIC rules that pose additional restrictions for hedge funds relative to bank holding companies when they acquire failed banks:

The Federal Deposit Insurance Corp.'s board voted 4-1 to reduce the cash that private equity funds must maintain in banks they acquire.

Private equity funds tend to buy distressed companies, slash costs and then resell them a few years later. They have been criticized for excessive risk-taking. But the depth of the banking crisis has softened the FDIC's resistance to them...

Under the new rules, a buyer would need to maintain the bank's capital reserves equal to 10 percent of the failed bank's assets, down from 15 percent under an earlier proposal. That compares with a 5 percent minimum requirement for banks that buy other banks. And the new policy limits the circumstances under which private investors must maintain assets that could be provided if needed to bolster banks they own.

But the FDIC sought to guard against private equity funds that might want to quickly buy and sell at a profit: It required the acquiring investors to maintain a bank's minimum capital levels for three years.

But as the WSJ reported:

Hedge-fund assets in offshore tax havens such as the Cayman Islands and Bermuda represent more than two-thirds of the roughly $1.3 trillion industry, according to Hedge Fund Research Inc.

Of those offshore assets, industry insiders estimate, between $400 billion and $500 billion belongs to U.S. investors, with tax-exempt foundations, endowments and pension funds accounting for about half of that. Investors from outside the U.S. make up the rest.

What implications might this have for our trade and investment rules? Changes in minimal capital requirements would probably not run afoul of WTO member countries' market access commitments, but they could impact their commitments on domestic regulations.

NAFTA Case Shows Financial Rescue Measures Open to Trade Pact Attack

I'm just back from a relaxing vacation of kayaking, eagle-watching, gun-shooting and salmon-eating, and I've got a bit of a long post stored up in me. So, you've been warned.

Before there was the New Great Depression, or whatever the latest term of art is for the current economic meltdown, there was a series of financial crises that wracked developing countries in the 1990s. And there's one NAFTA case that followed from these government responses to crises that provides a unique insight into how trade and investment treaties limit policy space in response to financial crises.

Going back to 1994, we saw Mexico's Peso Crisis, which came mere months after NAFTA went into effect. As a response, the incoming Ernesto Zedillo administration launched the Programa de Capitalización y Compra de Cartera, a financial rescue plan very similar to the packet of policies launched by the U.S. government in response to our crisis: the government bought non-performing loan portfolios from troubled banks in return for interest-generating government notes redeemable 10 years later. As a condition for participation in the program, banks had to raise additional capital from outside sources.

One of the 11 banks that participated in the program was BanCrecer, a subsidiary of a bank-holding company called Grupo Financiero BanCrecer (GFB). One of the outside sugar-daddies GFB saddled up to for capitalization was the Fireman's Fund Insurance Company (FFIC) of Novato, California. FFIC is owned by Allianz of America, a Delaware corporation owned in turn by Allianz AG of Germany. Allianz of America also owns Allianz Mexico, which in the mid 1990s was trying to ramp up some insurance business in Mexico.

So, to get Allianz's foot in the door, FFIC lent (via dollar-denominated mandatorily convertible five-year subordinated debentures issued by GFB) $50 million to GFB in September 1995. But GFB continued to have financial difficulties, and by 1998-99 was working with JP Morgan and Allianz to find a foreign corporation willing to buy BanCrecer, in coordination with Mexican regulators.

Allianz throughout was looking out for its own financial position, and by summer of 1999 was looking for an emergency parachute from the crumbling BanCrecer empire. It's best possible option appeared to be a reimbursement for the debentures along the lines of what some Mexican investors had gotten for their peso-denominated debentures around the same time period. But in August 1999, the Mexican Central Bank denied one of FFIC/ Allianz's parachute plan, and over 2000-01, BanCrecer was auctioned off to another Mexican bank and GFB began to be liquidated, in coordination with Mexican regulators.

By October 2001, FFIC had launched a NAFTA investor-state case against Mexico, claiming that its investment was expropriated by Mexico, among other claims. There are lot of ins and outs to the case (which you can read about on Todd Weiler's website here), but there are a few points (which I draw primarily from the July 2006 award) that are instructive for anyone thinking about how trade and investment treaties limit governments' policy space in crisis situations:

The most awesome WTO agreement that no one can remember

After years of celebrating the WTO Financial Services Agreement, many analysts and institutions appear eager to pretend it doesn't even exist.

Take a new report by Gary Hufbauer of the Peterson Institute and his colleagues Luca Rubini and Yee Wong. They assert that:

By far the largest bailouts were extended to the financial sector, both in the United States and Europe. This is not surprising, since reckless behavior by major banks and insurance firms created the epicenter for the Great Crisis and threatened to drag the entire world into the Second Great Depression. By our reckoning, shown in Tables 1 and 2, the United States has extended $1.7 trillion to financial institutions, and European member states have extended $854 billion. These figures exclude mortgage market support and the Fed’s dealings in commercial paper (which exceeded $6 trillion), though of course those measures were entwined with rescuing the financial system. The threat of a Second Great Depression furnished the justification for financial sector bailouts on an unprecedented scale.

The Agreement on Subsidies and Countervailing Measures (ASCM) was not extended to discipline subsidies in the service sector. Moreover, the General Agreement on Services (GATS) does not provide meaningful regulation of service subsidies. Accordingly, WTO members have no grounds for complaining in the WTO Dispute Settlement Mechanism when another member provides massive assistance to a bank or insurer, even when the assistance enables the recipient firm to survive and compete vigorously in the global marketplace.

As support, they cite an opinion piece by Arvind Subramanian and Aaditya Mattoo, the latter a GATS expert who should know better. In their joint piece, they write:

We have witnessed protection imposed through traditional instruments, such as tariff increases, restrictive import licensing, state aid (especially in the automobile and financial sectors), anti-dumping actions, and discriminatory government procurement, which has assumed greater importance in industrial countries because of the increased role of the state and higher government expenditures. There have also been newer forms of protection, including undervalued exchange rates, environmentally motivated trade restrictions, resource nationalism (such as when countries restricted the export of food during last year’s commodity crisis), and now financial nationalism, whereby financial resources are directed to national firms.

These differing forms of protection share two common features – they are consistent with current WTO rules and, for the most part, are not being addressed in the Doha Round.

The authors seem not to have read the Guidelines for Scheduling GATS Commitments, adopted by WTO Members in 2001, which state:

“Article XVII [National Treatment] applies to subsidies in the same way that it applies to all other measures. ... any subsidy which is a discriminatory measure within the meaning of Article XVII would have to be either scheduled as a limitation on National Treatment or brought into conformity with that Article. Subsidies are also not excluded from the scope of Article II (MFN). In line with the paragraph above, a binding under Article XVII with respect to the granting of a subsidy does not require a Member to offer such a subsidy to a services supplier located in the territory of another Member.”

So, for scheduled sectors, subsidies that favor domestic financial industries can certainly conflict with the GATS. The United States committed essentially the entirety of its financial services sector to GATS coverage, thanks in large part to negotiations led alternately by Timothy Geithner and Larry Summers in the 1990s. And, as pages 12-13 of this document show, subsidies are not excluded from the national treatment obligations for services suppliers operating in the United States (i.e. Mode 3, or establishment).

As the Wall Street Journal recently noted, banks like Goldman Sachs that benefited from government largesse and thus weathered the storm, certainly have a leg up on the competition. Meanwhile, no foreign bank got TARP money, or had access to many of the other bailout programs. Banks that did not have access to these bailout funds and found themselves eliminated from competition are likely to feel very differently than Mattoo and Hufbauer.

Despite disagreeing with these authors on the empirics, I do agree with their prescription to negotiate more policy space on crisis-related measures, especially prudential financial regulations and capital controls.

Another Race to the Bottom

As the United States and other countries around the world embark on properly regulating the financial services sector in hopes of preventing future financial collapse, House Financial Services Chairman Barney Frank warns that an international "race to the bottom" could undermine these efforts.

Congress Daily reported last week:

Frank said that there is wide agreement among the European Union, Canada, France and others that there must not be an "escape hatch" as countries revamp their systems to make their rules sufficiently similar to others.

"Everyone understands that it would be fatal," Frank said. "There is just overwhelming agreement that this is going to be done in a multinational, coordinated way and that a great conglomeration is going to come down hard on anybody that tries to play games with it."

While Frank deserves praise for pledging to prevent the woefully low regulatory floor that would be created should some countries fail to implement stricter regulations on financial services, policymakers also need to be careful about the regulatory ceiling that could be imposed by the World Trade Organization (WTO) and other international trade agreements.   

Americans for Financial Reform lays out a set of guiding principles for re-regulating financial services in the global arena which will help ensure that policymakers and regulators have the policy space to get it right.

U.S. Pushes for Ceiling on Global Financial Re-regulation

Here we go.

Since last year, we've been predicting that it was only a matter of time before governments and corporations decided to start invoking trade-law concepts to talk down the ambition in financial re-regulation, but I wouldn't have guessed that entities headed by "Barack Hussein Obama" and the "Labour Party" would be kicking off the kicking.

Reports the WSJ:

The U.S. and U.K. are lining up to change the European Union's proposed Alternative Investment Funds Directive, a sweeping bid to overhaul regulation of hedge funds, private equity and other alternative investment funds...

The directive would effectively apply to all funds and financial firms, including those based in the U.S., if they want to raise cash or provide services in Europe. This so-called equivalence test may block some U.S. companies from operating in Europe, given that the European directive goes much further than proposed increases in U.S. fund regulation. The U.S government wants hedge funds to register and provide more information but isn't looking at rules such as leverage caps.

The U.S. signaled its position in a little-noticed speech late last month by Mark Sobel, the U.S. Acting Secretary for International Affairs. "In a world of mobile capital...we cannot go our own ways, deviating significantly from international standards," Mr. Sobel told the Federation Bancaire Francaise, a Paris-based banking association. "Nor should we impose standards on one another if we are not identical."...

The U.K., which already regulates hedge-fund managers, believes the European rules go too far and will drive funds out of Europe in what was described as a "weak form of protectionism" by Paul Myners, a U.K. government minister responsible for London's financial center.

What's noteworthy about the EU proposal is that it is non-discriminatory, i.e. would apply to European and U.S. firms alike. But even non-discriminatory regulations conflict with WTO market access terms.

This is the real danger for advocates who wish to postpone or avoid the international re-regulation dimension: if you haven't adequately prepared by calling simultaneously for domestic re-regulation and removal of the WTO and other institutions' regulatory ceiling, you too could end up being called a (gasp) "protectionist." And, it ain't fun, I assure you.

Public Citizen, others endorse Incorporation Transparency and Law Enforcement Assistance Act

Yesterday, Public Citizen alongside the Center for Corporate Policy, Citizens for Tax Justice, Friends Fiduciary Corporation, Global Financial Integrity, Global Witness, Government Accountability Project, MaryKnoll, New Rules for Global Finance, Oxfam America, and Tax Justice Network USA delivered a letter to leaders of the Senate Committee on Homeland Security and Governmental Affairs (PDF) expressing support for S. 569, the Incorporation Transparency and Law Enforcement Assistance Act. This legislation, as the letter describes,

"...will help law enforcement stop the misuse of U.S. corporations for tax fraud, money laundering, terrorist financing and other illicit financial transactions... [and will] bring the United States in line with international standards of transparency."

At a committee hearing yesterday, the bill's sponsor, Sen. Carl Levin (D-Mich.), referenced this letter in his opening remarks (around the 37 minute mark of the hearing video) and inserted its text into the hearing record.

"There is a long list of endorsers of our legislation, including the Federal Law Enforcement Officers Association, Fraternal Order of Police, National Association of Assistant U.S. Attorneys and more; it's been endorsed by groups combatting financial and corporate abuses including Tax Justice Network, Global Financial Integrity, Citizens for Tax Justice, Public Citizen and more."

Read the full letter here (PDF).

Re-regulating Finance Starts Now

Yesterday, Public Citizen and a wide variety of other consumer and labor groups kicked off the Americans for Financial Reform coalition. Our mission?

For too long, the rules of Wall Street have been written by the bankers themselves.

This year, that has to change.

Americans for Financial Reform is a coalition of nearly 200 national, state and local consumer, employee, investor, community and civil rights organizations that have come together to spearhead a campaign for real reform in our banking and financial system.

We're circulating a petition to restore transparency, oversight, and fairness to the financial marketplace. Take action here!

One of the principles of the coalition is that International institutions, from trade pacts to development banks and others, should provide a regulatory floor, not impose a regulatory ceiling. (You can read our issues brief on that matter here.) Expect to see more from us about how we can reform trade, investment and financial pacts to promote prosperity and security!

Clinton's Real Policy for an Unreal World

The Sunday NYT Magazine had an extended interview with Bill Clinton that shed some light on his views on deregulation:

In almost clinical form, as if back at Oxford as a Rhodes scholar, he broke down the case against him into three allegations: first, that he used the Community Reinvestment Act to force small banks into making loans to low-income depositors who were too risky. Second, that he signed the deregulatory Gramm-Leach-Bliley Act in 1999, repealing part of the Depression-era Glass-Steagall Act that prohibited commercial banks from engaging in the investment business. And third, that he failed to regulate the complex financial instruments known as derivatives.

The first complaint Clinton rejects as “just a totally off-the-wall crazy argument” made by the “right wing,” noting that community banks have not had major problems. The second he gives some credence to, although he blames Bush for, in his view, neutering the Securities and Exchange Commission. “Letting banks take investment positions I don’t think had much to do with this meltdown,” he said. “And the more diversified institutions in general were better able to handle what happened. And again, if I had known that the S.E.C. would have taken a rain check, would I have done it? Probably not. But I wouldn’t have done anything. In other words, I would have tried to reverse everything if I had known we were going to have eight years where we would not have an S.E.C. for most of the time.”

Clinton argued that the Gramm-Leach-Bliley Act set up a framework for overseeing the industry. “So I don’t think that’s such a good criticism,” he said. “I think, actually, if you want to make a criticism on that, it would be an indirect one * you could say that the signing of that legislation sped up what was happening anyway and maybe led some of these institutions to be bigger than they otherwise would have been and the very bigness of some of these groups caused some of this problem because the bigger something is and the newer it is, the harder it is to manage. And I do think there were some serious management problems which might not have occurred.”

Then there are the derivatives. There, Clinton pleads guilty. Alan Greenspan, the Federal Reserve chairman, opposed regulation of derivatives as they came to the fore in the 1990s, and Clinton agreed. “They argued that nobody’s going to buy these derivatives, we’ll do it without transparency, they’ll get the information they need,” he recalled. “And it turned out to be just wrong; it just wasn’t true.” He said others share blame, including credit-rating agencies that underestimated the risk. But he accepts responsibility as well. “I very much wish now that I had demanded that we put derivatives under the jurisdiction of the Securities and Exchange Commission and that transparency rules had been observed and that we had done that. That I think is a legitimate criticism of what we didn’t do.” He added: “If you ask me to write the indictment, I’d say: ‘I wish Bill Clinton had said more about derivatives. The Republicans probably would have stopped him from doing it, but at least he should have sounded the alarm bell.’ ”

Clinton's comments on Gramm-Leach-Bliley and derivatives non-regulation illustrate almost perfectly the flaws in (even smart) neoliberals' logic. First, construct a coherent policy approach that only makes sense if you ignore political economy and political uncertainty (i.e. "de/non regulation would have worked, if only the relevant agencies had done their job like I hoped they would, rather than how industry wants them to function," or "it all would have worked if someone just like me were elected president"). Second, the outcome that someone with even a passing understanding of power and regulatory capture would predict, in fact happens. Third, avoid blame by claiming good intentions.

Are we doomed to repeat this history?

Louise Slaughter, Presente!

The Conference Board of Canada just released a report that looks at the impact of the fair-trade sweep in the last two U.S. elections.

It takes the anti-democratic analytical perspective that things said during campaigns don't matter. So we have the inevitable comparison that only Nixon could "open" China, and only Obama could "save free trade," apparently because he campaigned against NAFTA-style policy.

While it's a well-worn trope that Democratic Party candidates lie to their base in the primaries to win their support, the important difference this time was the specificity of Obama's critique of NAFTA, some of which you can read about here. To be certain, we have no idea what his eventual policies will be, but we do know that this is not your father's Democratic primary in terms of the specificity of the commitments. It is a new day in regards to the trade-policy orientation of the president.

As for the congressional politics, the notion that the legislative branch will just roll over on its commitments seems incorrect as well. All you have to do is look at today's Roll Call story for evidence of Congress' collective backbone, and that they won't take the Panama FTA lying down:

“I’m getting really pis*ed off,” said House Rules Chairwoman Louise Slaughter (D), who represents a region of New York that has suffered under the North American Free Trade Agreement. “Obama’s got to get a he*l of a lot of stuff up through here, and to start out by bumming out about half of us doesn’t strike me as a wise move.”

Rep. Mike Michaud (D-Maine), co- chairman of the House Trade Working Group, singled out House Majority Leader Steny Hoyer (D-Md.) in his criticism of his party leaders’ desire to advance the Panama deal. The working group includes several prominent Members, including six committee chairmen and 17 subcommittee chairmen.

“As a Democratic leader, I don’t think it’s helpful to vulnerable Members to ask them to support a Bush-negotiated trade deal,” Michaud said. “As a Democratic leader, [Hoyer] should not be encouraging the White House to move forward on this.”...

During a meeting last month with representatives from the Office of the U.S. Trade Representative, Slaughter spoke on behalf of about 20 Members in voicing concerns with the Panama deal. The USTR attendees seemed “receptive,” she said, but have not contacted her since the meeting.

“I carried on awful,” Slaughter said of the hourlong meeting. “We’re not just going to take all of this stuff lying down anymore.”...

Rep. Marcy Kaptur (D-Ohio), one of the Members who attended the USTR meeting, said Slaughter repeatedly reminded USTR officials that she chairs the powerful Rules Committee.

“She made it very clear that she didn’t intend to move any of those bills,” Kaptur said. “I hope it gets someone’s attention over at the White House.”

The author of the report's obliviousness to a changed landscape within the Democratic Party shows through in the citation of the U.S.-Peru Free Trade Agreement, which the Conference Board notes passed, but doesn't mention that a majority of the majority Democrats opposed.

The Conference Board report is off in a number of other regards. First, it says that Obama will ask for Fast Track (i.e. Trade Promotion Authority). I have not seen that anywhere, and I don't think it is correct. He may ask for some form of delegated authority, but it is unlikely to be Fast Track. In fact, the quote that the Conference Board cites indicates that Obama is looking to change the form of delegated authority by establishing new checks and balances on the process. As the campaign commitments cited above note, Obama has said he will "replace Fast Track." (Our recent book - "The Rise and Fall of Fast Track Trade Authority" - offers a variety of alternative arrangements that could boost the legitimacy of trade deals.)

Finally, far too many Canadian sources are spreading misinformation about the Buy America/n provisions in the stimulus bill. As we've explained many times, the stimulus bill is ONLY an improvement for Canada. For the Buy America provisions related to federal grants to states for transit projects,  U.S. products have always been given a 25 percent price preference over products from Canada (and other trade-pact partner countries). For the Buy American provisions related to federal procurement, U.S. products (specifically iron, steel, and manufactured products for stimulus-funded projects) received a 6 percent preference, and now they receive a 25 percent preference. But... wait for it... so. does. Canada., and all of our other trade-pact partners. Pre-stimulus rules were more generous to Canada than Canada is to us under its WTO-NAFTA commitments, and the post-stimulus rules are more generous than the pre-stimulus rules.

So, friends to the north, don't hate, appreciate! (And don't worry, we know that our friends in labor and the environmental community are already far ahead of their government and elites on this question.)

Double Standards for Banks and Builders

The Treasury Department released details of its new Public-Private Investment Program, which will give a massive subsidy to investors to partner with the government to buy up toxic assets.

You too can participate! All you need to pre-qualify is "demonstrated capacity to raise at least $500 million of private capital; demonstrated experience investing in Eligible Assets, including through performance track records, a minimum of $10 billion (market value) of Eligible Assets currently under management; demonstrated operational capacity to manage the Funds in a manner consistent with Treasury’s stated Investment Objective while also protecting taxpayers."

Oh, and you must have "Headquarters in the United States."

But in the WTO's Financial Services Agreement, the United States took on the commitment to treat foreign banks as well as we treat U.S. banks. As we say in a forthcoming paper:

A requirement to provide foreign corporations National Treatment with regard to subsidies is unquestionably part of these obligations. The Guidelines for Scheduling GATS Commitments, adopted by WTO Members in 2001, states:

“Article XVII [National Treatment] applies to subsidies in the same way that it applies to all other measures. ... any subsidy which is a discriminatory measure within the meaning of Article XVII would have to be either scheduled as a limitation on National Treatment or brought into conformity with that Article. Subsidies are also not excluded from the scope of Article II (MFN). In line with the paragraph above, a binding under Article XVII with respect to the granting of a subsidy does not require a Member to offer such a subsidy to a services supplier located in the territory of another Member.”

As Dean Baker points out, it is an outrage that folks in Washington would make such a stink about making sure Buy America is compliant with draconian WTO requirements, but we violate them willy nilly when it comes to subsidizing someone's rich friends on Wall Street.

Are Multinationals Down With, or Down On, America?

The Business Roundtable published a report today entitled "How U.S. Multinational Companies Strengthen the U.S. Economy." It's full of information such as how many workers these swell companies have not yet fired all their U.S. workers. But are multinationals good for America? As I told the Financial Times, I would argue not.

1. Multinational companies advocate for policies that are contrary to the economic and other interests of the majority of Americans. Standard textbook economics predicts that the current NAFTA-WTO-model of trade (i.e. opening up markets in products made by most workers, while protecting markets in intellectual property) would lead to upward redistribution of income, and empirical evidence has borne this out. For the 70% of workers without a four-year college degree, the Economic Policy Institute (using standard Heckscher-Ohlin trade models) estimates that current trade policy has cost them an amount annually in excess of their income-tax burden (around $2,000). Such policies have long been advocated by multinational companies, as one can see most recently in the line up of firms pushing NAFTA-style deals with Panama and Colombia. (http://www.latradecoalition.org/portal/latc/default)
2. Multinational companies do not uphold their end of the social contract. U.S. states originally chartered corporations to undertake projects that the government (for whatever reason) was ill-equipped or did not wish to perform. But ever since passage of the 16th Amendment, Congress has had to fight tooth and nail to get corporations to pay their fair share of taxes, instead of simply deferring the repatriation of their income in overseas tax havens like Panama to get out of their social obligations here at home. (Side note: this Panama FTA will give the 350,000 subsidiaries of foreign firms based in Panama the right to challenge U.S. public-interest regulations as "expropriations," claiming U.S. taxpayer dollars in foreign tribunals, for measures not considered expropriatory under domestic U.S. law.) According to the Government Accountability Office, many multinational firms have engineered their global operations so that they face an effective tax rate of virtually zero. In short, many multinationals want the benefits of U.S. citizenship (access to preferential bailouts, recognition of corporate charters) without living up to their responsibilities.
3. Multinational companies have pushed a model of deregulation and global supply chains that socializes risk and privatizes profit. We should never be facing a situation where entities are too big or too globally interconnected to fail. The prevailing multinational business model relies on supply chains that are stretched too thin, across too many countries, such that even isolated occurences (earthquakes, say), can have outsize global economic impacts. This model has also relied on carbon-intensive international shipping that scientists now recognize is one of the fastest growing contributors to global warming. This model of deregulated and overextended supply chains with considerable negative social externalities did not happen by accident: it was the outcome of years of multinationals contributing to politicians' campaigns so as to roll back prudential measures. My colleagues at Essential Information recently completed a large report on the nexus between corporate campaign donations and deregulation.

Obama Budget to Close Offshore Tax Loopholes

The new Obama Budget will close Offshore Tax Loopholes. At least that's what the Office on Management and Budget's budget document says:

The Budget also begins to restore a basic sense of fairness to the tax code, eliminating incentives for companies that ship jobs overseas and giving a generous package of tax cuts to 95 percent of working families.

No detail as of yet as to what this means. As this CRS Report on the U.S. international taxation system shows, it could mean at least a few things:

1. Elimination to multinationals' ability to defer taxes on foreign-source income;
2. Elimination of the foreign tax credit, which give certain multinationals with subsidiaries in certain countries a credit for taxes they pay in the foreign country;
3. Some sort of regulatory prohibition or disincentive structure to make it difficult to re-incorporate abroad, i.e. create a "new" parent company in Panama that "adopts" the "old" U.S. parent company, which becomes the kiddie and ages in reverse like Benjamin Button or Mearth in Mork & Mindy.

Sources tell me we may be waiting a bit before OMB Director Peter Orzag offers any detail on this.

The other trade tidbits in the budget:

Countries and companies around the world recognize [the climate crisis] and are working day and night to develop clean energy technologies that will change everything from how we generate our electricity to how we power our cars and trucks. While the challenge is great, the promise of the moment is unparalleled. If we lead the world in the research and development of clean energy technology, we can create a whole new industry with high-paying jobs that cannot be shipped overseas...

Reforming the Market Access Program (MAP). The Budget reforms MAP by reducing program funding for overseas brand promotion and minimizes the benefits that large for-profit entities may indirectly gain as members of trade associations who participate in MAP. An annual funding reduction of 20 percent will improve the program by placing greater emphasis on promoting generic American agricultural products overseas and assisting small business entities.

UPDATE: A colleague alerts met to page 122 of the budget document, which indicates that some non-elaborated combination of "international enforcement, reform deferral and other tax reform efforts" is projected to generate $210 billion in additional federal revenue over 2010-2019.

Buy Keynesian

My colleague John Schmitt has written an interesting column suggesting the following:

The President could rewrite the current "Buy American" restriction to allow US recovery funds to be spent on US goods — as well as those from any country that passes an economic stimulus program that is at least as large (as a percent of their national GDP) as the package ultimately passed here. Call it a "Buy Keynesian" plan.

The "Buy Keynesian" clause would let the President thread the political needle. He gets to keep the "Buy American" provision that many taxpayers (and Senators) are demanding. And, when foreign leaders accuse him of protectionism, he can rightly respond that their goods have been excluded not because they are foreign, but because their countries aren't pulling their weight in the international recovery.

This is a great idea, and obviously a great way to reflate the economy. Which of course means that it's  WTO illegal. Check this out from the WTO procurement agreement:

With respect to all laws, regulations, procedures and practices regarding government procurement covered by this Agreement, each Party shall provide immediately and unconditionally to the products, services and suppliers of other Parties offering products or services of the Parties, treatment no less favourable than:

            (a)        that accorded to domestic products, services and suppliers; and

            (b)        that accorded to products, services and suppliers of any other Party.

And unfortunately, there is no Keynesian exception to the national-treatment and most-favored nation obligation. Yet another reason that I am coming to the point of view that EVERY policy proposal ith any WTO implications should include both the proposed domestic measure, and a proposed sense of Congress that the WTO should be renegotiated to allow policy space for the measure.

Congress Passes Buy America in Stimulus

On votes of 246-183 in the House and 60-38 in the Senate, Congress passed the biggest economic stimulus package of all time, which included Buy America provisions. The Washington Post has a truly touching story about how fair-trade champion Sen. Sherrod Brown (D-Ohio) flew from his mother's memorial service to cast the deciding vote. Our hearts and prayers go out to Sen. Brown and his family.

Here's the final version of the language:

    Sec. 1605. Use of American Iron, Steel, and Manufactured Goods. (a) None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.

    (b) Subsection (a) shall not apply in any case or category of cases in which the head of the Federal department or agency involved finds that--

    (1) applying subsection (a) would be inconsistent with the public interest;

    (2) iron, steel, and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality; or

    (3) inclusion of iron, steel, and manufactured goods produced in the United States will increase the cost of the overall project by more than 25 percent.

    (c) If the head of a Federal department or agency determines that it is necessary to waive the application of subsection (a) based on a finding under subsection (b), the head of the department or agency shall publish in the Federal Register a detailed written justification as to why the provision is being waived.

    (d) This section shall be applied in a manner consistent with United States obligations under international agreements.

The conferees' report made the following note regarding Buy America provisions:

Section 1605 provides for the use of American iron, steel and manufactured goods, except in certain instances. Section 1605(d) is not intended to repeal by implication the President's authority under Title III of the Trade Agreements Act of 1979. The conferees anticipate that the Administration will rely on the authority under 19 U.S.C. 2511(b) to the extent necessary to comply with U.S. obligations under the WTO Agreement on Government Procurement and under U.S. free trade agreements and so that section 1605 will not apply to least developed countries to the same extent that it does not apply to the parties to those international agreements. The conferees also note that waiver authority under section 2511(b)(2) has not been used.

It seems that this last sentence refers to the president's ability to waive Buy America requirements for countries that aren't parties to procurement agreements with the U.S. (i.e. Brazil, India, China, for starters.) It's actually fairly troubling that the president has so much discretion in these matters in the first place. The history of this power is that Congress, in 1979 on a fast-tracked vote, decided to waive much of its authority over procurement, handing it to the president, who could then waive the requirements to comply with flawed trade deals. Clearly, this whole system - born as it was of a kind of double delegation of legislative powers - needs a major rethink.

In other news, our colleagues Terry Stewart and Elizabeth Drake put out a useful paper debunking some of the myths surrounding Buy America perpetrated by corporate-backed think-tanks. It's chock full of useful material. Here is something I did not know:

Myth #5: Insisting on the use of domestic goods will reduce the effectiveness of the recovery plan by imposing unreasonable requirements where U.S. goods are unavailable or prohibitively expensive.33

The Facts: This assertion ignores the language of the recovery bills and U.S. experience applying similar provisions in the past. First, both the House and Senate versions of the Act allow domestic sourcing requirements to be waived where the relevant goods “are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality.”34 This waiver provision is also included in the Buy American Act,35 and data relied upon by Hufbauer and Schott indicate that such non-availability waivers were necessary to permit foreign sourcing for only 0.29 percent of all federal contract dollars spent in 2007.36

Moreover, the House and Senate bills permit domestic sourcing requirements to be waived where their application would increase the cost of the overall project by more than 25 percent.37 The 25 percent threshold reflects cost competitiveness standards that currently apply in Buy America requirements attached to federal highway and mass transit funds.38 Similar cost waivers are available for direct federal contracting under the Buy American Act, though they have been set at different levels administratively.39 Such cost waivers were needed to justify 0.20 percent of the federal government’s spending on foreign manufactures for domestic use in 2007 – a mere 0.01 percent of all federal contracting dollars spent.40

Clearly, unavailability and cost differences present obstacles to domestic purchasing in only a tiny portion of contracts, and, where such issues do arise, procurement officials are able to use their waiver authority to address them. The same will be true under the economic recovery plan.

Buying America; Playing in Peoria

Do you remember this campaign graphic from the Obama campaign in Pennsylvania? Obama promoted Buy American policy in television and radio ads and even committed to renegotiating existing trade agreements to remove their limits on Buy American procurement. We thought you'd be interested in what President Obama had to say about "Buy America" policies on the campaign trail, especially given this Thursday he will be in Peoria visiting a plant operated by Caterpillar, the corporation leading the attack against Buy America provisions in the Stimulus Plan:

When asked in writing: "Do you support renegotiating trade agreements so they will allow us to use "Buy America" and "Buy Local" procurement policies? Obama answered "Yes" in a May 2008 Candidate Questionnaire (PDF) from the Oregon Fair Trade Campaign.

Obama ran paid TV attack ads in North Carolina against John McCain's opposition to Buy American provisions.

Obama also ran a radio ad attacking John McCain's opposition to Buy America after McCain slammed Obama's European trip at a biker rally. At the rally, McCain said he would rather listen to the "roar of 50,000 Harleys" than the cheering of 200,000 Berliners. An Obama ad retorted that McCain was a phony for opposing a requirement that the government buy American-made motorbikes. "But when it comes to his record," the announcer says, "American-made motorcycles like Harleys don't matter to John McCain. Back in Washington, McCain opposed the requirement that the government buy American-made motorcycles."

Finally, check out David Sirota's piece for lots of great details of Obama's commitments to voters to support Buy America policies.

According to a recent poll (PDF), an overwhelming 86 percent of Americans support the Buy America provisions in the stimulus. (See the video embedded below for more on this poll.)

Buy America policies seem to play pretty well in Peoria.

Canadian Businesses Support "Buy Canada"

We've reported on the disappointing efforts of offshore-happy corporations like Caterpillar to invoke the "Shock Doctrine" and roll back "Buy America" rules already on the books and consistent with our trade obligations. We've reported on the hypocritical campaign by the Canadian government to accomplish the same, even though they committed even fewer types of procurement contracts to the WTO than we did.

But one question has been nagging me: what kinds of "Buy Canada" policies are actually on the books? Turns out there are a few major examples

• In Ontario, mass transit vehicles are given preference if they have 25% Canadian content. (This is a compromise from the 50% demanded by the New Democratic Party and the Canadian unions, and the 60% by some others.)
• In Quebec, mass transit vehicles are given an increasing scale of preference the more Canadian content that they have.

Another major difference between here and there is that the business and exporters' associations actually support Buy Canadian policies (including the Manufacturers and Exporters of Canada, where my friend Birgit works!)

And a recent USTR report shows that the Europeans are making good use of their flexibilities under the WTO:

In 2004, the EU adopted a revised Utilities Directive (2004/17), covering purchases in the water, transportation, energy, and postal services sectors. Member States were mandated to implement the new Utilities Directive by the end of January 2006, but some EU Member States still have not implemented it. This Directive requires open, objective bidding procedures, but discriminates against bids with less than 50 percent EU content that are not covered by an international or reciprocal bilateral agreement. The EU content requirement applies to U.S suppliers of goods and services in the following sectors: water (production, transport, and distribution of drinking water), energy (gas and heat), urban transport (urban railway, automated systems, tramway, bus, trolley bus, and cable), and postal services.

Congrats EU and Canada!  Nice to see we're all doing what we can to support a local industrial base!

(Please let me know if you know of other local content requirements - especially in transportation infrastructure funding - that we should highlight.)

Buy America survives Collins-Nelson Fleet Streeting

Paul Krugman points out in today's column that Sens. Susan Collins (R-Maine) and Ben Nelson (D-Neb.) have effectively gutted much of the stimulative impact of the American Recovery and Reinvestment Act.

Luckily, the Buy America provisions survived the Collins-Nelson Fleet Streeting of the Stimulus, as did the Sanders-Grassley amendment, which was passed unanimously by voice vote. For companies receiving TARP funds, it restricts their ability to cite labor shortages in their hiring of H-1B workers from abroad. The idea is that Microsoft shouldn't be able to layoff thousands of workers and then come to Congress citing engineer labor shortages in their quest to import foreign workers that are covered by weaker labor rights. (Text below).

Sec. 1610. Hiring American workers in companies receiving TARP funding.

(a) Short Title- This section may be cited as the `Employ American Workers Act'.

(b) Prohibition-

(1) IN GENERAL- Notwithstanding any other provision of law, it shall be unlawful for any recipient of funding under title I of the Emergency Economic Stabilization Act of 2008 (Public Law 110-343) or section 13 of the Federal Reserve Act (12 U.S.C. 342 et seq.) to hire any nonimmigrant described in section 101(a)(15)(h)(i)(b) of the Immigration and Nationality Act (8 U.S.C. 1101(a)(15)(h)(i)(b)) unless the recipient is in compliance with the requirements for an H-1B dependent employer (as defined in section 212(n)(3) of such Act (8 U.S.C. 1182(n)(3))), except that the second sentence of section 212(n)(1)(E)(ii) of such Act shall not apply.

(2) DEFINED TERM- In this subsection, the term `hire' means to permit a new employee to commence a period of employment.

(c) Sunset Provision- This section shall be effective during the 2-year period beginning on the date of the enactment of this Act.

Pretending there's a problem

Canada's Globe and Mail had a must read editorial from a few days ago on Buy America. Here's a preview:

This week's horror and hysteria over a U.S. move to “protectionism” like the Smoot-Hawley tariffs of the 1930s, leading to global “trade war” and disaster – was sheer myth. The Buy American clause and the ensuing “backdown” by Congress meant nothing. Those policies have been in place for decades; they still are...

So what's up? Whence the frenzy? Good question, different answers. Stockwell Day and Stephen Harper get to look vigilant and militant, standing on guard for us, while nothing is really at stake. Barack Obama gets to look presidential. He says sternly that he's against bad things, knowing no vetoes or actions will follow. John McCain wants to repeal the offending clause so the world won't think the U.S. has “gone back” to protectionism, which it never left, but maybe the world won't think so now...

Derek Burney, Canadian corporate mouthpiece, calls for even less regulation and protection than we now have, on the grounds, as they say in the Obama White House, that you never let a serious crisis (or a fake one) go to waste. ...

I especially like Michael Ignatieff's demand that Stephen Harper phone Barack Obama on this. I'd like to overhear that one. Uh, I'm calling to pretend there's a problem. … Fine, I'm taking the call to pretend the same thing. [Silence. Silence. Silence.] We agree, then. … Yes, good talking to you...

It's like the murder on the Orient Express: It turned out everyone participated, but they all did it for their own reasons.

The American People is Ready for a Change with Buy America

I was on Washington Journal this morning opposite Birgit Matthiesen of the Manufacturers and Exporters of Canada. The subject? Buy America, and how it is consistent with existing domestic and international law. And a few digs at the WTO's procurement agreement while we're at it.

Here's the video; let me know what you think.

McCain Amendment to Prohibit Buy America Crashes and Burns

Back in the general election, Obama bashed McCain for his comment that Buy America provisions were "disgraceful," as in this paid television ad below:

(See this ad and over a hundred others in our online database of paid election trade ads.)

If there was any doubt that McCain was fo' real, an amendment he introduced yesterday to the stimulus bill cleared that up. Senate Amendment 279 to the American Recovery and Reinvestment Act of 2009 (H.R. 1) listed as its purpose: "To prohibit the applicability of Buy American requirements in the Act to the utilization of funds provided by the Act."

This would have gone considerably farther than our current law and WTO commitments, since we have always been allowed to do most if not all of what is in the stimulus package. In essence, had it passed, it would have put the Senate on the record as opposing even the WTO-legal parts of Buy America. It would have also announced to America that, even when domestic policy proposals do NOT violate WTO obligations, we will not pass them if someone might THINK that they do. I'm not a total sovereignty hawk, but, wow...

Luckily, the amendment crashed and burned at around 8:30 pm last night, with only 31 senators (all GOP + Lieberman) supporting. All the Dems plus 9 GOP opposed. Find out how your senator voted! And then let them know what you think about it!

Harper Gets Hypocritical about Hypotheticals

The hysteria-fest coming out of Ottawa and Brussels over the Buy America/n provisions in the stimulus plan continues. But if Canadian PM Stephen Harper and the EU are getting so bent out of shape over our tiny domestic preferences, what's the state of theirs? As it turns out, we (at least according to the WTO exceptions if not actual practice) our products can't get the contracts benefits in their countries that they claim we will be denying them theirs here.

First, some background. As we keep pointing out, the U.S. excluded Buy America (i.e. requiring U.S.-made iron and steel in transit projects administered by the states but with federal funding) from its WTO commitments. What does this mean? Put simply, the way trade agreements are generally structured is to presume total "free trade" and "free markets," but then allow countries to say "except for" in a certain sensitive sectors. Governments with lots of trade lawyers will typically put in lots of so-called "exceptions," or "carve outs," from our trade-pact obligations to generally pursue totally "free markets." Poor nations with few trade lawyers may put in relatively few "exceptions" or "carve outs." (Often, however, the trade agreements are so complicated that the simple dichotomy doesn't hold: a few years back, the U.S. lost a WTO case brought by the Caribbean island of Antigua against our Internet gambling ban because the U.S. didn't realize it had failed to "exclude" or "carve out" gambling from our WTO commitments.)

So, translated out of trade law language, the iron and steel provisions of the Buy America Act, in effect since 1982, are perfectly compliant with the WTO. The WTO knows that we have these policies on the books, and is not complaining. (Okay, not too loudly.) More importantly, they're nothing new. I'll say it again: the stimulus package is not a change from current U.S. practice, and is perfectly consistent with our WTO commitments.

But as we show in a forthcoming memo, the EU and Canada do not take their own medicine. They wisely excluded considerably broader swaths of their procurement activity from WTO rules (and in the case of Canada, also from NAFTA) than did the United States, and thus have no obligation to provide U.S. firms products with access to preferential treatment under a wide array of their government contracts.

While the United States (only) safeguards its preferences for domestic iron and steel used in federally funded state transportation projects, Canada simply carves out steel, motor vehicles and coal altogether (for all provinces, for all sectors), and also carves out all construction contracts issued by the Department of Transport. The EU carved out of its WTO procurement obligations all EU members’ country contracts awarded by federal governments and subfederal governments in connection with activities in the fields of drinking water, energy, transport or telecommunications. (On the links, just click on Appendix I, Annexes I-II, and the general notes. Some bits will be easy to read, other bits less so.)

Translated out of trade lingo, under their WTO obligations, both Canada and EU reserve the right to give their nations' companies products much more generous preferences than Congress is even considering giving ours. While current U.S. laws (merely extended in the stimulus bill) give U.S. iron and steel a leg up over the foreign competition for transit projects, Canada and the EU 's WTO commitments allow them to give their firms products a leg up over American companies and products on EVERY aspect of transit funding, and many other government purchases besides.

And, we’re not criticizing them for it: why SHOULD decisions by democratically elected parliaments about how to best spend tax dollars on domestic infrastructure be subject to constraints imposed by international trade agreements? There is no “protectionism” at issue here. But, it is certainly hypocrisy -- and perhaps a bit of opportunism -- on the part of Ottawa and Brussels.

[UPDATE: In my effort to speak English rather than trade-law-ese, I got a bit sloppy with some terminology. The Buy America/n preferences refer to the products, not the companies. So, if a Canadian firm wants to make steel in the U.S., that steel could get preferential treatment. Yet another way these rules are not protectionist, but instead about job creation.]

Gap Between Dems and Corporate "Dem" Think-tanks Grows

The folks over at Third Way - a corporate-backed "think"-tank that claims to be aligned with the Democrats - have put out an anti-Buy America "memo."

Besides raising the tired bogeyman of foreign retaliation and the misleading claims about WTO compatibility, they propose providing "a bonus R&D tax credit that significantly rewards companies based on the percentage of their manufacturing and production that occurs in the United States. This would entice companies to conduct research here and produce here. It would not violate international laws."

Not a bad idea, but unfortunately the Bush administration has pushed to expand the WTO coverage of U.S. R&D measures, which could limit our policy space in this area and something that the Obama administration must act on to reverse.

Third Way also proposes decreasing the taxes that multinationals have to pay on their profits earned overseas. While the group claims that this would entice the big boys to generate U.S. jobs, a comprehensive Congressional Research Service analysis found that the opposite occurred when the same policy was enacted for a year in 2005-06. According to the Washington Post:

A more recent analysis in January by the nonpartisan Congressional Research Service looked at 12 companies that returned significant sums to the United States. Of those companies, at least eight had cut jobs by 2006. Pfizer, for example, received a significant tax break on $37 billion returned to the United States -- more than double the amount returned by any other company -- but cut 10,000 jobs in 2005, according to the CRS report.

"Empirical analyses of the stimulative effects of the repatriation provisions . . . suggests a limited stimulative impact from the provisions," the report says. "They conclude that much of the repatriated earnings were used for cash-flow purposes and little evidence exists that new investment was spurred."

Meanwhile, the nonpartisan Joint Committee on Taxation estimates that the tax holiday produced an initial flood of cash in 2005, increasing tax collections by $2.8 billion. But because some of that money would have been returned to the United States anyway -- and at a much higher tax rate -- congressional tax analysts predict that the 2004 holiday will cost the government $3.3 billion in lost revenue by 2014.

"Uncle Sam missed out on billions in needed tax revenues," Levin said yesterday. "Such tax holidays not only reduce U.S. tax revenue in the long run, but create new incentives for U.S. multinationals to send more jobs, funds and facilities offshore."

I got a chance to look at the report, and here's what the CRS said about the 2005-06 program, citing IRS statistics:

The benefits of the repatriation provision are not evenly spread across industries. The pharmaceutical and medicine industry accounted for $99 billion in repatriations or 32% of the total. The computer and electronic equipment industry accounted for $58 billion or 18% of the total. Thus these two industries accounted for half of the repatriations. Most of the dividends were repatriated from low tax countries or tax havens.

The benefits were also highly concentrated in a few firms. According to a recent study, five firms (Pfizer, Merck, Hewlett-Packard, Johnson & Johnson, and IBM) are responsible for $88 billion, over a quarter (28%) of total repatriations. The top 10 firms (adding Schering-Plough, Du Pont, Bristol-Myers Squibb, Eli Lilly, and PepsiCo) accounted for 42%. The top 15 (adding Procter and Gamble, Intel, Coca-Cola, Altria, and Motorola) accounted for over half (52%).

At least Third Way proposes putting some conditions on the multinational tax cut. But their overall take on Buy America is out of step with the party. As Inside U.S. Trade reported today,

House Transportation and Infrastructure Committee Chairman James Oberstar (D-MN) warned today (Feb. 4) in a House Steel Caucus meeting that he would actively work against the passage of the stimulus package if the “Buy America” provisions are removed.

“If it's not in, I'm against this package. Can I be any clearer than that? If it's not in, I'm not supporting it and I'm bringing a lot of votes with me,” he said. “We can't have any of this fluff about being nicey-nicey on foreign trade at time when we're trying to create jobs at home and to have foreign steel come in here and undercut U.S. jobs? No way, not with my help.”

In short, while Dems are running government thanks to a fair-trade platform, the Corporate "Dem" think-tanks are spouting the same old snake oil that got us into this economic mess.

Double Standards for Banks and Builders

In 2008, Congress passed sweeping bailout legislation for the white-collar financial sector, but failed to take comparable action for the blue-collar manufacturing sector.

As Steelworkers President Leo Gerard said, "The message here could not be more clear: Washington will bailout out those who shower before work but not those who shower afterwards."

Fast forward to 2009. Scare stories on Buy America are being ginned up by a perverse alliance of corporations (who want to deflect attention from the fact that they offshore U.S. jobs) and pro-corporate foreign governments (who want to deflect attention from the fact that they do not allow U.S.-made iron and steel in THEIR countries' transit and procurement projects, as we show in a forthcoming memo.)

That's right: a Buy America provision that affects a tiny fraction of stimulus spending and national income is being used as a pretext to make all sorts of threats: that it violates U.S. trade commitments (it doesn't), that it's some sort of radically new policy (it isn't); and that this offends other nations (news flash: Canadians want job programs just as much as we do).

But where was this perverse alliance when the U.S. financial bailout was going through? As a new document from the WTO shows, the Bush administration's approach to the financial crisis was much more nationalistic than many of our top trading partners. While most nations opened up their financial sector reforms to subsidiaries of foreign companies, the U.S. TARP and other programs are (in practice) geared almost exclusively to domestically owned banks.* (Not to mention that the Bush administration jacked up tariffs on French Roquefort cheese to 300%.)

Where were the cries of trade war then? I think Scott Sinclair, the Canadian writer, had it right when he said:

"As far as I can tell," he says, "the provision included in the stimulus package will not violate U.S. international treaty obligations." ,,,"I think they want to knock Obama off balance and gain influence over his trade policy from the outset," said Sinclair.

The Senate now faces tremendous corporate pressure to weaken the Buy America provisions of the stimulus bill. As I told the Dayton Daily News,  "We need to use all the tools that are available to help put people back to work... This is one of those tools."

Use this link to contact your senators today, and let them know you support Buy America!

(*If you know different, please let me know!)

Broken Promises from Buy America Opponents

Back in 1992, economist Gary Hufbauer of the Peterson Institute for International Economics famously predicted that NAFTA would create 170,000 new jobs, because the U.S. would be running a $9 billion trade surplus with Mexico.

But, as we know, our Mexican trade surplus instead turned into a raging deficit, now at $91 billion, accounting for an estimated 1 million lost manufacturing jobs.

By 1995, when we were already running a $23 billion deficit with Mexico, Hufbauer famously told Bob Davis at the Wall Street Journal that, "The lesson to me is that I should stay away from job forecasting." (Bob Davis, "Free Trade is Headed for More Debate," WSJ, 4/17/95.)

Unfortunately, Hufbauer has broken his occupational promises like they were so many NAFTA job-creation promises. And while economists like to preach that blue collar workers should lose their jobs when they screw up, there is no such accountability for the neoclassicals.

In a new paper for Peterson, Hufbauer and colleague Jeffrey Schott estimate that the Buy America provisions of the stimulus package would create 1,000 to 1,900 jobs, but destroy 6,500 to 65,000 jobs due to foreign retaliation. While the job creation estimates are based on something approaching a sound methodology, the job destruction estimates are pulled out of a hat, and retaliation is simply assumed.

But as we pointed out this morning, the rumors of retaliation are part of a joint scare campaign by right-wing governments and corporations that have offshored U.S. jobs. For the right-wing Canadian administration in particular, this is a continuation of their attacks on Obama that began in the Ohio primaries.

But the allegations of trade-law violations are misleading, as Hufbauer and Schott at least have the decency to point out:

While US commitments under the [World Trade Organization's Government Procurement Agreement] cover many federal government entities and 37 states, the proponents of Buy American provisions argue that a large portion of the projects funded by the stimulus bills are not covered in the GPA. For example, there is a general exclusion for federal funds destined for mass transit and highway projects. Moreover, many of the 37 states that acceded to the GPA also reserved sensitive procurement areas, such as motor vehicles, construction-grade steel, and construction services... [emphasis added]

Existing laws already provide Buy American preferences for much of the public procurement authorized in the stimulus bill...

Of course the bigger question continues to be why political leaders signed up government procurement rules – a quintessential, non-trade domestic issue – to comply with so-called “trade” agreements in the first place. It's clear that, going forward, these rules need to be changed. But the immediate task is to put America back to work.

Rightwing Canadian Government Trying to Sabotage Obama Administration

A lot of the hairbrained editorializing on the Buy America provisions in the stimulus package suggests that Obama will get cross-ways with the Europeans and Canadians if he were to implement the measures, and that a trade war would be provoked.

This is ridiculous. As we pointed out last year during the Ohio primaries, the rightwing Canadian government tried to sabotage the Obama candidacy with the NAFTA-gate leaks. Now they're trying to do the same to his administration. Think of Canadian Prime Minister Stephen Harper as a little Karl Rove of the North.

As we've been pointing out, there has been a massive corporate lying campaign about the iron and steel provisions for U.S. transit projects. Now, corporations have teamed up with Canada and some of the knuckle-dragging EU governments to throw just enough fake spin to try to fool U.S. policymakers into thinking these measures are WTO-illegal. They're not.

And, as it turns out, Canadians actually want the right to invest in themselves as well. Read this from the Toronto Star:

By using "trade war" rhetoric, [Canadian International Trade Minister Stockwell] Day appears to have positioned the Conservative government with big American corporations already gunning for new President Barack Obama by attacking the package now being worked out by Congress in response to Obama's election pledges. News emerged yesterday that Canada's ambassador to the U.S., Michael Wilson, has fired off a letter to U.S. legislators warning the rules would be a disaster for business and workers in both countries.

"Unfortunately, rather than working co-operatively and practically for an exemption, Canadians politicians ... have been publicly lecturing Americans about their `international obligations' and the theoretical virtues of global free trade," wrote Erin Weir, economist with the United Steelworkers' Canadian arm, in The Progressive Economics Forum.

"This argument is not correct in the current economic context and certainly will not be very persuasive south of the border."

Scott Sinclair, senior trade analyst with the Canadian Centre for Policy Alternatives, agrees. "As far as I can tell," he says, "the provision included in the stimulus package will not violate U.S. international treaty obligations." He cautions that Day "should know better," adding: "I think there is a back story here.",,,

"I think they want to knock Obama off balance and gain influence over his trade policy from the outset," said Sinclair. "They are enlisting the support of foreign governments, and so you have (British Prime Minister) Gordon Brown and Stockwell Day talking about it."...

NDP Leader Jack Layton agrees Ottawa is "failing to do what other countries are doing to ensure some of the work in government procurement has a big Canadian component." Says Layton: "Instead of doing his homework, Day is huffing and puffing – and this isn't a house that can be blown down."

We should work together "to ensure both of our stimulus packages work" he says, and concentrate on the dumping of cheap steel on the Canadian market from offshore.

EPI chimes in on Buy America

Over at the Economic Policy Institute, Rob Scott says,

Multinational companies such as General Electric and Caterpillar, and their allies in the Chamber of Commerce, are attacking “Buy American” provisions included in the economic recovery bill passed by the House on January 28th. They claim that these provisions will provoke a “trade war” with foreign governments, but foreign governments have long histories of supporting their own domestic companies. These companies are self-interested, simply wanting unlimited access to imports, many of which are illegally subsidized and unfairly traded... Companies like Caterpillar, which will benefit from billions of dollars of infrastructure spending in the stimulus package, want unfettered access to cheap steel from countries like China, which poured more than $15 billion into energy subsidies into that sector in 2007 alone. Chinese steel imports more than doubled between January and November, while U.S. steel production fell nearly 40%.

Click through to the full post for a nifty chart and more.

Caterpillar worms its way into "Buy America" debate

Corporations are attacking the "Buy America" provisions of the new stimulus package as "protectionism," as if investing U.S. taxpayer money in the domestic market is an abomination of the first order. Todd wrote about this yesterday; it's worth noting now that companies like Caterpillar, who are arguing strenuously against these provisions, have moved much production overseas.

What's more, the arguments being made are specious: the Buy America piece of the stimulus package simply extends existing law, rather than being some kind of brand-new nefarious protectionist scheme. The original Buy America Act was part of the 1982 Surface Transportation Assistance Act, and requires that U.S. steel and iron be used for federal and state transportation infrastructure projects. Notably, this is exempt from coverage under various trade-agreement procurement rules - although this certainly does not mean that said procurement rules are not still seriously problematic (PDF).

We have just released a lengthy memo for reporters and other interested parties on this issue. Many gory details contained therein, including the legal difference between "Buy America" and "Buy American" (yes, they are two different policies).

(Photo: Bill Lane of Caterpillar, back in his CAFTA Fat Cat days.)

WaPo sez do not big up yourself

I just subscribed to the Washington Post, after a dozen years in D.C., as part of my new year's resolution to "go native." So, I mostly read the Metro section.

But today I was unfortunate enough to look at the editorial page today, which I have resisted looking at ever since I worked on Latin America policy at CEPR. Here's the gross, in an editorial entitled "Obama Can't 'Buy American'":

"Buy American" sounds patriotic, but paying more than necessary for steel diverts resources that could create jobs in other industries. Worse, it raises the prospect of retaliation against American exporters by U.S. trading partners. The director-general of the European steel industry trade association already has threatened to take the United States before the World Trade Organization if the steel provision passes. (Notably, European stimulus programs do not bar U.S. steel or other products -- yet.) "Buy American" would violate the Nov. 15 G-20 joint declaration, which committed the United States to "refrain from raising new barriers to investment or trade in goods and services" until November 2009.

We pointed out the problems with this declaration back at the time of the G-20 meeting. Obama's going to have to crush that statement and forge a new path.

Menendez sez no bailout for foreign firms

The Detroit Free Press is reporting that some in Congress are eager to avoid having the bailout open the U.S. taxpayer up to limitless liability for the travails of multinational corporations.

Chrysler LLC should be forced to pay back its $4-billion loan from the U.S. Treasury should Fiat S.p.A. take control of the automaker, a U.S. senator told President Barack Obama today.

In a letter, U.S. Sen. Robert Menendez, D-N.J., said he did not want “American taxpayers paying to prop up the foreign auto industry.” Under the terms of the deal announced Tuesday, Fiat will take a 35% stake in Chrysler, and has the right to increase its stake to 55% if the two companies work well together...

“I am asking you to address the potentiality of foreign control and require the immediate payback of the loans already dispersed should such a scenario present itself,” Menendez said. “I am sure you would agree that the responsible action is to ensure that American taxpayers are not financing foreign automakers.”

Hat-tip to Simon Lester. Foreign banks have already been involved in some of the same shenanigans as it relates to the financial sector bailout, and the backdrop is of course the WTO's General Agreement on Trade in Services (GATS, and all its financial service tack-ons). Here's how legal scholar Apostolos Gkoutzinis describes this agreement:

The General Agreement on Trade in Services, the most significant product of the Uruguay Round of trade negotiations, is the most far-reaching in coverage of the international legal instruments that regulate the terms of trade in services among nations. The 1997 Financial Services Agreement and the specific national commitments on financial services operate against the legal and institutional framework established by the GATS. The agreement on trade in services reached in the Uruguay Round is perhaps the most important single development in the multilateral trading system since the GATT itself came into effect in 1948.

Here's a subtle way that so-called "trade" rules work as a constraint on public-sector activism and industrial policy: if every time you open up the piggy bank you have to open it up to thousands of corporations, you're going to be less likely to open it up at all. Such far-reaching non-discrimination rules are like advice from a demon psychologist: prioritize all objectives and all players all  at once. That kind of objective function would seem to lead to an equilibrium  away from selecting subsidization strategically and towards doing nothing at all.

New database on tariff suspensions

The Sunlight Foundation has premiered a new database on which members of Congress have sponsored which tariff suspensions. As Sunlight's Bill Allison notes:

House Members proposed more than 800 bills that would provide tax relief–in the form of tariff suspensions–for about 120 companies and organizations during the 110th Congress. The U.S. International Trade Commission, which analyzes the bills, suggests that all told, those bills–if enacted–will cost the Treasury $1.1 billion in 2009...

Tariff bills range from measures that would open the door to low cost footwear from China (affecting about 60 percent of the shoes sold in the United States, according to the International Trade Commission) to measures that will save a Connecticut textile firm the princely sum of $5.40 a year on imported “camel hair, not processed in any manner beyond the degreased or carbonized condition.”

While it’s easy to get lost in the details, a few points about tariff suspensions are worth mentioning: like earmarks, they generally benefit one company or organization; the House instituted new rules to provide more transparency in the tariff suspension process (these greatly facilitated my making of the database); transparency assumes that the press or public actually looks at what’s being made transparent; and, finally, because none of these bills is likely to pass before the current Congress turns out the lights, many of them will probably be reintroduced at some point in the 111th Congress, and we’ll keep tracking them.

I've crunched some of the numbers from this immensely useful tool, and here are the top 12 cosponsors of tariff suspensions from the last Congress, sorted by dollars of (potential) foregone tax revenue during the fiscal years of the session.

Howard Coble (R-NC)     $14,264,192
Earl Blumenauer (D-OR)     $10,267,000
Dan Burton (R-IN)     $9,888,065
Ellen Tauscher (D-CA)     $7,565,637
Kenny Hulshof (R-MO)     $7,432,957
Joe Courtney (D-CT)     $4,524,505
Emanuel Cleaver (D-MO)     $3,940,430
Bobby Scott (D-VA)     $3,509,225
Steve Israel (D-NY)     $3,216,250
Michael Castle (R-DE)     $2,618,000
Mike Ferguson (R-NJ)     $2,210,456
Ray LaHood (R-IL)     $2,142,211

In other news, a former U.S. trade official who helped negotiate China's WTO accession has now come out publicly that this was a bad idea. The Economic Policy Institute is hosting Bob Cassidy next Tuesday morning here in DC. Be sure to come on out!

FTAs Penalize U.S. Exports to the Tune of Five Auto Bailouts

Longtime readers will recall that we challenged the U.S. Chamber of Commerce to a data duel back in the fall. We scored two points to their one, and we promised we'd be back with even more nerdliness.

Now, the Dark Side has challenged us to a final duel, courtesy of a new report touting CAFTA. It arrives just in time for the January 1 implementation of CAFTA for Costa Rica, where nearly half of the voters rejected the pact in an unprecedented referendum, and the other half were scared to within an inch of  their life by false Bush administration threats.

This time has arrived, fearless nomads, for the fair-trade force to strike back. The Chamber's main argument is that U.S. exports have increased under CAFTA. This is true, but of course it is also the normal course of affairs. Barring unusual circumstances, U.S. exports increase with foreign income growth.

The real question is: growth relative to what?

It is meaningless to highlight U.S. export growth rates in the very recent past, given the changes in th e value of the dollar, which has made U.S. exports more competitive than they've been for decades. Currency changes, not the presence of FTAs, explain recent export growth.

In fact, to the extent that presence of an FTA has had an effect on U.S. exports, it seems to have been in a penalizing direction.

We've only got a short time horizon for meaningful comparisons. CAFTA was only implemented for the Dominican Republic in March 2007, so there isn't a single full year to year comparison available for the pact. (El Salvador implemented March 2006, Honduras and Nicaragua in April 2006, and Guatemala in July 2006). So it only makes sense to compare the 2006-08, or better still, the 2007-08 period. And even that's a stretch.

Here are the facts:

1. Over the 2006-08 period, inflation-adjusted annual average export growth to the 14 FTA countries was 10.9% 6%, while the comparable figure for non-FTA countries was over twice that at 14.4%. Looking at just the CAFTA 5 countries (i.e. without Costa Rica), the comparable figure is 12.7% - still lower than that to non-FTA countries.
2. Over the even more appropriate 2007-08 period, the figure is 7.1% for FTA countries, 10.5% for the CAFTA 5, and 14% for the non-FTA countries.
3. Even if you look at the 2005-08 period, non-FTA countries still beat CAFTA countries in terms of average annual export growth.

In other words, CAFTA amounted to a significant export penalty. If CAFTA exports had grown at the higher 14% rate of non-FTA countries, U.S. exports would have been $5 billion higher. If FTA country exports overall had done so, $77 billion would have been added to U.S. export accounts. In other words, FTAs accounted for a $77 billion export penalty in 2008.

To put this figure in perspective, this is over five times the sum demanded in the recent U.S. auto bailout. So, if the Chamber is serious about its analysis, it should be calling for a repeal of CAFTA, NAFTA and other FTAs to stimluate the economy. Or even better, let's have a permanent low dollar policy and acknowledge that FTAs aren't about export or job creation but are really about using the name of trade to lock in deregulation at home and abroad.

FTA Export Penalty  $                        77,413,993,339

	2007 (est based on 06-07 enhanced growth)	2008 (est)	Growth Rate (Real, Ann Avg)
FTA 14	$   430,842,916,340	$                    461,578,111,658	7.1%
CAFTA 5	$   108,655,500,173	$                    120,048,435,155	10.5%
Non-FTA Countries	$   665,166,651,535	$                    758,559,096,629	14.0%

WTO case against U.S. auto industry bailout??

We've been warning about this for some time, but there is an ongoing WTO threat to our plans to usher in a green energy revolution here in the U.S. See this news on the U.S. auto bailout, which includes several greening components:

The European Union might complain to the World Trade Organisation about U.S. plans to help its stricken car industry, European Commission President Jose Manuel Barroso said on Friday.

Democrats in the United States Congress are trying to draw up a $25 billion bail-out for American automakers, who are struggling to survive the financial crisis.

"We are in the process of analysing the plan. The plan has not yet been presented yet. Of course, if it is illegal state aid, we will act at a WTO level," Barroso told Europe 1 radio.

       

Honestly, I've even been a doubter at times as to whether these challenges would ever materialize. But as this news shows, whenever there is real money on the line - and the green revolution is nothing if not MONEY - there will be a WTO challenge.

IMF: Moving Past Harmful Conditions in Current Meltdown?

According to Mark Landler, the International Monetary Fund may be trying to take advantage of the current crisis to resurrect itself from its near-death experience, but there are no signs that this means a return to old-IMF-style conditionalities:

On Wednesday, the International Monetary Fund announced it would lend up to $100 billion to healthy countries that are having trouble borrowing as a result of the turmoil in the global markets. And the Federal Reserve said it would commit up to $30 billion each to Brazil, Mexico, South Korea and Singapore, to enable those countries to more easily swap their currencies for dollars...

The loans will carry none of the strings that usually accompany fund money, including demands to raise interest rates and cut public spending...

That prospect troubles some critics, who contend that the fund is prescribing the same radical measures that caused unnecessary pain in some Asian countries during that region’s financial crisis a decade ago...

Suspicion of the fund is a global phenomenon: the Korean government declared it would not take any loans. Feelings there are still raw from the Asian financial crisis, during which the fund forced South Korea and other countries to raise their interest rates sharply.Mr. Strauss-Kahn, a former French finance minister, said he was aware of resistance stemming from the Asian crisis and was trying to tailor loans more closely to the conditions in the countries.

Stay tuned to see if the IMF's promises are kept.

Trade Takes Center Stage in Campaign Ads

As the clock ticks rapidly toward the November 4, 2008 elections, the evidence is increasingly irrefutable that the only path to the White House and Congress is through, and definitely NOT around, the bread-and-butter impact of the global financial crisis on American families. A recent poll release by Bloomberg/Los Angeles Times added volume to a growing chorus of voter surveys indicating that there really isn't much point in candidates skirting the issue of the "serious economic crisis" now cited by more than 75 percent of Americans.

It's hardly surprising then that the leading issue across the nation is also the leading issue in the hard-fought Midwestern swing states, where the structural shifts in the U.S. economy away from "real economy" domestic industrial production in favor of Wall Street-led financial services in recent decades has been most in evidence. A recent Ohio Newspapers poll (PDF), found that 55 percent of likely voters thought free trade agreements - such as NAFTA - have been bad for Ohio's economy, with only 17 percent saying that such agreements had been good for the economy.

With this in mind, more than 70 (and climbing) television ads in federal races feature trade this election season (more than double the 2006 ad count), making it one of the hottest items on the 2008 political stage. For just one sample, see Ohio's 15th Congressional District where both sides of the congressional race for retiring Rep. Ralph Regula's (R-Ohio) seat feature ads on trade. Democrat John Boccieri's ad promises to "fight against trade policies that ship our jobs overseas," while Republican Kurt Schuring promises "fairer trade policies that would create jobs."

Public Citizen's Global Trade Watch division will be continuing to monitor the role that trade and globalization issues play in the 2008 elections, including a full analysis of the role trade and globalization positions play in shaping the actual outcome of both the presidential and over 100 congressional races. Our Trade in the 2008 Elections report will be released the morning of November 5th, just hours after the polls close.

Disclosure: Global Trade Watch has no preference among the candidates.

Our statement on the Bush summit

Bush called for a global huddle on financial rules today, and here's what we had to say about it:

Bush’s Schizophrenic Economic Summit Plan: With World Calling for Regulation of Global Finance to Counter Wild Volatility, Bush Calls for Session to ‘Enhance Commitments’ to Deregulation, Liberalization

Statement of Lori Wallach, Director of Public Citizen’s Global Trade Watch Division

That President George W. Bush’s idea of a global plan “to avoid a repetition” of the financial crisis spawned in large part by radical deregulation of financial services is to call a summit for nations “to strengthen the underpinnings of capitalism by discussing how they can enhance their commitment to open, competitive economies, as well as trade and investment liberalization” brings to mind Einstein’s definition of insanity: doing the same thing over and over and expecting a different result.

The White House today said that the Nov. 15 summit would advance a common understanding of the crisis’ causes and lead global leaders to agree “on a common set of principles for reform of regulatory and institutional regimes for the world's financial sectors.” Yet unless the radical financial services deregulation agenda that has been aggressively promoted and entrenched by the World Trade Organization (WTO), World Bank and International Monetary Fund is understood as a source of the current crisis, reform proposals will not address the crisis’ root causes.

The content of the Bush administration summit announcement suggests that trying to resuscitate the radical deregulatory agenda and the laissez faire ideology thoroughly discredited by this crisis is the primary objective of the summit, rather than a serious discussion of what new global governance and regulation is required.

While an extreme deregulation agenda had been pursued in the United States by various administrations, it was the WTO’s 1995 General Agreement on Trade in Services (GATS) and 1999 WTO Financial Services Agreement (FSA) that exported the radical deregulation agenda worldwide and locked it into place. Deregulation of the financial services sector - including banking, insurance, asset management, pension funds, securities, financial information and financial advisory services - has been among the most important but least discussed aspects of the WTO’s agenda since its inception.

As part of its original WTO commitments, the United States agreed to conform a broad array of financial services including banking, insurance and other financial services to comply with GATS rules. In some cases, for instance regarding the “firewall” policies established in the 1933 Glass-Steagall Act that forbade bank holding companies from operating other financial services, U.S. WTO commitments that contradicted domestic policy were used to push for domestic revocation of existing laws. (The U.S. WTO GATS schedule explicitly includes a Clinton administration commitment to roll back Glass-Steagall, which had been keeping foreign financial service firms that offered both traditional consumer banking and investment banking services from operating here.) Other U.S. WTO commitments in financial services simply locked into place existing U.S. policies because the GATS includes a “standstill” rule - meaning countries may not roll back liberalization and deregulation once a sector is bound to GATS.

The United States then used ongoing WTO financial service negotiations to export the U.S. model of extreme financial service deregulation to the other 100-plus WTO signatory countries, including through a 1999 WTO Financial Service Agreement. Further financial service deregulation is currently on the agenda of the WTO Doha Round talks.

For further detail, please see our backgrounder on the WTO’s role in the crisis at http://www.citizen.org/hot_issues/issue.cfm?ID=2044.

Krugman Wins Nobel!

Paul Krugman, the famous NYT columnist and Princeton economics professor, has been awarded the Nobel Prize in Economics for his work on trade theory.

Krugman is an interesting character in the world of trade politics. In the late 1970s and 80s, he produced rigorous academic work that indicated that trade could increase inequality, and that countries could benefit from adopting active competitiveness policies. But like all good mainstream economists, he thought that dwelling on these implications was a dangerous obsession. As Bob Kuttner wrote in 2002,

Having cautiously embraced this view, Krugman almost immediately (and prudently) distanced himself from its implications. His early writings warned that even though gains from industrial targeting and strategic trade policy were in principle possible, it was not at all clear that governments would act wisely in their pursuit of strategic advantage. And there was the usual risk that each nation's strategic efforts would degenerate into "beggar-my-neighbor trade policies" and even trade war... By the late 1980s, Krugman was railing against advocates of strategic trade and industrial policy, as dangerous opportunists and frauds.

 

Krugman's methodology, which yielded relatively low estimates of trade's effect on inequality, was later taken up by the pro-NAFTA Institute for International Economics for further estimations. They found that nearly 40 percent of the ballooning of U.S. inequality was attributable to U.S. trade policy. (The folks at CEPR have a useful 2001 summary of both Krugman and IIE.) The Economic Policy Institute used this work in 2007 to find that the average American family lost $2,000 a year from the burden of rising inequality due to trade - an amount that outweighs the median income tax.

In the 1990s through the early 00's, Krugman joined many Democratic Party-affiliated economists in taking every opportunity to ridicule a global-justice movement that had drawn inspiration from his work, for instance slamming my former CEPR and Public Citizen colleague Bob Naiman as "Seattle Man."

In recent years, Krugman has appeared to grow more comfortable with progressives, coauthoring some work with CEPR economist Dean Baker and showing up at EPI events. In an NYT column from last year, Krugman said that trade is now even “a bigger factor than it was” at the time of his early work in explaining skyrocketing inequality. And he noted that the easy fixes proposed by all too many in Washington are off the mark:

Realistically, however, labor standards won’t do all that much for American workers. No matter how free third-world workers are to organize, they’re still going to be paid very little, and trade will continue to place pressure on U.S. wages...

By all means, let’s have strong labor standards in our pending trade agreements, and let’s approach proposals for new agreements with an appropriate degree of skepticism. But if Democrats really want to help American workers, they’ll have to do it with a pro-labor policy that relies on better tools than trade policy. Universal health care, paid for by taxing the economy’s winners, would be a good place to start.

And that is where most economists - including many progressive ones - stop. As with the 1990s debate, too many policy wonks don't really care to engage with the main arguments advanced by the global-justice movement: that neoliberal institutions are harmful to democracy and are not really about trade promotion, but deregulation. That's why even health-care advocates should care about WTO rules that limit the kinds of domestic health-care reforms we can pursue, as we show in a recent report.

In closing, I was riveted by Krugman's academic work as a grad student (Harvard's Ed Glaeser even makes his students memorize his equations). His NYT columns provide biweekly grist for progressives. And more than many economists, he has been willing to entertain ideas and research outside of the accepted neoclassical dogmas. This is an exciting Nobel choice, and we look forward to seeing how Krugman's views on trade policy continue to evolve in the years to come.

After we give the swindlers their deficient capital...

The Boston Globe discusses "what's next after the financial crisis". Here's what we and some other advocates are saying:

Now come the second thoughts on globalization.

Never before have world markets been so integrated. And yesterday's concerted interest rate cuts by central banks in the United States and other countries from Britain to China was a signal that the financial crisis rippling around the globe has grown too big for any one of them - even the US Federal Reserve - to contain on its own.

It also could mark the start of an effort to overhaul the global financial system conceived at the 1944 summit in Bretton Woods, N.H., which set the rules of international commerce for industrial countries...

Critics of global trade and finance, long a vocal minority in many countries, including the United States, have based much of their opposition on such historical factors as job migration. Now they see their cause gaining momentum as lawmakers push for tougher oversight and financial restrictions to stem the mayhem in world markets. US Representative Barney Frank, Democrat of Newton, has called for stepped-up regulation of investment banks and other financial institutions.

"There's going to be a large push for re-regulation," said Lori Wallach, director of Public Citizen's Global Trade Watch, a policy advocacy group in Washington. Wallach said trade pacts have undermined safeguards for workers and consumers worldwide.

"We're seeing the fruits of three decades of deregulation of the financial markets," said Tonya Hennessey, project director at CorpWatch, an antiglobalization group in San Francisco. "Because of that, we've had this complex packaging of securities sold around the world. There's no choice but to go back to strong regulation."

Free Traitors

Chris Hayes writes in the New Republican on the growing trade revisionist movement in mainstream economicsland, and notes:

It's not just workers in the importing sector that suffer the wage cut" when forced to compete with foreign workers, says Bivens. "It's everyone that looks like them. Landscapers don't get replaced by imports, but their wages are depressed by having to compete with laid-off apparel workers." ...

Just how much the losers have lost is a matter of debate, but most economists agree that the wealth gained from free trade has been redistributed upward, toward the skilled, and that low-skilled workers have suffered the most. They also agree that, as a portion of the total U.S. economy, the overall net benefit of NAFTA and other free-trade deals is too small to find with even the most powerful econometric microscope. What you're left with is a small gain in the nation's net income and a strong, lasting depression of wages that hits exactly the kinds of unskilled workers who had already been falling further and further behind.

Thoughts on Bailout Vote

In no particular order...

Wall Street might have needed a bailout, and it's conceivable that the Paulson-Dodd-Frank approach was the right one. But this case has to be made by credible people who can distill the problem into soundbytes. There are very few people in the leadership of either party that have such credibility: remember that the Republicans spent years crying that trade agreements with Central America and Oman were vital to U.S. economic prosperity, and many in Democratic leadership spent much of 2007 arguing the same for the NAFTA expansion to Peru.

Now, as the economy tumbles around us, we've got folks in Congress who only want to talk about NAFTA expansion to countries like Panama. You can only cry wolf so many times before you lose all credibility. History will not judge kindly those policymakers who spent the last few years wasting political capital and legislative time pushing ridiculous FTAs with small, poor countries instead of dealing with the housing and financial crises. And as Sirota points out, answering basic questions in a non-fearmongering fashion should be a basic prerequisite for allocating 5% of our national income.

Most consistent fair traders voted against the bailout. But there were consistent anti-fair traders like Rep. Henry Cuellar (D-Texas) who opposed, while very serious fair traders like Rep. Phil Hare (D-Ill.) voted for it. Here's his statement. Nevertheless, with (mostly) left and (mostly) right uniting in shared opposition to the package, you had a bit of an uprising dynamic. As John Nichols writes,

They do not usually unite--although it has happened a few times in recent years on trade votes. And they do not usually hold together in the face of whipping--not to mention outright bribery--by party leaders... on Monday, urged on by two of the Capitol's more consistent dissenters, California Republican Darrell Issa and Ohio Democrat Marcy Kaptur--who developed something of a rogue coalition to whip the "no" votes--the outsiders briefly became the bosses of Capitol Hill."

Financial deregulation and trade are not separate issues: in fact, they're closely linked, since NAFTA and the WTO- style pacts have been used to further tear apart financial safety nets. Bill Clinton, when he failed to get Congress to approve Glass-Steagall repeal in 1998, had his trade team make a WTO commitment to repeal it. If it hadn't been repealed in 1999 by Gramm-Leach-Bliley, the United States would have been in violation of our WTO service-sector commitments, and could have faced trade sanctions. Similarly, backers of the Peru FTA from last year gave Citigroup more tools to lock in that country's failed social-security privatization. Going forward, there may be any number of trade pact blocks on the reregulation of the financial sector. More on this later...

Nerds v. Suits, 2-1

Last Friday, we did an analysis of the U.S. Chamber of Commerce's latest pro-FTA screed, and showed that their selective use of only 10 of the 14 FTA countries to make a point about export growth was seriously misleading. Stumo called "truthy" on 'em, which sounds about right.

The Chamber has responded, and they confirm that when all 14 countries are thrown into the mix, U.S. export growth to non-FTA countries is in fact higher than to FTA countries.

But they then attempt to make at another selective cut, this time including Jordan and Israel but still excluding Canada and Mexico (i.e. NAFTA). There is no clear reason for doing that, since, as they note, NAFTA is the biggest FTA. But it does weaken their argument, since export growth to NAFTA nations is the lowest of any of the FTAs. Hey, we didn't exclude Chile from our calculations - why should they exclude NAFTA??

Nerds, 1.

However, the Chamber scores a point for catching that we were not using the estimates of 2008 exports as our base for calculating growth trajectory for Colombia, Panama, and South Korea. Kudos to the Chamber's Brad Peck for catching my bubu.

Suits, 1.

However, because the export growth rate to the full 14 FTAs is still below that of non-FTA countries, there continues to be an "export penalty" under this exercise of $17.4 billion. That's a little less than our original export penalty calculation, but it's still a penalty.

Nerds v. Suits, 2-1.

Of course, the whole exercise is more than a little D&D. As we noted last week, making arguments about export growth without reference to import growth and the overall trade deficit is about as useful as using a halfling to fight a hell hound (err, or whatever). And is also sidesteps the issue of why one would promote an FTA, rather than just promote trade or tariff reduction more generally.

Obama Advisor on What's So Cool About Free Trade

(Disclosure: Global Trade Watch has no preference among the candidates.)

Obama campaign staffer Jason Furman has a piece out in the Harvard Law & Policy Review that touches on trade. (It came out in the summer edition, but I just saw it.) You may remember the decision to hire Furman caused a bit of a stink a few months ago. Here's what he and co-author Jason Bordoff, in a piece mostly about tax policy, have to sez:

The Growing Protectionist Backlash

The U.S. economy has become increasingly integrated with the rest of the world over the past twenty years, due to advances in technology and transportation. The result has been greater flows across borders of goods, services, capital, people, and ideas. In 2007, the sum of exports and imports amounted to 29% of GDP, up from 19% in 1979.

Concomitant with this rise in global economic integration in recent years has been a protectionist drift among Americans and their representatives. Trade deals have stalled in Congress, most notably one with South Korea, and Congress allowed the President’s trade promotion authority to expire last summer. Voters, meanwhile, are becoming more skeptical of the benefits of trade. According to a recent Pew Research Center poll, the share of Americans who believe that trade is good for their country has plunged from 78% in 2002 to 59% in 2007, the lowest proportion among the forty-seven countries included in the survey. This concern is not limited to Democrats: a Wall Street Journal poll in the fall of 2007 found that Republican voters were skeptical of free trade by an almost two-to-one margin (59% versus 32%).

Beyond free trade, protectionist sentiment is likely to be fueled further by increased foreign direct investment in the United States. Voters and policymakers alike expressed outrage when the Chinese energy firm CNOOC tried to purchase the U.S.-based Unocal, and similarly when Dubai Ports World tried to purchase operations at six U.S. ports. Such concerns are likely to be exacerbated in the coming years as the sovereign wealth funds of some foreign nations increasingly seek investment opportunities in the
United States.

The Promise of Global Economic Integration

The growing protectionist backlash against global economic integration is a serious threat to our economic well-being. Greater openness has greatly benefited the U.S. economy—even though it admittedly can precipitate concentrated harm to workers in particular industries and communities. For example, one study found that trade provided an aggregate benefit to the U.S. economy of $1 trillion per year. Free trade allows people to specialize in the goods and services they produce with the most comparative efficiency— the classic idea of “comparative advantage”—while also allowing producers and consumers to benefit from economies of scale. In doing so, free trade leads to increased productivity and GDP growth, which ultimately are necessary to raise standards of living and provide the resources needed to address costly challenges such as health care and climate change. For consumers, free trade also promotes competition, which introduces new low-priced goods and services and constrains markups on existing goods and services. For workers, free trade may be associated with competitive labor markets that can sustain lower rates of unemployment without triggering inflation.

Closely linked to greater trade are greater international capital flows, which have grown even more quickly than trade volumes in recent decades. American firms are leaders in financial services, and financial openness allows U.S. investors to find new and more productive investment opportunities abroad and permits foreigners to invest in the United States. America’s large budget deficit and low private savings would have had much more serious consequences were it not for America’s open capital account, which allows substantial foreign investment to help maintain America’s production. Moreover, open trade has been beneficial for the United States recently because, as the economy has slowed and the dollar has weakened, a rising share of economic growth has come from exports.

Finally, globalization is a benefit not only to the United States, but also to the rest of the world—particularly the developing world. Trade is driving economic growth throughout the world, lifting hundreds of millions of people out of poverty, and has proven far more effective at doing so than has traditional development aid. Openness to trade and investment can facilitate growth, and growth and poverty reduction go hand in hand. Even for those countries trapped in a cycle of poverty, one leading scholar argues that what is needed more than increased foreign aid is increased market access for the “bottom billion” to the economies of the rest of the world.

Here's what Senator Obama had to say about the Korea trade deal that the Jasons reference:

Obama, who has made criticism of free-trade pacts a staple of his campaign, called the accord between the two nations ``badly flawed.''

``In the interests of cultivating bipartisan cooperation on trade policy, I urge you not to send this agreement forward to the Congress,'' Obama wrote in a letter to Bush released today. Instead of pushing the agreement, the U.S. trade office should use existing laws to challenge ``barriers to U.S. exports,'' Obama said.

Nerds Fight Back Against Exporting Lies

I've got a long and kinda nerdy post today, but hopefully you'll find it fun. (9/16 update here: Chamber responds!)

The U.S. Chamber of Commerce released a memo yesterday that attempted to project a possible trajectory for U.S. exports if pending trade pacts with Colombia, Panama and South Korea were approved.  Extrapolating from the U.S. export growth rate under a select 10 other so-called “free trade agreements” (FTAs) implemented under President Bush’s tenure, the Chamber estimated that annual exports to Colombia, Panama and South Korea could total $101 billion without the FTAs, and $143 billion with the FTAs, by the year 2012. The difference between the two figures – $42.6 billion – would constitute an export “premium,” in the Chamber’s wording. John Murphy, the Chamber’s vice president for international affairs, went so far as to call this “a $42 billion economic stimulus that’s almost free.”

There are several problems with the Chamber’s report and framing. First, the Chamber’s calculation is incomplete and highly misleading. As with past Chamber and Bush administration estimates (PDF),  U.S. export performance in Canada, Israel, Jordan and Mexico – FTA partners all – is curiously excluded. This is curious because these four countries account for 83 percent of all U.S. exports to FTA markets. Instead, the Chamber’s calculation only includes a select 10 FTAs negotiated with mostly poorer countries under the Bush administration.

The graph and table posted here shows that once these four FTA partners are reinserted into the calculation, U.S. export growth in FTA markets since 2003 (8 percent) is not only lower that the select 10 Chamber estimates (24 percent),  but is lower than U.S. export performance in non-FTA markets (14 percent). In other words, U.S. export growth in non-FTA markets was nearly twice that of FTA markets, and the U.S. export growth rate to all FTA countries is only a third that of the Chamber’s select 10 FTA countries. I present to you (fanfare please!): the FTA export penalty.

Corporate America Wins with Trade!

This is quite the impressive jam by the Oregon Fair Trade Campaign (ORFTC)...

They do a great job of cutting straight to the heart of the the Consumer Electronics Association's silly-ness. US exports grow faster on average with countries when we have no NAFTA-style trade pact. The Colombia FTA can do nothing but wreak more havoc on the US economy and job market. We've already lost more than 3 million good manufacturing jobs since NAFTA, with the electronics industry itself having dealt its fair share of pink-slips. Now they go around highlighting the few jobs their members have not yet sent overseas as a reason to keep paving the way for them by passing unfair trade deals! Do they really expect a "thank you" from the American worker?

The truth is that the Fat Cat CEOs who stand to gain from FTAs would simply love another round of trade deals to make sure they can ship out the rest of the jobs wherever they please, whenever they please. As long as they can escape progressive, pro-worker regulation that ensures shared prosperity and sustainability, they'll be supporting any and every trade deal, no matter how horrendous the abuses of the regimes themselves or the abuses of their paramilitary allies.

Hats off to the Oregon Fair Trade Campaign for this one. World-class spoofing, indeed! My favorite is the part where they slam the bus as being too "low-brow" a mode of transport. Kudos.

The Punditocracy: Speaking for the Wretched of the Earth

For those of us who get dizzy listening to the circular logic of the paragons of Punditocracy (especially of the capital P variety), Roger Bybee's (Fairness and Accuracy in Reporting) excellent historical round-up of Fareed Zakaria's noxious views on trade and globalization issues offers a welcome breath of cold, clean facts  after some pretty serious doses of post-Doha death vertigo from the 'powers that be'...

Fareed Zakaria, now the highly influential editor of Newsweek International, author of The Post-American World, and host of Fareed Zakaria GPS, constructed a landmark of unintended irony when he regally pronounced that “the downtrodden beg to differ” with protesters of corporate globalization (Foreign Affairs, 12/13/99).

Those who demonstrated against the World Trade Organization at the famous “battle of Seattle” in 1999, he asserted, were displaying the hubris of the “rich and privileged,” who were delivering “a familiar plea for the downtrodden of the world” by challenging the WTO’s promotion of sweatshops and environmental degradation in the impoverished Third World.

In other words, Zakaria denounced the arrogance of those who presume to advocate for the world’s poor—while appointing himself, the son of a prominent Indian attorney and politician, as the poor’s spokesperson. “There’s just one problem: The downtrodden beg to differ,” Zakaria declared.

In his eyes, the Third World’s poor eagerly welcome Western investment on any terms as a vast improvement over their current misery. Microscopic wages, long hours and heartless management in sweatshops, along with befouled air and water, might seem horrific to wealthy Westerners, but are gratefully welcomed by the desperate people of nations like Mexico, China and India. “In fact, if the demonstrators’ demands were met, the effect would be to crush the hopes of much poorer Third World workers,” he declared (12/13/99)...

On globalization, Zakaria zealously denounces opponents of corporate-determined trade agreements as seeking to impose utopian rules for the global economy that are widely rejected, especially by the most wretched of the earth....

Zakaria’s “anti-democratic” and “minority” accusations invert reality in...critical ways....

A recent multinational Chicago Council/ WorldPublicOpinion.org poll (released 4/25/07) found majorities in most poor nations insisting that globalization be accompanied by global standards to prevent a “race to the bottom.”

“Strong majorities in developing nations around the world support requiring signatories of trade agreements to meet minimum labor and environmental standards,” the survey concluded, citing data from China, India, Thailand, the Philippines, Argentina and Mexico. “Nine in 10 Americans also support such protections for workers and the environment.”

Elites in Third World nations, in contrast, staunchly opposed such standards, the study noted:

The leaders of less developed nations have generally opposed including language mandating minimum standards for working conditions and environmental protections in trade deals, arguing that such rules are protectionist and would undermine their ability to compete in major markets such as Europe and the United States.

“It has often been assumed that when leaders of developing countries argue against including labor or environmental standards in trade agreements, they represent the wishes of their people,” added Steven Kull, director of WorldPublic Opinion.org. “However, it appears that these publics would like to see the international community put pressure on their governments to raise their standards.”

These findings directly contradict Zakaria’s simplistic worldview that the free-trade agenda of America’s political and business elite reflects overwhelming public sentiment in both poorer nations and the U.S.

And, closer to home (and to the other salient topic of the day - the upcoming November polls - about which Zakaria is busy confusing the American electorate daily), Bybee reminds us of the ultimate price yet to be paid by those candidates who forget that the people actually know what's going on...

While elites across the globe support unregulated globalization, majorities in both the U.S. and poorer nations essentially seek to restructure globalization so that it benefits everyone—as signified by the flipping of 37 congressional seats in the 2006 mid-term elections from “free trade” advocates to supporters of “fair trade” (Global Trade Watch, 12/13/06)."

Gotta love it when the real elites try to carve their niches by claiming to speak for the poorest of the poor. Frantz Fanon must be spinning in his grave!

Who Likes to Rock the FDI Party? Kevin G Likes To Rock the...

We've written about our bud Kevin Gallagher of the Global Development and Environment Institute many times before. After an amazing book out last year with Lyuba Zarsky, he has another one out on foreign direct investment and sustainable development that's getting the book event treatment over at the Carnegie Institute this Thursday in DC. If you're around, it'll be the best FDI party around. Details after the jump...

New NAFTA facts for your brain and heart

The Bush administration is getting restless! The candidates' ongoing campaigning against the NAFTA trade model is putting quite a spotlight on their efforts to expand NAFTA to the union murder capital of the world (Colombia.) Bush's latest counterinformation is here; our latest countercounter is here. Get your facts on! Here's a clip:

CONCLUSION: Can we evaluate the promises on NAFTA? Yes, we can!

An army of think tanks and corporations spends millions every year in an attempt to muddle even the basic facts on NAFTA. We know that under NAFTA, the U.S. trade deficit is up, manufacturing jobs are down, wages are stagnant, Mexican immigration is up, Mexican growth is down, and policy space has been seriously limited. Bush administration officials and pundits can debate whether any of these facts matter, but they cannot make up their own facts, nor serve up irrelevant ones in the hope of distracting policymakers or the public from continuing to demand trade policy change.

Why we should care about manufacturing employment and FTAs

There's been some fretting in the blogosphere about the NAFTA job loss numbers cited by the candidates, and generated by our friends at the Economic Policy Institute (EPI). I won't do a full response to the original American Enterprise Institute comment piece that sparked the musing. Suffice it to say that the Trade Diversion site has it right when they say that "trade affects the composition, not the number, of jobs in an economy." That's right, and tradable sectors like manufacturing lose out when there's a trade deficit. A few additional points, in no particular order:

1. There's things that you can criticize about the EPI methodology. Where people start to sound ridiculous is when they suggest that you wouldn't have more manufacturing jobs with balanced trade. You can debate the numbers, but you can't debate the underlying theory, or the political heart that EPI has after all these years trying to talk about an issue that matters to working people the neoliberal think tanks deny even exists.
2. I mean, seriously. It is amazing the kind of flak you take in this town for just trying to put a number on something that everyone knows is happening. And all over whether input-output tables like the kind you learned in matrix algebra are the best tools to use in looking at the problem! Seriously! That's what the "fuss" is about.
3. We've been running a trade deficit since before the Tokyo Round of the GATT, but it grew bigger after NAFTA and the WTO kicked in. To the extent that these deals offer incentives to offshore U.S. production in tradable sectors above and beyond that already promoted by the high dollar policy, then real people's work was affected.
4. But it's true that if the only thing you care about is reducing the trade deficit, then fights over FTAs are not a first order fight for you. They may be a second order political fight because you know that time spent negotiating and passing FTAs is time not spent fighting the trade deficit, i.e. you may think it's a good indication of absolutely backward political priorities in Washington. And that's right: it seems pretty clear that the 110th Congress will have spent a year working on the Peru FTA, and will have done nothing on the trade deficit. The chief first order reason to oppose FTAs remains that they're atrocious neo-liberal policy that do the wrong things for development, for democracy, and for regulation.
5. Bosses could use the threat of relocation to hold back wages, which because we have a national labor market, contributes to wage stagnation for everyone, not just manufacturing workers.
6. There's a startling lack of sympathy in much of the punditry's discussion of blue collar workers. Think to a time when you had a rough personal year - maybe you got fired, had a relationship fall apart, struggled with sickness. These are years that you will remember for the rest of your life, even as you try to forget them. They carry a deep psychic toll that you may never fully recover from. This is just a fraction of what many people who lose manufacturing jobs go through. Its a real cost to our economy and our democracy and civilization, and a major cost to these people's lives. It perpetuates the injuries of class that make progressive movement building very difficult.
7. Manufacturing is pretty sweet because it - like fast food jobs - doesn't require a lot of advance education. This is good, since most Americans don't have that much education. The thing is, there's simply not that many highly educated workers that the economy needs, with most jobs "of the future" projected to be in hospitality and related services. At a manufacturing plant, you can get on the job training, and have a pretty good shot of making a middle class income and being covered by a union contract. Whether you care about innovation or national security, manufacturing is also pretty important.
8. Some pundits like to say that manufacturing isn't in crisis because manufacturing output is at high levels. But this stat measures that total value of shipments coming from our manufacturing facilities, and doesn't take into account the value of imported parts. U.S. manufacturing value-added, a more appropriate measure, increased 13 percent between 1993 and 2006 – the exact same rate as between 1980 and 1993.
9. I have friends in service sector unions that say that it's important for progressives to talk about making bad service sector jobs into good jobs, just like was done with manufacturing. I don't disagree with that (I'm an SEIU member!), and I don't think that this contradicts any of the things that I've said.
10. If you don't think that manufacturing matters, then you may not care about a small trade deficit. But if you value macroeconomic stability and predictable trade flows (something more important if you've a developing country trying to to figure out the right degree of export orientation), then you should worry about a large trade deficit in the world's largest economy. In fact, you should worry about it a good deal more than the U.S. federal budget deficit, which is about half as large as the trade deficit.
11. If you think that having 2.3 million Americans or 1 in 100 Americans (and one in nine prime age black males) being behind bars is a national tragedy, then you might think it would be a good idea to have more entry level manufacturing jobs in the inner city. In fact, if we had a trade deficit that was the size of the budget deficit, we could (conservatively) create 1 million jobs. Wouldn't that be a good place to put some of those non-violent offenders?

Book Recommendation: Bad Samaritans

I'm pretty sure that I've recommended my prof Ha-Joon Chang's Bad Samaritans' book in the past, based on some advance chapters I had seen. Now that I've read the book fully through, let me double up on that recommendation and say that I think it is the finest and most accessible distillation of his ideas to date, and it's even getting grudging praise from the mainstream press. Thom Hartmann has a much longer review just published, but let me point out a few highlights:

• This is a book about globalization that you could buy for your parents. Ha-Joon is a very witty guy who has appropriated the best of Thomas Friedman's anecdote-heavy style, and turned the conclusions on their head. For instance, in a chapter on whether the poorest countries should adopt neo-liberal trade policy and compete with the big guys, Ha-Joon darkly muses on whether he would win any parenting awards by subjecting his own son to grinding labor market competition.
• The examples skew towards the U.S. and Europe, rather than more recently developed countries in Asia, which I think only makes it more accessible for the non-globe trotting audience here in the U.S. There are some great historical examples from the U.S., Europe and Japan about how the popular press and punditry hundreds of years ago (and even more recently in Japan) tried to discourage them from branching out into different production now thoroughly associated with the countries.
• He doesn't dodge some of the difficult debates in economic development, such as whether democracy is necessary for development, boldly noting that the U.S. was not a democracy in the formal sense until 1965. He also doesn't pander to the anti-corruption line, as he explains that latest neo-liberal trap. Corruption may be wrong, but it's only in certain instances that it retards development.
• Finally, Ha-Joon makes analysis of imperialism a lot less frightening to your middle-of-the-road reader. It's presented in a factual way related to power in the global economy, with all the best in British political economy as opposed to sectarian tradition (the chapter on FDI has a great line from the Keynesian economist Joan Robinson: the only thing worse than being exploited by capital is not being exploited by capital.) He also clearly exposes the parallels between the unequal treaties of the 19th century, and WTO policies today.

The field narrows, and advice from Feingold

This just in... Romney to pull out... On trade, Romney started out his campaign by talking about how great offshoring was, only to end up in Michigan talking about fighting for manufacturing jobs. A strange thing, democracy - when it works, it ends up changing the positions of those in power.

Even Huckabee, who as governor of Arkansas signed his state up for the procurement chapters of NAFTA-style deals, channels some of our own Holly Shulman from earlier in the week:

When President Bush agreed with House Democrats on a stimulus package centered on big tax rebates, for example, Mr. Huckabee raised the hackles of supporters of free trade by arguing that the plan in effect subsidized the Chinese manufacturers of imported consumer goods. And he argued that the money would be better spent building roads, bridges and other infrastructure projects at home, irking proponents of limited government.

In the wake of Edwards losing the race, there are now new power centers pushing on Clinton and Obama to fair trade it up. As John Nichols writes:

"Talking about experience and idealism is so much conversation for Wisconsin people," says Feingold, a three-term U.S. senator who serves with Obama and Clinton and who flirted with making a presidential run of his own this year. "We'd like to hear something about what they're going to do. It's amazing to me that this campaign has gotten as far as it has without getting down to specifics. But Wisconsin voters expect more from the candidates than the slogans." Like what?

Feingold says that the two remaining serious contenders for the nomination need to bone up on trade policy -- and its impact of real people in places like Wisconsin.

"I would urge them to be aware of the devastation that has occurred for people in the state over the past twenty years as a result of trade policies that were forced through Congress without any concern for working people in states like Wisconsin," says Feingold, who has since coming to the Senate in 1993 consistently opposed the free-trade agenda of both the Bill Clinton and George W. Bush administrations.

The campaign — especially on the Dem side — could get pretty interesting as the candidates grasp at something — anything — to differentiate between the two. Feingold's suggestion seems pretty savvy to me.

(Disclosure: Global Trade Watch has no preference among the candidates.)

Inefficiency of redistribution

Dean Baker, in his new lecture on trade and inequality, raises an interesting point:

Most of the supporters of the current trade agenda, and especially the more liberal supporters of this agenda, do make a point of advocating redistribution from winners to losers, so that in principle at least everyone can gain from trade. As noted, this redistribution usually takes the form of retraining or readjustment assistance for workers who can demonstrate that they directly lost their jobs due to trade. Although, it has never really appeared as a serious proposition in political debate, in principle it would be possible to tax away enough of the gains from the winners to compensate all the people who lose from trade...

Most forms of trade readjustment assistance are relatively small items in the federal budget. For example, the 2008 appropriation for trade adjustment assistance is less than $200 million, approximately 0.006 percent of the federal budget.

By contrast, suppose that trade had the effect of lowering the wages of the bottom 70 percent of the wage distribution by an average of 2.0 percent, a relatively conservative estimate of the impact of trade on inequality. In this case, the amount of money that would have to redistributed from higher income people to low wage workers would be close to $50 billion annually, or 1.6 percent of the federal budget. This would be a qualitatively larger sum to raise in taxes, which perhaps explains the reason that no politician has championed this effort to date.

There is a second more fundamental point that needs to be addressed in assessing such large redistributions from the standpoint of trade policy. The argument for trade liberalization depends primarily on the claim that it increases economic efficiency. However, any revenue that is raised to pay for compensation from winners to losers will require taxes. These taxes will themselves be distortionary. While it is easy to say that the distortions that result from the taxes necessary to fund a $200 million job retraining program will not create enough distortions to offset the gains from trade liberalization, it is far from obvious that this is true if it’s necessary to raise $50 billion to redistribute to the losers from trade...