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WSJ Got It Wrong: Tariff decision correlated with halt in tire sector job loss

UPDATED: 9/3/10

Yesterday, the Wall Street Journal wrote an editorial in which it blasted the 35 percent safeguard tariff against Chinese tires imposed by the United States in September of last year. The U.S. imposed the tariff due to a huge surge in tire imports from China that materially harmed domestic manufacturers. According to the Wall Street Journal:

The measure hasn't boosted employment. In the first five months of this year, the number of workers at U.S. tire factories fell about 10% compared to the same period last year, according to an analysis from the pro-trade U.S.-China Business Council.

Strictly speaking, the statistic that the U.S.-China Business Council claims is correct. However, this statistic cannot lead us to the conclusion that employment in the American tire manufacturing sector has continued to suffer with the tariff upon Chinese tires.  The graph below reveals how the comparison data seems to have been selected specially to support the desired negitive conclusion. First, the data referenced: According to the Bureau of Labor Statistics (BLS), there were 50,300 workers employed in the American tire manufacturing sector in June 2010, the most recent month with available data.  By contrast, only 49,100 workers had jobs in tire manufacturing in August 2009, the month before the tariff was imposed.  Since the BLS does not seasonally adjust data for small sectors of the economy, there may be some hidden seasonal effect here; 51,700 workers were employed in tire manufacturing in June 2009, though this is only slightly higher (1,400 jobs relative to 50,300) than tire employment in June 2010.

Graph of tire employment

The graph makes clear that by the end of the summer of 2009, tire employment began to stabilize, which happened about the same time that the tariffs were imposed.  Correlation certainly doesn't indicate causation, but given the evidence it is quite possible that the tariffs played a role in the tire employment stabilization. The graph also makes it obvious why the U.S.-China Business Council found that "in the first five months of this year, the number of workers at U.S. tire factories fell about 10% compared to the same period last year."  It is simply because in the first half of 2009 - before the tariff was imposed - employment in the tire sector was steadily plummeting! So, when the first few months of 2009 are averaged in (with their comparatively high employment levels which were being eroded every month by the import surge), tire employment in early 2010 looks worse by comparison to that average.  However, again, the graph makes clear that in fact by the end of the summer of 2009, tire employment finally began to stabilize. This is the period when the tariffs went into place. 

But don't take my word for it. Go here and input “CEU3232621001” as the series ID to pull the tire manufacturing data.

Besides the cherry picking of stats, what is vexing about the way that the WSJ presents the issue is that it seems to believe that Obama came up with the idea of this safeguard out of the blue and that he had sole discretion in the decision. The WSJ refers to the tariff as "Mr. Obama's tire tax."  In fact, the U.S. International Trade Commission (USITC), and independent federal body, rigorously analyzed the numbers and issued a recommendation to Obama that a 55 percent tariff be imposed on Chinese tire imports. The 35 percent tariff that Obama chose to impose was actually lower than the tariff that the USITC recommended. Rep. Sander Levin's website has a great Q&A on the Chinese tire tariffs.

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IMF on Capital Controls: For Them Before It Was Against Them?

IMF logo Earlier this month the IMF published a working paper that examined the financial barriers between members of the East African Community (Burundi, Kenya, Rwanda, Tanzania, and Uganda).  The barriers could include the transaction costs inherent in the difficulty of finding a buyer, seller, or broker of a financial product, or the risk that a party to a financial transaction would default on a loan or otherwise fail to live up to contractual obligations.  The East African Community (EAC) economies are still maturing, so these barriers are expected.  However, the author of the paper chose to zero in on the controls placed on the international flows of capital in the EAC countries and urged that they be put on the chopping block:

Efforts can be made by EAC members to remove and lower their existing financial barriers. The fact that EAC countries have agreed to abolish existing capital controls [among themselves] by the year 2015 is a step in the right direction.

This paper comes just months after the IMF released a staff position note that suggested that “controls on inflows of foreign capital can be one tool in broad policy toolkit.”  In the paper, it noted that

policymakers are again reconsidering the view that unfettered capital flows are a fundamentally benign phenomenon and that all financial flows are the result of rational investing/borrowing/lending decisions. Concerns that foreign investors may be subject to herd behavior, and suffer from excessive optimism, have grown stronger; and even when flows are fundamentally sound, it is recognized that they may contribute to collateral damage, including bubbles and asset booms and busts.

To be fair, this paper criticizing capital controls in the EAC is an IMF “Working Paper”, which does not necessarily represent the views of the IMF like the previous “IMF Staff Position Note”.  Nevertheless, this paper on EAC suggests that the IMF may be drifting back to its old ways merely two years after the worst financial crisis since the Great Depression.

The EAC countries are no strangers to rapid flows of massive amounts of capital.  In June 2008, Kenya’s largest cell phone service provider Safaricom held an initial public offering (IPO) of its shares.  Strong demand from foreign and local investors alike pushed share prices high immediately following the IPO.  Many small Kenyan investors took out loans to purchase the stock.  When the global financial crisis came to a head in late 2008, though, the stock price collapsed as foreign investors sold their shares, and local investors were burned.

For a discussion of how capital controls could run afoul of WTO rules (how to fix WTO rules to prevent this) see our recent memo here.

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Companies Based in Third Countries Could Use Korea FTA Investor-State Enforcement


From the Wall Street Journal comes news that German-based engineering conglomerate Siemens is seeking a bigger slice of the government contracts pie:

The new top U.S executive at Siemens AG is taking aim at business with the federal government, hoping he can take advantage of the German industrial conglomerate's scale to win a bigger share of that steady customer's order flow.

Eric Spiegel, chief executive of Siemens Corp., the U.S. division of Siemens, says his operations currently bring in about $1 billion a year from the U.S. government, a figure he hopes to double by 2015. The effort puts the company up against tough competitors like General Electric Co. and Honeywell International Inc., but Mr. Spiegel believes new spending will come in areas like energy efficiency and health care, where Siemens has products such as offshore wind turbines, MRI scanners and high-speed trains.

If you stroll over to our Korea-U.S. corporate investment maps, you’ll find that Siemens is invested all over the United States and Korea.  Siemens has 147 establishments in 39 states. 

With its investments in the United States and Korea, Siemens could stand to benefit from a loophole in the Korea FTA’s investor-state enforcement mechanism.  The United States or Korea could only deny the benefits of the investor-state enforcement to a foreign investor under two circumstances (see Article 11.11 here for the text. The first circumstance deals with situations in which the U.S. or Korea has sanctions or “not normal economic relations” with the third country where the investor is based, which would apply mostly to firms based in Iran, North Korea, Burma, Cuba, etc.  The FTA outlines a second possible way to deny the benefits of the investor-state arbitration:

A Party may deny the benefits of this Chapter to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of the other Party and persons of a non-Party, or of the denying Party, own or control the enterprise. [emphasis added]

Given that Siemens has 1,800 employees and annual sales of 1.2 billion Euros in Korea, it could merely change its country of incorporation with the stroke of a pen and argue that it has substantial business activities in Korea in order to sue the U.S. government under the Korea FTA. It could also do the same to Korea.  This re-incorporation issue arose very recently in the Pacific Rim CAFTA case. Just a year before Canada-based Pacific Rim filed its CAFTA suit against El Salvador for denying it permission to mine gold, Pacific Rim re-incorporated in the United States, which gave it access to the CAFTA investor-state enforcement rights.

Since the government contracts that Siemens is pursuing would be classified as an “investment agreement” under the Korea FTA, it would be free to bring cases.  In fact, this is not hypothetical possibility: Siemens has already successfully brought a case under the Germany-Argentina Bilateral Investment Treaty.  The case involved a contract between Siemens and Argentina to establish a system of migration control and personal identification.

The possibility of Siemens or a similar corporation using the Korea FTA to challenge the handling of U.S. government contracts is yet another reason why the investment chapter of the Korea FTA must be fixed.

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Lori Wallach on HuffPo: "Does the U.S. Trade Rep. Secretly Love Higher Tariffs?"

Check out Lori Wallach's latest piece on the Huffington Post:

HuffPo logo 

Does the U.S. Trade Rep. Secretly Love Higher Tariffs?

"For a guy who loves 'free trade' and is supposed to represent U.S. workers and businesses, U.S. Trade Representative Ron Kirk seems way too comfy with tariffs being slapped on American exports. Instead of renegotiating a North American Free Trade Agreement (NAFTA) requirement that Mexico-domiciled tractor-trailers have full access to U.S. roads, Kirk is allowing a second year of sanctions against $2.5 billion in U.S. exports to Mexico..."

Read the entire piece at the Huffington Post.

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Your Tax Dollars Going to Foreign Banks? Lori Wallach Comments on CNN.

Cnn-logoThe Congressional Oversight Panel issued a report last week that showed much of the bailout money ended up going to foreign banks. Does that strike you as odd - or maybe even bad? If so, you should know that, under WTO rules, the U.S. has to give equal treatment to foreign and domestic banks.

As Lori Wallach put it, "Under the current World Trade Organization rules, the United States is pretty much required to take our tax dollars and, on the down side, bail out things that don't work. But the U.S. taxpayers don't get the profit for those risks on the upside when that globalization finance is profitable for the banks."

Click here to see Lori Wallach's comments on CNN's "The Situation Room."

Lori - CNN 8.12.10 small

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Trade Deficit Undermines Economic Recovery

“Spectacularly terrible” – that’s how Ian Shepherdson of High Frequency Economics described the surprising trade deficit numbers released yesterday by the Census Bureau. Bloomberg’s survey of 73 economists predicted that the trade deficit would fall by $0.2 billion, but the deficit actually rose by $7.9 billion – 18.8 percent. The trade deficit is now the highest it has been since October 2008.

The very unusual part of the data report is that exports declined by $2.0 billion in June from May exports of $152.4 billion. Yes, we know that the (anemic) U.S. economic recovery is stimulating consumer demand for foreign goods, so we’ll see rising imports, but the decline in exports is very worrisome.

The unexpected widening of the trade deficit was not included in the second quarter advance GDP estimates released by the Bureau of Economic Analysis (BEA) late last month, which showed the economy growing at a 2.4 percent annualized rate, but the data available at the time of the release indicated that imports were a major drag on the GDP:

The deceleration in real GDP in the second quarter primarily reflected an acceleration in imports and a deceleration in private inventory investment…

The advance BEA estimate of second quarter GDP growth of 2.4 percent was based on trade deficit projections that were $4 billion less than the numbers that have just been released. The Wall Street Journal reports on the implications of this discrepancy:

“The wider-than-expected trade gap in itself points to a 0.4 percentage point downward revision to GDP growth, which needs to be added to the 0.8 percentage point estimated downward revision coming from construction and inventories. Added together, these revisions at this point suggest second-quarter real GDP growth will barely be above 1% (call it 1.1%–1.2%),” said John Ryding and Conrad DeQuadros at RDQ Economics.

Wall Street types were so concerned with the prospect of the widening trade deficit stunting the economic recovery that the Dow lost 2 percent of its value once markets opened yesterday morning to the news.

The trade numbers are yet another reminder that the status quo trade policy is broken.  NAFTA-style trade deals are only leading to larger and larger trade deficits: trade with our 17 FTA partners contributed $1.4 billion to the rise in the goods trade deficit in June.  Luckily, 145 members of Congress have cosponsored the TRADE Act, which establishes negotiating objectives for trade pacts that would ensure strong export growth and would prevent the offshoring of jobs associated with high trade deficits.

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New Sierra Club / Public Citizen Report on Fixes to Investment in the TPP

Earlier this week, the Sierra Club, Public Citizen, Institute for Policy Studies, Friends of the Earth and Earthjustice released a new report entitled: "Investment Rules in Trade Agreements: Top 10 Changes to Build a Pro-Labor, Pro-Community and Pro-Environment Trans-Pacific Partnership." You can get a copy right here.

This builds on some of the work done by the various organizations and the Model BIT Subcommittee. The core of the message is simple: trade deals can help lift living standards when public-interest rules aren't being undermined in the process. Obama can make this a reality if he ditches Bush's plans for the TPP, and instead uses the TPP to deliver on his fair-trade campaign promises.

The report also includes particularly detailed remedies to problems like:

  • How do we ensure that foreign investors aren't given greater rights than domestic investors?
  • How do we ensure that Chinese and German companies don't falsely claim nationality from other countries?
  • How do we ensure that investors actually invest and create jobs before having access to special rights under the TPP?
  • How can we safeguard financial transaction taxes from trade-pact challenge?
  • And much much more...
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Department of Bogus Jobs Statistics

Last Friday, U.S. Trade Representative (USTR) Ron Kirk was in Pennsylvania to tout the Korea Free Trade Agreement (FTA) where he claimed that “Increased exports due to the Korea deal alone may support as many as 70,000 additional jobs nationwide.”

Most of the time these types of jobs statistics seem to come out of thin air and you never hear how the proponents came up with them. However, with a bit of investigation we can try to trace this number back to its origin.

An earlier mention of this stat in the President’s Progress Report on the National Export Initiative gives a hint as to its origin: “The Korean FTA would increase goods exports by an estimated $10-11 billion, which would support an estimated 70,000 jobs…”

The $10-11 billion exports figure matches the bilateral export figure in Table 2.2 of the U.S. International Trade Commission (USITC) report on the Korea FTA, so it seems that the export figure comes from there. Now, if only we had an exports-to-jobs ratio…

Aha! – a recent report from the International Trade Administration estimated that every $150,000 in exports supports one American job (see Table 1 here). Applying this multiplier to the USITC exports estimate, we get 73,333-66,667 jobs. The 70,000 jobs stat is right in the middle of the range, so there is a high probability that this is the origin of the estimate.

Sure, more exports leads to more jobs, but don’t NAFTA-style FTAs tend to increase imports, which force companies to lay off American workers?  This “70,000 new jobs” stat leaves out any consideration of the effect of imports.  The USITC’s report does contain full estimates of the increased imports that the Korea FTA will bring about, but the USTR chooses to ignore this estimate.

If we were to account for the effects of imports, use this same method of jobs calculation, and consider the effect of the Korea FTA on the U.S. global trade balance (available on Table 2.3 in the USITC report), we would find that the Korea FTA would cost us a net 2,100-2,700 jobs, since the trade deficit will increase by $308-$416 million.

The bottom line is that the “70,000 jobs created” number is just a bogus stat, and USTR should stop using it to promote the Korea FTA.

(And, BTW, as for Kirk's selective invocation of the merely bilateral change in trade, 60 percent of the merely bilateral job estimate is wiped away if you were to also incorporate the USITC's projections on bilateral imports with Korea.)

UPDATE: Lastly, even if the 70,000 jobs figure was correct, the U.S. would have to do the equivalent of signing 29 Korea FTAs to get to Obama's goal of 2 million jobs from exports by 2015, which would be a heavy lift since Korea is the 15th largest economy in the world.

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Introducing: Maps of Corporations to Gain New Rights to Sue Under Korea FTA

Korea maps image for blog We now have exclusive Google maps of the locations of corporations that would gain new rights to challenge public interest laws under the Korea FTA. Click here to explore the maps on our website or look below the jump to view them.

These maps show that the threat of corporate challenges of public interest laws under the Korea FTA is not just a theoretical possibility.  And, given that so many NAFTA investor-state cases have challenged local and state laws , the maps are a wonderful tool to explore which corporations could challenge laws in your community whether you're in the U.S. or Korea!

Check out our memo on the dangers of the investor-state enforcement provisions of the Korea FTA.  Also check out the list of firms that would gain new rights to sue the U.S. under the Korea FTA.

A broad coalition has sounded the alarm on these dangerous new corporate rights.  Among the members of the coalition are 110 members of the House of Representatives who sent a letter to President Obama on July 22, stating:

Implementing [the Korea FTA] without major changes to the text will…make the U.S. government vulnerable to compensation demands in foreign tribunals raised by Korean companies doing business within our borders.

AFL-CIO President Richard Trumka has added his voice to the chorus, saying:

Our negotiators should go back to the table to address the imbalanced market-access provisions in the agreement and to revisit the flawed investment, procurement, and services provisions as well.

Continue reading "Introducing: Maps of Corporations to Gain New Rights to Sue Under Korea FTA" »

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Lori Wallach on HuffPo: "Tribunal OKs Mining Corp’s CAFTA Attack on Green Policy: Did Team Obama Really Need More Reasons to Renegotiate Bush’s NAFTA-Style Trade Deals?"

Check out Lori Wallach's latest piece on the Huffington Post:

HuffPo logo

Tribunal OKs Mining Corp’s CAFTA Attack on Green Policy: Did Team Obama Really Need More Reasons to Renegotiate Bush’s NAFTA-Style Trade Deals?

“[Pacific Rim Mining Corp.] is using the CAFTA provisions that grant foreign investors expansive new rights to sue governments in foreign tribunals over regulations or government actions that conflict with the pacts' special rights for foreign investors and that could undermine their future expected profits. …The same provisions appear word-for-word in Bush Free Trade Agreements (FTAs) with Korea, Colombia and Panama… The fact that an attack like Pacific Rim’s would even be possible highlights what is wrong with our current trade agreement model.”

Read the entire piece at the Huffington Post.

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Economists Don't Count in Enron Attack on Argentina

Economists don't count. At least, that's the conclusion of the arbitral committee that was reviewing the annulment request in the Enron v. Argentina case.

Before I delve into their conclusion, I should mention a bit more by way of (dramatically simplified) history about this case.

As far as most folks are concerned, Enron fell well off the public radar screen when they lost the public's trust, the firm imploded and its leaders were imprisoned.But, almost ten years later, Enron survives as a walking corpse, and has persisted as a legal shell trying to shake down Argentine taxpayers for compensation related to that country's financial crisis in the early 2000s.

Take a step back even further. Argentina's right-wing government in the 1990s (led by Carlos Menem and Domingo Cavallo) pursued what locals called "carnal relations" with the U.S., and with U.S. capital. They privatized electric and gas utilities, auctioned these off (or contracted them out) to private U.S. and European companies, and then signed a series of "Bilateral Investment Treaties" (BIT) that gave these companies outrageous rights not even available to Argentine corporations.

The Menem-Cavallo plan to destroy Argentina's prospects for development succeeded, and the country faced a series of economic crises, culminating in the early 2000s. As part of this response, Argentina's post-Menem caretaker governments took a set of extraordinary measures, including changing the sweetheart terms that companies like Enron got through the privatizations (for instance, getting paid at a fixed dollar-peso exchange rate).

In Enron's morbid second life (now renamed Enron Credit Recovery Corporation - even less clear what Enron produces nowadays), the company took advantage of the U.S.-Argentina BIT to claim that their rights were violated, and Argentine taxpayers should compensate them for not shielding them from the economic and legal fallout of the crisis (fallout which, by the way, regular Argentines had to suffer through in the brutal experience of lost jobs, increasing poverty, and other social ills on the scale of a tragic Great Depression). Under the Bush-Clinton-Bush vision of international investment protection, however, corporations can claim a lifeboat for themselves in these situations, even when ordinary folks are left to drown.

Stunningly, the BIT tribunal sided with Enron in its May 2007 award, and ordered Argentine taxpayers to cough up $106.2 million. Argentina claimed that it should be allowed to use an "exception" in the BIT that (supposedly) allows for countries to deviate from the BIT when their essential security is at stake. The tribunal rejected Argentina's argument. (Believe it or not, five out of five US-Argentina BIT tribunals that examined the essential security claim made the same call on all or some of the government policies challenged by corporations.)

Continue reading "Economists Don't Count in Enron Attack on Argentina" »

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Pac Rim CAFTA Challenge of Salvadoran Environmental, Mining Safety Policies Given Go-Ahead by Tribunal

Initial Win for Corporation in Trade Agreement Attack on Environmental Policy Poses Complications for Obama Administration as It Tries to Revive Korea FTA

WASHINGTON, D.C. – An international tribunal’s decision to allow a controversial suit against El Salvador under the 2005 Central America Free Trade Agreement (CAFTA) will fuel demands by many in Congress that the Obama administration alter the foreign investor terms in three North American Free Trade Agreement (NAFTA)-style trade pacts inherited from the George W. Bush administration and new pacts under negotiation, Public Citizen said today.

“The fact that an attack like this would even be possible highlights what is wrong with our current trade agreement model,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. “The same crazy investor rights are in Bush’s leftover trade deal with Korea that President Obama wants to move forward. Unless they fix Bush’s deal, the hundreds of Korean firms operating here would get new rights to skirt our court system and laws and use foreign tribunals to demand taxpayer compensation for laws that they do not like, just like Pac Rim is doing to El Salvador.”

This month, the Obama administration must decide how to proceed with Bush’s leftover Korea-U.S. Free Trade Agreement (FTA), which contains the same CAFTA special rights for foreign investors and private enforcement of them through “investor-state” tribunals. A CAFTA panel for another mining-related investor challenge brought against El Salvador by Milwaukee-based Commerce Group for $100 million was constituted a few weeks ago.

“Today’s ruling just provides another reason why a bipartisan majority of Americans oppose the Bush NAFTA-style trade model and expect President Obama to deliver on his campaign commitments to replace it,” Wallach said.

The CAFTA ruling issued today from the International Centre for the Settlement of Investment Disputes (ICSID) rejected the Salvadoran government’s preliminary objections, which could have led to the dismissal of Canadian-based Pacific Rim’s CAFTA claim. The mining firm is demanding hundreds of millions of dollars in compensation from the government of El Salvador over a dispute about a large gold mine with cyanide ore processing that the corporations sought to operate. The firm never completed the process to obtain a permit to operate the mine and filed its CAFTA case in 2008.

The same provisions in CAFTA that allow multinational corporations to challenge domestic environmental and public health regulations in private, foreign tribunals are also found in the Korea FTA. Obama has called on his negotiators to fix outstanding issues with the Korea FTA, saying that he wants to bring the pact – negotiated by the Bush administration – to Congress for a vote by early next year. However, to date, the administration has stated that it intends only to remedy market access issues for U.S. autos and beef. Labor unions and other civil society groups, as well as many members of Congress, are opposed to the Bush Korea FTA text and have demanded that the extraordinary investor rights and their private enforcement be removed. There are currently 85 Korean-owned multinational companies with about 270 establishments in the United States that would be newly empowered under the Korea FTA to challenge U.S. policies in foreign tribunals if the pact went into effect. There are also hundreds of  U.S. firms operating in Korea that could use the same system to attack Korean public interest laws.

The case is being prosecuted under extremely controversial CAFTA provisions that grant foreign investors expansive new rights to sue governments in foreign tribunals over regulations or government actions that conflict with the pacts’ special rights for foreign investors and that could undermine their future expected profits. These terms are included in all three of the Bush-signed but unapproved trade agreements with Panama, Colombia and Korea that the Obama administration inherited.

Continue reading "Pac Rim CAFTA Challenge of Salvadoran Environmental, Mining Safety Policies Given Go-Ahead by Tribunal" »

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Quick Observations on Pac Rim ruling

Pac Rim Cayman LLC v. El Salvador, the fist first major corporate attack under CAFTA against the environment, just unfortunately advanced to the next stage. We'll be sharing our official statement momentarily, but you can check out the CAFTA tribunal's decision on preliminary objections here, and other documents related to the case here.

In the meantime, I thought I'd share a few thoughts on the award itself. (For more background on the underlying issues, check out our backgrounder here.)

Continue reading "Quick Observations on Pac Rim ruling" »

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