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How the Korea FTA Could Provide New Revenue for the North Korean Dictatorship via Increased Access to the U.S. Market: Responding to Inaccuracies in Recent Commentary

The prospect of the U.S.-South Korea FTA providing a means for North Korea’s Kim Jong Il dictatorship to generate new funding for its weapons programs is emerging as a hot issue in the escalating congressional debate. Our new memo explains how a loophole in the FTA could provide backdoor North Korean access to the U.S. market, in conflict with U.S. sanctions, and the sweatshop conditions in North Korea's Kaesong Industrial Complex, where 120 South Korean firms operate. The memo also explains why recent interventions by the Obama administration and corporate sources to quell this debate are not convincing.

Read the full memo here.

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Wisconsin, Korea, and the attack on working families

Working families are under attack by state legislatures nationwide - and the last thing we need is more anti-worker, job-killing trade policy at the federal level. But it looks like that's just what we'll get - unless we draw a line in the sand now and stop the Korea trade deal. It's time to fight back - and to raise fair globalization as part of our vision of a just and sustainable economy.

It's all part of the same problem. They cut taxes for corporations and let them write the rules of the global economy to shift production to where the taxes are the lowest, and worker rights and environmental protections are the weakest. When we don't have any tax revenue left because the corporations (and jobs) have left for overseas or blackmailed their way to criminally low tax rates, they try to balance budgets on the backs of working families. They cut essential services and are now even trying to take our rights. If jobs stayed here in the first place, we wouldn't' be in this mess.

It's what Leo Gerard of the Steelworkers union calls a "revenue problem". We can't let it go unchecked.
We need to fight back - and to raise the need for fair globalization policies as part of our vision of a just and sustainable economy where workers rights are upheld as sacred.

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U.S.-Panama FTA Would Allow Offshore Companies to Attack U.S. Anti-Tax Haven Regulations; Meanwhile Panama Has Not Eliminated Financial Secrecy, Tax Haven Problems

Statement of Todd Tucker, Research Director, Public Citizen’s Global Trade Watch

Note: This statement was submitted for the record to the House Ways and Means Committee’s Subcommittee on Trade for its hearing today on the U.S.-Panama FTA.

PanamaMembers of Congress and the public were very clear that two problems must be remedied before Congress should even consider a “free trade agreement” (FTA) with Panama. First, Panama needed to clean up its bank secrecy practices and get rid of bearer shares and other money-laundering tools; and second, the FTA must be amended to ensure that Panama-registered corporations cannot use the FTA to attack U.S. anti-tax haven regulations. Neither of these conditions has been even halfway met.

Panama is one of the world’s worst tax havens. It is home to an estimated 400,000 corporations, including offshore corporations and multinational subsidiaries. For decades, the Panamanian government has pursued an intentional tax haven strategy. It offers foreign banks and firms a special offshore license to conduct business.  Not only are these businesses not taxed, but they are subject to little to no reporting requirements or regulations. According to the Organisation for Economic Co-operation and Development (OECD), the Panamanian government has little to no legal authority to ascertain key information about these offshore corporations, such as their ownership.

Because of this secrecy, precise numbers of the taxes lost to Panama do not exist. However, according to the U.S. Office of Management and Budget, eliminating tax evasion in tax havens overall could save U.S. taxpayers $210 billion over the coming decade,  while the Senate Committee on Homeland Security and Government Affairs estimates a savings five times as great.  Since Panama is one of the world’s leading tax havens, the country is likely to account for a significant share of those revenue losses, which could be used to meet other urgent policy priorities at home.

Even after several years of intensified scrutiny from the G-20, the OECD and the international community, Panama is the only country in the Western Hemisphere to not pass the OECD’s peer review process.  OECD experts said that sufficient time needed to pass to see how well Panama’s recent flurry of tax reform commitments worked in practice, after years of avoiding even minimal transparency commitments. Even the infamous Cayman Islands tax haven was able to pass this test,  again confirming Panama’s preeminent status as a leading site for tax and regulatory arbitrage.

Continue reading "U.S.-Panama FTA Would Allow Offshore Companies to Attack U.S. Anti-Tax Haven Regulations; Meanwhile Panama Has Not Eliminated Financial Secrecy, Tax Haven Problems" »

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Korean Public Opinion Against the FTA

We’re continuing our series of facts in response to the Korean Embassy’s misleading claims on the Korea Free Trade Agreement (FTA). Our full response can be viewed here. This time, the focus is on the Korean public’s view on the Korea FTA. Korea FTA protest

Lori Wallach’s Huffington Post piece: “A majority of Koreans oppose the (KORUS) FTA.”

Korean Embassy’s claim: “Koreans have been surveyed at least six times on the KORUS FTA since Feb. 1, 2008. None of those polls showed FTA opponents in the majority. The most recent poll, published by the Dong-A Ilbo newspaper on Jan, 13, 2011, showed 55.2 percent approval vs. 28.5 percent disapproval.”

Facts: Embassy misrepresents Korean public opinion, while citing methodologically suspect poll. First, there are polls that have shown opposition to the Korea FTA by wide margins. For instance, a May 2008 poll revealed that 55 percent of Koreans opposed the U.S.-Korea FTA, while only 29 percent supported it.[i] Moreover, the widespread Korean opposition to the FTA is clear for all to see. According to the New York Times, a deal related to the Korea FTA has provoked “the biggest anti-government demonstrations since the end of military dictatorship in the late 1980s” and almost brought down the Lee administration. The FTA has spawned a steady stream of protests since 2008.[ii] Upon announcement of the broad outlines of the deal in December 2010, the main Korean opposition party stated that the deal was “humiliating.” The chairperson of the main opposition party declared that the FTA “damaged the two countries’ alliance.”[iii]

The central fact highlighted in the Huffington Post piece was that prominent members of the Korean National Assembly and leaders of the powerful Korean Confederation of Trade Unions are so opposed to the Korea FTA that they traveled to Washington to share the basis for their opposition with members of the U.S. Congress.

The Korean Embassy has no response to this central point. Instead, they cite a methodologically suspect poll that is at odds with the obvious political situation on the ground. The methodology of the Dong-A Ilbo poll cited by the Korean Embassy was conducted over only one day, resulting in a response rate of 16 percent, meaning that 84 percent of the homes called by the surveyors did not answer the survey.[iv] According to the American Association for Public Opinion Research, “Failure to follow up non respondents and refusals, in particular, can severely undermine an otherwise well-designed survey. To deal with this possibility…allowance is made for repeated attempts (e.g., callbacks at different times and days) to thoroughly work the selected sample in not-at home and related situations….”[v] Low response rates can indicate biased results since individuals holding certain views may be less likely to answer the phone when first contacted. Since the Dong-A Ilbo surveyors did not attempt to contact non-respondents over multiple days, contrary to standard public opinion polling practice, the poll may have failed to pick up on the widespread opposition to the U.S.-Korea FTA in Korea. Because the Embassy does not provide any of the details of the remaining polls, it is impossible to know their validity.


[i] Views & News, “[여론조사] 한미FTA 반대, 58.6%로 급증,” May 30 2008, Available at: http://www.viewsnnews.com/article/view.jsp?seq=35414

[ii] Choe Sang-Hun, “South Koreans Press Anti-Government Protests,” New York Times, June 20, 2008. Available at: http://www.nytimes.com/2008/06/20/world/asia/20korea.html

Choe Sang-Hun, “Beef Furor Provokes a Turnover in Seoul,” New York Times, June 21, 2008. Available at: http://www.nytimes.com/2008/06/21/world/asia/21korea.html?ref=asia

Choe Sang-Hun, “South Korea and U.S. Reach Deal on Beef Imports,” New York Times, June 22, 2008. Available at: http://www.nytimes.com/2008/06/22/world/asia/22korea.html

Mark McDonald, “Protesters Rally in Seoul Ahead of G-20 Summit,” New York Times, November 7, 2010, Available at: http://www.nytimes.com/2010/11/08/world/asia/08korea.html

[iii] “Rival parties wrangle over U.S. FTA, budget,” The Korea Herald, December 6, 2010, Available at: http://www.koreaherald.com/national/Detail.jsp?newsMLId=20101206000907

[iv] Dong-A Ilbo, “정치․사회 현안 관련 국민여론조사(2010년도 제5차),” January 2011, Available at: http://www.donga.com/docs/news/img/201101/20101226_3.hwp

[v] American Association for Public Opinion Research, “Best Practices,” Accessed February 28 2011, Available at: http://www.aapor.org/Best_Practices/2845.htm

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The Korea FTA is Lose-Lose for the U.S. and Korea: The Facts

The Korean Embassy recently released claims purporting to rebut the statements in Lori Wallach’s February 15, 2011 Huffington Post piece about the lose-lose nature of the NAFTA-style deal with South Korea. These statements do not reveal the full truth of the matter and could leave a mistaken impression of the so-called “free trade agreement” (FTA) with Korea and its consequences. We’ll be posting the facts in response to the Korean Embassy’s misleading claims throughout the week.


Korean Embassy does not even dispute that the Korea FTA could worsen financial stability and undermine labor rights. Wallach wrote that, “Another issue intensifying opposition to the FTA in Korea is the pact’s pre-crisis era financial deregulation requirements. After the 1997 Asian financial crisis wiped out decades of improvements to Korean living standards, Korea's policy response to the recent global crisis was forceful. Yet, aspects of both Korean and U.S. financial regulation would newly be exposed to direct challenge by the very firms that wrecked the global economy. Finally, the Korean union members on the delegation clearly shocked many of their audiences with their stories of how South Korean labor laws allow for strikers to be arrested for, well, striking and also allow individual strikers to be sued for compensation by their employers for lost profits.” The Korean Embassy does not rebut any of these points in their response to Wallach.


Lori Wallach’s Huffington Post piece: “…the ITC [International Trade Commission] study showed that the (overall) U.S. deficit in autos and auto parts would increase by at least $531 million under the pact.”

Korean Embassy’s claim: “The ITC study predicted that the KORUS FTA would increase U.S. auto exports to Korea by 45.5 percent to 58.9 percent and auto imports from Korea by 9.1 percent to 12.0 percent. At the request of the House Ways and Means Committee, the ITC is investigating potential effects on the U.S. auto industry of FTA modifications agreed upon in December 2010. The ITC expects to submit its findings to the Committee by March 15, 2011.”

Facts: Playing with percentages obscures the projected worsening of the auto trade deficit. The embassy’s use of percentage gains versus the net balance or quantities of vehicles obscures the reality of the data. The USITC's prediction that exports of U.S. autos to Korea would increase by 46-59 percent seems impressive at first glance, but upon closer inspection it becomes clear that the very low starting point of U.S. exports to Korea (about 6,000 vehicles in 2009) means that this percentage increase is small potatoes that will be overwhelmed by the huge increase in Korean auto exports (at about 500,000 in 2009) to the United States projected to occur under the FTA. In the USITC study, U.S. auto exports to Korea start at only $0.7 billion, but Korean auto exports to the United States start at $14.5 billion. Thus, an increase in U.S. auto exports of 46-59 percent results in $294-381 million in greater auto exports, but the increase of 9-12 percent for imports of Korean autos leads to a $1,324-1,737 million import increase, dwarfing the U.S. exports and resulting in a net increase in the auto trade deficit with Korea of $1,030-1,356 million. (Note that due to trade diversion effects, the USITC found that the total increase in the U.S. auto trade deficit with the world is less than the increased deficit with Korea itself.)

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The Incredible Shrinking FTA Jobs Claim

In Rep. Brady's announcement of last week's hearing on the Colombia Free Trade Agreement (FTA), he said, "According to the President’s own statements, [the pending trade agreements with Colombia, Panama, and South Korea] have the ability to create over 250,000 American jobs." Speaker Boehner's blog has also been claiming this 250,000 jobs gain figure.

But did the President ever say that the three FTAs will create 250,000 jobs? No. Rep. Brady here makes at least three errors. If you correct for one, the "jobs created" number goes down to 78,000. If you correct for two, the jobs number goes down to 39,333. If you correct for three, the job gain turns into a job loss of 3,200 jobs.

Back in November 2009, Obama gave an interview to Reuters on the eve of his trip to Asia in which he stated, "And right now we have about 9 percent of -- a 9 percent share of Asia's -- not just China, but Asia's trade overall, and it's estimated that for every 1 percent of increased share that we get, that could mean 250,000, 300,000 jobs."

Obama's statement was misinterpreted almost immediately by opponents of fair trade. In December 2009, Rep. Aaron Schock (R-IL) wrote an op-ed in The Hill in which he claimed, "Surprisingly, even President Obama agrees with me. He recently stated that increasing US exports by just one percent would create over 250,000 American jobs. According to the International Trade Commission [USITC], passage of the Colombia, Panama and South Korea free trade agreements would increase our exports by more than one percent. The inaction on these trade agreements is preventing the creation of a quarter million American jobs."

Rep. Schock completely ignored the crucial difference between increasing America's market share in Asia (a very big pie) and increasing total U.S. exports (a sizable, but smaller, pie). Going from 9 to 10 percent of the export market share in Asia would mean that total U.S. exports to the world would actually increase by three percent. When Obama talked about going from 9 to 10 percent of the market share in Asia, he was talking about increasing exports by $37.2 billion, which would have translated into 248,000 jobs using the standard exports-jobs multiplier estimated by the Commerce Department, so his estimate was apparently spot-on. Schock is instead talking about a projection of an increase in U.S. exports to the world of one percent, or $11.7 billion, which would translate into only 78,000 jobs using the standard jobs multiplier.

So, Rep. Brady is merely dusting off Rep. Schock's old talking claim that was based on shoddy math. But was Rep. Schock's claim that the USITC predicted a one percent increase in total US exports from the three FTAs accurate? No.

Continue reading "The Incredible Shrinking FTA Jobs Claim" »

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Two opportunities to hear Ha-Joon Chang in DC

Want to hear economic and trade policy issues discussed in an accesible and engaging manner? You can  23-things-they-dont-tell-you-about-capitalism-ha-joon-chang-hardcover-cover-art
do little better than stopping by two events tonight and tomorrow in DC where Ha-Joon Chang is speaking on his new book 23 Things They Don't Tell You About Capitalism.

The first opportunity is tonight at 6:30 pm at Busboys and Poets on 14th St., NW, cosponsored by the Center for Economic and Policy Research page. The second opportunity is tomorrow at the New America Foundation at 12:15 pm.

Here's a little bit more about the book and Chang, from the promotional materials:

We may like or dislike capitalism, but surely we all know how it works. Right? Wrong. Today, most arguments about capitalism are dominated by free-market ideology and unfounded assumptions that parade as ‘facts’. With the help of the ‘Dead Presidents’ on the dollar bills, Walt Disney’s Rescuers, an Indian bus driver named Ram, and sheep-burning French farmers, Ha-Joon Chang’s new book, 23 Things They Don’t Tell You About Capitalism (Bloomsbury USA, January 2011), tell the story of capitalism as it is and shows how capitalism as we know it can be, and should be, made better.

About Ha-Joon Chang:

Ha-Joon Chang teaches in the Faculty of Economics at the University of Cambridge. His books include the international bestseller Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism and Kicking Away the Ladder, winner of the 2003 Myrdal Prize. In 2005, Chang was awarded the Leontief Prize for Advancing the Frontiers of Economic Thought.

Praise for 23 Things They Don't Tell You About Capitalism:

“Chang, befitting his position as an economics professor at Cambridge University, is engagingly thoughtful and opinionated at a much lower decibel level. ‘The “truths” peddled by free-market ideologues are based on lazy assumptions and blinkered visions,’ he charges.”—Time

“Chang presents an enlightening précis of modern economic thought—and all the places it’s gone wrong, urging us to act in order to completely rebuild the world economy: ‘This will [make] some readers uncomfortable…[;] it is time to get uncomfortable.’”—Publishers Weekly

“Myth-busting and nicely-written collection of essays”—Independent (UK)

“For 40 years, I have worked as a journalist and trained thousands of other journalists from my former perches as a University of Missouri Journalism School professor and as executive director of Investigative Reporters and Editors. I have written newspaper articles, magazine features and entire books with heavy doses of economics policy and business behavior. I wish the book 23 Things They Don’t Tell You About Capitalism had been available when I was a rookie; I would have been more alert to the hands-off-business catechism by which Americans are relentlessly indoctrinated.”—Steven Weinberg, Remapping Debate

“Shaking Economics 101 assumptions to the core … Eminently accessible, with a clearly liberal (or at least anticonservative) bent, but with surprises along the way—for one, the thought that markets need to become less rather than more efficient.”—Kirkus Reviews

“I doubt there is one book, written in response to the current economic crisis, that is as fun or easy to read as Ha-Joon Chang's 23 Things They Don't Tell you About Capitalism.”—AlterNet Executive Editor Don Hazen

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WTO compatibility of Dodd-Frank financial regulation questioned

Late last year, Barbados raised questions about the GATS compatibilty of U.S. financial regulation efforts at the WTO, according to documents that have recently been released. 

The island nation questioned how the GATS would intersect with nearly a dozen re-regulatory efforts by various countries. But, according to the minutes of the December 20, 2010 meeting where this came up, only the United States and EU reregulatory efforts were mentioned by name. This is very significant, since WTO delegations are typically loath to mention countries by name in these settings.

The delegate from Barbados argued the following:

As part of the remedial measures put in place in the aftermath of the crisis, one was the banning of naked short selling – a measure introduced in May 2010 by the German Financial Regulator (BAFin), which enacted a ban on naked short selling of credit default swaps on Eurozone government bonds.  However, under the GATS, a Member should not normally ban a highly risky financial service if it had made specific commitments relating to that sector.  Similarly, the new financial regulatory reform bill passed in the United States Senate in May 2010 included a provision that would force some of the biggest banks to spin off their trading in swaps into special subsidiaries or be denied access to the federal emergency lending window.  Another initiative included making credit default swaps available only to people who own the underlying debt.  However, Members with specific commitments in the sector ran the risk of contravening those commitment if they imposed limits on the types of financial services which an entity may provide, except under permitted circumstances...

The notion of too-big-to-fail had always been a concern, but the current financial crisis confirmed the regulators' worst fears.  The question had arisen lately as to whether the rules should vary according to the size and  level of sophistication of the financial entity.  Regulators had been moving in this direction lately.  Other proposals for enhanced regulation included the suggestion to set up a mega regulator, which would oversee individual regulators at the national level.  The powers of enforcement of such a mega regulator and the power to impose sanctions would need to be carefully considered, so as not to endow an institution with excessive power.  According to GATS Article XVI (Market Access) governments cannot prohibit or limit the size or the total number of financial service suppliers in covered sectors.  However, under the new US Financial Reform Bill 2010, an oversight entity would be set up to do exactly that, that is, to make sure that the size of banks was reduced if they appeared to be becoming too large.

Thankfully, Barbados appears to be raising these issues not as a precursor to a WTO dispute case, but instead in the spirit of proposing amendments to the GATS. Just some of the nearly dozen reforms they propose:

  • Rolling back the "standstill" on new regulations envisioned by the Understanding on Commitments in Financial Services.
  • Expanding the circumstances under which countries can be allowed to use capital controls without running afoul of their GATS commitments.
  • Amending the market access provisions of the GATS so that regulatory bans and size limitations can be utilized.
  • Amending the GATS terms that require compensation following a withdrawal of commitments, because the GATS can make "the securing of financial stability very costly."

The WTO's Committee on Trade in Financial Services will be taking up Barbados' proposal at their next meeting, so stay tuned.

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Tariffdega Nights: The Latest Ballad of Ricky Bobby

Adam McKay, the writer and director of such Will Ferrell classics as Talladega Nights: The Ballad of Ricky Talladega Nights The Ballad of Ricky Bobby
Bobby, has always had a political streak. His Funny or Die website featured the hilarious video with all the "SNL presidents" calling for Wall Street reform, and his movie "The Other Guys" tackled corporate corruption in its closing credits.

His engagement with policy runs deep. He maintains a blog over at the Huffington Post, where he recently questioned offshoring of jobs. And on comedian Marc Maron's excellent podcast, McKay recently said the following:

McKay: You have to raise trade tariffs. We only pay 2%... India has a 40% tariff, China has 22%, we only have a 2% tariff. That's crazy! You notice no one talks about that. You could almost say that one issue alone could change our whole nation if we went to a 10% trade tariff.

Maron: Because it would encourage manufacturing?

McKay: All the manufacturing would come back here. Wal-Mart couldn't be making that money anymore. You'd see factories spring up all over this country. And you could get rid of all those subsidies, the 48 billion, you could get rid of the Bush tax cuts...

By the way, we could literally balance the budget and fix the economy right now in 10 minutes. That's how easy it is. The problem is the wall of white noise and misinformation and anger that gets in the way of it where they justify everything...

How about Mitch McConnell in Kentucky voted against the Made in America provision for the stimulus package, and he's in the poorest state in the country? Against the Made in America provision, but no one talks about that. Instead it's about liberals, it's about gay marriage...

It would be pretty unusual to hear this policy advocated in Washington policy circles. But then again, as a long running Pew poll shows, there is a wide gap between the general public and elite respondents (defined as Council on Foreign Relations members) when it comes to trade policy.

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Debunked FTA Export Claims Continue to Pop Up

In his announcement of the hearing on the Colombia FTA that occurred yesterday, Rep. Kevin Brady alleged that "Since 2000, U.S. exports to the 13 countries with which the United States has implemented trade agreements have grown almost twice as fast as our worldwide exports," but a fair accounting of the export record does not support this claim.

In our September report about the dismal record of U.S. exports to our FTA partners, Lies, Damn Lies, and Export Statistics, we debunked similar claims floated by the Chamber of Commerce and the U.S. Trade Representative. Apparently fair trade opponents think this claim is just too good to let facts get in the way, because it has surfaced again in Rep. Brady's statement.

It seems Rep. Brady is engaging in the same apples-to-oranges comparison trick that we highlighted in our September report (see page 18). If you take the unweighted average growth of exports to FTA partners and compare it to the weighted average growth of exports to the world over 2000-2010, you'll get an FTA growth rate almost twice as high as the growth rate of exports to the world.* Comparing weighted and unweighted averages makes FTAs seem great for U.S. exports, but it's a false comparison.

In fact, an apples-to-apples comparison of exports to FTA partners and non-FTA partners since 2000 shows just the opposite of Rep. Brady's claims: exports to FTA partners have grown at half the pace of exports to non-FTA partners. In inflation-adjusted and trade weighted terms, exports to FTA partners grew at an average annual rate of only 1.5 percent over 2000-2010 while exports to non-FTA partners grew at an average annual rate of 3.8 percent over the same period. The best way to compare the FTA and non-FTA export rates is to use a weighted measure since it weights exports by their value - and thus their importance to U.S. workers who produce the exported goods. However, as we demonstrated in our September report, it is also the case that if you slice it the other way - comparing the unweighted FTA rate against the unweighted non-FTA rate - exports to FTA partners still have grown at half the pace of exports to non-FTA partners. Thus, any way you slice it, exports to FTA partners have lagged behind exports to countries with which we do not have FTAs.

*Since Rep. Brady says "worldwide" exports, here exports to FTA partners are not subtracted out from exports to the world to get the non-FTA export growth rate. Also, Rep. Brady speaks of 13 U.S. FTA partners, but there are 17 FTA partners and all 17 were included in the calculations here. Finally, these numbers are not adjusted for inflation because the unweighted FTA export growth rate would actually be more than twice the weighted worldwide export growth rate if the data was adjusted for inflation, which would be inconsistent with Brady's claims.

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Korea Trade Deal Won't Help Kentucky Bourbon Sales

Check out this op-ed in the Louisville Courier-Journal to find out why. It's by our very own Todd Tucker, who also happens to be a Kentucky native.


Louisville Courier-Journal

Korea Trade Deal Won't Help Kentucky Bourbon Sales

"With Congress expected to consider a NAFTA-style trade deal with Korea in the coming weeks, distilled spirits companies have been claiming that Kentucky bourbon sales will take off in Korea if the deal is approved. But this claim is misleading, and it papers over the expected job loss from the Korea deal..."

Read the entire piece here.

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Previewing Camp's Request for USITC Analysis of Korea FTA Supplemental

Earlier this year, Ways and Means Committee Chair Dave Camp requested that the U.S. International Trade Commission prepare a study covering changes to auto sector provisions in the Korea trade deal agreed upon during December 2010 supplemental negotiations. The USITC was slated to release this study to Camp yesterday. Now, Camp must decide if it will be made public. It will be critical to review both the USITC's findings and methodology. We urge Camp to make the study public, rather than release selective quotes from it.

What the USITC concludes will be very interesting. So, we've prepared a preview of the study. You can read it here.

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Gingrich lauds loss of jobs to Mexico

As Alex Seitz-Wald at Think Progress reports, possible Republican presidential candidate Newt Gingrich is saying NAFTA worked because it created jobs in Mexico. On a call in show, Gingrich said:

    CALLER: Back in the ’90s I remember Ross Perot saying that there was going to be the giant sucking sound of jobs if NAFTA passed. I think it ended up being true, right? And I know you were a big free trader.

    GINGRICH: Yeah, well, I don’t think it was true in Mexico. I think the fact is that NAFTA allowed us to build jobs in Canada, the United States, and Mexico, in competition with China. I mean, our big competitor is not Mexico. Our big competitor is China and India. And I’d rather have jobs close to the United States than have jobs overseas in places like China and India. That’s why I was in favor of it. … So in a sense, I’d like our neighborhood to be fairly well off and fairly prosperous.

I doubt too many fair trade Tea Party folk will rally behind a guy who shows so little concerns for "Making it in America."

Moreover, as EOT readers know, it's false that NAFTA has somehow benefited Mexico at the expense of the United States: it has been lose-lose for working people in both nations.

Today's revelation that the Pentagon is flying drones over Mexico to track down narcotraffickers is just the latest revelation that NAFTA prioritized the corporate bottomline at the expense of sustainable, non-drug related job creation.

(Disclosure: Public Citizen has no preference among the candidates for public office.)

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Commerce Group CAFTA Ruling Highlights Threat of Foreign Investor Rules Also Included in Korea FTA

Even as Mining Firm's Frivolous Challenge of Environmental Policy Is Dismissed on Technicality, El Salvador Must Pay $800,000
Statement of Lori Wallach, Director of Public Citizen's Global Trade Watch

That El Salvador must pay more than $800,000 in legal fees to defend itself against a frivolous corporate challenge of its environmental laws under the Central America Free Trade Agreement (CAFTA) provides a glaring example of why having the same provisions in the Korea trade pact now before Congress is so dangerous. In fact, there are nearly $9.1 billion in claims in the 14 known investor-state cases outstanding under NAFTA-style deals. None of them relate to traditional trade concerns; all of them relate to environmental, public health and transportation policy...

The tribunal in this case made clear that Commerce Group Corp. had the right under CAFTA to challenge El Salvador's mining policy. The case was dismissed on a technicality: If Commerce Group had simply written a letter to the Salvadoran judiciary informing it that it was waiving its right to challenge revocation of its environmental permits in Salvadoran courts, then Commerce Group's attack on Salvadoran mining policy would likely be going forward under CAFTA.

Indeed, when El Salvador attempted to recoup its legal costs, the tribunal sided with Commerce Group that its case was not frivolous. The fact that a corporate attack on a sovereign country's domestic environmental policy before a foreign tribunal would even be possible - much less cost a country almost a million dollars when they win the case - highlights what is wrong with our current trade agreement model.

The same outlandish investor rights were in the trade deal George W. Bush signed with Korea that President Barack Obama now wants to push through Congress early this year. If Congress implements the U.S.-South Korea Free Trade Agreement (FTA), the hundreds of Korean firms operating here would get new rights to skirt our court system and domestic laws and demand taxpayer compensation before foreign tribunals for U.S. policies that they don't like, just as these mining corporations are doing in El Salvador. In contrast to pacts such as CAFTA, the Korea FTA involves a country that has 270 corporate affiliates established in this country - all of which would be newly empowered to attack our public interest laws before foreign tribunals to demand taxpayer compensation for loss of expected future profits. 

These trade pact investor attacks ring an alarm across the political spectrum - from conservatives concerned about sovereignty threats posed by the U.S. government being under the jurisdiction of such foreign tribunals to progressives concerned about the 200-plus Korean affiliates that would be newly empowered to attack domestic environmental or health policies.

The question is: Will we allow this kind of thing to keep happening? These cases reignite the debate about trade pacts' threats to the environment and public health, remind people that Obama promised during his campaign to fix this very problem and shine a spotlight on the same horrible terms in the pending Korea trade deal.

The mining environmental and safety regulatory policies at issue in this CAFTA case was of vital importance to environmental protection and the future of democracy in El Salvador.

Continue reading "Commerce Group CAFTA Ruling Highlights Threat of Foreign Investor Rules Also Included in Korea FTA" »

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Japan tragedy highlights consequences of corporate offshoring

Our hearts go out to those who have lost loved ones as a result of the earthquake and its aftermath in Japan.

As humanity collectively sifts through the lessons that can learned from this disaster (including with respect to the perils of nuclear power), Information Week is reporting on another fallout with global implications:

The massive 8.9 earthquake that has caused widespread devastation in Japan is expected to cause worldwide shortages and severe price swings in some semiconductors manufactured in the island nation, according to some analysts.

The electronics expected to be most affected by the 8.9 quake that struck Friday include semiconductor wafers used in making microprocessors, NAND flash used for storing music, video, and other content in handheld devices, and DRAM, which is the system memory in PCs. More than 40% of the world's NAND and 15% of the world's DRAM are made in Japan, according to market researcher Objective Analysis.

In other words, there are consequences beyond just job loss to corporations' decision to offshore production to a few locations on the planet. To put it a different way, what is rational for the individual corporation can be irrational from the perspective of society as a whole.

Such a problem was predicted nearly six years ago by my colleague Barry Lynn, the author of the book "End of the Line." In a column for the FT summarizing the book, Barry wrote:

Time and again, human beings have learned to build buffers into complex systems. We design compartments into our ships, circuit breakers into our electrical networks and minimum reserve requirements for our banks. Yet since the cold war era, we have done the exact opposite with our industrial system. Rather than conceive market-friendly methods to distribute risk and dampen shocks, we devoted ourselves to eliminating the bulkheads that have traditionally existed between nations and between companies. To evoke a more raw analogy, in our production system, we bulldozed all the levees flat.

As a result, we now live in a world where an isolated political or natural disaster on the far side of the globe can disrupt basic systems on which we all depend. Consider what would happen in the event of war on the Korean peninsula, or an uprising in south India, or an avian flu pandemic in industrial Asia.

In the first case, we would immediately lose half the global production of D-ram chips, 65 per cent of Nand flash chips and much more. At a minimum, the result would be massive disruptions in the electronics industry and in all industries that depend on electronics components. In the second case, numerous global companies, including banks, would lose their ability to process information because they have relocated key back-office operations to that region. The third case, meanwhile, presents chilling proof that the production system has evolved in directions no one expected. As a recent article
in Foreign Affairs noted, one cross-border system that would collapse in the event of a pandemic is the one the US relies on for medical respiratory masks.

In each instance, an everyday disaster far away would set off potentially massive disruptions of the industrial systems on which all nations depend... It is time to admit that our grand experiment with radical laissez faire management of industry has failed.

While the global response to the Japan earthquake in the short-term will rightly focus on saving lives and avoiding further deaths, policymakers should also assess why they have allowed corporations to break down reasonable buffers against excessive offshoring of production. A little more redundancy in supply chains is not only collectively rational, but would also have the benefit of creating jobs at home.

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Domestic courts must defer to NAFTA courts?

Yesterday, I wrote that there were some additional aspects of the Cargill v. Mexico award under NAFTA that were notable that I hadn't covered in my original post last week.

Another dimension of the Cargill v. Mexico arbitration worth mentioning is that Mexico lauched a case in Canadian courts to have the NAFTA award set aside, on the grounds that the ICSID panel erred and exceeded its jurisdiction. Mexico argued that it should only have to compensate Cargill for the damages it suffered in Mexico proper, not for the loss of revenue to the U.S. parent company as a result of not being able to export HFCS to Mexico.

The Ontario court refused to set aside or reduce the damages, and stated that national courts must show a high degree of deference to NAFTA investor-state awards. There were several quotes from U.S. and Canadian courts related to international arbitration that I had not seen before, but which were surprisingly blunt.  See this quote from Supreme Court Justice Blackmun from the Mitsubishi v. Chrysler case:

"As international trade has expanded in recent decades, so too has the use of international arbitration to resolve disputes arising in the course of that trade. The controversies that international arbitral institutions are called upon to resolve have increased in diversity as well as in complexity. Yet the potential of these tribunals for efficient disposition of legal disagreements arising from commercial relations has not yet been tested. If they are to take a central place in the international legal order, national courts will need to 'shake off the old judicial hostility to arbitration.'... and also their customary and understandable unwillingness to cede jurisdiction of a claim arising under domestic law to a foreign or transnational tribunal. To this extent at least, it will be necessary for national courts to subordinate domestic notions of arbitrability to the international policy favoring commercial arbitration..."

The Ontario court also favorably cited an argument from the Mexico v. Feldman Karpa case under NAFTA that  "the dispute settlement mechanism and the need for expertise, all combine to indicate that the statutory purpose is to take resolution of these disputes out of the hands of domestic courts..." (This argument was made by counsel for Feldman in Mexico's request to have the NAFTA arbitration set aside in Ontario courts in 2005.)

The Blackmun quote has been primarily invoked in U.S. courts with reference to private commercial arbitration, not investor-state cases that relate to public law. However, that has changed in the last year. On March 16, 2010, the U.S. District Court Southern District of New York wrote inthe Ecuador v. Chevron case that,

Chevron and Texaco (hereinafter referred to as “Chevron”), have commenced an arbitration proceeding before a tribunal pursuant to the Bilateral  Investment  Treaty  between the United States and Ecuador...

Numerous cases have held that there is a strong presumption in favor of arbitration. See, e.g., Smith/Enron Cogeneration Ltd. P'ship, Inc. v. Smith Cogenerational Int'l, Inc., 198 F.3d 88, 92 (2d Cir.1999). We believe that this is particularly true where the arbitration is pursuant to an international treaty, here a treaty between Ecuador and the United States. See, e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985) (Federal policy favoring arbitration “applies with special force in the field of international commerce.”). The explicitly stated purposes of the treaty were to encourage investment by Americans in Ecuador and Ecuadorians in the United States by assuring investors that an independent, neutral tribunal exists to arbitrate claims such as the claim here that Ecuador is seeking to impose liability unlawfully. See Treaty Between The United States of America and The Republic of Ecuador Concerning the Encouragement and Reciprocal Protection of Investment, U.S.-Ecuador, Aug. 27, 1993, S. Treaty Doc. No. 103-15. It is Chevron's claim that this is what Ecuador is now in the process of doing. Thus, a motion to stay here strikes at the core purposes of the treaty between Ecuador and the United States...

Ecuador's motion for summary judgment and motion for a preliminary injunction are denied. The Yaiguaje Plaintiffs' motion for summary judgment is denied. Chevron's motions to dismiss Ecuador's petition and the Yaiguaje Plaintiffs' petition are granted.

Finally, the same court made a virtually identical conclusion citing the Blackmun language on Jan. 21, 2011, in Argentina's application to vacate an arbitral award under the UK-Argentina BIT. Argentina made the argument that U.S. courts should not side with the British investor BG Group PLC because...

Argentina argues that the arbitral panel should have appraised the value of BG Group's investment on “the day before the [emergency] measures” were taken, Tr. 17:7, Sept. 28, 2010, when the Argentine economy had already collapsed, Pet'r's 3d Supp. Mem. at 18, instead of assessing “the value of BG [Group's] stake in MetroGAS in 1998 .... when the Argentine economy was at its peak,” id. at 18, by relying on the July 12, 1998 transaction involving the sale of Gas Argentino, S.A. shares, Award ¶ 441. Argentina asserts that the arbitral panel's valuation of BG Group's investment resulted in Argentina being “held responsible ... for the effects of the economic crisis it suffered between 1998 and 2001,” and thus the arbitral panel's ruling conflicts with both the principle that “[a]ctual pecuniary loss sustained as a direct result of the wrong is the measure to be applied in fixing damages,” Pet'r's 3d Supp. at 22 (citing Ainger v. Michigan General Corp., 476 F.Supp. 1209, 1233 (S.D.N.Y.1979)),15 as well as the Fifth Amendment's guarantee of entitlement to only “just compensation” for the taking of property, see Tr. 15:21-25, Sept, 28, 2010 (asserting that “the guiding principle of just compensation and the [T]akings [C]lause of the Fifth Amendment is that the owner of the condemned property must be made whole[,] but is entitled to no more”). These arguments are without merit...

To the extent Argentina is asserting that the arbitral panel's issuance of the Award itself violates the Takings Clause and contravenes the public policy of the United States, that position is also without merit. Of course, the arbitral panel is not an arm of any government, and thus any decision rendered by it could not constitute a “government taking.” But even assuming that the arbitral panel, as a quasi-judicial body, see, e.g., Portland Gen. Elec. Co. v. U.S. Bank Trust Nat'l Assoc., 218 F.3d 1085, 1090 (9th Cir.2000) (observing that an “arbitrator plays a quasi-judicial role” in conducting an arbitration), could be viewed as a governmental entity, the Supreme Court noted in Stop the Beach Renourishment, Inc. v. Florida Dep't of Environmental Protection, ---U.S. ----, ----, 130 S.Ct. 2592, 2604, 177 L.Ed.2d 184 (2010), that no clear standard exists for what constitutes a “judicial taking, or indeed whether such a thing as a judicial taking even exists.” It cannot be said, therefore, that the arbitral panel's issuance of the Award was an act that “violate[d] some explicit public policy that is well defined and dominant.” Banco de Seguros Del Estado, 344 F.3d at 264 (quoting United Paperworkers Int'l Union, 484 U.S. at 43) (emphasis added). Accordingly, if Argentina's position is that the issuance of the Award itself offends the Takings Clause and precludes confirmation of the Award, that argument also fails.

This ruling comes pretty close to examining the compatibility of international investment law obligations with U.S. constitutional norms. My blood started racing a bit as I read this. But the court veered away from anything very conclusive because of the muddled way in which Argentina raised the takings defense.

Folks waiting for a serious U.S. judicial look at whether and how well FTA/BIT indirect expropriation obligations match up with regulatory takings clauses must wait for another day.

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Wanna maximize NAFTA Claims? Create as few jobs as possible.

In my long post on the Cargill v. Mexico investor-state claim under NAFTA that was published last week, there were a couple of dimensions that I did not delve into, but which merit mention.

First, Cargill was able to get a much bigger damages award ($77.3 million) than its competitors Archer Daniels Midland (ADM, $33.5 million) or Corn Products International (CPI, $58.38 million).

There are a lot of similarities between the three. All three are U.S.-registered firms that sell high fructose corn syrup (HFCS) in the Mexican market. All three brought NAFTA claims against the same Mexican policy - the special excise tax on soda drinks that contain HFCS.

The main difference was that ADM and CPI actually went to the trouble to build HFCS facilities in Mexico, thus creating jobs in Mexico. Cargill thought about creating a facility in Mexico, but instead decided to process the HFCS in the United States and ship it to Mexico, thus creating only distribution-related jobs in Mexico, but not substantial manufacturing jobs.

Why does this matter? Well, the much reviled Mexican soda tax was motivated by Mexico's desperate attempts to salvage jobs as the country's rural sector got hammered post-NAFTA. CPI and ADM, who helped moderate the job destruction (by a tiny bit), were not able to claim as much in damages as Cargill, who moderated the job loss even less. Simon Lester over at IELP quotes the relevant reasoning, which relates to whether so-called "up-stream losses" should be counted among the damages in a NAFTA investor-state case.

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Despite USTR Kirk’s Rhetoric, Obama Administration Trade Approach Is More of the Same

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

Kirk Ambassador Ron Kirk says that the administration wants to restore Americans’ long-lost faith in our trade policy and repeatedly promises to truly fix Bush’s leftover job-killing trade deals – but, at the same time, he’s before Congress pushing forward three of Bush’s NAFTA-style deals for approval.

Slightly altering auto tariff schedules in Bush’s NAFTA-style agreement certainly is not a faith-restoring trade policy overhaul. The Korea trade deal is still projected to increase the overall U.S. trade deficit and cost 159,000 U.S. jobs. The Korea deal requires the kind of financial deregulation that contributed to the economic crisis. The deal still contains Bush’s ban on reference to the International Labor Organization conventions when enforcing its weak labor standards. This agreement even allows South Korean goods to be given the benefits of the agreement even if such goods contain inputs or parts from North Korea, despite our sanctions on trade with that country. And it still has sovereignty-eroding, public-interest-policy-chilling rules that allow multinational corporations to sue governments in private, foreign tribunals for taxpayer money. 

The administration had a chance to fix the many glaring problems in Bush’s NAFTA-style Korea agreement, but it didn’t. Kirk is right that the majority of Americans oppose another one of these job-killing trade deals.

Given the ugly battle that will ensue in Congress and with the American public over the Korea trade deal, we hope the administration will take a different approach with Colombia, Panama and the other countries with which it is now negotiating. With respect to Panama and Colombia, prior to any trade agreement being appropriate, Colombia’s deeply ingrained violence and Panama’s tax-haven status must be eliminated.


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Trade party at the cattle farm

Princeton economist Uwe Reinhardt had an interesting post on trade last week on the NYT website that will probably spark some debate. He writes:

The economist’s case for free trade is cobbled together from the toolkit labeled normative economics, a branch of economic analysis that seeks to identify what is efficient and what is not and, thus, what is good policy and what is not — and, therefore, what should and should not be done.

I have already written several posts that were critical of that branch of economics. My objection to this approach is the dictatorial, collectivist nature of normative analysis.

In a nutshell, in that branch of inquiry, economists view the world as a giant cattle farm to be managed in ways that maximize the collective weight of the cattle, totally in abstraction from the welfare of any individual animal. We call the collective weight of the cattle social welfare.

The cattle-farm model then allows us to say, with a straight face, that if a public policy bestows a gain of $2,000 on George but makes Martha $1,000 poorer, social welfare has been increased.

This dictum underlies the economist’s case for free trade. The cattle farm is global. Free-trade analysis pays little attention to the love people have for their own nation, which makes them assign more weight to the welfare of fellow citizens than to that of citizens of other countries.

The post - along with Reinhardt's post from last month - couldn't have come at a more appropriate time.

Many proponents of what they deem "free trade" (not to mention "free trade agreements" that have little to do with actual free trade) have been ramping up the cattle farm happy talk recently.

Take for instance this well-assembled video clip on the virtues of "free trade". I highly recommend the three minute clip, because it captures exactly what is wrong with the cattle farm metaphors.

In the simple world of Fritz and Lou (the characters in the clip), free trade makes about as much sense, as well, a division of labor at your workplace or home. That's because the simple stories we use to talk about the benefits of division of labor between individuals are at their core the same stories we use to talk about the benefits of trade between nations.

But nations are different than people, because there's more than one person in a nation. And as the recent protests in Wisconsin remind us, there is a class division in America. The trade policies that we have pursued have benefited one (increasingly tiny but insanely wealthy) class at the expense of another. And not only has the upper class not been redistributing their newfound gains to the rest of us (an operating assumption that underpins the classical free trade story), but they're actually calling for ripping off the few bandaids and burial insurance policies that are in place.

This themes are are also raised in "Free Trade Doesn't Work," a readable book by Ian Fletcher, now a fellow with the Coalition for a Prosperous America. Reinhardt and Fletcher are asking many of the same questions, making many supporters of status quo trade policies uncomfortable in the process.

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Cola Wars Beat Drug Wars

The award in agribusiness giant Cargill's NAFTA investor-state attack on Mexico's jobs program was published last week.

The short version: a tribunal of three unelected judges determined that Mexico's efforts to save or create jobs for campesinos in the sugar sector were a violation of NAFTA. Mexico's taxpayers were ordered to cough up over $77 million plus interest, all the judges' and court fees, and to even pay Cargill $2 million for Cargill's own lawyers' costs.

Here's the longer version:

For years, large agribusiness groups have been pushing the use of high fructose corn syrup in soda drinks, despite concerns about the environmental and public health impact. Not only is HFCS opposed on health grounds, it's also opposed by some foodies on taste grounds: witness the growing demand for Mexican Coca Cola, much of which is made with sugar and is said to therefore taste better.

By the late 1990s, Mexico had a whole lot of excess sugar in its market that it hoped to be able to export to the U.S.This pile-up was driving down prices and hurting Mexico's farmers, who were generally getting battered by NAFTA-style rules and in turn driving displacement into drug trafficking or immigration, as President Obama himself noted during the campaign.

Continue reading "Cola Wars Beat Drug Wars" »

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Op-Ed Lays Out Risks Korea Trade Deal Poses to Oregon

An op-ed by in today's Register-Guard (Eugene, Ore.) lays out the risks that the U.S.-Korea trade deal poses to Oregon and the U.S. - and calls for Sen. Ron Wyden to oppose it. The piece is by Gordon Lafer, an associate professor at the University of Oregon’s Labor Education and Research Center.



NAFTA-style Korea trade treaty would cost U.S. jobs

"As chairman of the Senate’s subcommittee on International Trade, Oregon’s own Sen. Ron Wyden will play a key role in determining whether the [U.S.-South Korea Free Trade Agreement] is approved or shelved, and he is officially undecided on the issue... There is really only one reason for elected officials to support these treaties: to curry favor with big-money corporate donors. While the American people are against more NAFTAs, the U.S. Chamber of Commerce and the nation’s biggest corporations are salivating at the prospect..."

Read the entire piece here.


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