House Passes Currency Legislation; Whoop-Dee-Freakin-Doo

Only moments before being forced to adjourn for its mid-term election recess, the US House of Representatives today overwhelmingly passed angry-sounding legislation targeting "unfair" currency practices by certain unnamed countries (yes, I'm looking right at you, Chinese Government).  Sigh.  I've already gone over at ridiculous length why any unilateral action against China's currency policies is a really dumb idea, and Cato's Dan Griswold today gives us a good summary of many of those reasons (citing, as always, oodles of good research by his team):

• A stronger Chinese currency will not put a major dent in our large bilateral trade deficit with China, certainly not any time in the near future. 

• The bilateral deficit with China and America’s overall trade deficit is not a drag on growth or a barrier to manufacturing exports and output. 

• U.S. manufacturing has not been decimated by trade. In fact it has been expanding as American producers move up the value chain to more sophisticated, high-tech products. 

• Provoking a needless trade spat with China will jeopardize the healthy export success American companies have enjoyed in China’s fast-growing market.

AEI's Phil Levy helpfully (and humorously) adds that the CBO scoring of this big legislation is, well, less than exciting:

The House bill itself has gone through changes to make it fit with global trade rules. Those changes affect key provisions like whether Commerce must do something, or whether Commerce may do something.  How can one parse all this to see what it means? The Congressional Budget Office can!  That’s their job—to look at impenetrable or improbable pieces of legislation, take them seriously, and cost them out impartially. That’s what they just did on the China bill.  They were not asked to figure out how many American jobs it would produce; they were asked about revenue and cost effects, but those should give us a clue.

How much money would these new tariffs deliver in the next year (fiscal 2011)? CBO says: $0.

So much for an effective and speedy remedy to the recession.

Perhaps it was expecting too much to have a complicated procedural change kick in so soon. What about the year after that, fiscal 2012? CBO says: $5 million.

A little perspective may be helpful here. In 2009, U.S. imports of goods from China were $297 billion. So we’re talking about an average tariff rate change of 0.0017 percent. That’s expected to triple in fiscal 2013, to $15 million in revenue, perhaps 0.005 percent.

Finally, the latest news out of the Senate is that consideration of, and a vote on, any currency legislation in that chamber is increasingly unlikely, even in a post-election "lame duck" session.  So if the bill won't help (and might hurt) the US economy, and it won't help the budget, and it's almost certainly going to die in the Senate, then why'd the House overwhelmingly pass the darn thing?

Three guesses (if you need a hint, just check my blog post from yesterday).  Or as Griswold eloquently put it:

Advocates of the legislation say it is about jobs, and they are partly right. The bill is about saving the jobs of incumbent lawmakers who are desperate to appear tough on China trade, which they blame for the loss of U.S. manufacturing jobs.

Zing!  But hey, just for the sake of argument, let's assume that (i) the Senate comes back from the mid-term elections and just decides to go all damn-the-torpedoes-crazy and pass this bill; and (ii) President Obama signs the thing because he's overdue on some zany AFL-CIO payback.  Would this just-passed legislation, if it became law, cause a "trade war," like many people seem to think?

Quick answer: Nope.

Now, don't get me wrong, I think this whole episode is about as distasteful and embarrassing as they come (and considering we're talking about the US Congress here, that's saying a LOT).  And I'm particularly disappointed that President Obama has once again voted "present" on an important trade issue by not  preempting the House vote with a veto threat (and thus signalling the stupidity of aggressive unilateral chest-thumping).  But none of that changes the fact that, if it became law, this particular legislation probably won't have a big effect on things, at least in the near term.  I've already given several media interviews on this subject today (I'm so famous, I know), so here's the Cliff Notes version of what I told the journalists:

Assuming the bill becomes law as written, a large spike in CVD petitions against China is highly unlikely in the near term.  Instead, only a small number of “test case” petitions would likely be filed initially in order to determine how the Department of Commerce intends to exercise its initiation authority under the revised legal standard.  It's important to remember that the revised bill does not force the Department to initiate a CVD investigation based on alleged currency undervaluation. It only narrows the Department's discretion to refuse to initiate based on an allegation of export contingency and describes how the Department must calculate the subsidy benefit.  In short, if the administration wanted to not initiate a CVD investigation of alleged currency undervaluation, the door's still open for Commerce to do so, but only a little.  (And it's also important to remember that the US courts are highly deferential to technical administrative decisions like that.)

Should DOC decide to initiate CVD investigations in those test cases and then go on to find significant levels of subsidization, several more petitions would likely follow. However, even if DOC signals a broad and aggressive desire to go down this road, the number of new petitions will still be limited by (1) practical considerations surrounding the time and expense of filing a CVD petition; (2) the requirement of proving "material injury" at the International Trade Commission before the imposition of remedial tariffs (and that's typically the more difficult part of any AD/CVD investigation); and (3) the requirement that the petition be supported by a significant proportion of a domestic industry that manufactures a "like" product.  On the other hand, the new law would likely encourage industries with existing CVD orders on Chinese goods to request administrative reviews and submit new subsidy allegations to increase countervailing duties under those orders.

Or as I put it to the Wall Street Journal: "The change in language... gives the administration 'a way to say no' to U.S. industries and could signal to China that Washington isn't looking to declare a trade war over currency practices."  Now, it would intensify market uncertainty for Chinese exporters (and US consumers of Chinese goods), so it's not totally benign, but the bill's not the giant anti-China club that its supporters - and much of its opposition - claim it to be.

So be angry at (most of) Congress, folks.  They certainly deserve it for proving once again what misleading, self-interested jerks they are.  And be miffed with President Obama for once again putting politics over good policy.  And be embarrassed about the dismal state of American trade policy.

But cool it on the "trade war" talk, ok?

(Especially considering the undeniable fact that the Senate probably won't even touch the darn thing after the elections because all that great political motivation to be a raving protectionist will have just disappeared.)

Hoyer: Only My Political Party Can Save You from This Horrible Fake Problem

House Majority Leader Steny Hoyer (D-MD) gave a big political speech today about the horrendous state of American manufacturing.  Here's The Hill previewing Hoyer's speech:

In the speech to be delivered at the National Press Club, Hoyer will lament the decline in homemade goods during the last three decades and highlight Democratic efforts to promote “Make It in America” policies as the November midterm elections draw closer.

“Manufacturing, and the middle-class economy it creates, is a part of the American character that we must not give up,” Hoyer plans to say, according to an excerpt released Monday.

Not reported in The Hill's rundown is one rather glaring problem with Hoyer's speech: American manufacturing doesn't actually suck.  Cafe Hayek's Don Boudreaux makes that fact clear in his scathing rebuttal letter to The Hill:

It's shameful that a person with such a strong grasp on power has such a weak grasp on reality. In 2008, the value of U.S. manufacturing output – measured in inflation-adjusted dollars – was 84 percent percent higher than it was in 1980. In 2009, despite the severe recession, the real value of U.S. manufacturing output was still nearly 60 percent higher than it was three decades earlier.

Mr. Hoyer and the many other politicians and pundits who keep insisting that U.S. manufacturing is dying remind me of the soldier in Stephen Crane's The Red Badge Courage who warned his fellow troops with great assurance, but with no evidence, that the army was finally to decamp the following morning: "He came near to convincing them by disdaining to produce proofs." The next morning the army remained in camp.

In fairness to these fictional soldiers, however, they – unlike Mr. Hoyer – had no access to overwhelming data that disprove their hallucinations.

Nice.  I'd only add that (i) even during our current economic malaise, American manufacturing has been doing relatively well (13 straight months of expansion), and (ii) while American manufacturing employment has declined over last several years, such reductions are happening everywhere in the world - in developed and developing countries, in nations with trade deficits and trade surpluses, and, yes, even in China - because of rising productivity and changing consumer tastes.  Oh, and not that it really matters, but the good ol' US of A is still the world's top manufacturer by value, folks.  (Cue the"we're #1" chant!)

So why would the House Majority Leader - the number three Democrat in the United States Congress - claim that American manufacturing stinks, despite the "overwhelming data that disprove his hallucinations"?

Obvious answer: to sell his party's big election-year plans, as The Hill also helpfully explains:

House Majority Leader Steny Hoyer (D-Md.) will tout the Democratic Party’s domestic manufacturing agenda, including a bill that could lead to tariffs on Chinese goods....

House Democrats are using the “Make It in America” theme to reach out to middle-class voters, particularly in Rust Belt states that have been hard hit by outsourcing. A centerpiece of the House agenda this week is a bill that targets China’s currency policy, which Democrats and the Obama administration have criticized as manipulative and unfair to American workers....

Another bill the House is expected to pass this week would require American flags purchased by the federal government to be domestically produced.

You see, it's rather difficult to sell your big campaign-season "solution," when it turns out that there is no real "problem" to "solve."  So in that rather inconvenient case, you make the problem up, and - BAM! - Democrats to the rescue!

Of course, as I've already mentioned several times, Leader Hoyer is hardly the only member of his party playing fast-and-loose with the facts in order to sell protectionist solutions that almost no one actually needs.  In fact, just this week Sen. Russ Feingold - facing increasingly abysmal poll numbers - got into the myth-selling act:



Leaving aside the hilarious contradiction that is a politician using an internet ad to deride innovation and progress (through creative destruction), here's the money quote for today's purposes: "according to independent analysis, unfair trade deals have resulted in the loss of over 64,000 jobs in Wisconsin."  But what Feingold fails to mention is that his scary job numbers come from union-backed and union-funded "think tank" and have been routinely debunked for almost a decade.  In short, this "independent analysis" is neither "independent" nor "analytical."

But other than that.....

Given the current state of the American economy, one must ask why incumbent Dems like Hoyer and Feingold feel the need to create fake problems to solve when so many real economic problems actually exist.  I mean, I get it that our "leaders" want to improve their electoral chances in November by "rescuing" us clueless voters from some impending "catastrophe," but with so many real crises out there, why pick a fake one?

Could it be that they don't want us to notice that their Party has been in charge of Congress for four years, and in total control of the American government for almost two more, and yet they've offered almost nothing in the way of real solutions to real problems?

Could it be that they need a defenseless scapegoat - dirty rotten foreigners(!) - on which they can blame all of America's ills because we're in deeper trouble now than we were back when they took over?

Could it be that if they were to offer real solutions to solve America's real problems, that their plans, while perhaps helpful for the nation, would further hurt their chances in November by highlighting just how dismal the last two years of Obamanomics (and Keynesianism) have been?

And could it be that, by emphasizing (and blatantly misleading the American public about) trade and the state of US manufacturing rather than trying to fix the problems they've helped create, Hoyer and his colleagues in Congress have undoubtedly proven just how desperate they are to maintain their power?

Nahhh, that just couldn't be it, now could it?

Rrriiiiiiiiiight.

On a positive note, at least that awesome "American flag" legislation gives us further proof that, at this point, Congress has run completely out of ideas and is just acting out episodes of The Simpsons until they adjourn for the year.  And for that (and only that) I heartily applaud them:

More Research on the "Inequality Myth"

One of the more sophisticated arguments against free trade and other free market policies is that they exacerbate income inequality in the United States.  For example, here's Public Citizen in a 2008 anti-Bush/FTA screed:

U.S. median wages in inflation-controlled terms have scarcely risen in a generation, in no small part thanks to "labor arbitrage" between U.S. workers and low wage workers offshore, and the replacement of higher paying manufacturing jobs with lower paying service sector jobs....

[S]ome have suggested that technology – not trade deficits – are to blame for the job losses and stagnant real wages, meaning that policymakers should ignore trade and focus on making workers more computer literate. While more education and skills are certainly desirable, these are a separate concern.  For instance, college-educated workers have seen their wage growth stagnate in recent years, even in technologically sophisticated fields like engineering – the opposite of what you would expect if growing returns to skill were the main story. As well, a National Academies' study has found that employers will continue to demand mostly low skilled labor for the foreseeable future, projecting occupations like hospitality and restaurants as having the greatest demand in the coming decades. Thus, addressing the problems with the existing trade and investment rules, not only better educating American workers, will be an essential part of halting rising income inequality.

I've mentioned before that these criticisms are pretty misguided, most notably because (a) traditional measures of income inequality often focus on wages alone and neglect critical things like benefits and the ever-declining cost of basic necessities; and (b) recent work shows that trade actually decreases real income inequality by lowering prices for lower-end goods.  On this latter point, I've stated:

Beyond the obvious savings for basic household necessities (food, clothing, appliances, shelter, etc.) and the lower interest rates that it provides, free trade - particularly with low-cost countries like China - also has been shown to reduce real income inequality in the United States because the benefits of "cheap" imports are disproportionately enjoyed by lower income Americans. (Put simply, "rich" people don't shop at Wal-Mart, so they don't get as much benefit from free trade with China than do frequent Wal-Mart shoppers.)  Less real income disparity and more equal access to disrectionary goods and services means more social cohesion among America's rich, middle class and poor.

According to the Economist, new research supports both of these points and reinforces the notion that "income inequality" is mostly a myth and thus provides no grounds for the imposition of anti-market policies like protectionism:

In a recent paper weaving together several strands of new research, [Robert Gordon, an economist from Northwestern University] reports that improved use of income datasets "shows that there was no increase of inequality after 1993 in the bottom 99 percent of the population, and can be entirely explained by the behavior of income in the top 1 percent." So we are left needing an explanation for the rise of "the stinking rich"....  But when it comes to rising inequality, that's all there is to explain....

Mr Gordon's surprising conclusion is based upon recent studies showing that measured income inequality has been overstated due to inadequacies in traditional methods for constructing price indices and estimating real income. In the latest version of a much-discussed paper Christian Broda and John Romalis find that

the relative prices of low-quality products that are consumed disproportionately by low-income consumers have been falling over this period. This fact implies that measured against the prices of products that poorer consumers actually buy, their “real” incomes have been rising steadily. As a consequence, we find that around half of the increase in conventional inequality measures during 1994–2005 is the result of using the same price index for non-durable goods across different income groups.

Many popular narratives about inequality are grounded on the alleged fact that wages and incomes at the middle and bottom of the distribution have been stagnant for decades. It appears that this, too, may be an artefact of insufficiently sophisticated methods for building the price indices used to calculate rates of inflation. Using an updated price index, Christian Broda, Ephraim Leibtag, and David Weinstein find that

the real wages at the 10th percentile increased by 30 percent from 1979 to 2005. In other words, the real wages of low earners have not remained stagnant, as suggested by conventional measures, but actually have been rising on average by around 1 percent per year.

Surely there are intelligent objections to these studies. But taken together they are impressive and deserve careful consideration....

Please keep this research in mind the next time you hear someone breathlessly demanding the imposition of protectionist policies because they are "essential" to reversing American income inequality.  Either he's ignorant of the latest research, or he might just have other, less altruistic motives.

Awesome: The Daily Show on Unions, Hypocrisy and Competitiveness

Once again the folks at The Daily Show convey in one 5-minute skit what I couldn't do in 30 blogposts:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Working Stiffed
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party

I'll again be the stick-in-the-mud and mention that this great skit, while certainly hilarious, also provides several fine examples of things that I've been trying to explain here for a while now:

• Most obviously, unions are self-interested organizations that, contrary to their statements about "greed" or "fairness" or "sticking up for the common worker," are readily willing to jettison their alleged principles when they don't benefit the union.  We've recently seen this union hypocrisy on the trade front, as the United Steelworkers loudly complained about Chinese "green energy" subsidies while conveniently forgetting to mention the billions than Uncle Sam has sent their way.

• Perhaps more interestingly, however, is that when push comes to shove, unions are rational employers that respond to market realities rather than vague concepts like "fairness."  This fact is made clear by the frank admissions of the UFCW's (rather unwitting) leader, Mike Gittings, about why they have hired temporary, non-union workers (and have given them part-time hours and no benefits) to protest Wal-Mart (starting at about 3:55): "Our union members are working.... We don't have union members that are able to go down there on a daily basis.... The alternative to the way that we do it would be to not do it...  We're doing the best we can with our limited resources..."  In short, the UFCW, as an employer without magically unlimited resources, is responding to market realities about its labor needs and costs, and if it adopted a "fairer" approach, simply wouldn't be able to hire ANYONE and thus would have to get out of the protesting business altogether.

• And thus brings us to our last lesson: the result of non-market demands on American employers erodes their global competitiveness and leads to their (a) going out of business in the face of foreign competition; or (b) offshoring of their labor force or hiring of illegal, off-book workers.  Don't believe me that a zany comedy show like TDS is providing this final lesson?  Well, check out correspondent Aasif Mandvi's "solution" to getting the "protesters" he needs at the right (non-government-mandated) price: picking up illegals to do the job.  In fact, Stewart rather coyly introduces the whole skit with an aside about "The American labor movement, sometimes criticized for driving jobs overseas with some outdated demands...."  Pretty clever, eh?  Yet labor unions don't recognize these obvious economic realities and instead choose to blame free trade for offshoring and job losses rather than look in the mirror.  And unfortunately, that's no laughing matter.

Considering that the union's behavior here - treating its own employees far more shabbily than the businesses it routinely demonizes - is hardly an isolated occurrence, these three lessons are broadly applicable.  So hopefully the millions of youngsters who watch The Daily Show instead of the real news absorbed the message.  

I'm not holding my breath, but a guy can dream.

Rethinking the Conventional Wisdom that a True Free Trade Platform is Political Poison

I've often lamented the misguided political position of many free trade advocates in the House and Senate who are afraid to counter protectionist politics with a robust defense of trade liberalization, and instead use self-defeating mercantilism to deflect anti-trade criticism.  My reasoning is pretty simple: by focusing only on exports and trade surpluses, free traders are immediately exposed to false protectionist arguments that, for example, "if exports and trade surpluses are good, then current US free trade policies must be bad because we're running a trade deficit."  Of course, this response is poppycock (as I've noted seemingly millions of times), but a little thing like the truth has never stopped most politicians, especially during campaign season.

Typically, however, pro-trade politicians and their omniscient strategists respond to my idealistic (albeit totally fact-based) pleas with stories of bad poll numbers and "short-term political realities."  Their (short-sighted) argument is that because free trade is a dead loser of a political issue and because they don't have the time to teach folks the "truth" about trade and protectionism, they'll politely decline my advice thankyouverymuch and, assuming they can't avoid the issue altogether, merely deflect protectionist criticism with trite chatter about exports and international obligations, regardless of the inevitable protectionist auto-response.

But is this "conventional wisdom" correct?  Is true free trade advocacy really a one-way ticket to Loserville?

Recent events sure seem to indicate otherwise.  As I noted last week, Democrats across the country are running full-steam on an anti-NAFTA, anti-China, anti-trade campaign platform.  And as Cato's Dan Griswold points out today, protectionism so far appears to be a big fat dud of a plan:

The early returns are in on the Democratic tactic of making trade an issue in the 2010 campaign, and the results are not encouraging for those who want to blame trade agreements for the state of the economy.

In a column this morning for the Wall Street Journal (“Ohio’s Test of Protectionist Rage”), Gerald Seib reports from Ohio that two Republican candidates have been unscathed so far by Democratic attacks on their past support for major trade agreements.

In races for U.S. Senate and governor, Democrats have unleashed hard-hitting ads accusing their GOP opponents of supporting trade deals “that shipped tens of thousands of Ohio jobs overseas.” So far the attacks have failed to draw blood. According to Seib:

Right now, both Republican contenders in those races—Rob Portman for the Senate and John Kasich for governor—are coming under fire for their past support of free trade. The fact that both enjoy big poll leads right now suggests the attacks have had limited effect so far.

A key question in the campaign stretch run, both for Ohio and for policy making in Washington after the election, is whether that remains the case.

The Ohio races are ones that I've already noted here, and these polls are certainly a good sign that not only is protectionism not winning lots of votes these days (even in the Rust Belt), but also a free trade agenda might not be the political poison that it (allegedly) once was.  Nice.

Yet perhaps an even better sign of this phenomenon is a little-known race in Maine's 2nd district between incumbent Democrat Rep. Mike Michaud and his Republican challenger Jason Levesque.  Congressman Michaud, you see, is one of the House's biggest protectionists.  He's chair of the "House Trade Working Group," which ironically works to prevent trade, co-sponsor of the equally ironic TRADE Act, and routinely campaigns on rabid protectionism.  Michaud's congressional seat was thought to be very safe, but a little thing happened on the way to the mid-terms: he's getting a strong challenge from the relatively unknown Levesque, who now trails Michaud by only a few percentage points and is starting to pop-up on everyone's radar as a race to watch in 2010.

Now, given Michaud's hardcore protectionism and past electoral success, as well as the fact that Maine has long been represented by protectionist (and Republican) Senators Olympia Snowe and Susan Collins, one would expect Levesque to also express serious skepticism about free trade, or at best adopt the standard GOP "milquetoast mercantilism" in order to survive the inevitable protectionist onslaught and maybe eke out a win in a very favorable year for Republicans.

Guess again.

Now, it's not like Levesque is hanging his hat on free trade, and no one, not even your humble correspondent, can blame him for that. (As Griswold said today "free trade... is probably not a big vote-getter on Election Day, but neither is it a vote-loser.")  But Levesque also isn't dodging the issue or embracing mercantilism either, as these recent pro-trade statements make absolutely clear:

“We cannot be a protectionist society — this is a changing world, we live in a modern global economy, where communications, travel and goods are, quite frankly, regardless of border,” says Jason Levesque, Michaud’s Republican challenger in this year’s election and a big supporter of free trade.

The challenges faced by Maine’s paper industry, Levesque says, are more a result of the state’s non-business-friendly climate than foreign competition. “I’d argue that they need to look at the paper industry domestically and realize that there are paper machines and paper plants that are starting up in other parts of the United States, namely Virginia. So we’re not necessarily losing jobs to foreign entities, we’re losing jobs to other states because we are not a business-friendly district any more.”

Maine companies, he says, need to become more competitive and not rely on what he calls “trade walls” to insulate them from foreign competition. He does not, he says, support efforts to make foreign companies abide by certain labor and environmental standards.

“Do we just take our ball and go home and stop playing if they don’t abide by our rules and our social conscience?” Levesque says. “I just think it’s another excuse to be not competitive in a modern global economy and to build that wall and become more of a protectionist society, which will not work in this day and age.”

Awesome.  Of course, everything Levesque said is correct, and the facts about trade liberalization and competitiveness certainly support him (and contradict Michaud's anti-trade claims).  Indeed, I don't think I could've said it much better myself.

But as good as Levesque's response is, there's a much bigger point to be made here.  If Levesque - who currently trails Rep. Michaud by a an easily surmountable 7 percent - can pull off a win against a rabidly protectionist incumbent in a highly trade-skeptical area of the country, it would, in my humble opinion, go as far as the Ohio races - and considering his unapologetic free trade rhetoric, perhaps even further - to proving that the "conventional wisdom" on free trade and politics is dead wrong.  So stay tuned, folks.  And cross your fingers that Levesque's trade honesty and integrity pay off in November, and that the Democrats' broader protectionist plans go down in flames.

(Of course, a little contribution to Jason's cause couldn't hurt.)

Thai Data Poke More Holes In Currency Hawks' Trade Deficit Claims

With everyone once again screaming and yelling about China's currency policies, it's another good time to take a deep breath and look at what's actually happening in global trade and currency markets to test whether any of the policies being proposed has any grounds in, you know, reality.  (Crazy thought, I know.)  For example, a bunch of American congressmen have supported their calls for aggressive (and highly controversial) unilateral action against China with economic projections that a significant appreciation in China's currency, the RMB, will magically decrease the US-China trade deficit.  Indeed, as I've previously noted this is probably the currency hawks' biggest reason for enacting their dangerous currency legislation, so it's probably a good idea to check their projections by looking at what other countries' currency moves have actually done to their respective bilateral trade balances with the United States, as well as their imports and exports more generally.

I originally tested the currency hawks' big theory by looking at how Japan's appreciation of the Yen in the 1970s and 80s versus the Dollar resulted in larger, not smaller bilateral trade deficits with the United States.  In that same blog post, I also noted how "the 20% RMB appreciation in 2006-2008 that resulted in an expanding US-China trade deficit."  Indeed, it was these historical facts - not fancy economic projections or models - that first caused me to be skeptical of the myriad congressional claims about the effects of RMB appreciation on bilateral trade flows.

A few months later, I revisited this issue when I examined India's recent appreciation of the rupee against the dollar, and I once again found reason for skepticism:

As the rupee strengthened against the dollar, the US-India trade deficit, and Indian imports to the US, did not steadily decline, as the currency hawks unequivocally assert should happen. And US exports to India didn't steadily increase either. Hmm.

Thus, the US-India currency and trade data strongly undermine the idea that anyone can accurately predict how changes in currency policies will affect bilateral trade flows in an increasingly globalized economy. There's just too much going on beyond currency for it to dictate trade. Indeed, as the correlations listed above show, there's actually a weak, positive correlation between a stronger rupee and both increased Indian imports and an increased bilateral trade deficit, and there's a weak negative correlation between a stronger rupee and increased US exports.

Ok, so that's historical evidence from Japan, China and India all arguing against the currency hawks' claims about currency appreciation and the US trade deficit.  And it appears that we can now add yet another country to my growing "skepticism list": Thailand.  As Bloomberg reports:

Thailand’s exports rose for the 10th consecutive month in August as the baht’s appreciation to a 13-year high failed to curb demand for the country’s automobile parts and electronics.

Shipments increased 23.9 percent last month from a year earlier to $16.5 billion, Commerce Minister Porntiva Nakasai said in Nonthaburi province on the outskirts of Bangkok today. The median estimate of 12 economists in a Bloomberg News survey was for a 23.5 percent gain....

The baht has gained 8.4 percent against the dollar this year, making it the second-best performer in Asia....

The commerce ministry still expects exports to grow 20 percent to $183 billion this year, even after the baht’s appreciation, Porntiva said.

Imports climbed 41.1 percent in August, the ninth consecutive month of gains, as the nation’s economic recovery raised demand for raw materials and consumer goods. Thailand had a trade surplus of $643 million last month, compared with a $940 million deficit reported in July....

Thailand’s exports to the U.S. grew 37 percent in August, up from a 24 percent gain a month earlier, and shipments to Europe rose 20 percent from 16 percent. Exports to China rose 22 percent compared with a 30 percent gain in the previous month, according to the ministry’s statement.

Interestingly, the analysts and government officials quoted in the Bloomberg article are adamant that, despite almost a year of hard data arguing to the contrary, further baht appreciation will soon put a dent in Thailand's booming export sector.  Maybe that'll indeed be the case, but it certainly hasn't happened so far.  And as the article implies, exports to the US in particular have consistently increased as the baht has strengthened against the Dollar.

Meanwhile, the US-Thailand trade deficit has also increased since the start of 2009: based on my quick calculations from the US Census data available here, the US-Thailand trade deficit has increased by about $1 billion ($997.093 million to be exact) in January-July 2010 over the same period in 2009.  That's an increase of about 15.7% (from about -6.35 billion to -7.35 billion) year-on-year.  Yet, as Bloomberg states, the baht has gained 8.4 percent against the Dollar since the beginning of the year and now sits at a 13-year high.  Other currency data (available here) also confirm that the baht has steadily appreciated versus the Dollar since the beginning of 2009.

Clearly, the baht's appreciation has not - I repeat, not - led to a magical reduction in the US-Thailand trade deficit, as the currency hawks' glorious economic models probably would have predicted.  Instead, just like in '06-'08 China, '70s-'80s Japan and (to a lesser extent) '09-'10 India, Thailand's trade surplus with the United States (and thus the US deficit with Thailand) actually increased as the baht steadily climbed in value versus the USD.  Pretty interesting, eh?

And please let me be clear here: just as I've said when pointing out other historical currency/trade relationships, I do not mean for a second to imply that the latest Thai data further prove that a nation's trade deficit with the United States will increase as its currency strengthens against the dollar.  Instead, I think the Thai data, just like the Japanese, Chinese and Indian data before them, provide just a little more evidence that (a) there are many economic forces beyond - and probably far more important than - currency levels that determine global trade flows; and (b) the steadfast claims of currency hawks that RMB appreciation will magically "cure" the US-China trade deficit should be treated with extreme skepticism.

(And, in this most political of seasons, maybe even a little suspicion.)

Exit question: if the congressional currency hawks' number one reason for taking aggressive unilateral action against Chinese imports is this questionable, then what does that say about all of their other steadfast assertions re: their legislation's impact on US jobs or its WTO-consistency or, well, just about anything?

Who Needs an FTA When You Have an, Errrrr, "Action Plan on Racial and Ethnic Equality"?

I've spent a lot of time here chronicling the depressing story that is the Colombian government's extensive-yet-utterly-futile efforts to secure congressional passageconsideration of the US-Colombia FTA.  In short, the Colombians have spent millions of dollars lobbying for the FTA, have undergone massive domestic reforms, have allowed US congressman and other officials to snootily judge firsthand their domestic (particularly labor) improvements, and have received nothing but empty administration promises and baseless congressional insults in return.  Here's how I put it last year:

The US-Colombia FTA was completed and signed on November 22, 2006.  Since that time, American exporters have paid approximately $1.9 million per day in Colombian tariffs that they wouldn't have paid if the Democrat-controlled Congress had just passed the FTA back then and thus allowed it to enter into force. By my math, that means that Congress' and (now) the President's partisan stalling has resulted in a pointless tax on American businesses of almost $2 billion ($1.9798 billion = 1042 days times $1.9 million) and counting.  Meanwhile, one of our closest allies in Latin America has bent over backwards to get the agreement passed, holding hundreds of public meetings, working hard to (successfully) reduce domestic labor union violence, and countering Hugo Chavez' viral influence in the region.  Heck, the Colombians even sponsored a massive public art campaign here in Washington, DC in an attempt to improve public sentiment about their country. 

Sadly, only the tab has changed since I wrote that.  (It's been another 356 days, which is another $676.4 million in needless tariffs and brings the grand total to 2.6562 billion dollars!).

Well, actually, that's not the only thing:

In January 2010, the United States and Colombia signed the U.S.-Colombia Action Plan on Racial and Ethnic Equality. The Action Plan recognizes the important contributions of African–descendent and indigenous peoples and seeks to elevate recognition of their cultures in both countries....

The Action Plan focuses on sharing best practices and implementing programs to address social barriers that affect Afro-Colombian and indigenous communities. These barriers include lack of continuity, quality, access, and participation in education; low participation and representation in democratic institutions; limited opportunities in the labor market; structural racism; and multiple forms of discrimination...

The Action Plan's Steering Group held its first meeting June 2, 2010, in Bogotá. U.S. and Colombian government representatives evaluated current assistance programs in Colombia for Afro-Colombian and indigenous communities. The two governments agreed to establish working groups to discuss the make-up of the plenary group and an agenda for the first plenary session, to be held in October 2010....

The U.S. Department of State's Bureau of Western Hemisphere Affairs launched its Race, Ethnicity, and Social Inclusion Unit in July 2010 to coordinate the implementation of the U.S.-Colombia Action Plan and similar initiatives in the region.

Problem.  Solved.

Sunday Quick Hits

I'm just back from some business travel, and there's lots to mention, so let's get right to it:

• Ten months of Section 421 tariffs on Chinese tires produce nothing except higher domestic prices and increased imports from other countries.

• New Cato briefer: The Miscellaneous Tariff Bill: A Blueprint for Future Trade Expansion.

• New Heritage briefer: Targeting the Yuan: A Feel-Good but Futile Response.

• Op-ed: Why imports are a boon for the US economy (and another reason why Keynesianism is dumb).

• In response to Krugman's latest China currency column, monetary economist rightly asks if we can revoke PK's Nobel prize.

• Boeing-Airbus dispute: the EU strikes back.

• WSJ editorial board asks an obviously rhetorical question: does Obama or the USW run US trade policy?

• Yet another trade dispute over "green" subsidies: this time Japan goes after Canada's "feed-in tariffs" for renewable energy generation.  You were warned, people.  You were warned.

• Shocker: Dems' anti-china push is based on politics, not economics.

• Excellent NYT op-ed on how visa reform is critical to the future of US global competitiveness.  Me: something China is already doing, by the way.

• Journalist notices that US pols attack China's currency policies to "save American jobs," but they don't seem to care about those same jobs when they block Chinese investment in the United States.

• Breakthrough?  Iowa farmers starting to balk at taking government money.

That should keep you all busy for a while.

On Global Competitiveness, Investment and Jobs

Dismal news arrived last week from the World Economic Forum: the United States has dropped from second to fourth place on the WEF's Global Competitiveness Report 2010-11 - a comprehensive annual survey of public data and the opinions of the world's top business executives.  The report explains why the US dropped (emphasis mine):

The United States continues the decline that began last year, falling two more places to 4th position. While many structural features that make its economy extremely productive, a number of escalating weaknesses have lowered the US ranking over the past two years.

US companies are highly sophisticated and innovative, supported by an excellent university system that collaborates strongly with the business sector in R&D. Combined with the scale opportunities afforded by the sheer size of its domestic economy—the largest in the
world by far—these qualities continue to make the United States very competitive.  Labor markets are ranked 4th, characterized by the ease and affordability of hiring workers and significant wage flexibility.

On the other hand, there are some weaknesses in particular areas that have deepened since our last assessment.  The evaluation of institutions has continued to decline, falling from 34th to 40th this year.  The public does not demonstrate strong trust of politicians (54th), and the business community remains concerned about the government’s ability to maintain arms-length relationships with the private sector (55th) and considers that the government spends its resources relatively wastefully (68th). There is also increasing concern related to the functioning of private institutions, with a measurable weakening of the assessment of auditing and reporting standards (down from 39th last year to 55th this year), as well as corporate ethics (down from 22nd to 30th). Measures of financial market development have also continued to decline, dropping from 9th two years ago to 31st overall this year in that pillar.

A lack of macroeconomic stability continues to be the United States’ greatest area of weakness (ranked 87th). Prior to the crisis, the United States had been building up large macroeconomic imbalances, with repeated fiscal deficits leading to burgeoning levels of public indebtedness; this has been exacerbated by significant stimulus spending. In this context it is clear that mapping out a clear exit strategy will be an important step in reinforcing the country’s competitiveness going into the future.

Unfortunately, it gets worse.  Not mentioned in the WEF report, but shown in the accompanying US factsheet, are the horrible United States' rankings in "burden of government regulation" (49th) and "transparency in government policymaking" (41st).   According to the Washington Post, these regulatory burdens, along with access to credit, were the top problems that global CEOs see in the US today.  Not good.

Of course, anyone who regularly follows this blog already knows that bad US government regulation and regulatory uncertainty, particularly the new (and often unknown) burdens of ObamaCare and Financial Regulatory Reform, are doing a number on American businesses' ability to compete in the global economy.   But it's certainly not just ObamaCare that's salting the regulatory earth here in the USA.  Indeed, just last week the Post wrote about how draconian environmental regulations have all but extinguished domestic manufacturing of the incandescent lightbulb and the jobs that go with it:

The last major GE factory making ordinary incandescent light bulbs in the United States is closing this month, marking a small, sad exit for a product and company that can trace their roots to Thomas Alva Edison's innovations in the 1870s.

The remaining 200 workers at the plant here will lose their jobs.

"Now what're we going to do?" said Toby Savolainen, 49, who like many others worked for decades at the factory, making bulbs now deemed wasteful.

During the recession, political and business leaders have held out the promise that American advances, particularly in green technology, might stem the decades-long decline in U.S. manufacturing jobs. But as the lighting industry shows, even when the government pushes companies toward environmental innovations and Americans come up with them, the manufacture of the next generation technology can still end up overseas.

What made the plant here vulnerable is, in part, a 2007 energy conservation measure passed by Congress that set standards essentially banning ordinary incandescents by 2014. The law will force millions of American households to switch to more efficient bulbs.

The resulting savings in energy and greenhouse-gas emissions are expected to be immense. But the move also had unintended consequences.

Rather than setting off a boom in the U.S. manufacture of replacement lights, the leading replacement lights are compact fluorescents, or CFLs, which are made almost entirely overseas, mostly in China.

Consisting of glass tubes twisted into a spiral, they require more hand labor, which is cheaper there. So though they were first developed by American engineers in the 1970s, none of the major brands make CFLs in the United States.

Another big problem, as highlighted by Ed Morrissey over at HotAir, is the distressing fact that the United States has dropped to 40th(!) place on protecting basic property rights:

If readers aren’t stunned by the nations listed, then they’ll be stunned by the length of the list, at least. No one will be terribly put out to see Canada (10), Austria (9), or Switzerland (1) ahead of the US. But what about Saudi Arabia (28)? China (38)? Jordan (30)? The US got edged out by Gambia, which relies on foreign aid to deal with high unemployment and underemployment, according to the CIA factbook.

If we want to improve our economy, we need to improve our competitiveness. If we want to improve competitiveness, we need to protect property rights and get the federal government out of the redistribution business. Property rights are the first rights mentioned in the Constitution (Article I, Section 8) for a reason. It’s the basis of prosperity and opportunity, and also the basis of a free, self-governing people. Falling behind China in property rights should be a national embarrassment, and a reminder of just how far we have traveled from our founding principles. And that journey didn’t start with Barack Obama, even if he’s been busy hitting the accelerator.

Everything Morrissey says is definitely correct, but he misses a more basic point that is, I think, most important for the present competitiveness discussion (the whole point of WEF survey, afterall): why regulatory burdens and ineffective protection of property rights hinder a nation's global competitiveness and, even more broadly, why declining competitiveness is even a problem.  Fortunately, the answers to both of these questions are actually pretty simple, especially when you consider the folks who form the basis of the WEF's survey - global business leaders.  You see, it's these guys (and gals) who make the really big and tough decisions about where to invest their companies' (and shareholders') money in things like factories or banks or tanning salons or... well, you get the idea.  Coming to that decision is no easy task, and CEOs have a fiduciary duty to their shareholders (read: you and me) to make the best decision possible based on all possible facts - a calculus which includes, among many factors, the likelihood that the host government is going to interfere in, and thus diminish or destroy, the value of that investment after it's been made.

And, of course, an unlimited, overburdensome, opaque and/or uncertain regulatory environment is a very big "minus" in that calculus.  For example, who would want to spend a billion dollars on a steel plant if there's a reasonable chance that the domestic government might pass some crazy regulation that would make steel production at that plant impossibly expensive (or outright illegal)?  Or who would want spend another billion to buy land or mineral rights in a country whose leader might suddenly decide that the land and all its minerals belong to his croniesthe People?  The answer: nobody, and it's for these reasons that the very first pillar of the WEF's competitiveness analysis is "institutions" (and its 21 subcategories!).

In these examples we also see one of the biggest reasons why the rapid decline in a nation's global competitiveness is a big problem - it discourages domestic and foreign investment in the declining country, and thus curtails economic activity and new jobs.  And that's why the United States' decline in the aforementioned competitiveness categories is so alarming.

These problems are also a big reason why governments and corporations have developed modern global investment rules - to limit the potential for government intrusion in their lawful investments.  As I said the other day:

FTA investment provisions... are actually designed to encourage mutual investment in FTA partner countries - i.e., to help the countries give each other money for silly things like factories and jobs - by providing certain basic protections for that investment. And against what exactly are these rules protecting, you ask? Well, for one, they help discourage guys like Hugo Chavez from forcibly taking the land or facilities that a foreign company has fairly purchased because those rules would obligate ol' Hugo to compensate the company in the amount of its stolen investment. The horror! These rules also prevent governments from passing protectionist laws that will harm an FTA partner company's investment where the company proves that those laws are actually disguised restrictions on trade or violate due process. For example, if American ScottCo buys a Mexican widget factory and then Mexico passes a "health regulation" prohibiting the domestic use of only ScottCo widgets (but not Mexican widgets), Mexico would have to compensate ScottCo where the company showed that the Mexican regulation had no rational, scientific basis. And, of course, by seeing this type of sane, rules-based investment protection, companies like ScottCo are more inclined to invest in Mexico in the first place.

Now, I'd never attempt to claim that global investment rules are perfect or that they don't occasionally produce some odd, even unseemly, disputes (as I noted in the comments to my post above).  Such criticism is entirely fair.  But to claim, as some folks seem to do, that global investment protections don't help encourage foreign investment (and thus job creation) by limiting naughty governments' ability to thwart that investment is to completely ignore reality and surveys of actual business decision-making like the WEF's.  Does anyone really think that, if the United States had a long history of confiscating foreign (or domestic) investors' property or whimsically regulating them out of existence (and no limits on its power to do these troubling things), Toyota would have decided to invest $1.3 billion in a new automobile factory in Mississippi (2000 new jobs), or Germany's ThyssenKrupp would have invested almost $5 billion in a new stainless steel plant in Alabama (2700 new jobs)?

Of course they wouldn't, and the struggling American workforce be almost 5000 jobs smaller (not to mention all the indirect jobs created from these investments).

Now, the United States has (had?) a longstanding history of reasonably sound domestic regulation and basic property rights protections (among other things), so the external limits on government meddling imposed by international investment treaties are the icing, rather than the cake, for foreign investors deciding whether to invest in the US market.  But plenty of other, especially developing, countries don't have this history, and often don't even have a short history of peaceful, seamless transfer of power.  So by providing an external check on these big institutional risks, investment treaties provide a small "plus" in that aforementioned CEO calculus about where and whether to invest that shareholder money.  In short, by limiting governments' ability to infringe on foreign investment, no matter how big or small, these treaties enhance the countries' global competitiveness and ability to attract that investment.  They provide a small bit of clarity and consistency - an absolute imperative for investment (and law) - where little if any exists.  And that environment benefits everyone, particularly those workers whose jobs result from that new investment.

Now if only the US government would remember these lessons.

FearFest 2010

For about a year now, I've been obsessing oversystematically documenting in my "Protectionist Campaigning for Dummies" series the unseemly efforts of campaigning American politicians to scare voters into voting for them through good ol' fashioned protectionism.  And considering that the Democratic Party officially adopted protectionism as its main 2010 campaign strategy (i.e., its completely recycled "Make it In America" plan), it really should come as no surprise to any of us that, as the Wall Street Journal reports, ridiculous anti-trade campaign ads from increasingly-desperate Democrats are popping up across the country:

Democrats seeking to regain footing among middle-class voters are putting trade anxiety at the forefront of new campaign messages, challenging free-trade deals backed by the White House and linking Republicans to corporate outsourcing....

In southern Virginia, embattled Democratic Rep. Tom Perriello has put his opposition to the Korea deal and outsourcing at the center of his re-election pitch. In his manufacturing-heavy district in Illinois, Democratic Rep. Phil Hare attacks Washington for easing trade ties with China.

Anybody who paid attention to last year's special elections in Massachusetts, Hawaii or New York would understand quite well that today's Democrats, in particular Democratic Congressional Campaign Committee chair Chris Van Hollen (D-MD), love to pull out the scary-but-utterly false China/outsourcing/NAFTA cards anytime an election becomes a little too close for comfort.  Indeed, even a certain hope-tastic junior Senator from Illinois morphed into a rabid protectionist during the 2008 presidential election, and look where that got him?  As the same WSJ article notes:

Opposing free-trade deals is a common election-year tactic for Democrats, who rely on labor unions for financial support and grassroots activism. With polls showing the party losing crucial working-class voters in dozens of House districts and broad disapproval of the Democrats' economic agenda in Washington, strategists now see trade as their most effective weapon in minimizing election losses.

So, again, none of this news is really surprising.  What is surprising, however, is that this new round of campaign ads has pushed the trade fearmongering to a whole new level.  Nevermind for a second that the ads are completely false, and that the benefits of free trade (and the falsehoods about outsourcing and China trade) are undeniable.  Instead, let's just take a moment to look at how low our elected representatives (and those eager to represent us) have gone.

Seriously, folks, it's Halloween come early across the country, and the trick-or-treaters are out in force:

Mr. Perriello's new ad depicts a dark-suited U.S. businessman standing in front of an Asian factory, thanking the Republican challenger, state Sen. Robert Hurt, for "protecting the tax loophole that gives a company like ours a kickback for sending jobs overseas."

Mr. Hare's spot shows a picture of his GOP challenger, Bobby Schilling, alongside the image of an Asian woman wearing a head set—an apparent reference to an Asian call center....

Democratic candidates in Ohio, Wisconsin, Nevada, Indiana, New York and California have launched similar ads in recent days. Others are decrying the 1994 North American Free Trade Agreement and expressing opposition to a Korea deal.

But hey, don't just take my (or the WSJ's) word for it.  Check out Hare's ad for yourself:



Translation: China is coming for your jobs unless you vote for me.  Pretty nice ad during the worst economic downturn since the Great Depression, huh?  Or how about this classy one from Ohio Senate candidate Lee Fisher (about whom we've already discussed at length):



That's right, people of Ohio, Rob Portman is coming for your jobs!  Be afraid!  Be very, very afraid!  Ooogaboogaboogabooga-ooooooooh!!

Or not, as this excellent editorial in the Cleveland Plain Dealer makes clear:

Former President Bill Clinton was to campaign with Democratic Senate candidate Lee Fisher in Cincinnati Sunday night. The two have a long relationship: Back in 1991, when Clinton was little known beyond Arkansas, Fisher -- then Ohio's attorney general -- offered to lead his presidential effort in Ohio.

So let's hope that if Clinton got a glimpse of Fisher's first general election ad, he took his old friend aside and gave him a quick lesson in history and economics.

The ad is a broadside aimed at Republican nominee Rob Portman -- one in which Fisher's not mentioned until the disclaimer at the end. Although it cites Portman's time as George W. Bush's budget director, its focus -- as much as any 30-second spot can have a focus -- is on trade, and especially on trade with China.

There are images of Chinese workers -- in ominous black-and-white, no less -- of Portman shaking hands with a Chinese official and of a Chinese flag that fills the entire screen. The ad blames Portman for the loss of 100,000 jobs to China during his time as U.S. trade representative.

The report cited by Fisher's campaign estimates that it took six years -- between 2001 and 2007 -- for Ohio to lose that many jobs to China. Portman was trade rep for all of one year. But the big message that Fisher is selling is that trade, especially with China, is bad for Ohio. That has long been gospel to some Democratic constituencies, but it's also a mindset that Clinton fought.

Clinton believed that America's economic future depended on robust trade with emerging markets in the Far East. He expended enormous political capital to get China into the World Trade Organization. And that opening helped Ohio firms raise their exports to China six-fold between 2000 and 2009. Exports sustain many thousands of manufacturing jobs in Ohio -- a fact that Fisher proudly touted when he was the state's development director.

The problems in U.S.-China trade, including currency values and China's cheating on trade rules, won't be solved by withdrawing from the arena or by fear-mongering. Clinton has known that for a long time. Does Fisher?

Well, of course he does, Plain Dealer Editors.  But he's campaigning, you see, and the facts - like the small one about how all of those China jobs stats from the union-run Economic Policy Institute are total garbage - don't sell in November.  Fear, on the other hand, apparently does, especially now.

Of course, some of the Democrats' protectionist hate would probably die down a little if President Obama - the leader of the Democratic Party, and a guy who, by the way, has voiced his support for pending FTAs with Korea, Colombia and Panama - just came out and reiterated that support.  Oh, wait:

Mr. Obama has avoided mentioning the Korea FTA on the campaign trail for weeks. A spokeswoman for U.S. Trade Representative Ron Kirk, who is handling the Korea talks, declined to discuss them in detail.

Separately, the White House has yet to resolve a trucking dispute with Mexico in which the country imposed tariffs on the U.S. after the president signed a measure favored by Democrats canceling a pilot program that allowed Mexican trucks to carry cargo on U.S. roads.

So the Democratic Obama administration - even the agency (USTR) charged with advancing American free trade interests - has remained silent while Democrats across the country demagogoue free trade and try to scare a vast majority of Americans into voting against their interests.

Stay classy, guys!

But, hey, don't be too upset, folks, because there's actually a reasonably big silver lining in all of these dark anti-trade clouds.  The Democrats are on pace for losses of truly historic proportions in November 2010.  And if/when that happens, it could go a long way to undermining the horribly misguided idea that protectionism sells in November.  It might even cause the Democratic party to ditch the anti-trade strategy and begin to move back towards their pro-trade roots in folks like like Clinton, JFK, FDR and Cordell Hull.

Then again, maybe they won't.  But, honestly, the Dems can't get any worse on trade than they are right now.

Can they?

USW to China: Green Subsidies for Me, but Not for Thee

The big trade news of the day is that United Steelworkers union (USW) has filed a petition with the US government alleging that the Chinese government unfairly favors, through subsidies and other trade measures, its domestic manufacturers of "green" goods like solar panels and wind turbines.  The petition was filed under a section of US trade law - Section 301 of the Trade Act of 1974 - that was once a strong protectionist weapon but has basically gone dormant since the advent of the World Trade Organization.  Here's the New York Times with the basic facts about the new USW case:

The United Steelworkers union filed a legal case with the Obama administration Thursday morning, accusing China of violating World Trade Organization rules by subsidizing exports of clean energy equipment to the United States.

The filing, more than 5,000 pages long and 18 inches thick, contends that the central government in Beijing and China’s provincial governments have used land grants, low-interest loans and dozens of other measures that violate W.T.O. rules.

Leo W. Gerard, president of the 850,000-member union, said in a conference call with reporters after the filing that China’s violations of free-trade rules had helped Chinese companies expand their share of the world market for wind turbines, solar panels, nuclear power plants and other clean energy equipment, at the expense of jobs in the United States and elsewhere.

The filing asks the Office of the United States Trade Representative to begin formal consultations with China, which would lead to proceedings at the W.T.O. in Geneva if Beijing did not agree to repeal the subsidies....

Nefeterius A. McPherson, a spokeswoman for the Office of the United States Trade Representative, said that the office had accepted the union’s petition and would reach a decision on whether to open an investigation of Chinese trade practices within 45 days. That is the maximum amount of time allowed under the obscure provision invoked by the union in its filing, Section 301 of the 1974 trade law....

With clean energy a stated priority of the Obama administration, as a jobs generator and for environmental reasons, the union says it hopes to gain support for its case by injecting the trade issue into the autumn Congressional campaigns....

The filing of the trade case comes as trade and currency frictions with China are mounting. Friday morning in Beijing (late Thursday night in New York) China is expected to announce that in August it ran another especially large trade surplus, possibly exceeding $25 billion.

President Obama imposed steep tariffs a year ago on tire imports from China, a decision that China is itself now challenging before a W.T.O. panel, which is expected to give an initial ruling this month. The Commerce Department has separately granted dozens of requests to impose tariffs on very narrow categories of imports from China, like steel wire strands for prestressed concrete, after finding evidence that they were subsidized, or dumped, in the American market.

But special tariffs and other import restrictions still cover less than 3 percent of American imports from China. Unions and many Congressional Democrats have contended that the administration should be more assertive in forcing China to honor previous free-trade commitments. But the United States government has long depended on companies to gather commercial information for trade cases, which companies have been hesitant to do.

China’s manufacture of solar panels, wind power turbines and other clean energy products — with the strong support of its government, through land grants and low-interest loans — has turned that nation into the global leader in those markets. China has more than one million jobs in all clean energy industries combined.

Meanwhile, American and other Western manufacturers of solar and wind power equipment have struggled to compete. Some American clean energy companies have scaled back production and laid off workers, while moving operations to China.

Mr. Obama called in his State of the Union address in January for the United States to become a leader in green energy instead of ceding the industry to foreign competitors, including China. But China continues to gain market share in practically every category of clean energy technologies, including solar panels and high-speed trains....

The United Steelworkers union represents employees in a wide range of energy-related jobs, including manufacturers who make the steel for wind turbine towers and nuclear reactors, and glassworkers who make solar panels and various kinds of incandescent and halogen light bulbs. The union also represents workers involved in the assembly of wind turbine towers and those who make gears, valves, engines and other components of clean energy equipment. All those job categories have faced increased competition from China and other countries in recent years.

Another big American union, the International Brotherhood of Electrical Workers, with more than 700,000 members, is also involved in the installation of many clean energy systems, although the steelworkers’ union has not invited it or other unions to participate in the case....

Besides Chinese government assistance to clean energy exporters in the form of free or discounted land for manufacturing plants and low-cost loans, the steelworkers’ union says China has broken W.T.O. rules by tightly restricting the export of so-called rare earth elements needed for the manufacture of wind turbines, solar panels and energy-saving compact fluorescent bulbs.

The filing also accuses the Chinese government of forcing foreign clean energy companies to license their technology to local partners as a condition of entry to the Chinese market....

In the United States, the solar industry has been largely quiet on trade actions and has not retained a law firm to advise it on the feasibility of a trade case.

So while there have been months of back-channel discussions in the United States among lawyers, administration officials and corporate executives about China’s clean energy policies, those discussions have not led to the filing of any trade cases.

Section 301 of the 1974 trade law, the provision cited by the steelworkers’ union, gives legal standing to unions as well as corporations to file trade cases. The law provided the legal basis for threats of unilateral American trade restrictions in many confrontations with Japan and South Korea through the 1980s and early 1990s....

An executive summary of the USW's big petition is available on its website here.  As the NYT article makes clear, this is a pretty complex political and legal issue that requires far more than a Thursday-night blog post (especially with the NFL regular season kicking off in about an hour!).  So while I'm sure I'll have far more to say on this later, here are a few initial thoughts to tide you over.

(1) I must admit that I'm at a loss as to what the USW is really getting for its unknowing members' duesmoney here.  As the NYT article makes clear, Section 301 is not like Section 421 (the tires case) or antidumping and countervailing duty investigations (the other cases mentioned), which can result in the unilateral imposition of remedial US tariffs on Chinese products.  Instead, the very best outcome here is (i) the mutual resolution of the matter through bilateral consultations or (ii) a WTO case adjudicated by an independent panel of arbiters (unlike the, ahem, sympathetic US Department of Commerce or USTR).  And, trust me, a 5000+ page petition drafted by a big DC law firm is not cheap (well, not if you want it done right).  So what gives?  Is this the world's most boring PR stunt, or am I missing something?

(2) As the NYT states, the USW petition claims that Chinese subsidies have crippled American producers of several products, including light bulbs.  I guess the unions and their lawyers weren't expecting a front-page article in yesterday's Washington Post which essentially demonstrated that (i) US environmental regulations, not unfair Chinese trade practices, have killed the American incandescent lightbulb industry; and (ii) Chinese long-term investment and low labor costs, not subsidies, are the biggest reasons for China's success in the compact flourescent light (CFL) business.  Talk about bad timing!

(3) It's no secret to readers of this blog that the USW complaint reeks of hypocrisy, as the Obama administration has already thrown billions of taxpayer dollars at green manufacturers over the last 21 months in an attempt to make them globally competitive.  And it wouldn't be surprising at all for USTR to bring a WTO case against China's green subsidies, despite the fact that the US government's hands are also deep into the (green) cookie jar.  What is surprising, however, is that the USW petition freely admits that US companies (and their unions, natch) have received tons of government cheese:

China’s massive domestic subsidies to green technology are distorting trade and harming producers in other countries.  In its economic stimulus package, for example, China gave more than $216 billion to subsidize green technologies – more than twice as much as the U.S. spent in the sector and nearly half of the total “green” stimulus spent worldwide. These subsidies are helping Chinese producers ramp up production, seize market share, drive down prices, and put global competitors out of business. U.S. companies and firms have suffered the consequences as their exports are displaced, domestic market share erodes, prices plummet, and jobs are lost.

Obvious translation: Sure American manufacturers received $100 billion worth of green subsidies in order to crush their foreign competitors, but China's producers received lots more, and theirs have been far more effective!  No fair!   In essence, the USW is openly complaining that the Chinese are better cheaters than we are, and the union thus wants the US government to call in the WTO's referees in order to stop China's cheating.

Talk about chutzpah.

Exit question: if USTR ends up filing a WTO dispute on the USW's grounds, does that mean we'll have our first ever official case of "subsidy envy"?

(Cheesy answer: well, they don't call them "green" products for nuthin'!)

Just Who Exactly Pays When We Tax Chinese Imports?

One of this blog's frequent complaints about American protectionism or mercantilism is that, because almost 60 percent of all US imports capital goods and equipment, attacking imports actually ends up hurting a lot of US businesses that rely on those goods to remain globally competitive.  Continuing this theme comes some new information from the US-China Business Council (using FedGov data) about Chinese imports into the United States during the first half of 2010.  And as you can see, the Chinese ain't just selling us cheap t-shirts:

Category                                                          World   China

Food, Feeds, and Beverages                               4.9%     1.4%

Industrial Supplies & Materials                            32.7        8.6

Capital Goods, Excl. Auto                                  23.1      36.6

Auto Vehicles, Parts, and Engines                     11.9        2.9

Non-Food Consumer Goods, Excl. Auto              24.2      49.3

Imports, NES                                                     3.1        1.1

In short, so far in 2010 a little over 45% of all Chinese imports into the United States have been (i) industrial supplies and materials or (ii) non-automotive capital goods - i.e., inputs used by American companies.  So, when politicians like Sen. Chuck Schumer call for new tariffs on Chinese goods in order to "punish" China, it's critically important to remember that the pain will be felt by not only American families (through higher prices for food, clothing and other consumer goods), but also lots and lots of American businesses.  

And their many workers.

In fact, downstream US industries that consume these Chinese inputs typically employ a lot more Americans that the US raw material companies that would benefit from anti-China protectionism.  One of my favorite examples of this fact comes from an old Cato Institute study which showed that, at the time of publication, workers in steel-consuming industries outnumbered upstream steelworkers by a whopping 40-to-1.  (And that ratio has probably only gotten bigger as Big Steel has undergone a dramatic consolidation over the last decade.)  So when anyone talks about "saving American jobs" by taxing Chinese steel (or any other commodity), just remember that for every job those taxes might protect, more than 40 others are put at risk.  That's a bad deal in even the best of economic conditions, and it's highway robbery right now.

And just so we're totally clear here, the brutal costs of American tariffs on Chinese imports are not just limited to the prognostications of blathering free trade bloggers and their econo-geek stats.  They're very, very real, as made abundantly by this recent letter from an American printer who's trying to rally opposition to potential anti-dumping and countervailing duty tariffs on Chinese coated paper:

The U.S. International Trade Commission (ITC) will hold a hearing on Sept. 16 on the pending trade case involving coated free sheet (CFS) paper imports from China and Indonesia. If the ITC determines that U.S. paper manufacturers have been harmed by the practices of importers, it will apply additional duties to those imports.

I have been in the printing business for more than 25 years and I oppose duties in this case for many reasons. I believe the paper market has been competitive and domestic producers are not entitled to any special protections. Tariffs and duties are un-American and anti-competitive. As a printer, and as a customer, I want and need access to a wide range of products from many vendors to suit my customer’s needs and budget.

This is a critically important issue for the printing industry. It affects all of us because paper is our largest single input cost. If you agree additional tariffs in this case are unwarranted, your help is needed to verify facts about the competitive nature of the CFS paper market....

Sincerely,

Robert Johannes
Co-owner and General Manager
Parris Printing
Nashville, Tenn.

Johannes' website has more stories like his own and puts a very real face on the Chinese import data I've provided above.  And the lesson from all of this is breathtakingly simple: when you attack Chinese imports, you hurt American workers.

Hopefully enough of our elected officials get the picture.