04.30.09
Posted in Latin America, Negotiating, Obama Administration, Trade Policy at 4:20 am by Administrator
The recent Summit of the Americas in Trinidad marked a positive change in US attitudes towards Latin America. Much has been made of the interchanges with Hugo Chavez but the real story is that the Obama Administration has decided to approach Latin America as an equal rather than the big brother (bully?) to the north. I suspect that in the long run the new stance will do more to undercut the likes of Chavez than all the bully tactics of the Bush Administration.
The one country absent from the gathering of hemispheric leaders was Cuba. There have been some movements by Cuba on loosening the grip of the dictatorship since Raul Castro took over from his brother Fidel and Obama responded by allowing greater contact between families in the US and Cuba. Obama is wisely playing a shrewd negotiating game by giving small concessions. I think the small steps will lead to wide fissures that will result in a return to democracy. Whenever democracy arrives in Cuba, it take place in a relatively short time and from within (not caused by external pressure). The US embargo policy lost its effectiveness decades ago but it can still be traded away for reforms.
The last important result of the Summit of the Americas was that the Obama Administration placed itself squarely in the camp of preserving free trade. As we face the worst recession since the Great Depression, the lessons of how protectionist measures (Smoot-Hawley bill) prolonged the Depression have not been lost on the Obama Team. USTR Kirk announced that the US would not seek changes in the NAFTA agreement and would push for ratification of the draft Free Trade Agreements with Panama, Colombia and South Korea. These are all good agreements and we should urge our Representatives and Senators to approve the measures. In this global economic downturn, we need to reaffirm the need for open global markets that will promote economic recovery.
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12.29.08
Posted in China, Economic Analysis, Exchange Rates, Obama Administration, Trade Policy at 6:49 am by Administrator
The New York Time has been running an oustanding series entitled “The Reckoning” which explores the causes of the global economic crisis. I recommend the one published this week entitled “Chinese Savings Helped Inflate American Bubble” by Mark Landler. Landler pointed out how Chinese money (from the huge export surplus due to the fixed exchange rate policy) helped the US run a risky economic policy (sharply expansive fiscal policy fueled by large deficits at the same time as an expansive monetary policy from a low interest rate policy). The first to write about the phenomenon was a leading economist (guess who?). Landler starts off the article:
In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.
The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.
This colossal credit cycle could not last forever, he said. But in a global economy, the transfer of Chinese money to America was a market phenomenon that would take years, even a decade, to work itself out. For now, he said, “we probably have little choice except to be patient.”
Today, the dependence of the United States on Chinese money looks less benign. And the economist who proposed the theory, Ben S. Bernanke, is dealing with the consequences, having been promoted to chairman of the Fed in 2006, as these cross-border money flows were reaching stratospheric levels.
As I blogged previously, the US consumption binge was fueled with Chinese money. The trade policy of a fixed exchange rate allowed China to price its goods aggressively in the US markets. China however had to sterilize the inflationary effects of the export surplus by buying up the excess dollars. It then invested those dollars in Treasury securities, even though the Fed was keeping US rates low. (Other Asia export-oriented countries did similarly with their surpluses, although at a much smaller scale.)
The US made its share of economic mistakes as well. The Bush Administration started two wars without raising taxes, relaxed financial regulation and supervision and took advantage of the Alan Greenspan’s low interest rate policy. In the ensuing party, the banks gave away mortgages to just about anyone, causing a huge housing bubble. Unfortunately, US policy makers focused largely on the domestic US market, and thus they missed the “blinking red light.” The US inflation indicators excluded the wealth effects of higher stock indices and higher housing prices. Without those two components, inflation looked under control, especially in the consumer goods portion of the CPI where Chinese imports kept down prices. The little that US policy makers looked at international issues was with regard to the euro/dollar or yen/dollar relationship.
One lesson that has to be learned is the US is inextricably entwined in the world economy and that it no longer sets the agenda. It can play a leadership role if it chooses to participate in the game. The incoming Obama administration has the intellectual horsepower to make that mental shift. My New Year’s wish is that the Obama administration will formulate its economic policies with a global vision.
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07.31.08
Posted in China, Economic Analysis, Trade Policy at 4:12 am by Administrator
The media is reporting today that the latest round of WTO talks has (again) collapsed. Having been involved with trade talks since the mid 1970’s, my reaction is ‘it ain’t over until its over.’ Talks may string out over time but they eventually pick up where they left off.
That being said, today’s news comes at a difficult moment for the world economy. The US is finally accepting that it is in recession (housing prices nationwide down 16% yr/yr and where I live 35%) and there is a real credit crunch at this moment. Europe, also suffering from a bursting real estate bubble and run-up in oil prices, also faces a period of slow growth — perhaps even a downturn. It’s at times like these, that our political leaders have to take brave steps of keeping open and expanding markets despite domestic political pressures from declining industries.
It is particularly ironic, however, that China and India seem to bear the responsibility for the latest breakdown in the trade talks. Their economies have the most to gain and the most to lose in this period of economic uncertainty. Both have just emerged on the world stage as important exporting nations. With that newfound status playing as equals on the stage of the major industrialized countries, comes the responsibility to resist domestic political pressures to protect traditional markets. Having benefited from GSP and other programs, their products have had for years preferential access to developed country markets with little required in return. To go the next step, the countries will have to make meaningful concessions, particularly in agricultural markets. Ag markets worldwide have been the last to lose protection, but trade barrier reductions in this area that will benefit consumers worldwide, particularly as we see food commodity prices soar and shortages develop.
There is no question that overall the world is better off for having undertaken over a half-century of tariff and trade barrier reductions. We are a much more interdependent world and political relations between countries have strengthened as trade ties have increased. It’s always a hard sell to the public, but our political leaders know the benefits. And that is why we will have to complete these trade talks, eventually.
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07.02.08
Posted in China, Intellectual Property, Negotiating, Standards, Taxes & Tariffs, Trade Policy at 11:40 pm by Administrator
International Trade is again an issue in the Presidential campaign. John McCain was in Colombia this week and spoke out in favoring the Free Trade Agreement (FTA) with the country, calling Obama and the Democrats “protectionists”. The most famous FTA, the North American Free Trade Agreement (NAFTA) was a major issue in the 1992 campaign. H. Ross Perot pilloried NAFTA claiming there would be a “great sucking sound” as Mexico would siphon off jobs from the US to Mexico. That never occurred, and although there were never the major job gains that the George H.W. Bush promised, the US clearly has benefited from tremendous increase in bilateral trade.
How do FTAs work? The countries involved (this could be bilateral as in the case of Chile-US or multilateral as with Central America and the Dominican Republic –CAFTA-DR– with the US) negotiate on both tariff levels and codes of conduct. Most tariffs are reduced to zero, but inevitably some politically sensitive products are excluded (so most are “Almost Free Trade Areas”). On codes of conduct, the countries negotiate on issues like intellectual property, standards, financial services, etc. using the original NAFTA agreement and the WTO codes as a starting point. The resulting agreements have to be ratified by the respective legislative bodies. (In the US, under the negotiating authority, the House and Senate approve it on an up/down vote (no amendments allowed), as opposed to other international treaties which require a 2/3 vote of the Senate. Once the agreements are ratified the governments must pass implementing legislation to bring national law into conformity with the FTA. The FTAs also provide for consultations and dispute resolution mechanisms to ensure that both sides are living up the bargain.
For the US, the FTA is usually a great deal since the US has relatively low tariffs and already has strong laws that the codes cover. The pending agreement with Colombia is a case in point. Virtually all of Colombia’s exports enter the US duty free and Colombian companies already enjoy all of the protections in terms of intellectual property, investment guarantees etc. On the other hand, US exporters face considerable tariff and non-tariff barriers going into Colombia. Clearly the US has lots to gain from an agreement with our South American partner.
Why then is there such opposition from groups like unions and environmental groups? The unions may affected by job losses for union members who are protected from international competition. Frankly, with greater and greater trade, the marginal effect of an FTA with Colombia or South Korea on union jobs will be so small that it would be hard to detect by most statistical analyses. Nevertheless, manufacturing jobs are being outsourced (largely to countries with no FTAs, like China and India) and the unions are looking for scapegoats. On the environmental front, there is the concern that increased production will result in increased environmental damage. The FTA’s all contain environmental clauses, not as strong as some enviros would want, but considerably more that there are in the absence of FTAs (again China and India are prime examples.)
We are in an increasingly interconnected world and FTAs increase the interconnectedness. While there are some inevitable unintended results from FTAs, overall the global economy benefits.
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03.26.08
Posted in Economic Analysis, Oceania Cruise, Trade Policy at 12:28 pm by Administrator
It is certainly busy times for China. Flights across the Pacific remain full, despite the run-up in oil prices. Those on board the flights include businessmen and more importantly China is a burgeoning tourist destination (in fact a bargain compared to Europe in these days of the plummeting dollar).
From the airport to the port at Tianjin revealed the explosion in infrastructure spending. There were literally hundreds of apartment buildings or new factories under construction. The construction at the Tianjin airport zone continues, supplementing the dozens of existing structures.
The new apartment boom continues apace with 20 and 40 story structures rapidly going up. In the mean time, the shoddily constructed structures of the Mao era, particularly in Tianjin, are being abandoned and torn down.
The highway from Beijing to the port was chockablock with trucks carrying containers to the port for export to the US and the rest of Asia. There were almost as many trucks coming from the port. China has increasingly become an assembly location for consumer goods being designed in Korea and Japan. Both countries already have major automotive assembly operations in the country and the streets have brand names from US, Germany, Japan and Korea. (While I was Consul General in Hamburg, I had a tour at the VW factory in Wolfsburg and then VW CEO Piech underscored the growing importance of the Chinese market to their global operations.)
As we went down the highway, I was thinking about the volume of new construction and what might happen if there is a slowdown. These apartments are being built on the assumption that the economy will continue growing at a 10% growth path. There are two possible scenario for the slowdown – exports to the US fall as the US economy cools or China pulls the reins in on the economy after the Olympics. One only needs to remember the decade of the 90’s after the Japanese boom collapsed. So, how will China’s new found banking system deal with an eventual slowdown?
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03.14.08
Posted in Trade Policy at 4:06 am by Administrator
As the Democrat party race for the nomination has tightened, trade became a major issue in the debate. Hillary Clinton claims that the US needs to take a second look at NAFTA and negotiate a better deal. Barak Obama made similar statements while campaigning in Ohio, although an aide explained to a Canadian diplomat that the statements were just political posturing.
The bulk of the academic studies come to the conclusion that NAFTA had little impact on employment in the US and that there was a net contribution to economic growth. In fact, the greatest growth in imports came from China and the value increase in oil imports as crude prices have soared. In the traditional manufacturing areas of the mid-west, jobs have been dwindling for decades as new technologies have moved in and high-labor content has moved off-shore. Many manufacturing processes have been automated. I remember touring a Caterpillar factory in the 1990’s in which an entire line used to make transmission gears had been automated. What was surprising was not the absence of workers but the fact that the machine could consistently manufacture gears to tolerances that were 10x better than the best master lathesman could do. The sad fact is that most of these jobs would have gone in any case and the workers were caught in the middle. The frustration by the states which had lost many of these jobs without seeing new opportunities replace them focused on NAFTA. States like California which also lost manufacturing jobs were able to replace them with new jobs scarcely mention free trade arrangements.
I do think there is one issue about NAFTA and job losses that does bear discussion. Mexico opened its borders under NAFTA, particularly to agricultural products. The result was that traditional subsistence level farms in southern Mexico failed and the peasants fled to large cities in Mexico and to the US. Some studies of immigration in the US suggest that over 8 percent of the Mexican population has moved to the US in the past 15 years. Many African countries that have experienced civil conflicts have not displaced such a large percentage of their populations.
The US could have learned an important lesson from the EU with its expansions. The EU gave billions in development aid to the new entrants to build infrastructure and jobs to avoid large migrations of workers for jobs. This clearly worked with the expansion to Spain and Portugal and to a good extent with admission of the former East Bloc countries. The US should make part of its policy a determined policy to help out with economic development in Mexico and Central America to ensure that local citizens find good jobs at home where they will buy goods manufactured in the US.
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