Planet Not For Sale

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

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

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

The graph above tells a more complete story than picking out numbers for certain months, though. Here, it is obvious why the U.S.-China Business Council found that “in the first five months of this year, the number of workers at U.S. tire factories fell about 10% compared to the same period last year.”  It is simply because in the first half of 2009 employment in the tire sector was plummeting, so when the first few months of 2009 are averaged in (with their comparatively high employment levels), tire employment in early 2010 looks terrible by comparison.  However, the graph makes clear that by the end of the summer of 2009, tire employment began to stabilize, which happened about the same time that the tariffs were imposed.  Correlation certainly doesn’t indicate causation, but given the evidence it is quite possible that the tariffs played a role in the tire employment stabilization.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

Read the entire piece at the Huffington Post.

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

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

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

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

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

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

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

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

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

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

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

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

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

The report also includes particularly detailed remedies to problems like:

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

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En las actuales negociaciones sobre el cambio climático global se trata a las emisiones de gas de invernadero como una... [PDF]

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This paper reviews the disproportionate role of wealthy nations in contributing global GHG emissions, contrasted with the role of poorer... [PDF]

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