Erecting Trade Barriers: The Return of Smoot-Hawley
IER, March 24, 2009
Free trade is one of the greatest forces for positive change the world has ever seen. It opens new economic frontiers for American good and services, allows America access to the best the world has to offer, and promotes peace between nations. But free trade is coming under increasing assault as some in Washington, including the Obama administration, promote restricting free trade in the name of limiting carbon dioxide emissions. Secretary of Energy Steven Chu recently advocated using tariff duties as a “weapon” to restrict free trade, and some policymakers have also advocated increasing tariffs to “protect” some politically connected U.S. businesses.
These attacks are a serious threat to free trade and, if enacted, would deepen the recession. At the start of the Great Depression, Herbert Hoover made some bad economic decisions, and it appears President Obama is now considering following Hoover’s example.
In the early 1930s, in an effort to stem the economic downturn, President Hoover implemented massive deficit spending and tax hikes. This wrecked an already crippled economy. One of the worst episodes occurred when Hoover signed the infamous Smoot-Hawley tariff bill in 1930, which crippled international trade in the midst of the Depression. The Obama administration is considering a similar mistake in the form of “carbon tariffs” to prevent U.S. businesses from outsourcing to other countries after a cap-and-trade regulation makes it too economically difficult to do business in the United States. Just as in the 1930s, this Smoot-Hawley redux would punish American consumers at the worst possible time.
The Original Smoot-Hawley
Contrary to popular belief, Herbert Hoover was no fan of the free market or small government. After the stock market crashed in 1929, Hoover engaged in unprecedented peacetime deficit spending and other measures that increased the role of the federal government in the economy. Arguably, the most detrimental of his actions was the Smoot-Hawley Tariff Act of 1930, which sharply hiked taxes on thousands of imports.
Even conventional American history textbooks assign partial blame for the severity of the Depression to Hoover’s blow against international trade. In response to the legislation, European countries levied their own retaliatory tariffs and even repudiated their debts from World War I because (they claimed) the U.S. government was making it impossible for them to export goods to earn the dollars to pay back Uncle Sam’s loans.
Even without retaliation, a unilateral tariff increase makes Americans poorer. The gains to the workers in the “protected” domestic industry are more than offset by the loss to consumers who have to pay higher prices. A tariff is a tax on American consumers; the government says to its own citizens, “If you want to buy a product from a foreign producer, you have to make a side payment to the U.S. Treasury.” You don’t make a country richer by jacking up taxes on its own consumers.
International trade allows countries to specialize in their “comparative advantage,” or their areas of relative expertise. It would be catastrophic if everyone had to grow his own food, sew his own clothes, and drill his own cavities. We all benefit tremendously from the ability to specialize in occupations at which we are better than our peers, and then trade with each other.
The same principle applies to entire countries, which are simply aggregates of the individuals living in them. Because of differences in resource endowments, industrial infrastructure, weather, and the skills of the workforce, it is much more efficient for certain regions of the world to concentrate on a few key items and export them to other regions. When the government raises tax barriers, it interferes with this process and makes everyone poorer on average.
Ironically, when Herbert Hoover raised U.S. tariffs, he didn’t simply hurt American consumers, but he also crippled American exporters. Ultimately, other nations pay for their imports through their own exports. If Uncle Sam makes it more difficult for foreigners to sell their goods to Americans, then those same foreigners will not have the ability to buy goods produced by Americans. Indeed, total U.S. exports dropped from $7.2 billion in 1929 to $2.5 billion in 1932,[i] although some of this fall was no doubt due to the general price decline and the sharp drop in economic activity.
Smoot-Hawley II
True to form, the Obama administration—under the guise of fighting climate change—is testing the waters with new restrictions on imports. Specifically, lawmakers on the House Energy and Commerce Committee are considering imposing “carbon tariffs” to prevent foreign nations from gaining a competitive advantage vis-à-vis U.S. producers who are burdened with a forthcoming cap-and-trade regime. The idea is that the U.S. government would slap a huge “compensatory” tax on imports that were produced in foreign nations that do not impose carbon legislation on their manufacturers.
This is a very disturbing trend. Regardless of whether the World Trade Organization deems such “carbon tariffs” to be an acceptable infringement on trade, U.S. and European carbon tariffs will spawn another destructive trade war, just as the world suffered in the early 1930s. (If the WTO rules against the carbon tariffs, then the besieged countries will have the right to levy their own retaliatory tariffs, and if the WTO signs off on them, other countries will then find some excuse for levying tariffs to compensate themselves for the “overconsumption” of the Western nations or some such sin against the environment.)
Even if the threat from man-made climate change is as serious as some scientists claim, this fact would not overturn the centuries of work done by economic scientists. We know from both theory and history that raising trade barriers in the middle of a severe worldwide recession is a terrible policy. We also know from theory and history that government central planning does not work. When the technocrats reorder the economy, deciding which firms will survive and which prices are too high or too low, the results are disastrous. It doesn’t matter whether the justification is “fighting the Depression” (as in the 1930s) or “fighting climate change” (as in today’s discussions). Either way, central planning will wreck the economy, and it won’t even achieve its ostensible goals.
Conclusion
It is encouraging that the politicians are finally taking seriously the effects that cap-and-trade would have on U.S. manufacturers. The fact that lawmakers are finally admitting that the new burden would force many American firms to lay off domestic workers and relocate abroad is a positive development in the highly emotional debate about carbon dioxide regulations. But instead of abandoning their plans for cap-and-trade, the proposed solution of levying a fresh round of new taxes on American consumers who are merely trying to buy the best products at the lowest prices just adds insult to injury.
Notes
[i] Burton Folsom, Jr., New Deal or Raw Deal? How FDR’s Legacy Has Damaged America (New York: Threshold Editions, 2008), p. 31.
Showing posts with label trade. Show all posts
Showing posts with label trade. Show all posts
Wednesday, March 25, 2009
Tuesday, March 17, 2009
China Gains Key Assets In Spate of Purchases
China Gains Key Assets In Spate of Purchases. By Ariana Eunjung Cha
Oil, Minerals Are Among Acquisitions Worldwide
Washington Post, Tuesday, March 17, 2009; Page A01
SHANGHAI -- Chinese companies have been on a shopping spree in the past month, snapping up tens of billions of dollars' worth of key assets in Iran, Brazil, Russia, Venezuela, Australia and France in a global fire sale set off by the financial crisis.
The deals have allowed China to lock up supplies of oil, minerals, metals and other strategic natural resources it needs to continue to fuel its growth. The sheer scope of the agreements marks a shift in global finance, roiling energy markets and feeding worries about the future availability and prices of those commodities in other countries that compete for them, including the United States.
Just a few months ago, many countries were greeting such overtures from China with suspicion. Today, as corporations and banks in other parts of the world find themselves reluctant or unable to give out money to distressed companies, cash-rich China has become a major force driving new lending and investment.
On Feb. 12, China's state-owned metals giant Chinalco signed a $19.5 billion deal with Australia's Rio Tinto that will eventually double its stake in the world's second-largest mining company.
In three other cases, China has used loans as a way of securing energy supplies. On Feb. 17 and 18, China National Petroleum signed separate agreements with Russia and Venezuela under which China would provide $25 billion and $4 billion in loans, respectively, in exchange for long-term commitments to supply oil. And on Feb. 19, the China Development Bank struck a similar deal with Petrobras, the Brazilian oil company, agreeing to a loan of $10 billion in exchange for oil.
On Saturday, Iran announced that it had signed a $3.2 billion agreement with a Chinese consortium to develop an area beneath the Persian Gulf seabed that is believed to hold about 8 percent of the world's reserves of natural gas.
Even as global financial flows have slowed sharply overall, China has dramatically stepped up its outbound investment. In 2008, its overseas mergers and acquisitions were worth $52.1 billion -- a record, according to the research firm Dealogic. In January and February of this year, Chinese companies invested $16.3 billion abroad, meaning that if the pace holds, the total for 2009 could be nearly double last year's.
Worldwide, the value of mergers and acquisitions transactions so far this year has dropped 35 percent to $384 billion. By comparison, the United States had $186.2 billion in outbound mergers and acquisitions in 2008 and Japan had $74.3 billion.
China's state-run media outlets are calling the acquisition spree an opportunity that comes once in a hundred years, and analysts are drawing parallels to 1980s Japan.
"That China started investing or acquiring some overseas mineral resources companies with relatively low prices during the global economic crisis is quite a normal practice. Japan did the same thing in its prime development period, too," said Xu Xiangchun, consulting director for Mysteel.com, a market research and analysis firm.
It's not just Chinese corporations that are taking advantage of the economic crisis to help others while helping themselves.
The Chinese government also has come to the rescue of ailing countries, such as Jamaica and Pakistan, that it wants as allies, extending generous loans. Even Chinese consumers are taking their money abroad. In a shopping trip last month organized by an online real estate brokerage, a group of 50 individual investors from China traveled to New York, Los Angeles and San Francisco to purchase homes at prices that have crashed since the subprime crisis.
"As soon as we launched the project, we had 100 people registered and ready to go," said Dai Jianzhong, chief executive of SouFun Holdings, which organized the trip. "Now the number has reached 400. Apparently, the American real estate market has a great appeal to Chinese buyers."
China's Commerce Ministry organized a similar shopping expedition -- but for Chinese companies to visit foreign companies -- the week of Feb. 25. Commerce Minister Chen Deming took with him about 90 executives, who signed contracts worth about $10 billion in Germany, $400,000 in Switzerland, $320 million in Spain and $2 billion in Britain. The deals were mostly for the purchase of goods, including olive oil, 3,000 Jaguars and 10,000 Land Rovers.
The Commerce Ministry said Monday that it intends to send more investment missions abroad this year. Although details are still being worked out, the itineraries will probably include the United States, Japan and Southeast Asia, the ministry said.
Foreign automakers may be next on China's acquisitions list.
On Feb. 23, Weichai Power, a diesel engine company, said it would spend about $3.8 million to acquire the products, technology and brand of France's Moteurs Baudouin, which designs and manufactures marine propulsive equipment such as engines and propellers.
That was a relatively small deal, but Chen Bin, director general of the National Development and Reform Commission's Department of Industry, hinted that larger acquisitions may be in the works. He noted on the sidelines of a news conference on the economy late last month that overseas car companies are facing cash difficulties at the same time their Chinese counterparts "need their technology, brands, talent and sales networks."
"It will be a very big challenge for Chinese companies to stabilize the operations of foreign automakers and to maintain growth," Chen acknowledged, according to the official People's Daily, but he added that if the companies decide to acquire such assets, "the government will support them."
The one country that appears conspicuously absent from China's corporate bargain-hunting spree is the United States.
Many Chinese investors are still stung by the memory of China National Offshore Oil's 2005 attempt to buy a stake in the U.S. energy company Unocal. The deal fell apart after U.S. lawmakers expressed concern about the national security implications of China controlling some of the country's oil resources.
Xiong Weiping, president of Chinalco, whose bid for a larger stake in Rio Tinto is China's biggest outbound investment to date, has taken measures to address concerns as scrutiny of that deal has increased. The deal will be put to a shareholder vote in May or June and must also be approved by Australia's Foreign Investment Review Board.
At a news briefing in Sydney on March 2, Xiong assured the country that Chinalco is not seeking a majority share of the mining giant and that its management and corporate strategy would not change. Xiong emphasized that "the transaction will in no way lead to any control of the natural resources of Australia."
Zha Daojiong, an energy researcher at Peking University, said Chinese companies feel they may be discriminated against in the United States because of the mistaken perception that they are all state-owned or state-directed.
"Foreigners question these companies' intentions and tend to link their moves with government instructions," Zha said, "but I should say it is really hard to tell whether this is true nor not."
Researchers Wang Juan and Liu Liu in Beijing contributed to this report.
Oil, Minerals Are Among Acquisitions Worldwide
Washington Post, Tuesday, March 17, 2009; Page A01
SHANGHAI -- Chinese companies have been on a shopping spree in the past month, snapping up tens of billions of dollars' worth of key assets in Iran, Brazil, Russia, Venezuela, Australia and France in a global fire sale set off by the financial crisis.
The deals have allowed China to lock up supplies of oil, minerals, metals and other strategic natural resources it needs to continue to fuel its growth. The sheer scope of the agreements marks a shift in global finance, roiling energy markets and feeding worries about the future availability and prices of those commodities in other countries that compete for them, including the United States.
Just a few months ago, many countries were greeting such overtures from China with suspicion. Today, as corporations and banks in other parts of the world find themselves reluctant or unable to give out money to distressed companies, cash-rich China has become a major force driving new lending and investment.
On Feb. 12, China's state-owned metals giant Chinalco signed a $19.5 billion deal with Australia's Rio Tinto that will eventually double its stake in the world's second-largest mining company.
In three other cases, China has used loans as a way of securing energy supplies. On Feb. 17 and 18, China National Petroleum signed separate agreements with Russia and Venezuela under which China would provide $25 billion and $4 billion in loans, respectively, in exchange for long-term commitments to supply oil. And on Feb. 19, the China Development Bank struck a similar deal with Petrobras, the Brazilian oil company, agreeing to a loan of $10 billion in exchange for oil.
On Saturday, Iran announced that it had signed a $3.2 billion agreement with a Chinese consortium to develop an area beneath the Persian Gulf seabed that is believed to hold about 8 percent of the world's reserves of natural gas.
Even as global financial flows have slowed sharply overall, China has dramatically stepped up its outbound investment. In 2008, its overseas mergers and acquisitions were worth $52.1 billion -- a record, according to the research firm Dealogic. In January and February of this year, Chinese companies invested $16.3 billion abroad, meaning that if the pace holds, the total for 2009 could be nearly double last year's.
Worldwide, the value of mergers and acquisitions transactions so far this year has dropped 35 percent to $384 billion. By comparison, the United States had $186.2 billion in outbound mergers and acquisitions in 2008 and Japan had $74.3 billion.
China's state-run media outlets are calling the acquisition spree an opportunity that comes once in a hundred years, and analysts are drawing parallels to 1980s Japan.
"That China started investing or acquiring some overseas mineral resources companies with relatively low prices during the global economic crisis is quite a normal practice. Japan did the same thing in its prime development period, too," said Xu Xiangchun, consulting director for Mysteel.com, a market research and analysis firm.
It's not just Chinese corporations that are taking advantage of the economic crisis to help others while helping themselves.
The Chinese government also has come to the rescue of ailing countries, such as Jamaica and Pakistan, that it wants as allies, extending generous loans. Even Chinese consumers are taking their money abroad. In a shopping trip last month organized by an online real estate brokerage, a group of 50 individual investors from China traveled to New York, Los Angeles and San Francisco to purchase homes at prices that have crashed since the subprime crisis.
"As soon as we launched the project, we had 100 people registered and ready to go," said Dai Jianzhong, chief executive of SouFun Holdings, which organized the trip. "Now the number has reached 400. Apparently, the American real estate market has a great appeal to Chinese buyers."
China's Commerce Ministry organized a similar shopping expedition -- but for Chinese companies to visit foreign companies -- the week of Feb. 25. Commerce Minister Chen Deming took with him about 90 executives, who signed contracts worth about $10 billion in Germany, $400,000 in Switzerland, $320 million in Spain and $2 billion in Britain. The deals were mostly for the purchase of goods, including olive oil, 3,000 Jaguars and 10,000 Land Rovers.
The Commerce Ministry said Monday that it intends to send more investment missions abroad this year. Although details are still being worked out, the itineraries will probably include the United States, Japan and Southeast Asia, the ministry said.
Foreign automakers may be next on China's acquisitions list.
On Feb. 23, Weichai Power, a diesel engine company, said it would spend about $3.8 million to acquire the products, technology and brand of France's Moteurs Baudouin, which designs and manufactures marine propulsive equipment such as engines and propellers.
That was a relatively small deal, but Chen Bin, director general of the National Development and Reform Commission's Department of Industry, hinted that larger acquisitions may be in the works. He noted on the sidelines of a news conference on the economy late last month that overseas car companies are facing cash difficulties at the same time their Chinese counterparts "need their technology, brands, talent and sales networks."
"It will be a very big challenge for Chinese companies to stabilize the operations of foreign automakers and to maintain growth," Chen acknowledged, according to the official People's Daily, but he added that if the companies decide to acquire such assets, "the government will support them."
The one country that appears conspicuously absent from China's corporate bargain-hunting spree is the United States.
Many Chinese investors are still stung by the memory of China National Offshore Oil's 2005 attempt to buy a stake in the U.S. energy company Unocal. The deal fell apart after U.S. lawmakers expressed concern about the national security implications of China controlling some of the country's oil resources.
Xiong Weiping, president of Chinalco, whose bid for a larger stake in Rio Tinto is China's biggest outbound investment to date, has taken measures to address concerns as scrutiny of that deal has increased. The deal will be put to a shareholder vote in May or June and must also be approved by Australia's Foreign Investment Review Board.
At a news briefing in Sydney on March 2, Xiong assured the country that Chinalco is not seeking a majority share of the mining giant and that its management and corporate strategy would not change. Xiong emphasized that "the transaction will in no way lead to any control of the natural resources of Australia."
Zha Daojiong, an energy researcher at Peking University, said Chinese companies feel they may be discriminated against in the United States because of the mistaken perception that they are all state-owned or state-directed.
"Foreigners question these companies' intentions and tend to link their moves with government instructions," Zha said, "but I should say it is really hard to tell whether this is true nor not."
Researchers Wang Juan and Liu Liu in Beijing contributed to this report.
Friday, March 13, 2009
Taiwan and China Make Strides: Can America Respond?
Taiwan and China Make Strides: Can America Respond? By Rupert Hammond-Chambers, President, U.S.-Taiwan Business Council
The Brookings Institution, Mar 12, 2009
On March 22, 2008, Taiwan voters went to the polls and declared a return to Kuomintang (KMT) rule. The KMT’s Ma Ying-jeou won a landslide election against Frank Hsieh of the incumbent Democratic Progressive Party (DPP), and the end result was rarely in question as voter frustration over DPP rule – accumulated over 8 years – spilled over into a convincing 58.45 percent victory for Ma and his running mate Vincent Siew.
Ma’s contention that Taiwan’s economy had fared poorly from 2000-2008 played well to Taiwan’s electorate - somewhat unfairly, as in fact Taiwan enjoyed average annual GDP growth of 3.63 percent during that period, according to the National Statistics Database maintained by Taiwan’s Directorate-General of Budget, Accounting and Statistics (DGBAS). But voter perception was centered on missed opportunities and a Taiwan that had mostly stood still for eight years while its regional competitors advanced their interests.
But Ma won the election also by highlighting the angst that former President Chen Shui-bian had caused Taiwan’s most important interlocutors – China and the United States. China was never interested in offering President Chen a dialogue during his 8 years as president of Taiwan, other than under terms and conditions that ran contrary to DPP principles. However, President Chen’s diplomatic isolation was exacerbated by his rhetoric that so often caught policymakers in Beijing and Washington off guard. This left the Chinese increasingly concerned about Chen’s intentions – even in the face of obvious constitutional limitations on his power – and left the U.S. frustrated both with constant Chinese harping and Chen’s erratic behavior. This tense situation appeared to cast a shadow over much else that the Bush administration was attempting to accomplish in its relationship with China.
Fairly or unfairly, the picture that evolved – particularly after Chen’s second election victory in March of 2004 – was of a Taiwan actively undermining peace and security in north Asia, and by extension hurting its own commercial and diplomatic interests. This perception neatly teed up candidate Ma’s campaign, where he pitched Taiwan voters on the importance of returning to the safe and steady hands of the technocratic KMT and of addressing Taiwan’s core economic, domestic and foreign relationships.
Ma’s Campaign Commitments
Candidate Ma’s general campaign pitch was a return to balanced and experienced rule under the KMT. He focused acutely on the perception that Taiwan had been treading water during a period of global economic expansion, thereby missing opportunities to grow global markets as well as to reform domestically. In addition, he noted that Taiwan’s global diplomatic isolation had increased under the DPP, and contended that the course of confrontation with China and the U.S. was unsustainable. Ma argued that it was essential to reach a new accommodation with China that would allow for meaningful representation of Taiwan in global organizations – including but not limited to the World Health Assembly (WHA).
Candidate Ma’s choice for vice president spoke volumes for his campaign’s focus on the economy. Vincent Siew is a former premier and was Minister of Economic Affairs under former president Lee Teng-hui. His role would be to spearhead both comprehensive domestic economic reform, including further deregulation of services like banking; and to take charge of implementing the i-Taiwan 12 projects – a large infrastructure package valued at approximately US$117 billion over 8 years. In addition, Vincent Siew is strongly identified with the concept of a Cross-Strait Common Market, an idea that he formulated and championed over several years. Ma even incorporated this initiative into his election manifesto as a central goal in a plan to harmonize commercial activity between Taiwan and what is now Taiwan’s largest market, China.
Cross-Strait economic engagement had another equally important deliverable for the Ma camp; it was a natural platform to reduce tensions and map a more reasonable path for increased cooperation with China, while staving off the need to engage on pricklier matters concerning sovereignty. The Ma campaign promised that this issue, often and rather simplistically viewed through the logistical challenge of flying between Taiwan and China, was to be tackled early on through an incremental resumption of cross-Strait transportation links, coupled with more comprehensive agreements on air travel and mail. Ma and Siew also saw an increase in mainland tourists visiting the island as an important objective, given their potential impact on a broad cross-section of Taiwan’s economy.
During his campaign, Ma also articulated the need to improve relations with the United States, with which ties had soured terribly since about 2003. Chen’s erratic behavior, coupled with a Bush team more interested in improving relations with China, made for a difficult set of circumstances and an increasingly reflexive urge to press Taiwan into a box. While this attitude was initially focused on Chen and his colleagues, it drifted into an overall view of Taiwan that drew no distinctions. In the end, Taiwan could do no right. Ma noted that Taiwan-U.S. relations would likely improve simply as a function of improved Taiwan relations with China. However, he also put great weight on improved communications between Taipei and Washington, and the need to avoid surprising and confrontational actions.
Policies & Developments
President Ma hit the ground running when he assumed office on May 20, 2008.
The newly appointed chairman of the Strait Exchange Foundation (SEF), Chiang Pin-kung, went to China in mid-June of 2008 to consummate an initial deal on cross-Strait transportation as promised by the Ma campaign. The deal allowed for an expanded charter flight schedule, based on the holiday flight framework already in place. While the agreement included a limited number of direct routes on weekends only – and involved aircraft flying over Hong Kong airspace but not alighting – the agreement also stipulated that both sides would work toward normalized passenger and cargo air traffic with direct routes. This early triumph was seen in all three capitals as a positive sign and raised hopes that a more sustainable relationship might be within their grasp.
However, the Ma government had not seen cross-Strait transportation links as the only low-hanging fruit. To remain committed to his election platform, Ma quickly expanded his SEF - Association for Relations Across the Taiwan Straits (ARATS) dialogue to include:
· Opening currency exchanges for Chinese Yuan/New Taiwan Dollar trade
· Loosening of capital restriction for Chinese investment in Taiwan equities, companies, and property
· An agreement on tourists that hypothetically could dramatically increase the number of Chinese citizens visiting Taiwan daily
· Signing agreements for direct cross-Strait sea, air, and mail travel
· Simplifying procedures for Chinese professionals to visit and work for limited periods in Taiwan.
In addition, the Ma administration launched negotiations to allow Chinese students to visit and study in Taiwan, and a whole host of smaller initiatives have been negotiated and are in the early stages of implementation. This is a substantive and impressive body of work for approximately 8 months of dialogue. That said, Ma upped the ante substantially in late February when he and his colleagues responded positively to Chinese President Hu Jintao’s offer to negotiate and sign a Comprehensive Economic Cooperation Agreement (CECA) with Taiwan, now referred to on the island as the Economic Cooperation Framework Agreement (ECFA).
Despite this improvement in cross-Strait relations, Ma did not see the early gains he might have hoped for with the United States. By President Bush’s last year in office, the fact that Chen Shui-bian was no longer president of Taiwan was immaterial. America’s positive relationship with China was viewed as an important part of President Bush’s legacy, and the change in leadership in Taipei did not automatically change Taiwan’s value in the equation. President Ma was treated with minimal cordiality, and as he left office President Bush’s penultimate substantive Taiwan action – an October 3, 2008 decision to notify several weapons systems to Congress – created more confusion and frustration over the breakdown in the arms sales process on the U.S. side. Thus America’s defense relationship with Taiwan was bequeathed with unaddressed platforms and a broken arms sales process, a mess that President Obama and his colleagues will have to address.
China’s Role
From China’s perspective, Taiwan’s democratic transition has been decidedly unpleasant. Chen Shui-bian’s actions and statements were deemed highly provocative, and he replaced the reviled Lee Teng-hui whose late 1990s statements had made him persona non-grata with Beijing. So China stewed for the past eight years, happy only when President Bush or one of his colleagues made a statement or undertook an action or non-action that China saw as contrary to Taiwan’s interests, or beneficial to China at Taiwan’s expense. While the short term approach of demonizing Taiwan presidents might have played well in Beijing, it was having a profoundly negative effect on the view of China from Taiwan.
This was not China’s “Taiwan policy” per se. China mostly understood that Taiwan’s democratization and demographic changes were undermining what support existed on Taiwan for unification with China. A sustained churlish attitude toward the island would only accelerate these trends, making the possibility of resolution of the fundamental dispute that much more remote. Therefore, Ma’s election placed great import on the need to put China’s relations with Taiwan back on a path that at least held the possibility of peaceful resolution. President Hu and his civilian colleagues viewed Ma’s policy of economic engagement as a positive and reasonable momentum builder for relations. So under the guidance of ARATS’s chairman Chen Yunlin, China responded substantively to Ma’s outreached hand.
In a December 31, 2008 speech commemorating the 30th anniversary of an important Taiwan policy speech, China’s President Hu expanded the possibilities in bilateral cross-Strait relations when he made a six point proposal that included, 1) scrupulously abiding by the One-China principle and enhancing political mutual trust; 2) strengthening commercial ties, partly though negotiating an economic cooperation agreement; 3) promoting personnel exchanges of personnel between the two sides; 4) highlighting common cultural links; 5) allowing Taiwan’s “reasonable” participation in international organizations and 6) the negotiation of a peace agreement.
The notion of China’s “One-China Principle” – that there is only one China, it is the People’s Republic of China, and Taiwan is a part of it – is anathema to a majority of the people of Taiwan. According to the latest Mainland Affairs Council poll, 91 percent of Taiwan citizens support the status quo with less than 10 percent in favor of unification with the mainland. But President Hu’s Points 2 and 5 were well received in Taiwan by the current leadership and its supporters, if not by the entire population. If his policies are going to enjoy majority support in Taiwan, Ma must be seen domestically to be making progress with China and he needs for China to be viewed as making real concessions. As argued in his election campaign, Ma places great stock in maximizing Taiwan’s economic relationship with China while reconstituting Taiwan’s global diplomatic position in a more sustainable and accommodating framework under improved relations with China. The overall outcome should also meet another of Ma’s campaign commitments – improved security through increased economic opportunity as well as a reduction in the overall threat from China after 6 plus years of heightened tension. However, as noted below China’s continued massive military modernization efforts and the degree to which their efforts are focused on Taiwan remains a major barrier to sustainable security improvements in the Taiwan Strait.
Evidence of improved relations are already manifest, with clear progress on economic cooperation but with nascent diplomatic progress as well. A small but positive action was Taiwan’s inclusion in the International Health Regulations (IHR) under the World Health Organization (WHO), which will allow the island to contact the body directly. That said, a far larger test will come this spring with Taiwan’s annual attempt to gain observer status at the World Health Assembly (WHA). It’s an important moment for China, one which it must seize both to serve its own interests on Taiwan through an improved view of its attitude, as well as to reinforce Ma’s ability to maintain domestic support for cross-Strait engagement by making a substantive concession.
Finally, it is important to highlight an inconsistency in China’s recent attitude toward Taiwan and a major challenge for the U.S. While Beijing’s civilian leadership continues to frame a positive path for Taiwan-China relations, China’s military modernization continues unabated and actively undermines these gains. There has been no Chinese slowing in defense spending, training, or deployment of forces directed at Taiwan. This marks a stark contrast to the political and economic efforts, and creates a genuine conundrum for Ma as well as for the Obama administration. How do they maintain positive engagement while discouraging China from pursuing such a provocative military posture?
President Obama should certainly use resumed military-to-military exchanges to impress upon the People’s Liberation Army that there is a direct correlation between Chinese force modernization and U.S. support for Taiwan’s defense, including arms sales. In addition, continued material support for President Ma’s move to an all volunteer force, coupled with a more integrated and modern military, will require continued supplies of modern weaponry. This support will positively underpin Taiwan’s engagement with China and will provide continued legitimacy to Ma’s efforts – a dynamic Ma himself understands well, as he continues to make the case for replacement fighters through a second tranche of F-16s, Black Hawk helicopters, and other modern equipment.
The Global Recession & Trade Policy
The Economist Intelligence Unit (EIU) recently noted that of the 55 major global economies tracked in detail, Taiwan has been hit harder than almost anyone else by the global downturn. Based on industrial production alone, Taiwan’s output has fallen by 32 percent in the 12 months to December 2008. GDP figures released on February 18, 2009 showed that Taiwan’s economy contracted by approximately 8.4 percent in Q4 2008, basically wiping away the last two and a half years of economic expansion. Taiwan’s DGBAS is predicting economic contraction of approximately 3 percent in 2009, while the aggregate analyst prediction is closer to 6 percent. Taiwan exports 70 percent of its industrial production, and with its main markets America, China, Japan, and the European Union all experiencing degrees of economic distress, Taiwan is affected acutely. This has added greatly to the urgency of Ma’s domestic economic reform, liberalization, and trade liberalization agenda.
The Ma administration has responded to the crisis, albeit with mixed results to date. The Taiwan government has issued spending vouchers worth approximately US$100 per citizen, vouchers intended to act as a catalyst for domestic demand. Taiwan’s Central Bank of China (CBC) has cut rates aggressively – 7 times since last September – with the latest cut bringing Taiwan interest rates to 1.25 percent. The government has also hastened to implement the 12 i-Taiwan infrastructure projects. In addition, it has allowed Taiwan’s currency to continue to depreciate against its major trading partners, down to a 6 year low against the U.S. dollar. These actions, except for the currency depreciation, are commensurate with those of other major global economies. That said, Taiwan has a high savings rate, and nothing suggests that Taiwan citizens are going to drop the savings habit in order to increase domestic demand for goods and services. Therefore, it seems likely that the Taiwan government will combine a loose economic policy with infrastructure investment, and then wait for its major trading partners to recover.
Taiwan did achieve two major trade policy goals over the past quarter, one being its signing of the Agreement on Government Procurement (GPA) at the World Trade Organization (WTO) in December, and the second being its removal from the United States Trade Representative’s Special 301 Watch List for IPR violators in mid January of 2009. With the GPA, President Ma has signed an agreement that will give Taiwan companies access to government procurement contracts in over 40 global economies, thereby increasing market access dramatically. It will also open Taiwan’s market to increasing competition and competitiveness, as well as to new foreign direct investment. The removal from USTR’s Special 301 Watch List is the culmination of 4-5 years of hard work, and considerable credit must also be given to the Chen administration for implementing many of the policies that resulted in this positive development. While Taiwan’s IPR regime is now well placed to manage the bulk of the challenges, IPR theft remains a massive global problem. Taiwan will be looked to for leadership, particularly in Asia.
President Ma’s economic team views renewed efforts to liberalize Taiwan’s major trading markets as essential to recovery and increased future growth. It is also a way to break out of its current economic isolation, absent of any meaningful role for Taiwan in bilateral and multilateral regional trade liberalization efforts. The Ma government views the ECFA not as a goal unto itself, nor only in the narrow prism of Taiwan-China relations, but as a part of its overall global trade strategy. Both the Taiwan government and businesses are particularly concerned about the impact of ASEAN +1 and ASEAN +3 on Taiwan’s competitiveness in the China market. President Ma also believes that improved Taiwan-China relations and the willingness of China to engage in free trade negotiations will assist Taiwan in breaking out of its trade liberalization isolation and allow it to sign FTAs with the U.S., Japan, Singapore, and other major trading partners. China’s offer of an ECFA has been well received, but it is but a part of what should also be an appropriate U.S. and pan-Asian response to Taiwan’s efforts to liberalize its markets in the shadow of improved Taiwan-China relations.
At this time, Taiwan has a Trade and Investment Framework Agreement (TIFA) with the United States that has acted as a periodic platform for discussing bilateral economic issues. This mechanism is a modest foundation that allows America and its trading partners to manage the myriad trade issues that characterize large commercial relationships. That said, for the second time in 5 years America has frozen the TIFA – in this instance due to its displeasure over Taiwan’s restrictions on imports of American beef. While beef, and indeed rice and pork too, are important export commodities for America, they represent a relatively small percentage of our bilateral trade – in the case of beef it’s considerably less than 1 percent of bilateral trade. The Bush administration felt that it had been misled over commitments to re-open aspects of the beef market (some beef is already being sold), and shut the TIFA process down in 2008 until those commitments were fulfilled. Now we must wait until the Obama administration trade team is confirmed and in place before we can ascertain its intentions on the TIFA freeze. Whatever the outcome, however, America’s last foray into such a freeze – in 2003-2004 over IPR – was generally viewed to have been a failure. Furthermore, as in the case of last year’s arms sales freeze, there are no other cases of global partners being treated in this fashion.
At such time as beef imports resume, or President Obama’s trade team decides to resume the TIFA prior to such a resolution, Taiwan and the Obama administration must look for ways to allow the relationship to mature. America has treated Taiwan in uniquely punitive ways, to the increasing detriment of our interests in this major market. If we cannot find a way to respond to Taiwan and China’s detente, we run the very real risk of adding wind to the economic impetuses that are pushing this top 10 U.S. market further into the purview of China’s economic embrace. A good place to start would be adding consistency to our approach to Taiwan and begin treating it the same way we do our other major trading partners, even when we disagree. In the longer term, we need to start representing our equities more assertively with Taiwan, not, as in the past, in reaction to Beijing’s displeasure on any number of issues but in substantive strategic ways such as free trade agreements. America needs to look at what it can accomplish in the light of improved Taiwan-China relations.
The subject of FTAs at this time may seem ridiculous given the lack of support for such agreements amongst America’s ruling party. However, it is likely that as President Obama grows more comfortable in his new post he’ll look to shape a trade policy consensus that will allow his government to support global trade liberalization. This will be particularly needed in Asia, which continues to remove barriers to trade and accelerate integration. In the absence of U.S. leadership, or even basic participation, this process will continue to center around the China market at the expense of our own. If China and Taiwan see fit to negotiate a free trade agreement then what possible reason should America have for not doing likewise with Taiwan?
In addition, it is certainly time for the U.S. to return to the policy of sending economic cabinet officers to Taiwan annually to boost our interests in the market. This policy was started by President Bush in 1992 with the visit of then United States Trade Representative Carla Hills, and continued throughout the 1990s under President Clinton. While the recent Bush administration had legitimate concerns over how President Chen would react to the presence of such a high ranking U.S. official, now is the time to re-engage this policy. Other countries see high-level interaction with Taiwan as in their economic interest: the U.K.’s commerce secretary visited Taipei within a month of Taiwan’s acceptance of GPA commitments, for example. In light of Ma’s commitment to spend almost US$120 billion on infrastructure in the coming 8 years, the U.S. should also be making every effort to promote its own companies in the market.
What’s Next?
For Taiwan, like with the United States, there are considerable unknowns associated with this latest economic recession. While Taiwan’s financial institutions are not burdened to the same extent with the toxic assets weighting down our own institutions, the notion that Asian economies have decoupled from the U.S. and Europe is nonsense. Asia shares our economic pain, and cannot hope to launch a sustained recovery until America and Europe turn the corner and its export markets return. In the meantime, President Ma will continue to focus on what he can control – namely domestic efforts to increase investment, along with external efforts to open new markets or address trade-diverting developments such as FTAs from which Taiwan has been excluded.
The CECA, or Comprehensive Economic Cooperation Agreement as referred to by President Hu in his recent speech, with China has very real legs, and we can expect to hear a great deal more on this matter as Ma moves it through the Taiwan court of public opinion and shapes a policy response that P.K. Chiang can take into SEF-ARATS negotiations. Indeed, President Ma has already made a significant adjustment by changing the name with which Taiwan will refer to such an agreement to Economic Cooperation Framework Agreement (ECFA). This adjustment was made in response to early domestic criticism of the effort and the similarity of the CECA name to Hong Kong and Macau’s Closer Economic Partnership Agreement (or CEPA) with China. I believe that Ma has made the decision to proceed with the ECFA with a basic framework agreed to and signed with the Chinese at the end of 2009, and the specifics to be worked out in a series of SEF-ARATS negotiations running several years. This will generate much discussion about what sovereignty positions are being sacrificed to secure preferential market access and how transparent the process will be. However, I believe that Ma will work hard to mitigate both negative public perceptions as well as any real attempts by China to use this economic initiative to move the sovereignty line. China wants this agreement too, and this provides real leverage for Ma to strike a good deal for Taiwan.
The ECFA provides a tremendous opportunity for the U.S. as well. We have large interests in the Taiwan market, and the triangular economic relationship between America, Taiwan, and China comes only behind Europe and NAFTA in its strategic importance to U.S. economic prosperity. If China and Taiwan are genuinely seeking a free trade agreement with one another, albeit under a different name, then the United States must seize this opportunity and likewise engage Taiwan. America is not without equities in this discussion; preferential market access for China in the Taiwan market and vice versa should press the U.S. to respond in kind. In addition, the U.S. is vested in continued Taiwan-China rapprochement. But as the negotiations expand so will domestic angst on Taiwan. If the U.S. agrees to negotiate its own FTA with Taiwan, that could assuage domestic Taiwan concerns that this is part of a KMT effort to promote unification with China, and would thereby provide Taiwan’s people with options and a semblance of balance, calming fears and keeping support for improved cross-Strait relations on the right track.
President Obama and his team haven’t yet had an opportunity to shape a cohesive trade policy, but as he ventures out into the world in his capacity as president he will quickly note the importance of U.S. leadership on trade – both in setting sound examples for trade policy as well as leading on trade liberalization. America does not have the luxury of taking a trade “timeout,” particularly with the rest of the global economy looking for ways to accelerate bilateral, regional multilateral, and global trade liberalization.
President Ma’s election and his cross-Strait policies have markedly improved cross-Strait relations. But to what ultimate end, if all parties including the United States cannot use this period to move away from past policies that have retarded the maturing of this complex triumvirate? Taiwan and China are not missing this opportunity to allow their relationship to mature, and America shouldn’t either.
The Brookings Institution, Mar 12, 2009
On March 22, 2008, Taiwan voters went to the polls and declared a return to Kuomintang (KMT) rule. The KMT’s Ma Ying-jeou won a landslide election against Frank Hsieh of the incumbent Democratic Progressive Party (DPP), and the end result was rarely in question as voter frustration over DPP rule – accumulated over 8 years – spilled over into a convincing 58.45 percent victory for Ma and his running mate Vincent Siew.
Ma’s contention that Taiwan’s economy had fared poorly from 2000-2008 played well to Taiwan’s electorate - somewhat unfairly, as in fact Taiwan enjoyed average annual GDP growth of 3.63 percent during that period, according to the National Statistics Database maintained by Taiwan’s Directorate-General of Budget, Accounting and Statistics (DGBAS). But voter perception was centered on missed opportunities and a Taiwan that had mostly stood still for eight years while its regional competitors advanced their interests.
But Ma won the election also by highlighting the angst that former President Chen Shui-bian had caused Taiwan’s most important interlocutors – China and the United States. China was never interested in offering President Chen a dialogue during his 8 years as president of Taiwan, other than under terms and conditions that ran contrary to DPP principles. However, President Chen’s diplomatic isolation was exacerbated by his rhetoric that so often caught policymakers in Beijing and Washington off guard. This left the Chinese increasingly concerned about Chen’s intentions – even in the face of obvious constitutional limitations on his power – and left the U.S. frustrated both with constant Chinese harping and Chen’s erratic behavior. This tense situation appeared to cast a shadow over much else that the Bush administration was attempting to accomplish in its relationship with China.
Fairly or unfairly, the picture that evolved – particularly after Chen’s second election victory in March of 2004 – was of a Taiwan actively undermining peace and security in north Asia, and by extension hurting its own commercial and diplomatic interests. This perception neatly teed up candidate Ma’s campaign, where he pitched Taiwan voters on the importance of returning to the safe and steady hands of the technocratic KMT and of addressing Taiwan’s core economic, domestic and foreign relationships.
Ma’s Campaign Commitments
Candidate Ma’s general campaign pitch was a return to balanced and experienced rule under the KMT. He focused acutely on the perception that Taiwan had been treading water during a period of global economic expansion, thereby missing opportunities to grow global markets as well as to reform domestically. In addition, he noted that Taiwan’s global diplomatic isolation had increased under the DPP, and contended that the course of confrontation with China and the U.S. was unsustainable. Ma argued that it was essential to reach a new accommodation with China that would allow for meaningful representation of Taiwan in global organizations – including but not limited to the World Health Assembly (WHA).
Candidate Ma’s choice for vice president spoke volumes for his campaign’s focus on the economy. Vincent Siew is a former premier and was Minister of Economic Affairs under former president Lee Teng-hui. His role would be to spearhead both comprehensive domestic economic reform, including further deregulation of services like banking; and to take charge of implementing the i-Taiwan 12 projects – a large infrastructure package valued at approximately US$117 billion over 8 years. In addition, Vincent Siew is strongly identified with the concept of a Cross-Strait Common Market, an idea that he formulated and championed over several years. Ma even incorporated this initiative into his election manifesto as a central goal in a plan to harmonize commercial activity between Taiwan and what is now Taiwan’s largest market, China.
Cross-Strait economic engagement had another equally important deliverable for the Ma camp; it was a natural platform to reduce tensions and map a more reasonable path for increased cooperation with China, while staving off the need to engage on pricklier matters concerning sovereignty. The Ma campaign promised that this issue, often and rather simplistically viewed through the logistical challenge of flying between Taiwan and China, was to be tackled early on through an incremental resumption of cross-Strait transportation links, coupled with more comprehensive agreements on air travel and mail. Ma and Siew also saw an increase in mainland tourists visiting the island as an important objective, given their potential impact on a broad cross-section of Taiwan’s economy.
During his campaign, Ma also articulated the need to improve relations with the United States, with which ties had soured terribly since about 2003. Chen’s erratic behavior, coupled with a Bush team more interested in improving relations with China, made for a difficult set of circumstances and an increasingly reflexive urge to press Taiwan into a box. While this attitude was initially focused on Chen and his colleagues, it drifted into an overall view of Taiwan that drew no distinctions. In the end, Taiwan could do no right. Ma noted that Taiwan-U.S. relations would likely improve simply as a function of improved Taiwan relations with China. However, he also put great weight on improved communications between Taipei and Washington, and the need to avoid surprising and confrontational actions.
Policies & Developments
President Ma hit the ground running when he assumed office on May 20, 2008.
The newly appointed chairman of the Strait Exchange Foundation (SEF), Chiang Pin-kung, went to China in mid-June of 2008 to consummate an initial deal on cross-Strait transportation as promised by the Ma campaign. The deal allowed for an expanded charter flight schedule, based on the holiday flight framework already in place. While the agreement included a limited number of direct routes on weekends only – and involved aircraft flying over Hong Kong airspace but not alighting – the agreement also stipulated that both sides would work toward normalized passenger and cargo air traffic with direct routes. This early triumph was seen in all three capitals as a positive sign and raised hopes that a more sustainable relationship might be within their grasp.
However, the Ma government had not seen cross-Strait transportation links as the only low-hanging fruit. To remain committed to his election platform, Ma quickly expanded his SEF - Association for Relations Across the Taiwan Straits (ARATS) dialogue to include:
· Opening currency exchanges for Chinese Yuan/New Taiwan Dollar trade
· Loosening of capital restriction for Chinese investment in Taiwan equities, companies, and property
· An agreement on tourists that hypothetically could dramatically increase the number of Chinese citizens visiting Taiwan daily
· Signing agreements for direct cross-Strait sea, air, and mail travel
· Simplifying procedures for Chinese professionals to visit and work for limited periods in Taiwan.
In addition, the Ma administration launched negotiations to allow Chinese students to visit and study in Taiwan, and a whole host of smaller initiatives have been negotiated and are in the early stages of implementation. This is a substantive and impressive body of work for approximately 8 months of dialogue. That said, Ma upped the ante substantially in late February when he and his colleagues responded positively to Chinese President Hu Jintao’s offer to negotiate and sign a Comprehensive Economic Cooperation Agreement (CECA) with Taiwan, now referred to on the island as the Economic Cooperation Framework Agreement (ECFA).
Despite this improvement in cross-Strait relations, Ma did not see the early gains he might have hoped for with the United States. By President Bush’s last year in office, the fact that Chen Shui-bian was no longer president of Taiwan was immaterial. America’s positive relationship with China was viewed as an important part of President Bush’s legacy, and the change in leadership in Taipei did not automatically change Taiwan’s value in the equation. President Ma was treated with minimal cordiality, and as he left office President Bush’s penultimate substantive Taiwan action – an October 3, 2008 decision to notify several weapons systems to Congress – created more confusion and frustration over the breakdown in the arms sales process on the U.S. side. Thus America’s defense relationship with Taiwan was bequeathed with unaddressed platforms and a broken arms sales process, a mess that President Obama and his colleagues will have to address.
China’s Role
From China’s perspective, Taiwan’s democratic transition has been decidedly unpleasant. Chen Shui-bian’s actions and statements were deemed highly provocative, and he replaced the reviled Lee Teng-hui whose late 1990s statements had made him persona non-grata with Beijing. So China stewed for the past eight years, happy only when President Bush or one of his colleagues made a statement or undertook an action or non-action that China saw as contrary to Taiwan’s interests, or beneficial to China at Taiwan’s expense. While the short term approach of demonizing Taiwan presidents might have played well in Beijing, it was having a profoundly negative effect on the view of China from Taiwan.
This was not China’s “Taiwan policy” per se. China mostly understood that Taiwan’s democratization and demographic changes were undermining what support existed on Taiwan for unification with China. A sustained churlish attitude toward the island would only accelerate these trends, making the possibility of resolution of the fundamental dispute that much more remote. Therefore, Ma’s election placed great import on the need to put China’s relations with Taiwan back on a path that at least held the possibility of peaceful resolution. President Hu and his civilian colleagues viewed Ma’s policy of economic engagement as a positive and reasonable momentum builder for relations. So under the guidance of ARATS’s chairman Chen Yunlin, China responded substantively to Ma’s outreached hand.
In a December 31, 2008 speech commemorating the 30th anniversary of an important Taiwan policy speech, China’s President Hu expanded the possibilities in bilateral cross-Strait relations when he made a six point proposal that included, 1) scrupulously abiding by the One-China principle and enhancing political mutual trust; 2) strengthening commercial ties, partly though negotiating an economic cooperation agreement; 3) promoting personnel exchanges of personnel between the two sides; 4) highlighting common cultural links; 5) allowing Taiwan’s “reasonable” participation in international organizations and 6) the negotiation of a peace agreement.
The notion of China’s “One-China Principle” – that there is only one China, it is the People’s Republic of China, and Taiwan is a part of it – is anathema to a majority of the people of Taiwan. According to the latest Mainland Affairs Council poll, 91 percent of Taiwan citizens support the status quo with less than 10 percent in favor of unification with the mainland. But President Hu’s Points 2 and 5 were well received in Taiwan by the current leadership and its supporters, if not by the entire population. If his policies are going to enjoy majority support in Taiwan, Ma must be seen domestically to be making progress with China and he needs for China to be viewed as making real concessions. As argued in his election campaign, Ma places great stock in maximizing Taiwan’s economic relationship with China while reconstituting Taiwan’s global diplomatic position in a more sustainable and accommodating framework under improved relations with China. The overall outcome should also meet another of Ma’s campaign commitments – improved security through increased economic opportunity as well as a reduction in the overall threat from China after 6 plus years of heightened tension. However, as noted below China’s continued massive military modernization efforts and the degree to which their efforts are focused on Taiwan remains a major barrier to sustainable security improvements in the Taiwan Strait.
Evidence of improved relations are already manifest, with clear progress on economic cooperation but with nascent diplomatic progress as well. A small but positive action was Taiwan’s inclusion in the International Health Regulations (IHR) under the World Health Organization (WHO), which will allow the island to contact the body directly. That said, a far larger test will come this spring with Taiwan’s annual attempt to gain observer status at the World Health Assembly (WHA). It’s an important moment for China, one which it must seize both to serve its own interests on Taiwan through an improved view of its attitude, as well as to reinforce Ma’s ability to maintain domestic support for cross-Strait engagement by making a substantive concession.
Finally, it is important to highlight an inconsistency in China’s recent attitude toward Taiwan and a major challenge for the U.S. While Beijing’s civilian leadership continues to frame a positive path for Taiwan-China relations, China’s military modernization continues unabated and actively undermines these gains. There has been no Chinese slowing in defense spending, training, or deployment of forces directed at Taiwan. This marks a stark contrast to the political and economic efforts, and creates a genuine conundrum for Ma as well as for the Obama administration. How do they maintain positive engagement while discouraging China from pursuing such a provocative military posture?
President Obama should certainly use resumed military-to-military exchanges to impress upon the People’s Liberation Army that there is a direct correlation between Chinese force modernization and U.S. support for Taiwan’s defense, including arms sales. In addition, continued material support for President Ma’s move to an all volunteer force, coupled with a more integrated and modern military, will require continued supplies of modern weaponry. This support will positively underpin Taiwan’s engagement with China and will provide continued legitimacy to Ma’s efforts – a dynamic Ma himself understands well, as he continues to make the case for replacement fighters through a second tranche of F-16s, Black Hawk helicopters, and other modern equipment.
The Global Recession & Trade Policy
The Economist Intelligence Unit (EIU) recently noted that of the 55 major global economies tracked in detail, Taiwan has been hit harder than almost anyone else by the global downturn. Based on industrial production alone, Taiwan’s output has fallen by 32 percent in the 12 months to December 2008. GDP figures released on February 18, 2009 showed that Taiwan’s economy contracted by approximately 8.4 percent in Q4 2008, basically wiping away the last two and a half years of economic expansion. Taiwan’s DGBAS is predicting economic contraction of approximately 3 percent in 2009, while the aggregate analyst prediction is closer to 6 percent. Taiwan exports 70 percent of its industrial production, and with its main markets America, China, Japan, and the European Union all experiencing degrees of economic distress, Taiwan is affected acutely. This has added greatly to the urgency of Ma’s domestic economic reform, liberalization, and trade liberalization agenda.
The Ma administration has responded to the crisis, albeit with mixed results to date. The Taiwan government has issued spending vouchers worth approximately US$100 per citizen, vouchers intended to act as a catalyst for domestic demand. Taiwan’s Central Bank of China (CBC) has cut rates aggressively – 7 times since last September – with the latest cut bringing Taiwan interest rates to 1.25 percent. The government has also hastened to implement the 12 i-Taiwan infrastructure projects. In addition, it has allowed Taiwan’s currency to continue to depreciate against its major trading partners, down to a 6 year low against the U.S. dollar. These actions, except for the currency depreciation, are commensurate with those of other major global economies. That said, Taiwan has a high savings rate, and nothing suggests that Taiwan citizens are going to drop the savings habit in order to increase domestic demand for goods and services. Therefore, it seems likely that the Taiwan government will combine a loose economic policy with infrastructure investment, and then wait for its major trading partners to recover.
Taiwan did achieve two major trade policy goals over the past quarter, one being its signing of the Agreement on Government Procurement (GPA) at the World Trade Organization (WTO) in December, and the second being its removal from the United States Trade Representative’s Special 301 Watch List for IPR violators in mid January of 2009. With the GPA, President Ma has signed an agreement that will give Taiwan companies access to government procurement contracts in over 40 global economies, thereby increasing market access dramatically. It will also open Taiwan’s market to increasing competition and competitiveness, as well as to new foreign direct investment. The removal from USTR’s Special 301 Watch List is the culmination of 4-5 years of hard work, and considerable credit must also be given to the Chen administration for implementing many of the policies that resulted in this positive development. While Taiwan’s IPR regime is now well placed to manage the bulk of the challenges, IPR theft remains a massive global problem. Taiwan will be looked to for leadership, particularly in Asia.
President Ma’s economic team views renewed efforts to liberalize Taiwan’s major trading markets as essential to recovery and increased future growth. It is also a way to break out of its current economic isolation, absent of any meaningful role for Taiwan in bilateral and multilateral regional trade liberalization efforts. The Ma government views the ECFA not as a goal unto itself, nor only in the narrow prism of Taiwan-China relations, but as a part of its overall global trade strategy. Both the Taiwan government and businesses are particularly concerned about the impact of ASEAN +1 and ASEAN +3 on Taiwan’s competitiveness in the China market. President Ma also believes that improved Taiwan-China relations and the willingness of China to engage in free trade negotiations will assist Taiwan in breaking out of its trade liberalization isolation and allow it to sign FTAs with the U.S., Japan, Singapore, and other major trading partners. China’s offer of an ECFA has been well received, but it is but a part of what should also be an appropriate U.S. and pan-Asian response to Taiwan’s efforts to liberalize its markets in the shadow of improved Taiwan-China relations.
At this time, Taiwan has a Trade and Investment Framework Agreement (TIFA) with the United States that has acted as a periodic platform for discussing bilateral economic issues. This mechanism is a modest foundation that allows America and its trading partners to manage the myriad trade issues that characterize large commercial relationships. That said, for the second time in 5 years America has frozen the TIFA – in this instance due to its displeasure over Taiwan’s restrictions on imports of American beef. While beef, and indeed rice and pork too, are important export commodities for America, they represent a relatively small percentage of our bilateral trade – in the case of beef it’s considerably less than 1 percent of bilateral trade. The Bush administration felt that it had been misled over commitments to re-open aspects of the beef market (some beef is already being sold), and shut the TIFA process down in 2008 until those commitments were fulfilled. Now we must wait until the Obama administration trade team is confirmed and in place before we can ascertain its intentions on the TIFA freeze. Whatever the outcome, however, America’s last foray into such a freeze – in 2003-2004 over IPR – was generally viewed to have been a failure. Furthermore, as in the case of last year’s arms sales freeze, there are no other cases of global partners being treated in this fashion.
At such time as beef imports resume, or President Obama’s trade team decides to resume the TIFA prior to such a resolution, Taiwan and the Obama administration must look for ways to allow the relationship to mature. America has treated Taiwan in uniquely punitive ways, to the increasing detriment of our interests in this major market. If we cannot find a way to respond to Taiwan and China’s detente, we run the very real risk of adding wind to the economic impetuses that are pushing this top 10 U.S. market further into the purview of China’s economic embrace. A good place to start would be adding consistency to our approach to Taiwan and begin treating it the same way we do our other major trading partners, even when we disagree. In the longer term, we need to start representing our equities more assertively with Taiwan, not, as in the past, in reaction to Beijing’s displeasure on any number of issues but in substantive strategic ways such as free trade agreements. America needs to look at what it can accomplish in the light of improved Taiwan-China relations.
The subject of FTAs at this time may seem ridiculous given the lack of support for such agreements amongst America’s ruling party. However, it is likely that as President Obama grows more comfortable in his new post he’ll look to shape a trade policy consensus that will allow his government to support global trade liberalization. This will be particularly needed in Asia, which continues to remove barriers to trade and accelerate integration. In the absence of U.S. leadership, or even basic participation, this process will continue to center around the China market at the expense of our own. If China and Taiwan see fit to negotiate a free trade agreement then what possible reason should America have for not doing likewise with Taiwan?
In addition, it is certainly time for the U.S. to return to the policy of sending economic cabinet officers to Taiwan annually to boost our interests in the market. This policy was started by President Bush in 1992 with the visit of then United States Trade Representative Carla Hills, and continued throughout the 1990s under President Clinton. While the recent Bush administration had legitimate concerns over how President Chen would react to the presence of such a high ranking U.S. official, now is the time to re-engage this policy. Other countries see high-level interaction with Taiwan as in their economic interest: the U.K.’s commerce secretary visited Taipei within a month of Taiwan’s acceptance of GPA commitments, for example. In light of Ma’s commitment to spend almost US$120 billion on infrastructure in the coming 8 years, the U.S. should also be making every effort to promote its own companies in the market.
What’s Next?
For Taiwan, like with the United States, there are considerable unknowns associated with this latest economic recession. While Taiwan’s financial institutions are not burdened to the same extent with the toxic assets weighting down our own institutions, the notion that Asian economies have decoupled from the U.S. and Europe is nonsense. Asia shares our economic pain, and cannot hope to launch a sustained recovery until America and Europe turn the corner and its export markets return. In the meantime, President Ma will continue to focus on what he can control – namely domestic efforts to increase investment, along with external efforts to open new markets or address trade-diverting developments such as FTAs from which Taiwan has been excluded.
The CECA, or Comprehensive Economic Cooperation Agreement as referred to by President Hu in his recent speech, with China has very real legs, and we can expect to hear a great deal more on this matter as Ma moves it through the Taiwan court of public opinion and shapes a policy response that P.K. Chiang can take into SEF-ARATS negotiations. Indeed, President Ma has already made a significant adjustment by changing the name with which Taiwan will refer to such an agreement to Economic Cooperation Framework Agreement (ECFA). This adjustment was made in response to early domestic criticism of the effort and the similarity of the CECA name to Hong Kong and Macau’s Closer Economic Partnership Agreement (or CEPA) with China. I believe that Ma has made the decision to proceed with the ECFA with a basic framework agreed to and signed with the Chinese at the end of 2009, and the specifics to be worked out in a series of SEF-ARATS negotiations running several years. This will generate much discussion about what sovereignty positions are being sacrificed to secure preferential market access and how transparent the process will be. However, I believe that Ma will work hard to mitigate both negative public perceptions as well as any real attempts by China to use this economic initiative to move the sovereignty line. China wants this agreement too, and this provides real leverage for Ma to strike a good deal for Taiwan.
The ECFA provides a tremendous opportunity for the U.S. as well. We have large interests in the Taiwan market, and the triangular economic relationship between America, Taiwan, and China comes only behind Europe and NAFTA in its strategic importance to U.S. economic prosperity. If China and Taiwan are genuinely seeking a free trade agreement with one another, albeit under a different name, then the United States must seize this opportunity and likewise engage Taiwan. America is not without equities in this discussion; preferential market access for China in the Taiwan market and vice versa should press the U.S. to respond in kind. In addition, the U.S. is vested in continued Taiwan-China rapprochement. But as the negotiations expand so will domestic angst on Taiwan. If the U.S. agrees to negotiate its own FTA with Taiwan, that could assuage domestic Taiwan concerns that this is part of a KMT effort to promote unification with China, and would thereby provide Taiwan’s people with options and a semblance of balance, calming fears and keeping support for improved cross-Strait relations on the right track.
President Obama and his team haven’t yet had an opportunity to shape a cohesive trade policy, but as he ventures out into the world in his capacity as president he will quickly note the importance of U.S. leadership on trade – both in setting sound examples for trade policy as well as leading on trade liberalization. America does not have the luxury of taking a trade “timeout,” particularly with the rest of the global economy looking for ways to accelerate bilateral, regional multilateral, and global trade liberalization.
President Ma’s election and his cross-Strait policies have markedly improved cross-Strait relations. But to what ultimate end, if all parties including the United States cannot use this period to move away from past policies that have retarded the maturing of this complex triumvirate? Taiwan and China are not missing this opportunity to allow their relationship to mature, and America shouldn’t either.
Thursday, March 5, 2009
PPI: Tariffs Are One Percent of American Tax Revenue, But Once Were Half
Tariffs Are One Percent of American Tax Revenue, But Once Were Half
PPI Trade Fact of the Week March 4, 2009
The Numbers: U.S. government tax revenue:
[see table in the original article]
What They Mean:
How has taxation changed in a century?
For one thing, it is larger. In 1909, William Taft's revenue men collected $604 million in taxes, or about 5 percent of GDP. By comparison, the $2.2 trillion forecast for 2009 will be about 16 percent of GDP, with the extra money going to pay for a long series of 20th-century innovations. In rough chronological order: food-safety inspections, a permanent standing army, Social Security, national highways, Medicare, clean air programs, space exploration, AIDS research, and so on.
For another, it is fairer. Of Taft's $604 million, $301 million came from tariffs, with clothes and food bringing in half of tariff revenue and a quarter of federal money: $84 million from clothes and household linens; $56 million from sugar; $18 million from other foods. As in every age, taxation of clothes and food hits poorer families hardest, as they spend more of their income on necessities; the then Ways and Means Committee Chairman, Tennessean Benton McMillin, called the tariff system a "tax on want."
Woodrow Wilson's creation of the income tax in 1913, joined by the 1916 estate tax, remains the most revolutionary of all American tax reforms. It shrank the tariff system to 5 percent of revenue by 1920, shifted tax payment from poor to rich, and joins the payroll tax Franklin Roosevelt created in 1936 to pay for Social Security and later for Medicare at the heart of the 2009 tax system. The 1040 forms American workers fill out in coming weeks will accordingly raise about 45 percent of the government's money this year; payroll taxes add 40 percent. Another 9 percent comes from corporate taxes, and 1 percent from estate taxes. Taft's tax system survives in vestigial form, with excise taxes raising 3 percent and tariffs 1 percent.
But though taxation generally has changed, the tariff system has not. Now a small part of the tax system, tariffs nonetheless remain the government's most effective tax on want, as it still relies on clothes, shoes, and food for most of its money. Of last year's $26 billion in tariff revenue, clothes brought in $9.5 billion. Shoes added $1.9 billion, about the same as cars; household linens and luggage came in at a billion each. Altogether, low-cost household necessities account for about 6 percent of imports, but raise 60 percent of tariff money; and foods -- mainly orange juice, cheese, and canned tuna -- raise another half billion. Further tilting tariff policy against poor families, the system taxes the cheapest products most heavily: acrylic sweaters are taxed at 32 percent, and cashmeres at 4 percent; women's polyester underwear is taxed at 16 percent, but 0.9 percent on silks; 48 percent tax on cheap sneakers, but 8.5 percent on leather dress shoes; and so on. A triviality for most Americans, the tariff system likely costs single-mother families (whose clothing and food bills are highest relative to income) a week's salary each year, more than any tax but the payroll tax, as it quietly raises prices for life necessities.
Further Reading:
New -- The Internal Revenue Service traces its ancestry to Abraham Lincoln's Civil War revenue policy, which imposed the first income tax and created the excise taxes. Tax forms and advice, for free from the IRS:http://www.irs.gov/individuals/index.html
Old -- The modern Harmonized Tariff System stretches out through 97 chapters and about 11,000 separate products, from live horses to statuary. See chapters 61 and 62 for high clothing tariffs, chapter 27 for zero-tariff energy, chapter 64 for shoes, and chapter 79 for goods made entirely of zinc:http://www.usitc.gov/tata/hts/bychapter/index.htm
And money -- The 2009 Budget's Summary Tables lay out grim tax revenue forecasts for 2009:http://www.whitehouse.gov/omb/budget/
Analysis and ideas -
Next wave -- PPI's Paul Weinstein suggests a reshaping of the tax system:
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=450020&subsecID=900200&contentID=254831
PPI's Ed Gresser looks at tariffs, taxes and the single mom:
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=108&subsecID=900010&contentID=250828
... and, in left-right collaboration with the Heritage Foundation's Daniella Markheim, on shoe tariffs as America's single-worst tax:
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=108&subsecID=900010&contentID=254538
And context -
Tariffs around the world -- Japan, Europe, and Switzerland join America in drawing about 1 percent of revenue from tariffs. Norway, Hong Kong, and Singapore are lower, at zero or essentially zero; Korea is a bit higher at 3 percent. The World Bank's World Development Indicators 2008 finds only a few Sub-Saharan African nations -- Namibia, Lesotho, Swaziland, Cote d'Ivoire -- relying on tariffs for 40 percent or more of tax revenue. Latin American countries are usually below 10 percent, and the normal range for mid-tier developing countries tops out at the 15 percent and 20 percent recorded for India and the Philippines. The WTO's world tariff summary:
http://www.wto.org/english/res_e/publications_e/world_tariff_profiles08_e.htm
Tariffs as employment policy -- Tariffs in the United States are rarely debated as tax policy; the standard arguments revolve around trade flows and employment. But as 2009 passes, tariffs (at least the light-industry tariffs that bring in the most money) have mostly lost their power to affect employment and trade flows, and are reverting instead to their 18th-century origins as excise taxes whose sole function is to raise money. In 1970, the four big high-tariff industries -- clothes, shoes, linens, and luggage -- accounted for 1.7 million out of the 58 million private-sector U.S. jobs. By 1980, they were down to 1.4 million; then 1.0 million in 1990, 0.6 million in 2000, 0.35 million by the end of the textile quota system in 2004, and now 0.22 million out of 112 million private-sector jobs.
PPI Trade Fact of the Week March 4, 2009
The Numbers: U.S. government tax revenue:
[see table in the original article]
What They Mean:
How has taxation changed in a century?
For one thing, it is larger. In 1909, William Taft's revenue men collected $604 million in taxes, or about 5 percent of GDP. By comparison, the $2.2 trillion forecast for 2009 will be about 16 percent of GDP, with the extra money going to pay for a long series of 20th-century innovations. In rough chronological order: food-safety inspections, a permanent standing army, Social Security, national highways, Medicare, clean air programs, space exploration, AIDS research, and so on.
For another, it is fairer. Of Taft's $604 million, $301 million came from tariffs, with clothes and food bringing in half of tariff revenue and a quarter of federal money: $84 million from clothes and household linens; $56 million from sugar; $18 million from other foods. As in every age, taxation of clothes and food hits poorer families hardest, as they spend more of their income on necessities; the then Ways and Means Committee Chairman, Tennessean Benton McMillin, called the tariff system a "tax on want."
Woodrow Wilson's creation of the income tax in 1913, joined by the 1916 estate tax, remains the most revolutionary of all American tax reforms. It shrank the tariff system to 5 percent of revenue by 1920, shifted tax payment from poor to rich, and joins the payroll tax Franklin Roosevelt created in 1936 to pay for Social Security and later for Medicare at the heart of the 2009 tax system. The 1040 forms American workers fill out in coming weeks will accordingly raise about 45 percent of the government's money this year; payroll taxes add 40 percent. Another 9 percent comes from corporate taxes, and 1 percent from estate taxes. Taft's tax system survives in vestigial form, with excise taxes raising 3 percent and tariffs 1 percent.
But though taxation generally has changed, the tariff system has not. Now a small part of the tax system, tariffs nonetheless remain the government's most effective tax on want, as it still relies on clothes, shoes, and food for most of its money. Of last year's $26 billion in tariff revenue, clothes brought in $9.5 billion. Shoes added $1.9 billion, about the same as cars; household linens and luggage came in at a billion each. Altogether, low-cost household necessities account for about 6 percent of imports, but raise 60 percent of tariff money; and foods -- mainly orange juice, cheese, and canned tuna -- raise another half billion. Further tilting tariff policy against poor families, the system taxes the cheapest products most heavily: acrylic sweaters are taxed at 32 percent, and cashmeres at 4 percent; women's polyester underwear is taxed at 16 percent, but 0.9 percent on silks; 48 percent tax on cheap sneakers, but 8.5 percent on leather dress shoes; and so on. A triviality for most Americans, the tariff system likely costs single-mother families (whose clothing and food bills are highest relative to income) a week's salary each year, more than any tax but the payroll tax, as it quietly raises prices for life necessities.
Further Reading:
New -- The Internal Revenue Service traces its ancestry to Abraham Lincoln's Civil War revenue policy, which imposed the first income tax and created the excise taxes. Tax forms and advice, for free from the IRS:http://www.irs.gov/individuals/index.html
Old -- The modern Harmonized Tariff System stretches out through 97 chapters and about 11,000 separate products, from live horses to statuary. See chapters 61 and 62 for high clothing tariffs, chapter 27 for zero-tariff energy, chapter 64 for shoes, and chapter 79 for goods made entirely of zinc:http://www.usitc.gov/tata/hts/bychapter/index.htm
And money -- The 2009 Budget's Summary Tables lay out grim tax revenue forecasts for 2009:http://www.whitehouse.gov/omb/budget/
Analysis and ideas -
Next wave -- PPI's Paul Weinstein suggests a reshaping of the tax system:
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=450020&subsecID=900200&contentID=254831
PPI's Ed Gresser looks at tariffs, taxes and the single mom:
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=108&subsecID=900010&contentID=250828
... and, in left-right collaboration with the Heritage Foundation's Daniella Markheim, on shoe tariffs as America's single-worst tax:
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=108&subsecID=900010&contentID=254538
And context -
Tariffs around the world -- Japan, Europe, and Switzerland join America in drawing about 1 percent of revenue from tariffs. Norway, Hong Kong, and Singapore are lower, at zero or essentially zero; Korea is a bit higher at 3 percent. The World Bank's World Development Indicators 2008 finds only a few Sub-Saharan African nations -- Namibia, Lesotho, Swaziland, Cote d'Ivoire -- relying on tariffs for 40 percent or more of tax revenue. Latin American countries are usually below 10 percent, and the normal range for mid-tier developing countries tops out at the 15 percent and 20 percent recorded for India and the Philippines. The WTO's world tariff summary:
http://www.wto.org/english/res_e/publications_e/world_tariff_profiles08_e.htm
Tariffs as employment policy -- Tariffs in the United States are rarely debated as tax policy; the standard arguments revolve around trade flows and employment. But as 2009 passes, tariffs (at least the light-industry tariffs that bring in the most money) have mostly lost their power to affect employment and trade flows, and are reverting instead to their 18th-century origins as excise taxes whose sole function is to raise money. In 1970, the four big high-tariff industries -- clothes, shoes, linens, and luggage -- accounted for 1.7 million out of the 58 million private-sector U.S. jobs. By 1980, they were down to 1.4 million; then 1.0 million in 1990, 0.6 million in 2000, 0.35 million by the end of the textile quota system in 2004, and now 0.22 million out of 112 million private-sector jobs.
Friday, February 6, 2009
Attempt to establish non-market prices: The Athenian Grain Merchants, 386 B.C.
Cold Case Files: The Athenian Grain Merchants, 386 B.C. By Wayne R. Dunham
Cato Journal, Vol. 28, No. 3 (Fall 2008). Feb 2009
Food price increases have always been politically sensitive. Price spikes like those that have occurred recently create the demand for action on the part of government to alleviate the problem. Yet, government intervention can often do more harm than good. This article examines one such example of a counterproductive response that occurred in 388 B.C. in Athens, Greece. In response to a negative supply shock to the grain market, regulators encouraged grain importers to form a buyers' cartel (monopsony), hoping that it would reduce retail prices by first lowering wholesale grain prices. In reality, the decrease in wholesale prices resulted in a decrease in the willingness of producers in other regions to supply grain to Athens, and retail grain prices increased substantially. Grain importers soon found themselves on trial for their lives in what is probably the earliest recorded antitrust trial. This article uses the information presented at that trial and other contemporary sources to evaluate the grain merchants. actions. More generally, it analyses the impact of a buyer's cartel or monopsony on prices and consumption.
Cato Journal, Vol. 28, No. 3 (Fall 2008). Feb 2009
Food price increases have always been politically sensitive. Price spikes like those that have occurred recently create the demand for action on the part of government to alleviate the problem. Yet, government intervention can often do more harm than good. This article examines one such example of a counterproductive response that occurred in 388 B.C. in Athens, Greece. In response to a negative supply shock to the grain market, regulators encouraged grain importers to form a buyers' cartel (monopsony), hoping that it would reduce retail prices by first lowering wholesale grain prices. In reality, the decrease in wholesale prices resulted in a decrease in the willingness of producers in other regions to supply grain to Athens, and retail grain prices increased substantially. Grain importers soon found themselves on trial for their lives in what is probably the earliest recorded antitrust trial. This article uses the information presented at that trial and other contemporary sources to evaluate the grain merchants. actions. More generally, it analyses the impact of a buyer's cartel or monopsony on prices and consumption.
Wednesday, January 28, 2009
US Protectionism in the Stimulus Bill
U.S. Protectionism in the Stimulus Bill. By Philip I. Levy
AEI, Jan 28, 2009
Lurking inside the proposed stimulus bill is a provision that threatens to stoke global protectionism and weaken U.S. leadership. The "Buy American" clause requires the new infrastructure projects in the bill to use American steel exclusively in a misguided attempt to create jobs. Its proponents fail to consider the worldwide repercussions.
The federal government of the US is currently consumed with an effort to craft a fiscal stimulus that will save the economy. Even before assuming the Presidency this month, Barack Obama called for a major stimulus package and warned that without quick action "we could lose a generation of potential and promise . . . our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world." In the process, however, the US is poised to lose some of its standing through its flirtation with protectionism.
Flirtation with protectionism
The $825 billion stimulus bill introduced in the US House of Representatives includes the following provision:
"None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron and steel used in the project is produced in the US." (Sec. 1110(a)) The bill allows for exceptions if the clause would boost project costs by more than 25% or "would be inconsistent with the public interest." It would take an unusually brave Obama Administration official, however, to seek a waiver on public interest grounds.
Fiscal stimulus as protectionism Trojan Horse
The inclusion of this "Buy American" clause is a deliberate attempt to translate stimulus dollars into American jobs. One group advocating the measure, the Alliance for American Manufacturing, cites a report it commissioned as finding that:
"[M]anufacturing employment gains from such an infrastructure program could be improved significantly if the percentage of US-made material inputs were increased. Simply put, a higher share of domestically produced supplies would have a significant impact in terms of generating new manufacturing jobs. Utilizing 100% domestically produced inputs for infrastructure projects would yield a total of 77,000 additional jobs nationally."
They argue that the provision would disproportionately help manufacturing, raising the number of stimulated manufacturing jobs by 33% (AAM 2009).
Protection and the open economy multiplier
The underlying report argues that:
"the most important source of leakages for the kinds of investment we consider in this report is the use of imported goods and services in the production of infrastructure. Spending on imports does not raise the demand for domestic output and therefore does not create additional jobs."
The report never mentions the word 'export.' (Heintz, Pollin, and Garrett-Peltier 2009, p. 23)
US traditional policy: level playing field on procurement and the GPA
With some exceptions, the US has generally taken a different stance in the past. The website of the US Trade Representative, as yet unchanged from the Bush Administration, lauds the Government Procurement Agreement (GPA) and states that a "longstanding objective of US trade policy has been to open opportunities for US suppliers to compete on a level playing field for foreign government contracts." It cites WTO estimates that the parties to the GPA receive annual access to more than $300 billion in government tendering procedures.
What comes around goes around
Were there careful consideration of the implications, the US would seem to have little incentive to start a procurement fight. According to OECD figures (OECD 2008, pp. 56-57) the US in 2007 trailed only Switzerland, Mexico, Turkey, and Luxembourg in the race among members for lowest government consumption expenditure as a fraction of GDP.
Opposition from US business and trade groups
The "Buy American" stimulus provision has sparked opposition from US business and trade groups. They argue that it could prompt retaliation, undermine US leadership, and violate the pledge at the November 2008 G20 Summit in Washington not to adopt protectionist measures (Drajem, 2009).
It is unclear whether this lobbying will block the measure, though. There is extraordinary pressure to deliver the stimulus package to President Obama before the end of February. That allows little time for deliberation and debate. The rationale for the rush is the urgent need for the spending, though the Congressional Budget Office estimates that almost 60% of the new spending projects would take place after September of 2010 (CBO, 2009, p. 3).
Keynesian multiplier and the fallacy of composition
As significant as government procurement may be, the flawed mercantilist logic of the "Buy American" provision is even more dangerous because of its broader applicability. Dani Rodrik (2008) argues that one way to enhance the Keynesian multiplier effects of any fiscal stimulus would be to raise import tariffs. He writes: "Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment?"
Such analysis is flawed at several levels. Among them, there are the failings of Keynesian analysis more generally (see, e.g., Barro 2009), and the globally integrated nature of production, which would be exceedingly difficult and costly to unwind and which is uncaptured by simplistic macro models. But the idea is clearly seductive.
Obama's first test on protectionism
The protectionist urges in the stimulus debate pose a major challenge for President Obama at a difficult time.
He has not seemed to emphasize the importance of international economic relations in his appointments to date. His nomination for US Trade Representative, Ron Kirk, was one of his last, remains unconfirmed, and is inexperienced in global trade matters. President Obama has yet to name a new Secretary of Commerce after his first choice withdrew. His new Treasury Secretary, Tim Geithner, will likely be consumed with domestic aspects of stimulus and with averting financial collapse.
Campaign promises: Multilateral approach to foreign policy
In his campaign last year, President Obama called for a multilateral approach to foreign policy and a restoration of America's image in the world. It may fall to other world leaders to remind him of the role that global trade plays in US international relations.
AEI, Jan 28, 2009
Lurking inside the proposed stimulus bill is a provision that threatens to stoke global protectionism and weaken U.S. leadership. The "Buy American" clause requires the new infrastructure projects in the bill to use American steel exclusively in a misguided attempt to create jobs. Its proponents fail to consider the worldwide repercussions.
The federal government of the US is currently consumed with an effort to craft a fiscal stimulus that will save the economy. Even before assuming the Presidency this month, Barack Obama called for a major stimulus package and warned that without quick action "we could lose a generation of potential and promise . . . our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world." In the process, however, the US is poised to lose some of its standing through its flirtation with protectionism.
Flirtation with protectionism
The $825 billion stimulus bill introduced in the US House of Representatives includes the following provision:
"None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron and steel used in the project is produced in the US." (Sec. 1110(a)) The bill allows for exceptions if the clause would boost project costs by more than 25% or "would be inconsistent with the public interest." It would take an unusually brave Obama Administration official, however, to seek a waiver on public interest grounds.
Fiscal stimulus as protectionism Trojan Horse
The inclusion of this "Buy American" clause is a deliberate attempt to translate stimulus dollars into American jobs. One group advocating the measure, the Alliance for American Manufacturing, cites a report it commissioned as finding that:
"[M]anufacturing employment gains from such an infrastructure program could be improved significantly if the percentage of US-made material inputs were increased. Simply put, a higher share of domestically produced supplies would have a significant impact in terms of generating new manufacturing jobs. Utilizing 100% domestically produced inputs for infrastructure projects would yield a total of 77,000 additional jobs nationally."
They argue that the provision would disproportionately help manufacturing, raising the number of stimulated manufacturing jobs by 33% (AAM 2009).
Protection and the open economy multiplier
The underlying report argues that:
"the most important source of leakages for the kinds of investment we consider in this report is the use of imported goods and services in the production of infrastructure. Spending on imports does not raise the demand for domestic output and therefore does not create additional jobs."
The report never mentions the word 'export.' (Heintz, Pollin, and Garrett-Peltier 2009, p. 23)
US traditional policy: level playing field on procurement and the GPA
With some exceptions, the US has generally taken a different stance in the past. The website of the US Trade Representative, as yet unchanged from the Bush Administration, lauds the Government Procurement Agreement (GPA) and states that a "longstanding objective of US trade policy has been to open opportunities for US suppliers to compete on a level playing field for foreign government contracts." It cites WTO estimates that the parties to the GPA receive annual access to more than $300 billion in government tendering procedures.
What comes around goes around
Were there careful consideration of the implications, the US would seem to have little incentive to start a procurement fight. According to OECD figures (OECD 2008, pp. 56-57) the US in 2007 trailed only Switzerland, Mexico, Turkey, and Luxembourg in the race among members for lowest government consumption expenditure as a fraction of GDP.
Opposition from US business and trade groups
The "Buy American" stimulus provision has sparked opposition from US business and trade groups. They argue that it could prompt retaliation, undermine US leadership, and violate the pledge at the November 2008 G20 Summit in Washington not to adopt protectionist measures (Drajem, 2009).
It is unclear whether this lobbying will block the measure, though. There is extraordinary pressure to deliver the stimulus package to President Obama before the end of February. That allows little time for deliberation and debate. The rationale for the rush is the urgent need for the spending, though the Congressional Budget Office estimates that almost 60% of the new spending projects would take place after September of 2010 (CBO, 2009, p. 3).
Keynesian multiplier and the fallacy of composition
As significant as government procurement may be, the flawed mercantilist logic of the "Buy American" provision is even more dangerous because of its broader applicability. Dani Rodrik (2008) argues that one way to enhance the Keynesian multiplier effects of any fiscal stimulus would be to raise import tariffs. He writes: "Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment?"
Such analysis is flawed at several levels. Among them, there are the failings of Keynesian analysis more generally (see, e.g., Barro 2009), and the globally integrated nature of production, which would be exceedingly difficult and costly to unwind and which is uncaptured by simplistic macro models. But the idea is clearly seductive.
Obama's first test on protectionism
The protectionist urges in the stimulus debate pose a major challenge for President Obama at a difficult time.
He has not seemed to emphasize the importance of international economic relations in his appointments to date. His nomination for US Trade Representative, Ron Kirk, was one of his last, remains unconfirmed, and is inexperienced in global trade matters. President Obama has yet to name a new Secretary of Commerce after his first choice withdrew. His new Treasury Secretary, Tim Geithner, will likely be consumed with domestic aspects of stimulus and with averting financial collapse.
Campaign promises: Multilateral approach to foreign policy
In his campaign last year, President Obama called for a multilateral approach to foreign policy and a restoration of America's image in the world. It may fall to other world leaders to remind him of the role that global trade plays in US international relations.
The End of Poverty: Not a Dream
The End of Poverty: Not a Dream
Progressive Policy Institute, January 28, 2009
Excerpts:
[...]
From last Tuesday's inaugural address, the first inaugural pledge to fight poverty abroad since Kennedy's in 1961:
"To the people of poor nations, we pledge to work alongside you to make your farms flourish and let clean waters flow; to nourish starved bodies and feed hungry minds. And to those nations like ours that enjoy relative plenty, we say we can no longer afford indifference to suffering outside our borders."
Cynics ask whether such promises are ever realistic. Worried idealists wonder whether we can keep them now, with life at home suddenly so difficult and the financial crisis already pushing people into poverty overseas. Brief answers: A promise to ease poverty is entirely realistic; and though the poor abroad will not escape the crisis, better trade policy this year can ease the blow. Background first, then more information.
Background: In dollar terms, America's ties with poor nations span aid, charity, trade, and remittances. Government aid and private charity flows, at $22 billion and $9 billion, account for the least money but are essential in emergencies and can bolster public health, primary education, and other public services. Remittances are larger -- immigrants send at least $45 billion home from the United States each year, with Mexico, Central America, the Caribbean, and the Philippines especially large beneficiaries -- and complement aid by raising family incomes in rural districts and urban slums. Imports from low-income countries, excluding energy and goods from China, totaled $405 billion (or $35 billion per month) in 2007, spread across clothes, toys, Christmas decorations, coffee, mangoes, sports and fishing gear, TV sets, shrimp, flowers, and other goods. This is a much larger figure than those for aid, charity and remittances, but complements rather than replaces them by supporting tens of millions of middle-class and lower-middle class urban jobs and raising farm incomes, in poor countries.
Now the answers:
Question (1): Can we ever reduce poverty? Judged by facts, yes: the idealist's case is strong and the cynic's weak. The World Bank defines "absolute poverty" as life on $1.25 a day or less (in constant 1993 dollars) and has estimated poverty rates on this basis back to 1981. In that year, 52 percent of the world's people were very poor. By 1990, the figure was 42 percent. In 2005, the most recent year available, only 25 percent of the world's people were very poor. East Asia recorded the most progress, with the absolute-poverty rate falling from 78 percent in 1981, to 55 percent in 1990, and 16 percent in 2005. In one generation, then, Asian poverty fell from the near-universal experience of life to the sad exception. Drops elsewhere in the world have been slower but real: Since 1981, Latin America has cut absolute poverty from 13 percent to 8 percent; India and its neighbors from 60 percent to 40 percent; the Middle East from 8 percent to 4 percent; Africa from 54 percent to 51 percent. In eight low-to-middle-income countries without oil -- Chile, Jamaica, Mexico, Uruguay, Egypt, Jordan, Thailand, and Malaysia -- the absolute-poverty rate has fallen below two percent. Conclusion: if poor countries have good education, financial, infrastructure, anti-corruption, and other policies; if they are free of wars and coups; and if rich countries help through aid, trade and easy remittance, poverty often falls quickly and permanently.
Cambodia offers a human-scale and recent example. In 1996, after 25 years of first bombing, then genocide and famine, then endemic warfare, the country's gross national income was $14 billion, its per capita income was $1,240, and its infant mortality rate ran at 102 deaths per thousand live births annually. Cambodia has since received significant aid -- about $500 million annually, with Japan the largest donor -- and succeeded in trade, putting 350,000 young women to work through garment exports to American retailers. Earning three times the average national income as they sew shirts and pajamas, these garment-workers send a third of their pay money home, raising their rural relatives' "food security" from two months to a year. By last November's Rain Festival regatta on the Mekong, Cambodia's gross national income had in 12 years doubled to $29 billion, per capita income had risen by 60 percent to $2100, infant mortality had dropped by nearly half, and absolute poverty was down 20 percent.
Question (2): And in the midst of the current crisis? If cynics are wrong, are worried idealists right to fear that the achievement may slip away? Yes; and American policy can make matters worse or better.
Aid commitments have so far held up. With falling demand and unemployment in the United States, though, remittances are beginning to fall and trade is falling fast. Here again, Cambodia illustrates a general trend. Between October and November, as the crisis set in, America's imports from poor countries fell by $7 billion -- a 20 percent drop in a month. And as tourists and visitors from the rural districts watched the Rain Festival regatta, the garment factories that power Cambodia's growth were beginning to close down. According to The Phnom Penh Post, orders dropped by a third, 30 factories closed, and 20,000 young women lost work. The same things were happening in southern Africa, Central America, Pakistan, Mexico, the Philippines, Thailand, and many other countries. The effect in each is to suddenly increase poverty rates, raise the risk of rural hunger and urban sex-industry recruitment, and sometimes cause political instability.
No American policy can fully protect poor countries. But at minimum, Americans can avoid the trade protectionism and aid cuts that would worsen the blow to the poor; and with some energy, Congress and the new administration can ease it by making the U.S. trade regime more open and friendly to the poor.
In general, American trade policy is tougher on poor countries than rich ones, because tariffs and other barriers are relatively high on the cheap and simple manufactures and farm products poor countries provide, but low on services and high-tech products Americans buy from rich countries. On average, tariffs on poor-country imports are about twice as tariffs on rich-country goods. A series of "trade preference" programs partially ease the inequity by waiving some tariffs for poor countries. But the preferences are antiquated and in some ways ineffective, as they offer little help to low-income countries in Asia and the Muslim world, because it bars duty-free treatment for the clothes, shoes, and other light-industry products that account for most of their trade. In 2007, for example, Cambodia faced a $415 million tariff penalty on its $2.5 billion in clothes -- more than the $405 million penalty on Britain's $100 billion in medicines, aircraft parts, TV shows, insurance policies, and North Sea crude. Pakistan, Bangladesh, Lebanon, Sri Lanka, Laos, and others get similar exorbitant penalties.
Ending them through a better preference system would be easy and essentially cost free. The principal competitive effect would not be to raise total imports, but to give poor countries some help in dealing with much larger competitors; the main domestic consequence would be slightly lower clothing prices. A modest step, preference reform would give the people of poor nations some help as they manage a crisis they did not cause -- and over time, can help Americans keep a promise that, with some luck and good policy, we can fulfill in this generation.
[...]
Further Reading:
[...]
The World Bank charts the decline of poverty, 1981-2005: http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI08povertysupplement.pdf
And has a shorter note on the falling rate of malnutrition:http://siteresources.worldbank.org/INTPRH/Resources/childrenunderfive.pdf
PPI Trade & Global Markets Director Ed Gresser testifies last year at the Senate Finance Committee on preference policy:http://finance.senate.gov/sitepages/hearing061208.htm
The Center for Global Development's Kim Elliott has preference advice for the new administration:http://www.cgdev.org/content/publications/detail/967263
And the U.S. Trade Representative Office explains today's preference programs:http://www.ustr.gov/Trade_Development/Preference_Programs/Section_Index.html
Three views of Cambodia:
The Royal Ministry of Tourism tells the story of the water festival:http://www.mot.gov.kh/Hot_News/water_festival.html
The International Labor Organization's Cambodia factory-monitoring project reports on work conditions, pay and the social implications of the garment business:http://www.betterfactories.org/
The Phnom Penh Post reports on slipping sales, job loss and prospects for 2009:http://www.phnompenhpost.com/index.php/2009011923690/Business/Garment-factories-hunker-down-for-a-miserable-2009.html
The Kennedy legacy:
The 1961 inaugural: "To those peoples in the huts and villages across the globe struggling to break the bonds of mass misery, we pledge our best efforts to help them help themselves, for whatever period is required -- not because the Communists may be doing it, not because we seek their votes, but because it is right. If a free society cannot help the many who are poor, it cannot save the few who are rich."
The promise led to creation of the Agency for International Development, a 50 percent increase in foreign aid, the launch of the Peace Corps, and one of the most ambitious and successful efforts to reduce U.S. and world trade barriers since the Second World War. The Bank has not calculated $1.25-a-day figures for years before 1981, so evaluations aren't easy. But social indicators suggest that posterity should judge him well on results, as well as inspiration. Since 1960, global infant mortality has fallen by nearly two-thirds (from 126 to 50 infant deaths per thousand live births) and life expectancy has jumped from 50 years to 68 years.
The Peace Corps:http://www.peacecorps.gov/index.cfm?shell=learn.whatispc.history
The Agency for International Development:http://www.usaid.gov/
Aid and remittances:
The OECD has foreign-aid data by donor country and recipient:http://www.oecd.org/department/0,3355,en_2649_34447_1_1_1_1_1,00.html
The World Bank predicts remittance growth to slow next year, with payments to Africa and the Middle East likely to fall:http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21121930~menuPK:3145470~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html
[...]
Progressive Policy Institute, January 28, 2009
Excerpts:
[...]
From last Tuesday's inaugural address, the first inaugural pledge to fight poverty abroad since Kennedy's in 1961:
"To the people of poor nations, we pledge to work alongside you to make your farms flourish and let clean waters flow; to nourish starved bodies and feed hungry minds. And to those nations like ours that enjoy relative plenty, we say we can no longer afford indifference to suffering outside our borders."
Cynics ask whether such promises are ever realistic. Worried idealists wonder whether we can keep them now, with life at home suddenly so difficult and the financial crisis already pushing people into poverty overseas. Brief answers: A promise to ease poverty is entirely realistic; and though the poor abroad will not escape the crisis, better trade policy this year can ease the blow. Background first, then more information.
Background: In dollar terms, America's ties with poor nations span aid, charity, trade, and remittances. Government aid and private charity flows, at $22 billion and $9 billion, account for the least money but are essential in emergencies and can bolster public health, primary education, and other public services. Remittances are larger -- immigrants send at least $45 billion home from the United States each year, with Mexico, Central America, the Caribbean, and the Philippines especially large beneficiaries -- and complement aid by raising family incomes in rural districts and urban slums. Imports from low-income countries, excluding energy and goods from China, totaled $405 billion (or $35 billion per month) in 2007, spread across clothes, toys, Christmas decorations, coffee, mangoes, sports and fishing gear, TV sets, shrimp, flowers, and other goods. This is a much larger figure than those for aid, charity and remittances, but complements rather than replaces them by supporting tens of millions of middle-class and lower-middle class urban jobs and raising farm incomes, in poor countries.
Now the answers:
Question (1): Can we ever reduce poverty? Judged by facts, yes: the idealist's case is strong and the cynic's weak. The World Bank defines "absolute poverty" as life on $1.25 a day or less (in constant 1993 dollars) and has estimated poverty rates on this basis back to 1981. In that year, 52 percent of the world's people were very poor. By 1990, the figure was 42 percent. In 2005, the most recent year available, only 25 percent of the world's people were very poor. East Asia recorded the most progress, with the absolute-poverty rate falling from 78 percent in 1981, to 55 percent in 1990, and 16 percent in 2005. In one generation, then, Asian poverty fell from the near-universal experience of life to the sad exception. Drops elsewhere in the world have been slower but real: Since 1981, Latin America has cut absolute poverty from 13 percent to 8 percent; India and its neighbors from 60 percent to 40 percent; the Middle East from 8 percent to 4 percent; Africa from 54 percent to 51 percent. In eight low-to-middle-income countries without oil -- Chile, Jamaica, Mexico, Uruguay, Egypt, Jordan, Thailand, and Malaysia -- the absolute-poverty rate has fallen below two percent. Conclusion: if poor countries have good education, financial, infrastructure, anti-corruption, and other policies; if they are free of wars and coups; and if rich countries help through aid, trade and easy remittance, poverty often falls quickly and permanently.
Cambodia offers a human-scale and recent example. In 1996, after 25 years of first bombing, then genocide and famine, then endemic warfare, the country's gross national income was $14 billion, its per capita income was $1,240, and its infant mortality rate ran at 102 deaths per thousand live births annually. Cambodia has since received significant aid -- about $500 million annually, with Japan the largest donor -- and succeeded in trade, putting 350,000 young women to work through garment exports to American retailers. Earning three times the average national income as they sew shirts and pajamas, these garment-workers send a third of their pay money home, raising their rural relatives' "food security" from two months to a year. By last November's Rain Festival regatta on the Mekong, Cambodia's gross national income had in 12 years doubled to $29 billion, per capita income had risen by 60 percent to $2100, infant mortality had dropped by nearly half, and absolute poverty was down 20 percent.
Question (2): And in the midst of the current crisis? If cynics are wrong, are worried idealists right to fear that the achievement may slip away? Yes; and American policy can make matters worse or better.
Aid commitments have so far held up. With falling demand and unemployment in the United States, though, remittances are beginning to fall and trade is falling fast. Here again, Cambodia illustrates a general trend. Between October and November, as the crisis set in, America's imports from poor countries fell by $7 billion -- a 20 percent drop in a month. And as tourists and visitors from the rural districts watched the Rain Festival regatta, the garment factories that power Cambodia's growth were beginning to close down. According to The Phnom Penh Post, orders dropped by a third, 30 factories closed, and 20,000 young women lost work. The same things were happening in southern Africa, Central America, Pakistan, Mexico, the Philippines, Thailand, and many other countries. The effect in each is to suddenly increase poverty rates, raise the risk of rural hunger and urban sex-industry recruitment, and sometimes cause political instability.
No American policy can fully protect poor countries. But at minimum, Americans can avoid the trade protectionism and aid cuts that would worsen the blow to the poor; and with some energy, Congress and the new administration can ease it by making the U.S. trade regime more open and friendly to the poor.
In general, American trade policy is tougher on poor countries than rich ones, because tariffs and other barriers are relatively high on the cheap and simple manufactures and farm products poor countries provide, but low on services and high-tech products Americans buy from rich countries. On average, tariffs on poor-country imports are about twice as tariffs on rich-country goods. A series of "trade preference" programs partially ease the inequity by waiving some tariffs for poor countries. But the preferences are antiquated and in some ways ineffective, as they offer little help to low-income countries in Asia and the Muslim world, because it bars duty-free treatment for the clothes, shoes, and other light-industry products that account for most of their trade. In 2007, for example, Cambodia faced a $415 million tariff penalty on its $2.5 billion in clothes -- more than the $405 million penalty on Britain's $100 billion in medicines, aircraft parts, TV shows, insurance policies, and North Sea crude. Pakistan, Bangladesh, Lebanon, Sri Lanka, Laos, and others get similar exorbitant penalties.
Ending them through a better preference system would be easy and essentially cost free. The principal competitive effect would not be to raise total imports, but to give poor countries some help in dealing with much larger competitors; the main domestic consequence would be slightly lower clothing prices. A modest step, preference reform would give the people of poor nations some help as they manage a crisis they did not cause -- and over time, can help Americans keep a promise that, with some luck and good policy, we can fulfill in this generation.
[...]
Further Reading:
[...]
The World Bank charts the decline of poverty, 1981-2005: http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI08povertysupplement.pdf
And has a shorter note on the falling rate of malnutrition:http://siteresources.worldbank.org/INTPRH/Resources/childrenunderfive.pdf
PPI Trade & Global Markets Director Ed Gresser testifies last year at the Senate Finance Committee on preference policy:http://finance.senate.gov/sitepages/hearing061208.htm
The Center for Global Development's Kim Elliott has preference advice for the new administration:http://www.cgdev.org/content/publications/detail/967263
And the U.S. Trade Representative Office explains today's preference programs:http://www.ustr.gov/Trade_Development/Preference_Programs/Section_Index.html
Three views of Cambodia:
The Royal Ministry of Tourism tells the story of the water festival:http://www.mot.gov.kh/Hot_News/water_festival.html
The International Labor Organization's Cambodia factory-monitoring project reports on work conditions, pay and the social implications of the garment business:http://www.betterfactories.org/
The Phnom Penh Post reports on slipping sales, job loss and prospects for 2009:http://www.phnompenhpost.com/index.php/2009011923690/Business/Garment-factories-hunker-down-for-a-miserable-2009.html
The Kennedy legacy:
The 1961 inaugural: "To those peoples in the huts and villages across the globe struggling to break the bonds of mass misery, we pledge our best efforts to help them help themselves, for whatever period is required -- not because the Communists may be doing it, not because we seek their votes, but because it is right. If a free society cannot help the many who are poor, it cannot save the few who are rich."
The promise led to creation of the Agency for International Development, a 50 percent increase in foreign aid, the launch of the Peace Corps, and one of the most ambitious and successful efforts to reduce U.S. and world trade barriers since the Second World War. The Bank has not calculated $1.25-a-day figures for years before 1981, so evaluations aren't easy. But social indicators suggest that posterity should judge him well on results, as well as inspiration. Since 1960, global infant mortality has fallen by nearly two-thirds (from 126 to 50 infant deaths per thousand live births) and life expectancy has jumped from 50 years to 68 years.
The Peace Corps:http://www.peacecorps.gov/index.cfm?shell=learn.whatispc.history
The Agency for International Development:http://www.usaid.gov/
Aid and remittances:
The OECD has foreign-aid data by donor country and recipient:http://www.oecd.org/department/0,3355,en_2649_34447_1_1_1_1_1,00.html
The World Bank predicts remittance growth to slow next year, with payments to Africa and the Middle East likely to fall:http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21121930~menuPK:3145470~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html
[...]
Wednesday, January 21, 2009
European Antitrust Officials Target Microsoft over Internet Explorer
European Antitrust Officials Target Microsoft over Internet Explorer. By Ryan Radia
CEI, January 20, 2009
Washington, D.C., January 20, 2009—The European Commission may order Microsoft to strip Internet Explorer (IE) from certain versions of Windows, according to a preliminary ruling against Microsoft stemming from a complaint brought by Opera. Opera claims that Microsoft is “abusing its dominant position” by bundling IE with Windows, and consequently denying consumers “genuine choice” among web browsers.
If the European Commission upholds Opera’s complaint against Microsoft, it wouldn’t be the first time Microsoft has been found guilty of antitrust violations stemming from applications bundled with Windows.
Back in 2004, the Commission ruled that it was illegal for Microsoft to bundle its Windows Media Player with Windows and ordered Microsoft to offer a Media Player-less version of the operating system. Microsoft responded by unveiling the wryly named “Windows XP Reduced Media Edition.” Unsurprisingly, the European Commission rejected the name, so Microsoft renamed the OS “Windows N.”
Despite Windows N’s fairly neutral-sounding name, consumers showed little interest in Windows N when it hit the shelves. It’s quite obvious why Windows N was a flop–why would anybody want to run an operating system lacking useful components, especially when plenty of alternatives are available online at the click of a button?
The same reasoning is sure to relegate a browserless Windows (Windows: Reduced Internet Edition, perhaps?) to commercial irrelevance. Such a product would be placed on shelves solely to satisfy regulators convinced that they’re somehow “protecting” consumers by ensuring inferior products can be had.
How would the average user even select a preferred browser in the first place without a pre-installed browser? While OEMs could always pre-install a browser, anyone who wanted to install (or reinstall) a browserless version of Windows from scratch would need to jump through hoops just to get online.
More to the point, Opera’s claim against Microsoft looks downright absurd given the reality of today’s increasingly competitive browser marketplace. Despite IE being bundled with Windows, Firefox has gained significant ground on IE in recent years. Four years ago, IE had 91% global market share, while Firefox hovered around 3.5%. Now, Firefox is almost at 21% market share, and IE recently dropped below 70%.
Firefox’s ascent did not happen because of a mass exodus of users from Windows to other operating systems. To be sure, Windows has faltered a bit as of late, but Firefox has gained the following of a massive number of Windows users who elected to download and install Firefox as a replacement for Internet Explorer. This illustrates that users are perfectly willing to pick their favorite application for a given task, even if that means downloading a third-party app on the Internet. Plenty of other programs, like VLC and Google Desktop, have taken off among Windows users even though these apps largely duplicate the functionality of bundled Windows components.
Where does all this leave Opera? Unlike Firefox, Opera is still a laggard in terms of market share. Blaming Opera’s inability to gain a large user base on the bundling of IE with Windows, however, is entirely misplaced. The folks at Opera may feel that going after Microsoft might help them peel off a few users - or, at least, get Opera’s name out there in the press - but Opera’s biggest enemy is certainly not Internet Explorer.
CEI, January 20, 2009
Washington, D.C., January 20, 2009—The European Commission may order Microsoft to strip Internet Explorer (IE) from certain versions of Windows, according to a preliminary ruling against Microsoft stemming from a complaint brought by Opera. Opera claims that Microsoft is “abusing its dominant position” by bundling IE with Windows, and consequently denying consumers “genuine choice” among web browsers.
If the European Commission upholds Opera’s complaint against Microsoft, it wouldn’t be the first time Microsoft has been found guilty of antitrust violations stemming from applications bundled with Windows.
Back in 2004, the Commission ruled that it was illegal for Microsoft to bundle its Windows Media Player with Windows and ordered Microsoft to offer a Media Player-less version of the operating system. Microsoft responded by unveiling the wryly named “Windows XP Reduced Media Edition.” Unsurprisingly, the European Commission rejected the name, so Microsoft renamed the OS “Windows N.”
Despite Windows N’s fairly neutral-sounding name, consumers showed little interest in Windows N when it hit the shelves. It’s quite obvious why Windows N was a flop–why would anybody want to run an operating system lacking useful components, especially when plenty of alternatives are available online at the click of a button?
The same reasoning is sure to relegate a browserless Windows (Windows: Reduced Internet Edition, perhaps?) to commercial irrelevance. Such a product would be placed on shelves solely to satisfy regulators convinced that they’re somehow “protecting” consumers by ensuring inferior products can be had.
How would the average user even select a preferred browser in the first place without a pre-installed browser? While OEMs could always pre-install a browser, anyone who wanted to install (or reinstall) a browserless version of Windows from scratch would need to jump through hoops just to get online.
More to the point, Opera’s claim against Microsoft looks downright absurd given the reality of today’s increasingly competitive browser marketplace. Despite IE being bundled with Windows, Firefox has gained significant ground on IE in recent years. Four years ago, IE had 91% global market share, while Firefox hovered around 3.5%. Now, Firefox is almost at 21% market share, and IE recently dropped below 70%.
Firefox’s ascent did not happen because of a mass exodus of users from Windows to other operating systems. To be sure, Windows has faltered a bit as of late, but Firefox has gained the following of a massive number of Windows users who elected to download and install Firefox as a replacement for Internet Explorer. This illustrates that users are perfectly willing to pick their favorite application for a given task, even if that means downloading a third-party app on the Internet. Plenty of other programs, like VLC and Google Desktop, have taken off among Windows users even though these apps largely duplicate the functionality of bundled Windows components.
Where does all this leave Opera? Unlike Firefox, Opera is still a laggard in terms of market share. Blaming Opera’s inability to gain a large user base on the bundling of IE with Windows, however, is entirely misplaced. The folks at Opera may feel that going after Microsoft might help them peel off a few users - or, at least, get Opera’s name out there in the press - but Opera’s biggest enemy is certainly not Internet Explorer.
Saturday, January 17, 2009
To Implement the US-Peru Trade Promotion Agreement and for Other Purposes, 2009
To Implement the United States-Peru Trade Promotion Agreement and for Other Purposes, 2009
A Proclamation by the President of the United States of America
Washington, DC, Jan 16, 2009
1. On April 12, 2006, the United States entered into the United States-Peru Trade Promotion Agreement (the "Agreement"), and on June 24 and June 25, 2007, the Parties to the Agreement signed a protocol amending the Agreement. Congress approved the Agreement as amended in section 101(a) of the United States-Peru Trade Promotion Agreement Implementation Act (the "Implementation Act") (Public Law 110-138, 121 Stat. 1455) (19 U.S.C. 3805 note).
2. Section 105(a) of the Implementation Act authorizes the President to establish or designate within the Department of Commerce an office that shall be responsible for providing administrative assistance to panels established under chapter 21 of the Agreement.
3. Section 201 of the Implementation Act authorizes the President to proclaim such modifications or continuation of any duty, such continuation of duty-free or excise treatment, or such additional duties, as the President determines to be necessary or appropriate to carry out or apply Articles 2.3, 2.5, 2.6, 3.3.13 and Annex 2.3 of the Agreement.
4. Section 201(d) of the Implementation Act authorizes the President to take such action as may be necessary in implementing the tariff-rate quotas set forth in Appendix I to the Schedule of the United States to Annex 2.3 of the Agreement to ensure that imports of agricultural goods do not disrupt the orderly marketing of commodities in the United States.
5. Consistent with section 201(a)(2) of the Implementation Act, Peru is to be removed from the enumeration of designated beneficiary developing countries eligible for the benefits of the Generalized System of Preferences (GSP) on the date the Agreement enters into force. Further, consistent with section 604 of the Trade Act of 1974, as amended (the "1974 Act") (19 U.S.C. 2483), I have determined that other technical and conforming changes to the Harmonized Tariff Schedule of the United States (HTS) are necessary to reflect that Peru is no longer eligible to receive the benefits of the GSP.
6. Section 203 of the Implementation Act sets forth certain rules for determining whether a good is an originating good for the purpose of implementing preferential tariff treatment provided for under the Agreement. I have decided that it is necessary to include these rules of origin, together with particular rules applicable to certain other goods, in the HTS.
7. Section 203(o) of the Implementation Act authorizes the President to determine that a fabric, yarn, or fiber is or is not available in commercial quantities in a timely manner in the United States and Peru; to establish procedures governing the request for any such determination and ensuring appropriate public participation in any such determination; to add any fabric, yarn, or fiber determined to be not available in commercial quantities in a timely manner in the United States and Peru to the list in Annex 3-B of the Agreement in a restricted or unrestricted quantity; to eliminate a restriction on the quantity of a fabric, yarn, or fiber within 6 months after adding the fabric, yarn, or fiber to the list in Annex 3-B of the Agreement in a restricted quantity; and to restrict the quantity of, or remove from the list in Annex 3-B of the Agreement, certain fabrics, yarns, or fibers.
8. Section 208 of the Implementation Act authorizes the President to take certain enforcement actions relating to trade with Peru in textile and apparel goods.
9. Subtitle B of title III of the Implementation Act authorizes the President to take certain actions in response to a request by an interested party for relief from serious damage or actual threat thereof to a domestic industry producing certain textile or apparel articles.
10. Executive Order 11651 of March 3, 1972, as amended, established the Committee for the Implementation of Textile Agreements (CITA), consisting of representatives of the Departments of State, the Treasury, Commerce, and Labor, and the Office of the United States Trade Representative, with the representative of the Department of Commerce as Chairman, to supervise the implementation of textile trade agreements. Consistent with section 301 of title 3, United States Code, when carrying out functions vested in the President by statute and assigned by the President to CITA, the officials collectively exercising those functions are all to be officers required to be appointed by the President with the advice and consent of the Senate.
11. Presidential Proclamation 7971 of December 22, 2005, implemented the United States-Morocco Free Trade Agreement (USMFTA). The proclamation implemented, pursuant to section 201 of the United States-Morocco Free Trade Agreement Implementation Act (the "USMFTA Act") (Public Law 108-302, 118 Stat. 1103) (19 U.S.C. 3805 note), the staged reductions in rates of duty that I determined to be necessary or appropriate to carry out or apply certain provisions of the USMFTA, including Articles 2.5 and 2.6. The proclamation inadvertently omitted two modifications to the HTS necessary to carry out the provisions of Articles 2.5 and 2.6 of the USMFTA. I have determined that technical corrections to the HTS are necessary to provide the intended tariff treatment under Articles 2.5 and 2.6 of the USMFTA.
12. Presidential Proclamation 8039 of July 27, 2006, implemented the United States-Bahrain Free Trade Agreement (USBFTA). The proclamation implemented, pursuant to section 201 of the United State-Bahrain Free Trade Agreement Implementation Act (the "USBFTA Act") (Public Law 109-169, 119 Stat. 3581), the staged reductions in rates of duty that I determined to be necessary or appropriate to carry out or apply certain provisions of the USBFTA, including Articles 2.5 and 2.6. The proclamation inadvertently omitted two modifications to the HTS necessary to carry out the provisions of Articles 2.5 and 2.6 of the USBFTA. I have determined that technical corrections to the HTS are necessary to provide the intended tariff treatment under Articles 2.5 and 2.6 of the USBFTA.
13. Presidential Proclamation 8331 of December 23, 2008, implemented the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) for trade with Costa Rica. The proclamation implemented, pursuant to section 201 of the Dominican Republic-Central America-United States Free Trade Agreement Implementation Act (the "CAFTA-DR Act") (Public Law 109-53, 119 Stat. 467) (19 U.S.C. 4031), the duty treatment necessary to carry out or apply Articles 3.3 and 3.27, and Annexes 3.3 (including the schedule of United States duty reductions with respect to originating goods) and 3.27, of the CAFTA-DR. I have determined that technical corrections to the HTS are necessary to provide the intended duty treatment under the CAFTA-DR.
14. Section 604 of the 1974 Act, as amended, authorizes the President to embody in the HTS the substance of relevant provisions of that Act, or other Acts affecting import treatment, and of actions taken thereunder, including the removal, modification, continuance, or imposition of any rate of duty or other import restriction.
NOW, THEREFORE, I, GEORGE W. BUSH, President of the United States of America, acting under the authority vested in me by the Constitution and the laws of the United States of America, including but not limited to section 604 of the 1974 Act; sections 105(a), 201, 203, 208, and subtitle B of title III of the Implementation Act; and section 301 of title 3, United States Code, and having made the determination under section 101(b) of the Implementation Act necessary for the exchange of notes, do hereby proclaim:
(1) In order to provide generally for the preferential tariff treatment being accorded under the Agreement, to set forth rules for determining whether goods imported into the customs territory of the United States are eligible for preferential tariff treatment under the Agreement, to provide certain other treatment to originating goods of Peru for the purposes of the Agreement, to provide tariff-rate quotas with respect to certain originating goods of Peru, to reflect Peru's removal from the enumeration of designated beneficiary developing countries for purposes of the GSP, and to make technical and conforming changes in the general notes to the HTS, the HTS is modified as set forth in Annex I of Publication 4058 of the United States International Trade Commission, entitled, "Modifications to the Harmonized Tariff Schedule of the United States to Implement the United States-Peru Trade Promotion Agreement", which is incorporated by reference into this proclamation.
(2) In order to implement the initial stage of duty elimination provided for in the Agreement and to provide for future staged reductions in duties for originating goods of Peru for purposes of the Agreement, the HTS is modified as provided in Annex II of Publication 4058, effective on the dates specified in the relevant sections of such publication and on any subsequent dates set forth for such duty reductions in that publication.
(3) The amendments to the HTS made by paragraphs (1) and (2) of this proclamation shall be effective with respect to goods entered, or withdrawn from warehouse for consumption, on or after the relevant dates indicated in Annex II to Publication 4058.
(4) The Secretary of Commerce is authorized to exercise my authority under section 105(a) of the Implementation Act to establish or designate an office within the Department of Commerce to carry out the functions set forth in that section.
(5) The United States Trade Representative (USTR) is authorized to exercise my authority under section 201(d) of the Implementation Act to take such action as may be necessary in implementing the tariff-rate quotas set forth in Appendix I to the Schedule of the United States to Annex 2.3 of the Agreement to ensure that imports of agricultural goods do not disrupt the orderly marketing of commodities in the United States. This action is set forth in Annex I of Publication 4058.
(6) The CITA is authorized to exercise my authority under section 203(o) of the Implementation Act to determine that a fabric, yarn, or fiber is or is not available in commercial quantities in a timely manner in the United States and Peru; to establish procedures governing the request for any such determination and ensuring appropriate public participation in any such determination; to add any fabric, yarn, or fiber determined to be not available in commercial quantities in a timely manner in the United States and Peru to the list in Annex 3-B of the Agreement in a restricted or unrestricted quantity; to eliminate a restriction on the quantity of a fabric, yarn, or fiber within 6 months after adding the fabric, yarn, or fiber to the list in Annex 3-B of the Agreement in a restricted quantity; and to restrict the quantity of, or remove from the list in Annex 3-B of the Agreement, certain fabrics, yarns, or fibers.
(7) The CITA is authorized to exercise my authority under section 208 of the Implementation Act to exclude certain textile and apparel goods from the customs territory of the United States; to determine whether an enterprise's production of, and capability to produce, goods are consistent with statements by the enterprise; to find that an enterprise has knowingly or willfully engaged in circumvention; and to deny preferential tariff treatment to textile and apparel goods.
(8) The CITA is authorized to exercise the functions of the President under subtitle B of title III of the Implementation Act to review requests, and to determine whether to commence consideration of such requests; to cause to be published in the Federal Register a notice of commencement of consideration of a request and notice seeking public comment; to determine whether imports of a Peruvian textile or apparel article are causing serious damage, or actual threat thereof, to a domestic industry producing an article that is like, or directly competitive with, the imported article; and to provide relief from imports of an article that is the subject of such a determination.
(9) The CITA, after consultation with the Commissioner of Customs (the "Commissioner"), is authorized to consult with representatives of Peru for the purpose of identifying particular textile or apparel goods of Peru that are mutually agreed to be handloomed fabrics, handmade goods made of such handloomed fabrics, folklore goods, or handmade goods that substantially incorporate a historical or traditional regional design or motif, as provided in Article 3.3.12 of the Agreement. The Commissioner shall take actions as directed by the CITA to carry out any such determination.
(10) The USTR is authorized to fulfill my obligations under section 104 of the Implementation Act to obtain advice from the appropriate advisory committees and the United States International Trade Commission on the proposed implementation of an action by presidential proclamation; to submit a report on such proposed action to the appropriate congressional committees; and to consult with those congressional committees regarding the proposed action.
(11) The USTR is authorized to modify U.S. note 29 to subchapter XXII of chapter 98 of the HTS in a notice published in the Federal Register to reflect modifications pursuant to paragraph (6) of this proclamation by the CITA to the list of fabrics, yarns, or fibers in Annex 3-B of the Agreement.
(12) In order to make technical corrections necessary to provide the intended duty treatment under Articles 2.5 and 2.6 of the USMFTA, Articles 2.5 and 2.6 of the USBFTA, and the CAFTA-DR, the HTS is modified as set forth in Annex III of Publication 4058.
(13) All provisions of previous proclamations and Executive Orders that are inconsistent with the actions taken in this proclamation are superseded to the extent of such inconsistency.
IN WITNESS WHEREOF, I have hereunto set my hand this sixteenth day of January, in the year of our Lord two thousand nine, and of the Independence of the United States of America the two hundred and thirty-third.
GEORGE W. BUSH
A Proclamation by the President of the United States of America
Washington, DC, Jan 16, 2009
1. On April 12, 2006, the United States entered into the United States-Peru Trade Promotion Agreement (the "Agreement"), and on June 24 and June 25, 2007, the Parties to the Agreement signed a protocol amending the Agreement. Congress approved the Agreement as amended in section 101(a) of the United States-Peru Trade Promotion Agreement Implementation Act (the "Implementation Act") (Public Law 110-138, 121 Stat. 1455) (19 U.S.C. 3805 note).
2. Section 105(a) of the Implementation Act authorizes the President to establish or designate within the Department of Commerce an office that shall be responsible for providing administrative assistance to panels established under chapter 21 of the Agreement.
3. Section 201 of the Implementation Act authorizes the President to proclaim such modifications or continuation of any duty, such continuation of duty-free or excise treatment, or such additional duties, as the President determines to be necessary or appropriate to carry out or apply Articles 2.3, 2.5, 2.6, 3.3.13 and Annex 2.3 of the Agreement.
4. Section 201(d) of the Implementation Act authorizes the President to take such action as may be necessary in implementing the tariff-rate quotas set forth in Appendix I to the Schedule of the United States to Annex 2.3 of the Agreement to ensure that imports of agricultural goods do not disrupt the orderly marketing of commodities in the United States.
5. Consistent with section 201(a)(2) of the Implementation Act, Peru is to be removed from the enumeration of designated beneficiary developing countries eligible for the benefits of the Generalized System of Preferences (GSP) on the date the Agreement enters into force. Further, consistent with section 604 of the Trade Act of 1974, as amended (the "1974 Act") (19 U.S.C. 2483), I have determined that other technical and conforming changes to the Harmonized Tariff Schedule of the United States (HTS) are necessary to reflect that Peru is no longer eligible to receive the benefits of the GSP.
6. Section 203 of the Implementation Act sets forth certain rules for determining whether a good is an originating good for the purpose of implementing preferential tariff treatment provided for under the Agreement. I have decided that it is necessary to include these rules of origin, together with particular rules applicable to certain other goods, in the HTS.
7. Section 203(o) of the Implementation Act authorizes the President to determine that a fabric, yarn, or fiber is or is not available in commercial quantities in a timely manner in the United States and Peru; to establish procedures governing the request for any such determination and ensuring appropriate public participation in any such determination; to add any fabric, yarn, or fiber determined to be not available in commercial quantities in a timely manner in the United States and Peru to the list in Annex 3-B of the Agreement in a restricted or unrestricted quantity; to eliminate a restriction on the quantity of a fabric, yarn, or fiber within 6 months after adding the fabric, yarn, or fiber to the list in Annex 3-B of the Agreement in a restricted quantity; and to restrict the quantity of, or remove from the list in Annex 3-B of the Agreement, certain fabrics, yarns, or fibers.
8. Section 208 of the Implementation Act authorizes the President to take certain enforcement actions relating to trade with Peru in textile and apparel goods.
9. Subtitle B of title III of the Implementation Act authorizes the President to take certain actions in response to a request by an interested party for relief from serious damage or actual threat thereof to a domestic industry producing certain textile or apparel articles.
10. Executive Order 11651 of March 3, 1972, as amended, established the Committee for the Implementation of Textile Agreements (CITA), consisting of representatives of the Departments of State, the Treasury, Commerce, and Labor, and the Office of the United States Trade Representative, with the representative of the Department of Commerce as Chairman, to supervise the implementation of textile trade agreements. Consistent with section 301 of title 3, United States Code, when carrying out functions vested in the President by statute and assigned by the President to CITA, the officials collectively exercising those functions are all to be officers required to be appointed by the President with the advice and consent of the Senate.
11. Presidential Proclamation 7971 of December 22, 2005, implemented the United States-Morocco Free Trade Agreement (USMFTA). The proclamation implemented, pursuant to section 201 of the United States-Morocco Free Trade Agreement Implementation Act (the "USMFTA Act") (Public Law 108-302, 118 Stat. 1103) (19 U.S.C. 3805 note), the staged reductions in rates of duty that I determined to be necessary or appropriate to carry out or apply certain provisions of the USMFTA, including Articles 2.5 and 2.6. The proclamation inadvertently omitted two modifications to the HTS necessary to carry out the provisions of Articles 2.5 and 2.6 of the USMFTA. I have determined that technical corrections to the HTS are necessary to provide the intended tariff treatment under Articles 2.5 and 2.6 of the USMFTA.
12. Presidential Proclamation 8039 of July 27, 2006, implemented the United States-Bahrain Free Trade Agreement (USBFTA). The proclamation implemented, pursuant to section 201 of the United State-Bahrain Free Trade Agreement Implementation Act (the "USBFTA Act") (Public Law 109-169, 119 Stat. 3581), the staged reductions in rates of duty that I determined to be necessary or appropriate to carry out or apply certain provisions of the USBFTA, including Articles 2.5 and 2.6. The proclamation inadvertently omitted two modifications to the HTS necessary to carry out the provisions of Articles 2.5 and 2.6 of the USBFTA. I have determined that technical corrections to the HTS are necessary to provide the intended tariff treatment under Articles 2.5 and 2.6 of the USBFTA.
13. Presidential Proclamation 8331 of December 23, 2008, implemented the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) for trade with Costa Rica. The proclamation implemented, pursuant to section 201 of the Dominican Republic-Central America-United States Free Trade Agreement Implementation Act (the "CAFTA-DR Act") (Public Law 109-53, 119 Stat. 467) (19 U.S.C. 4031), the duty treatment necessary to carry out or apply Articles 3.3 and 3.27, and Annexes 3.3 (including the schedule of United States duty reductions with respect to originating goods) and 3.27, of the CAFTA-DR. I have determined that technical corrections to the HTS are necessary to provide the intended duty treatment under the CAFTA-DR.
14. Section 604 of the 1974 Act, as amended, authorizes the President to embody in the HTS the substance of relevant provisions of that Act, or other Acts affecting import treatment, and of actions taken thereunder, including the removal, modification, continuance, or imposition of any rate of duty or other import restriction.
NOW, THEREFORE, I, GEORGE W. BUSH, President of the United States of America, acting under the authority vested in me by the Constitution and the laws of the United States of America, including but not limited to section 604 of the 1974 Act; sections 105(a), 201, 203, 208, and subtitle B of title III of the Implementation Act; and section 301 of title 3, United States Code, and having made the determination under section 101(b) of the Implementation Act necessary for the exchange of notes, do hereby proclaim:
(1) In order to provide generally for the preferential tariff treatment being accorded under the Agreement, to set forth rules for determining whether goods imported into the customs territory of the United States are eligible for preferential tariff treatment under the Agreement, to provide certain other treatment to originating goods of Peru for the purposes of the Agreement, to provide tariff-rate quotas with respect to certain originating goods of Peru, to reflect Peru's removal from the enumeration of designated beneficiary developing countries for purposes of the GSP, and to make technical and conforming changes in the general notes to the HTS, the HTS is modified as set forth in Annex I of Publication 4058 of the United States International Trade Commission, entitled, "Modifications to the Harmonized Tariff Schedule of the United States to Implement the United States-Peru Trade Promotion Agreement", which is incorporated by reference into this proclamation.
(2) In order to implement the initial stage of duty elimination provided for in the Agreement and to provide for future staged reductions in duties for originating goods of Peru for purposes of the Agreement, the HTS is modified as provided in Annex II of Publication 4058, effective on the dates specified in the relevant sections of such publication and on any subsequent dates set forth for such duty reductions in that publication.
(3) The amendments to the HTS made by paragraphs (1) and (2) of this proclamation shall be effective with respect to goods entered, or withdrawn from warehouse for consumption, on or after the relevant dates indicated in Annex II to Publication 4058.
(4) The Secretary of Commerce is authorized to exercise my authority under section 105(a) of the Implementation Act to establish or designate an office within the Department of Commerce to carry out the functions set forth in that section.
(5) The United States Trade Representative (USTR) is authorized to exercise my authority under section 201(d) of the Implementation Act to take such action as may be necessary in implementing the tariff-rate quotas set forth in Appendix I to the Schedule of the United States to Annex 2.3 of the Agreement to ensure that imports of agricultural goods do not disrupt the orderly marketing of commodities in the United States. This action is set forth in Annex I of Publication 4058.
(6) The CITA is authorized to exercise my authority under section 203(o) of the Implementation Act to determine that a fabric, yarn, or fiber is or is not available in commercial quantities in a timely manner in the United States and Peru; to establish procedures governing the request for any such determination and ensuring appropriate public participation in any such determination; to add any fabric, yarn, or fiber determined to be not available in commercial quantities in a timely manner in the United States and Peru to the list in Annex 3-B of the Agreement in a restricted or unrestricted quantity; to eliminate a restriction on the quantity of a fabric, yarn, or fiber within 6 months after adding the fabric, yarn, or fiber to the list in Annex 3-B of the Agreement in a restricted quantity; and to restrict the quantity of, or remove from the list in Annex 3-B of the Agreement, certain fabrics, yarns, or fibers.
(7) The CITA is authorized to exercise my authority under section 208 of the Implementation Act to exclude certain textile and apparel goods from the customs territory of the United States; to determine whether an enterprise's production of, and capability to produce, goods are consistent with statements by the enterprise; to find that an enterprise has knowingly or willfully engaged in circumvention; and to deny preferential tariff treatment to textile and apparel goods.
(8) The CITA is authorized to exercise the functions of the President under subtitle B of title III of the Implementation Act to review requests, and to determine whether to commence consideration of such requests; to cause to be published in the Federal Register a notice of commencement of consideration of a request and notice seeking public comment; to determine whether imports of a Peruvian textile or apparel article are causing serious damage, or actual threat thereof, to a domestic industry producing an article that is like, or directly competitive with, the imported article; and to provide relief from imports of an article that is the subject of such a determination.
(9) The CITA, after consultation with the Commissioner of Customs (the "Commissioner"), is authorized to consult with representatives of Peru for the purpose of identifying particular textile or apparel goods of Peru that are mutually agreed to be handloomed fabrics, handmade goods made of such handloomed fabrics, folklore goods, or handmade goods that substantially incorporate a historical or traditional regional design or motif, as provided in Article 3.3.12 of the Agreement. The Commissioner shall take actions as directed by the CITA to carry out any such determination.
(10) The USTR is authorized to fulfill my obligations under section 104 of the Implementation Act to obtain advice from the appropriate advisory committees and the United States International Trade Commission on the proposed implementation of an action by presidential proclamation; to submit a report on such proposed action to the appropriate congressional committees; and to consult with those congressional committees regarding the proposed action.
(11) The USTR is authorized to modify U.S. note 29 to subchapter XXII of chapter 98 of the HTS in a notice published in the Federal Register to reflect modifications pursuant to paragraph (6) of this proclamation by the CITA to the list of fabrics, yarns, or fibers in Annex 3-B of the Agreement.
(12) In order to make technical corrections necessary to provide the intended duty treatment under Articles 2.5 and 2.6 of the USMFTA, Articles 2.5 and 2.6 of the USBFTA, and the CAFTA-DR, the HTS is modified as set forth in Annex III of Publication 4058.
(13) All provisions of previous proclamations and Executive Orders that are inconsistent with the actions taken in this proclamation are superseded to the extent of such inconsistency.
IN WITNESS WHEREOF, I have hereunto set my hand this sixteenth day of January, in the year of our Lord two thousand nine, and of the Independence of the United States of America the two hundred and thirty-third.
GEORGE W. BUSH
Friday, January 16, 2009
Mexico: unilaterally reducing tariff rates
Laudable Economic Stimulus Plan in Mexico, by Daniel Ikenson
Cato Blog, January 15, 2009 @ 11:39 am
While the United States and many other countries flirt with the idea of raising barriers to trade, our enlightened neighbor to the south has a more promising response to the global economic contraction.
On January 2, the Calderon administration initiated a plan (discussed here; HT to Scott Lincicome) to unilaterally reduce tariff rates on about 70 percent of the items on its tariff schedule. Those 8,000 items comprising 20 different industrial sectors accounted for about half of all Mexican import value in 2007. When the final phase of the plan is implemented on January 1, 2013, the average industrial tariff rate in Mexico will have fallen from 10.4% to 4.3%.
The objectives of the plan are to reduce business operating costs, attract and retain foreign investment, raise business productivity, and provide consumers a greater variety and better quality of goods and services at competitive prices. Perhaps our free trade advocacy is having a positive impact on public policy after all. I suspect those objectives are very well served by the plan.
Mexico is no stranger to unilateral trade liberalization—so they’re not just grasping at straws here. This is a tried and true approach to economic growth in Mexico and throughout the world. Many of the reforms Mexico agreed to in the North American Free Trade Agreement were already undertaken before the NAFTA went into effect in 1994. They were undertaken with the same objectives in mind. So, Mexico has some experience and credibility on the issue of the benefits of unilateral trade liberalization.
Let’s hope the rest of the world is watching, if not waiting in the wings.
Cato Blog, January 15, 2009 @ 11:39 am
While the United States and many other countries flirt with the idea of raising barriers to trade, our enlightened neighbor to the south has a more promising response to the global economic contraction.
On January 2, the Calderon administration initiated a plan (discussed here; HT to Scott Lincicome) to unilaterally reduce tariff rates on about 70 percent of the items on its tariff schedule. Those 8,000 items comprising 20 different industrial sectors accounted for about half of all Mexican import value in 2007. When the final phase of the plan is implemented on January 1, 2013, the average industrial tariff rate in Mexico will have fallen from 10.4% to 4.3%.
The objectives of the plan are to reduce business operating costs, attract and retain foreign investment, raise business productivity, and provide consumers a greater variety and better quality of goods and services at competitive prices. Perhaps our free trade advocacy is having a positive impact on public policy after all. I suspect those objectives are very well served by the plan.
Mexico is no stranger to unilateral trade liberalization—so they’re not just grasping at straws here. This is a tried and true approach to economic growth in Mexico and throughout the world. Many of the reforms Mexico agreed to in the North American Free Trade Agreement were already undertaken before the NAFTA went into effect in 1994. They were undertaken with the same objectives in mind. So, Mexico has some experience and credibility on the issue of the benefits of unilateral trade liberalization.
Let’s hope the rest of the world is watching, if not waiting in the wings.
"Shipping Jobs Overseas" or Reaching New Customers? Why Congress Should Not Tax Reinvested Earnings Abroad
"Shipping Jobs Overseas" or Reaching New Customers? Why Congress Should Not Tax Reinvested Earnings Abroad. By Daniel T. Griswold
Cato, Free Trade Bulletin No. 36, Jan 13, 2009
Trade and globalization have become more inviting targets during the current economic downturn. As output falls and unemployment rises, politicians in Washington are questioning not only imports but U.S. companies that invest in production abroad.
The incoming president, Barack Obama, pledged during his campaign that, "Unlike John McCain, I will stop giving tax breaks to corporations that ship jobs overseas and I will start giving them to companies that create good jobs right here in America."1 That campaign refrain, echoed by a number of other successful candidates, raises three basic questions:
Why do U.S. multinational companies establish affiliates abroad and hire foreign workers? What kind of tax breaks are they receiving? And should the new Congress and new president change U.S. law to make it more difficult for U.S. multinational corporations to produce goods and services in foreign countries?
Reaching millions of new customers
To demonize U.S. multinationals operating production facilities abroad is to indict virtually every major American company. At latest count more than 2,500 U.S. corporations own and operate a total of 23,853 affiliates in other countries. In 2006, according to the U.S. Department of Commerce, majority-owned foreign affiliates of U.S. companies posted $4.1 trillion in sales, created just under $1 trillion in value added, employed 9.5 million foreign workers, and earned $644 billion in net income for their U.S.-based parent companies.2
The primary reason why U.S. companies invest in affiliates abroad is to sell more products to foreign customers. Certain services can only be delivered on the spot, where the provider must have a physical presence in the same location as its customers. Operating affiliates abroad allows U.S. companies to maintain control over their brand name and intellectual property such as trademarks, patents, and engineering expertise. U.S. companies also establish foreign affiliates because of certain advantages in the host country— lower-cost labor, ready access to raw materials and other inputs, reduced transportation costs and proximity to their ultimate customers. Yes, the motivations can include access to "cheap labor," but labor costs are not the principal motivation for most U.S. direct investment abroad.
Politicians focus most of their attention on comparing exports and imports, but the most common way American companies sell their goods and services in the global market today is through overseas affiliates. In 2006, U.S. multinational companies sold $3,301 billion in goods through their majority-owned affiliates abroad and $677 billion in services. For every $1 billion in goods that U.S. multinational companies exported from the United States in 2006, those same companies sold $6.2 billion through their overseas operations. For every $1 billion in service exports, U.S.- owned affiliates abroad sold $1.6 billion.3
Contrary to popular myth, U.S. multinational companies do not use their foreign operations as an "export platform" back to the United States. Close to 90 percent of the goods and services produced by U.S.-owned affiliates abroad are sold to customers either in the host country or exported to consumers in third countries outside the United States. Even in Mexico and China, where low-wage workers are supposedly too poor to buy American products, more than half of the products of new and existing U.S. affiliates are sold in their domestic markets, whereas customers in the United States account for only 17 percent of sales.4
More Jobs Abroad, More Jobs at Home
Investing abroad is not about "shipping jobs overseas." There is no evidence that expanding employment at U.S.- owned affiliates comes at the expense of overall employment by parent companies back home in the United States. In fact, the evidence and experience of U.S. multinational companies points in the opposite direction: foreign and domestic operations tend to compliment each other and expand together. A successful company operating in a favorable business climate will tend to expand employment at both its domestic and overseas operations. More activity and sales abroad often require the hiring of more managers, accountants, lawyers, engineers, and production workers at the parent company.
Consider Caterpillar Inc., the Peoria, Illinois-based company known for making giant earth-moving equipment. From 2005 through 2007, the company enjoyed booming global sales because of strong growth in overseas markets, especially those with resources extracted from the ground. According to the company's 2007 annual report, Caterpillar earned 63 percent of its sales revenue abroad, including $1 billion in sales in China alone. As a result, Caterpillar ramped up employment at its overseas affiliates during that time from 41,238 to 50,788, an increase of almost 10,000 workers. During that same three-year period, the company expanded its domestic employment from 43,878 to 50,545, a healthy increase of 6,667.5
Caterpillar's experience is not unusual for U.S. multinational companies. A 2005 study from the National Bureau of Economic Research found that, during the 1980s and 1990s, there was "a strong positive correlation between domestic and foreign growth rates of multinational firms." After analyzing the operations of U.S. multinational companies at home and abroad, economists Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr. found that a 10 percent increase in capital investment in existing foreign affiliates was associated with a 2.2 percent increase in domestic investment by the same company and a 4 percent increase in compensation for its domestic workforce. They also found a positive connection between foreign and domestic sales, assets, and numbers of employees.6 "Foreign production requires inputs of tangible or intellectual property produced in the home country," the authors explained. "Greater foreign activity spurs higher exports from American parent companies to foreign affiliates and greater domestic R&D spending."7
The positive connection between foreign and domestic employment of U.S. multinational companies has continued into the current decade. As Figure 1 shows, parent and affiliate employment have tracked each other since the early 1980s. More recently, employment rose briskly for parents and affiliates alike in the boom of the late 1990s, fell for both during the downturn and slow recovery of 2001 through 2003, and then rose again from 2003 through 2006.8 Although the numbers have not been reported yet for 2007 and 2008, it's likely that the loss of net jobs in the domestic U.S. economy will be mirrored by much slower growth or outright decline in foreign affiliate employment.
Modest Investment in China and Mexico
Investment in China and Mexico drew the most fire on the campaign trail. In a primary debate in Texas in February 2008, then-senator Obama said, "In Youngstown, Ohio, I've talked to workers who have seen their plants shipped overseas as a consequence of bad trade deals like NAFTA, literally seeing equipment unbolted from the floors of factories and shipped to China."9 That makes for a good sound-bite in the heat of a campaign, but it does not accurately reflect the broader reality of outward foreign investment by U.S. manufacturers.
[graph in original article]
Outflows of U.S. manufacturing investment to Mexico and China have been modest by any measure. Between 2003 and 2007, U.S. manufacturing companies sent an average of $2 billion a year in direct investment to China and $1.9 billion to Mexico. That pales in comparison to the average $22 billion a year in direct manufacturing investment "shipped" to Europe during that same period, but talking about equipment being unbolted from the floors of U.S. factories and shipped to England just doesn't have the same bite.10 The modest annual outflow in investment to China and Mexico is positively dwarfed by the annual $59 billion inflow of manufacturing investment to the United States from abroad during those same years11 and the average of $165 billion per year that U.S. manufacturers invested domestically in plant and equipment.12
The fear of manufacturing jobs being shipped to China and Mexico is not supported by the evidence. While U.S. factories were famously shedding those 3 million net jobs between 2000 and 2006, U.S.-owned manufacturing affiliates abroad increased their employment by a modest 128,000 jobs. An increase in 172,000 jobs at U.S.-owned affiliates in China was partially offset by an actual decline of almost 100,000 jobs at affiliates in Mexico.13 The large majority of factory jobs lost in the United States since 2000 were not "shipped to China" or anywhere else, but were lost to automation and other sources of increased efficiency in U.S. manufacturing.
U.S. manufacturing investment in China remains modest compared to the huge political investment that candidates and pundits have made in making it an issue. U.S. direct investment in China remains a relatively small part of China's overall economy, and a small part of America's total investments abroad. Of the nearly 10 million workers that U.S. affiliates employ abroad, fewer than 5 percent are Chinese; Americanowned affiliates employed just as many manufacturing workers in high-wage Germany in 2006 as they did in low-wage China.14
"Tax breaks" Keep U.S. Companies Competitive
Politicians are not usually specific about exactly what "tax breaks" they want to repeal. The biggest tax exemption for U.S. companies that invest abroad is the deferral of tax payments for "active" income. U.S. corporations are generally liable for tax on their worldwide income, whether it is earned in the United States or abroad. But the relatively high U.S. corporate tax rate is not applied to income earned abroad that is reinvested abroad in productive operations. U.S. multinationals are taxed on foreign income only when they repatriate the earnings to the United States. Not surprisingly, the deferral of active income gives U.S. companies a powerful incentive to reinvest abroad what they earn abroad, but this is hardly an incentive to "ship jobs overseas."
Such deferral may sound like an unjustified tax break to some, but every major industrial country offers at least as favorable treatment of foreign income to their multinational corporations. Indeed, numerous major countries exempt their companies from paying any tax on their foreign business operations. Foreign governments seem to more readily grasp the fact that when corporations have healthy and expanding foreign operations it is good for the parent company and its workers back home.15
If President Obama and other leaders in Washington want to encourage more investment in the United States, they should lower the U.S. corporate tax rate, not seek to extend the high U.S. rate to the overseas activities of U.S. companies. Extending high U.S. tax rates to U.S.-owned affiliates abroad would put U.S. companies at a competitive disadvantage as they try to compete to sell their goods and services abroad. Their French and German competitors in third-country markets would continue to pay the lower corporate tax rates applied by the host country, while U.S. companies would be burdened with paying the higher U.S. rate. The result of repealing tax breaks on foreign earnings would be less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.
Politicians who disparage investment in foreign operations are wedded to an outdated and misguided economic model that glorifies domestic production for export above all other ways for Americans to engage in the global economy. They would deny Americans access to hundreds of millions of foreign customers and access to lower-cost inputs through global supply chains. In short, they would cripple American companies and their American workers as they try to compete in global markets.
[Full text w/references at the original link above]
Daniel T. Griswold is the director of the Center for Trade Policy Studies at the Cato Institute.
Cato, Free Trade Bulletin No. 36, Jan 13, 2009
Trade and globalization have become more inviting targets during the current economic downturn. As output falls and unemployment rises, politicians in Washington are questioning not only imports but U.S. companies that invest in production abroad.
The incoming president, Barack Obama, pledged during his campaign that, "Unlike John McCain, I will stop giving tax breaks to corporations that ship jobs overseas and I will start giving them to companies that create good jobs right here in America."1 That campaign refrain, echoed by a number of other successful candidates, raises three basic questions:
Why do U.S. multinational companies establish affiliates abroad and hire foreign workers? What kind of tax breaks are they receiving? And should the new Congress and new president change U.S. law to make it more difficult for U.S. multinational corporations to produce goods and services in foreign countries?
Reaching millions of new customers
To demonize U.S. multinationals operating production facilities abroad is to indict virtually every major American company. At latest count more than 2,500 U.S. corporations own and operate a total of 23,853 affiliates in other countries. In 2006, according to the U.S. Department of Commerce, majority-owned foreign affiliates of U.S. companies posted $4.1 trillion in sales, created just under $1 trillion in value added, employed 9.5 million foreign workers, and earned $644 billion in net income for their U.S.-based parent companies.2
The primary reason why U.S. companies invest in affiliates abroad is to sell more products to foreign customers. Certain services can only be delivered on the spot, where the provider must have a physical presence in the same location as its customers. Operating affiliates abroad allows U.S. companies to maintain control over their brand name and intellectual property such as trademarks, patents, and engineering expertise. U.S. companies also establish foreign affiliates because of certain advantages in the host country— lower-cost labor, ready access to raw materials and other inputs, reduced transportation costs and proximity to their ultimate customers. Yes, the motivations can include access to "cheap labor," but labor costs are not the principal motivation for most U.S. direct investment abroad.
Politicians focus most of their attention on comparing exports and imports, but the most common way American companies sell their goods and services in the global market today is through overseas affiliates. In 2006, U.S. multinational companies sold $3,301 billion in goods through their majority-owned affiliates abroad and $677 billion in services. For every $1 billion in goods that U.S. multinational companies exported from the United States in 2006, those same companies sold $6.2 billion through their overseas operations. For every $1 billion in service exports, U.S.- owned affiliates abroad sold $1.6 billion.3
Contrary to popular myth, U.S. multinational companies do not use their foreign operations as an "export platform" back to the United States. Close to 90 percent of the goods and services produced by U.S.-owned affiliates abroad are sold to customers either in the host country or exported to consumers in third countries outside the United States. Even in Mexico and China, where low-wage workers are supposedly too poor to buy American products, more than half of the products of new and existing U.S. affiliates are sold in their domestic markets, whereas customers in the United States account for only 17 percent of sales.4
More Jobs Abroad, More Jobs at Home
Investing abroad is not about "shipping jobs overseas." There is no evidence that expanding employment at U.S.- owned affiliates comes at the expense of overall employment by parent companies back home in the United States. In fact, the evidence and experience of U.S. multinational companies points in the opposite direction: foreign and domestic operations tend to compliment each other and expand together. A successful company operating in a favorable business climate will tend to expand employment at both its domestic and overseas operations. More activity and sales abroad often require the hiring of more managers, accountants, lawyers, engineers, and production workers at the parent company.
Consider Caterpillar Inc., the Peoria, Illinois-based company known for making giant earth-moving equipment. From 2005 through 2007, the company enjoyed booming global sales because of strong growth in overseas markets, especially those with resources extracted from the ground. According to the company's 2007 annual report, Caterpillar earned 63 percent of its sales revenue abroad, including $1 billion in sales in China alone. As a result, Caterpillar ramped up employment at its overseas affiliates during that time from 41,238 to 50,788, an increase of almost 10,000 workers. During that same three-year period, the company expanded its domestic employment from 43,878 to 50,545, a healthy increase of 6,667.5
Caterpillar's experience is not unusual for U.S. multinational companies. A 2005 study from the National Bureau of Economic Research found that, during the 1980s and 1990s, there was "a strong positive correlation between domestic and foreign growth rates of multinational firms." After analyzing the operations of U.S. multinational companies at home and abroad, economists Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr. found that a 10 percent increase in capital investment in existing foreign affiliates was associated with a 2.2 percent increase in domestic investment by the same company and a 4 percent increase in compensation for its domestic workforce. They also found a positive connection between foreign and domestic sales, assets, and numbers of employees.6 "Foreign production requires inputs of tangible or intellectual property produced in the home country," the authors explained. "Greater foreign activity spurs higher exports from American parent companies to foreign affiliates and greater domestic R&D spending."7
The positive connection between foreign and domestic employment of U.S. multinational companies has continued into the current decade. As Figure 1 shows, parent and affiliate employment have tracked each other since the early 1980s. More recently, employment rose briskly for parents and affiliates alike in the boom of the late 1990s, fell for both during the downturn and slow recovery of 2001 through 2003, and then rose again from 2003 through 2006.8 Although the numbers have not been reported yet for 2007 and 2008, it's likely that the loss of net jobs in the domestic U.S. economy will be mirrored by much slower growth or outright decline in foreign affiliate employment.
Modest Investment in China and Mexico
Investment in China and Mexico drew the most fire on the campaign trail. In a primary debate in Texas in February 2008, then-senator Obama said, "In Youngstown, Ohio, I've talked to workers who have seen their plants shipped overseas as a consequence of bad trade deals like NAFTA, literally seeing equipment unbolted from the floors of factories and shipped to China."9 That makes for a good sound-bite in the heat of a campaign, but it does not accurately reflect the broader reality of outward foreign investment by U.S. manufacturers.
[graph in original article]
Outflows of U.S. manufacturing investment to Mexico and China have been modest by any measure. Between 2003 and 2007, U.S. manufacturing companies sent an average of $2 billion a year in direct investment to China and $1.9 billion to Mexico. That pales in comparison to the average $22 billion a year in direct manufacturing investment "shipped" to Europe during that same period, but talking about equipment being unbolted from the floors of U.S. factories and shipped to England just doesn't have the same bite.10 The modest annual outflow in investment to China and Mexico is positively dwarfed by the annual $59 billion inflow of manufacturing investment to the United States from abroad during those same years11 and the average of $165 billion per year that U.S. manufacturers invested domestically in plant and equipment.12
The fear of manufacturing jobs being shipped to China and Mexico is not supported by the evidence. While U.S. factories were famously shedding those 3 million net jobs between 2000 and 2006, U.S.-owned manufacturing affiliates abroad increased their employment by a modest 128,000 jobs. An increase in 172,000 jobs at U.S.-owned affiliates in China was partially offset by an actual decline of almost 100,000 jobs at affiliates in Mexico.13 The large majority of factory jobs lost in the United States since 2000 were not "shipped to China" or anywhere else, but were lost to automation and other sources of increased efficiency in U.S. manufacturing.
U.S. manufacturing investment in China remains modest compared to the huge political investment that candidates and pundits have made in making it an issue. U.S. direct investment in China remains a relatively small part of China's overall economy, and a small part of America's total investments abroad. Of the nearly 10 million workers that U.S. affiliates employ abroad, fewer than 5 percent are Chinese; Americanowned affiliates employed just as many manufacturing workers in high-wage Germany in 2006 as they did in low-wage China.14
"Tax breaks" Keep U.S. Companies Competitive
Politicians are not usually specific about exactly what "tax breaks" they want to repeal. The biggest tax exemption for U.S. companies that invest abroad is the deferral of tax payments for "active" income. U.S. corporations are generally liable for tax on their worldwide income, whether it is earned in the United States or abroad. But the relatively high U.S. corporate tax rate is not applied to income earned abroad that is reinvested abroad in productive operations. U.S. multinationals are taxed on foreign income only when they repatriate the earnings to the United States. Not surprisingly, the deferral of active income gives U.S. companies a powerful incentive to reinvest abroad what they earn abroad, but this is hardly an incentive to "ship jobs overseas."
Such deferral may sound like an unjustified tax break to some, but every major industrial country offers at least as favorable treatment of foreign income to their multinational corporations. Indeed, numerous major countries exempt their companies from paying any tax on their foreign business operations. Foreign governments seem to more readily grasp the fact that when corporations have healthy and expanding foreign operations it is good for the parent company and its workers back home.15
If President Obama and other leaders in Washington want to encourage more investment in the United States, they should lower the U.S. corporate tax rate, not seek to extend the high U.S. rate to the overseas activities of U.S. companies. Extending high U.S. tax rates to U.S.-owned affiliates abroad would put U.S. companies at a competitive disadvantage as they try to compete to sell their goods and services abroad. Their French and German competitors in third-country markets would continue to pay the lower corporate tax rates applied by the host country, while U.S. companies would be burdened with paying the higher U.S. rate. The result of repealing tax breaks on foreign earnings would be less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.
Politicians who disparage investment in foreign operations are wedded to an outdated and misguided economic model that glorifies domestic production for export above all other ways for Americans to engage in the global economy. They would deny Americans access to hundreds of millions of foreign customers and access to lower-cost inputs through global supply chains. In short, they would cripple American companies and their American workers as they try to compete in global markets.
[Full text w/references at the original link above]
Daniel T. Griswold is the director of the Center for Trade Policy Studies at the Cato Institute.
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