Last week-end, the Washington Post had a good article about how difficult it will be for the upcoming U.S.-European Union trade talks to deal with the issue of genetically modified foods. In the Huffington Post, I have a short piece in which I explain why, in my view, trade talks can’t solve this issue.
Here’s my conclusion:
However, asking trade negotiations to solve the issue in the next year and a half–the projected time-frame for the talks–may doom the whole process of US-EU trade negotiations. Let’s not risk killing a possible free trade deal on a quixotic quest to improve the EU regulatory process. Instead, put the EU arguments to the test: If protectionism is not the reason for the reluctance to approve genetically modified foods, the EU should have no objection to lowering tariffs and removing quotas for U.S. food products that are not genetically modified. Let’s push the EU on that issue instead, moving us towards free trade in the most simple and direct way we can.
My point here is that in order for international trade negotiations to work, we have to focus on what is actually achievable. Tariffs, quotas, and other explicit forms of discrimination are the core of protectionism, and there are plenty of those left. I’m happy to focus on those issues for now. It’s hard enough convincing the U.S. government not to regulate too much; using trade talks to rein in other governments’ regulation is asking a lot.
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I’ve mentioned before on this blog my concern that some provisions in trade agreements have little to do with free trade. Here’s a good example, from the specialty trade publication Inside U.S. Trade
U.S. labor unions are keeping an eye on the U.S.-European efforts to deepen economic ties, and believe a potential U.S.-EU trade agreement could provide an opportunity to raise some U.S. labor standards to the level prevailing in EU member states, according to labor sources.
This source noted that the EU is a community of nations that tends to have stronger labor laws than the U.S., higher union density and better wage rates. U.S. unions do not want to see a trans-Atlantic trade agreement used as a vehicle to lower labor standards in Europe, and they also view it as an opportunity to try to “raise up” U.S. standards to the European level, this source said.
I’ve talked about the proposed U.S.-EU free trade agreement before. To repeat what I said previously, there are some benefits to these kinds of agreements (although multilateral agreements would be much better). But I would really like to see the negotiators stick to the core issue of reducing protectionism, and not get distracted by domestic regulatory issues like the appropriate level of labor standards.
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By Sallie James
Well-meaning if misguided politicians often tout job creation when they promote preferential trade agreements: freer trade will mean higher exports (the benefits of imports are almost never mentioned), and more exports means more production, which means more jobs. That narrow focus is understandable, especially in times of above-acceptable unemployment, when every bill seems to need a jobs angle to sell: witness, for example, Secretary of Agriculture Tom Vilsack’s verbal gymnastics in a statement yesterday, when he referred to the multi-year spending binge that is the Farm Bill as the “Food, Farm and Jobs Bill”. Politicians, not being the most courageous of creatures, don’t usually have the stomach/spine/etc. to make a principled stand in favor of free exchange across borders for its own sake (if you want to read more on the case for free trade, there are plenty of publications available at the Herbert A. Stiefel Center for Trade Policy Studies website, starting with our position statement at the bottom of the homepage).
Unfortunately, the extent of job creation is hard to quantify, and the case may be oversold. Edward Alden at the Council for Foreign Relations yesterday drew our attention to a recent International Trade Administration study that looks at the jobs created by exports and finds, well, that exports create fewer jobs than often is promised, and that the “job intensity” of exports is falling:
In 1993, which turns out to be the first year for which data are available, the report says that each $1 billion of exports supported just over 12,000 jobs… By 2011, however, that same $1 billion in exports supported only 5,000 jobs. About one-quarter of the difference is due to rising prices over the past two decades, but most of the difference is the result of higher productivity in export-intensive sectors which has reduced the need for labor.
That makes perfect sense. Some three-quarters of U.S. exports are in the goods sector, one-third of those directly in manufacturing, and many of the rest in industries that support manufacturing exports. From 1993 to 2011, labor productivity in the manufacturing sector doubled, compared with just a 50 percent increase in overall productivity. In other words, today it takes many fewer workers than in 1993 to produce the same $1 billion in exported products.
The consequence is that even rapidly growing exports have created very few new jobs. Given the average annual productivity improvements over the past two decades, exports need to grow by roughly 5 percent each year just to support the same number of jobs. Even with the extremely strong U.S. export performance over the past two decades, the total number of U.S. jobs supported by exports in 2011 — 9.7 million jobs – is up just 27 percent from the number of jobs in 1993…
The implication of these figures is fairly stark. As the Obama administration has noted often, export jobs are good jobs – employees in export-intensive industries earn some 20 percent more on average than comparable workers in industries that produce goods and/or services only for the domestic market. But there are simply too few of them to make a significant dent in unemployment, or to lift household incomes which have been flat for the past two decades. The largest number of export jobs are in technology-intensive industries such as aerospace, semiconductors, and motor vehicles. [links in original]
Is there anything wrong with making specious claims about jobs in support of something that is in the best interests of the economy? I guess that depends on your tolerance for spurious means in pursuit of worthy ends. For my part, I worry that when jobs claims are discredited, the case for free trade (and hence public support for it) is eroded. So my advice to politicians when it comes to prognostications about jobs created by trade agreements is: don’t go there. Be brave.
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By Simon Lester
In the Wall Street Journal, former U.S. Trade Representative Charlene Barshefsky argues for strong intellectual property protection in international trade agreements, in particular the Trans Pacific Partnership (TPP) currently under negotiation:
Every country’s competitiveness and economic well-being ultimately depends on its companies’ ability to innovate. So governments’ trade policies should help companies to successfully realize returns on their innovative capabilities so that they have the incentive to continue developing the new products that will improve consumer welfare and deliver rising wages and living standards.
The touchstone for evaluating TPP should be whether it positions the U.S. to compete on the basis of innovation. The United States trade representative has been seeking to ensure that TPP is such an agreement—but difficult work lies ahead.
To meet this test, the agreement needs strong intellectual property provisions, which several TPP negotiating parties are reportedly resisting.
U.S. companies have lots of intellectual property, and it’s not suprising that they want it protected. But this is not a free trade issue, and it does not really fit within trade agreements (despite the fact that it has been in there for more than two decades now — it didn’t fit at the beginning, and it doesn’t fit now). It’s in there because powerful interest groups want it in there, not because of any real connection to free trade.
In fact, including intellectual property in trade agreements is more akin to protectionism, as the U.S. pushes for inclusion so as to give U.S. companies an advantage in global markets. Barshefsky says: “governments’ trade policies should help companies to successfully realize returns on their innovative capabilities.” I don’t think that’s what trade policy should do at all. Trade policy should pursue free trade, which is in the interest of the country as a whole, not go to bat for particular domestic companies or industries.
That’s not to say there are no issues with regard to global protection of intellectual property rights. Most people would agree that intellectual property deserves some protection. The real question, though, is how much protection. The U.S., with lots of intellectual property, wants a good deal of protection. Developing countries, with less of it, want weaker protection. None of that is surprising. The way I see it, these countries can argue about what the right level of protection is, and find an acceptable balance between the competing interests. They can negotiate this directly, or in an international forum devoted to intellectual property. But I can’t see any good reason to do this in trade agreements.
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By Ilya Shapiro
The Interstate Agreement on Detainers, a compact authorized by federal statute, provides a simple procedure for transferring custody of prisoners between states. Because the federal government annually seeks to prosecute thousands of prisoners already in state custody, it joined the IAD in 1970 to get the benefit of this unified procedure. When it joined, it did so as a “state” for purposes of the agreement, and exempted itself from only two provisions (which aren’t relevant here). One of the provisions that the federal government decided not to exempt itself from, Article IV(a), allows the governor of the sending state to deny any request made by a receiving state to transfer a prisoner.
In September of 2010, Jason Pleau offered to plead guilty to robbery and murder charges in Rhode Island in exchange for life in prison without parole, the harshest sentence that state’s law allows. Pleau’s crimes also allegedly violated federal law, however, and the U.S. government wanted to prosecute Pleau itself in order to seek the death penalty. The federal government thus sought custody through the IAD by filing for the little-known writ of habeas corpus ad prosequendum (“show me the body for prosecution”).
The governor of Rhode Island, Lincoln Chafee, disapproves of the death penalty and used his authority under the IAD’s Article IV(a) to deny the federal request. A federal district court, later affirmed by the U.S. Court of Appeals for the First Circuit, overruled Chafee’s denial, stating that the Supremacy Clause prevented the governor from interfering with the federal government’s wishes.
The First Circuit found that the compact’s specific text and the normal canons of statutory construction were “all beside the point.” According to the court, what was important was that Congress could not possibly have meant to grant state governors the power to deny federal transfer requests—and thus the IAD didn’t affect the balance of power between the federal government and the states. The First Circuit thus granted the writ, and Pleau is now in federal custody.
The question presented here, whether the Supremacy Clause trumps a governor’s right to deny a request for transfer of custody under the IAD, raises two important issues: First, if the First Circuit is right, then the federal government may reap the benefit of interstate bargains without having to fulfill its own obligations under them. Second, the First Circuit’s opinion effectively treats the state courts as inferior to the federal courts, which upsets the system of concurrent sovereignty that the Founders designed.
Cato has joined the Independence Institute to file an amicus brief urging the U.S. Supreme Court to hear this case, with a focus on the second issue. We argue that the U.S. legal system has always recognized the dual sovereignty of federal and state courts, dating back to Chief Justice John Marshall. As Chief Justice Marshall explained, that dual system requires that state courts not be considered inferior to federal courts, and thus federal courts have no independent authority to order prisoners under state jurisdiction to be transferred to the federal system.
Furthermore, when abrogating state sovereignty via the Supremacy Clause, Congress must demonstrate its intent to do so with “unmistakably clear language”—and none of the statutes applicable here contain any such language. Finally, we argue that the First Circuit has misinterpreted relevant Supreme Court precedent and that a proper reading of the relevant case law would establish that a state is well within its rights to treat the federal government like any other state under the IAD and deny its request to transfer a prisoner into federal custody.
The Supreme Court will decide whether to take up the case of Chafee v. United States and Pleau v. United States later this fall.
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By Simon Lester
Last week, I voiced several complaints about the Trans Pacific Partnership, the main trade agreement being negotiated by the U.S. Let me add another concern: There’s too much protectionism in this “free trade” agreement. Here are two good examples, as reported by Reuters:
U.S. athletic footwear manufacturer New Balance said on Thursday that it pressed the top U.S. trade official during a visit to its Norridgewock, Maine, factory to maintain tariffs on shoes from Vietnam in a proposed free-trade deal.
Only 3,000 workers still make footwear in the United States, with about 1,350 of them employed by New Balance, headquartered in Boston, company spokesman Matt LeBretton told Reuters by phone after the meeting with U.S. Trade Representative Ron Kirk.
New Balance wants Washington to maintain tariffs on roughly 20 categories of athletic shoes from Vietnam.
LeBretton said that at the meeting with Kirk, a New Balance employee asked, ‘Can you tell us right now you’re going to protect our jobs through this free-trade agreement?’”
LeBretton sounded a hopeful note after Kirk’s visit.
“We’re certainly encouraged by his visit today that (the) USTR is hearing what we say,” LeBretton said.
The U.S. government has told domestic sugar producers that it does not plan to allow Australia to export any additional sugar to the United States under a proposed regional free trade pact, a U.S. sugar industry analyst said on Friday.
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Is the petrodollar dead? Well, not yet, but the nails are being hammered into the coffin even as you read this. For decades, most of the nations of the world have used the U.S. dollar to buy oil and to trade with each other. In essence, the U.S. dollar has been acting as a true global currency. Virtually every country on the face of the earth has needed big piles of U.S. dollars for international trade. This has ensured a huge demand for U.S. dollars and U.S. government debt. This demand for dollars has kept prices and interest rates low, and it has given the U.S. government an incredible amount of power and leverage around the globe. Right now, U.S. dollars make up more than 60 percent of all foreign currency reserves in the world. But times are changing. Over the past couple of years there has been a whole bunch of international agreements that have made the U.S. dollar less important in international trade. The mainstream media in the United States has been strangely quiet about all of these agreements, but the truth is that they are setting the stage for a fundamental shift in the way that trade is conducted around the globe. When the petrodollar dies, it is going to have an absolutely devastating impact on the U.S. economy. Sadly, most Americans are totally clueless regarding what is about to happen to the dollar.
One of the reasons the Federal Reserve has been able to get away with flooding the financial system with U.S. dollars is because the rest of the world has been soaking a lot of those dollars up. The rest of the world has needed giant piles of dollars to trade with, but what is going to happen when they don’t need dollars anymore?
Could we see a tsunami of inflation as demand for the dollar plummets like a rock?
The power of the U.S. dollar has been one of the few things holding up our economy. Once that leg gets kicked out from under us we are going to be in a whole lot of trouble.
The following are 11 international agreements that are nails in the coffin of the petrodollar….
#1 China And Russia
China and Russia have decided to start using their own currencies when trading with each other. The following is from a China Daily article about this important agreement….
China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.
Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.
“About trade settlement, we have decided to use our own currencies,” Putin said at a joint news conference with Wen in St. Petersburg.
The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.
#2 China And Brazil
Did you know that Brazil conducts more trade with China than with anyone else?
The largest economy in South America has just agreed to a huge currency swap deal with the largest economy in Asia. The following is from a recent BBC article….
China and Brazil have agreed a currency swap deal in a bid to safeguard against any global financial crisis and strengthen their trade ties.
It will allow their respective central banks to exchange local currencies worth up to 60bn reais or 190bn yuan ($30bn; £19bn).
The amount can be used to shore up reserves in times of crisis or put towards boosting bilateral trade.
#3 China And Australia
Did you know that Australia conducts more trade with China than with anyone else?
Australia also recently agreed to a huge currency swap deal with China. The following is from a recent Financial Express article….
The central banks of China and Australia signed a A$30 billion ($31.2 billion) currency-swap agreement to ensure the availability of capital between the trading partners, the Reserve Bank of Australia said.
“The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms, and to strengthen bilateral financial cooperation,” the RBA said in a statement on its website. “The agreement reflects the increasing opportunities available to settle trade between the two countries in Chinese renminbi and to make RMB-denominated investments.”
China has been expanding currency-swap accords as it promotes the international use of the yuan, and the accord with Australia follows similar deals with nations including South Korea, Turkey and Kazakhstan. China is Australia’s biggest trading partner and accounts for about a quarter of the nation’s merchandise sales abroad.
#4 China And Japan
The second and third largest economies on the entire planet have decided that they should start moving toward using their own currencies when trading with each other. This agreement was incredibly important but it was almost totally ignored by the U.S. media.
According to Bloomberg, it is anticipated that this agreement will strengthen ties between these two Asian giants….
Japan and China will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said.
Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday. Encouraging direct yen- yuan settlement should reduce currency risks and trading costs, the Japanese and Chinese governments said.
China is Japan’s biggest trading partner with 26.5 trillion yen ($340 billion) in two-way transactions last year, from 9.2 trillion yen a decade earlier.
#5 India And Japan
It is not just China making these kinds of currency agreements. According to Reuters, India and Japan have also agreed to a very large currency swap deal….
India and Japan have agreed to a $15 billion currency swap line, Japan’s Prime Minister Yoshihiko Noda said on Wednesday, in a positive move for the troubled Indian rupee, Asia’s worst-performing currency this year.
#6 “Junk For Oil”: How India And China Are Buying Oil From Iran
Iran is still selling lots of oil. They just aren’t exchanging that oil for U.S. dollars as much these days.
So how is Iran selling their oil without using dollars?
A Bloomberg article recently detailed what countries such as China and India are exchanging for Iranian oil….
Iran and its leading oil buyers, China and India, are finding ways to skirt U.S. and European Union financial sanctions on the Islamic republic by agreeing to trade oil for local currencies and goods including wheat, soybean meal and consumer products.
India, the second-biggest importer of Iran’s oil, has set up a rupee account at a state-owned bank to settle as much as much as 45 percent of its bill, according to Indian officials. China, Iran’s largest oil customer, already settles some of its oil debts through barter, Mahmoud Bahmani, Iran’s central bank governor, said Feb. 28. Iran also has sought to trade oil for wheat from Pakistan and Russia, according to media reports from the two countries.
#7 Iran And Russia
According to Bloomberg, Iran and Russia have decided to discard the U.S. dollar and use their own currencies when trading with each other….
Iran and Russia replaced the U.S. dollar with their national currencies in bilateral trade, Iran’s state-run Fars news agency reported, citing Seyed Reza Sajjadi, the Iranian ambassador in Moscow.
The proposal to switch to the ruble and the rial was raised by Russian President Dmitry Medvedev at a meeting with his Iranian counterpart, Mahmoud Ahmadinejad, in Astana, Kazakhstan, of the Shanghai Cooperation Organization, the ambassador said.
#8 China And Chile
China and Chile recently signed a new agreement that will dramatically expand trade between the two nations and that is also likely to lead to significant currency swaps between the two countries….
The following is from a recent report that described this new agreement between China and Chile….
Wen called on the two nations to expand trade in goods, promote trade in services and mutual investment, and double bilateral trade in three years.
The Chinese leader also said the two countries should enhance cooperation in mining, expand farm product trade, and promote cooperation in farm product production and processing and agricultural technology.
China would like to be actively engaged in Chile’s infrastructure construction and work with Chile to promote the development of transportation networks in Latin America, said Wen.
Meanwhile, Wen suggested that the two sides launch currency swaps and expand settlement in China’s renminbi.
#9 China And The United Arab Emirates
According to CNN, China and the United Arab Emirates recently agreed to a very large currency swap deal….
In January, Chinese Premier Wen Jiabao visited the United Arab Emirates and signed a $5.5 billion currency swap deal to boost trade and investments between the two countries.
#10 China And Africa
Did you know that China is now Africa’s biggest trading partner?
For many years the U.S. dollar was dominant in Africa, but now that is changing. A report from Africa’s largest bank, Standard Bank, says the following….
“We expect at least $100 billion (about R768 billion) in Sino-African trade – more than the total bilateral trade between China and Africa in 2010 – to be settled in the renminbi by 2015.”
#11 Brazil, Russia, India, China And South Africa
The BRICS (Brazil, Russia, India, China and South Africa) continue to become a larger factor in the global economy.
A recent agreement between those nations sets the stage for them to increasingly use their own national currencies when trading with each other rather than the U.S. dollar. The following is from a news source in India….
The five major emerging economies of BRICS — Brazil, Russia, India, China and South Africa — are set to inject greater economic momentum into their grouping by signing two pacts for promoting intra-BRICS trade at the fourth summit of their leaders here Thursday.
The two agreements that will enable credit facility in local currency for businesses of BRICS countries will be signed in the presence of the leaders of the five countries, Sudhir Vyas, secretary (economic relations) in the external affairs ministry, told reporters here.
The pacts are expected to scale up intra-BRICS trade which has been growing at the rate of 28 percent over the last few years, but at $230 billion, remains much below the potential of the five economic powerhouses.
So what does all of this mean?
It means that the days of the U.S. dollar being the de facto reserve currency of the world are numbered.
So why is this important?
The “petrodollar” system was a brilliant political and economic move. It forced the world’s oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt, while essentially letting the US pretty much own the world’s oil for free, since oil’s value is denominated in a currency that America controls and prints. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.
The US has reaped many rewards. As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount – the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.
So what happens when the petrodollar dies?
The following are some of the things we are likely to see….
-Oil will cost a lot more.
-Everything will cost a lot more.
-There will be a lot less foreign demand for U.S. government debt.
-Interest rates on U.S. government debt will rise.
-Interest rates on just about everything in the U.S. economy will rise.
And that is just for starters.
As I wrote about earlier today, the Federal Reserve is not going to save us. Ben Bernanke is not somehow going to pull a rabbit out of a hat that will magically make everything okay. Fundamental changes to the global financial system are happening right now that are impossible for Bernanke to stop.
We should have never gone into so much debt. Up until now we have gotten away with it, but when demand for U.S. dollars and U.S. debt dries up we are going to experience a massive amount of pain.
Keep your eyes and ears open for more news stories like the ones referenced above. The end of the petrodollar is going to be a very significant landmark on the road toward the total collapse of the U.S. economy.
So what do you think the fate of the U.S. dollar is going to be in the years ahead?
Please feel free to post a comment with your thoughts below….
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