macroblog

Protectionism Watch, Air Travel Edition

From USA Today:

The rising tide of protectionism that killed the Dubai ports deal threatens to swamp another major transportation proposal: removal of 62-year-old limits on air service between Europe and the USA.

If European Union transport ministers approve the move at a meeting scheduled for June, any U.S. airline could fly to any of the European Union's 25 nations. Likewise, any European airline could fly from anywhere in Europe to anywhere in the USA.

Supporters of so-called Open Skies say it would allow airlines to step up competition for an estimated 17 million new passengers annually, making a trans-Atlantic market already valued at $22 billion a year even more lucrative. For travelers, Open Skies could mean more flights, more convenient routes and cheaper fares across the Atlantic...

In the USA, the Bush administration backs Open Skies because officials believe it would lower fares and benefit U.S. carriers. No. 2 United Airlines and No. 3 Delta Air Lines support it as a welcome step toward globalization of the industry.

Well, that certainly sounds like a good thing.  But wait...

Just as adamantly, Houston-based Continental Airlines argues that the promised benefits are illusory. Open Skies has also drawn vehement opposition from labor groups that fear American jobs might be lost.

"Giving away another vital U.S. industry to foreign interests is one more example of globalization run amok," says the AFL-CIO's Edward Wytkind.

Open Skies was no sure thing even before the political flare-up that killed the plan to turn over management of five major U.S. ports to Dubai Ports World, a company based in the United Arab Emirates. Now some of the same arguments used to thwart that deal are being used to attack Open Skies.

Great.  From my perspective, those arguments look just as weak as they seemed in the case of the port deal:

Opponents are aiming criticism not at Open Skies directly, but at a proposed change in rules that govern ownership of U.S. airlines. EU transport ministers aren't inclined to approve Open Skies unless the U.S. first relaxes restrictions on foreign control of U.S. airlines to better reflect foreign ownership rules for European airlines...

Tight restrictions on foreign control of U.S. airlines date back to the 1920s, when memories of World War I were still fresh. Even today, no U.S. airline is permitted to have foreign interests control more than 25% of its voting stock or more than one-third of its board of directors...

U.S. citizens must control an airline's safety, security, routes, fares — everything. To invite foreign investment and to pave the way for Open Skies, the DOT now proposes changing this rule so foreign investors could exert control over purely "commercial" decisions, such as fares and routes.

Only U.S. citizens would make decisions on safety and security, the proposal says. Limits on stock ownership and board control wouldn't change. Loosening foreign-control restrictions is not formally linked to Open Skies, but EU officials say one follows the other.

In other words, the increasingly abused safety and security shield is, once again, a red herring.  No matter:

Reps. James Oberstar, D-Minn., and Frank LoBiondo, R-N.J., sponsors of the House bill to block the easing of ownership restrictions, are sounding alarms about homeland security and national defense. During war, the Pentagon pays U.S. airlines to transport troops in the airlines' jets. Critics of the rule change say foreign investors might resist allowing aircraft use in a war they oppose.

"Allowing the daily operations of our airlines to be controlled by competing — and potentially unfriendly — foreign interests could significantly undermine homeland security," LoBiondo says.

Look, I'm no expert on the airline industry and maybe there is something I am missing here.  If there is, I welcome the opportunity to be educated.  But I'm waiting for someone to give me an example where cutting out competition ultimately served the public good (as opposed to narrow or parochial interests).  And putting up walls to foreign direct investment at a time when the U.S. economy has a large exposure to rapid reverses in capital inflows does not strike me as wise.  For sure, none of this serves to enhance our claim to global economic leadership:

... criticism in the USA shows no sign of relenting. "Some of the rhetoric has been embarrassing, even xenophobic," [Michael Whitaker, vice president of United Airlines] says.

Unfortunately, merely looking foolish looks to me to be the best possible outcome.

UPDATE: On the general topic, today brings this from the Adam Smith Institute Blog:

Tony Blair is telling them Down Under that the biggest threat to world stability is not terrorism, not even climate change, but American isolationism after Iraq. On trade, the WTO implies he may be right.

There is more, and you should read it.  And while I am at it, let me belatedly commend to you the Becker-Posner discussion of a few weeks back on the "Dubai Ports World Fiasco" -- here, here, here, and here.

Odds And Ends

Another quarter begins at the University of Chicago Graduate School of Business, and I have once again cleverly fallen behind on my reading, giving me the excuse to introduce some of my favorite weblogs to new students, via this review of things I should have talked about last week.

First things first, the week ended with economic news that was mixed, at best. Kash at Angry Bear reads the durable goods reports and concludes (fairly, I think) that business investment spending is still short of spectacular.  On the other hand, at The Nattering Naybob Chronicles, Mr. Naybob is able to look on the bright side: "Both [the durable goods and house sales] reports eased inflation fears and bond yield dropped."

With respect to the real estate news, Calculated Risk, a consistently fine go-to source on the housing market, has the latest on home mortgage applications (down slightly), existing home sales (up, but perhaps not the best indicator),  and new home sales (a better indicator, and coming in "very weak".) CR also has a handy chart, mapping the pattern of home sales in recessions.  At the Big Picture, Barry Ritholtz opines: "The [Real Estate] market has dropped from white hot to red hot to mid-plateau."  Calculated Risk says   "The sky may not be falling, but... housing sales are clearly trending down."  Captain Capitalism, however, is not cheered by that prognosis, and Michael Shedlock pores over the Calculated Risk pictures, to find that his disposition is soured as well.  ElectEcon finds a prediction that things are going to get ugly fast. 

For those who simply must have more housing indicators to watch, Daniel Gross bears good news, from Standard & Poor's.  For those who just can't get enough detail on economic data period, Mark Thoma has more at Economist's View.

Speaking of data, a nice summary of U.S. wealth as reported in the Federal Reserve's Flow of Funds can be found at Angry Bear. (Although I don't necessarily endorse the conclusions, you might also enjoy the pictures provided at Economic Dreams - Economic Nightmares.)

Last week I (sort of) came to the rescue of the Consumer Price Index.  Barry Ritholtz (again) counter punches, with a Wall Street Journal survey of readers indicating the vast majority don't think very highly of the Consumer Price Index, but Russell Roberts effectively (in my view) defends the beleaguered index, at Cafe Hayek.

Also in the inflation vein, Mark Thoma follows up my post on the relationship between the CPI and the PPI with some work of his own -- broadly illustrating the point of the research I was citing.

Mark also relays the crux of Federal Reserve Chairman Ben Bernanke's speech on the yield curve.  Meanwhile, the inverted yield curve watch continues, at The Capital Spectator.

Shifting to the fiscal side of the government house, Kash breaks down the sources of federal spending growth in the United States over the past five years.  The guys at Angry Bear have had several useful, even if a bit partisan, posts on the subject in the recent past -- here, here, here, here, and here.  Gary Becker and Richard Posner provide some much needed perspective on how to think about the build-up in defense spending. 

In other legislative news, Andrew Chamberlain at Tax Policy Blog indicates that tax reform may not be dead just yet (good), and at Vox Baby, Andrew Samwick reports on the progress of pension reform (decidedly not good).

David Weman at A Few Euros More gives us the heads up on an item (from the Guardian Unlimited (U.K.) blog) bemoaning the rising tide of protectionism (among countries, including the U.S., that really ought to know better).  The Skeptical Speculator concurs that "protectionism looms." Asia Pundit reminds us that, in the United States, the impulse is bipartisan (and Sun Bin channels Stephen Roach's comments on the subject). William Polley deems it "Nothing if not predictable." Mark Thoma provides an extended commentary from the Financial Times on the dangers of "Dobbism" (as in Lou).  Daniel Drezner, however, has better news. Brad DeLong takes notice of a Alan Blinder's sometimes less charitable view of trade and globalization, to which Arnold Kling replies -- here and here.

Steve Antler (of EconoPundit) makes the connection from trade protectionism to immigration reform.   Russell Roberts is even less tolerant of the anti-immigration argument.  So is Arnold Kling (at EconLog).  EurActiv reports on how the EU is attempting to deal with its own immigration questions. The New Economist provides a glimpse of research suggesting that outsourcing explains about 28 percent of the growth in the wage gap between high- and low-skilled labor between 1980 and 1999.

Continuing with the international theme, Brad Setser thinks both sides are at fault in the ongoing tensions over Chinese exchange rate policies.  He also has terrific coverage of Larry Summers' must-read views on the current state of global financial markets and capital flows.  Mark Thoma notes an article on the relationship between exchange rate policies and trade gaps and a summary of research on foreign direct investment. Steve Antler suggests an explanation for "why the dollar still reigns".  Barry Ritholtz is pretty sure the answer is not Dark Matter.  Menzie Chinn, writing at Econbrowser, is even less convinced.  (He follows up that post with a very nice discussion of "purchasing power parity."  Don't worry if you don't know what that means -- Menzie will fill you in.)

Speaking of China, Daniel Gross carries a story from the New York Times on the development race between China and India, the latter a country that I think gets far less attention than it deserves.  (Lest there is any confusion, I mean positive attention.)  Interestingly, Toni Straka at The Prudent Investor -- who  unfailingly does not ignore India -- reports that India is about to float its currency and remove foreign exchange controls.

About Economics has a macro-relevant post on the, increasingly quaint, problem of the so-called zero nominal interest rate bound.  Digging even further into the history of monetary theory, Jane Galt ruminates on "free money." In the some-think-it-matters-I-don't category, The Capital Spectator comments on the retirement of M3.  So does Tim Iacono. That makes the graphs at Economist's View on M3 velocity -- explained here -- somewhat obsolete, but don't worry -- there is still M1 and M2 to absorb your attention.

UPDATE: Oh yeah -- Tyler Cowen has a new gig at the New York Times.

SPECIAL BRAIN-LOCK UPDATE:  Above I hat-tipped A Fistful of Euro's David Weman for a Guardian article  "bemoaning  the rising tide of protectionism" (my words).  Unfortunately, the Guardian article that does the bemoaning is not the one David cites.  I had in mind an earlier article by James Surowiecki.  David was pointing to another article, by Daniel Davies, arguing that capital controls do not count as protectionism.  Double hat-tip to David for keeping me on the straight and narrow.  (Oh, and by the way -- I'm with Surowiecki.)

The Economic Costs Of The Failed Port Deal

Regular readers know that I generally avoid wading into waters where political riptides dominate, and for that reason I have avoided commentary on the now defunct plan to allow interests from Dubai to take control of a (very) small number of US ports.  But in today's Wall Street Journal (page A18 in the print edition), Larry Lindsey makes a pretty good case that the consequences go well beyond the political fallout:

...congressional attitudes on the ports raise questions about the sustainability of our global economic leadership. For over 50 years a bipartisan consensus has held that global free trade and the free movement of capital is in our interest. The U.S. was the world's driving force for globalization, whether the president was named Kennedy, Reagan, Clinton or Bush. That leadership has underpinned the greatest rise in living standards the world has seen, the emergence of a global middle class that now numbers well over a billion people, and America's triumph in the Cold War without ever firing a direct shot...

... America has not pushed globalization and the free movement of capital out of an altruistic concern for global development: These are causes from which America enjoys enormous benefits. This is particularly true today when the free movement of capital underpins so much of our macroeconomic stability. The U.S. is by far the largest investor in the rest of the world, with $10 trillion of assets overseas. We have pushed other countries to allow our companies to invest overseas because it was in our interest to do so. Our corporate boards did not authorize this scale of investment in order to lose money: Last year they made over $500 billion on these investments -- $1,600 for every person in the U.S. To insist on our ability to invest abroad but resist foreign investments here is untenable.

Even more important is that America is the recipient of a huge amount of foreign inward investment. Last year foreigners increased their investments here by $1.4 trillion. A good portion of this comes from the Middle East for the simple reason that their oil revenues have soared. Does Congress prefer that this money be invested elsewhere to create jobs overseas rather than here? Moreover, absent this capital inflow, interest rates would be far higher and equity prices far lower than what they currently are. If you hang out a "Not For Sale to Foreigners" sign, fewer bidders will mean lower prices.

Color me saddened, and distressed.

Trade And Debt

One of my New year's resolutions is to work through some the random bits of things I have been meaning to blog on about, stored in my ever-useful copy of EverNote.  So far I am making about as much progress on that as on my promise to eat less ice cream.

Oh, well.  Baby steps.  One piece of old business comes from Don Boudreaux's campaign last month to undermine the view that current account deficits imply indebtedness.  If I might paraphrase, Don's argument -- which you can find here, here, and here -- is essentially that that trade deficits represent an act of deferred consumption -- and hence investment -- by someone in the world. This is crystal clear when the funds made available by countries with trade surpluses are used to purchase plants, properties, or significant equity claims outside of their own border -- an activity known as foreign direct investment. 

Here's a picture you have probably seen before:

Here's a picture you may not have seen, from Sun Bin:

Since about 1980 the United States has, for all practical purposes, run permanent trade deficits.  It has also been a magnet for direct investment.  And though some of the income from that direct investment is repatriated to other countries, I think you would be hard pressed to argue that the situation shown above represents a loss to Americans.

You can certainly quibble with the size of the U.S. current account deficit today.  Or that in present circumstances current account deficits are primarily financing consumption, not investment. Don would probably say shame on you for your parochial perspective (because those deficits surely represent saving for someone else in the world, even if globally they just swap their consumption today for our consumption tomorrow).   Either way, a blanket aversion to trade or current account deficits just does not seem justified by the record.

Free Trade And Freedom

asiapundit was loaded with items yesterday on internet censorship in China -- here, here, here, and here --  which prompted me to reflect on the juxtaposition of two seemingly unrelated events during my own recently completed trip. 

The first "event" was my own face-to-face with the limitations on internet access imposed by the Chinese government.  There appears to be some confusion about what is, and what is not, blocked in China these days.  Apparently Typead was blocked before, was unblocked, and then blocked once more. Blogspot supposedly lit up again, but maybe not everywhere.  The commentary at asiapundit posts suggests that the situation is, well, confused.

Here is my story, which I have relayed before, in bits and pieces.  During a visit last January, I discovered that I was unable to locate any weblogs hosted by the Blogspot service. Subsequent to that visit, news arrived that Typepad -- my host -- had joined the list of blocked blog services.  It was a pleasant surprise, then, when I found that, upon arriving in China this month, I was having no problem reading all of my favorite weblogs, or posting on my own site. Then a minor disaster befell me, my trusty laptop decided it had had enough of my abuse, and it would henceforth decline to operate. As a consequence, I was driven to the public computer in my hotel's business center.

Uh-oh.  Once again, no Typepad, no Blogspot.  I tried to access these sites in many other public or quasi-public places -- a university, airports and airport lounges, other hotel business centers. All to no avail.  I was led to conclude that, at least where I was -- Guangzhou mostly -- I had relatively unfettered access in the privacy of my own hotel room, but nowhere else.  One conclusion is that travelers -- particularly non-Chinese travelers, who are probably the majority in the hotels I stayed at -- are simply less likely to create trouble than are Chinese citizens.  But that can only be half the answer.  The other part must be that the government finds that it is not useful to put restrictions on foreigners used to a less heavy hand, either because it repels them or because it does not project the desired image of a thoroughly modern China.   

Which brings me to the second event during my visit, the all-too familiar protests surrounding the World Trade Organization talks in Hong Kong. This time around the demonstrations were concentrated among the South Korean farmers.  There appeared to me not much, if any, of the hodge-podge of anti-capitalism, anti-globalization groups that have plagued past meetings.  That is  probably due more to the particular venue than some newly found enlightenment among the groups to which I allude.  In any event, we now have yet another moment in the ongoing attempt to tear down the barriers to global trade marred by considerable noise from those who want no part of it.

The connection between this and my personal internet trials? The irony, of course.  I believe that, if China continues on its current course, the on-again, off-again relaxation of personal freedoms for the Chinese people will soon or later be on-again for good.  That will in main part be due to the dynamics of the relationship between the government and a citizenry growing ever wealthier.  But it will also in part be due to the imperatives of trade, the increasing role of foreigners that trade-driven development requires, and the presumptions of basic freedoms (and economic necessities) that outsiders bring with them.  Foreign business concerns are increasingly moving out of the hotel rooms and into the population, and that itself provides an impulse to change.

I understand that there will always be some interest group that stands to lose from free trade.  And I am not unsympathetic to their plight.  But I take it as an absolute article of faith that those losses are swamped by the returns to humanity as a whole.  And those returns are not just measured in dollars and cents.

UPDATE: myrick stays on the case.

All Quiet On The Fed Funds Futures Front

Although I was largely on the sidelines, there was plenty to talk about on the trade front last week, including the news that our trade deficits continue to grow and China's surpluses continued to rise.  That wasn't the only old news, however, as none of that made any impression on market expectations of where the federal funds rate is headed over the next couple of FOMC meetings.  The pictures:

Tim Duy says "Monotonous", and William Polley is feeling  a bit complacent. It appears they have lots of company.

If you are new here, the calculations in the pictures above are described here.  If you are not new here, and are beginning to feel your Monday funds probabilities jones, relax.  Here is the data:

Download implied_pdf_december_111105.xls
Download implied_pdf_january_111105.xls
Download Imp_pdf_slides_for_blog_111105.ppt

Note: If you are paying really, really close attention, you may recall that the implied probability for a 4.5% funds rate after the January meeting was over 90% when we last reported.  The difference this week is that we added an option for an increase to 4.75%, which absorbed a little of the action on 4.5.

Getting The Savings Glut Right

Perhaps it is because he is the most forceful discouraging word at the moment, but for the second day in a row I find myself reacting to a comment from Barry Ritholtz at The Big Picture.  What got my attention this morning relates to Barry's reservations about Ben Bernanke's nomination to replace Alan Greenspan at the helm of the Federal Reserve Board of Governors:

My only reservations with Bernanke are a couple of his speeches as a Fed Governor:

The Global Saving Glut and the U.S. Current Account Deficit -- was just so much political blather. It completely fails intellectually.

I have used the global savings glut story many times -- most recently here -- but I do agree with those that have urged us to put more emphasis on the global investment bust side of the story. Although a glut by definition implies a surplus relative to a deficit in something else, from which side of the saving-investment equation the surpluses arise is relevant for many of the policy questions we want answered.  But that quibble aside, I think Brad Setser has exactly the right perspective:

But Bernanke's savings glut speech also got two key things right -

The counterpart to the increase in the US current account deficit has been a rise in the current account surplus of the emerging world.    He rightly puts far more emphasis on the emerging world than on Europe or Japan...

And Bernanke recognizes that the transition from a housing-centric to an export-centric economy (when it happens) may not be easy.

An intellectual failure it was not.

New Website On Current Account Sustainability...

... from the University of Wisconsin's Charles Engel and Menzie Chinn.  You can find it here, and henceforth in the useful links section on this page.

Evaluating The Renminbi Revaluation

I have, in the past, alluded to work-in-progress by my colleagues Pat Higgins and Owen Humpage that has significantly colored the way I look at the whole issue of Chinese exchange rate policy and its likely effects on the U.S. economy.   The work is in progress no more, appearing in the form of two new Economic Commentary articles from the Federal Reserve Bank of Cleveland.  The first deals with the impact of yuan-appreciation/dollar-depreciation on trade conditions.  The second discusses  nondeliverable forward contracts, and what we can learn from these contracts about market participant's estimates of the renminbi's future value.

Here is the key conclusion from the first article:

China's recent devaluation and liberalization of its exchange-rate policies will, at best, have only a temporary impact on its trade competitiveness with the United States. The type of exchange-rate regime that a country adopts matters little for its long-term international competitiveness. In addition, the recent focus on China's exchange rate diverts attention from the real problem: China’s command economy.

Higgins and Humpage come to this conclusion about liberalization of China's capital markets:

In general, Chinese policies favor net inflows of foreign direct investment,encourage exports over imports, and —most importantly— discourage other types of private financial outflows, largely by limiting the amount of dollars that China’s residents might hold and their ability to invest in foreign assets. Remove the restraints and corresponding policies, and the demand for renminbi will fall relative to the supply and domestic prices will rise.

In other words, the pressure will be in the direction of renminbi depreciation.  This conforms to former Commerce Department undersecretary Grant Aldonas' view of things.  It decidedly does not conform to Brad Setser's.

Becker and Posner On China's Failed Unocal Bid

The Chinese have retreated for the moment, but Gary Becker and Richard Posner do not believe it is a victory.  Becker:

The attempted takeover of Unocal by CNOOC aroused great opposition in Congress, which resulted in Senator Byron Dorgan introducing a bill that would prohibit any takeover or merger of these two companies. After pursuing Unocal for several months, CNOOC accepted defeat last Tuesday and withdrew its offer, blaming the Washington political atmosphere.

The Dorgan bill lists several reasons why the purchase of Unocal by CNOOC would not be in America's interests, but none are convincing...

Most politicians and journalists, and even many economists, support free trade, including purchase by foreign companies of American assets, only when other countries abide by the same free trade rules. As the Dorgan bill indicates, China does not allow free movement of capital, and restricts foreign purchases of Chinese companies. These policies hurt China, but nevertheless the US is better off when it allows foreign companies, including those from China, to bid for American companies. If they are high bidders, either they would overpay for the assets-called the "winners curse" in auction theory- or they are more efficient managers. The US benefits even in the second case because it raises overall productivity of the American economy, and sets a good example for competitors.

Posner agrees with Becker, and essentially makes an argument that suggests inhibiting such direct investment in U.S. companies could have a destabilizing effect:

China holds vast amounts of U.S. dollars. To the extent that these holdings exceed China's need for financial reserves, China can benefit from holding dollars only by exchanging them for valuable goods, such as goods produced in the United States or assets of U.S. companies. We should want China to be able to make such purchases, since otherwise it will be less willing to hold dollars, which is to say less willing to sell us valuable goods in exchange for pieces of paper.

Do read the whole thing.

UPDATE: The Washington Post's Sebastian Mallaby suggests some geopolitcal arguments for treating of the successful Congressional resistance as a pyrrhic victory.

The Enemy Of The Good?

No props for the Bush administration on the passage of CAFTA.  So saith pgl and Brad Delong, pointing to this story:

It was just before midnight on Wednesday when Representative Robin Hayes capitulated [on his opposition to the passage of CAFTA]...

But the House speaker, J. Dennis Hastert, told him they needed his vote anyway. If he switched from "nay" to "aye," Mr. Hayes recounted, Mr. Hastert promised to push for whatever steps he felt were necessary to restrict imports of Chinese clothing, which has been flooding into the United States in recent months.

As it turned out, the switch by Mr. Hayes was decisive.

If BD and pgl are looking for more ammunition with which to pursue this line of attack, I'll throw in the reminder that, in some circles, commentators were comforting themselves with rationale that the steel tariffs of 2002 were the price of breaking down resistance to the "fast-track" trade authority -- actually renamed Trade Promotion Authority (TPA) -- that ultimately led to the successful passage of CAFTA.   But even then that authority came with significant strings attached.  Here's a blast from the past from Larry Kudlow:

This week, the Senate added the Dayton-Craig amendment to a bill that would have given the White House greater negotiating authority on international trade. But what this amendment does is allow individual members of Congress to veto specific provisions of any presidentially negotiated trade pact. Say good-bye to fast-track trade-promotion authority for the White House.

This is a big backslide on trade for the U.S. And the finger can be pointed directly at the flawed strategy created by White House Senior Adviser Karl Rove and U.S. Trade Representative Robert Zoellick. Their original idea was to bring protection to the steel industry in order to capture the rustbelt states of West Virginia, Pennsylvania, and Ohio in the 2004 election. Also, steel protection (and now lumber protection against Canada) was designed to win votes from House members and Senators who might waver on a new fast-track negotiating package.

But apparently, a lean and mean trade-negotiating bill is not coming. The White House trade strategy has completely unravelled.

The Dayton-Craig Amendment did not wholly survive the House-Senate conference but that does not mean it faded into irrelevance:

On another difficult issue, the Dayton-Craig provisions in the Senate version, conferees dropped the provision but agreed to additional reports and oversight if negotiations might result in possible changes to U.S. trade remedy laws.

That last passage comes from an excellent overview of the legislative process (beginning in the Clinton administration) that led to the passage of the Trade Promotion Authority.   

And yes, it was a rather messy sight.  And pgl and Brad DeLong are shocked, shocked to find it so. 

Look.  pgl and Brad may be right in the larger scheme of things.  It may indeed be the case that the constellation of compromises required to get CAFTA -- in itself admittedly smaller potatoes -- are more costly than whatever benefits might be derived in terms of the deal itself or whatever it buys in terms of making future progress on the free trade front.  But observing that political outcomes involve politics, as odious as that seems, does not a compelling argument make.

Is CAFTA The End Of The (Free Trade) Road?

Probably not, but the road may get even bumpier, according this report from the Wall Street Journal (page A1 in the print version):

Congressional approval of a trade pact with six small Central American countries nudged forward the Bush administration's free-trade agenda. But the close vote and bitter fight underscored anxiety about the pace of globalization and clouded prospects for approval of future deals...

But the push to encourage globalization is faltering elsewhere. In Geneva this week, the global trade talks being held under the auspices of the World Trade Organization and known as the Doha Round have been languishing, stymied by the reluctance of the U.S., Europe and others to make concessions, especially in the key area of slashing agricultural subsidies. And there is little visible movement toward the long-promised hemispheric Free Trade Area of the Americas. This effort to knock down trade barriers throughout North and South America began in late 1994 and missed its January 2005 target date for sealing a deal.

With scant progress in those areas, the close call with Cafta raised doubts around the world about the willingness of the U.S. Congress to take the politically painful steps that are sure to be part of any future trade deals. It may also encourage the move in other countries, particularly in Asia, to form free-trade zones that exclude the U.S...

Of particular concern to those who see virtue in globalization is the erosion of support among Democrats. The House vote was much more partisan than the 1993 vote for the North American Free Trade Agreement, which lowered trade barriers for the U.S., Canada and Mexico. Republicans voted 202 to 27 for Cafta. Democrats and the lone House independent voted 188 to 15 against it.

I'm not sure if this should encourage me or not...

Mr. Destler suggested that the partisanship may say more about the dynamics of Congress -- "where the parties don't talk to each other anymore" -- than partisan divisions among the public. A recent poll of 821 adults by the University of Maryland's Program on International Policy Attitudes found 50% of self-described Republicans in favor of Cafta and 51% of Democrats.

While the poll found three-quarters "support the growth of international trade in principle," it picked up widespread dissatisfaction with "the way the U.S. government is dealing with the effects of trade on American jobs, the poor in other countries and the environment."

... as the conditionality of the support suggested by this poll is not necessarily inconsistent with the Congressional divide.  In any event, these are definitely not encouraging words:

In Asia, the perception that American political support for globalization is weak could accelerate moves to form regional free-trade pacts that exclude the U.S. China reached a deal in November 2004 with the 10-member Association of Southeast Asian Nations to create one of the world's biggest free-trade areas by 2010 and is pursuing separate pacts with countries as distant as Chile. India is pursuing bilateral deals, too.

For Latin American governments mulling their own free-trade pacts with the U.S., the Cafta cliffhanger raised an unsettling question: If the tiny, ardently pro-U.S. economies of Central America can barely get a deal, what can we expect? That may make Latin leaders less willing to expend political capital at home to win approval for trade deals that grant greater access for U.S. goods. While individual countries like Panama will continue to seek bilateral pacts with the U.S., the Bush administration's already troubled plan for a Free Trade Area of the Americas faces an increasingly uncertain future.

CAFTA Moves Ahead

From Bloomberg:

The U.S. House of Representatives approved the Central American Free Trade Agreement early today, overcoming objections by unions, sugar producers and textile makers in what was the most contentious trade fight in Congress in more than a decade.

The vote was 217-215 in favor of Cafta, in an hour-long vote held just after midnight in Washington. With only a minor procedural step in the Senate ahead, today's vote effectively completes a yearlong battle for U.S. ratification of Cafta...

Cafta ends most tariffs on more than $33 billion in goods traded between the U.S. and Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. That includes removing duties on 80 percent of the $15 billion in annual U.S. exports to the region and making permanent the duty-free access to the U.S. that most products from Central America already have...

The legislation must now go back to the Senate for completion in a procedural step. Senators already voted 54-45 in favor of the measure on June 30.       

Legislatures in El Salvador, Guatemala and Honduras have already passed Cafta, while governments in Costa Rica, the Dominican Republic and Nicaragua are still debating it.         

As usual, there were compromises...

The administration was able to garner just enough votes by pledging to maintain caps on sugar imports, getting commitments from Central America to renegotiate some textile export provisions, and by meeting with U.S. lawmakers at least twice this week about Cafta's "geopolitical'' necessity.

... but on balance, I'm impressed. 

Live8: Answers For Africa?

If nothing else, yesterday's Live8 event offers the occasion to reflect yet more on the role of trade policy in advancing, or inhibiting, the cause of human welfare.  In case you haven't been paying attention, the goal of the global -- read North American and European -- music event is to get you to visit the Live8 website and photographically sign a petition to the G8, calling on them to reform their ways with respect to economy policy toward Africa:

8 world leaders, gathered in Scotland for the G8 summit, will be presented with a workable plan to double aid, drop the debt and make the trade laws fair. If these 8 men agree, then we will become the generation that made poverty history.

Would you believe that not everyone is so sure about that?  Don Boudreaux suggests that Spain's history (as in the 16th and 17th centuries) may contain lessons for those who see more foreign aid and debt relief to Africa as key to Africa`s escape from poverty:

Debt relief certainly didn't`t work for Spain.

... transforming resources into desirable goods and services requires productive creativity and productive effort.  These, in turn, are unleashed (and properly channeled) only by a system of secure and exchangeable private property rights defined and enforced under a strong rule of law.

Meanwhile, The Liberal Order reminds us that the track record of economic aid is not, shall we say, spotless:

In one of the most extensive studies on the effect of providing foreign aid on economic growth in developing countries, [William] Easterly finds no overall positive effect, including instances where aid is provided to developing countries with favorable institutions.

Here's a particularly interesting picture from the Easterly paper:

To be fair, the Live8 organizers don't want just more aid to Africa, but better aid...

However, without far-reaching changes in how aid is delivered, it won't achieve maximum benefits. Aid needs to focus better on poor people's needs. This means more aid being spent on areas such as basic health care and education.

... and there is evidence, not surprisingly, that not all assistance is futile.  Again from Easterly:

Indeed, in some cases foreign aid has been strikingly successful. For example, the World Bank’s $70 million loan to the Ceara state government in the Brazilian northeast concluded in June 2001. The loan facilitated innovative government-led initiatives in land reform, rural electrification and water supply and a fall in infant mortality. There are countrywide success stories like Uganda, with heavy involvement by the World Bank and other aid agencies. Earlier success stories associated with aid included South Korea and Taiwan. There are also sectoral success stories, like the elimination of smallpox, the near elimination of river blindness, family planning and the general rise in life expectancy and fall in infant mortality, in which foreign assistance played some role.

But the Live8 crowd wants to bundle things up with this...

[Aid] should no longer be conditional on recipients promising economic change like privatising or deregulating their services...

... and the seemingly inevitable call for "trade justice":

Three main bodies combine to write the rules of trade:

World Trade Organisation (WTO)   

World Bank   

International Monetary Fund (IMF) 

All three are dominated by the world's richest nations.

Between them, they're forcing poor countries to open up their markets to foreign imports and businesses, and sell off public services like electricity - even when this isn't in their interest. They're also banning poor countries from supporting vulnerable farmers and industries, while wealthy nations continue to support their own.

Oh-oh.  The Live8 group appears to be all for developed countries importing from developing countries, but adamantly opposed to trade flowing in the opposite direction.  Mercantilism as the path to economic well-being? And the presumption that government direction of resources is the key to economic development?   Let's call that one questionable.

Besides, there is scant evidence that conditionality is even consistently enforced, let alone the problem.  Back to Easterly:

... the fundamental problem remains that both the success of past aid to follow conditions and the failure of past aid to follow conditions are both taken as justifications for future aid. For example, in 2002, a World Bank task force made recommendations on how to direct aid to states convulsed by predatory autocrats and corruption (the World Bank euphemism was “low income countries under stress”). In other words, a nation will selectively receive aid if it is a “good performer”— unless it is a bad performer, in which case it will receive aid from the “bad performer” fund. In these circumstances, the imposition of conditions is no more than a wistful hope, rather than a policy with consequences.

In the end, perhaps the Africans themselves have the better handle on what Africa really needs. Here is a thoroughly unscientific snapshot from the Christian Science Monitor (hat tip, Mark Thoma):

Should strings be attached to Western aid:

Africans: 8 of 8 said yes.

Concertgoers: 3 of 8 said yes.

What can the west do to help Africa most?

Africans:

• Educate us and "stop selling weapons to African countries."

• Help end Africa's wars

• Give aid that is "better organized and more carefully watched."

• Create "programs that can help with things like AIDS."

• Open up trade.

It was a fine hootenanny, though.

Personal note: This post is for Tianna.

UPDATE: More from Easterly, via Liberal Order.  And if you feel like you might want to spend a good part of your day absorbing blogger-chatter on the Live8 soiree, Pajama Hadin has the links for you.

CAFTA Takes A Step Forward

Shouldn't let this go unnoticed.  From the New York Times:

After a bitter and prolonged battle over the promises and perils of foreign trade, the Senate voted on Thursday to approve the Central American Free Trade Agreement.

The vote of 54 to 45, which came after weeks of efforts to placate angry sugar producers and other interest groups, was a major victory for President Bush at a time when Republicans and Democrats alike have been alarmed about soaring imports from low-cost countries...

The pact would eliminate most trade restrictions on about $32 billion in annual trade with the Dominican Republic and the five Central American nations of Costa Rica, El Salvador, Honduras, Guatemala and Nicaragua.

Success in the Senate did not come without the usual unpalatable compromise of, course:

To placate sugar producers, White House officials agreed to limit imports for another two years by paying Central American producers not to export to the United States. The United States would pay with surplus farm products accumulated through its other subsidy programs.

In case the administration's broader agenda is in doubt:

"This is a gateway to other agreements," said Rob Portman, the United States trade representative. "If this agreement goes down, it will signal to the rest of the world that America's leadership role in trade is being abdicated."

It won't be easy:

The vote set the stage for an even more difficult fight in the House, where opposition to the trade pact is strong among lawmakers from textile regions in the South, manufacturing states in the Midwest and sugar- producing areas like Florida, Louisiana, Minnesota and Wyoming...

Democratic lawmakers, including many who voted to open up trade with China and to pass the North American Free Trade Agreement, were overwhelmingly opposed to the Central American trade pact.

Senator Byron L. Dorgan, Democrat of North Dakota, charged that the agreement offered little to ensure that Central American nations would enforce their own labor and environmental laws...

Senator John Kerry, Democrat of Massachusetts, who voted for the North American Free Trade Agreement and walked a very careful line during last year's presidential campaign, called the deal a "giant step backward."

Outsourcing/Offshoring Info

Brad DeLong advises:

Offshoring is a very big deal, not for the next five years, but for the next fifty.

Based on the popularity of Tom Friedman's latest book, many of you apparently agree.  If you are one of them, here are a couple of sites you might want to keep your eyes on: Outsourcing Times and Outsourcing Blog.  These are run by proprietary concerns -- and my notice does not constitute an endorsement of whatever they are selling -- but that doesn't make them uninformative.  You can also find a ton of links at Blogspot's Outsourcing/Offshoring Information and Resources Subject Tracer. 

(P.S. My friend and colleague Eric Fisher offered this recent review of Friedman's book in the Cleveland Plain Dealer.)

Two Tutorials...

... worth your time: James Hamilton on how to interpret prices on oil futures, and Tim Worstall on comparative advantage.

UPDATE: I've fixed the bad link to Hamilton post.  Sorry for the inconvenience.  (Thanks Shadya!)