Neo-Mercantilism
Daily Article by Murray N. Rothbard | Posted on 2/9/1999
Protectionism, often refuted and seemingly abandoned, has returned, and with a vengeance. The Japanese, who bounced back from grievous losses in World War II to astound the world by producing innovative, high-quality products at low prices, are serving as the convenient butt of protectionist propaganda. Memories of wartime myths prove a heady brew, as protectionists warn about this new "Japanese imperialism," even "worse than Pearl Harbor." This "imperialism" turns out to consist of selling Americans wonderful TV sets, autos, microchips, etc., at prices more than competitive with American firms.
Is this "flood" of Japanese products really a menace, to be combated by the U.S. government? Or is the new Japan a godsend to American consumers? In taking our stand on this issue, we should recognize that all government action means coercion, so that calling upon the U.S. government to intervene means urging it to use force and violence to restrain peaceful trade. One trusts that the protectionists are not willing to pursue their logic of force to the ultimate in the form of another Hiroshima and Nagasaki.
Keep Your Eye on the Consumer
As we unravel the tangled web of protectionist argument, we should keep our eye on two essential points: (1) protectionism means force in restraint of trade; and (2) the key is what happens to the consumer. Invariably, we will find that the protectionists are out to cripple, exploit, and impose severe losses not only on foreign consumers but especially on Americans. And since each and every one of us is a consumer, this means that protectionism is out to mulct all of us for the benefit of a specially privileged, subsidized few--and an inefficient few at that: people who cannot make it in a free and unhampered market.
Take, for example, the alleged Japanese menace. All trade is mutually beneficial to both parties--in this case Japanese producers and American consumers--otherwise they would not engage in the exchange. In trying to stop this trade, protectionists are trying to stop American consumers from enjoying high living standards by buying cheap and high-quality Japanese products. Instead, we are to be forced by government to return to the inefficient, higher-priced products we have already rejected. In short, inefficient producers are trying to deprive all of us of products we desire so that we will have to turn to inefficient firms. American consumers are to be plundered.
How To Look at Tariffs and Quotas
The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by high-priced New York or Rhode Island textile manufacturers who would then be complaining about the "unfair," "cheap labor" competition from various low-type "foreigners" from Tennessee or North Carolina, or vice versa.
Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on inter-state trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure ripoff of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by less efficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.
Fortunately, inter-state tariffs are unconstitutional. But even with this clear barrier, and even without being able to wrap themselves in the cloak of nationalism, protectionists have been able to impose inter-state tariffs in another guise. Part of the drive for continuing increases in the federal minimum-wage law is to impose a protectionist devise against lower-wage, lower-labor-cost competition from North Carolina and other southern states against their New England and New York competitors.
During the 1966 Congressional battle over a higher federal minimum wage, for example, the late Senator Jacob Javits (R-NY) freely admitted that one of his main reasons for supporting the bill was to cripple the southern competitors of New York textile firms. Since southern wages are generally lower than in the north, the business firms hardest hit by an increased minimum wage (and the workers struck by unemployment) will be located in the south.
Another way in which interstate trade restrictions have been imposed has been in the fashionable name of "safety." Government-organized state milk cartels in New York, for example, have prevented importation of milk from nearby New Jersey under the patently spurious grounds that the trip across the Hudson would render New Jersey milk "unsafe."
If tariffs and restraints on trade are good for a country, then why not indeed for a state or region? The principle is precisely the same. In America's first great depression, the Panic of 1819, Detroit was a tiny frontier town of only a few hundred people. Yet protectionist cries arose--fortunately not fulfilled--to prohibit all "imports" from outside of Detroit, and citizens were exhorted to buy only Detroit. If this nonsense had been put into effect, general starvation and death would have ended all other economic problems for Detroiters.
So why not restrict and even prohibit trade, i.e., "imports," into a city, or a neighborhood, or even on a block, or, to boil it down to its logical conclusion, to one family? Why shouldn't the Jones family issue a decree that from now on, no member of the family can buy any goods or services produced outside the family house? Starvation would quickly wipe out this ludicrous drive for self-sufficiency.
And yet we must realize that this absurdity is inherent in the logic of protectionism. Standard protectionism is just as preposterous, but the rhetoric of nationalism and national boundaries has been able to obscure this vital fact.
The upshot is that protectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world of self-sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade--such as protectionism--cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of less efficient producers, at the expense of more competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.
The Negative Railroad
Protectionism is also peculiarly destructive because it acts as a coerced and artificial increase in the cost of transportation between regions. One of the great features of the Industrial Revolution, one of the ways in which it brought prosperity to the starving masses, was by reducing drastically the cost of transportation. The development of railroads in the early 19th century, for example, meant that for the first time in the history of the human race, goods could be transported cheaply over land. Before that, water--rivers and oceans--was the only economically viable means of transport. By making land transport accessible and cheap, railroads allowed interregional land transportation to break up expensive inefficient local monopolies. The result was an enormous improvement in living standards for all consumers. And what the protectionists want to do is lay an axe to this wondrous principle of progress.
It is no wonder that Frederic Bastiat, the great French laissez-faire economist of the mid-19th century, called a tariff a "negative railroad." Protectionists are just as economically destructive as if they were physically chopping up railroads, or planes, or ships, and forcing us to revert to the costly transport of the past--mountain trails, rafts, or sailing ships.
"Fair" Trade
Let us now turn to some of the leading protectionist arguments. Take, for example, the standard complaint that while the protectionist "welcomes competition," this competition must be "fair." Whenever someone starts talking about "fair competition" or indeed, about "fairness" in general, it is time to keep a sharp eye on your wallet, for it is about to be picked. For the genuinely "fair" is simply the voluntary terms of exchange, mutually agreed upon by buyer and seller. As most of the medieval scholastics were able to figure out, there is no "just" (or "fair") price outside of the market price.
So what could be "unfair" about the free-market price? One common protectionist charge is that it is "unfair" for an American firm to compete with, say, a Taiwanese firm which needs to pay only one-half the wages of the American competitor. The U.S. government is called upon to step in and "equalize" the wage rates by imposing an equivalent tariff upon the Taiwanese. But does this mean that consumers can never patronize low-cost firms because it is "unfair" for them to have lower costs than inefficient competitors? This is the same argument that would be used by a New York firm trying to cripple its North Carolina competitor.
What the protectionists don't bother to explain is why U.S. wage rates are so much higher than Taiwan. They are not imposed by Providence. Wage rates are high in the U.S. because American employers have bid these rates up. Like all other prices on the market, wage rates are determined by supply and demand, and the increased demand by U.S. employers has bid wages up. What determines this demand? The "marginal productivity" of labor.
The demand for any factor of production, including labor, is constituted by the productivity of that factor, the amount of revenue that the worker, or the pound of cement or acre of land, is expected to bring to the brim. The more productive the factory, the greater the demand by employers, and the higher its price or wage rate. American labor is more costly than Taiwanese because it is far more productive. What makes it productive? To some extent, the comparative qualities of labor, skill, and education. But most of the difference is not due to the personal qualities of the laborers themselves, but to the fact that the American laborer, on the whole, is equipped with more and better capital equipment than his Taiwanese counterparts. The more and better the capital investment per worker, the greater the worker's productivity, and therefore the higher the wage rate.
In short, if the American wage rate is twice that of the Taiwanese, it is because the American laborer is more heavily capitalized, is equipped with more and better tools, and is therefore, on the average, twice as productive. In a sense, I suppose, it is not "fair" for the American worker to make more than the Taiwanese, not because of his personal qualities, but because savers and investors have supplied him with more tools. But a wage rate is determined not just by personal quality but also by relative scarcity, and in the United States the worker is far scarcer compared to capital than he is in Taiwan.
Putting it another way, the fact that American wage rates are on the average twice that of the Taiwanese, does not make the cost of labor in the U.S. twice that of Taiwan. Since U.S. labor is twice as productive, this means that the double wage rate in the U.S. is offset by the double productivity, so that the cost of labor per unit product in the U.S. and Taiwan tends, on the average, to be the same. One of the major protectionist fallacies is to confuse the price of labor (wage rates) with its cost, which also depends on its relative productivity.
Thus, the problem faced by American employers is not really with the "cheap labor" in Taiwan, because "expensive labor" in the U.S. is precisely the result of the bidding for scarce labor by U.S. employers. The problem faced by less efficient U.S. textile or auto firms is not so much cheap labor in Taiwan or Japan, but the fact that other U.S. industries are efficient enough to afford it, because they bid wages that high in the first place.
So, by imposing protective tariffs and quotas to save, bail out, and keep in place less efficient U.S. textile or auto or microchip firms, the protectionists are not only injuring the American consumer. They are also harming efficient U.S. firms and industries, which are prevented from employing resources now locked into incompetent firms, and who could otherwise be able to expand and sell their efficient products at home and abroad.
"Dumping"
Another contradictory line of protectionist assault on the free market asserts that the problem is not so much the low costs enjoyed by foreign firms, as the "unfairness" of selling their products "below costs" to American consumers, and thereby engaging in the pernicious and sinful practice of "dumping." By such dumping they are able to exert unfair advantage over American firms who presumably never engage in such practices and make sure that their prices are always high enough to cover costs. But if selling below costs is such a powerful weapon, why isn't it ever pursued by business firms within a country?
Our first response to this charge is, once again, to keep our eye on consumers in general and on American consumers in particular. Why should it be a matter of complaint when consumers so clearly benefit? Suppose, for example, that Sony is willing to injure American competitors by selling TV sets to Americans for a penny apiece. Shouldn't we rejoice at such an absurd policy of suffering severe losses by subsidizing us, the American consumers? And shouldn't our response be: "Come on, Sony, subsidize us some more!" As far as consumers are concerned, the more "dumping" that takes place, the better.
But what of the poor American TV firms, whose sales will suffer so long as Sony is willing to virtually give their sets away? Well, surely, the sensible policy for RCA, Zenith, etc. would be to hold back production and sales until Sony drives itself into bankruptcy. But suppose that the worst happens, and RCA, Zenith, etc. are themselves driven into bankruptcy by the Sony price war? Well, in that case, we the consumers will still be better off, since the plants of the bankrupt firms, which would still be in existence, would be picked up for a song at auction, and the American buyers at auction would be able to enter the TV business and outcompete Sony because they now enjoy far lower capital costs.
For decades, indeed, opponents of the free market have claimed that many businesses gained their powerful status on the market by what is called "predatory price-cutting," that is, by driving their smaller competitors into bankruptcy by selling their goods below cost, and then reaping the reward of their unfair methods by raising their prices and thereby charging "monopoly prices" to the consumers. The claim is that while consumers may gain in the short run by price wars, "dumping," and selling below costs, they lose in the long run from the alleged monopoly. But, as we have seen, economic theory shows that this would be a mug's game, losing money for the "dumping" firms, and never really achieving a monopoly price. And sure enough, historical investigation has not turned up a single case where predatory pricing, when tried, was successful, and there are actually very few cases where it has even been tried.
Another charge claims that Japanese or other foreign firms can afford to engage in dumping because their governments are willing to subsidize their losses. But again, we should still welcome such an absurd policy. If the Japanese government is really willing to waste scarce resources subsidizing American purchases of Sony's, so much the better! Their policy would be just as self-defeating as if the losses were private. There is yet another problem with the charge of "dumping," even when it is made by economists or other alleged "experts" sitting on impartial tariff commissions and government bureaus. There is no way whatever that outside observers, be they economists, businessmen, or other experts, can decide what some other firm's "costs" may be. "Costs" are not objective entities that can be gauged or measured. Costs are subjective to the businessman himself, and they vary continually, depending on the businessman's time horizon or the stage of production or selling process he happens to be dealing with at any given time.
Suppose, for example, a fruit dealer has purchased a case of pears for $20, amounting to $1 a pound. He hopes and expects to sell those pears for $1.50 a pound. But something has happened to the pear market, and he finds it impossible to sell most of the pears at anything near that price. In fact, he finds that he must sell the pears at whatever price he can get before they become overripe. Suppose he finds that he can only sell his stock of pears at 70 cents a pound. The outside observer might say that the fruit dealer has, perhaps "unfairly," sold his pears "below costs," figuring that the dealer's costs were $1 a pound.
"Infant" Industries
Another protectionist fallacy held that the government should provide a temporary protective tariff to aid, or to bring into being, an "infant industry." Then, when the industry was well-established, the government would and should remove the tariff and toss the now "mature" industry into the competitive swim.
The theory is fallacious, and the policy has proved disastrous in practice. For there is no more need for government to protect a new, young, industry from foreign competition than there is to protect it from domestic competition.
In the last few decades, the "infant" plastics, television, and computer industries made out very well without such protection. Any government subsidizing of a new industry will funnel too many resources into that industry as compared to older firms, and will also inaugurate distortions that may persist and render the firm or industry permanently inefficient and vulnerable to competition. As a result, "infant-industry" tariffs have tended to become permanent, regardless of the "maturity" of the industry. The proponents were carried away by a misleading biological analogy to "infants" who need adult care. But a business firm is not a person, young or old.
Older Industries
Indeed, in recent years, older industries that are notoriously inefficient have been using what might be called a "senile-industry" argument for protectionism. Steel, auto, and other outcompeted industries have been complaining that they "need a breathing space" to retool and become competitive with foreign rivals, and that this breather could be provided by several years of tariffs or import quotas. This argument is just as full of holes as the hoary infant-industry approach, except that it will be even more difficult to figure out when the "senile" industry will have become magically rejuvenated. In fact, the steel industry has been inefficient ever since its inception, and its chronological age seems to make no difference. The first protectionist movement in the U.S. was launched in 1820, headed by the Pennsylvania iron (later iron and steel) industry, artificially force-fed by the War of 1812 and already in grave danger from far more efficient foreign competitors.
The Non-Problem of the Balance of Payments
A final set of arguments, or rather alarms, center on the mysteries of the balance of payments. Protectionists focus on the horrors of imports being greater than exports, implying that if market forces continued unchecked, Americans might wind up buying everything from abroad, while selling foreigners nothing, so that American consumers will have engorged themselves to the permanent ruin of American business firms. But if the exports really fell to somewhere near zero, where in the world would Americans still find the money to purchase foreign products? The balance of payments, as we said earlier, is a pseudo-problem created by the existence of customs statistics.
During the day of the gold standard, a deficit in the national balance of payments was a problem, but only because of the nature of the fractional-reserve banking system. If U.S. banks, spurred on by the Fed or previous forms of central banks, inflated money and credit, the American inflation would lead to higher prices in the U.S., and this would discourage exports and encourage imports. The resulting deficit had to be paid for in some way, and during the gold standard era this meant being paid for in gold, the international money. So as bank credit expanded, gold began to flow out of the country, which put the fractional-reserve banks in even shakier shape. To meet the threat to their solvency posed by the gold outflow, the banks eventually were forced to contract credit, precipitating a recession and reversing the balance of payment deficits, thus bringing gold back into the country.
But now, in the fiat-money era, balance of payments deficits are truly meaningless. For gold is no longer a "balancing item." In effect, there is no deficit in the balance of payments. It is true that in the last few years, imports have been greater than exports by $150 billion or so per year. But no gold flowed out of the country. Neither id dollars "leak" out. The alleged "deficit" was paid for by foreigners investing the equivalent amount of money in American dollars: in real estate, capital goods, U.S. securities, and bank accounts.
In effect, in the last couple of years, foreigners have been investing enough of their own funds in dollars to keep the dollar high, enabling us to purchase cheap imports. Instead of worrying and complaining about this development, we should rejoice that foreign investors are willing to finance our cheap imports. The only problem is that this bonanza is already coming to an end, with the dollar becoming cheaper and exports more expensive.
We conclude that the sheaf of protectionist arguments, many plausible at first glance, are really a tissue of egregious fallacies. They betray a complete ignorance of the most basic economic analysis. Indeed, some of the arguments are almost embarrassing replicas of the most ridiculous claims of 17th-century mercantilism: for example, that it is somehow a calamitous problem that the U.S. has a balance of trade deficit, not overall, but merely with one specific country, e.g., Japan.
Must we even relearn the rebuttals of the more sophisticated mercantilists of the 18th century: namely, that balances with individual countries will cancel each other out, and therefore that we should only concern ourselves with the overall balance? (Let alone realize that the overall balance is no problem either.) But we need not reread the economic literature to realize that the impetus for protectionism comes not from preposterous theories, but from the quest for coerced special privilege and restraint of trade at the expense of efficient competitors and consumers.
In the host of special interests using the political process to repress and loot the rest of us, the protectionists are among the most venerable. It is high time that we get them, once and for all, off our backs, and treat them with the righteous indignation they so richly deserve.
* * * * *
This essay first appeared in 1986. Read a short biography of Murray N. Rothbard
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Saturday, November 29, 2008
The Rise of the New Mercantilism (Part I)
The Rise of the New Mercantilism (Part I)
By Robert D. Atkinson | Thursday, May 29, 2008
With the balance of trade shifting from multinational corporations to large emerging markets — such as China and India — some nations have been tempted to turn to unfair practices to gain a trade advantage. As Robert D. Atkinson explains, these mercantilist practices are taking over knowledge- and technology-based industries.
When many of the trade enforcement tools were established by the U.S. Congress 30 or more years ago, the international trading regime was quite different than it is today. Services accounted for a small fraction of cross-border trade. A larger percentage of goods trade was in commodity-type products.
Many other nations — especially developed nations — focused their economic and trade policies on promoting natural resource production and commodity goods assembly. No nation — not even Japan — was so large that it could dictate terms of trade to multinational companies.
Managing the U.S. trade deficit
As a result, competition between nations for investment exerted at least some discipline on nations’ worst mercantilist impulses. And when countries erected mercantilist
Because the stakes are so much higher, nations have stronger motivations to employ complex and non-transparent means to gain an unfair advantage in the global trading system.
trade policies designed to unfairly gain competitive advantage, these usually consisted of tariffs, quotas or other relatively blunt means of protectionism that were easy to detect and confront. For example, in the 1970s and early 1980s, the Japanese government limited imports of semiconductors to no more than 10% of domestic consumption.
All of these factors worked to keep the U.S. trade deficit at relatively minimal levels.
Thirty years later, the global trading system is significantly different. With the rise of information technology and global communication networks, services trade has expanded significantly. While commodity-based goods are still traded, a growing share of goods trade is now in technology-based products.
Shift in the balance of power
And with the entry into the global trading system of nations with very large markets — like China and India — the relative balance of power has shifted away from multinational companies toward these nations, who increasingly use access to their huge and growing markets as leverage to dictate the terms of trade.
Moreover, a large share of nations, including developing nations, see the royal road to growth in shifting their economies more toward high value-added, innovation-based goods and services — the very sectors upon which the United States’ competitive advantage is based.
Unfair advantages
And indeed, a growing share of nations have turned to discriminatory mercantilist policies
If the United States is to maintain its advantage, we Americans will have to work for it — in part by boosting our innovation policies.
to gain jobs in those sectors, and in the process targeted U.S. technology jobs. Not surprisingly, the U.S. trade deficit has ballooned to record levels — as we have become the “importer of last resort” for most of the rest of the world.
Because the nature of trade has changed and because the stakes are so much higher, nations are able to employ a much wider array of complex and relatively non-transparent means of gaining unfair advantage in the global trading system — and they have much stronger motivations to do so.
In short, mercantilist trade policies have become the policy of choice for many nations.
Falling behind
The U.S. trade enforcement system has not kept pace with these changes — and it has failed to adequately respond to either the magnitude or the nature of the challenge.
As technology- and knowledge-based industries become a more important part of the global economy — and a key source of high-paying jobs — many nations have established policies to grow their technology industries. Many of these policies are quite legitimate and consistent with market-based competition.
An uphill battle
These include policies such as research and development (R&D) tax incentives, government investment in research, efforts
The United States is more dependent on protection of intellectual property (IP) than other nations. Over 50% of U.S. exports depend on some form of IP protection.
to increase education and skill levels (particularly in science and technology fields) — and spurring telecommunications development.
It would be one thing if that were all these nations were doing to compete for technology-based jobs. After all, there is nothing inherent about the United States’ competitive advantage in these sectors.
If the United States is to maintain its advantage, we Americans will have to work for it, in part by boosting our innovation policies — such as expanding the R&D tax credit and increasing support for federal research.
Skirting the rules
But the other nations’ efforts go far beyond legitimate and market-based innovation policies. Many have decided that to compete they have to erect a whole host of unfair and protectionist policies focused on systematically disadvantaging foreign, including U.S., companies in global competition.
Perhaps the most troubling part of this is that nearly all of the nations engaging in these unfair and distorting trade practices targeting U.S. technology leadership are members of the World Trade Organization (WTO). These nations made a free decision to join the WTO and when they did they agreed to reduce — if not end — mercantilist practices.
Both ends of the bargain
In fact, many of these nations saw membership in the WTO as an avenue to exporting to the
Over 90% of video games consumed in China are pirated. But China doesn’t just copy them — it is a leading producer and exporter of pirated software.
United States without committing to their responsibilities as WTO members. Here are a few tell-tale examples:
1. Tariffs: For example, The WTO’s 1997 Information Technology Agreement (ITA) was supposed to eliminate tariffs that distort trade flows on a wide variety of high-tech goods, including computers and telecommunications equipment.
Nevertheless, ten years after its passage, countries such as India and Indonesia still maintain tariffs on imported IT goods despite being signatories to the ITA — and maintaining high trade surpluses with the United States.
Europe and abroad
2. But it’s not just developing nations that are violating the letter and spirit of the ITA. The European Union has also decided that it must erect barriers to high-tech imports covered by the ITA. In recent years, it has been slapping tariffs as high as 14% on products — simply because companies have improved those products and added innovative features. These products include computer monitors and multi-function printers.
The argument that the EU makes for its tariffs is that these are new products and therefore they do not fall under the list of covered products under the ITA agreement. The real reason for their action is to erect a tariff wall so that high-tech production will move to economically disadvantaged regions of Eastern Europe.
The Office of the United States Trade Representative announced in late May 2008 that it intends to bring a case before the WTO on this issue.
Making exceptions
3. India applies a 12% excise duty on computers that local manufacturers (either domestic or foreign) can offset against their value-added taxes (VAT).
While commodity-based goods are still traded, a growing share of goods trade is now in technology-based products.
But foreign manufacturers are nonetheless at a disadvantage because they also pay a 4% countervailing duty (CVD), which the Indian government has specifically imposed to protect domestic computer manufacturers.
4. China recently created a tax scheme that blatantly violated the WTO when it applied a 17% VAT to both foreign and domestically produced integrated circuits (ICs) used in the semiconductor industry, and gave a rebate on most of the VAT only to companies producing ICs in China for export, but not to companies importing ICs.
Intellectual property
5. Intellectual Property Theft: As a net exporter of manufacturing know-how as intellectual property, the United States is more dependent on protection of intellectual property (IP) than other nations. Over 50% of U.S. exports depend on some form of IP protection, compared to less than 10% 50 years ago.
But this very strength is also a key vulnerability, for unlike physical property — which is relatively difficult to steal — IP theft or forced transfer is much easier. Many nations either turn a blind eye to IP theft or actually encourage it as a way to gain competitive advantage.
China is one of the most egregious violators. Not only does China fail to enforce its own intellectual property laws, but it also has implemented measures to block the trading and distribution rights of producers of U.S. entertainment products. Even the Chinese government continues to support theft of U.S. intellectual property.
Looking to China to uphold IP
For example, although China’s State Council ordered all government agencies to use only legal software in 1999, widespread lack of enforcement or monitoring ensures
With the entry of nations with very large markets into global trade — like China and India — the relative balance of power has shifted away from multinational companies.
that the Chinese government still favors pirated software, as is reflected in its low levels of government purchases.
Computer software theft is just the tip of the iceberg. The entertainment software industry (e.g. video games), in which the United States leads, suffers from rampant piracy in China. Over 90% of video games consumed in China are pirated. But China doesn’t just copy them — it is a leading producer and exporter of pirated cartridge-based entertainment software.
Yet China is by no means the main offender. Russia also is a distribution center for pirated entertainment software into Central and Eastern Europe. Malaysia is a primary source of pirated CDs, DVDs and console games — with a capacity of producing over 300 million disks per year.
Editor's Note: This is first in a two-part series. Part II will appear on The Globalist tomorrow.
By Robert D. Atkinson | Thursday, May 29, 2008
With the balance of trade shifting from multinational corporations to large emerging markets — such as China and India — some nations have been tempted to turn to unfair practices to gain a trade advantage. As Robert D. Atkinson explains, these mercantilist practices are taking over knowledge- and technology-based industries.
When many of the trade enforcement tools were established by the U.S. Congress 30 or more years ago, the international trading regime was quite different than it is today. Services accounted for a small fraction of cross-border trade. A larger percentage of goods trade was in commodity-type products.
Many other nations — especially developed nations — focused their economic and trade policies on promoting natural resource production and commodity goods assembly. No nation — not even Japan — was so large that it could dictate terms of trade to multinational companies.
Managing the U.S. trade deficit
As a result, competition between nations for investment exerted at least some discipline on nations’ worst mercantilist impulses. And when countries erected mercantilist
Because the stakes are so much higher, nations have stronger motivations to employ complex and non-transparent means to gain an unfair advantage in the global trading system.
trade policies designed to unfairly gain competitive advantage, these usually consisted of tariffs, quotas or other relatively blunt means of protectionism that were easy to detect and confront. For example, in the 1970s and early 1980s, the Japanese government limited imports of semiconductors to no more than 10% of domestic consumption.
All of these factors worked to keep the U.S. trade deficit at relatively minimal levels.
Thirty years later, the global trading system is significantly different. With the rise of information technology and global communication networks, services trade has expanded significantly. While commodity-based goods are still traded, a growing share of goods trade is now in technology-based products.
Shift in the balance of power
And with the entry into the global trading system of nations with very large markets — like China and India — the relative balance of power has shifted away from multinational companies toward these nations, who increasingly use access to their huge and growing markets as leverage to dictate the terms of trade.
Moreover, a large share of nations, including developing nations, see the royal road to growth in shifting their economies more toward high value-added, innovation-based goods and services — the very sectors upon which the United States’ competitive advantage is based.
Unfair advantages
And indeed, a growing share of nations have turned to discriminatory mercantilist policies
If the United States is to maintain its advantage, we Americans will have to work for it — in part by boosting our innovation policies.
to gain jobs in those sectors, and in the process targeted U.S. technology jobs. Not surprisingly, the U.S. trade deficit has ballooned to record levels — as we have become the “importer of last resort” for most of the rest of the world.
Because the nature of trade has changed and because the stakes are so much higher, nations are able to employ a much wider array of complex and relatively non-transparent means of gaining unfair advantage in the global trading system — and they have much stronger motivations to do so.
In short, mercantilist trade policies have become the policy of choice for many nations.
Falling behind
The U.S. trade enforcement system has not kept pace with these changes — and it has failed to adequately respond to either the magnitude or the nature of the challenge.
As technology- and knowledge-based industries become a more important part of the global economy — and a key source of high-paying jobs — many nations have established policies to grow their technology industries. Many of these policies are quite legitimate and consistent with market-based competition.
An uphill battle
These include policies such as research and development (R&D) tax incentives, government investment in research, efforts
The United States is more dependent on protection of intellectual property (IP) than other nations. Over 50% of U.S. exports depend on some form of IP protection.
to increase education and skill levels (particularly in science and technology fields) — and spurring telecommunications development.
It would be one thing if that were all these nations were doing to compete for technology-based jobs. After all, there is nothing inherent about the United States’ competitive advantage in these sectors.
If the United States is to maintain its advantage, we Americans will have to work for it, in part by boosting our innovation policies — such as expanding the R&D tax credit and increasing support for federal research.
Skirting the rules
But the other nations’ efforts go far beyond legitimate and market-based innovation policies. Many have decided that to compete they have to erect a whole host of unfair and protectionist policies focused on systematically disadvantaging foreign, including U.S., companies in global competition.
Perhaps the most troubling part of this is that nearly all of the nations engaging in these unfair and distorting trade practices targeting U.S. technology leadership are members of the World Trade Organization (WTO). These nations made a free decision to join the WTO and when they did they agreed to reduce — if not end — mercantilist practices.
Both ends of the bargain
In fact, many of these nations saw membership in the WTO as an avenue to exporting to the
Over 90% of video games consumed in China are pirated. But China doesn’t just copy them — it is a leading producer and exporter of pirated software.
United States without committing to their responsibilities as WTO members. Here are a few tell-tale examples:
1. Tariffs: For example, The WTO’s 1997 Information Technology Agreement (ITA) was supposed to eliminate tariffs that distort trade flows on a wide variety of high-tech goods, including computers and telecommunications equipment.
Nevertheless, ten years after its passage, countries such as India and Indonesia still maintain tariffs on imported IT goods despite being signatories to the ITA — and maintaining high trade surpluses with the United States.
Europe and abroad
2. But it’s not just developing nations that are violating the letter and spirit of the ITA. The European Union has also decided that it must erect barriers to high-tech imports covered by the ITA. In recent years, it has been slapping tariffs as high as 14% on products — simply because companies have improved those products and added innovative features. These products include computer monitors and multi-function printers.
The argument that the EU makes for its tariffs is that these are new products and therefore they do not fall under the list of covered products under the ITA agreement. The real reason for their action is to erect a tariff wall so that high-tech production will move to economically disadvantaged regions of Eastern Europe.
The Office of the United States Trade Representative announced in late May 2008 that it intends to bring a case before the WTO on this issue.
Making exceptions
3. India applies a 12% excise duty on computers that local manufacturers (either domestic or foreign) can offset against their value-added taxes (VAT).
While commodity-based goods are still traded, a growing share of goods trade is now in technology-based products.
But foreign manufacturers are nonetheless at a disadvantage because they also pay a 4% countervailing duty (CVD), which the Indian government has specifically imposed to protect domestic computer manufacturers.
4. China recently created a tax scheme that blatantly violated the WTO when it applied a 17% VAT to both foreign and domestically produced integrated circuits (ICs) used in the semiconductor industry, and gave a rebate on most of the VAT only to companies producing ICs in China for export, but not to companies importing ICs.
Intellectual property
5. Intellectual Property Theft: As a net exporter of manufacturing know-how as intellectual property, the United States is more dependent on protection of intellectual property (IP) than other nations. Over 50% of U.S. exports depend on some form of IP protection, compared to less than 10% 50 years ago.
But this very strength is also a key vulnerability, for unlike physical property — which is relatively difficult to steal — IP theft or forced transfer is much easier. Many nations either turn a blind eye to IP theft or actually encourage it as a way to gain competitive advantage.
China is one of the most egregious violators. Not only does China fail to enforce its own intellectual property laws, but it also has implemented measures to block the trading and distribution rights of producers of U.S. entertainment products. Even the Chinese government continues to support theft of U.S. intellectual property.
Looking to China to uphold IP
For example, although China’s State Council ordered all government agencies to use only legal software in 1999, widespread lack of enforcement or monitoring ensures
With the entry of nations with very large markets into global trade — like China and India — the relative balance of power has shifted away from multinational companies.
that the Chinese government still favors pirated software, as is reflected in its low levels of government purchases.
Computer software theft is just the tip of the iceberg. The entertainment software industry (e.g. video games), in which the United States leads, suffers from rampant piracy in China. Over 90% of video games consumed in China are pirated. But China doesn’t just copy them — it is a leading producer and exporter of pirated cartridge-based entertainment software.
Yet China is by no means the main offender. Russia also is a distribution center for pirated entertainment software into Central and Eastern Europe. Malaysia is a primary source of pirated CDs, DVDs and console games — with a capacity of producing over 300 million disks per year.
Editor's Note: This is first in a two-part series. Part II will appear on The Globalist tomorrow.
ROI, Paulson's Plan, and the Rise of Neo-Mercantilism
ROI, Paulson's Plan, and the Rise of Neo-Mercantilism
As our government continues to recklessly spend its way into an increasingly larger debt, it's about time that American society embraces a different disposition towards government. For years, we've all heard "pro-government" versus "anti-government" arguments but this strikes me as nothing more than an exercise in ideological hogwash. Government is absolutely necessary in certain areas and not needed in others; it's difficult to dispute this. Moreover governments are a lot like corporations --- sometimes they are run well and sometimes not-so-much. Hence, "more government" or "less government" is not the correct question; rather, the following questions should be asked in regards to any policy proposal:
Can the government provide a service more efficiently than the private sector?
If the government can provide something more efficiently, does the government plan being proposed achieve that objective?
Does the government plan achieve the greatest societal return on investment [ROI]?
It's a mystery to me as to why the concept of ROI is constantly evoked in the business world, yet almost never used when evaluating government policies. If the government can complete a task more efficiently than the private sector, then by all means it should do so. If it cannot, it should keep away.
Unfortunately, our government has a rather dismal record of providing things in a cost-effective manner. In fact, I'd argue that one of the biggest problems with the American government is not that we pay "high" taxes --- rather it's that we pay high taxes and receive very little in return when compared to other nations with similar taxes. In essence, we get a very poor return on our investment.
The Paulson Plan
All this brings me to the Paulson bailout plan. Make no mistake about it --- this could potentially be the most radical change to American economic policy in the past few decades. Certainly PNTR and NAFTA have changed American society to a great extent, but neither seemed to change the mechanisms of American capitalism quite like this bailout plan might.
There has been a scary trend going on in government for quite a while. It only occasionally makes the front pages, but it's there all the same. Various American governments have increasingly been taking the risk away from the private sector without gaining any of the rewards. The most notable parallel is the stadium construction proposals that various cities, states, and localities have given out --- the major complaint about these proposals is that the private sector profits while the taxpayer receives the bill. In essence, it is a shifting of wealth from the taxpayers (who come from lower, middle, and upper income classes) to individuals that are already wealthy. Or to put it another way, it does not provide much of an ROI to taxpayers.
The Paulson bailout plan is a stadium construction plan on a grand scale --- the only difference is, the taxpayers don't even get a football team out of it. Instead, we are being asked to subsidize the losses of major financial institutions without receiving any of the benefits. To their credit, a majority Democratic Congress has at least tried to pressure the Administrator into a modified package that would give the taxpayers (via the U.S. Government) an equity interest in these financial institutions in exchange for the bad assets. However, even at that, this policy does signal a frightening acceptance of a doctrine of shifting risks to the taxpayers while most of the rewards remain in the private sector. To go back to our theme of government and ROI, I am not seeing how this plan creates the highest ROI for the taxpayers.
So What's the Rush?
Congress is being pressured by the Administration to rush through the proposal. Apparently, it's imperative to pass legislation that could have far-reaching ramifications on the American economy system for decades to come in a few days' time.
Haven't we seen this before? It has become a pattern that this Administration uses any and every crisis as an excuse for usurpation of power from the Legislative Branch. Yet, Congress keeps biting. It was irritating when a Republican Congress passively accepted Executive attempts to seize power from it (presumably on the basis of party loyalty), but it's going to be even more infuriating if a Democratic Congress allows the Administration to do the same thing to it. All the same, it wouldn't surprise me if that is exactly the way it goes.
Will It Even Work?
While I've already mentioned some of the negative socio-economic ramifications of this proposal, it's worth asking if this will even work? Are we going to spend $700 Billion of taxpayer money on a plan that has maybe a 50-50 chance of achieving its short-term objective? Let's not even focus on the long-term questions yet (which are numerous!). Senator Richard Shelby (R-AL) has echoed these concerns stating:
In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted and may actually cause the government to revert to an inadequate strategy of ad hoc bailouts.
Reading over various articles, it's very clear that this wide-reaching proposal that has the capacity to change the functioning of the American economic system for many decades to come is nothing more than a skeletal draft. We don't know if this proposal only deals with "mortgage-related assets" or any "troubled assets." Little thought has been given to the scope and there appears to be virtually no oversight. This proposal sounds a lot like trying to bake a cake by randomly grabbing the first ingredients you can find in the cabinet. And if your idea of a great cake involves vanilla icing, cayenne pepper, and horseradish sauce, maybe this plan seems like a great idea.
Long-Term Ramifications
In the short-term, the plan might work or it might not work. But even given a best-case scenario, what are the long-term ramifications? For starters, the plan will create even more inflationary pressures. That's a frightening thought given that Former Federal Reserve Chair Paul Volcker already believes the actual inflationary rate to be around 11% at the present time. Could the U.S. experience 20%+ inflation in the near future? It doesn't seem all that far-fetched. Better hoard up on precious metals!
Then there's that whole "housing bubble" thing. You see --- for some reason, Federal policymakers have convinced themselves that the problem is not ineffective market mechanisms that allow prices to become extremely out-of-whack with underlying valuations. Rather, we've heard from many policymakers that the real problem is that housing prices have gone down. Hence, the solution is to drive them back up. Yet, isn't this essentially the same boneheaded wisdom behind rent controls? Just because the government forces prices upwards does not mean, what we'll call the "market reality" for a lack of a better term, will necessarily follow.
Until the recent bursting of the bubble, it was no stretch to suggest that housing prices had gotten insane. Lower and middle income earners had an extremely difficult time affording housing in that environment. In a sense, the bursting of the housing bubble was the greatest thing to happen for a lot of people who couldn't afford things at the overpriced rates things were going for. The only reason prices skyrocketed upwards was because reckless lending practices were increasing demand to absurd levels.
With the bailout proposal, the Feds are sending the message to the lending institutions to start handing out loans without much of a care again. So in essence, if I read the Feds correctly, the problem wasn't the nature of a system that encouraged reckless lending practices, drove housing prices sky-high, and created a bubble that was bound to burst. Rather, the problem was that the Feds did not come up with policies that allowed the bubble to stay artificially inflated for all of eternity.
So here we are with a bailout proposal that attempts to reinflate the bubble. Another 3, 5, 10 years down the road, the thing merely bursts again and it's even worse than it was this go around because we have a government that refuses to address underlying issues, only thinks in short-term, and is more concerned about symbolic reform that makes the national airwaves rather than fixing real problems in our society.
The Rise of Neo-Mercantilism
To be sure, the short-sighted economic policies of our government have put us in a lose-lose situation and, at this point in time, all that is left is to find the least-worst solution. Yet, the Paulson plan seems far, far from that. Rather, it affirms a dangerous trend of redistributing wealth via taxpayer monies to a class of people that are already wealthy. It's yet another step towards destroying the American middle class. And without the American middle class, the American economy suddenly becomes only a fragment of what we have become accustomed to in the not-so-distant past.
What's even worse is that the plan completely undermines basic market mechanisms like risk-reward. This isn't a simple tweak to the system like Paulson suggests --- rather, this is a shift towards an alternate system. Some have called it "socialism" --- a strange misnomer since socialism involves the working class taking power and essentially redistributing wealth to the lower and middle classes. This isn't socialism at all, but history does reveal a somewhat similar system we used in the past.
Remember mercantilism? It was an early form of capitalism where the government and certain business interests acted in concert. Government established monopolies and hindered real competition with policies that favored certain interests over others. It was this exact system that Adam Smith criticized in The Wealth of Nations for the extreme inefficiencies that resulted. Yet, we appear to officially be entering an age of neo-mercantilism here in America.
The Alternatives
If we are indeed in a lose-lose situation, what are we to do? There seem to be few good options. We could keep government out of this, let the institutions that fail go ahead and do so and ride this out. One way or another, we are going to have to suffer the consequences. It might take a few years to see the light, but contrary to what some suggest, I believe we will emerge eventually.
Another plan I am intrigued by is one mentioned by Seeking Alpha blogger Jason Lindt. His plan calls for a Reconstruction Finance Corporation that invests in preferred stock of financial institutions, which would increase their capital cushions and potentially allow them to ride this thing out. While this still gets into the sphere of government investing in companies, it is an infinitely less intrusive plan than Paulson's, it would probably cost much less, and it makes a whole lot more sense. Though, I worry more about the second part of his plan since it would seem to reinflate housing prices to some extent.
Regardless, if the government is going to create a plan, it needs a much more cost-efficient and well thought out plan than Paulson's. We can't simply rush forward a plan that radically changes the American economic system while giving little thought to the ramifications.
Conclusions
The Paulson proposal increases our Federal debt substantially without guaranteeing any real return. The question we all as taxpayers should be asking is whether or not we will see a good return on our investment. If we adopt Paulson's original version, the answer is undoubtedly no! The Democratic proposal is a bit iffier since the taxpayers would at least own an equity interest in these companies. However, even that modified plan seems too expensive and way too intrusive. We should consider alternative plans that are not quite as intrusive to market mechanisms such as the Lindt plan.
The Paulson plan also seems to signal a dangerous shift away from liberal market mechanisms into an age of neo-mercantilism. This should concern both American conservatives (destruction of Smith's Liberalism) and American liberals (since the system naturally favors certainly wealthy interests at the expense of largely lower and middle income taxpayers). While it's unlikely we'll all line up around the country while holding hands and decide to agree everything, certainly we should agree that a government that takes our taxpayer monies and distributes it out to already-wealthy individuals who have shown a reckless disregard for managing that money in the past does not provide us with much of an efficient return on our own investment.
H.J. Huneycutt
http://seekingalpha.com/article/97155-roi-paulson-s-plan-and-the-rise-of-neo-mercantilism
As our government continues to recklessly spend its way into an increasingly larger debt, it's about time that American society embraces a different disposition towards government. For years, we've all heard "pro-government" versus "anti-government" arguments but this strikes me as nothing more than an exercise in ideological hogwash. Government is absolutely necessary in certain areas and not needed in others; it's difficult to dispute this. Moreover governments are a lot like corporations --- sometimes they are run well and sometimes not-so-much. Hence, "more government" or "less government" is not the correct question; rather, the following questions should be asked in regards to any policy proposal:
Can the government provide a service more efficiently than the private sector?
If the government can provide something more efficiently, does the government plan being proposed achieve that objective?
Does the government plan achieve the greatest societal return on investment [ROI]?
It's a mystery to me as to why the concept of ROI is constantly evoked in the business world, yet almost never used when evaluating government policies. If the government can complete a task more efficiently than the private sector, then by all means it should do so. If it cannot, it should keep away.
Unfortunately, our government has a rather dismal record of providing things in a cost-effective manner. In fact, I'd argue that one of the biggest problems with the American government is not that we pay "high" taxes --- rather it's that we pay high taxes and receive very little in return when compared to other nations with similar taxes. In essence, we get a very poor return on our investment.
The Paulson Plan
All this brings me to the Paulson bailout plan. Make no mistake about it --- this could potentially be the most radical change to American economic policy in the past few decades. Certainly PNTR and NAFTA have changed American society to a great extent, but neither seemed to change the mechanisms of American capitalism quite like this bailout plan might.
There has been a scary trend going on in government for quite a while. It only occasionally makes the front pages, but it's there all the same. Various American governments have increasingly been taking the risk away from the private sector without gaining any of the rewards. The most notable parallel is the stadium construction proposals that various cities, states, and localities have given out --- the major complaint about these proposals is that the private sector profits while the taxpayer receives the bill. In essence, it is a shifting of wealth from the taxpayers (who come from lower, middle, and upper income classes) to individuals that are already wealthy. Or to put it another way, it does not provide much of an ROI to taxpayers.
The Paulson bailout plan is a stadium construction plan on a grand scale --- the only difference is, the taxpayers don't even get a football team out of it. Instead, we are being asked to subsidize the losses of major financial institutions without receiving any of the benefits. To their credit, a majority Democratic Congress has at least tried to pressure the Administrator into a modified package that would give the taxpayers (via the U.S. Government) an equity interest in these financial institutions in exchange for the bad assets. However, even at that, this policy does signal a frightening acceptance of a doctrine of shifting risks to the taxpayers while most of the rewards remain in the private sector. To go back to our theme of government and ROI, I am not seeing how this plan creates the highest ROI for the taxpayers.
So What's the Rush?
Congress is being pressured by the Administration to rush through the proposal. Apparently, it's imperative to pass legislation that could have far-reaching ramifications on the American economy system for decades to come in a few days' time.
Haven't we seen this before? It has become a pattern that this Administration uses any and every crisis as an excuse for usurpation of power from the Legislative Branch. Yet, Congress keeps biting. It was irritating when a Republican Congress passively accepted Executive attempts to seize power from it (presumably on the basis of party loyalty), but it's going to be even more infuriating if a Democratic Congress allows the Administration to do the same thing to it. All the same, it wouldn't surprise me if that is exactly the way it goes.
Will It Even Work?
While I've already mentioned some of the negative socio-economic ramifications of this proposal, it's worth asking if this will even work? Are we going to spend $700 Billion of taxpayer money on a plan that has maybe a 50-50 chance of achieving its short-term objective? Let's not even focus on the long-term questions yet (which are numerous!). Senator Richard Shelby (R-AL) has echoed these concerns stating:
In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted and may actually cause the government to revert to an inadequate strategy of ad hoc bailouts.
Reading over various articles, it's very clear that this wide-reaching proposal that has the capacity to change the functioning of the American economic system for many decades to come is nothing more than a skeletal draft. We don't know if this proposal only deals with "mortgage-related assets" or any "troubled assets." Little thought has been given to the scope and there appears to be virtually no oversight. This proposal sounds a lot like trying to bake a cake by randomly grabbing the first ingredients you can find in the cabinet. And if your idea of a great cake involves vanilla icing, cayenne pepper, and horseradish sauce, maybe this plan seems like a great idea.
Long-Term Ramifications
In the short-term, the plan might work or it might not work. But even given a best-case scenario, what are the long-term ramifications? For starters, the plan will create even more inflationary pressures. That's a frightening thought given that Former Federal Reserve Chair Paul Volcker already believes the actual inflationary rate to be around 11% at the present time. Could the U.S. experience 20%+ inflation in the near future? It doesn't seem all that far-fetched. Better hoard up on precious metals!
Then there's that whole "housing bubble" thing. You see --- for some reason, Federal policymakers have convinced themselves that the problem is not ineffective market mechanisms that allow prices to become extremely out-of-whack with underlying valuations. Rather, we've heard from many policymakers that the real problem is that housing prices have gone down. Hence, the solution is to drive them back up. Yet, isn't this essentially the same boneheaded wisdom behind rent controls? Just because the government forces prices upwards does not mean, what we'll call the "market reality" for a lack of a better term, will necessarily follow.
Until the recent bursting of the bubble, it was no stretch to suggest that housing prices had gotten insane. Lower and middle income earners had an extremely difficult time affording housing in that environment. In a sense, the bursting of the housing bubble was the greatest thing to happen for a lot of people who couldn't afford things at the overpriced rates things were going for. The only reason prices skyrocketed upwards was because reckless lending practices were increasing demand to absurd levels.
With the bailout proposal, the Feds are sending the message to the lending institutions to start handing out loans without much of a care again. So in essence, if I read the Feds correctly, the problem wasn't the nature of a system that encouraged reckless lending practices, drove housing prices sky-high, and created a bubble that was bound to burst. Rather, the problem was that the Feds did not come up with policies that allowed the bubble to stay artificially inflated for all of eternity.
So here we are with a bailout proposal that attempts to reinflate the bubble. Another 3, 5, 10 years down the road, the thing merely bursts again and it's even worse than it was this go around because we have a government that refuses to address underlying issues, only thinks in short-term, and is more concerned about symbolic reform that makes the national airwaves rather than fixing real problems in our society.
The Rise of Neo-Mercantilism
To be sure, the short-sighted economic policies of our government have put us in a lose-lose situation and, at this point in time, all that is left is to find the least-worst solution. Yet, the Paulson plan seems far, far from that. Rather, it affirms a dangerous trend of redistributing wealth via taxpayer monies to a class of people that are already wealthy. It's yet another step towards destroying the American middle class. And without the American middle class, the American economy suddenly becomes only a fragment of what we have become accustomed to in the not-so-distant past.
What's even worse is that the plan completely undermines basic market mechanisms like risk-reward. This isn't a simple tweak to the system like Paulson suggests --- rather, this is a shift towards an alternate system. Some have called it "socialism" --- a strange misnomer since socialism involves the working class taking power and essentially redistributing wealth to the lower and middle classes. This isn't socialism at all, but history does reveal a somewhat similar system we used in the past.
Remember mercantilism? It was an early form of capitalism where the government and certain business interests acted in concert. Government established monopolies and hindered real competition with policies that favored certain interests over others. It was this exact system that Adam Smith criticized in The Wealth of Nations for the extreme inefficiencies that resulted. Yet, we appear to officially be entering an age of neo-mercantilism here in America.
The Alternatives
If we are indeed in a lose-lose situation, what are we to do? There seem to be few good options. We could keep government out of this, let the institutions that fail go ahead and do so and ride this out. One way or another, we are going to have to suffer the consequences. It might take a few years to see the light, but contrary to what some suggest, I believe we will emerge eventually.
Another plan I am intrigued by is one mentioned by Seeking Alpha blogger Jason Lindt. His plan calls for a Reconstruction Finance Corporation that invests in preferred stock of financial institutions, which would increase their capital cushions and potentially allow them to ride this thing out. While this still gets into the sphere of government investing in companies, it is an infinitely less intrusive plan than Paulson's, it would probably cost much less, and it makes a whole lot more sense. Though, I worry more about the second part of his plan since it would seem to reinflate housing prices to some extent.
Regardless, if the government is going to create a plan, it needs a much more cost-efficient and well thought out plan than Paulson's. We can't simply rush forward a plan that radically changes the American economic system while giving little thought to the ramifications.
Conclusions
The Paulson proposal increases our Federal debt substantially without guaranteeing any real return. The question we all as taxpayers should be asking is whether or not we will see a good return on our investment. If we adopt Paulson's original version, the answer is undoubtedly no! The Democratic proposal is a bit iffier since the taxpayers would at least own an equity interest in these companies. However, even that modified plan seems too expensive and way too intrusive. We should consider alternative plans that are not quite as intrusive to market mechanisms such as the Lindt plan.
The Paulson plan also seems to signal a dangerous shift away from liberal market mechanisms into an age of neo-mercantilism. This should concern both American conservatives (destruction of Smith's Liberalism) and American liberals (since the system naturally favors certainly wealthy interests at the expense of largely lower and middle income taxpayers). While it's unlikely we'll all line up around the country while holding hands and decide to agree everything, certainly we should agree that a government that takes our taxpayer monies and distributes it out to already-wealthy individuals who have shown a reckless disregard for managing that money in the past does not provide us with much of an efficient return on our own investment.
H.J. Huneycutt
http://seekingalpha.com/article/97155-roi-paulson-s-plan-and-the-rise-of-neo-mercantilism
The Rise of Mercantilism
The Rise of Mercantilism
Oscar B. Johannsen
[Reprinted from The Gargoyle, November, 1971]
In 1776, Adam Smith delivered a death blow to the mercantilist philosophy in his classic, The Wealth of Nations -- or so it was thought.
Mercantilism was the system which arose in Europe as power was centralized in what were called nation-states. It was predicted on a belief that government regulation was necessary in order to insure the growth and prosperity of a nation. Thus, it brought into existence controls over industry and commerce, with the imposition of discriminatory tariff and quota laws, creation of trade monopolies as well as increasing monopolistic control of banking and money.
Underlying this philosophy was the belief that a nation should have a favorable balance of trade. This meant that there were to be more exports than imports. The difference was to be made up by the importation of money, which meant primarily gold.
Adam Smith demonstrated clearly that the "unseen hand" of the free marketplace regulated commerce and industry equitably and efficiently; that, on the contrary, controls by government were inhibitory and harmful to a nation. He also showed, as others as David Hume had before him, that a nation wasn't better off merely because it had more money (gold). AS a matter of fact, with no barriers to trade, the country with a so-called favorable balance of trade would find that the importation of money (gold) tended to raise its price level. This discouraged exports from that nation as now its goods cost relatively more. At the same time, the nation with the so-called unfavorable balance of trade, as it was losing money, found its price level falling. This encouraged foreigners to buy there as its prices were now relatively cheaper. Thus, just as water seeks its own level, so the tendency was for any imbalances to be evened out, so prices tended to be the same no matter where (after taking into account such problems as transportation costs.)
The United States was the example par excellence of the truth of Adam Smith's thesis of free trade in its broadest concept -- that is, of freedom from controls by the government.
But, now, because of the fundamental disequilibrium caused by our unsound system of land tenure, Adam Smith's wisdom has been dumped into the ash can, and Mercantilism is coming into its own. This, of course, has not been a changeover night. The government has increasingly been adopting mercantilistic principles -- as a matter of fact -- the United States never had a completely free economy. But, for the extent of land concerned, and number of people involved, America has approximated a free economy closer than any other nation in the world.
What was a marked departure was the overnight change made on August 15th with the imposition of the New Economic Program of the Administration. This was the first time in peacetime that wage-price-rent controls were imposed on the nation. It was Mercantilism at its worst.
What has been the result? A predictable one. Other nations, claiming the necessity to protect their own economies, are also adopting more and more mercantilistic principles. Denmark has just announced that it is instituting controls over exports to counter America's 10% import surcharge. This is just the beginning.
It means an increasing isolation of the nations of the world as one after another impose more and more controls over commerce. Unless this process is reversed, the trade war will bring in its train increasing strains among the peoples of the world, with prejudice and other social problems arising which almost inexplicably seem to divide up the peoples of the world.
What can be done to reverse the present trend? Probably not too much as long as the sacrosanct land question is ignored. Economists can stand on 42nd Street and Broadway day and night shouting the advantages of free trade; they can prove indisputably that mercantilism is harmful, and people may even agree with them. But just as a confirmed smoker will listen to all the arguments why he should not smoke, will nonetheless continue that habit, so will the people continue to go on their merry way assuming that government controls will stop the rise in prices, will increase employment and will rescue the nation from economic disaster. And just as a smoker may agree that ultimately he will have to pay a price for his habit, so the people may realize that ultimately they, too, will have to pay a price. But, in both cases, it is something in the future, and as long as it seems to be far enough away, no corrective action may be taken.
Only something dramatic will stop the smoker -- that may be a physical breakdown. For the nation, it may well mean a war or revolution.
There is no escaping it. For good health, you must follow the rules of good health. For a sound economy, you must follow the rules of a sound economy-the most important rule of which is no government interference (no mercantilism) but instead freedom to the greatest possible extent.
But life without hope is meaningless. So we can hope that through education of the land question, possibly, just possibly, the present trend may be stopped and reversed. Certainly, all of us who feel we do have some little understanding of the problem and solution must do whatever we can to educate and hope that our work has an effect. One never knows when the spark of knowledge may ignite a fire which will burn away the ignorance surrounding man.
Oscar B. Johannsen
[Reprinted from The Gargoyle, November, 1971]
In 1776, Adam Smith delivered a death blow to the mercantilist philosophy in his classic, The Wealth of Nations -- or so it was thought.
Mercantilism was the system which arose in Europe as power was centralized in what were called nation-states. It was predicted on a belief that government regulation was necessary in order to insure the growth and prosperity of a nation. Thus, it brought into existence controls over industry and commerce, with the imposition of discriminatory tariff and quota laws, creation of trade monopolies as well as increasing monopolistic control of banking and money.
Underlying this philosophy was the belief that a nation should have a favorable balance of trade. This meant that there were to be more exports than imports. The difference was to be made up by the importation of money, which meant primarily gold.
Adam Smith demonstrated clearly that the "unseen hand" of the free marketplace regulated commerce and industry equitably and efficiently; that, on the contrary, controls by government were inhibitory and harmful to a nation. He also showed, as others as David Hume had before him, that a nation wasn't better off merely because it had more money (gold). AS a matter of fact, with no barriers to trade, the country with a so-called favorable balance of trade would find that the importation of money (gold) tended to raise its price level. This discouraged exports from that nation as now its goods cost relatively more. At the same time, the nation with the so-called unfavorable balance of trade, as it was losing money, found its price level falling. This encouraged foreigners to buy there as its prices were now relatively cheaper. Thus, just as water seeks its own level, so the tendency was for any imbalances to be evened out, so prices tended to be the same no matter where (after taking into account such problems as transportation costs.)
The United States was the example par excellence of the truth of Adam Smith's thesis of free trade in its broadest concept -- that is, of freedom from controls by the government.
But, now, because of the fundamental disequilibrium caused by our unsound system of land tenure, Adam Smith's wisdom has been dumped into the ash can, and Mercantilism is coming into its own. This, of course, has not been a changeover night. The government has increasingly been adopting mercantilistic principles -- as a matter of fact -- the United States never had a completely free economy. But, for the extent of land concerned, and number of people involved, America has approximated a free economy closer than any other nation in the world.
What was a marked departure was the overnight change made on August 15th with the imposition of the New Economic Program of the Administration. This was the first time in peacetime that wage-price-rent controls were imposed on the nation. It was Mercantilism at its worst.
What has been the result? A predictable one. Other nations, claiming the necessity to protect their own economies, are also adopting more and more mercantilistic principles. Denmark has just announced that it is instituting controls over exports to counter America's 10% import surcharge. This is just the beginning.
It means an increasing isolation of the nations of the world as one after another impose more and more controls over commerce. Unless this process is reversed, the trade war will bring in its train increasing strains among the peoples of the world, with prejudice and other social problems arising which almost inexplicably seem to divide up the peoples of the world.
What can be done to reverse the present trend? Probably not too much as long as the sacrosanct land question is ignored. Economists can stand on 42nd Street and Broadway day and night shouting the advantages of free trade; they can prove indisputably that mercantilism is harmful, and people may even agree with them. But just as a confirmed smoker will listen to all the arguments why he should not smoke, will nonetheless continue that habit, so will the people continue to go on their merry way assuming that government controls will stop the rise in prices, will increase employment and will rescue the nation from economic disaster. And just as a smoker may agree that ultimately he will have to pay a price for his habit, so the people may realize that ultimately they, too, will have to pay a price. But, in both cases, it is something in the future, and as long as it seems to be far enough away, no corrective action may be taken.
Only something dramatic will stop the smoker -- that may be a physical breakdown. For the nation, it may well mean a war or revolution.
There is no escaping it. For good health, you must follow the rules of good health. For a sound economy, you must follow the rules of a sound economy-the most important rule of which is no government interference (no mercantilism) but instead freedom to the greatest possible extent.
But life without hope is meaningless. So we can hope that through education of the land question, possibly, just possibly, the present trend may be stopped and reversed. Certainly, all of us who feel we do have some little understanding of the problem and solution must do whatever we can to educate and hope that our work has an effect. One never knows when the spark of knowledge may ignite a fire which will burn away the ignorance surrounding man.
Obama’s Trade Stance Coming into Focus
Obama’s Trade Stance Coming into Focus
Barack Obama, who will become the 44th president of the United States in 75 days, will have the opportunity to make drastic changes to the country’s role in international trade at a time of global financial turmoil and deep frustration at the slow progress of multilateral trade talks at the WTO.
Indeed, exit polls conducted outside polling places on Election Day suggested that the US economy was the chief concern among voters, with 62 percent of those surveyed citing it as the most important issue facing the US. This figure was far ahead of the 10 percent of voters who said Iraq was their most important concern.
On international trade issues, the president-elect has pledged to take a stronger stance against China, take another look at NAFTA and to reject bilateral and regional trade deals that “put the interests of multinational corporations ahead of the interests of American workers.”
“When it comes to trade, there is no one-size-fits-all approach,” Obama said in a speech at a trade and manufacturing forum in April. “If countries are committed to reciprocity, if they are abiding by basic rules of the road, then we should welcome trade. Many poor countries need access to our markets and pose no threats to our workers,” he said.
Although the president-elect has yet to take any policy decisions or make any appointments, his approach to trade can be drawn out from speeches he made on the campaign trail and in interviews that his chief economic advisers have given.
The attitude that the Obama administration will adopt in the ongoing Doha Round of Trade talks at the WTO will no doubt be the subject of much speculation. The multilateral negotiations have stalled repeatedly in their seven-year history — the most recent major setback came in July. Some analysts say that the talks may effectively go into hibernation over the next one or two years as new administrations find their feet not only in the US, but also in India and the EU.
Ever optimistic that a deal to liberalise trade in agriculture and industrial goods can still be concluded in the coming months, Brazilian Foreign Minister Celso Amorim has urged WTO Members to finalise an agreement before Obama’s inauguration on 20 January.
“It will facilitate things for President-elect Obama if we are able to finalise the modalities by the end of this year. It would relieve him of very difficult choices at the start of his government,” Amorim said during a visit to Geneva on Wednesday, Reuters reported.
Amorim dismissed the notion that having a Democrat in the White House would hinder progress toward a global trade deal.
“I don’t think that holds any more,” he said, referring to the widely held belief that Democrats are more protectionist than Republicans. “This has more to do with manufacturing than with the agricultural problems we are facing, and the Democrats are also more multilateralist,” he said.
Indeed, Obama has promised that his administration will actively engage in the multilateral talks.
“I believe that we can work within the framework of the WTO to ensure our international standards for workers, poor nations, public health and environment are all improved,” Obama said during the Democratic primaries earlier this year.
But the president-elect’s views on agriculture subsidies may not sit well with many of the US’ trading partners.
Obama, who in May of this year voted for the US farm bill — a broad piece of legislation that, among other things, largely preserves previous levels of agriculture subsidies — has repeatedly pledged to protect the interests of US farmers in international trade. A supporter of US ethanol production, Obama has vowed to invest US$ 150 billion over the next decade in biofuels and to maintain the US$ 0.45 blenders’ tax credit and the US$ 0.54 ethanol tariff. He has also publicly backed crop revenue insurance programmes as well as a permanent mechanism to encourage farmers to use crop insurance.
Further complicating the potential for progress at the multilateral level, Obama has said that he would only support giving the executive branch ‘fast track authority’ to submit trade deals to Congress for a simple up-or-down vote on the condition that the legislative branch is given more power under the authority. Such a shift could complicate negotiations at WTO headquarters in Geneva, as Obama’s trade officials might need to carefully consider Congress’ views before making commitments to trading partners.
More details of Obama’s trade views will emerge over the coming weeks as the president-elect appoints a new US Trade Representative and selects the members of his cabinet. Such appointments will all be subject to the approval of the Senate, but as Obama’s Democratic Party is in the majority in the 100-member legislative body, his picks for the cabinet and other high-level positions will most likely be endorsed.
A stronger stance on China
At the bilateral level, one theme that has clearly emerged is Obama’s commitment to taking a strong stance on trade relations with China. The Democrat outlined his views on the matter in a letter to the National Council of Textile Organisations last month:
“The massive current account surpluses accumulated by China are directly related to its manipulation of its currency’s value,” Obama wrote. “The result is a large imbalance that is not good for the United States, not good for the global economy, and likely to create problems in China itself. China must change its policies, including its foreign exchange policies, so that it relies less on exports and more on domestic demand for growth.”
“I will use all diplomatic means at my disposal to induce China to make these changes,” he wrote.
Obama has also levelled criticism at the Asian giant’s industrial subsidies, and has called for stronger measures to stop the piracy of US intellectual property in the country.
Walking a fine line on NAFTA
Obama’s views on the North American Free Trade Agreement, or NAFTA, are somewhat more nuanced. The deal - whose passage is considered one of the major achievements of Bill Clinton, the last Democrat to occupy the White House - has not sat well with many in the Democratic base. Indeed, some union leaders have claimed that the agreement has shut down factories in the Midwest, while conservationists have argued that the deal to liberalise trade on the continent has spurred an environmental ‘race to the bottom’.
Some would say that Obama’s stance on NAFTA shifted somewhat over the course of the campaign. Amid his battle for the Democratic nomination against Senator Hillary Clinton last February, Obama called the regional trade deal “devastating” and “a big mistake” and vowed to either renegotiate NAFTA’s environmental and labour standards or pull the US out of the agreement altogether.
But in a meeting with Canadian leaders the following month, senior Obama adviser Austan Goolsbee reportedly indicated that Obama’s protectionist-sounding messaging “should be viewed as more about political positioning than a clear articulation of policy plans,” according to a memo from the meeting that was leaked to the press.
“On NAFTA, Goolsbee suggested that Obama is less about fundamentally changing the agreement and more in favour of strengthening/clarifying language on labour mobility and environment and trying to establish these as more ‘core’ principles of the agreement,” the memo said.
Uncertainty over bilateral trade deals
Just how well other trade deals will fare in an Obama administration remains to be seen. The president-elect has backed the US’ bilateral deal with Peru, to which Congressional Democrats successfully added labour and environmental provisions last year, but he has opposed pacts with Colombia and Korea, which he says would be bad for American workers. These latter two pacts, as well as one with Panama, are currently awaiting Congressional approval.
Obama’s opposition to the agreement with Colombia stems from the violence against unionists in that country. “When organising workers puts an organiser’s life at risk, as it does in Colombia, it makes a mockery of our labour protections,” he said in a speech to unionists in April.
But despite Obama’s stated opposition to the deal, at least in its current form, some in Washington think that the president-elect might push the Senate to approve an amended version of the agreement once he is in office, especially if he is able to get significant union input on amendments to the deal.
Prospects for the passage of a US-Korea deal, which the two countries finalised last year, could also be brighter than some might have thought during the primary season. Obama has long opposed the pact, which he has called “badly flawed,” because it does not offer enough protections for US industry. “In particular, the terms of the agreement fall well short of assuring effective, enforceable market access for American exports of manufactured goods and many agricultural products,” Obama wrote in a letter to President Bush, a supporter of the agreement, in May.
But just last month, Obama’s foreign policy adviser, Frank Jannuzi, said that Obama would submit a US-Korea trade deal to Congress for approval if he were to win the election. But that deal would first have to satisfy several pre-conditions, Jannuzi said, including increased access of US autos to the Korean market, stronger protections for US workers who lose their jobs because of the deal, and resolution of a long-running dispute over beef imports.
ICTSD reporting; “Obama: NAFTA not so bad after all,” FORTUNE, 18 June 2008; “Bush presses for Colombia trade deal Obama opposes,” Reuters, 16 October 2008; “Colombia deal has better shot under Obama, say trade lobbyists, union reps,” THE HILL, 16 September 2008; “WTO needs new labor, environment rules-Clinton, Obama,” REUTERS, 29 February 2008; “Obama urges Bush back off South Korea trade deal,” REUTERS, 23 May 2008; “Obama to Submit Korean Free Trade Pact for Ratification in 2009,” YONHAP, 27 October 2008; “Obama watching Bush closely in WTO talks: aide,” REUTERS, 10 July 2008; “Brazil urges Doha deal before Obama start,” REUTERS, 5 November 2008.
Barack Obama, who will become the 44th president of the United States in 75 days, will have the opportunity to make drastic changes to the country’s role in international trade at a time of global financial turmoil and deep frustration at the slow progress of multilateral trade talks at the WTO.
Indeed, exit polls conducted outside polling places on Election Day suggested that the US economy was the chief concern among voters, with 62 percent of those surveyed citing it as the most important issue facing the US. This figure was far ahead of the 10 percent of voters who said Iraq was their most important concern.
On international trade issues, the president-elect has pledged to take a stronger stance against China, take another look at NAFTA and to reject bilateral and regional trade deals that “put the interests of multinational corporations ahead of the interests of American workers.”
“When it comes to trade, there is no one-size-fits-all approach,” Obama said in a speech at a trade and manufacturing forum in April. “If countries are committed to reciprocity, if they are abiding by basic rules of the road, then we should welcome trade. Many poor countries need access to our markets and pose no threats to our workers,” he said.
Although the president-elect has yet to take any policy decisions or make any appointments, his approach to trade can be drawn out from speeches he made on the campaign trail and in interviews that his chief economic advisers have given.
The attitude that the Obama administration will adopt in the ongoing Doha Round of Trade talks at the WTO will no doubt be the subject of much speculation. The multilateral negotiations have stalled repeatedly in their seven-year history — the most recent major setback came in July. Some analysts say that the talks may effectively go into hibernation over the next one or two years as new administrations find their feet not only in the US, but also in India and the EU.
Ever optimistic that a deal to liberalise trade in agriculture and industrial goods can still be concluded in the coming months, Brazilian Foreign Minister Celso Amorim has urged WTO Members to finalise an agreement before Obama’s inauguration on 20 January.
“It will facilitate things for President-elect Obama if we are able to finalise the modalities by the end of this year. It would relieve him of very difficult choices at the start of his government,” Amorim said during a visit to Geneva on Wednesday, Reuters reported.
Amorim dismissed the notion that having a Democrat in the White House would hinder progress toward a global trade deal.
“I don’t think that holds any more,” he said, referring to the widely held belief that Democrats are more protectionist than Republicans. “This has more to do with manufacturing than with the agricultural problems we are facing, and the Democrats are also more multilateralist,” he said.
Indeed, Obama has promised that his administration will actively engage in the multilateral talks.
“I believe that we can work within the framework of the WTO to ensure our international standards for workers, poor nations, public health and environment are all improved,” Obama said during the Democratic primaries earlier this year.
But the president-elect’s views on agriculture subsidies may not sit well with many of the US’ trading partners.
Obama, who in May of this year voted for the US farm bill — a broad piece of legislation that, among other things, largely preserves previous levels of agriculture subsidies — has repeatedly pledged to protect the interests of US farmers in international trade. A supporter of US ethanol production, Obama has vowed to invest US$ 150 billion over the next decade in biofuels and to maintain the US$ 0.45 blenders’ tax credit and the US$ 0.54 ethanol tariff. He has also publicly backed crop revenue insurance programmes as well as a permanent mechanism to encourage farmers to use crop insurance.
Further complicating the potential for progress at the multilateral level, Obama has said that he would only support giving the executive branch ‘fast track authority’ to submit trade deals to Congress for a simple up-or-down vote on the condition that the legislative branch is given more power under the authority. Such a shift could complicate negotiations at WTO headquarters in Geneva, as Obama’s trade officials might need to carefully consider Congress’ views before making commitments to trading partners.
More details of Obama’s trade views will emerge over the coming weeks as the president-elect appoints a new US Trade Representative and selects the members of his cabinet. Such appointments will all be subject to the approval of the Senate, but as Obama’s Democratic Party is in the majority in the 100-member legislative body, his picks for the cabinet and other high-level positions will most likely be endorsed.
A stronger stance on China
At the bilateral level, one theme that has clearly emerged is Obama’s commitment to taking a strong stance on trade relations with China. The Democrat outlined his views on the matter in a letter to the National Council of Textile Organisations last month:
“The massive current account surpluses accumulated by China are directly related to its manipulation of its currency’s value,” Obama wrote. “The result is a large imbalance that is not good for the United States, not good for the global economy, and likely to create problems in China itself. China must change its policies, including its foreign exchange policies, so that it relies less on exports and more on domestic demand for growth.”
“I will use all diplomatic means at my disposal to induce China to make these changes,” he wrote.
Obama has also levelled criticism at the Asian giant’s industrial subsidies, and has called for stronger measures to stop the piracy of US intellectual property in the country.
Walking a fine line on NAFTA
Obama’s views on the North American Free Trade Agreement, or NAFTA, are somewhat more nuanced. The deal - whose passage is considered one of the major achievements of Bill Clinton, the last Democrat to occupy the White House - has not sat well with many in the Democratic base. Indeed, some union leaders have claimed that the agreement has shut down factories in the Midwest, while conservationists have argued that the deal to liberalise trade on the continent has spurred an environmental ‘race to the bottom’.
Some would say that Obama’s stance on NAFTA shifted somewhat over the course of the campaign. Amid his battle for the Democratic nomination against Senator Hillary Clinton last February, Obama called the regional trade deal “devastating” and “a big mistake” and vowed to either renegotiate NAFTA’s environmental and labour standards or pull the US out of the agreement altogether.
But in a meeting with Canadian leaders the following month, senior Obama adviser Austan Goolsbee reportedly indicated that Obama’s protectionist-sounding messaging “should be viewed as more about political positioning than a clear articulation of policy plans,” according to a memo from the meeting that was leaked to the press.
“On NAFTA, Goolsbee suggested that Obama is less about fundamentally changing the agreement and more in favour of strengthening/clarifying language on labour mobility and environment and trying to establish these as more ‘core’ principles of the agreement,” the memo said.
Uncertainty over bilateral trade deals
Just how well other trade deals will fare in an Obama administration remains to be seen. The president-elect has backed the US’ bilateral deal with Peru, to which Congressional Democrats successfully added labour and environmental provisions last year, but he has opposed pacts with Colombia and Korea, which he says would be bad for American workers. These latter two pacts, as well as one with Panama, are currently awaiting Congressional approval.
Obama’s opposition to the agreement with Colombia stems from the violence against unionists in that country. “When organising workers puts an organiser’s life at risk, as it does in Colombia, it makes a mockery of our labour protections,” he said in a speech to unionists in April.
But despite Obama’s stated opposition to the deal, at least in its current form, some in Washington think that the president-elect might push the Senate to approve an amended version of the agreement once he is in office, especially if he is able to get significant union input on amendments to the deal.
Prospects for the passage of a US-Korea deal, which the two countries finalised last year, could also be brighter than some might have thought during the primary season. Obama has long opposed the pact, which he has called “badly flawed,” because it does not offer enough protections for US industry. “In particular, the terms of the agreement fall well short of assuring effective, enforceable market access for American exports of manufactured goods and many agricultural products,” Obama wrote in a letter to President Bush, a supporter of the agreement, in May.
But just last month, Obama’s foreign policy adviser, Frank Jannuzi, said that Obama would submit a US-Korea trade deal to Congress for approval if he were to win the election. But that deal would first have to satisfy several pre-conditions, Jannuzi said, including increased access of US autos to the Korean market, stronger protections for US workers who lose their jobs because of the deal, and resolution of a long-running dispute over beef imports.
ICTSD reporting; “Obama: NAFTA not so bad after all,” FORTUNE, 18 June 2008; “Bush presses for Colombia trade deal Obama opposes,” Reuters, 16 October 2008; “Colombia deal has better shot under Obama, say trade lobbyists, union reps,” THE HILL, 16 September 2008; “WTO needs new labor, environment rules-Clinton, Obama,” REUTERS, 29 February 2008; “Obama urges Bush back off South Korea trade deal,” REUTERS, 23 May 2008; “Obama to Submit Korean Free Trade Pact for Ratification in 2009,” YONHAP, 27 October 2008; “Obama watching Bush closely in WTO talks: aide,” REUTERS, 10 July 2008; “Brazil urges Doha deal before Obama start,” REUTERS, 5 November 2008.
Asians uneasy over Obama trade stance
Asians uneasy over Obama trade stance
November 5, 2008 8:58 AM ET
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BEIJING (AP) - Asian exporters looked closely Wednesday at Barack Obama's trade stance, worried about the possible impact of his victory on Cambodian textile producers, Indian outsourcing companies and Korean automakers.
"He appears to be a protectionist," said Chea Mony, president of the Free Trade Union of Workers in Cambodia, which has an export-driven textile industry. "I am quite concerned about that because most of our clothing products are exported to America."
Obama has said he is in favor of free trade agreements if they benefit the United States. He has criticized a deal with South Korea that has yet to be ratified, saying it does not adequately address an imbalance in auto trade. South Korean automakers sold 772,482 vehicles in the United States in 2007, while the U.S. sold 6,235 in South Korea, according to industry statistics.
In an Oct. 24 letter to the U.S. National Council of Textile Organizations, Obama pledged "strong enforcement" of trade remedy laws, which can include added tariffs on imports that are deemed to hurt American businesses. Obama said he would include labor and environmental standards in free trade agreements — a measure that many in Asia view as a possible pretext to shield U.S. companies from foreign competition.
Obama also has said he would pressure China to end what he calls the manipulation of its exchange-rate system. Washington and other trading partners say Beijing's currency, the yuan, is kept undervalued, giving its exporters an unfair price advantage and adding to China's multibillion-dollar trade surplus.
Indian outsourcing companies — accused by critics of stealing U.S. jobs — have also expressed some apprehensions about an Obama victory.
"There are some apprehensions about protectionism being on the Democrats' political agenda. We hope that's misplaced and global trade and flows of goods and services will continue," said Saumitra Chaudhury, a member of the Economic Advisory Council of Prime Minister Manmohan Singh and chief economist at the credit rating agency ICRA Ltd., a Moody's affiliate in New Delhi.
Other analysts said that despite Obama's pre-election comments, he was likely to follow the example of previous U.S. presidents and take a moderate line in office to preserve important trade relations with Asia.
"He may have talked tough, but based on past experience, that's just a tool to win over voters," said Qiang Yongchang, a professor at the Economy Institute at Shanghai's Fudan University.
___
AP Business Writers Tomoko Hosaka and Yuri Kageyama in Tokyo, Elaine Kurtenbach in Shanghai, Jeremiah Marquez in Hong Kong and Kelly Olsen in Seoul, Associated Press Writer Ker Munthit in Phnom Penh and AP researcher Bonnie Cao in Beijing contributed to this report.
© 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
November 5, 2008 8:58 AM ET
advertisement
BEIJING (AP) - Asian exporters looked closely Wednesday at Barack Obama's trade stance, worried about the possible impact of his victory on Cambodian textile producers, Indian outsourcing companies and Korean automakers.
"He appears to be a protectionist," said Chea Mony, president of the Free Trade Union of Workers in Cambodia, which has an export-driven textile industry. "I am quite concerned about that because most of our clothing products are exported to America."
Obama has said he is in favor of free trade agreements if they benefit the United States. He has criticized a deal with South Korea that has yet to be ratified, saying it does not adequately address an imbalance in auto trade. South Korean automakers sold 772,482 vehicles in the United States in 2007, while the U.S. sold 6,235 in South Korea, according to industry statistics.
In an Oct. 24 letter to the U.S. National Council of Textile Organizations, Obama pledged "strong enforcement" of trade remedy laws, which can include added tariffs on imports that are deemed to hurt American businesses. Obama said he would include labor and environmental standards in free trade agreements — a measure that many in Asia view as a possible pretext to shield U.S. companies from foreign competition.
Obama also has said he would pressure China to end what he calls the manipulation of its exchange-rate system. Washington and other trading partners say Beijing's currency, the yuan, is kept undervalued, giving its exporters an unfair price advantage and adding to China's multibillion-dollar trade surplus.
Indian outsourcing companies — accused by critics of stealing U.S. jobs — have also expressed some apprehensions about an Obama victory.
"There are some apprehensions about protectionism being on the Democrats' political agenda. We hope that's misplaced and global trade and flows of goods and services will continue," said Saumitra Chaudhury, a member of the Economic Advisory Council of Prime Minister Manmohan Singh and chief economist at the credit rating agency ICRA Ltd., a Moody's affiliate in New Delhi.
Other analysts said that despite Obama's pre-election comments, he was likely to follow the example of previous U.S. presidents and take a moderate line in office to preserve important trade relations with Asia.
"He may have talked tough, but based on past experience, that's just a tool to win over voters," said Qiang Yongchang, a professor at the Economy Institute at Shanghai's Fudan University.
___
AP Business Writers Tomoko Hosaka and Yuri Kageyama in Tokyo, Elaine Kurtenbach in Shanghai, Jeremiah Marquez in Hong Kong and Kelly Olsen in Seoul, Associated Press Writer Ker Munthit in Phnom Penh and AP researcher Bonnie Cao in Beijing contributed to this report.
© 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Thursday, November 13, 2008
US backtracks on plan to buy toxic assets
US backtracks on plan to buy toxic assets
WASHINGTON
Thursday, November 13, 2008
US TREASURY Secretary Henry Paulson yesterday said he was backing away from buying troubled mortgage assets using a US$700 billion bailout fund, instead favouring a second round of capital injections into financial institutions that would match private funds.
Paulson, in an update on the Treasury's financial rescue efforts, said his staff has continued to examine the benefits of purchasing illiquid mortgage assets under the so-called Troubled Asset Relief Programme (TARP).
"Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources," Paulson told a news conference.
When Treasury was selling the US$700 billion bailout plan to Congress, it initially promoted it as a vehicle that would purchase illiquid mortgage assets from banks and other institutions to cushion potential losses.
But it became quickly apparent that setting up such purchases would take time, and Treasury opted for the faster method of injecting capital directly into banks by buying preferred stock.
The Treasury has allocated US$250 billion of the fund to such purchases so far.
Paulson said the Treasury is evaluating a second programme that would provide government investments that would match private investments in capital raisings.
"In developing a potential matching programme, we will also consider capital needs of non-bank financial institutions not eligible for the current capital programme," Paulson said.
He also said support was needed for the markets that securitise credit outside the banking system for products such as car loans, credit cards and student loans. The Treasury and Federal Reserve are exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities.
"We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment," Paulson said.
US stocks extended losses in early trade yesterday after the announcement. The Dow Jones industrial average was down 3.39 per cent at 8,399.02. The Standard & Poor's 500 Index was down 3.38 per cent at 868.56. The Nasdaq Composite Index was down 2.82 per cent at 1,536.35.Reuters
WASHINGTON
Thursday, November 13, 2008
US TREASURY Secretary Henry Paulson yesterday said he was backing away from buying troubled mortgage assets using a US$700 billion bailout fund, instead favouring a second round of capital injections into financial institutions that would match private funds.
Paulson, in an update on the Treasury's financial rescue efforts, said his staff has continued to examine the benefits of purchasing illiquid mortgage assets under the so-called Troubled Asset Relief Programme (TARP).
"Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources," Paulson told a news conference.
When Treasury was selling the US$700 billion bailout plan to Congress, it initially promoted it as a vehicle that would purchase illiquid mortgage assets from banks and other institutions to cushion potential losses.
But it became quickly apparent that setting up such purchases would take time, and Treasury opted for the faster method of injecting capital directly into banks by buying preferred stock.
The Treasury has allocated US$250 billion of the fund to such purchases so far.
Paulson said the Treasury is evaluating a second programme that would provide government investments that would match private investments in capital raisings.
"In developing a potential matching programme, we will also consider capital needs of non-bank financial institutions not eligible for the current capital programme," Paulson said.
He also said support was needed for the markets that securitise credit outside the banking system for products such as car loans, credit cards and student loans. The Treasury and Federal Reserve are exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities.
"We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment," Paulson said.
US stocks extended losses in early trade yesterday after the announcement. The Dow Jones industrial average was down 3.39 per cent at 8,399.02. The Standard & Poor's 500 Index was down 3.38 per cent at 868.56. The Nasdaq Composite Index was down 2.82 per cent at 1,536.35.Reuters
Sunday, November 9, 2008
Oil Prices and Venezuela's Economy
Oil Prices and Venezuela's Economy
November 2008, Mark Weisbrot and Rebecca Ray
This paper looks at Venezuela’s export revenue, imports, and trade and current account balances under a range of oil price outcomes for the next two years. It finds that Venezuela would run large current account surpluses for prices between $60-90 per barrel, and would even run a small surplus with prices at $50 per barrel. (Most oil industry estimates for the next two years are in the range of $80-90 per barrel). The authors conclude that Venezuela is unlikely to run into foreign exchange constraints in the foreseeable future, and can pursue expansionary fiscal policies to counter any economic downturn.
November 2008, Mark Weisbrot and Rebecca Ray
This paper looks at Venezuela’s export revenue, imports, and trade and current account balances under a range of oil price outcomes for the next two years. It finds that Venezuela would run large current account surpluses for prices between $60-90 per barrel, and would even run a small surplus with prices at $50 per barrel. (Most oil industry estimates for the next two years are in the range of $80-90 per barrel). The authors conclude that Venezuela is unlikely to run into foreign exchange constraints in the foreseeable future, and can pursue expansionary fiscal policies to counter any economic downturn.
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