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Tuesday, July 25, 2006

Leaving Money on the Table
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What would you do if someone offered you a million dollars? What if all you had to do was give the person $200,000 in return? Assuming this isn't being offered as part of a Nigerian e-mail campaign, I'd bet you'd think that was a pretty good deal and scramble to gather up $200,000 as best you could. That's what rational people would do. But people aren't rational. If they don't see the million dollars in front of them -- lots of bound packets of $100 bills sitting in a briefcase -- they're going to be skeptical, and they're likely to say the dealmaker is just trying to scam them out of $200,000.

Okay, maybe that behavior is rational. But there is a long history of evidence that reducing trade barriers means more money for everybody; it's not a reallocation of the pie, the pie itself gets bigger. Everybody wins. We've known this for hundreds of years, and probably no one has expressed it better than 19th century economic journalist Claude Frederic Bastiat. But trade does require a bit of a leap of faith among its practitioners, and there has to be a recognition that one can't discriminate on the basis of nationality. The latest Doha Round collapse suggests much of the world, developing and developed, still hasn't learned that lesson, and the reckless comments in Congress in recent months on port deals, laptop sales and the latest free trade agreement suggest we have a lot to learn here too.

First to the WTO talks. It was asking a lot of U.S. Trade Representative Susan Scwhab to step in at the 11th hour and rescue a 4-year-plus Doha Round that was going nowhere. To her credit, she picked up where her former boss Rob Portman left off and gave it her best. She's saying there may be a chance to rescue the round, but news reports suggest the latest collapse of talks in Geneva are it for now. This round of meetings was not a full WTO complement but representatives of key developing and developed nations, an effort to rescue talks that appeared to be torpedoed by developing countries at the beginning of the month, particularly by Indian representative Kamal Nath. He showed up late to a key meeting at the last talks because he wanted to watch a Germany-Argentina World Cup match (the Argentine delegation was on time). Nath seemed positively giddy about the latest failure, quoted in the Washington Post as calling the talks "between intensive care and the crematorium." Media in developing countries is crowing about the collapse.

The International Monetary Fund estimates that global trade in 2006 will be about 30 percent of global GDP, the highest recorded rate ever. Global exports of goods and services will also set a record, in the neighborhood of $14 trillion dollars. But things could get even better. The World Bank has determined that a Doha deal would boost global wealth by several billion dollars annually. That's the money that's being left on the table. Meanwhile, you have the developing countries insisting this never was a "development" round even though developed countries were agreeing to endure higher percentage reductions to already lower rates on tariffs and other protection measures. You also have the European Union criticizing the U.S. for not making significant new concessions to the latest talks. I admire the EU's Peter Mandelson, but it hardly seems reasonable to be lectured on trade by an entity that heavily subsidizes Airbus yet is still losing market share to unsubsidized Boeing.

But I don't want to be a homer for the US here, either. I have watched with dismay in recent years as support for free trade has dwindled in the US Congress. There was a time when most Republicans -- Chamber of Commerce types -- supported free trade vigorously, as did a significant percentage of "New Democrats" such as Bill Clinton. But the trade promotion authority bill that cleared the House by a whisker a few years ago showed us that has changed, and when TPA expires next spring it's hard to imagine it being renewed.

Now the Democratic Party embraces "fair trade," which apparently means we should only trade with nations that place the same regulatory burdens on employers as we do. (When a nation's only competitive advantage is cheaper labor, that's not going to happen, so the Dems essentially oppose all trade now.) Many in the GOP are also going the protectionist route, however, either to protect a special interest like textile workers or, more dangerously, out of "national security" concerns.

Look at the latest bilateral trade agreement up in the House for debate last week. The US, since getting TPA, has frantically been negotiating bilateral agreements, each of which share similar templates; if we can't get a comprehensive WTO agreement at least we'll have these. The latest was with Oman, which only has $1 billion annually in trade with the US. This should be a noncontroversial agreement; it cleared the Senate 60-34, and a very similar agreement with Bahrain passed the House last year by 327-95. The Bahrain and Oman agreements are considered key building blocks in a free-trade zone for the Middle East, which should help contribute to stability in that region.

But many House members objected to the Oman treaty. Why? Three words: Dubai ports deal. We all remember the hysteria raised when it appeared a Dubai-owned company might be buying the administrative portion of some US ports. Nationalism, jingoism and downright paranoia set in. No one considered the fact that DHS officials have repeatedly testified publicly on Capitol Hill that only about 5% of shipping containers are physically inspected in our ports, suggesting they're already quite vulnerable. No one noted that the administration of other US ports were in foreign hands. No, commerce fell victim to fear, and Dubai withdrew.

We saw a similar situation shortly after the Dubai port kerfuffle. The State Department has long bought ThinkPad computers. But then a key House subcommittee chairman learned that the sales were continuing despite the fact that Lenovo, a Chinese company, had purchased the ThinkPad line from IBM. He sent a letter to Condi Rice, and the next thing you know, the computers are reclassified for nonsecure use. Of course, those computers likely will be connected to the Internet; secure computers wouldn't have been, which would have made it difficult for any kind of Chinese spying device to communicate with its masters. But Lenovo's Jeffery Carlisle finds the whole notion of spying ridiculous. The computers are tested internally and by third-party vendors before reaching State, he told The New York Times: "If anything were detected, it would be a death warrant for the company," Mr. Carlisle said. "No one would ever buy another Lenovo PC. It would make no sense to do it."

That brings us back to the Oman free trade agreement. Not surprisingly, the floor debate involved a lot of "security" concerns along the lines of those voiced during the Dubai ports deal and the Lenovo-State Department deal. From Reuters: "'Who's to say al Qaeda would not set up shop in Oman to gain access to control of our ports?' said Rep. Michael Michaud, a Maine Democrat." This modest agreement eventually did pass, but only with a 221-205 vote.

Security is of course a paramount concern, but just as privacy advocates fear it's being invoked to invade our privacy, I fear it's being invoked to interfere with international trade. Paranoia and protectionism are not a good combination, and they harm us when we try to persuade other countries to make trade concessions. We mock the French for their extreme protectionism, such as blocking PepsiCo from purchasing Danone, but we won't permit a foreign-based airline to have a "semblance of control" of a US-based airline.

Trade can certainly hurt sectors of the economy, but the economy as a whole grows. This is in keeping with the theories of classical liberalism, which simplified in a way that might upset some argues that a rising tide eventually lifts all boats. But in a society of abundance where no one is supposed to lose, we run the risk of encouraging government behavior to protect certain interests at the expense of the greater whole. Let us return to Bastiat, who so successfully imploded the arguments in favor of protectionism that it's kind of silly they need to keep being made:

Allow me to emphasize this point, at the risk of repeating myself. There is a fundamental antagonism between the seller and the buyer. The former wants the goods on the market to be scarce, in short supply, and expensive. The latter wants them abundant, in plentiful supply and cheap. Our laws, which should at least be neutral, take the side of the seller against the buyer, the producer against the consumer, of high prices against low prices, of scarcity against abundance.

They operate, if not intentionally, then logically on the assumption that a nation is rich when it is lacking in everything. (Bastiat's emphasis)

There will be more free trade agreements. There will be more foreign purchases of US companies and product lines. There will be renewed WTO trade initiatives. All of these developments will benefit consumers. Let's hope that level heads prevail over those who would breed fear and suspicion or seek to protect parochial interests.

posted by Patrick Ross @ 12:28 PM | Trade

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