EU on US Trade Policies: Pot-and-Kettle Syndrome

The Big Chill

By PETE DU PONT

Two years ago a Time magazine's cover warned us about global warming: "Be Worried . . . Be Very Worried." We should be even more worried about the supposed global warming legislation the U.S. Senate debated last week, then rejected without a vote. It would have replaced markets with government controls over the economy and Americans' personal lives. So different would be a Boxer-Lieberman-Warner America, and so likely it is that the same legislation will be back in Congress next year, that it is worth thinking through what it would do and how it would affect us.

First, though, does the world's climate change from time to time? Of course it does. Sometimes it warms, and sometimes it cools. Is it rapidly warming now, threatening our way of life? No. It is neither warming nor cooling. The average of four recent climate temperature studies show that over the past 10 years, the planet has warmed only 0.047 degree Celsius, less than 1/20th of a degree. Recent studies suggest there will be no significant warming until after 2020.

But that does not restrain the full-throated environmental establishment, nor Congress, both presidential candidates, many corporate CEOs and university professors, nor the liberal media, all of whom believe the Earth is warming, requiring an expansion of governmental control system to manage our economy.

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The Senate's global warming bill began by capping greenhouse gas emissions and reducing them each year, from 5.8 billion metric tons in 2015 to 1.7 billion in 2050. A Heritage Foundation study calculates that such reductions would cost more than 600,000 jobs a year through 2028 (900,000 in both 2016 and 2017), and the Environmental Protection Agency estimates the annual economic losses at $1 trillion to $2.8 trillion by 2050. Electricity prices would rise about 44% by 2030, and gasoline prices by more than 50 cents a gallon. Existing coal-fired plants, which provide about half of our electricity, would be shut down, requiring nuclear generation capacity would have to expand by more than 150%, to 1,982 billion kilowatt-hours from the current 782 billion, by 2050. That is a good idea--nuclear plants are virtually pollution-free--but doubling the number of them has zero chance of happening in a country that has not started construction of a new nuclear plant since 1977.

Then comes modern socialism: The government would offer "allowance" permits to emit greenhouse gasses. Initially about half the permits would be auctioned off to businesses, which Sen. Barbara Boxer (D., Calif.) says would raise about $3.3 trillion by 2050--money the federal government would give away to favorite constituencies. There would be $190 billion for "environmental" job training, $228 billion for federal "wildlife adaptation" and $237 billion to the states for similar efforts. There would be billions for international aid, domestic mass transit, energy research and so on.

The permits that wouldn't be auctioned off would be given by the government to the states, foreign countries, Indian tribes, carbon-heavy industries, utilities, oil refineries and so forth to help them meet their global warming challenges.

To make all this work, the bill would create massive new federal bureaucracies, beginning with a Climate Change Credit Corp., which would invest government money in private businesses, and a Carbon Market Efficiency Board, which could change the rules and alter the government demands on businesses.

Finally would come protectionism: A new climate change agency would have the authority to determine whether other countries are taking proper action to prevent climate change, and to restrict their imports into America if not. Sen. Joseph Lieberman (I., Conn.) tells us if a foreign company "enjoys a price advantage over an American competitor" whose country has no cap-and-trade system, "we will impose a fee" on the foreign company's imports "to equalize the price." Sen. Sherrod Brown (D., Ohio) wants to impose trade sanctions on countries that do not cap their emissions. Should Barack Obama become president, his protectionism will become our policy; add to that this global warming bill and rampant protectionism will be with us once again, as it was in 1930.

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The core of the Boxer-Lieberman-Warner legislation is that an expanded government, not the market economy, must control our society. The U.S. Chamber of Commerce has produced a chart--click here to see it--showing that the bill "contains over 300 regulations and mandates," each of which must go through a federal regulatory process.

The bill does focus on some global warming objectives--although it is an America-only program estimated to lower global CO2 emissions only by about 1.4%--but it is less about that and more a step towards traditional socialism. The government would take control of our economy and regulate everything from electricity, oil and gas to imported shoes, our food, how high we may set our thermostats, and what kinds of light bulbs we may use. The EPA and the Energy Information Agency predict such controls would reduce GDP by "as much as seven percent (over $2.8 trillion) by 2050 and reduce U.S. manufacturing output by almost 10 percent by 2030."

Add to that the fact that Barack Obama and John McCain both support the bill, and that the next Congress is likely to have bigger Democratic majorities, and one can see in the next administration where a very collectivist America will be headed.

Why do people oppose globalization?

Dani Rodrik writes:

So the "us" and "them" characterization that Tyler attributes to irrational nativism perhaps has more to do with the absence of a common set of international rules on labor standards, environment, consumer safety, and so on.

(There is much more at the link.) I was surprised to read this. In the 1980s people were very hostile to Japan and Japanese imports, even though Japan at the time was quite wealthy and had relatively high standards in these areas. I also receive a fair number of emails -- some of them of the hate variety -- by people who are suspicious of the rise of China. I believe it is Chinese success which bothers them even though they sometimes come up with ancillary stories about unfairnesss. These people are not less upset when other countries use capital rather than labor or when foreign production does not create much pollution.

Most of all, many people in poorer countries object to having to compete with America, with McDonald's, with Hollywood, and so on. Those objections are usually more strenuous than the complaints of Americans about a poorer China and of course the poorer countries tend to be more protectionist, in part for this reason. That's where feelings of unfairness are truly strong. There's nothing special about the "regulatory arbitrage" unfairness story and in fact it is one of the weaker feelings of unfairness out there. In reality the entire past of the world is unfair but cosmopolitanites can look past that to appreciate the gains from ongoing trade.

Rodrik himself seems to object to when Americans trade with countries in which first world labor standards are violated. But doesn't such trade raise wages in these countries and also give a long-run boost to labor standards? And where does the net unfairness lie? Haven't the Western powers -- if only through imperialism -- usually treated these countries much worse than vice versa? Didn't we steal Panama from Colombia for instance and take away a huge chunk of Mexico? (Were Europeans so nice to the Ottoman Empire?) Maybe the American worker ought to feel those folks deserve a bit of regulatory arbitrage (and that's not what most of the trade is based upon) in return. But it is striking how infrequently such a fairness calculus -- whether correct or not -- is even considered. That again is because most people engage in "in group, out group" thinking.

The bottom line is that most people support their countries to a highly irrational degree in most international questions or disputes. That's just obvious -- watch the World Cup -- and yes Jonathan Swift understood that too.

The Return of Stagflation?

By Steve Chapman

If you're at a party and the subject of the economy comes up, it's easy to sound like you know what you're talking about: Just drop the phrase "the return of stagflation" -- a phenomenon not seen, and not missed, since the 1970s and early 1980s. With unemployment and gas prices climbing, you're not likely to get an argument.

Even Ben Bernanke is paying heed to that concern. This week, the Fed chairman pledged that "we will not countenance building inflationary expectations."

That wasn't universally reassuring. His comment added to worries that, having let inflation emerge, the Fed will now take steps that are a) too late to head it off but b) just in time to squeeze any remaining life out of the economy. So we'll be left with the dismal worst of both worlds.

Given negligible recent growth, the economy can already be described as stagnant. But as with a ham-and-cheese sandwich, one ingredient is not enough. To get stagflation, you also need inflation. And contrary to popular impression, that has yet to show itself.

For months now, Bernanke and Co. have been trying to stimulate lending by cutting interest rates. In normal times, that can be inflationary. But these are not normal times.

Because of the mortgage crisis, banks are inclined to cut back on loans, which means a shrinkage of the money supply. To counter that contractionary effect and try to avert a recession, the Fed had to use expansionary tools. If it's got the balance right, the result will be that inflation won't rise or fall but stay the same.

Critics insist that the Fed has surrendered on inflation, pumping money out in a desperate attempt to prevent a full-fledged downturn. Exhibit A in the charge is the weakness of the dollar. Bernanke's detractors say he's let the greenback sink, which in turn has pushed up the price of oil and doomed us to the sort of inflation we haven't seen in a long time.

But the theory and the evidence find themselves at odds. The dollar has actually been stable over the last three months, both against the Euro and against other currencies. Three months ago, however, the price of oil was below $100, and lately, it's been above $130. A dollar that's not declining can't explain why oil prices are rising.

If the dollar were steadily losing value, another commodity should also be soaring in price -- namely gold, the traditional haven for the inflation-wary. In fact, gold, which came within sight of $1,000 per ounce back in March, has been trading well below $900.

Nor has inflation spread across the rest of the economy. The core rate, which excludes food and energy, has been eerily consistent for a long time. In April, the annual core inflation rate was 2.3 percent higher than a year before. In April 2007, it was up 2.4 percent. In April 2006, 2.3 percent. A year before that, 2.2 percent. Whatever the Fed was doing right before, it seems to be doing still.

It may seem absurd to omit two hugely important categories like food and energy. The reason for leaving them out is that they are notoriously unpredictable and can suddenly climb or plunge for reasons having nothing to do with how much money is in circulation.

You can get high energy or food prices even when inflation is in check. But you can't get high prices everywhere else unless the Fed is pumping too much money into the economy for an extended period of time.

Rising costs at the pump and the grocery are a major problem. But the problem is not inflation. It's that worldwide demand for some key commodities has risen faster than supply. Unlike inflation, which tends to feed on itself, supply and demand changes tend to be self-correcting.

That's why it makes sense for Bernanke not to get too wrought up about $4 gas. The Fed's job is not to maintain price stability in any specific good or service, which no central bank can hope to do. It's to maintain general price stability -- preferably while keeping the economy growing at a healthy pace.

So far, the Fed has managed to keep inflation in check, and it's done so without strangling the economy. These may not be the days of wine and roses, but the 1970s never had it so good.

EU on US Trade Policies: Pot-and-Kettle Syndrome

Just out is the WTO's trade policy review of the United States, the world's top trader in terms of both imports and exports. While most of the report's findings should hold few surprises for those who are generally familiar with US trade policy, I am amused that the EU has used this opportunity to probe the US about rising levels of protectionism [!] when it is hardly guiltless in this and other respects. Here is the introductory blurb on the EU's site:

The European Union used the opportunity of a two-day WTO review of US trade policy to raise concerns about rising levels of protectionism in America. The EU submitted more than 90 detailed technical questions to the United States about its trade policy during the meeting.

In its opening statement to the ninth WTO Trade Policy Review of the United States in Geneva on June 9, the EU expressed its concern at worrying signs of a re-emergence of protectionist sentiment in the United States. The increasingly restrictive import requirements imposed by the US for security purposes – new legislation requiring the 100% scanning of containers destined for the US was an example - and the lack of reform in the 2008 US Farm Bill raised doubts about the compliance and professed intent of some aspects of US trade policy with the WTO.

In questions to the US, the European Union also raised the use of fisheries subsidies, intellectual property rights enforcement, sanitary measures for food products, RTA [Regional Trade Agreements] policy and constraints on investment in services sectors.

The EU believes that the "trade policy review" mechanism plays an important role by ensuring that WTO members review each others' openness to trade and raise concerns about market barriers and compliance with WTO rules and procedures.

Aside from concerns that "security"-related measures may be protectionism in disguise, the 2008 Farm Bill which has been much derided here [1, 2] and elsewhere also serves as fodder for EU criticism. Nevermind that the EU maintains pretty hefty subsidies itself, but maybe it's the spirit of the legislation that counts:

The expiration of the 2002 Farm Bill presented a significant opportunity for the United States, and for the wider WTO membership, to secure a more reformed-oriented US agricultural policy. Unfortunately, this opportunity has been missed, and the recently enacted 2008 Farm Bill has followed the same trade-distorting direction as its predecessor.

Some preliminary analysis reveal that the new provisions have even aggravated the trade-distorting character of the former Farm Bill, in particular, in a number of sectors such as cereals, cotton, sugar and dairy products.

Today, we would like to learn further on the intended objectives and foreseen consequences on world trade of the enactment of the 2008 Farm Bill, and the grounds on which the US justifies it. We wonder what signal the US is giving to us all with such retrograde Farm Bill [their language--not mine!].