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June 13, 2005

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» Catching my eye: morning A through Z from The Glittering Eye
Here's what's caught my eye this morning: David MacDuff of A Step at a Time, scholar and professional translator reminisces about his second trip to the Soviet Union in the late 60's. That was when, following the Soviet invasion of... [Read More]

» Catching my eye: morning A through Z from The Glittering Eye
Here's what's caught my eye this morning: David MacDuff of A Step at a Time, scholar and professional translator reminisces about his second trip to the Soviet Union in the late 60's. That was when, following the Soviet invasion of... [Read More]

» Catching my eye: morning A through Z from The Glittering Eye
Here's what's caught my eye this morning: David MacDuff of A Step at a Time, scholar and professional translator, reminisces about his second trip to the Soviet Union in the late 60's. That was when, following the Soviet invasion of... [Read More]

» Catching my eye: morning A through Z from The Glittering Eye
Here's what's caught my eye this morning: David MacDuff of A Step at a Time, scholar and professional translator, reminisces about his second trip to the Soviet Union in the late 60's. That was when, following the Soviet invasion of... [Read More]

» Catching my eye: morning A through Z from The Glittering Eye
Here's what's caught my eye this morning: David MacDuff of A Step at a Time, scholar and professional translator, reminisces about his second trip to the Soviet Union in the late 60's. That was when, following the Soviet invasion of... [Read More]

» Is CAFTA a good idea? from The Volokh Conspiracy

Eugene has asked me if I might occasionally run a cross-post from MarginalRevolution.com, if I thought the topic would be of interest to VC readers. We each believe that the two blogs do not have massive overlap of readership. ... [Read More]

» CAFTA from Thoughts from Kansas
I think CAFTA could be fixed, but only if we reject the badly flawed current treaty and start by thinking about how trade can benefit everyone. This is something that gets missed. Truly free trade really does help people. Poor laborers in Central ... [Read More]

Comments

Holy crap. Lawsuits are being pressed for "unfair competition"? Three thousand lashes with al dente linguine, and read Atlas Shrugged five times, and then slap yourself repeatedly in the face for being an idiot.

That last, directed toward the perpetrators, and not toward hilzoy.

Heh. ISTR some suits filed by US companies doing business in Canada under NAFTA's aegis, contending that Canada's provincial health care systems, which freed Canadian employers from offering their employees health insurance, placed an unfair competitive burden on the US companies. Don't know whatever became of those.

Good post, hilzoy. Lots to absorb.

Re your comments on free trade agreements in general, "above the fold," Hilzoy, as usual: yeah, me, too! (Which is to say that, yes, seriously, that's my stance as well.)

As regards below the fold comments and questions on CAFTA specifically: good questions, and I otherwise decline to offer comment on the grounds that, as I've said here before, I feel I have insufficient competence and knowledge to address the topic.

The Chapter 11 provisions are pure insanity. Thanks for pointing it out -- it as new to me.

Regarding the general thesis of markes and regulation, it is funny how people seem to think that the free market somehow represents the absence of regulation. By definition, unregulated capitalism always destroys free markets (and that's also the lesson of history). The two are incompatible, and free markets can exist only if there is government regulation.

When I think of markets that are really free of regulation, I think of Russia during the Yeltsin years, and draw the obvious conclusions.

"When I think of markets that are really free of regulation, I think of Russia during the Yeltsin years, and draw the obvious conclusions."

My thoughts run to the US in the 1870's and 1880's, but the essential differences are small.

"When I think of markets that are really free of regulation, I think of Russia during the Yeltsin years, and draw the obvious conclusions."

I prefer to point to Somalia. Less opportunity to argue that what was wrong in Russia was the use of government revision of regulation to enforce crony capitalism. Somalia has simply been far more, you know, free. Although the Congo is another place where regulation is limited. (Of course, the only real problem is that rational people haven't worked out agreements on fair markets; if only everyone were rational and well-informed, laissez-faire could work fine. Just like communism.)

"My thoughts run to the US in the 1870's and 1880's, but the essential differences are small."

Ah, but if you read the right texts, you can learn that these were, in fact, golden years for the growth of wealth and the country, and the primary problems were ruthless and violent and out-of-control labor mobs.

I've read a fair amount about this, and they couldn't write it if it weren't true, you know. Freedom finally perished in 1933.

"I've read a fair amount about this, and they couldn't write it if it weren't true, you know. Freedom finally perished in 1933."

I thought it perished in 1937, at the time of our "Socialist Revolution", according to the newly confirmed judge on the DC circuit.

"My thoughts run to the US in the 1870's and 1880's, but the essential differences are small."

Posted by: Dantheman

Come on now, don't you have *any* aesthetic judgment?

Single-action revolvers vs Glock 19's.
Lever-action rifles vs AK-47's.
Shotguns vs MP5 SMG's.
Horses vs Mercedes Benz', BMW's, and SUV's.
Cowboy hats, dusters, chaps, jeanse, and red long johns
vs Armani suits, silk shirts.
All-covering dresses for the womenfolk vs form-fitting silk dresses slit up the side.
Whiskey vs vodka and imported liquor.
Player piano vs CD's.

The west was weak - Russia was lots cooler.

I am reflexively free-trade, but that means in part that I really haven't ever given it much thought. Besides the many specific issues hilzot illuminates, the post also suddenly raised within me some vague disquiet and some abstract questions.

In Adam Smith's era, comparative advantage...which if I have confused with "competitive advantage", correct me...was largely based on natural resources, since much trade was agricultural(bananas grow better in some places, wheat in others), or commodities/raw materials in exchange for finished products. If now comparative advantage is based on differing labor costs or development or governmental regulation and infrastructure or head starts in capital formation or educational establishments...well these "comparative advantages" seem artificial, temporary, and fragile.

In other words, if our level of social and technological development is our main comparative advantage, the US must somehow restrain Mexico's development.

Globalization as neo-imperialism.

I am gonna have go surfing. The only Marxists I know on the web are social and moral thinkers...Catholics, actually. This has to be old and well-argued issue, just new to me. Like I said, I always assumed the opponents of globalization were simply seeking to retain sinecure legacy jobs, or simply environmental nutcases.

Bob M: in the post I was talking about competitive advantage, which just means: whatever gives one firm an advantage over another in competing for consumers. Comparative advantage is one of the main ideas behind the thought that free trade across borders is, on balance, good for everyone, IF it's done right. I don't think it depends on the fact that one thing can be grown in one place but not another; a country's comparative advantage in producing something could come from its educated workforce, for instance.

The principle of comparative advantage, if true, implies that trade is good for everyone, but it has also always seemed to me to imply that it would be a very, very good idea to try to get the most advantageous niche possible -- e.g., to be the country with a comparative advantage in writing software, not mining coal.

I prefer to point to Somalia.

Let me put in a good word for Renaissance Italy here. de Medici, Borgia... they just don't make them like that any more.

Bob,

The important thing to understand about comparative advantage is that it is just that - comparative, and that it is a matter of relative costs of different kinds of production. That's sentence is clear as mud, so let me back up.

Forget about dollar costs of production and think about opportunity costs - the alternative goods the resources used could produce. Agriculture leads to good examples. If an acre of land in country A can produce 100 bushels of wheat or 80 bushels of corn (farmers please forgive the likely stupidity of these numbers) then we can say that a bushel of wheat costs .8 bushels of corn, or if A grows corn that a bushel of corn costs 1.25 bushels of wheat.

Now imagine country B (or state B if you prefer - it's all the same) where the land can produce 50 bushels of either wheat or corn. Here the cost of one bushel of wheat is one bushel of corn, and vice versa. What does this mean? It means that it's cheaper to grow corn in B, and cheaper to grow wheat in A. Country B has a comparative advantage in corn, A in wheat.

Some important things to note:

1. Country A is richer than country B, but that is a consequence of its greater productivity, not of exploiting B. Countries become wealthier by becoming more productive. A gains nothing by restraining B's development. Despite its relative poverty B has a comparative advantage in the production of corn.

2. Whatever numbers you use for relative production possibilities (unless they are identical) one country has a comparative advantage in wheat and the other in corn. It is not possible, as a matter of arithmetic, for one country to have the comparative advantage in everything.

This is the basic case for trade. It goes back to Ricardo. It's far from perfect and unassailable, but it's an important argument to understand.

As I keep saying, I'm extremely hesitant to comment at all on this topic, but I will note that while I believe that the freer the trade, the greater the increase to GDP, and the more restrictive the trade, the more that likely shaves GDP, another question is where do the benefits of increasing GDP go, exactly? I rather doubt that they're simply evenly distributed throughout society, and while I don't find that inherently at all objectionable, either, neither do I assume that the distribution, whatever it is, is inherently significantly good for all, as is commonly asserted.

"The rising tide lifts all boats" is a lovely thought, but a lot of small and poor boats seem to be quite leaky, although relatively few yachts are apt to be unfixable and sink.

Is Innovation Doomed?

Bradford Plumer on the slowing rate of innovation, based on a linked study. Discusses the ever-increasing amount of knowledge required to be up-to-date in fields, and current methods of overcoming the difficulty. Speculates on possible future solutions, including 2nd & 3rd head-grafts.

Speculates on thie inescapable loss of any comparative advantage based on technology.

neither do I assume that the distribution, whatever it is, is inherently significantly good for all, as is commonly asserted.

This is not commonly asserted. In fact, just the opposite is commonly asserted - that freer trade harms some people and benefits others. The argument is that the overall effect is positive.

"The argument is that the overall effect is positive."

May I rephrase? What is asserted -- one among many things, of course -- is that the overall positive effect makes it worthwhile, ultimately, to the majority of people, is it not? Presumably no one is saying that only a minority of people in society benefit from the overall net positive effect, right? Or do I have that wrong?

Gary Farber- I'm sure there are people saying that. Heck I'm one of them.

Is Innovation Doomed?

Ah, shades of Knowledge Crash. Not a new idea, by any means.

Knowledge Crash, as an idea advanced by Roger MacBride Allen in his novel The Ring of Charon, is what happens when the cost of education required to make oneself employable exceeds the sum total of (disposable?) income one obtains from employment. There's other things wrapped up in there, too, such as the impossibility of keeping current; the net effect was KC. Those who were convinced KC had already occurred offered as evidence that no one was really sure if it had or not. Not exactly logical, but that's part of the charm of the Naked Purples. Pretty good book; followed up by a better sequel (The Shattered Sphere).

That Chapter 11 MBTE case got me thinking -- if the company wins its suit, is there a limit to the decision's reach? For example, if a country legalized cocaine, could a company legally manufacturing it in that country stop U.S. drug laws that would impede its business? Short of a provision in the agreement that excludes drugs from the terms of Chapter 11, I'm not sure why such a result wouldn't be consistent.

Aaron: ianal, etc., but I would think that the answer is 'no'. In most of the cases cited in the post, what's at issue is a (supposed) 'expropriation' of property, interpreted as a change in existing law whose effect is to reduce the value of someone's property, or deprive them of business. Cocaine laws are already on the books, so there would be no such change.

The UPS suit is different, but I think that in that case the argument is not that, by having a public delivery service, Canada is expropriating UPS' potential future profits, but that it is essentially subsidizing a competitor in a way that NAFTA forbids. (And, normally, for good reason: free trade agreements are supposed to allow everyone to compete fairly, and that doesn't happen when one government shovels cash at its firms to allow them to undercut their competitors' prices.)

Since, as far as cocaine goes, we are neither changing the law to "expropriate" property nor subsidizing a competitor to the Cali cartel, I don't think Chapter 11 would apply. But it's still completely vile, since it implies that whenever any town, state, or country acts to ban some substance on the grounds that it is (say) a public health hazard or an environmental toxin, or bans or restricts some type of activity on the grounds that it is dangerous or destructive, it can be sued for the amount of lost profits, and that suit will be decided by an unaccountable and secret tribunal.

One other point I forgot to mention in the original post: as I understand it, in the Methanex suit (over the MTBE ban), the Federal government was sued over California's law, and thus California had no legal standing to defend or explain its own law.

Presumably no one is saying that only a minority of people in society benefit from the overall net positive effect, right? Or do I have that wrong?

As Frank points out, there are people saying that, though I think they tend to be opponents of free trade. As for supporters, The general tone is that the majority do benefit, but this is not really explicit. The costs are thought to be borne by more or less identifiable groups, while the benefits are diffuse, so on that premise it is a reasonable supposition that there are more beneficiaries than victims.

"The costs are thought to be borne by more or less identifiable groups, while the benefits are diffuse, so on that premise it is a reasonable supposition that there are more beneficiaries than victims."

And since it probably isn't obvious, I'd find it invaluable to see the best possible data on how the benefits are distributed, in the relevant countries, each time a new trade agreement is brought forward.

Can anyone give a justification for why the tribunals that hear free trade suits shouldn't be fairly completely open and transparent (usual exemptions for trade secrets and the like applying)?

I learn from National Review this:

Also striving mightily to scuttle CAFTA is the domestic sugar industry, which employs only about 52,000 people and accounts for roughly one percent of U.S. farm revenue, but wields political influence grossly disproportionate to its size. For years, it has won federal price supports from Congress, with the result that sugar in the U.S. is three times the average world price. The burden of such dirigisme is borne not only by consumers, but also by the sugar-refining and candy industries, which have lost thousands of jobs over the past decade as a result of the high prices they must pay for production inputs.

CAFTA is, in fact, embarrassingly deferential to the sugar lobby. It would increase sugar imports by only one percent in its first year. After 15 years, that number would rise to a staggering 1.4 percent.

Well. That certainly would be a radical improvement. But just to be clear on the crucial arguments:
For the U.S. to reject CAFTA would only strengthen the hand of would-be despots.
If NR says it, it must be true!

Yglesias suggests these radical anti-free-trade ideas.

Hmmm...the latter of those two appears to want to attack all manner of irrelevancies to their discussion of CAFTA. Not irrelevant in general, but certainly irrelevant to CAFTA.

Hmmm...the latter of those two appears to want to attach all manner of irrelevancies to their discussion of CAFTA. Not irrelevant in general, but certainly irrelevant to CAFTA.

Can anyone give a justification for why the tribunals that hear free trade suits shouldn't be fairly completely open and transparent (usual exemptions for trade secrets and the like applying)?

The only thing I can think of is that lots of the evidence presented, while not trade secrets per se, would nonetheless be something the company regards as confidential: sales breakdowns, production methods and costs, etc. Maybe someone could build a case around that.

Of course, even that wouldn't justify keeping decisions secret, or not explaining the basis on which the tribunal made its finding. You could do that without revealing specific confidential matters.

On principle, trying to get the other countries to adopt American-style labor and environmental standards is a classic labor union excuse for opposing free trade agreements, hilzoy. You may likely dismiss Gary's link upthread, but here you go anyway:

Sweeney and the sugar industry are joined by the Left’s usual sentimentalists, who denounce trade agreements with any nation where labor and environmental standards differ from those found in Ann Arbor, Mich. That group includes even the supposedly pro-trade New Democrats, who, when it comes down to it, would support CAFTA only if it were tied to regulations that would put large numbers of Central Americans out of work. As always, these critics betray themselves as both arrogant and ignorant. Arrogant because they are unsatisfied with CAFTA’s requirement that participating states enforce internal labor and environmental laws, and would instead hold sovereign nations accountable to their own unrealistic standards. Ignorant because they fail to grasp the simple truth that trade and foreign investment are among the surest ways of raising environmental and labor standards. This has been empirically proven across the globe, in such places as — Central America. Since the beginning of U.S. trade liberalization with Central America in the 1980s, literacy rates have risen and the incidence of child labor has fallen.
Basically, the wealthier a nation becomes, the more resources it has to address environmental issues. Same goes with labor standards. We have a case study: Mexico. Is their economy, environment and labor standards better or worse off because of NAFTA? Yes:
Mexico remains the United States’ second largest trade partner. Since the North American Free Trade Agreement took effect in 1994, Mexico has increased its total trade by more than 175 percent. With the exception of 2001, Mexico has been breaking export records every year.
I don't have time to fully check out the concerns you've outlined, hilzoy, but every trade agreement is going to have some costs to it. The quesion is whether you'll let the perfect be the enemy of the good. Personally, I think the Democrats are going the wrong way on CAFTA. You should be following the counsel of your most influential politician in a quarter centuryrather than standing on the side of the John Sweeneys of the world who never met a trade agreement they liked. Two Clinton administration officials had this to say:
First, the agreement is deeply in our national interest and will create, not destroy, jobs. Second, if the Democratic Party wants to regain the White House and control of Congress, it has to take pro-growth, pro-jobs positions on key issues, including trade agreements.

CAFTA follows the same template as the United States' free trade agreements with Australia, Singapore, Jordan, Chile, Morocco, Canada and Israel -- agreements which garnered substantial Democratic support. Cafta would also open markets to U.S. goods and services, lower tariffs, create transparent government procurement processes and adopt trade facilitation measures. In fact, exporters from Central America can already sell products in the United States at zero or low tariffs. CAFTA lowers tariffs on U.S. products exported to Central America...

...Critics of CAFTA are correct that the agreement's provisions on labor and the environment do not have as strong an enforcement mechanism as similar provisions in the U.S.-Jordan Free Trade Agreement and might have been improved if negotiated by a Democratic administration. These provisions, however, can help raise environmental and labor standards, which, too, will rise with the increased standard of living that Cafta will provide. Democrats can also use the legislative process to negotiate with the Bush administration for improvements in labor and environmental enforcement in Central America. But to maximize their negotiating leverage, Democrats will have to maximize the number of votes they can deliver in favor of Cafta.

Even the New York Times favors the agreement, hearkening us back to when a pro-NAFTA Al Gore was debating Ross Perot:
But globalization isn't going away whether CAFTA gets approved or not. Free-trade Democrats should be using their leverage to get more support for retraining assistance to displaced workers, not simply posturing with blanket opposition.

The Democrats also argue that the trade agreement's labor provisions don't go far enough to protect workers in the six other countries. But they are ignoring a provision that improves on existing rules by taking fines collected for violations of labor laws and using them to correct labor infractions. That's far better than the current system, in which penalties collected for labor violations end up in the United States Treasury.

The crux of the opposition seems to come from a general feeling of peevishness that the Bush administration didn't consult more with the pro-trade Democrats while negotiating the agreement. When you add that to the general anger over the Bush administration's failure to really negotiate with Democrats over issues from prescription drugs to education reform, it's understandable that they feel burned. But that doesn't make it right for them to take their marbles and go home. The Central American people deserve better.

Cafta would lower tariffs and help job growth in a needy region. It would encourage growth in the region's textile and apparel industries, a huge helping hand at a time when China is sucking up textile manufacturing jobs. The American Farm Bureau Federation estimates that Cafta would increase United States agricultural exports by $1.5 billion a year. The National Association of Manufacturers says the trade agreement would add $1 billion a year to United States exports of manufactured goods. And a study by the United States International Trade Commission estimates that Cafta, when fully implemented, would cut the trade deficit by $756 million.

Where'd those Clinton Democrats go?

Is their economy, environment and labor standards better or worse off because of NAFTA? Yes.

This is unequivocally the single funniest pair of sentences I have ever seen on Obsidian Wings. I'm not picking on you particularly, Charles, but it's a hilarious couplet.

"Basically, the wealthier a nation becomes, the more resources it has to address environmental issues. Same goes with labor standards."

As I keep saying, economics isn't my strong suit, but my understanding is that it's a fairly basic principle that capital will go to where it will get maximum return. This would suggest that if, on the one hand, all the signatories to a treaty such as CAFTA had to meet the same environmental or labor requirements, whatever those might be, the field would be level in terms of attraction to the different markets, but if each country gets to set their own standards, all will have a major incentive to keep their regulations at the lowest possible level. This, of course, might suit you just fine, seeing regulation as inevitably bad, but it certainly is not an argument for having such individual and diverse standards as a means of any country's raising their standards.

Do I have something wrong there?

I do look forward, by the way, Charles, to your returning, when you have a moment, to the discussion of whether or not uranium enrichment is "belligerent" or not, and your assertion that when countries are bombed, they've suffered no belligerency, but that it's simply "their problem." Your thoughts on Uzbekistan and the present Administration are also solicited (in that thread), if you feel so inclined.

Charles: I don't care whether or not my arguments are "a classic labor union excuse for opposing free trade agreements" -- if I cared who else made my arguments, the mere fact that I'm agreeing with the sugar lobby would make me change my mind. Nor do I care whether the New York Times and/or Clinton officials agree with me.

I certainly don't care either about arguments against views I don't hold -- e.g., against those who are "trying to get the other countries to adopt American-style labor and environmental standards", or who "who denounce trade agreements with any nation where labor and environmental standards differ from those found in Ann Arbor, Mich". (I didn't get more specific than saying: I think that asking these countries to enforce the laws they already have on the books is too weak. There's a lot of distance between that claim and Ann Arbor.) Nor am I concerned about the motives of other people who turn out to be on the same side as me: e.g., those who "a general feeling of peevishness that the Bush administration didn't consult more with the pro-trade Democrats while negotiating the agreement." I'm sure there are any number of Republicans with whom you share some position, but whose motives you dislike.

I am, as I said, in favor of free trade agreements in general. But I also think that a lot depends on the fine print. So I tried to read the treaty, and then to find out about it. I was just trying to make up my own mind. You haven't had time to address my concerns: fine. But I'm not sure I see the point of your post, then, unless you imagine that whatever can be said of "Democrats" can automatically be said of me.

That should be: those who are motivated by a general sense of peevishness...

Basically, the wealthier a nation becomes, the more resources it has to address environmental issues.

Externalities don't go away when you ignore them. A market with uncompensated externality costs is neither a free market, nor an optimal one. The only time it makes rational sense to ignore such externalities is when there is no efficient way to enforce that those responsible compensate the people they are imposing the costs on. This could be argued on a case by case basis, but to advocate it on a wide basis is an anti-free market position.

As for your heritage.org quote, it is simply a non-sequitur. Trade is a good thing you argue, and cite a reference that claims since NAFTA was enacted, the volume of trade between the two countries has risen. This is obviously an incoherent argument. Nobody is claiming that striking down barriers to trade will not result in an increase in trade. The question is who will benefit from striking down those barriers, and to what degree, and at what cost. What we do know is that real wages have fallen in Mexico since NAFTA was put into place, even as productivity has risen. Who does that make better off?

I do appreciate the irony of someone who seems, from past statements, to see poisoning the well as a valid tactic of debate quoting a heritage.org piece. A well-done bit of humor, that.

"But I'm not sure I see the point of your post, then, unless you imagine that whatever can be said of 'Democrats' can automatically be said of me."

My reading of Charles' comment tends to be rather unkinder and harsher than I would prefer, but it tends to run alongside lines of translating it something to the effect of "I have read many bad arguments against free trade agreements, so all arguments against them must be bad," or even more unkindly, "you mentioned 'free trade agreements,' so here is my pre-recorded tape on the topic, without regard to anything you actually said." But, to be sure, this is only a purely subjective, and admittedly entirely harsh interpretation, and I in no way assert that it is either accurate (I'm sure Charles finds it otherwise), fair, or correct.

I see that Hilzoy already read this, but since she hasn't yet passed it along....

Why, no, nothing compulsive at all.

Gary: takes one to know one ;)

I had written to Brad DeLong a few days ago, when I was researching this and getting frustrated by not finding enough, to ask him to write something about CAFTA, since I couldn't find enough from economists I trust. He wrote back and said, basically: I don't know enough. So when I saw the post, of course I had to thank him.

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