If you don’t yet subscribe to Cato Trade, the monthly newsletter of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, you can find the current edition here. Highlighted in this month’s release is Simon Lester’s new paper, Expanding Trade in Medical Care through Telemedicine. Additionally, you will find Cato trade scholars’ commentaries on the Export-Import Bank; the Trans-Pacific Partnership talks; Investor-State Dispute Settlement (ISDS); Trade Promotion Authority (TPA); and, other important matters of U.S. trade policy.

And here are the links to all previous monthly newsletters:

Cato Trade Monthly Update, Mar. 4, 2015

Cato Trade Monthly Update, Feb. 2, 2015

Cato Trade Monthly Update, Jan. 6, 2015

Cato Trade Monthly Update, Dec. 1, 2014

Cato Trade Monthly Update, Nov. 3, 2014

Cato Trade Monthly Update, Oct. 1, 2014

Cato Trade Monthly Update, Sept. 2, 2014

Cato Trade Monthly Update, Aug. 4, 2014

Cato Trade Monthly Update, July 1, 2014

Cato Trade Monthly Update, June 2, 2014

Cato Trade Monthly Update, May 1, 2014 

Cato Trade Monthly Update, Apr. 1, 2014

Cato Trade Monthly Update, Mar. 4, 2014

Cato Trade Monthly Update, Feb. 4, 2014

Cato Trade Monthly Update, Jan. 6, 2014

Cato Trade Monthly Update, Dec. 2, 2013

When deciding whether to impose antidumping duties on imports from Vietnam, the United States uses what’s known as nonmarket economy (NME) methodology. That is, instead of comparing a product’s U.S. price with the price for the same or similar product in Vietnam, U.S. authorities compare it with a fictitious price constructed using surrogate values from third countries.

The use of NME methodology is prohibited under the rules of the World Trade Organization. But when Vietnam and China joined the WTO, they each agreed that the use of NME methodology would be permitted against them for an additional 15 years. For China that’s until the end of 2016, and for Vietnam it’s until the end of 2018.

Vietnam, however, is also a negotiating party to the Trans-Pacific Partnership, a 12-member free trade agreement that may be concluded this year. Last week, Vietnam’s Ambassador to the United States implied that Vietnam was seeking to have its NME status revoked as part of those negotiations. As reported at Inside U.S. Trade ($):

“I think on the question of the market economy status, we can do it together. Vietnam has been doing it with other countries and I think about three dozen or something countries have recognized that,” said Pham Quang Vinh, Vietnam’s ambassador in Washington. Vinh added that he hopes “when we reach a conclusion of the TPP, then everything [with regard to this issue will] be resolved.”

It certainly makes sense that Vietnam would hope to negotiate the end of NME treatment. As the Ambassador explained, they’ve already secured market economy status in other countries. The TPP is a natural vehicle for getting a similar commitment from the United States . But there’s no guarantee they’re going to get it:

But his counterpart, U.S. Ambassador to Vietnam Ted Osius, seem to tamp down those expectations. Speaking at the same event, Osius indicated that while TPP might put Hanoi on strong footing to make the economic reforms necessary to become a market economy, a change in its status would be likely be further down the road. Both officials spoke at March 24 event at the Center for Strategic and International Studies (CSIS).

Osius said that the U.S. Commerce Department process to determine a country’s market economy status is non-political, and that Vietnam still needs to fulfill certain requirements, such as having a convertible currency.

The U.S. official’s characterization is telling. The U.S. government has consistently argued that NME status is a factual question. That is, if Vietnam or China meets the criteria under U.S. law for market economy treatment, their NME status will be revoked accordingly. 

This characterization is misleading and troubling for a number of reasons. First, NME status is very much a political decision. There are factors for evaluating nonmarket economy status under U.S. law, but those factors are not especially relevant to the problem a genuinely nonmarket economy poses for the use of regular antidumping methodology. “Currency convertibility” is an excellent example. Moreover, the factors ask regulators to evaluate “the extent of” certain interventionist policies without giving guidance on how extensive they must be. And a determination of whether a country “meets” the factors is explicitly not reviewable by any court. 

Second, the important question is not about Vietnam’s economy but about when the U.S. will end this abusive antidumping practice. As I explained in a policy analysis paper last year, the NME designation is merely an excuse for lawless protectionism. Whatever factors the U.S. government wants to come up with, the fact remains that Vietnam and China both are sufficiently market-oriented that authorities can use domestic prices to determine whether goods are being sold in the United States at “dumped” prices.

Finally, it’s particularly repugnant for the United States to impose NME treatment on imports from a country it has a free trade agreement with. The TPP should eliminate barriers to trade between the United States and Vietnam and further integrate their markets, so that increased competition can effectively drive economic growth. Singling out Vietnam for discriminatory antidumping treatment is entirely incompatible with that goal.

Vietnam is right to demand an end to abusive NME treatment by the United States. If U.S. negotiators are serious about making the TPP an “ambitious, 21st Century agreement,” they should welcome that demand without objection.

Senate Democratic Leader Harry Reid (NV) has announced that he will not seek reelection in 2016, and his most likely successor is Chuck Schumer (D‑NY). No doubt a lot will be said by journalists and commentators about what this transition means for policy and politics.

If you want to get an idea of what that change might mean for U.S. trade policy in the long run, you should take a look at Cato’s congressional trade votes database—Free Trade, Free Markets: Rating the Congress.

Throughout his career, Reid has been a staunch opponent of trade liberalization. He has voted in favor of market-distorting subsidies and tariffs at almost every opportunity:

For instance, Reid thwarted President Obama’s attempt to secure trade promotion authority last year when Reid was still majority leader.

Schumer has a less drastic voting record:

Though hardly inspiring, Schumer’s record is better than Reid’s.

It can be useful to see more specifically where the senators differ. Unlike Reid, Schumer has voted in favor of free trade agreements from time to time; he has supported lifting and loosening the Cuba embargo, and–at least in his earlier years in the Senate–voted to reform the sugar program.

Should he take the helm next term, Schumer’s less rigid resistance to trade liberalization may help Senate Democrats better represent their base, which is less opposed to trade and globalization than most people realize.

The Obama administration wants us to believe that even while the Trans-Pacific Partnership is shaping the global economy in favor of U.S. interests, it is also furthering U.S. foreign policy by strengthening alliances and containing China’s influence in the Asia-Pacific region. 

Alan Beattie of the Financial Times has written a scathing rebuttal to this line of argument:

This is an appealing fall-back for those who don’t like the deal’s content, but is at best one of the weaker arguments in favour. Whether or not agreements help strategic alliances, the intrusive and one-sided nature of pacts negotiated with the US can arouse resentment as well as cooperation.

…

The participation of countries in the TPP has less to do with enthusiasm for importing the US economic model than a grudging acceptance that yet more tribute has to be paid in order to retain access to the US market. Negotiating a trade deal with the US is not a particularly pleasant business, and nor is it becoming happier over time. You are essentially presented with a US model agreement that contains a decreasing proportion of actual free trade and an increasing proportion of intellectual property protection, and invited to sign.

It’s not clear that a country’s affection for the US will increase after being required to rewrite its patent and copyright law every few years on a model dictated by, respectively, the Pharmaceutical Research and Manufacturers of America and the Recording Industry Association of America. The US itself does not offer much liberalisation. It is highly unlikely to substantially dismantle its agricultural subsidy and protection regime to allow Australian and New Zealand farmers abundant access to its dairy market or stop its rice subsidies disadvantaging Vietnamese rice exports in world markets. America’s trading partners are thus on a permanent treadmill of enforced policy change in order to keep their trade access to the US.

…

At the moment, the US is essentially using its huge domestic market as a tool to remake other economies in its image. It is likely to work for some time to come, given the prize on offer. But Washington should not delude itself that trade deals which inflict political pain on the US’s negotiating partners will necessarily function as durable and positive elements of a wider diplomatic relationship.

Of course, trade agreements can and should be a tool to build good foreign relations. Protectionism breeds conflict while trade enables cooperative wealth creation. Free trade is an eminently friendly policy, and to the extent trade agreements liberalize trade, they reduce the potential for conflict between governments. 

One of the most pressing problems in U.S. trade policy is that policymakers constantly misstate and misunderstand the purpose of trade agreements. Trade agreements have the potential to overcome political barriers to trade liberalization in a win-win scenario for all countries involved. Tariffs, quotas, subsidies, and protectionist regulations harm everyone except the cronies that lobbied for them. Trade agreements reduce or eliminate these harmful policies.

Unfortunately, the Trans-Pacific Partnership has largely been conceived and shaped by a different set of motivations. According to its architects, the TPP is supposed to be a “21st century” agreement that will set the rules of trade in ways favorable to the United States. In other words, favorable to politically powerful U.S. constituencies. What U.S. policymakers are touting as the great achievements and aims of the TPP are better understood as distortions—issues added to agreements to make them more politically appealing at the expense of the agreement’s core economic function of opening markets to competition.

If the United States truly wants to use the TPP to strengthen relations in the region, the agreement should look a lot different. For starters, stop pushing for unpopular rules on intellectual property, investment arbitration, and labor and environmental protections. The United States could also offer more meaningful liberalization of the U.S. market in textiles, sugar, and shipping. A truly “ambitious” agreement would do a lot to improve U.S. international relations, but it would look very different from the TPP as it has been presented.

Being a U.S. senator can be fun. The position brings with it a certain amount of influence, fame, and stature. However, serving in the Senate also is fraught with challenges. Much time must be spent away from family. Flying back and forth between home and Washington can wear a person out. And some voters always are unhappy with you, sometimes really unhappy.

This is a complicated moment for Sen. Ron Wyden (D‑OR). He has paid his dues in the Senate since 1997 and now is one of its more senior members. That seniority has brought him to the position of ranking Democrat on the Senate Finance Committee, which has the responsibility (among others) for establishing policies pertaining to international trade.

Congress is trying to decide whether to grant President Obama Trade Promotion Authority (TPA), formerly known as “fast track” authority. TPA commits Congress to an up-or-down vote (no amendments) on a trade agreement presented to it by the White House. This procedure provides foreign negotiating partners with assurance that Congress will consider any agreement as a complete package, thus avoiding the risk that it might be amended in response to pressure from groups that are unhappy with one or more of its provisions. 

Such pressure dissuaded Congress from approving provisions that had been agreed to by the administration in the 1967 Kennedy Round of negotiations, which were conducted under the auspices of the General Agreement on Tariffs and Trade (GATT). Other countries were not amused when the United States didn’t live up to its Kennedy Round commitments. To rebuild its negotiating credibility, the United States needed to find a way to bridge the Constitution’s clear delineation of powers: the president has the right to negotiate with other countries, but Congress has authority to regulate foreign commerce. 

The response was the Trade Act of 1974, which developed the basic formula for approving trade agreements that has been used ever since. Congress granted the president five years of negotiating authority that covered both tariffs and non-tariff measures.

The most recent version of TPA expired in 2007. President Obama currently is seeking a new grant of negotiating authority in order to conclude the Trans-Pacific Partnership (TPP) with 11 other nations, and possibly also the Transatlantic Trade and Investment Partnership (TTIP) with the 28 members of the European Union. 

Senator Wyden will play a crucial role in determining whether or not TPA is approved. Sen. Orrin Hatch (R‑UT), chairman of the Finance Committee, and Rep. Paul Ryan (R‑WI), chairman of the House Ways and Means Committee, would like to introduce TPA legislation. However, they don’t want to do so without bipartisan support. There is a long tradition of Democrats and Republicans working together on behalf of trade liberalization. 

Rep. Sandy Levin (D‑MI), the ranking Democrat on the Ways and Means Committee, generally opposes trade reforms that could lead to a greater selection of affordable automobiles for consumers. In other words, he’s a lost cause when it comes to sponsoring a version of TPA that the White House might approve. This is why all eyes are on Senator Wyden.

Wyden voted in favor of TPA legislation when it was most recently approved in 2002. He voted in favor of free-trade agreements with Morocco, Australia, the Dominican Republic and Central American countries, Peru, Panama, Colombia, and South Korea. However, he also voted against free-trade agreements with Singapore, Chile, and Oman, so he’s been on both sides of trade debates. 

Senators Wyden and Hatch have been negotiating in an effort to agree on TPA language. So far, Wyden has held out for a version of TPA that would be much easier for Congress to revoke than has been the case in the past. The concern is that such a reluctant grant of negotiating authority would give the administration relatively little leverage with which to close the deal on TPP. U.S. negotiating partners likely would be hesitant to agree to final terms if they think Congress is about to pull the rug out from under them.

The politics surrounding TPA have gotten quite messy for Wyden. A substantial coalition of Democratic Party stalwarts, including organized labor and various left-leaning groups, has mounted an active campaign to discourage him from agreeing to a TPA bill.

On the merits, opposition from unions in Oregon is difficult to explain. Their state is conveniently located on the Pacific coast, so implementation of the TPP would be expected to lead to increases in employment in the port, transportation, and agricultural sectors, among others. Nonetheless, unions and their allies have used claims that are often misleading to argue against approval of either TPA or the TPP. They recognize that Wyden is the linchpin in the process. If he can be dissuaded from supporting TPA, it almost certainly won’t be approved, at least until after a new president has taken office. 

On the other hand, President Obama wants TPA–at least officially–but it’s not entirely clear how hard he’s willing to fight for it. There is no precedent in which President Obama has made a concerted effort to pass legislation that was opposed by such important Democratic Party constituencies. Why would he be willing to do so now, especially when liberal supporters like Paul Krugman, the well-known political columnist, has come out against the TPP (which is the proximate reason for needing TPA), writing, “Why, exactly, should the Obama administration spend any political capital–alienating labor, disillusioning progressive activists–over such a deal?” 

(Note: Economists generally agree that elimination of the numerous trade barriers remaining among TPP nations would lead to meaningful growth in sectors such as agriculture and services. Since the United States and Japan are the world’s largest and third largest economies, the potential benefits of making markets more open and competitive could be substantial.)

At any rate, this is not a time to envy Senator Wyden. In his heart of hearts, he likely wants to support a version of TPA that would give the United States the best possible opportunity to advance an agenda that liberalizes trade. But is it worth the risk, given the certain knowledge that Democratic activists will be very upset, and the uncertainty as to whether the White House really has its heart in the fight? Will President Obama ever be able to come up with enough Democratic votes (probably 20–30) to pass TPA in the House? If not, why should Wyden stick his neck out on this?

It will be interesting to see how he sorts through these issues.

This is from Ezra Klein:

I’m skeptical of the sheer size of modern trade deals and the opaque process that creates them. The negotiation process isn’t quite as secretive as some think — the congressional briefings are constant, and the advisory committees are sprawling — but it is insanely complex.

The result is that even where there is transparency, it’s a form of transparency that can only really be navigated by politically sophisticated, highly motivated actors — which is to say it’s a form of transparency that quickly becomes a venue for lobbying. That’s one reason these deals end up including so much … stuff. The process is constructed in such a way that the negotiators get a lot of special pleading from individual industries and interests. Responding to those requests feels like responding to the public, but it isn’t, and it leads to deals jam-packed with individual provisions that look a lot like giveaways.

This is a great insight about modern trade agreements. It’s important to think of a trade agreement as just another piece of legislation. In the past, trade agreements focused mainly on tariffs. Now they govern a wide range of policies (“stuff”), and as a result they are susceptible to regulatory capture. Special interest groups see them as just another way to achieve their political goals. What this means is, as with any piece of legislation, don’t be fooled by the marketing. Look closely at all the details.

Lego’s patent for the “Toy Building Brick” expired in 1988, but the company still aggressively tries to claim monopoly privileges over its products. Ten years ago, Lego tried unsuccessfully to claim trademark protection for blocks with circles on top. Now they are going after competitors for making products that look similar to the new “Lego Friends” line of blocks marketed toward girls. For example, Lego complains that its competitors have infringed its copyright in “Figure with Skirt”.

Of immediate interest is the fact that Lego has filed a complaint at the U.S. International Trade Commission seeking to bar importation of certain Mega Bloks, Lite Brix, and Best-Lock products. There are a number of reasons why the ITC should not be adjudicating patent or other intellectual property disputes, and if you’re interested in the full story, you should read my Cato Policy Analysis on the subject from 2012.

The Lego case, in particular, raises an important question about the ITC’s proper role in enforcing intellectual property rights. Because the ITC is a protectionist agency, and its IP litigation power was created to protect U.S. industries from “unfair competition,” there must be a “domestic industry” to protect before the ITC can act. 

The complainant in this case is a Danish company that manufactures its products in Europe and Mexico. The respondents include two U.S. companies and one Canadian company that manufacture their products in China and Canada. 

So there’s a strong possibility that Lego’s ITC complaint will fail due to lack of a domestic industry. That’s good news if you’re a consumer of children’s toys. But it’s also an irrational impediment to effective patent enforcement.

Supporters of the ITC’s patent power consistently point out that the agency is good at enforcing patents. Cases take less time and cost less money than court trials. But this is merely an argument for reforming how district courts handle patent cases, not a justification for a specialized patent court for imports. The domestic industry requirement, which certainly doesn’t apply in federal district court, just emphasizes how inappropriate it is to mix patent enforcement and trade protection.

And it’s always worth mentioning that bringing patent infringement lawsuits in court against importers is not difficult. The vast majority of ITC cases, including the Lego case, are simultaneously litigated in district court.