Over the past year or so, there has been a slow and steady effort to generate support for a U.S.-EU free trade agreement. The Obama administration is now behind this, and there is no reason to think a President Romney would change gears. Thus, regardless of the outcome of the Presidential election, this trade initiative is likely to go forward.

So should free traders be excited by the prospect of a trade agreement with the EU? Maybe a little. But before getting too wound up, it’s worth taking a look at the possible details of such an agreement, as set out in an interim report by a U.S.-EU “High Level Working Group”. As indicated by the post title, there are things to like, but also some things not to like — the Good and the Bad. I’ll go through the list roughly in order of those I am most to least happy with, quoting the report and offering some comments. I will conclude with the Ugly. (See if you can guess what it is.)

Tariffs

The goal would be to eliminate all duties on bilateral trade, with the shared objective of achieving a substantial elimination of tariffs upon entry into force and a phasing out of all but the most sensitive tariffs in a short time frame. In the course of negotiations, both sides would consider options for the treatment of the most sensitive products.

This is pretty good, but not great. Note the part about “options” for “sensitive products.” How many of these would there be? This language makes me nervous.

Services

The aim of negotiations would be to bind the existing autonomous level of liberalization of both parties at the highest level of liberalization captured in existing FTAs, while seeking to achieve new market access through efforts to address remaining long-standing market access barriers, recognizing the sensitive nature of certain sectors.

This is all sounds good (except for that reference to “sensitive” sectors again).

But then it goes off in a different direction:

the United States and the EU would include binding commitments to provide transparency, impartiality and due process with regard to licensing and qualification requirements and procedures, as well as enhancing the regulatory principles included in current U.S. and EU FTAs.

“Impartiality” and “due process” are useful concepts in domestic law. But can they be effectively used in international trade agreements? Are these concepts appropriate for binding international agreements, or do they turn trade agreements into a kind of global constitution?

Government Procurement

The goal of the negotiations would be to enhance business opportunities through substantially improved access to government procurement opportunities at all levels of government on the basis of national treatment.

While there is a good free market objection that governments spend too much on procurement, nonetheless, if they are going to spend, it would be better to do so in a non-protectionist way. This part of the report is good. It promotes economic welfare through non-discrimination in government procurement. We buy their products and services, and they buy ours. Note, of course, that it refers to “substantially improved access,” not full free trade. But it is still an improvement over today’s situation.

Investment

The aim would be to negotiate investment liberalization and protection provisions on the basis of the highest levels of liberalization and protection that both sides have negotiated to date.

Here, there are two very different concepts included. Investment “liberalization” is great. By all means, let’s make sure foreign investors are welcome and not subject to discrimination, in both the U.S. and EU. But “protection” of foreign investors is something else entirely, as the rules on this issue in other agreements go far beyond a simple non-discrimination requirement. Furthermore, of all the groups that need “protection” in this world, I would put “foreign investors” near the bottom of the list.

Rules

(a) trade facilitation/​customs; (b) trade-related aspects of competition and state-owned enterprises; (c) trade-related aspects of labor and environment; (d) horizontal provisions on small- and medium-sized enterprises; (e) strengthening supply chains; and (f) access to raw materials and energy.

In this hodge-podge of items, we have some good and some bad. It’s great to make customs procedures more efficient; but including labor and environment provisions in trade agreements makes the whole exercise seem more like global governance than free trade.

Regulatory Issues and Non-Tariff Barriers

Here, there are several issues that are difficult to understand. First, it is important to note at the outset that existing international trade rules do not allow discriminatory laws and regulations. That’s a core principle of the GATT/WTO, and has been since 1947. So, keep that in mind when you hear calls for trade agreements to address “regulatory issues and non-tariff barriers.” They are already addressed in important ways.

Getting specific, the report calls for the following related to Sanitary and Phytosanitary (SPS) issues (e.g., food safety) and Technical Barriers to Trade issues (TBT) (e.g., product regulations):

• An ambitious “SPS-plus” chapter, including establishing a bilateral forum for improved dialogue and cooperation on SPS issues.
• An ambitious “TBT-plus” chapter, including establishing a bilateral forum for addressing bilateral trade issues arising from technical regulations, conformity assessment procedures, and standards.

It is not at all clear to me why existing WTO SPS and TBT rules are insufficient.

The report also asks for:

• Horizontal disciplines on regulatory coherence and transparency for goods and services, including early consultations on significant regulations, impact assessment, upstream regulatory cooperation, and good regulatory practices.
• Provisions or annexes containing additional commitments or steps aimed at promoting regulatory compatibility over time in specific, mutually agreed sectors.

Here, I agree that there may be benefits from regulatory cooperation. But I’m not sure why they should be held hostage to free trade agreements. If the idea is to promote things like mutual recognition (say, in the auto industry), couldn’t it just be done now?

Finally, the report says:

In view of the importance of developing an ambitious and realistic approach to regulatory differences that unnecessarily impede trade, the two sides would invite stakeholders to present, before the end of the year, concrete proposals to address the impact on trade of those differences.

As noted above, the principle of non-discrimination has long been a core part of international trade rules. The principle mentioned here – “regulatory differences that unnecessarily impede trade” – is potentially much broader, as it intrudes into domestic policy-making to a greater degree.

Intellectual Property

Both the EU and the United States are committed to a high level of intellectual property protection, including enforcement, and cooperate extensively through the Transatlantic IPR Working Group. Both sides agree that it would not be feasible in negotiations to seek to reconcile across the board differences in the IPR obligations that each typically includes in its comprehensive trade agreements. Before the launch of any negotiations, both sides would further consult on possible approaches to deal with IPR matters in a mutually satisfactory manner.

It has never been clear to me why intellectual property should be included in trade agreements at all. Now the U.S. and the EU, who often push for strong protection in this area, will work together to achieve very tough international rules (except where they can’t agree, as with geographical indications, which will be left out).

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So, that was the Good and the Bad, all mixed together. Now let me wrap this up with the Ugly: No coverage of agricultural subsidies, or possibly agriculture trade of any sort! That means excluding one of the biggest sources of protectionism, not to mention two other big ones, with trade remedies and aircraft subsidies also out. Those are some serious omissions.

Oh, and one other thing: Free trade with just the EU is not really free trade! It is discriminatory trade, with EU products and services favored over other countries’ products and services.

I don’t mean to rain on this free trade parade. But keep all that in mind when evaluating this proposal.

With all the China bashing we’re hearing on the campaign trail and the arguments from both candidates that free trade agreements are good only because they increase manufacturing exports, one might reasonably deduce that free trade advocacy is a thing of the past and a losing position with the American people. If this is true, many in Congress haven’t gotten the memo. The House and Senate are home to many free traders. You can see for yourself by visiting Cato’s interactive trade votes database, Free Trade, Free Markets: Rating the Congress.

The Cato Institute has been keeping track of how Congress votes on trade issues since 1997. At the website you can see reports summarizing the votes for each congressional term. There is no report for last term (2009–2010) because Congress was too busy dealing with healthcare and Keynesian stimulus to take on trade issues, but the last two years have seen votes on free trade agreements, Chinese currency and subsidies, export finance, and sugar price controls. We’ll have a report after the current term ends on what all these votes mean for the freedom of Americans to interact with foreigners and on what to expect in the next two years.

The most enjoyable part of Free Trade, Free Markets: Rating the Congress is the ability to browse individual voting records. For any senator or representative who has served over the last 15 years, you can see a comprehensive report card that shows what they voted for or voted against. But they don’t just get a letter grade or percentage.

Each member’s record is plotted on a two dimensional graph that distinguishes between trade barriers and trade subsidies. Many representatives and senators vote against trade barriers but in favor of trade-distorting or protectionist subsidies. We call these folks Internationalists. Those who vote against subsidies but favor barriers are labeled Isolationists. Supporting both barriers and subsidies will place you in the Interventionist category, while consistent opposition to both sends you toward the venerable Free Trader designation.

The site offers excellent insight into the positions and ideologies of our elected officials, and I encourage you to investigate it at your leisure. As a primer, I would like to point out two important observations of my own in this post.

First, free trade is not a partisan issue. It is true that Free Traders tend to be Republicans and Interventionists tend to be Democrats, but the bulk of both parties are somewhere else on the graph and there is no obvious partisan correlation. For example, John Boehner (R‑OH) and Nancy Pelosi (D‑CA) have fairly similar scores that place them between Interventionist and Internationalist. There are plenty of Democrats who vote against trade barriers and plenty of Republicans who vote in favor of subsidies. It’s often regional interest rather than partisan affiliation that affects voting patterns, as demonstrated by Marco Rubio’s (R‑FL) support for sugar subsidies.

Second, senators from the same state can have widely different approaches to trade, especially in swing states. Three large swing states in the current presidential election have a Democratic senator elected in the 2006 midterm election and a Republican senator elected in the 2010 midterm election. Senators Rob Portman (R‑OH), Pat Toomey (R‑PA), and Roy Blunt (R‑MO) have earned high marks so far since joining the Senate in 2011. Senators Sherrod Brown (D‑OH), Bob Casey (D‑PA), and Claire McCaskill (D‑MO) have established themselves as solid Interventionists. Brown and Casey are among the most devout protectionists in Congress today.

The votes database suggests the hypothesis that giving lip service to free trade while advocating protectionism to boost manufacturing is a middle-of-the-road position for swing state voters that candidates are wise to adopt. But it also says that free trade can win elections in Ohio and Pennsylvania.

The trade votes database offers data to answer many compelling questions on trade policy positions. Three of the four names on the Republican and Democratic tickets have served in Congress—do their records on free trade match with their current positions? How have senators and representatives voted on China trade issues in the past? What issues does your representative think are more important than free trade? Take a look.

The Washington Post was channeling the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies in this morning’s succinct and insightful editorial about the foolishness of taxing imports of Chinese solar panels.

The editorial picks up a few of the themes and draws very similar policy conclusions to those we have been advocating for many years and, without stating it explicitly, presents a compelling case for major reform, if not repeal, of the trade remedies laws.

For context, last week the U.S. Commerce Department published the final rates of duty calculated in both antidumping and countervailing duty (anti-subsidy) investigations of imports of Chinese solar panels, which were initiated in October 2011. (Here are some earlier thoughts on the matter.)

Formal antidumping and countervailing duty orders will take effect, probably, next month following a final determination by the U.S. International Trade Commission that the U.S. solar panel industry has been materially injured by these Chinese imports.

The thrust of the editorial is that the antidumping and countervailing duties, which are “calculated” by Commerce using an absurdly inaccurate, punitive methodology, will hurt other U.S. companies that are downstream and upstream of the solar panel producers in the production supply chain.

Noting the transnational nature of solar panel production, the editorial states:

U.S. firms that export polysilicon, a key material in the panels’ manufacture, or machinery to Chinese solar-panel makers could lose – if not because of the direct influence of the tariffs themselves, then because of the Chinese government’s likely reaction. Analysts worry that the Chinese will retaliate by slapping duties on U.S. polysilicon. Also at risk is the U.S. solar installation business, which has thrived during this period of low-cost panels.

This is one of the critical defects of the AD/CVD regime. It focuses like a laser on assisting industries seeking protection from competition while systematically—indeed statutorily—ignoring the adverse impacts of that “assistance” on downstream U.S. industries. (Bastiat points out that people tend to err by focusing on what is immediately seen, while failing to consider the ripple effects of actions that are less readily observed; U.S. trade remedy law demands that we commit that error!)

Much more often than not (80% of AD measures in the last decade), the foreign product subject to duties is an intermediate good required by downstream U.S. industries. And these downstream firms—the overwhelming victims of AD/CVD duties—have no legal standing in the proceedings that lead to the imposition of duties that raise their costs of production and drive them offshore or out of business. Under the statutes, the U.S. International Trade Commission is forbidden from considering the likely impact on downstream firms. In this age of globalized production and transnational supply chains, nothing could be more absurd.

About the so-called non-market economy methodology used to calculate margins of dumping and, ultimately, duty rates in Chinese (and Vietnamese) antidumping cases, the editorial asks:

But how much should a Chinese-made solar panel cost? The answer isn’t obvious. Commerce’s estimating methods—using Thailand’s economy as a surrogate for China’s—don’t inspire confidence.

These Cato papers (here and here) provide the dirty details of the capriciousness inherent in NME antidumping methodology. This brand new Cato analysis from Scott Lincicome, which documents—among other things—the global green energy subsidies race, explains how the U.S. countervailing duty law does not redress foreign subsidization, but rather punishes U.S. consuming industries and end-users. Getting tough on China means America’s wealth and jobs creators take it on the chin.

In closing, the editorial states:

And if the Chinese want to subsidize U.S. solar-panel buyers for the time being, there’s a good case to let them.

This is just another example of the administration’s policies working at cross purposes. To the fanfare of the Sierra Club and other environmental groups, President Obama has rhetorically championed the idea of greening our energy consumption profile. Of course, one of the biggest obstacles to that goal has been that the costs don’t justify the benefits. Hasn’t Chinese dumping and subsidization helped to reduce that obstacle? And aren’t duties on Chinese solar panels anathema to that goal?

Duties on solar panels, wind towers, and presidential interventions to block foreign investments in U.S. wind farms suggest that industrial policy—and not environmental policy—explains the president’s interest in green energy.

Recognizing in an editorial that duties imposed to benefit one industry or one firm (as is often the case with trade remedies measures) cause collateral damage to other industries is a laudable development for the Washington Post. We look forward to the follow-up editorial calling for explicit repeal of the self-flagellating U.S. antidumping law.

A Wall Street Journal editorial this morning points out that Indiana Republican Senatorial candidate Richard Mourdock is getting pounded by his Democratic rival for having opposed the Chrysler bailout.

Mourdock opposed the bailout on principle, but at that time he was also the Indiana state treasurer and fiduciary for several state pension funds, including two holding the retirement resources of Indiana police officers and school teachers, which owned about $42 million dollars of “secured” Chrysler debt in 2009. When Mourdock rejected the administration’s offer of $0.29 for each dollar of debt held, his position was publicly excoriated by President Obama as greedy, unpatriotic, and reflecting and unwillingness to “sacrifice for the greater good.” There’s much more to this story.

If you are interested in a first hand account of the strong-arm tactics, threats, and intimidation employed by the White House to get its own Chrysler bankruptcy plan rubber stamped through the process in 2009, you will want to see this video of Mourdock speaking at a Cato event. It is truthful and chilling.

A recent op-ed in the Wall Street Journal describes what happens in an industry that suffers from a plethora of subsidies and a dearth of free markets. Water experts Peter Culp and Robert Glennon write:

In 2012, the drought-stricken Western United States will ship more than 50 billion gallons of water to China. This water will leave the country embedded in alfalfa–most of it grown in California–and is destined to feed Chinese cows. The strange situation illustrates what is wrong about how we think, or rather don’t think, about water policy in the U.S.

You can read about the historical background to this “strange situation” in an essay I co-authored with Peter Hill. Basically, irrigation water in the Western states is heavily subsidized and–unlike most commodities–is not easily traded in open markets. The result is a great deal of waste, economic inefficiency, and negative environmental consequences.

Here is some of Culp and Glennon’s discussion of the perverse results of big government water policies. (Keep in mind that “water rights” for farmers has come to mean “rights” to hugely subsidized water).

Alfalfa is a water-guzzling crop and the water embedded in the alfalfa that the U.S. will export to China in 2012 is enough to supply the annual needs of roughly 500,000 families.

Southern California’s Imperial Irrigation District gets its water from the Colorado River, 82 miles to the east. Alfalfa farmers in the district use as much as 50% more water than growers in other areas of the state due to scorching heat, salty soil and, perhaps most important, their legal rights to an enormous quantity of cheap water. This single irrigation district controls more than 20% of the total annual flow of the Colorado River. Remarkably, the district’s water rights are 10 times higher than that of the entire state of Nevada.

The perversity of a situation in which California taxpayers must spend tens of billions to protect the water supplies of vital farms and cities even as California farmers convert tens of thousands of irrigated acres to feed cows in China reflects the growing incoherence of domestic water and agricultural policy. Antiquated Western water laws often block intrastate or interstate water transfers that could satisfy changing domestic urban, agricultural and environmental needs.

In many Western states, moreover, farmers who conserve water by modernizing their irrigation systems don’t get to use, lease or sell the water they save … Even when a transfer is possible, complicated regulatory procedures mean that final approvals can take years. Interstate transfers typically fare even worse.

Perhaps I shouldn’t take campaign promises too seriously. But candidates say things, and my natural reaction is to assume they mean them. I have been proved wrong before, and perhaps I’m falling into the same old trap, but I’m going to assume Governor Romney means at least a little of what he said on trade in last night’s debate.

Based on what he said, I’m going to talk briefly about what a President Romney would (might?) do on trade. Let me focus on two issues: Trade with Latin America, and China’s alleged currency manipulation.

Trade with Latin America

Last night, Governor Romney said:

I’m also going to dramatically expand trade in Latin America. It’s been growing about 12 percent per year over a long period of time. I want to add more free trade agreements so we have more trade.

This all sounds great. He is saying positive things about free trade. Excellent. But what does he mean?

Latin America runs from Mexico down to Argentina. So far, we have trade agreements with: Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Peru. So who’s left? Venezuela is obviously not a great candidate. And Argentina isn’t either — they’ve been quite protectionist and inward-looking recently. So what major trading partners are we talking about? Brazil is the most obvious one. But U.S.-Brazil trade frictions are said to have played a big part in killing the proposed Free Trade Area of the Americas in the 1990s, and those frictions are still pretty high today, with, among other things, Brazil complaining about U.S. monetary policy driving down the value of our currency (see below for more on currency issues).

I’m all for free trade with Latin America, and I’m happy to hear Romney supporting it. But in practice, it’s not clear how much can be achieved.

China’s Alleged Currency Manipulation

This issue has been discussed ad nauseam already, but let me make a quick political point. Here’s what Romney said last night:

China has been a currency manipulator for years and years and years. And the president has a regular opportunity to — to label them as a — as a currency manipulator but refuses to do so. On day one, I will label China a currency manipulator, which will allow me as president to be able to put in place, if necessary, tariffs where I believe that they are taking unfair advantage of our manufacturers.

My colleague Dan Ikenson explains here why Romney shouldn’t follow through with this, and I agree. But what I want to focus on is what he will do, because, as is probably obvious, politicians don’t always do what they should!

It seems to me that Romney has dug in pretty deeply on the issue of labeling China a currency manipulator. I can’t see how he can step back from that without some major embarrassment. As a result, I think that, if elected, he will do something on day one that can be characterized as “labeling China a currency manipulator”. (He has mentioned an executive order, but it’s more complicated than that, as the Secretary of Treasury needs to be involved, too). But the dirty little secret here is that labeling China a currency manipulator just triggers consultations on the issue. Which is why, actually, I think Romney is pushing this — he knows it doesn’t mean much.

But then you’ve got the issue of imposing tariffs on China as a response, presumably by instructing the Department of Commerce to change its method of calculating countervailing duties, so as to provide for extra duties on Chinese goods based on the currency practices. This would be a more serious action (and would probably violate WTO rules), one that would have a direct impact on prices of Chinese imports (it would raise them!).

But look at the language Romney uses here. He says he will do this “if necessary”. Here, then, he leaves himself wiggle room. He can take some time to negotiate with China, study the issue, and ultimately decide that the tariffs are unnecessary.

For whatever that’s worth, which may not be much, that’s my guess as to how the Romney team is thinking about this issue.

More than anything else, Mitt Romney’s zealous determination to pin a scarlett “CM” on the Chinese government’s lapel has defined his trade platform. And that draws an unfavorable contrast for Romney, since President Obama’s repeated decisions not to label China a currency manipulator make him look the more cautious, circumspect, risk-averse business executive that Romney portrays himself to be.

In any event, the currency issue is very much last decade’s battle. By continuously harping about it, Governor Romney evokes tales of old Japanese soldiers, left behind on South Pacific islands, still fighting WWII well into the 1960s.

As I noted in this piece on Forbes yesterday, if Romney is elected he will have to renege on this silly commitment (substantively, at least), and change focus:

If Mitt Romney believes in “free trade,” his focus with respect to China should be on correcting that government’s failures to honor all of its commitments to liberalize and on the misguided efforts by U.S. policymakers to thwart legitimate commerce between Chinese exporters and American consumers.