Aussie Business Rallies for Investment Arbitration

In 2011, the Australian government of Prime Minister Julia Gillard announced a new policy on international investment treaties: its future agreements would not permit investor-state arbitration.
The government has since concluded the Australia-Malaysia Free Trade Agreement, which provides only for dispute resolution between the two states, leaving investors to head to national courts or seek diplomatic protection for their disputes. Australia also has included a reservation to the arbitration provisions of the draft Trans-Pacific Partnership Agreement. (previous post) However, the new position has been a sticking point in attempts to conclude trade agreements with Korea and Japan, as both countries preferred to provide for investor-state arbitration in a neutral third state. 
Australia’s anti-arbitration policy is thought to be in part a reaction to finding itself threatened for the first time with a claim by a foreign investor.
The government released the policy statement shortly after publishing a bill that would require smokeable tobacco products to be sold in greenish brown packs with graphic health warnings and no branding (photo below right, credit).
Philip Morris’s Asian arm threatened to sue if the bill became law. It ultimately made good on that threat, filing an arbitration claim for expropriation of its trademarks and investment mere hours after the Tobacco Plain Packaging Act was passed in November.
It is not terribly surprising that Australia would take an unfavorable position toward investor-state arbitration, since it imports more capital than it exports. It therefore has, in theory, a high probability of being on the receiving end of an investment claim relative to the expected benefits to its nationals of being able to bring claims against other states.
The Australian Chamber of Commerce and Industry, other business groups, and trade law experts yesterday announced a public campaign advocating for a return to Australia’s former policy of including investor-state arbitration in its treaties.
In July, the group had sent a letter to the Prime Minister contesting what it called the government's

'flawed approach which reduces security for Australian firms seeking to invest internationally.'

The letter argued that, at the same time, the new policy "provides no reduction in Australian Government exposure to liability due to the pre-existing exposure from previously negotiated investment treaties.”
In reality, the policy change seems unlikely to have much impact on either inbound our outbound Australian investment.

Look on! In Guatemala, Mountains Tremble

(Part 1 of a 2-part Look On! series of posts; Part 2 is here.)

When the Mountains Tremble (1983) is an incredible documentary.
It tells the story of state repression, under the leadership of General Efraín Ríos Montt, of indigenous populations in Guatemala during the 1980s. The filmmaker is Pamela Yates (bottom right) of Skylight Pictures, an IntLawGrrls contributor.

(credit)

Narrating this documentary about the war on Guatemala's Mayan population is Rigoberta Menchú (left). Then in her early 20s, Menchú would go on to win the Nobel Peace Prize in 1992.
Mountains bravely uncovers the role of the United States in facilitating, for its own trade purposes, military rule in Guatemala. Liberal capitalism and free trade promoted by the United States, the film tells us, led to the dispossession of local populations. Footage from both Guatemalan and US television is presented – including a statement of then-President Ronald Reagan, in which he calls on businesses to

'be bold and spread American enterprise throughout the hemisphere'.

Beyond asserting US responsibility in providing finance and weapons to the Guatemalan military, Mountains also looks at the complicity of religious organizations in a massacre. Following repression of some priests within the Catholic Church, evangelical groups from the US began to arrive.

(credit)

Throughout the story, we witness the organization of el pueblo guatemalteco, the people of Guatemala. It is these people who star in this film, risking their lives to tell the stories of repression and mass human rights violations. We see training exercises of the guerrillas, the activism of young men and young women who wish to protect their people and who strive for equality.
This powerful documentary, exploring the multifaceted factors which lead to genocide and human rights violations, currently can be viewed free online at PBS here. 
In my post tomorrow, I'll review Yates' 2011 sequel to this film – another documentary, entitled Granito.

(Cross-posted at Human Rights Film Diary blog)

G-20 2012 on Trade

(credit)

The Declaration issued at the conclusion of the G-20 Summit on June 19 has reiterated the commitment of the world’s largest twenty economies to free trade and open markets. At least in words, the leaders have pledged to avoid taking actions that have the goal of protecting their national economies at the expense of free and global trade.
The Group of Twenty, or G-20, comprises the finance ministers and central bank governors of 19 countries and of the European Union, who have met annually since 1999 to promote dialogue between industrialized and emerging-market countries. The G-20 summits of the Heads of State began in 2008 in response to the financial crisis. The focus of G-20 discussions on trade issues is how members can best structure policy to contribute to restoring global economic health and financial stability. At this year's summit in Los Cabos, Mexico, the leaders again committed to avoid protectionism and to pursue continued negotiations at the World Trade Organization.

On Protectionism

Always a threat, the risk of protectionism increases during periods of economic and financial crisis, such as the one into which the world has been thrown since 2008.
Protectionist measures are actions taken by a government to artificially increase the competitiveness of its products. Tariffs or import duties are the most obvious and used method. For example, to aid the ailing U.S. car industry, one tool available to the U.S. Government would have been to place a duty on all cars being imported into the U.S. market. A sufficiently high duty would have made imported cars so expensive that it would have deterred all but the wealthiest of Americans from buying them. Presumably, then, U.S. consumers would have increasingly turned to American-made cars simply because they would have been cheaper than any imported cars. However, taking this course of action would have placed the United States in violation of its mandatory commitments as a WTO member and of its voluntary commitments made at previous G-20 summits.
Economists agree that it was the use of tariffs and other such trade protectionist measures that worsened and prolonged the Great Depression of the 1930s. In our globalized economy, any efforts taken by one country to protect its companies at the expense of others threatens to further curtail economic growth.
 Mindful of this history, governments have been remarkably consistent in avoiding the use of protectionist tools.
As the crisis continues, spreads, and deepens, however, monitors are reporting the increased use of tariffs and other less transparent measures:

► Global Trade Alert, a monitoring service based in Europe, has reported that trade protectionism is “alive and well”.
► At the request of the G-20, the WTO has also begun issuing a Trade Monitoring Report.

Peek at Proposed Pan-Pacific Protection Pact

A draft of a groundbreaking trade and investment treaty under negotiation was leaked last week, revealing a text with significantly greater express affirmation of states’ discretion to regulate to address public welfare and environmental concerns than previous generations of investment treaties. If concluded, the agreement will create the Trans-Pacific Partnership, the largest free trade area in the world, linking 11 nations on four continents flanking the planet’s vastest ocean.
The leak of the investment protection chapter of the draft agreement inevitably sparked protests from anti-globalization groups. Those groups, and other critics of the investment protection regime, overstate (to varying degrees) the scope and rigidity of traditional investment treaty standards, construing them as incompatible with environmental law, human rights protection, and public welfare regulation. In reality, even without express acknowledgements such as those in the draft and recent investment treaties, traditional foreign investor protections give states ample regulatory leeway. Even so, the draft treaty takes the further step of expressly confirming that investment should be protected and encouraged with due regard to other public interest considerations. It also addresses concerns that have been raised about the transparency and openness of investor-state dispute resolution. A few examples:
► The prohibition on requiring foreign investors to meet performance requirements does not preclude a state from imposing measures to secure compliance with domestic environmental laws, to protect life or health of people or animals, or to conserve exhaustible natural resources.
► The treaty’s regulation (not prohibition) of expropriation may not be construed to prevent a state from taking measures to ensure investments conform to environmental, health, safety, and labor concerns. In addition, “[t]he Parties recognize that it is inappropriate to encourage investment by relaxing health safety or environmental measures.”
► To enhance the openness of investor-state arbitrations, extensive provision is made for amicus curiae submissions.
► To improve transparency, the treaty imposes detailed requirements on the parties and the tribunal in investment arbitrations to publicize all aspects of the proceedings, including not only awards (which already are almost universally published), but also the parties’ written submissions and hearings.


(Photo credit: Office of the United States Trade Representative)

On December 11

On this day in ...
... 2001 (10 years ago today), following what CNN called "15 years of diplomatic struggle," the People's Republic of China became a member state of the World Trade Organization. Preceding the accession were negotiations aimed at assuring, to the United States and Europe in particular, that China would "open its economy to international competition." But a report Congress released just last month asserted that China had not done enough in that regard -- even as China launched a WTO-linked investigation into the U.S. renewable energy sector.

(Prior December 11 posts are here, here, here, and here.)

Guatemala Battles Disaster on Two Fronts

On Saturday, May 29 Tropical Storm Agatha--the first of the 2010 Pacific storm season--hit Guatemala. So far, Agatha has killed about 100 people and opened a sinkhole in Guatemala City large enough to swallow a three-story building (photo credit). As if that wasn't enough, the Pacaya volcano, situated just 15 miles south of Guatemala City, erupted on Thursday afternoon, spewing lava and rocks and flooding the capital with sand and ash. The airport closed, a television reporter was killed by a shower of burning rocks, and the President called for calm as thousands fled their homes in search of safety. I actually felt the tremor as I was teaching on Thursday afternoon, but having lived in Northern California for almost a decade, I thought nothing of it. I continued teaching with hardly a pause.

But now that we know the extent of the devastation, it is impossible not to weep with the Guatemalan people. The death toll on these twin disasters is still climbing, and no one yet knows the price tag on rebuilding the 800 or so homes destroyed and otherwise giving aid to the victims. A country that was already facing unbelievable odds now must face one more: recovering from the one-two punch of Agatha and Pacaya.

In a horrible twist, our students in the McGeorge InterAmerican Program found themselves in the midst of the crisis. They had been on a field trip with their professor--my colleague Raquel Aldana. With the rains came mudslides that closed the roadways and effectively trapped the McGeorge group where they were for a couple of days. Raquel courageously shepherded our students to safety and kept everyone calm. They are now safe and well having lived through an experience they will never forget.

Throughout the crisis McGeorge has been incredibly supportive, as have friends, colleagues and family. How lucky we are--those of us with money, a U.S. passport, and friends and loved ones. We have the luxury of knowing we always have an exit strategy. So many here in Guatemala are not quite so lucky.

I'll be teaching class again for the first time tomorrow. It is difficult to imagine discussing the finer points of GATT Article I's non-discrimination provision; but I also realize my work here is very relevant. I don't have to convince these students of the need for every country to have a basic level of wealth and development to care for their people in times of crisis. My students have faced the problem head on. And they have been changed by it.

Trade & Development in Guatemala

I am in Guatemala for the next few weeks teaching a course on trade and development in Latin America (no, not in Spanish). The students are both Guatemalan and American, and as I prepare for my first day, I'm struck by the different experiences they surely have encountered around trade. For centuries, Guatemalan trade was exploited by and for the Spanish outsiders. Even after independence, much of it continues to be exploited for the benefit of the few. Americans, however, have a history rich in the spoils of international trade. Free trade has served us bountifully and well. Those of you who have been reading my posts for awhile know that I am "pro" trade. I believe in the power of trade to bring not just economic benefits but true freedom to the masses. But it is impossible to be a student of economic history and ignore the uneven benefits trade has brought -- particularly in a country like Guatemala.

Guatemala is a country rich in many things. The Mayan culture is alive and thriving, providing a doorway into the language, history and religious practice of these early Americans. It is blessed with good weather, wonderful food and music, gorgeous vistas and a warm, welcoming population. But Guatemala is not rich in the economic sense of the word. It has the largest economy in Latin America, representing about one third of the population and one quarter of the GDP of the Central American Common Market. But the level of poverty in Guatemala -- and more specifically, the vast stratification in wealth between the haves and the have nots-- is among the highest in Latin America. Simply put, trade has not worked for Guatemala. Well, at least not the way it is supposed to work.

Free trade theory tells us that exchanging goods and services at the international level provides wealth. This wealth must then be effectively redistributed from the government down to the people. What happens when that mechanism fails? Well, free trade tells us that is a "distributional" problem not a trade problem. Trade policy is not the problem, thus it cannot provide a solution (sort of like the idea that "Guns don't kill people. People kill people." So why have gun control?) Of course this distributional problem de-legitimizes trade in the eyes of the vast majority who will never see its benefits. It is thus impossible to come to a place like Guatemala and simply content oneself with the same old answers. But does that mean trade is not good? Does that mean we all close our borders while we strive for the illusive but oh-so-seductive idea of self sufficiency? I think not.

Professor Frank Garcia in his piece Is Free Trade “free?” Is it Even “trade?” Oppression and Consent in Hemispheric Trade Agreements provides an excellent framework for understanding what free trade is -- and more importantly, what it is not.

[T]he essence of free trade ... is consent: trade consists of voluntary mutual bargained-for exchanges of roughly equal value. Three other types of transaction which, while they may look in some ways like free trade, do not in fact meet this definition: theft or predation, which may not be trade at all; coercion; and exploitation, which may be trade in some sense but also introduce other dynamics of concern for normative and pragmatic reasons. Participants in any of these three will see economic value exchange hands, and society may reap some economic benefit, but under conditions involving the absence of either basic consent, or the fullness of consent.

In short, a non-consensual exchange of value is not free trade even when it provides an economic benefit. Trade is inherently a consensual transaction. And though the Spanish conquerors of Guatemala might want to bestow the title of "free trade" on their actions, they cannot do so -- at least not in Garcia's (and my own) world. But I wonder whether in a postcolonial world the definition of free trade should be extended. Is it still free trade when a country's own bottleneck prevents the benefits of trade from accruing to the majority of its population?

In 2009, the World Trade Organization conducted a thorough review of Guatemala's trade policy regime. It gave Guatemala a relatively good bill of health: protection of domestic goods through high tariff walls has decreased -- the average tariff rate went from 7% in 2001 to 5.9 % in 2008, for example. The report has little to say about addressing the distributional problem, however.

My American students will not have had to confront these issues in quite the same way as my Guatemalan students have. For them, one question seems inevitable: Is this really what free trade is all about?

The Vietnam War: Take II

The United States pulled out of an intractable, expensive and highly destructive war in Vietnam in 1975. For decades thereafter, relations between the two countries was nonexistent. But then ever so slowly came the thawing. Trade was a big part of The Great Thaw. Since time immemorial, whether the war involved companies or countries, real peace came only after the warring parties had established strong and deep trade ties between them. Trade has a way of creating new relationships and new memories.

Such has been the experience of Vietnam and the United States. Despite the bitter memories of mass bombings and torture cells deep in the jungle, the two countries forged a path to peace. In 2007, Vietnam joined the World Trade Organization with the aid and support of the United States. Vietnam's accession signaled the renewal of its ties with the international community. But just as important, it signaled a new relationship with the United States. The bonds of that new relationship are now being tested. Just a few weeks ago, Vietnam filed its first ever dispute in the WTO. Against whom? The United States.

In United States — Anti-dumping Measures on Certain Shrimp from Viet Nam (DS404), the two countries once again face off on some heated issues. The U.S. believes Vietnam is "dumping" large quantities of shrimp into the U.S. market. In trade law, dumping occurs when the exporting country sells its products into the domestic market either for less than the cost of production or less than the price sold at home. It is an unfair trade practice, and most countries have laws against such a practice. Vietnam, however, takes issue with the way the United States has calculated the so-called "dumping margin" -- an additional charge the U.S. imposes on Vietnamese shrimp to raise the price to more accurately reflect its normal value (i.e., it's "fair price"). The U.S. dumping methodology has long been under attack, indeed the WTO previously ruled the complicated "zeroing" method in dispute violated U.S. WTO obligations.

In this war, as in the last, Vietnam is likely to win an unexpected victory. What will this mean for relations between the two countries? Thankfully, in a sign of how far we have come since 1975, it is likely to have no effect. Trade = Peace

Times They Are A Changing: Developing Countries in the WTO

A few weeks ago, I strode into my law school classroom brimming with hope and optimism. "Brazil is about to retaliate against a U.S. trade measure!" I excitedly reported to my students. Luckily, this was a class on trade and development law, and so my students were equally struck by the news (it wouldn't have gone over so well in say . . . my contracts class!) Brazil poised to retaliate against the United States for an unfair trade action? Unheard of.

As Harvard Professor Robert Z. Lawrence notes, “Traditionally, retaliation in trade has been the preserve of the largest developed countries, which have market power.” To put it bluntly, there has always been an unspoken rule of trade law: Only rich countries get to retaliate against another's violation of trade rules. "Retaliation" in trade parlance simply means that one country receives approval from the WTO to take countermeasures against another for violation of the rules. The most common countermeasure is for the prevailing country to impose more duties on the exports of the losing country. But retaliation comes at some cost for poor countries--either economic or political.

For developing countries who desperately need the exports of more advanced countries, raising duties on these products simply punishes their own citizens who are forced to pay more for the goods (or risk not having them). Moreover, rich countries have an array of subtle and not-so-subtle means of coercion at their disposal to prevent developing countries from raising trade claims in the first place. Much of North-South trade is characterized by "voluntary" concessions--namely, rich countries provide poor ones preferential access to their markets on a non-reciprocal and voluntary basis. One example of this is the U.S.-created African Growth and Opportunity Act (AGOA), which allows duty-free and quota-free imports of some African goods into the U.S. market. But what would happen if Uganda, which is AGOA-certified, were to successfully raise a claim against the U.S. in the WTO? There goes its AGOA benefits. It is perhaps not surprising under the circumstances that no African country has raised a dispute in the WTO.

Developing countries have long faced the frustrating dilemma of a right without a remedy in trade disputes. But suddenly, things are changing. In 2002, Brazil successfully brought action in the WTO against U.S. subsidies to its cotton industry, which averaged $4.9 billion per year. After various appeals, Brazil was finally authorized by the WTO to retaliate against the United States to the tune of $830 million. Perhaps more importantly, Brazil threatened (with WTO support) to suspend intellectual property protection on things like U.S.-manufactured seeds and pharmaceuticals. Suddenly, Washington was taking note.

Just this week, Brazil and the United States announced a settlement of their now eight year old dispute. Brazil will postpone retaliation, and the United States in turn will modify its cotton subsidy program and establish a temporary assistance fund for the Brazilian cotton industry. Brazil's success has demonstrated that the trade rules are not exclusively the purview of the largest developed countries.

My students and I can only wonder what this will mean for the future of world trade.

Will Aid be the Death of Haiti?

"We should be helping Haitian companies instead of companies in Florida"

-- Alex Zamor, owner of a drinking-water factory in Port-au-Prince, Haiti

Ilia Alsene is a Haitian merchant who supports herself by selling food, water and other tidbits on the side of the road near Champ des Mars Plaza in Port-au-Prince, Haiti. The life of a street merchant in Haiti is difficult by any measure.

Obtaining supplies can be a challenge, which is why the women's (and men's) rickety tables often will sport just a few items: a handful of bags of peanuts, three bottles of soda, some purified water encased in plastic bags. Getting pedestrians to stop and shop can be a challenge. The narrow streets of Port-au-Prince are packed with cars weaving around traffic and potholes and other obstructions, children walking to and from school, stray dogs, and the occasional chicken. Enticing a would-be shopper in the midst of all that frenetic energy is not easy. But the greatest challenge for a merchant by far is managing to come home with enough goud to feed the family and purchase the next day's supplies.

After the January 12 earthquake, Ilia and merchants just like her must face one additional challenge: How to compete with the food aid being distributed for free? No one denies the critical necessity of getting food, water and other basics to Haiti's devastated populace. But one of the foreseeable consequences of shipping in thousands of tons of foodstuffs purchased from abroad is that Haitian businesses are being squeezed out of their own market. "I have fewer customers now," says Ilia "because they are handing out free food down the street."

If this were the story of just one merchant or even a handful, the cost-benefit analysis would suggest we do nothing. But Ilia is a key player in the Haitian economy. Frederic Madsen, CEO of Haiti's largest beverage company, makes the case for helping women like Ilia: "When women like that don't make enough money, they stop buying my products," Madsen says. "They are the backbone of this economy." Alex Zamor, owner of a drinking-water factory, cannot afford to rehire 200 workers who were on his payroll before the quake because sales of his product are down ". . . nobody wants to buy water if there's free water on the streets," he says.

The challenge facing Ilia, Frederic Madsen and Alex Zamor is neither unforeseen nor maliciously created. The relief agencies that went into Haiti just days after the quake faced a difficult task; it would have been made insurmountable if the supplies they needed could only be sourced in Haiti. For one, Haiti did not have the capacity necessary even before the January 12th earthquake. Plus, Haitian businesses suffer from real or perceived problems of quality and ineptitude. In short, many are simply unwilling to deal with local suppliers.

Without a well-orchestrated campaign to place Haitian businesses at the center of the rebuilding effort, Haiti's post-quake revitalization will be an abject failure. No country can survive in the long term through the beneficence of others. Foreign aid, no matter how well intentioned, will not create a meaningful future for Haiti. Jobs are necessary; a robust middle class is necessary; a self-sufficient agricultural sector is necessary. None of that comes about through foreign aid. In her hard-hitting New York Times Bestseller Dead Aid, Zambian-born Dambisa Moyo makes the case that foreign aid creates learned dependency rather than prosperity. We have decades of empirical evidence suggesting she is right. Moreover, it separates a government from its constituency. What hope can Haitian voices have of influencing government policy when actors in Europe and America hold the purse strings?

So, what are we to do? Those in charge of the rebuilding effort make noises about understanding the problem, but the solutions are too complex and nuanced to rely on a handful of "experts". Organizations like Peace Dividend Trust, a Canadian NGO, is doing an invaluable job by making this issue more visible. PDT has started a "Haiti First" campaign urging aid agencies to buy goods and services from Haitian suppliers whenever possible. "A 'Haiti First' approach can help turn a tragedy into an opportunity by driving millions if not billions of new investment into the Haitian economy."

We too must do our part when we contribute to Haitian relief. Just last night, for example, I was invited to keynote at a benefit concert for Haiti. It was an inspiring event that moved me beyond description at the capacity of humans to join with each other in moments of crisis. But at the end of the concert, our host mentioned he had enlisted the help of a friend who owned an auto dealership to send trucks to Haiti.

But Haiti has auto dealerships. How much more effective would that money be if it were spent on Haitian soil? The Haitian auto dealer could pay her employees, and those employees in turn could feed their children with the food Ilia sells from her street corner in Port-au-Prince. That would have a real impact on the Haitian economy.

On October 2

On this day in ...
... 1889 (120 years ago today), the 1st Pan-American Conference opened in Washington, D.C. The conference was a meeting between the United States and various countries in Latin America. U.S. officials had "hoped to reach agreements at the conference to create a customs union for free trade and establish a system for arbitration of international disputes." Their hopes were mostly dashed, in part due to mistrust and in part "due to the embarrassing fact that the Republican-controlled Congress was simultaneously working on legislation to strengthen tariffs." An International Bureau of American Republics, or Pan-American Union, was established to convene future meetings. (credit for 1943 photo of Pan-American Union building, now headquartesr of the Organization of American States)

(Prior October 2 posts are here and here.)

Celebrating Columbus

I've got Christopher Columbus on the brain. Today is officially Columbus Day in the United States, and for the first time in my adult life, I have not made a concerted effort to forget that. For the last six months, I have been immersed in all things Columbus. I am researching the life and times of this man who has had such a profound impact on my life in preparation for writing a book. It has been an emotionally-charged experience.

I remember as a kid sitting in my sixth grade social studies class listening to Mr. Branch teach us about Columbus. Here are some things I learned back then:

• Columbus was a great navigator
• Columbus discovered the world was round
  
• Columbus discovered America
  

It turns out, Mr. Branch was wrong on all counts. But, at the time, I absorbed and regurgitated the information without a thought. In fact, Columbus was a popular figure in my elementary school. We used to sing songs about him on the playground. I'm serious! ("In fourteen-hundred-and-ninety-two, Columbus sailed the ocean blue . . .")

In my college years, Columbus suddenly shifted from a benign and heroic figure to a rapist, colonizing madman. He killed the Indians (of course, he erroneously named them "Indians"). He massacred their culture and replaced it with Spanish imperialism. He paved the way for slavery in the New World.

In the third phase of my reintroduction to Columbus, I find myself falling somewhere in between the naivetee of my childhood and the militancy of my early adult years. It turn out everything I ever learned about Columbus was only a half truth. Columbus was not a great navigator. In fact, he was wrong in his calculations most of the time. He was a visionary, but the careful, meticulous work of navigation often proved too tedious for him. Columbus certainly did not discover that the world was round. Early Greek philosophers and scientists had already theorized the world was round--and they even had the mathematical equations to prove it. By the time Columbus was traipsing through Europe in search of a benefactor for his expedition, every self-respecting, educated person knew the world was not flat. And Columbus did not discover America. Credible evidence exists to show the Vikings found and left America long before Columbus. Even more spectacular, Dr. Ivan Van Sertima made the case for a pre-Columbian African presence in America in his ground breaking work They Came Before Columbus.

But none of those facts can change the transformational nature of Columbus' voyages. He changed the course of human history in a way no one else before him had ever done. For a trade scholar like me, it is indisputable that modern trade history began with Columbus. In his search for a western route to India and China, he reconstructed the modern trading system in a way that continues to resonate to this day. It's impact can still be felt all over Europe, Africa, Asia and the Americas. As a Haitian-born "West Indian" woman, I certainly continue to feel the impact of Columbus' voyages in my own life (I have written a series of essays on the point, which can be found here.)

In the face of all that, I find it impossible to not at least acknowledge this day. Happy (?) Columbus Day.

Bhagwati Defends Globalization

These days, it is difficult to find an unadulterated defense of globalization. Given the state of our credit markets, it is perhaps not surprising. When you realize the current global economic crisis can be traced directly back to the greed of a few U.S.-based mortgage-backed lending institutions, it is difficult to mount a wholehearted defense of the all-for-one-and-one-for-all mentality of globalization. But the maverick Jagdish Bhagwati (right), famed economist and professor at Columbia University, does exactly that. In a recent interview entitled "Why the Critics of Globalization are Wrong", Bhagwati had this to say to protesters and naysayers:

Globalization is the target of many critics today. The young see it as a malign force in regard to social agendas. The workers see it as a pernicious force in regard to their economic well-being. But both sets of fears, and resulting opposition to (economic) globalization, especially via trade and multinationals, are mistaken.

Mistaken? Strong words in the face of this current economic crisis. But Bhagwati is adament that on balance, trade has been good not only for the rich but also for the poor. He argues that the global movement for gender parity, for example, owes much to the fact that "industries competing in the world economy face fierce competition and cannot afford to indulge their prejudice against women." As companies compete for labor in order to meet export demand, they are forced to offer women the same (or similar) wages and benefits to attract strong talent. Thus, the economic impact of globalization filters into a nation's social consciousness.
Bhagwati could not resist taking a jab at his equally famous colleague, the Nobel Prize-winning economist Joseph Stiglitz, whom Diane metioned in a post yesterday. Stiglitiz has claimed free trade provides little benefit to developing countries, an assertion Bhagwati dismisses as "nonsense."
Strong words for tough times.

The Return of Austan Goolsbee

Last February, University of Chicago Economics Professor Austan Goolsbee got caught in the cross-fire of the Democratic primaries as Clinton and Obama ran as far as they could from NAFTA and other free trade agreements. Just a few days after Obama declared in a national debate he would "renegotiate NAFTA," Goolsbee, an Obama policy advisor, allegedly told the Canadians Obama's words were “more reflective of political maneuvering than policy.” (I wrote about it here). After that, Goolsbee receded from the limelight, and Obama appointed a new economic adviser, Jason Furman. But now, Goolsbee is back. He recently appeared on Fox TV and Charlie Ross, and he authored an op-ed in the Wall Street Journal defending Obama's tax policies.

I can't help but wonder (and hope) whether Goolsbee's re-emergence signals trade will once again take center stage in the 2008 election? And if so, will Obama's shift towards the middle continue (I wrote about Obama's "backtracking" on trade policy here)? I certainly hope so. In a recent interview, Goolsbee's had this to say on the question of why trade seems to have taken a back seat lately:

Q: Why has the campaign gone quiet on trade issues?

A: The biggest issue by far is taxes, alternative energy, health care and then if there's a fourth, it's probably issues with housing, the credit crunch and how to get the economy moving again. You might be putting excess importance on just trade. It's falling into the Republican trap to say that this involves trade agreements. It is more critical for us to address our fundamentals than arguing about whether we should sign a free trade agreement with Panama. That is an issue of symbolic importance.

As for whether Obama's views on NAFTA were moving toward the middle, Goolsbee seems to have learned his lesson well--the response was much more equivocal:

Q: Why does Obama want to amend NAFTA?

A: NAFTA's many things. It's a thousand pages long, it's riddled with loopholes. There are parts of it that are good. So his view from the outset is not that we should abolish NAFTA but that we should put environmental and labor agreements into the core of the agreement. NAFTA is not a state-of-the-art treaty. The most vocal proponents vastly overstated what it would do … rebuild manufacturing in the U.S., reduce illegal Immigration. If you're not going to open up the dialogue to all sides and take into account the people left out, you're not going to do any favors to the cause of open markets.

It seems reports of Obama's pro-NAFTA transformation (or at least rescission of his anti-NAFTA stance) have been greatly exaggerated?

Can Free Trade End Islamic Terrorism?

Does U.S. trade policy encourage Islamic terrorism? Edward Gresser, Director of the Progressive Policy Institute, suggests so. Muslim countries are left out of globalization's reach, Gresser maintains. U.S. trade policy should be used to bring these marginalized countries into the global family so as to more aggressively stamp out Islamic terrorism:

Our tariff regime puts many nations in the Middle East, whose young people are susceptible to the sirens of Islamic fundamentalism, at an unintended disadvantage. This works against our efforts to stamp out jihadism.

Grasser points out that most of the 57 Muslim countries participating in the world economy are experiencing something of a "de-globalization": Since 1980, the population of the Middle East has jumped from 175 million to 300 million, while that of Muslim south and central Asia has gone from 225 million to 360 million. But the Muslim world's share of global trade has contracted by 75% in a generation. The result? "A quarter of a billion young people are fighting for opportunities no more extensive than those their parents had in the 1970s."

Grasser's figures are stark and depressing, but he maintains the problem is easily fixed. All we need to do is create more preference programs for the Middle East--programs along the lines of the African Growth and Opportunity Act, or the myriad free trade arrangements with Latin America and the Caribbean.

While I am an optimist about the pacification role free trade can play, I am not sure opening up the world market to more Pakistani bedsheets and sweaters is the answer to the terrorism problem. As many others have noted, poverty alone does not begin to explain terrorism. If it did, we would have far more terrorists than we do now considering the state of many African, Caribbean, Latin American and Asian economies. History has shown us countries left out of the globalization revolution tend to become islands of poverty, isolation and despotic rule . . but not necessarily exporters of global terror (consider North Korea or Myanmar, for example).

Poor Middle Eastern countries experience the same trade challenges faced by poor countries the world over: lack of foreign investment that would allow them to grow export markets, greater tariff barriers in products like textiles and footwear, and difficulties meeting quality standards imposed by American and European regulations. These challenges must be confronted (and I would suggest from a global rather than regional approach), but would that necessarily lead to a reduction in terrorism? It seems unlikely. (photo credit)

Can Assistance “Save” Poor Countries?

Part I of a 2 Part Series

There is no question globalization has created significant riches for some countries; China and India are the two examples that come to mind. Yes, I recognize these successes are rather imperfect: China’s economic rise comes with frightening environmental costs we are just beginning to recognize, and the meteoric rise in India’s stock exchange cannot seem to eliminate the crushing poverty of millions of its citizens. But those consequences are at least in equal parts driven by a country’s own internal decision making as by globalization. In short, globalization produces wealth, and then we as fallible human beings do what we do best: We muck it up.
In this series, I want to move beyond the debate on globalization. Readers of my posts by now recognize I believe globalization comes with costs and benefits that must be adequately managed. Often they are not. The more complex and interesting question to me is whether we can use technical assistance to assist countries currently shut out of the world economy. Can transferring knowledge and providing aid and technology really lead to economic prosperity for poor countries? In other words, can technical assistance “save” developing countries?
Let me be upfront and say I may be somewhat biased; I have worked in technical assistance for almost half of the twelve years I’ve spent focused on international trade law. My interest has primarily been on Africa because I love a good challenge! Like everyone else, I want to believe my work makes a difference in the world. And I have had some measured and incremental successes to prove it. But have I ever seen a poor country rise to economic prominence because of the technical assistance work of another? Well, I’m an optimist so I’d have to say . . . not yet. In this post, I want to examine some of the problems in technical assistance delivery, and in the next explore some potential solutions.
Some claim trade-related technical assistance is a joke. Amy Chua in her book World on Fire recounts the story of the Americans in Mongolia who were sent out to advise the government on building free markets. The consultants were heartened when officials asked for several hardcopies of the voluminous U.S. securities laws—photocopied on only one side of the page. It turns out the Mongolians were not true converts to the U.S. system; they merely wanted to use the documents for scrap to alleviate the government’s chronic paper shortage. A few years back, Matt Bivens published Aboard the Gravy Train: In Kazakhstan, the Farce That Is U.S. Foreign Aid in Harper’s Magazine. Bivens claimed when a local Kazakhstani bureaucrat fancied a technical assistant provider’s red swim trunks, the advisor was forced to strip down and hand them over because angering the Kazahkstani bureaucrat might jeopardize his chance of returning to the bottomless well of USAID renewal contracts.
So, what can we learn from these and other stories of technical assistance failures? Three key points I’d like to make:

(1) Successful technical assistance requires “buy-in” from local officials and other key players
It sounds obvious, but it’s easier said than done. Remember, the money from these projects is coming from some rich country abroad, so for local officials it’s a “can’t lose” opportunity. That doesn’t necessarily mean the project is well-conceived, or that the recipient country is truly willing to implement it. For years I have thought recipient countries should “invest” in technical assistance. If it is something they really want—if they see a benefit in the project—then they should be willing to “pay” for it, either in cash or sweat equity. Few of us appreciate that which is given to us for free.

(2) Beware of the human emotions
Technical assistance providers arrive in the recipient country under a cloud of suspicion. Even as people are smiling and inviting you over to dinner, you can’t help but notice the question carefully hidden in their eyes: What does she want? It is not an illogical question; after all, technical assistance is not truly “free.” Rich countries provide it because they do want something—implementation of more favorable foreign investment laws, for example. And it isn’t as if the recipient country is blind to that reality: One African official characterized technical assistance provided by the World Trade Organization (and funded by rich countries) as “ideological.” In his view, providers came “to tell us what to think, what our positions should be.”
It is impossible to have a successful project unless these emotions are openly acknowledged and handled. The truth is, successful technical assistance is always “win-win.” Rich countries wouldn’t provide the funds if there was nothing in it for them, but recipient countries can work to ensure implementation also serves their interests.

(3) Don’t take your pants off for anyone

Enough said.

What’s Wrong With NAFTA?

Several weeks ago, I noted presidential elections seldom turned on a candidate's trade policy (post). But this campaign is shaping up to be all about trade! One newspaper recently claimed “If there is a sleeper issue with the potential to catapult Barack Obama past Hillary Rodham Clinton in the remaining delegate-rich Rust Belt states, it is the North American Free Trade Agreement . . . ” I wish I could say the debate between Obama and Clinton was a substantive one, but sadly I cannot. In a campaign where the candidates’ policies admittedly are more similar than different, they seem to be drawing distinctions based on who dislikes NAFTA more. Clinton’s now infamous “shame on you, Barack Obama” speech was in response to Obama mailers claiming she once touted NAFTA as “a boon for the U.S. economy.” Despite the fact the agreement was implemented under her husband’s watch (though partly negotiated by the first Pres. Bush), Clinton now questions NAFTA’s benefits and has called for a "time out" on future trade agreements. Obama too has adopted an anti-NAFTA stance; he claims the regional trade agreement was oversold to the American people and that his administration would fix NAFTA. So, how did NAFTA become the political hot potato for the Democratic party? What’s so wrong with NAFTA?
First off, I must admit I generally prefer multilateral arrangements like the WTO Agreement to bilateral or even regional trade agreements (“RTAs”) like NAFTA. RTAs create trade diversion. An example will help illustrate the point: Imagine Belgium is the most efficient producer of chocolate bars, and it has traditionally been the top supplier to the U.S. market. The United States subsequently enters into a trade agreement with Canada, who also produces chocolate bars. Canadian bars are less efficiently produced and therefore more expensive, but under the new trade pact Canada receives a tariff preference not granted to Belgium (as would be required under a multilateral agreement). Once the pact is signed, the lower tariff means Canadian chocolates become cheaper in the U.S. market—not because of increased efficiencies on the part of Canadian producers, but exclusively because of the negotiated preference. So now, U.S. imports of chocolate bars are diverted from Belgium, the efficient producer, to Canada.
The WTO does recognize RTAs, but GATT Article XXIV calls for these regional arrangements to liberalize substantially all trade among members, a requirement that is rarely satisfied in practice; RTA members invariably set up “carve-outs,” or specific goods and services that will not be liberalized (or that will be liberalized very slooow-ly). Moreover, there is a great imbalance in bargaining power when smaller economies negotiate individual agreements with powerful trade players like the United States or the European Union. In my view, the best trade deals—best for the United States, the world economy, and developing countries—are those that arise from the give-and-take of multilateral negotiations. Indeed, U.S. trade policy for a long time disfavored these regional arrangements. When NAFTA was signed in 1994, the United States had only two other bilateral arrangements—with Israel and Canada, neither one of which caused the firestorm of protest NAFTA did. (U.S. policy has now taken a drastic turn in favor of these RTAS, and a confusing array of regional arrangements are concluded seemingly every other day. But I save that discussion for another day.)
Alas, the strong criticism and opposition leveled at NAFTA has little to do with a philosophical debate between multilateral vs. regional trade liberalization. In a word, opponents of NAFTA are primarily concerned with jobs—or job losses to be more precise. Ross Perot once promised NAFTA’s implementation would bring “the giant sucking sound” of good manufacturing jobs leaving the United States in pursuit of lower wages in Mexico. Opposition to NAFTA plays well in states like Ohio that have lost a significant number of such jobs in recent years. But is NAFTA’s reputation as a stinker among Democrats well-deserved? Are Obama and Clinton’s efforts to distance themselves from NAFTA—and to one-up each other on the anti-NAFTA rhetoric—justified?
Understanding that statistics are “lies, lies and damn lies,” it is hard to look exclusively to empirical evidence for an answer. It is a first step, however. The studies I have seen show that NAFTA’s impact on U.S. jobs has been relatively small. One study looked at 10 years of data and concluded NAFTA-related job losses in the United States amounted to an average of 37,000 per year; during the same period, the U.S. economy was creating over 200,000 jobs per month. Another concluded “NAFTA has had relatively small positive effects on the
U.S. economy” (though it has had relatively large positive effects on Mexico). But NAFTA has created adjustment costs—and some argue those costs are disproportionately borne by certain industries and certain groups of Americans.
A report by the well-known Public Citizen (who is unabashedly anti-NAFTA) concluded that NAFTA-related job losses disproportionately affected Latinos. Citing U.S. government statistics, Public Citizen asserts “In 1999, an astounding 47 percent of the total number of workers who received federal assistance under a program for workers certified as having lost jobs as a direct result of NAFTA were Latino.” Apparently, Latinos are disproportionately represented in some of the industries most affected by NAFTA, such as textiles and apparel. But it has proved difficult to measure the specific effects of NAFTA on specific industries. There seems to be some general agreement that in addition to textiles and apparel, the automotive industry has experienced the greatest change in trade flows, which presumably has affected employment in those sectors. Some of those changes are due to events other than NAFTA, however—such as the Mexican devaluation of the peso. Undoubtedly, NAFTA has had both good and bad affects on the U.S. economy (and on Mexico’s economy, for that matter). But the mainstream studies indicate NAFTA’s impact in the United States has been relatively minor because trade with Mexico represents a small portion of U.S. GDP—less than 3 %. While some workers in some sectors have seen significant job losses, NAFTA contains two employment adjustment assistance programs meant to provide retraining to such workers. Of course no politician wants to tell her constituents that their good paying jobs are being exchanged for a social welfare program, but the long-feared “giant sucking sound” of massive job losses has yet to materialize.
What’s wrong with NAFTA? If we are expecting benefits without any burdens, then NAFTA—and the plethora of regional and bilateral agreements we have negotiated since—will prove a disappointment. There are costs to trade. We must determine whether those costs outweigh the benefits. It is too easy to set up NAFTA and free trade as the straw man upon which we heap all of our fears and anxieties, but trade has proved beneficial to the United States time and again. If the Democratic Presidential candidates are truly arguing that NAFTA’s costs outweigh its benefits, they would do well to provide substance and context to their arguments. The chest-thumping I-dislike-NAFTA-more approach does not serve the American people well.