Globalization Archive

Dr. Jagdish Bhagwati Kicks off New Econ Speaker Series

By
Jake Berliner
Published: October 8, 2009

On September 8, 2009, Council on Foreign Relations Senior Fellow for International Economics and Columbia University Economics Professor Jagdish Bhagwati and Globalization Initiative Chair Dr. Robert Shapiro kicked off a new series on the challenges facing the American and global economies. Experts in international economics, Bhagwati and Shapiro discussed the impact of the economic and financial crises on international trade, the changing shape of the global economy, and the future outlook for the trade liberalization agenda. Watch the full video below:

Meeting the Challenges of the 21st Century

By
Simon Rosenberg
Published: October 8, 2009

Demos, a London-based think tank, asked me to contribute a short essay on what it means to be on the center-left today.  It is one of a series of essays running as a part of a new Demos project called Open Left.  You can find the essay, Meeting the Challenges of the 21st Century, and other interesting essays here.

I’m on the left because only the progressive moments in our history, and the progressive leaders who forge them, ensure that prosperity is shared more broadly and our country more prepared to face the future. The last century has seen an ebb and flow between right and left. In America we’ve had three broad periods. The first ran between the two Roosevelts: a battle to lock-down a new reform-minded politics born in the aftermath of economic upheaval in the “progressive era.” It was eventually captured by the Democrats. The second went from FDR to Reagan: an era of Democratic consolidation, which built America’s (still unfinished) social contract. The third began in 1980: a conservative ascendancy that saw its greatest triumphs in 1994 and 2004.

It’s worth remembering that until 2007 the conservative movement had achieved more political and ideological control over my country than at any time since the 1920s. Under President Obama that moment is passing, we hope for good – although battles, such as those being fought over the economy, healthcare, climate changes and immigration as I write, must be won to truly turn back the two-decade march. But the most important question from America’s recent past was – would conservatism mature to provide a credible alternative governing philosophy to replace 20th century progressivism? The Bush era answered that question. The answer is no. It is a lesson that the United Kingdom should learn carefully, as it toys with returning a once-discredited party of the right to political office.

But this next progressive era will not be dominated by the two-tired conservative and liberal ideologies of the past. So it falls to the progressive side to build a reinvented governing agenda capable of tackling the challenges of our time, and new political arrangements built around the capabilities of our fast-changing economy, media and people. Three challenges standout; three that are quite different from those we faced even a few decades ago when Bill Clinton and Tony Blair rethought what it meant to be on the centre-left.

Just as FDR tamed America’s industrial society, so now we must make the transition to a low carbon society-a societal transformation which if anything has been understated by our leaders. Everything from how we build and drive to how we power our mobile devices must change. This transformation will requires a great deal of money, innovations yet unimagined, and a public ready and willing not just to follow but to lead. It also needs a strong moral vision, and a role for the state unsuited to conservativism. And while the proposals offered by Ed Miliband and the Brown government this month are a good start, managing this transformation over the next three decades will make or break political careers and parties. Getting this right is a prerequisite for center-left success in the 21st century.

Second, we must re-imagine politics and government for an age when we are all connected. At some point in the next ten years just about everyone in the world will become knitted together through mobile devices and online. All that we know – communications, commerce, learning, socialising, politics, governing, even the concept of free and open societies themselves-will be changed by this powerful and ever more ubiquitous network. Harnessing the promise of this new age of mobile, and the radical democratization of information, knowledge and power it offers will be one of our the great projects of the center-left in the years to come.

Finally, we must come to terms with “the rise of the rest” as Fareed Zakaria has defined the emergent geopolitical reality of our day, this inexorable trend of developing nations like China, India, Mexico and Brazil taking their seat at the global table. In the years ahead these countries will surely produce Chinese Microsofts and Indian Nokias. Their economic maturation will mean that our countries will compete with both their inexpensive workers and a whole new set of globally competitive corporations, further intensifying already virulent global competition for our businesses, workers and students. Producing rising standards of living in the West will require much more investment in infrastructure, knowledge, skills and schools, and our people’s full partnership in understanding that success will require us to do more, to raise our game, or risk being left behind.

This “rise of the rest” will also require a remaking of the global institutions of governance and power. We have seen this process play out this year as the G20 begins to replace the G8, and the debate over how to remake the International Money Fund has begun in earnest. With only about 15 percent of the world’s people today of European descent, the ability for the governments of the West to be the primary managers of global affairs is coming to an end, a process that will not be easy for our governments to manage, or perhaps our people to accept.

The challenges in front of the center-left political parties of the West today are extraordinary, the greatest we have faced since the rise of European fascism seventy years ago. Today, as in the past, only a progressive vision is fit to meet them. Facing them forthrightly, and showing the courage to tackle them head-on will be perhaps the greatest test of them all.

Message to World at the G-20 Summit: Don’t Depend on a Strong U.S. Recovery to Bail You Out

By
Rob Shapiro
Published: September 23, 2009

This week’s U.N. General Assembly and the countless, private discussions between presidents, premiers and prime ministers will range from climate change to terrorism, but most of the leaders are more preoccupied with the outlook for their economies.  In this sense, the UN meeting is an opening act for the main attraction, the G-20 summit in Pittsburgh at the end of the week.  There, the leaders will focus on new regulation for global capital flows and the institutions behind them, with some good doses of finger-pointing at the United States.  (Christina Kirchner of Argentina, the world’s largest debt defaulter, couldn’t wait: She led yesterday with America-bashing at the UN.)   But the blame game is really a plea that the United States help pull the rest of the world out of its ditch.

America, with 23.5 percent of worldwide GDP – Japan is second at 8.1 percent, followed by China with 7.3 percent – is the only country with the economic heft to move other nations.   Much of our impact comes from our annual imports of $2.5 trillion, which help keep employment up in most other large economies.  If we could get our imports growing strongly again, the world’s finger-pointing would turn into high-fives.  But that depends on reviving American consumption and investment, and the outlook for that is mixed at best.

Washington’s optimists point to recent gains in a number of important indicators – but look closely, and they’re less encouraging.  Retail sales in August were up 2.7 percent over July, for example.  But that’s 5.3 percent below levels a year earlier, when things already were pretty grim.  It’s the same story with other measures.  Housing starts were up 1.5 percent in August, but down 29.6 percent from a year earlier; and industrial production was up 0.8 percent, to a level still nearly 11 percent below August 2008.  These are the numbers that led Ben Bernanke and Janet Yellen to caution that while the recession may be technically over, hard times could be with us for another year or longer.

The bottom line for most Americans is that the steep decline in the value of their investments and homes is driving them to cut back their spending and restore some savings.  Mostly, they’re paring down the record credit card debt they ran up during both the first stage of the recession and an expansion before it which didn’t produce income gains.  This spending slowdown is unlikely to change soon.   And as we have argued here for more than a year, jobs will probably continue to contract for two or three years after this recession ends, just as they did after the 1990-1991 and 2001 downturns.  It’s hardly a recipe for a recovery strong enough to lift U.S. incomes or the prospects of other economies.

Nor can we expect help from other countries boosting our exports.  Of our five largest foreign markets, U.S. imports are still falling in three of them (Canada, China, and the UK); and American imports in all five (Mexico and Japan, plus the other three) are still running 17 percent to 27 percent below their levels a year earlier.

What if the modest pick-up we’re seeing now only reflects the President’s stimulus package finally kicking in?  Republicans had some cynical fun a few months ago charging that the stimulus had failed, since everything was still headed down.  Now, it’s the Democrats’ turn, as its effects increase over the next several months.  The hard question is whether the economy will keep growing once the stimulus runs out.  The administration’s economic strategy depends on the stimulus triggering self-sustaining growth – by creating jobs, which boost spending and then, in turn, lead to more jobs, more demand, and finally more investment.   That’s also the basis of their financial strategy, hoping that expanding growth will bring down foreclosures and bankruptcies, easing the pressures on banks so they can lend more.

Their economic logic is perfectly reasonable; but it may be a long shot in the world where we now find ourselves.  And it certainly doesn’t take account of the possibility of yet another nasty shock to the economy.  The most likely candidate is an implosion of securities based on commercial real estate.  Price movements in commercial estate have been running 12 to 16 months behind those in residential housing.  So, they remained strong for more than a year after the housing bubble began to deflate – and then began to fall sharply in the last six months.  Now, more and more commercial developers can’t keep their properties sufficiently occupied to service the loans they took out to build them.  As they default, the securities and derivatives based on those loans also go bad.   It could be another very nasty hit, with most of the impact falling on the regional and local banks across the country that made the loans.  That’s why we’re already seeing a sharp rise in bank failures.

The good news is that the Fed and the Treasury have more advance notice this time, and they have a better idea of what works and what doesn’t.  The bad news is that at after what we’ve already been through, Washington couldn’t borrow the money required to manage the failures of large numbers of big commercial banks, with all of the fallout, without risking the credit of the United States.

There’s a good chance we’ll dodge that particular bullet.  But even if we do, the prospects for a strong U.S. recovery are slim, especially one strong enough to help the rest of the world.  And that will be the biggest, unspoken disappointment at this week’s G-20 meetings.

The Future of the American Car

By
Michael Moynihan
Published: August 7, 2009

This week the Center for Automotive Research in Detroit is holding its annual conference on the future of cars.  Entitled “Today’s Turmoil: a Foundation for Success”, the four day conference allows the global industry to hear the insights of people like Akio Toyoda, the new president of Toyota who is shaking up the company started by his grandfather and discuss subjects such as manufacturing and how to make sustainable cars.  A new face this year: Ed Bloom of the US Auto Task Force in the role of the industry’s new partner, government.

With global sales down almost 50% from their peak, it has, indeed, been a brutal year for the industry, especially so for the Big Three, now really One and a Half.   From this new low base, however, the industry is certain to rebound.  The question is whether it will rebound in America or whether the center of gravity of auto manufacturing will continue to shift away.  After the decades-old decline of the Big Three’s market share, all the management studies and manufacturing initiatiaves, capped by GM and Chysler’s bankruptcy filings, some would argue the US industry is past recovery.  I disagree.

I believe US carmakers can be part of the global rebound.  I also believe they must be if the US is to benefit from the clean economic revolution.  However, recovery of the industry won’t come easy.   The US car industry needs to reinvent itself with help from policymakers and by listening to people outside the industry, especially the customer..  The good news it that auto manufacturing tends toward decentralization.  The weight of cars, variations in standards by country and a healthy measure of politics combines to encourage localized production.  There is no risk yet of a laptop-style shift of the entire industry to Asia.  The challenges are best described as severe but surmountable.  Here are six things the US auto industry needs to do to re-emerge in strong shape from the Great Recession of which government has a role in three:

First the industry needs to rediscover innovation.  In its glory days, passionate engineers invented new tires, transmissions, solutions to the problem of knock, the octane system of gasoline, ball bearings and other breakthrough technologies of the day, the equivalent of Twitter or Facebook or in the auto industry, new battery technologies, electric drive trains, carbon fiber materials, computerization, and energy economy technologies today.  One idea would be for US car companies to put venture capitalists from Silicon Valley or prominent scientists on their boards and move their R&D operations to Silicon Valley.   VC-backed Tesla, for example, is making major strides from its Palo Alto base. Palo Alto-based Better Place is similarly working with Renault and Nissan to pioneer new charging technology for an all electric car.  Cars are a technology product and it is time to remember this.  They are also a lifestyle product.  The Big Three should draw more design inspiration from places like New York and Los Angeles.  In its early days, GM had its headquarters in New York and it would behoove the industry to reconnect with centers of excellence across the country.

Second, the US car industry needs to recapture its ability to anticipate changes in consumer taste.  In My Years at General Motors, Alfred Sloan discussed how hard this always was, yet how essential: “Even though it takes years to develop a new product, it is our job to be ready with it when there is an effective demand”.  He was describing a problem that bedeviled the industry even in1957: a sudden desire by Americans for small cars—something in which the rest of the world even then excelled due to smaller streets, high priced gas and shorter distances—that caused imports to leap.  In that crisis, the Big Three responded with cars like the Corvair a year later to recapture the lower end of the market and bring imports from 10% back down to a negligible level.  The Big Three were far less successful after the oil shocks of the 1970s when imports began building market share.  They face an even sterner challenge in the wake of last year’s oil shock.  Message: be ready with small cars when they are needed.  And in the wake of climate change which is not going away: improve fuel efficiency.

Third, the US industry must try to reinvigorate its supplier base which has suffered even more than the OEMs in recent years.  A focused effort by industry to source locally and government support to high tech companies making batteries and other parts can help fuel the substrate necessary to a sound industry going forward.  Alan Mullaly at Ford is already shifting Ford toward greater outsourcing of parts.  To insure long term sustainability, it is important to rebuild the North American infrastructure.  As discussed below, this should be an element of negotiation with companies entering the US market.

Fourth, much has been made of the so-called cost disadvantage of the Big Three’s legacy costs which supposedly added $2,000 to the value of each car.  In fact, the appropriate way to deal with liabilities was always on the balance sheet as a capital item not as an operating one.  The GM and Chrysler bankruptcies put an end to much of this liability.  However, properly accounted for and written down, these legacy costs should be a footnote on the balance sheet, not a drag on operating profit..

Fifth, much has similarly been made of the supposedly high wages paid by US carmakers relative to foreign companies that have set up shop in the South.  While the gap is overstated, labor costs are lower in the South due to lower costs and the absence of unionization.  Here the US needs to act carefully but act on labor rules that have created an unfair playing field.  Due to our state system of regulation, the US has both right to work states and others where unionization is common.  Taking advantage of US federalism, foreign manufacturers even if their own countries are 100% union have set up shop in the South. A notable exception to this stratifaction is the unionized Toyota NUMMI facility in Fremont, California, where GM was a partner however, there is talk of Toyota closing that plant in the wake of GM’s pullout.

The answer to this is not heavy handed change in our federalist system.   However, as Bob Reich has argued, the US, as a whole, loses when states and even towns bid against one another for new factories.  He proposed a body or at least baseline standards to negotiate on behalf of American manufacturing sites.  It would not be unreasonable to require new factories to offer employees a chance to organize at some point after the plant is built, require some level of local sourcing of parts and at least try to negotiate for research and development investments.  Until other countries relax their standards for foreign investment, we should not give away the store.

Sixth, and here government is the critical player, the industry needs a reasonable exchange rate.  For about a quarter century, since the end of the 1982 recession, a high dollar has benefited our financial sector at the expense of manufacturing.  Something similar happened in England’s transition from manufacturing to finance capitalism in the late 19th Century when it shifted from a trade surplus to deficit (driving a quest for colonies.).  The dangers of over reliance on finance are clear.  Recently, Laura Tyson floated the idea of retooling our economy more toward investment and manufacturing in lieu of finance, in part, by lowering the value of the dollar.  Dollar policy is not something that is widely discussed or even understood yet it has an immense effect on the structure of our economy.  Perhaps like war it is too important to be left to the generals and should be the subject of an open and intellectually rigorous academic and industry discussion.

In short, cars will continue to be built in the United States.  The question is whether we will be leaders or followers, designing the breakthrough cars of the future, or building cars introduced somewhere else a few years earlier.

To this point, of the top 5 cars purchased under the Cash for Clunkers program, four bear Japanese nameplates.   (The rankings are Toyota Corolla, Ford Focus, Honda Civic, Toyota Camry and Toyota Prius.)  Of these, all but the Prius are largely made in the United States and Toyota will begin making the Prius in Mississippi next year.  While Japanese, German and Korean investment in factories in the United States is a win win, creating jobs, economic activity and tax revenues, it does not amount to leadership.

In conclusion, the US auto industry faces huge challenges.  But the bottom of a cycle creates opportunity and the decks are now clear for a rebound.  It was not long ago that the US industries—after suffering through the 1980s–mounted a partial comeback, improving quality and inventing breakthrough products of the day such as the minivan and SUV—formats soon copied by others.  US industry and policymakers should begin taking action now to lead recovery when it inevitably comes.

What To Do About China

By
Michael Moynihan
Published: July 22, 2009

Yesterday, the US and China concluded high level talks between Secretaries Geithner and Clinton and China’s State Councilor Dai Bingguo and Vice Premier Wang Qishan on the relationship that President Obama said, at the outset of meetings, will define the 21st century.  The President is right.  How the US and China manage their relationship will determine the balance of growth and contraction, war and peace and freedom and its opposite in the 21st Century.  This then was an important set of meetings raising the deeper question of what should the US do about China.

China’s rocket-like growth over the last decade has been extraordinary. However, beyond the sparkling towers, new roads and designer airports lies the fact that China’s rise has inextricably altered the economic and diplomatic balance of power of the 20th century.  According to economist Steven Roach, China’s growth alone is likely to keep global growth above zero this year.  China, America’s largest creditor, holds about $2 trillion in US dollar debt, an amount growing daily. To put that sum in perspective, the entire balance sheet of the US Federal Reserve prior to the financial crisis was less than $1 trillion.  China is quite simply rocking the global economy.

Rapidly emerging powers, by definition, alter the status quo and in prior epochs success or failure in accommodating that change has proven critical to global stability.  At the end of the 19th century, Europe mismanaged the rise in power of Germany which (with Bismarck’s dismissal by the erratic Wilhelm II) contributed to World War I.  Then in the early 20th century, the world failed to recognize Japan’s emergence as a major power after she defeated Russia in 1905 and began building airplanes capable of crossing the Pacific.  In contrast, through the post war framework of the Bretton Woods institutions including the GATT, the Bank for International Settlements (designed to lessen exchange rate imbalances), the IMF and the World Bank and the UN as well as the European Union and other organizations, the world did a much better job of accommodating the rise of Japan, the NICs and the peripheral European states at the end of the 20th Century.

Now, with China’s emergence, however, the world faces a new rebalancing of political and economic power.  And the task, as President Obama suggested, is to manage it in a way that benefits the US, China and the world.

Economic theory–in contrast to the popular notion of competing nations–teaches that one country’s rise should benefit others.  A richer China should consume more US goods.  It should produce more and through spillovers and the creation of knowledge, contribute to the global commons.

One country, moreover, cannot succeed as China has without others.  China remains dependent on the US as the major market for its exports.  In some ways the US China relationship is deeply symbiotic.  We design goods.  China makes them cheaply.  We buy them, allowing US consumers to get more for less.  However, to the extent that the Chinese consistently sell more to us than we buy–as a result of the Yuan being kept artificially low, America gets more stuff but loses industry, China gets less stuff but gains industry and China ends up holding US dollar denominated debt.  That is the story of our recent relationship in a nutshell.  Chinese economic officials, waking up their huge exposure to the value of the US dollar, have scolded the US about its deficits which could weaken the dollar and have floated the idea of diversifying into other currencies.  The threat to unseat the dollar as the world’s reserve currency is a serious shot across our bow.  Besides these economic issues, other matters on the table in Washington this week included nuclear proliferation and climate change.

In many ways, China in its economic strategy has followed the same trajectory of Japan and the other Asian tigers.  She has pursued a policy of export-oriented growth leveraging her low cost base built on the four pillars of a cheap currency, high savings financed through suppressed consumption, an aggressive state role in the economy, and a policy of securing technology transfer for market access.  The strategy is neo-mercantilist which is to say, its practical effect is to generate a trade surplus and accumulate hard currency.  (The original mercantilism practiced in Europe prized trade surpluses to accumulate gold and silver.)

However, China’s story is qualitatively different than that of Japan and the NICs in certain respects.  First, on the political track, beginning as a Communist country, China has, so far, not followed South Korea and the other NICs toward authoritarian democracy.  China remains a totalitarian police state. And second, she is simply larger in scale and scale changes everything.  Long before China reaches western standards of living, her overall GDP will be the largest in the world.  And, unlike the other Asian NICs, she is so large and her labor supply so abundant that her cost of labor can stay low even as her exchange rate appreciates.

On the political side, China does not appear aggressive in foreign policy.  Like the 19th Century resource-hungry European powers, she has been courting natural resources in Africa to fuel production.  However, she has pursued a commercial as opposed to political strategy.  While she is a nuclear power, she appears more preoccupied with economic growth currently than military objectives.

In many ways, the relationship with the US has proven beneficial for both.  An example of positive symbiosis would be the manufacture of the Apple iPhone.  Designed in the US, it is made in China by a company called Foxconn.  Both the US and China benefit from the success of the iPhone.  As an example of the political and human pitfalls of the relationship, however, one can point to the case of a Foxconn employee recently hounded to the point of defenestration by police and company security after he lost an iPhone prototype. Afterward, Apple issued a statement saying it was awaiting results of an investigation into the employee’s death.

The US China meeting this week made no news on the issue of climate change or nuclear proliferation, a complex initiative that will take time.  The principle outcome was that the US pledged to work to lower US budget deficits to protect the value of the dollar and China pledged to increase domestic demand.

With respect to the US concession, the very fact that the US had to apologize for our deficits shows how the balance of power in the relationship has changed.  As for the Chinese concession, it is indeed the right policy for the US and China to pursue.  As a result of the massive stimulus package enacted in China of close to $600 billion, some 88% of China’s GDP growth this year will occur in investment, much of it in infrastructure.  Most of the rest of the growth will come from exports.  Virtually none will come from consumption and increased living standards for the Chinese people.  This must change.  By allowing its people to consume more and buy more of the world’s products, China can help its own people live better and the rest of world produce more.

For its part, the US has to stop living beyond its means which means borrowing less both to fund government and imports.  That will put the US back on track toward more sustainable growth.

Economically, what remains unresolved is the depressed Yuan which continues to drive the Chinese trade surplus and the US deficit.  Clearly the Yuan has to appreciate to the point where US goods are competitive with Chinese ones.  The US should exert its negotiating leverage sooner rather than later on this point because the more US debt China accumulates, the worse the negotiating position of the US will become.

The one issue not explicitly on the table–apart from sympathy expressed by the US toward Chinese minorities–but that ultimately must underscore our relationship with China is how Chinese success will impact the US commitment to freedom and democracy.

The strategy not only of the US but of the West in general has been to encourage economic growth in China while hoping this will lead to greater freedoms.  This policy of engagement as opposed to containment is  the right strategy for now because it would be absurd for the US to disengage when China is moving in the right direction. However, China has moved far more slowly than many hoped and the US posture toward China has, all too often lacked even a semblance of muscularity.

The US has been a poor or non existent negotiator on behalf of US companies in standing up for values we hold dear such as freedom of expression.  The government has left companies such as Google and Yahoo to cut individual deals with the Chinese to gain market access.  Our government has also been missing in action when it comes to allowing companies to negotiate away technology in exchange for access to the Chinese market.  The US could be doing far more to strengthen the negotiating position of US-based companies which ultimately would benefit not only us but the Chinese people by widening their access to goods and information.

President Obama is right that the US China relationship will be critical to shaping the 21st century.  And ultimately, this is about accomodating China’s rise without sacrificing America’s values or our standard of living.  This week’s meeting was a useful first step.  Still problematic, however, are the huge trade imbalances resulting from an exchange rate imbalance and China’s negotiating position toward US firms that is far tougher than ours in the opposite direction  As we go forward, we should accelerate action to move the two countries toward a truly sustainable, long term partnership.

Trade and Carbon

By
Michael Moynihan
Published: July 22, 2009

This past weekend, Secretary of State Hillary Clinton traveling in India received the message, courteous but firm, that India has no intention of capping carbon.  The rationale provided is that India has low per capita emissions.  This is, to be sure, India’s best argument.  Her overall emissions are soaring as her population spirals upward–India only two thirds as populous as China a decade ago, will pass China to become the world’s most populous country of almost 1.5 billion people in 2030.  India’s per capita emissions are rising too from industrialization.  But they remain below those in developed countries.  China, the other key holdout on capping emissions can make a similar per capita argument though it recently passed the US to become the world’s largest emitter and its emissions are soaring as it develops.

While the posture of India and China are problematic on their own, they make it harder for other countries to take action.  After all, if the world’s two most populous and dynamic economies growing at about 7% (down admittedly from China’s 13% growth in 2007), won’t opt in, why should the US which contracted last quarter at a 5.5% rate.  With America’s standard of living under siege putting America at a further competitive disadvantage–no matter how much carbon we emit per capita–is a tough sell to voters.  And what emerges is a classic collective action stalemate.

This dilemna highlights one of the diferences between greenhouse gases and other environmental issues. Unlike cleaning the air or water where the benefits are realized locally, keeping costs and benefits within one country, reducing emissions benefits the entire planet but costs whomever does it growth.  This is what makes a global solution–such as that promoted by the UN through the Kyoto and now Copenhagen process so attractive.  However, if China and India won’t come to the table, what should the US do?

One solution attracting interest of late is the use of trade policy to punish carbon havens. Indeed, at the last minute, the House inserted into the Waxman Markey bill a provision to impose tariffs on countries that do not take action to limit emissions.  In announcing his support for the House bill after its passage, President Obama flagged the provision as troubling insofar as it runs counter to free trade principles.

So is trade policy a valid tool in climate policy?  The New York Times recently argued it is if enacted multilaterally but not if unilaterally.  Paul Krugman, my professor of trade policy at Princeton, has endorsed the idea in theory.  My view is that trade policy is a problematic tool from a practical standpoint that would require significant new infrastructure to work at all.

The problem with using trade policy for an environmental purposes are fourfold.

First, trade actions have an unfortunate tendency to invite retaliation and provoke trade wars even in a multilateral context.  No matter how good your case, other countries can respond in kind.  The result is then a lengthy negotiation or WTO process that ultimately harms both parties.

Second while the temptation to use trade policy to protect clean domestic industries against dirty foreign ones may be great, the track record for mixing the environment with trade is poor.  More often than not, environmental regulations have functioned as non tariff trade barriers.  Domestic companies claim them when threatened economically and verifying them becomes a political football.

Third, as with food safety regulations, labor regulations and other hard to measure quantities, measurement is labor intensive and becomes an impediment to good regulation.  This would complicate administering any tariff.  It might overwhelm the WTO.

Fourth, increasing the price of an import to protect a domestic industry can have the adverse consequence of increasing the price of inputs for other domestic products.  A classic example is that when the US slapped a tariff on LCDs to protect LCD domestic manufacturers in the 1980s, it drove American laptop manufacturing offshore.  Taxing imports from carbon havens to protect domestic industries could raise manufacturing costs for other companies causing the latter to shift their production to carbon havens.

Those are the arguments against. On the other hand, giving imports a total pass not only harms domestic producers but is tantamount to a cordial invitation to domestic companies to shift production–and jobs–offshore.  This issue came up, of course, in the NAFTA debate.  Ideally, there ought to be some middle ground.

To view how a tariff might succeed or not, consider the case of electricity intensive aluminum production.  Rio Tinto as one example, produces aluminum using a hydro power in Canada but coal-based power in Australia.  Were the US to slap a tariff on aluminum produced with coal-based power (hard enough to determine in and of itself), aluminum produced with hydro power would be cheaper. One outcome would be for Rio Tinto to phase out coal in favor of hydro in the production of aluminum.  Were that to occur, one might call a US tariff an environmental and economic success.

Another possible outcome, however, would be for Rio Tinto to fulfill US demand with an unchanged mix of product that would cost buyers more due to the tariff.  In that case, US companies might decide to shift the production of products using aluminum overseas.  This would be an environmental and economic failure.  The deciding factors between the two outcomes would probably be Rio Tinto’s ease of substituting zero carbon energy source for coal and the domesic companies’ difficulty of moving production of products using aluminum oversas.

In short, it is hard to predict in advance just how the tariff would impact the market, but it is clear, the more carbon havens exist, the greater the likelihood that production will seek them out.

Currently a workable regime is not readily at hand.  Were a trade regime to ultimately be invoked, here are some thoughts to guide its development.

First, as with the capping of carbon emissions themselves, putting a price on emissions in imports should be pushed as far up the value chain as possible. This is because as products grow more complex, tracking their carbon footprint becomes more difficult and trade restrictions multiply.  Any trade-based taxes on carbon intensive goods should be directed upstream at basic goods such as steel or aluminum, not at finished products made from those commodities.  While this could drive downstream industries overseas, on balance, I think, it would be far less distortionary to address a few commodities than many products.

Second, some sort of standardized process for measuring carbon footprints needs to be devised.  However, it would be preferable for some private body to administer standards rather than a governmental organization.  A number of creative startups are trying to devise novel ways of tracking carbon.  One such ventures is Greenerone.com which uses crowd sourced information–or information gleaned for free by numerous reporters to track the environmental profile of products.  Others are working on more industry-focused products.  Whatever system is used should involve as little bureaucracy as possible consistent with being stable and standardized.

Another idea, admittedly bold, would be to devise some sort of average duty–product independent–to penalize countries that choose not to limit their emissions during production.  Such an approach would have to be administered multilaterally, lest it lead to an immediate trade war, thus it is not something the US could do in and of itself.

The very complexity of using a trade hammer shows that it is far preferable to develop a coordinated multilateral regime than to use trade policy.  Free trade has created wealth since the days of the Minoans and since then for the Athenians, Carthaginians, Romans, Indians, Venetians, Portuguese, Spanish, British and yes, Americans to name only a few.  It is, in contrast, a clumsy tool for achieving environmental goals.  Nonetheless, if India and China–and for that matter the US,  refuse to address the problem of a changing climate, the pressure to use trade policy to achieve those goals will only increase.

Rob Shapiro on the Globalization of Capital

By
Jake Berliner
Published: April 15, 2008

In this short video, Dr. Rob Shapiro, Chair of NDN’s Globalization Initiative, says that in order to understand what is going on with the American economy, we must first understand the role of globalization, particularly the globalization of the capital pool.

Take a look:

For more of Rob’s far-reaching work on the economy and globalization, check out: