Topic Category: Politics

In an upbeat speech to the U.S. Chamber of Commerce in December 2006, U.S. Trade Representative Susan Schwab predicted that President Bush and a new Democratic Congress would work together in the next two years on a range of trade legislation. Supporters of trade expansion can only hope she is right, but political winds point toward rough waters ahead.

More Trade Skeptics in Congress

Democratic control of the 110th Congress will mean a chilly reception for the Bush administration’s agenda of promoting free trade agreements. According to post-election analysis by The Wall Street Journal, skeptics of trade gained about 16 votes in the House and five in the Senate. Core Democratic constituencies, such as organized labor and environmentalists, will demand opposition to new trade agreements as a reward for their support.

Trade Casualties Will Mount

The first casualty of the new Congress will be trade promotion authority (TPA), due to expire at the end of June 2007. Approved in 2002, TPA authorizes the president to negotiate free trade agreements and present them to Congress for an up-or-down vote without amendment.

Under TPA, Congress approved such deals as the Chile and Singapore free trade agreements in 2003, the Australia agreement in 2004, and the Central American Free Trade Agreement in 2005. Renewal of TPA was doubtful even before the election, given the narrow margin by which it passed in 2002, but the 110th Congress has sealed its fate for at least the next two years.

Anti-trade politicians also have staked out a skeptical line against free-trade agreements still in the pipeline with the United States’ Latin American neighbors Colombia and Peru. The mantra of the party and its organized-labor backers is that these agreements fail to protect the environment and labor rights. Those demands are based on the misguided belief that developing countries will only raise their workplace standards under threat of trade sanctions, when in reality, expanding trade has been a powerful engine to that end.

And Democrats keep raising their own standards for trade agreements. During the last Democratic-controlled Congress in 1993-94, 40 percent of House Democrats voted in favor of the North American Free Trade Agreement, even though it contained few references to labor and environmental standards. A dozen years later in 2005, a mere 15 Democrats voted for the Central American Free Trade Agreement, even though it affected much less trade and contained whole chapters devoted to labor and environmental standards.

The incoming chairman of the Senate Finance Committee, Max Baucus of Montana, consistently supports trade liberalization, but his counterpart on the House Ways and Means Committee, Charles Rangel of New York, has compiled a checkered record. Rangel voted in favor of permanent normal trade relations with China in 2000 and for a few smaller FTAs. Yet he opposed major trade legislation that forms the cornerstone of US trade policy — NAFTA and CAFTA, trade promotion authority, and even the Uruguay Round Agreements Act of 1994 that secured America’s membership in the World Trade Organization. And Rangel is considered a pro-trade policymaker.

Trade Legislation on Cuba May Get Support

The one area where the new Congress may be more pro-trade than the old will be on Cuba. Large majorities of Democrats have voted against the trade embargo and travel restrictions. Rep. Rangel himself has sponsored amendments that would have denied funding for enforcement of the embargo. Unfortunately, President Bush is wedded to defending the failed, four-decade-old policy of trying to change Cuba through economic isolation. The new Congress may chip at the edges but probably will not be able to repeal the embargo.

Protectionist Legislation Unlikely

Thanks to the American system of checks and balances, the 110th Congress will find it difficult to enact outright protectionist legislation, such as sweeping tariffs against goods from China. President Bush does (in theory, anyway) wield the veto pen. In the Senate, Democrats will need to muster a 60-vote supermajority for any trade bills, a real barrier against protectionism in a chamber that is normally more pro-trade than the House. Thus the most likely outcome for the next two years will be a rise in anti-trade rhetoric and proposals coming out of Washington — but no bold changes in actual policy.

Meanwhile, the American people will go on voting with their dollars for more engagement in the global economy. Americans have never earned or spent a higher share of their income in the global economy than they do today. Imports, exports and foreign investment are setting records.

Despite their campaign rhetoric on trade, the Democrats would be wise not to disrupt those positive trends.

Susan Schwab began work recently as U.S. Trade Representative (USTR) at a difficult time for free trade. Free traders have promised results for decades, and an honest assessment says they were right. Globalization is enhancing prosperity everywhere, and lowering trade barriers promotes broad prosperity for the poor and rich alike.

But reality and perceptions are far apart in Washington, making the free trade argument tougher than ever. After months of delay, the Senate finally approved Schwab, just as souring economies in Europe may offer yet another obstacle to further trade liberalization.

A Smart Choice

President Bush made a smart pick in Schwab. She is a tough and knowledgeable negotiator, having spent a lifetime working on trade issues in government, academia and private business. An Assistant Secretary of Commerce in the first Bush presidency, Schwab most recently managed European Union and World Trade Organization (WTO) relations as Deputy USTR. She will certainly need that experience to drive the Bush Administration’s free trade agenda.

Schwab was confirmed as USTR in early June by a Senate that is in one of its most protectionist moods of the last 20 years. Support for lower trade barriers—a cornerstone of American freedom and prosperity—has been eroding for the better part of a decade. This is largely due to hysteria over outsourcing, concerns about foreign investment in the United States, and the powerful influence of agricultural and industrial interests.

The net impact hasn’t slowed the USTR’s ambitious agenda, but it has quieted the bully pulpit and diminished America’s ability to push the current WTO round ahead. Farm subsidies remain high globally, while major tariff increases are lurking in the Senate. Two free trade agreements (FTAs) currently before Congress (and another four in the works) will have to be passed by mid-March of 2007, at the absolute latest, if they are to be passed at all. The elevation of Schwab may give America’s foreign economic efforts a much-needed shot in the arm.

As USTR, Susan Schwab must pursue four goals:

1. Don’t let Doha become the walking undead.

The Doha round of WTO trade negotiations is the USTR’s biggest challenge and opportunity, and achieving global consensus will undoubtedly be tougher than ever before.

Some say, “Doha is dead,” but that’s wishful thinking. In fact, the global trade talks risk becoming undead—going through the motions, with no genuine progress. The best solution is to reach an agreement under the auspices of the WTO. The second best solution is to reach agreement with a broad group of nations that excludes those who favor delay and inaction. A deal must be concluded by the end of 2006 so that President Bush can present the bill to Congress before his legal authority expires. The worst possible outcome would be, as Rep. Bill Thomas (R-CA) of the Ways and Means Committee said, for America to “just walk away.”

Schwab must focus on reducing EU and U.S. farm subsidies to jumpstart G-20 interest in Doha. The developing world will open its markets to American service-sector and manufacturing firms, but the U.S. needs to take the first step.

2. Emphasize the importance of global prosperity to the war on terrorism.

Winning the debate at home requires a message that links free trade to the defeat of terrorism. The instinct of terrorists is to resist openness, modernization and all aspects of globalization. Framing the debate in these terms helps voters understand why a vote for trade protectionism is a vote for homeland insecurity. With the argument presented that way, very few politicians would be willing to take the moral low ground, especially relating to bilateral trade opportunities in the Middle East.

3. Push property rights, not exchange rates.

Schwab, along with her Treasury and Commerce colleagues, must resist pressure to rattle sabers on foreign exchange rates, particularly on China’s currency. America can become more competitive and out-produce its rivals without resorting to legislative gimmicks. Artificially lowering the yuan exchange rate will not necessarily improve American trade. What matters more for fair trade is the enforcement of intellectual property rights in China and elsewhere, which should be a diplomatic priority.

4. Advance bilateral FTAs—and get them passed.

FTAs with Oman and Peru, along with Vietnam’s WTO accession, await congressional approval. FTAs with South Korea, Panama, Columbia, and Malaysia are still being negotiated. The dilemma now is how to get them through Congress—put them all up at once or push a few at a time? In an election year, it may be best to give Congress one big push; going through every individual bill one at a time may tax Members’ time and attention.

The free trade road may be rockier than ever, but there are actually many roads to freer trade. Multilateral, bilateral and unilateral trade action are all ways to improve America’s prosperity and security. Schwab has the experience, smarts and tenacity to make the passage, and she deserves the full, vocal support of Congress, Wall Street and the White House.

U.S. lawmakers have put off immigration reform for a decade because nobody could agree on how best to regulate the flow. They still can’t, as Washington’s recent scramble to craft a fix attests. But the stark disparity between job opportunities and living standards in America and many poor countries has resulted in such an influx of undocumented aliens (now between 10 million and 12 million, with more than half from Mexico) that Congress and the White House must act.

Helping Citizens at Home

Success in controlling this tide certainly requires better border security, stronger workplace enforcement, and a practical guest-worker process to match prospective laborers with legitimate employment. Yet there’s an equally important—but neglected—need. Developing countries must do more to provide employment opportunities and access to social mobility for citizens at home.

The Case of Mexico

For Mexico, sound fiscal policies including NAFTA and institutional reforms have kept lots of potential migrants from leaving. The bad news is that job growth south of the border hasn’t been fast enough to absorb all the new entrants into the labor force.

Mexican Interior Secretary Carlos Abascal Carranza came to Washington recently with an economic progress report. That is a welcome change from the rhetoric that President Vicente Fox has spouted for the past five years: constant reminders that Mexico should have the right to export its surplus workers to the U.S.

Fox’s first Foreign Secretary, Jorge Castañeda, pushed that absurd message without regard for America’s sovereignty or Americans’ sensitivities. No country exists to take on the problems of others. But internal conditions can have consequences that extend across borders. So it should come as no shock that the U.S. has an interest in Mexico’s economic policies and performance.

Mexico’s Economy Has Improved

Mexico’s economy has improved under Fox. From 2000 to 2005, annual inflation declined by two-thirds, foreign investment grew 74%, and the public deficit dropped to zero. Meanwhile, real wages rose 7%, the sum of Mexicans living under one poverty index fell 23%, 6 million scholarships now help keep more poor children in classrooms through high school, and nearly 577,000 jobs were created in 2005.

Still, almost a million youths enter the Mexican labor force each year; a half million new jobs are simply not enough. Mexico’s minimum wage is $4.50 per day, vs. the minimum $5.15 per hour stateside. And while more Mexican children are attending school, the system is still centralized under an inefficient national ministry and subject to periodic strikes.

Other Countries Are Worse Off

Other developing countries in our hemisphere are in even worse shape. Guatemala and Honduras report poverty rates of close to 75%. In South America’s Andean ridge, from Venezuela to Bolivia, the poor constitute more than half of the population. Except in Colombia, a developing trend is to consolidate power within populist presidencies, ignore the rule of law, and put business under government’s thumb.

The result? Blocked from social mobility at home, Peruvian entrepreneurs already are choosing the U.S. as a haven for business startups. Ecuadorians are stowing away in shipping containers to get to the U.S. or Europe, while one of Venezuela’s most popular Web sites continues to be www.mequieroir.com (“I Want to Leave”).

We Must Encourage Liberalization

Backsliding toward statist economies will only will make matters worse, forcing more workers to migrate. That’s why the U.S. must urge its hemispheric neighbors to liberalize economies, cut regulations and allow prosperity to spread more broadly across their citizenry. Mexico has gone partway. Fox’s four-year-old Rapid Business Start-Up System cut red tape for licensing some small firms from 50 days to just 24 hours. But inefficient state monopolies, high taxes, massive bureaucracy, and a rigid labor code still restrict job growth.

Policymakers Should Not Retreat from Free Market Principles.

U.S. officials should remind candidates for the Mexican presidency and congress this year that any retreat from free-market reforms will limit opportunities for Mexican workers at home and create friction between our nations. Beyond that, U.S. lawmakers should resist the temptation to adopt “silver bullet” reforms like building a border fence or embracing a guest-worker program. While these two tacks may be part of a solution, they alone are not enough. To reduce unauthorized immigration, U.S. policies also must seek reforms abroad.

For over 50 years, the U.S. and the world have reaped the economic benefits of gradual liberalization in trade and investment. Recognizing the benefits of open trade, the U.S. government has been a leading advocate of trade liberalization. Today however, the place of free trade in American policymaking is far from secure.

Rising protectionist sentiment in the wake of the aborted United Arab Emirates ports deal, concern about the U.S.-China economic relationship, and frustration over the pace of global trade talks are combining to threaten further trade liberalization, both in America and around the world.

Resisting Protectionsim

In the coming months, Congress must steel itself against protectionism. It should objectively debate and then approve free trade agreements with Oman and Peru, continue to support U.S. leadership and negotiations for new bilateral agreements and in the World Trade Organization (WTO) Doha Round, and resist the temptation of reactionary protectionism. Members of Congress who talk about punitive tariffs or restrictive investment measures without actually intending to enact them still inflame public opinion.

Congress should spend more time recognizing the prosperity that exists in America due to free trade and pushing for further trade reforms.

Opportunity and More Opportunity

As U.S. Ambassador Portman recently said, “We all must fight the protectionist forces with the facts, which show that benefits from trade are substantial. Today, the $12 trillion U.S. economy is bolstered by free trade, a pillar of America’s vitality. American exports support one in five U.S. manufacturing jobs. Jobs directly linked to the export of goods pay 13 to 18 percent more than other U.S. jobs. Moreover, agricultural exports hit a record high in 2005 and now account for 926,000 jobs.

In Colorado, international trade supports one of every 20 private-sector jobs and more than 20 percent of manufacturing jobs. South Carolina benefits from having one of every 10 private sector jobs and more than 25 percent of manufacturing jobs supported by trade. State by state, across the nation, international trade promotes opportunity.

Trade Is a Driving Force

Because today’s global economy offers unparalleled opportunities for the U.S., it is in America’s economic interest to continue to expand trade by lowering barriers to trade in goods and services. Freer trade policies have created a level of competition in today’s open market that leads to innovation and better products, higher-paying jobs, new markets, and increased savings and investment. Small businesses, a critical component of the U.S. economy, create two out of every three new jobs and account for about a quarter of America’s exports.

Trade has been a driving force behind America’s high living standards and promises even more if trade barriers can be broken down further. Gary Clyde Hufbauer of the Institute for International Economics estimates that trade liberalization over the last 50 years has brought an additional $10,000 per year to the typical American household. If all trade barriers were eliminated and global trade and investment became truly free, Hufbauer estimates that American households would gain an additional $5,000 per year.

According to a University of Michigan study, if today’s international trade barriers were reduced by just a third, the average American family of four would enjoy $2,500 per year in additional income.

The Result: A Higher Standard of Living

Freer trade enables more goods and services to reach American consumers at lower prices, giving families more income to save or spend on other goods and services. Moreover, the benefits of free trade extend well beyond American households. Free trade helps spread freedom globally, reinforces the rule of law, and fosters economic development in poor countries. A Center for Global Development study determined that a successful conclusion to the Doha Round would result in an additional $200 billion flowing to developing nations, reducing poverty and economic hardship. The national debate over trade-related issues too often ignores these important benefits.

More generally, economic freedom leads to higher standards of living. According to The Heritage Foundation/Wall Street Journal Index of Economic Freedom, countries with freer trade policies experience higher per-capita economic growth than countries that maintain trade barriers. Countries that opened their trade policies between 1995 and 2004 saw their per capita gross domestic product (GDP) grow at an average compound rate of 2.5 percent. Countries whose trade policies were unchanged experienced an average compound growth rate of 2.1 percent. Finally, countries that increased their barriers to trade managed only a 1.8 percent average compound growth rate.

Still, the Debate Continues

Despite more than five decades of evidence demonstrating the benefits of liberalizing trade, the impact of international trade and open markets on the U.S. economy remains a contentious issue. Fortunately, in past battles, free trade won the day, providing greater economic opportunity to Americans and allowing the U.S. to maintain its role as a leader in the international economic community.

Defending free trade and fighting for new trade agreements are central tasks for Congress this year. Expanding global trade is one of the keys to building a stronger economy at home and promoting better relationships abroad. Trade is one of keys to American prosperity.

Conservative Stephen Harper’s January 23 election victory to become the next prime minister of Canada doesn’t mean that his country’s cool alliance with the United States will automatically warm up—at least, not without some cooperation from Washington.

The Ice Is Thin

Canadians may have voted Conservative to cashier Liberals for a government kickback scandal from a previous administration. To a lesser degree, they may be disenchanted with entitlement programs like socialized medicine, which is so bureaucratic patients flock to U.S. clinics to pay out of pocket for timely service. And there is growing regionalism—Harper represents oil-rich western provinces that favor increased local autonomy.

Still, Conservatives are isolated and vulnerable in a society that tilts toward the welfare state. Out of the four other major parties, the Tories can count on support from none. Yet the Liberals can depend on the kindred New Democratic Party, the Bloc Quebécois, and the Greens for occasional support on social and environmental policy.

While the Conservatives gained 25 seats in the House of Commons, they needed 32 more to obtain a majority. Moreover, the Liberals have been consistent in getting and keeping power, while minority governments have had a hard time lasting beyond two years. That’s thin ice to support big policy changes.

Friendship Matters

Despite constraints, the United States can do business with Harper. He is a thoughtful conservative. Though media savvy, he is less prone to posturing than Paul Martin, who shrunk from leadership on global warming and security and then took up Washington-bashing to look tough in front of TV cameras.

Unfairly painted by the media as a knee-jerk conservative on social issues, Harper has transcended that niche in the gay marriage and abortion debates and will exhibit pragmatic expertise in stewardship of Canada’s larger interests. He knows Canada’s future will hinge on competitiveness with emerging economic giants like China and India, with its contributions including shaping reasoned treaty obligations and regional security.

Like the United States, Canada is both an industrial and agricultural power. And unfortunately, it maintains similar trade barriers on some agricultural products. Both President Bush and Prime Minister Harper could work together to reduce these remaining bilateral constraints and then press other national leaders through the World Trade Organization to follow suit.

As well, Canada’s help in promoting a more competitive business environment in Mexico will bring commerce and jobs to our southern partner, boost trilateral trade against encroachment by Asian giants, and reverse enormous northward migrant flows. Canada is a member of the North American Free Trade Agreement with the United States and Mexico. In blunt terms, Mexico is the weak link.

Canada’s contribution to a more equitable and reasonable approach to global environmental issues would be most welcome. Canadians may be in favor of broad international protections, but Mr. Harper could better inform that concern by explaining why the badly crafted Kyoto accord on global warming is worse that no agreement at all.

Paul Martin’s reduced defense budgets and retreat on supporting U.S. strategic missile defense (which would cost Canada nothing) have put into question Canada’s commitment to the North American Aerospace Defense Command (NORAD) accord—up for renewal in May 2006 and now more important for both countries than ever. Harper could eliminate this uncertainty, to everyone’s benefit.

In facing transnational crime, terrorism, and non-military threats such as natural disasters, the NAFTA partners are equally challenged. But Mexico—looking inward for most of its history—has more work to do than the U.S. or Canada. Like the United States, Canada can help Mexico with training, exchanges, and invitations to exercises—showing initiative toward the shared goal of regional security.

The Bush Administration can improve relations by not treating Prime Minister Harper as if he were in Uncle Sam’s hip pocket. Instead of a gushy embrace, a warm handshake will do.

Consulting Mr. Harper’s government and keeping him informed of pending U.S. policy decisions is crucial. After all, good neighbors talk regularly. Infrequent communication soured relations between Bush and Mexican President Vicente Fox—two conservative cowboys who never figured out how to speak frankly about how each could help solve the other’s problems. Bush kept Fox at arm’s length and thus open to poor advice on migration that eventually sidetracked U.S.-Mexico relations.

The Bottom Line

Canada shares a 4,000-mile border with the United States and is one of America’s top three foreign energy suppliers. It is the 8th largest economy in the world and is America’s largest commercial partner in an increasingly competitive, globalized marketplace.

There is no option other than to have close ties with this important neighbor. Stephen Harper’s election will draw us closer, but Washington can ensure a lasting friendship with progress on trade, multilateral relations, and security, and through respect and frequent consultation on matters involving our two nations.

It is no secret that world opinion of the United States and its policies is unfavorable. Yet, the Bush administration—with cajoling from Congress—is exacerbating those perceptions with an astonishingly antagonistic trade policy posture. The United States has become an international trade scofflaw.

The Softwood Lumber Dispute

Consider the U.S. position in its long-running softwood lumber dispute with Canada. The United States initially imposed antidumping and countervailing duties on Canadian lumber in 2001. Canada responded by challenging the legal and analytical propriety of those measures in the dispute settlement systems of the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO), both bodies whose rules governing trade and dispute settlement were coauthored by the United States.

Canada claimed the U.S. authorities failed to demonstrate that the domestic industry was threatened with injury by subsidized or dumped Canadian imports, and that the subsidy and dumping analyses were both illegal and violated international agreements. A NAFTA panel and WTO agreed.

After exhausting and losing every legal and procedural appeal at its disposal, the United States was handed a final loss by the panel in late 2005. Under NAFTA rules, the United States is expected to revoke the duties prospectively and refund the duties—close to $5 billion—that have been collected in error over the past four years. But how did the world’s richest country and self-proclaimed champion of rules-based trade respond? U.S. officials announced that the lumber duties would remain in place despite the rulings, and that there would be no refunds. So much for the rule of law.

The Bush administration cites a revised injury analysis, issued in November 2004, as the basis for continuing to restrict Canadian lumber and its refusal to refund duties already collected. But that revised analysis is invalid under NAFTA. It was rendered only after the record was re-opened and new information considered—contravening the NAFTA panel’s instructions to render a determination on the original record and explicitly forbidding re-opening of the record.

Under NAFTA rules, the United States is obligated to terminate the restrictions and refund the duties. At the very least, it should refund the duties collected through November 2004 before which there was not even a modicum of justification for the restraints. But such compliance appears unlikely.

The Byrd Amendment

Intransigence on lumber is the latest in an emerging pattern of U.S. disregard and antipathy for the trade rules that are so essential to the global economy. The United States has failed to comply with several other verdicts of the WTO dispute settlement body in recent years, including a 2003 indictment of the so-called Byrd Amendment—until recently. But it’s too late in terms of maintaining any credibility.

A little digging reveals a scandalous relationship between the U.S. positions on Byrd and lumber. The Byrd Amendment, formally known as the Continued Dumping and Subsidy Offset Act, became law in 2000. It mandates distribution of antidumping and countervailing duties collected at the border to the domestic industries that filed or supported the original petitions in the underlying cases. Previously, duties collected were commingled with funds in the general treasury.

Byrd was quickly challenged by several trade partners in the WTO and was ultimately found to violate U.S. trade obligations because it punishes foreign exporters twice—first, by imposing the duties as a remedy to dumping or subsidization (which is acceptable), and then by using those funds to directly subsidize the U.S. producers (which is not). Despite the ruling, the United States failed to repeal Byrd—until last December—and only after the WTO authorized retaliation by the complainants, which included Europe, Canada, Japan and Mexico. Interestingly, although the Byrd Amendment was grudgingly repealed as part of a broader budget reconciliation bill, it will continue in effect until October 1, 2007.

Why is there broad bipartisan support in Congress to keep the Byrd Amendment in place until 2007? Congress was able to dole out $1 billion in subsidies between 2001 and 2004 under Byrd without having to defend or justify the disbursements since the funds don’t come directly from U.S. taxpayers. But that $1 billion is modest relative to the $5 billion at stake in the lumber case. If the United States were to comply with earlier lumber rulings and refund the duties, Congress would lose the opportunity to bestow those massive subsidies on its constituents. Thus, U.S. willingness to blatantly ignore the outcomes in two major dispute settlement cases—inactions that will carry profound costs for U.S. interests—is being driven by the crassest of political considerations. Trade policy be damned.

America’s growing disdain for its international trade commitments is a troubling development. It will now be that much easier for U.S. trade partners to break the rules and disregard their own commitments. Members of Congress who grandstand over Chinese trade and currency policies haven’t a leg to stand on. U.S. credibility on trade issues is waning at a time when strong leadership is desperately needed.

If there is one thing about America that inspires the rest of the world, it is its level of economic freedom. Or at least it used to. According to the 2005 Index of Economic Freedom, published jointly by The Heritage Foundation and "The Wall Street Journal," the U.S. is no longer among the world’s 10 freest economies. In fact, the U.S. is becoming uncompetitive in economic freedom.

Reasons for Decline

One reason for this decline is a combination of onerous taxes and increasing government expenditures, which worsens the fiscal burden on businesses. Another reason is that countries like Australia, Chile and Iceland have leapfrogged past America by decisively and repeatedly cutting taxes, privatizing and deregulating, thus creating friendlier business environments. The degree of economic freedom that the U.S. had 10 years ago, when it was ranked the fifth freest economy, is clearly no longer good enough.

A Warning Is in Order

This plunge in the economic freedom ranking is a warning bell. Economic freedom is the foundation of U.S. economic strength, and economic strength is the foundation of America’s high standard of living, military power and status as a world leader. To regain its leadership in this important area, America must cut taxes and government expenditures, eliminate non-tariff barriers to trade and further deregulate some sectors of the economy. A freer U.S. economy will grow faster, and with faster growth, America will have the resources to raise its high living standard and to preserve its military power and status as a world leader.

Falling Behind

Economic freedom measures the opportunity for people to engage in all levels of economic activity—from starting a business, to opening a bank account, to using a credit card; from buying groceries, traveling and fixing their homes, to being able to obtain good health care; from buying a car, sending their children to school and finding a job, to counting on sound law enforcement and courts to protect their personal liberties and private property. The fewer obstacles to these activities, the more people can participate in the economy by working, investing, saving and consuming. The freer the economy, the more people can use their abilities to create wealth, putting money in the pockets of millions of families.

Until recently, America epitomized the benefits of living in a free society. However, in the four years since 2001, the U.S. ranking has fallen sharply from sixth place in 2001 to 12th place in 2005. Meanwhile other countries were opening their markets and improving their economic freedom. During this time, U.S. government spending ballooned, and this continuous expansion of government expenditures has seriously hurt the U.S. ranking.

The U.S. government has blamed the spending binge on the tragic events of September 11, 2001. However, according to Heritage Foundation analyst Brian Riedl, the majority of the government’s spending spree since 2001 is unrelated to 9/11 or national defense.

In other important areas of economic openness—taxes, non-tariff barriers and regulations affecting local and foreign investment—the U.S. has simply failed to keep pace with a changing world.

Should We Worry?

Should the United States, as a large economy, worry that it is losing its freedom “podium” to small economies like Chile, Iceland, New Zealand or Estonia? Absolutely. One can never overestimate the damage caused by continuously poor policymaking.

For example, in the early 1900s, Argentina was the world’s seventh wealthiest economy. Its wealth was driven largely by foreign direct investment from England and strong enforcement of property rights. It took no more than 40 years of continuously poor policymaking, starting in the 1930s, to erode this wealth. Today, with its world leadership lost, Argentina is a poor country mired in crisis, with a currency that moneychangers around the world refuse to handle. Argentina did not become poor overnight. Its road to poverty began when it became blind to the eventual implications of poor policy.

The perception of the U.S. as the most attractive place to do business is changing as the downward trend in U.S. economic freedom continues.

That perception plummets as spending swells the U.S. federal deficit, Congress threatens more trade restrictions and tariffs and passes legislation to expand underfunded transfer programs, tax rates remain among the highest in the world, the U.S. remains one of the few countries to tax the overseas earnings of its corporations, and some in the Administration support corporate welfare programs such as agricultural subsidies.

Four Reforms To Regain U.S. Leadership in Economic Freedom

It is time for America to rediscover the advantages that flow from increased economic freedom. Specifically, America needs sustained economic growth to maintain its high standard of living, military power and leadership in the world. And to foster this economic growth, the United States needs to increase economic freedom by advancing four reforms.

Reform #1: Cut Tax Rates

One area in which the top 10 economically freest countries in the world distinguish themselves is through low corporate tax rates.

The U.S. must find a way to slash its corporate tax significantly in order to be more competitive and provide businesses with better opportunities for increased production.

Reform #2: Cut Expenditures

Rising government expenditures are imposing a burden on American families and future generations that will be hard to remove. According to David Walker, Comptroller General of the United States, the official debt of the United States government today is $7 trillion.? If the “promises” that the U.S. government has made to retirees and users of government health care services are added, “the real debt is $42 trillion,” which amounts to “18 times the current federal budget, or three-and-one-half [times] the size of the current Gross Domestic Product.” In per capita terms, this obligation represents “over $140,000 for every person in America.”

Just to pay this debt, the U.S. economy would have to grow an average of 3 percent annually for the next 45 years or 6 percent annually for the next 23 years and incur no further obligations. These growth targets illustrate the extent to which current government actions have already affected the future of children born this year, who most likely will have to endure higher tax rates, higher interest rates, a much more difficult business environment, and a lower standard of living.

To reduce the unfunded debt burden on American families, the Administration should immediately advance proposals to reform Social Security, Medicare and Medicaid. Also important, the Administration should stop supporting corporate welfare programs like the farm subsidies.

Reform #3: Support Free Trade, Especially at Home.

The Bush Administration has decisively advanced free trade agreements with other countries. It should continue to do so with others.

The U.S. record is dubious, though, when it comes to removing domestic barriers to trade, such as protectionist tariffs and antidumping laws. One of the worst cases is the stubborn protectionism of U.S. sugar growers. At the current level of protection, sugar sells in U.S. supermarkets at three times the world market price. Moreover, U.S. protectionism is just as bad in other industries, such as orange juice, peanuts and dairy products.

Even worse are the U.S. antidumping laws. In principle, these laws give U.S. producers the right to request protectionist tariffs when a foreign producer sells products in the U.S. at a lower price than in the producer’s home country. In practice, this creates incentives for industries to seek ridiculous protections at the expense of taxpayers.

It all starts with the government’s requirement that 25 percent of the industry making the product must support such a claim. To assess the level of support, the Department of Commerce surveys the industry with a form that producers must complete. Here the Byrd Amendment—in effect the most distorting antidumping law—comes into play. Under the amendment, once the antidumping duty is approved, the producers that support a dumping case are eligible to receive a portion of the duties collected. This obviously creates a strong incentive to support a petition, and approval of every antidumping investigation is virtually guaranteed. A flawed methodology for identifying instances of dumping and the accompanying protection margins—a methodology that is usually biased against foreign producers—further compound the problem.

The damage does not stop there, though. With antidumping laws, producers have a mechanism for requesting protectionist tariffs where no tariff actually exists. In other words, no matter how many free trade agreements the U.S. makes or how many tariffs Congress tears down unilaterally, as long as the antidumping laws exist, U.S. producers will have an avenue they can use to pursue protectionism. Since success breeds imitation, many countries around the world now use antidumping laws as well. The U.S. government must repeal its antidumping laws, not just to preserve the interests of millions of U.S. consumers, but also to advance effectively free trade throughout the world.

Reform #4: Deregulate

The flow of new regulations continues unabated. This problem must be addressed in order to ease the regulatory burden on businesses. For example, foreigners should be allowed to invest in certain sectors that are off limits. In addition, many regulations (e.g., some health and product safety standards, food and drug labeling requirements, or corporate-governance regulations like Sarbanes-Oxley), although well-intentioned, can be particularly burdensome to small and medium-size businesses and should be removed.

The debate on the potential costs and benefits of the proposed Dominican Republic–Central American Free Trade Agreement (DR–CAFTA) continue. Often contentious, it has played out between those who fear the effects of freer trade on their own narrow interests and those who embrace the economic and strategic benefits the agreement will bring.

On June 30, DR-CAFTA passed in the Senate by a 54-45 vote. The House of Representatives is expected to take up the measure in mid-July. In doing so, it is essential that lawmakers separate myth from fact. The following are some common misconceptions about freeing trade between the United States and the countries of Central America.

MYTH: DR–CAFTA, like NAFTA (the North American Free Trade Agreement with Canada and Mexico), will be a disaster for the American economy.

FACT: Since the implementation of NAFTA, the U.S. economy has grown rapidly, millions of new jobs have been created, and investment has expanded.

Between 1993 and 2003, the U.S. economy added almost 18 million new jobs, grew by 38 percent, and increased exports to Mexico and Canada from $134.3 billion to $250.6 billion. And, U.S. manufacturing output rose 41 percent. Today, the U.S. economy continues to exhibit strong growth and enjoys a historically low rate of unemployment. Clearly, NAFTA did not hurt the U.S. economy.

Freer trade stimulates growth, improves investment and job opportunities, and leads to higher living standards. Under DR–CAFTA, farmers, manufacturers, banks, and other service providers will become more competitive, have access to new markets, and benefit from stronger protection of property rights.

DR–CAFTA also will help the Central American countries to develop and modernize their economies. This, in turn, will generate greater demand for U.S. goods and services. For example, Costa Rica will be seeking to renovate its telecommunications systems and financial services, creating opportunities for U.S. firms. Freeing trade generates benefits in America today by making U.S. goods more competitive and tomorrow as Central American countries develop into larger markets.

MYTH: DR–CAFTA will result in U.S. job losses.

FACT: DR–CAFTA will encourage stronger growth and new, higher-quality jobs in the United States.

As illustrated in the 2005 Index of Economic Freedom, countries adopting freer trade policies experienced higher average growth (2.8 percent) between 1995 and 2003 than countries that did nothing (2.4 percent) or that reduced their openness to trade (1.4 percent).

Since 1983, under the Caribbean Basin Initiative (CBI), the Dominican Republic and Central America have been receiving preferential trade access for most of their goods entering the U.S. Thus, any job loss associated with lowering tariffs on products from Central America already has occurred.

The agreement is actually a way to protect American jobs. For example, apparel manufacturers in Central America are required under the CBI to use U.S. fabric and yarn in their products in order to qualify for duty-free access to the U.S. market. By strengthening the relationship between U.S. textile producers and Central American apparel firms, DR–CAFTA will make the region, as a whole, better able to compete with Asia, thereby supporting continued U.S. textile exports and jobs.

DR–CAFTA will open Central America and the Dominican Republic to U.S. goods and services. It is an opportunity to gain new markets for American products and services, make investing in the U.S. more attractive, and support better, higher-paying U.S. jobs.

MYTH: DR–CAFTA will be just another excuse for outsourcing by U.S. companies, resulting in further job losses.

FACT: The U.S. is not losing net jobs to other countries, and this trend should continue under DR–CAFTA.

According to the Organization for International Investment, the number of manufacturing jobs insourced to the U.S. grew by 82 percent the past 15 years. During that same time period, the number of jobs lost as a result of outsourcing grew by only 23 percent.

The size of the U.S. market, a highly skilled workforce, and relatively low international trade barriers combine to serve as a beacon for attracting foreign investment into the American economy and generating new, better-paying jobs.

Although South Carolina has lost some textile jobs as a result of technological advancement and trade adjustment, it has gained higher-paying jobs at new factories, such as BMW, Daimler–Chrysler, and China’s leading electronics manufacturer.

The biggest reason for outsourcing is not free trade, but the tax and regulatory burdens faced by companies operating within the United States. If these burdens are reduced, firms in the U.S. will be more competitive and less likely to move their business elsewhere.

MYTH: DR–CAFTA will make the trade deficit bigger, hurting the U.S. economy.

FACT: A growing trade deficit is an indication of strong inflows of foreign investment and domestic economic growth, which results in higher living standards for Americans.

Between 1980 and 2004, in those years where the current account deficit increased, the U.S. grew an average of 3.5 percent. The economy grew only 1.9 percent in years when the current account deficit shrank.

By definition, a trade deficit indicates an inflow of foreign capital. The U.S. trade deficit reflects too little domestic savings to satisfy all of the investment opportunities in this country. This shortfall is remedied by a net inflow of foreign investment.

As investment and the economy grow, new jobs are created and the demand for all goods, including imports, rises. A growing trade deficit is generally a sign of a healthy, expanding economy.

MYTH: DR–CAFTA leaves foreign workers unprotected.

FACT: DR–CAFTA will enable the Central American countries to enforce labor standards.

DR–CAFTA countries have adopted the core labor standards of the International Labor Organization. DR–CAFTA also requires effective enforcement of labor regulations. Failure to comply would lead to monetary fines and/or the loss of preferential trade benefits.

Programs have been designed to assist these countries in strengthening their institutional capacity to administer labor regulations effectively.

Data indicate that the more flexible a country’s labor laws, the higher the level of a country’s per capita GDP and the greater the benefit to each household. Thus, caution should be used when demanding that the Central American countries adopt additional regulations that may reduce the ability of their workforce to adjust to economic change.

Historically, as prosperity increases, the desire and ability to implement labor protections and expend resources on their enforcement become stronger. This natural evolution toward protecting workers has been demonstrated in the U.S., Britain, and other developed countries.

MYTH: DR–CAFTA will encourage greater immigration from Central America to the United States.

FACT: New economic opportunities and growing living standards will work to stem the tide of immigration.

Recent studies show that areas in Mexico that benefited from NAFTA had higher wages and lower levels of emigration. Areas that did not experience increased economic activity as a result of NAFTA saw a decline in wages and remain the main source of immigration from Mexico into the U.S.

DR–CAFTA would help to generate the economic growth and stability that bring new opportunities, more jobs, and improved living standards to the people of Central America. With the agreement in place, the decision to emigrate to the United States would become one driven by choice rather than necessity.

Although the myths about DR–CAFTA might make for interesting media fodder, it is the facts that should rule the debate within Congress. Overall, the facts are clear: DR–CAFTA will improve U.S. economic performance, support American jobs, improve regional competitiveness against China, and promote economic freedom and prosperity across the region.

China’s practice of pegging its currency, the yuan (also known as the renminbi), to the U.S. dollar has created much speculation in corporate board rooms and controversy among policymakers. Unpegging the yuan from the dollar, a solution advocated by many, may not be so easy. And, it may not achieve what it is intended to do. What’s worse, it could have some unintended consequences.

Will It Rise or Fall?

Congressional sources have declared the yuan to be considerably undervalued, which in turn, make Chinese exports more attractive worldwide. In response, some U.S. politicians and various organizations suggest that China should allow the yuan to float freely, assuming it will rise to a higher level.

On the other hand, some economists believe that if this were to occur, the currency may become volatile due to China’s weak financial sector, instability associated with the country’s transition to a market economy and difficult economic adjustments associated with WTO-mandated reforms. In turn, a widely fluctuating yuan could have a destabilizing effect and fall well below current levels. In this less likely scenario, a falling yuan could lead to a financial crisis.

The Outcome Is Unclear

Regardless of these arguments, a revaluation of the yuan is likely to have little impact on the U.S. trade deficit. Why? If the yuan were to rise in value, U.S. companies would continue to seek low cost imports from other developing countries.

In his June 23, 2005 testimony before the U.S. Senate Committee on Finance, Federal Reserve Chairman Alan Greenspan said, “An increase in the exchange rate of the renminbi, relative to the dollar, would likely redirect trade within Asia, reversing to some extent the patterns that have emerged during the past half century. However, a revaluation of the renminbi would have limited consequences for overall U.S. imports, as well as for U.S. exports that compete with Chinese products for third markets.”

If China were to revalue its currency, other Asian countries would become more comfortable in allowing their currencies to appreciate against the dollar, according to the Deloitte Research report, China at a Crossroads: Seven Risks of Doing Business. The result: the U.S. would ultimately experience an improvement in its current account balance. How much? Economists suggest it would be minimal.

The Other Impact on China

Although the full impact of a floating yuan is uncertain, many analysts agree it is increasingly likely that China will allow the yuan to appreciate against the dollar. They also agree that continued pegging of the yuan to the dollar negatively impacts China.

In a May 2005 report to Congress, the U.S. Treasury Department said the yuan’s peg “blocks the transmission of critical price signals, impedes needed adjustment of international imbalances, attracts speculative capital flows and is a large and increasing risk to the Chinese economy.”

It also is widely agreed that the pegging policy hurts low-cost global producers who compete with China for global market share.

Market Forces Should Dictate

The yuan-dollar pegging policy originally began when the dollar was strong and China was considered an economy in need of development aid. Now that China has become a strong international player, especially in the manufacturing sector, and one that is seeking higher technologies, many argue that China is ready to implement a more flexible exchange rate.

To play fair on the world stage, China should take steps to achieve currency convertibility based on market forces. When, not if, may be the more appropriate question.