Tuesday, March 15, 2005

Here's another entry in my highly irregular series of economics puzzlers. This one will have more of a practical bent: Why is it interfering in trade when California tries to regulate toxic gasoline additives, but not when China pegs currency values?

I'm perhaps jumping the gun here a little bit. I'm referring to a case brought by a Candian company which was distressed to find that California had banned its gasoline additive. So, using provisions of the North American Free Trade Agreement, they are suing -- not in either an American or a Canadian court, but in a secretive tribunal set up by NAFTA. As I write, there has been no ruling yet. So, the board has not yet hit up the taxpayers of California for the billion dollars or so that the company is asking for. But they could.

So, what's going on here?

The world is getting increasingly bound up in trade treaties -- from NAFTA to the WTO agreements. And one of the things these treaties try to do to promote trade is to keep governments from levying tariffs and the like which retard trade. But tariffs are only one way that a government could try to keep foreign products out. They could also impose discriminatory health and safety regulations which ban foreign products outright for spurious reasons. And so, the treaties set up a mechanism of review panels to see whether a regulation is actually legitimate -- and to levy fines if it is not.

The upshot is that while these organizations are set up for the ostensible purpose of promoting trade, they are given review power local laws. More to the point, they are set up to treat them all -- not just, say, tariffs, but local environment and safety regulations as well, uniformly as "barriers to trade". To which they have only one possible response -- to demand removal of the "barriers", and penalize governments that keep them up.

It doesn't have to be that way. Disparate regulations in different jurisdictions do create trade friction -- but that friction could be resolved by subjecting countries to trade sanctions if they don't have health and safety regulations which meet certain basic standards. However, these organizations are not, in practice, really set up to do that. They can call for these regulations, as "trade barriers" to be removed; they cannot, or at any rate do not, call for them to be created or credibly enforced. The upshot is that a transnational corporation which finds local laws to be inconvenient can appeal to the WTO without fear; it'll either do nothing, or strike them down. Which makes these organizations powerful tools for corporations against the state, and against even beneficial kinds of regulation.

Now, it is one thing to believe that trade is good; it is another to believe that trade has a kind of transcendent goodness which deserves this kind of support. Particularly when the trade agreements are silent on yet another government strategy for influencing trade: by manipulating the value of their currency relative to others. The Chinese government, for instance, has "pegged" the value of its currency, the renminbi, to the dollar, and is buying immense amounts of dollar-demonminated securities (mostly treasury bonds and mortgage-backed securities) to prop up the dollar. It is widely acknowledged that if they stopped doing this, the result would be that the prices of Chinese goods in the U.S. would rise, and the prices of American goods in China would fall. And that this is a deliberate goal of the policy. China, in effect, has made American goods artificially more expensive -- retarding trade every bit as much as a tariff -- while also, in effect, subsidizing its exports to America. Even better: neither the subsidy nor the tariff is subject to the trade rules of the WTO. Environmental regulations can be reviewed by trade boards; monetary policy, even though it has a far more pervasive influence on trade, cannot.

(It's worth noting that, on China's part, this is one component of an overtly mercantile economic strategy which would not be dear to the hearts of the free traders. In fact, they are moving more directly to poach viable industry from the U.S. -- pressuring Silicon Valley companies like Cisco, and through Cisco, its subcontractors, to move jobs to China whether there's an economic rationale for that or not. This may not be sustainable, and if it all falls apart, both sides of the relationship may be hurt at the end of it. But if the Chinese see the game of the next century as a battle with us for economic power, they may not care how badly they wind up, so long as we wind up worse. But that's a topic for another day).

Obviously, a government might have perfectly good reasons to alter its monetary policy for reasons other than its effects on trade, per se. But that's true for environmental and safety regulations as well. Indeed, there already are large, transantional institutions, full of free trade advocates, which already dictate monetary (and even fiscal) policy for many third-world nations -- the World Bank and the IMF. The results aren't always pretty, but they do it. Hence, the puzzle: If the trade organizations' review processes are good enough for the one, why are they not trusted to oversee the other?

One last point: opposition to trade treaties and their review boards and the like is often painted not as opposition to a particular mechanism for the promotion of international trade, which has certain unfortunate side effects, but rather as "opposition to trade" per se. This takes framing into the realm of non-Euclidean geometry. It's impossible to believe that most of the victims of the "Miami model" were demonstrating in opposition to trade per se, because there's no earthly reason for most of them to give a damn about it -- and plenty of reason for them to care about the environment and about labor conditions, which are their actual, stated concerns).

There are plenty of ways to promote trade without imposing unaccountable review boards, gutting democracy and self-rule. What African farmers and textile workers need most to get their products into the United States isn't a few more bureaucrats reviewing EPA regulations in Geneva -- it's a vote in Washington to take away import barriers and price supports, which we can do all on our own without negotiating a thing with anybody.

And so it would be a lot easier to take the advocates of unaccountable, supranational organizations with veto power over local health and safety regulations as advocates for trade, per se, if they were more willing to put those proposals on the shelf until we were rid of the goddamn price supports -- a point which applies not just to the current administration, but to its predecessors, whose record on this point is likewise nothing to brag about.


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