the Saddle

Stephan Roach of Morgan Stanley lands some stiff left jabs when it comes to playing the blame game (leading up to the joint IMF-WB meetings) for the current US account deficit and global imbealances. [Blame is placed on the legislative branch and the Federal Reserve.]

America is to blame in shaping its own destiny. Sadly, that destiny is now manifested in the form of record excesses in the US economy. That’s true of the national saving rate, the current account deficit, household sector indebtedness, the consumption share of GDP, and the bubble-prone state of asset markets. As a result of these excesses, the US now accounts for fully 70% of the world’s imbalances — well above any measure of its share in the global economy.

Ouch. Where I stand in all of this, Yes we hold alot of the blame, Yes it does not look good in the immediate future, Yes we can dig ourselves out, Yes we need to save more as individuals and on a whole.

While the administrations stance is both a turn around and welcomed, I still have a bad taste in my mouth. Missing from Zoellicks’ argument is the longer we play the trade game, which is extensive, the greater the probablility and incentive of one player to screw the other(s). The trick of the administration is setting the aggrements up so this is as difficult as possible – the Doha talks certainly don’t lead by example.

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WSJ 8-25-04
CAPITAL JOURNAL
By GERALD F. SEIB

Push for Free Trade
In These Times?
Bush Answers Yes
August 25, 2004; Page A4

These are the times that try a free-trader’s soul.

It is an election year, and the trade deficit is way up. The U.S. imported $55.8 billion more in goods and services than it exported in June. Loss of jobs has become the economic issue, and the outsourcing of jobs abroad the metaphor for it.

Amidst all of that, Robert Zoellick is doing something intriguing, almost shocking: He is pushing free trade as hard as ever. More interesting, his boss, President Bush, who is busy running for re-election, is backing him all the way.

Mr. Zoellick is the Bush administration’s trade representative, and his continued pursuit of free trade amid all the political pressure to move in the opposite direction is one of the more surprising and little-noticed stories of the election year. Mr. Zoellick says the administration is “confounding conventional wisdom,” and he is right.

In recent weeks, the administration has signed a deal to add the Dominican Republic to five Central American nations already part of a free-trade agreement, signed a separate free-trade deal with Australia, pushed a trade agreement with Morocco through Congress and revived moribund talks on a new global deal to lower trade barriers. In fact, the administration has finished free-trade agreements with nine countries in the last eight months.

Far from buckling to populist protectionist impulses in the campaign season, the administration actually seems to be getting more committed to free trade as the re-election test approaches. This is a matter of core beliefs — but it also may be the result of the administration’s own somewhat painful experiences.

The Bush team dallied with protectionism early on, when it imposed temporary tariffs on imported steel. That was a fairly obvious attempt to please the steel industry and the politically important swing states of Pennsylvania and West Virginia, as well as a bid to buy political support for trade-liberalization in other areas. While the tariffs did win some time for the domestic steel industry to regroup and reorganize, manufacturers in other politically sensitive swing states saw the cost of their steel go up, and they weren’t happy.

Now Mr. Bush seems to have moved past that experience, and he delivers a hearty defense of free trade. On one trip to Ohio — the ultimate swing state — he lauded the way open trade has brought more than 900 foreign facilities to the state, and more than 16,000 jobs building Hondas alone.

“When politicians in Washington attack trade for political reasons, they don’t mention these workers, or the 6.4 million other Americans who draw their paychecks from foreign companies,” he declared. “Across America, from Marysville, Ohio, to Seattle, Washington, workers are better off — better off — because this country is an optimistic, successful trading nation.”

For his part, Mr. Zoellick also sounds like a man itching to make the case for free trade as a political winner, even in a climate of trembling over jobs lost abroad. He rattles off statistics to back his case: More than 12 million Americans with jobs supported by exports, with pay that runs perhaps 18% above average. One in five manufacturing jobs dependent on exports. One in three acres of crops planted for exports. A quarter of economic growth in the 1990s from exports.

Offsetting those numbers, of course, is the uncomfortable reality that, despite the free-trade leanings of this administration and the Clinton one before it, the country has lost 1.1 million jobs since 2001. If trade creates jobs, why are the job numbers going down?

Mr. Zoellick has a ready answer for that as well. The big reason the U.S. is running a manufacturing trade deficit, he argues, isn’t that it is buying more from abroad, but that it isn’t exporting enough goods overseas. That problem is rooted in the fact that barriers to trade abroad tend to be much higher than U.S. barriers.

So free-trade agreements, by definition, should benefit the U.S. more than the other guys: The other side eliminates barriers that are higher to start with, while the U.S. eliminates barriers that are lower. The bigger bang should go to American exports. “The benefit of a free-trade negotiation is that we’re leveling the playing field — to zero,” says Mr. Zoellick.

So in theory, at least, free trade is a win-win for the U.S. — provided, the other side lives up to its deal. Which the administration, of course, pledges it will ensure. That is at least a coherent economic message at a time when the Bush team is straining for one, and has the added benefit of being one the president firmly believes. Expect to hear more of it next week at the Republican national convention, and beyond.

Write to Gerald F. Seib at jerry.seib@wsj.com

One aspect of freedom is openness and transparency. Iraqi linux community is slowly gaining momentum and should be fostered.

A working paper out by Andrew Rose gives disconcerting evidence how membership in trade organizations does little to smooth a path towards interdependence. I resign myself to the notion that while trade is a crucial component, it is not sufficient condition for stability. Therefor the WTO is imperative, but not the answer-all it can be presented as.

“I examine the hypothesis that membership in the World Trade Organization (WTO) and its predecessor the General Agreement on Tariffs and Trade (GATT) has increased the stability and predictability of trade flows. I use a large data set covering annual bilateral trade flows between over 175 countries between 1950 and 1999, and estimate the effect of GATT/WTO membership on the coefficient of variation in trade computed over 25-year samples, controlling for a number of factors. I also use a comparable multilateral data set. There is little evidence that membership in the GATT/WTO has a significant dampening effect on trade volatility.”

The tenth birthday of the North American Free Trade Agreement is this week, so I guess now is as good a time as any to look back and see what was accomplished and what was just smoke.

Depending on how your point of view, Nafta was a sucess and a failure. Alot of claims made about it (I remember these well, I was a Senior in High School then) were way to large for any single trade pact to accomplish. Certainly the winners were the US and Canada. While the fears of the US of jobs loss to the ‘Giant sucking sound’ south of the border (although some manufacturing did leave – the US had its largest decade of expansion and job creation in history) never fully materalized. Canada was most concerned about loosing tax revenues which help to support its large social welfare programs. After 10 years they are still on par with most of Europe for services for their citizens.

Mexico, the one who was supposed to benefit greatly from the pact, has seen less impressive results. First of all, farming has collapsed, since the small family farm simply cannot compete with the efficiency of a much more technological american sector. However, corn imports from the US does mean cheaper tortillas for the urban poor. Also the Tequila Crisis of the mid 90′s wasn’t kind. As the Mexican gov’t was forced to float the peso it quickly devaluse to 1/5 th of its amt. vs. the dollar. However, Mexico recovered from this quicker than its previous two banking crisis in the early 80′s with some help form the US who
(a) didn’t want to see its new trading partner fall into disrepair, but also
(b) was making the case for trade liberalization and a failure in Mexico would not only hurt creditability but stymie and global arrangements the Clinton administration was pursuing.

Currently wages in Mexico are just returning to pre-crisis levels, so it is a bit early to see large scale positive development. However in these 10 years China has joined the WTO and is a derect competitor for manufacturing and cheap labor. Whether Mexico will retain these industries or loose them overseas is inconclusive.