Corn and Sugar Subsidies

As mentioned in previous posts, corn growers are subsidized by laws that require consumers to buy ethanol which is more expensive than gasoline.  If it were not more expensive, you would not have to force people to buy it.  The subsidies come in three forms: forced consumption of ethanol paid by consumers, blending fees paid by taxpayers, and tariffs on the importation of sugar based ethanol which is again paid indirectly by consumers.  Included below are quotes by two Nobel Laureates in economics and a former head of the Council of Economic Advisors to President Bush, the president who greatly increased the subsidies to corn growers.

Paul Krugman is a Nobel Prize winner who sometimes criticizes President Obama from the left.  He writes from his column, The Conscience of a Liberal in a post titled “Demon Ethanol,”

I’m almost never censored at the Times. However, I was told that I couldn’t use the lede I originally wrote for my column following the 2007 State of the Union address, in which Bush made ethanol the centerpiece of his energy strategy: “Before the State of the Union address, there had been hints and hopes that President Bush would offer a serious plan to reduce our dependence on imported oil. Instead, however, he took refuge in alcohol.”

Well, anyway — the news on ethanol just keeps getting worse. Bad for the economy, bad for consumers, bad for the planet — what’s not to love?

Gary Becker is a Nobel Prize winner often associated with the political right.  He writes in “Let's Make Gasoline Prices Even Higher”

Other ways to reduce dependence on oil take much longer to implement, but a long view is necessary since the terrorism threat will last into the foreseeable future. The federal government has been trying to develop a cleaner substitute for gasoline by subsidizing production of ethanol, made primarily from corn. This program has essentially been a flop: Ethanol is still too expensive, and ethanol factories create pollution consisting of nitrogen dioxides and other gases. The ethanol subsidy of about 50 cents a gallon is just another way to subsidize corn growers, not a serious attempt to find efficient ways to reduce dependence on gasoline.

Greg Mankiw was a head of the Council of Economic Advisors to President Bush.  What follows is a post from his blog that quotes Thomas Friedman and Mankiw’s short reply to the comment (“Sugar Ethanol”).

In today's NY Times, columnist Tom Friedman arrives at the intersection of energy, farm, and trade policy and doesn't like what he finds:

Thanks to pressure from Midwest farmers and agribusinesses, who want to protect the U.S. corn ethanol industry from competition from Brazilian sugar ethanol, we have imposed a stiff tariff to keep it out. We do this even though Brazilian sugar ethanol provides eight times the energy of the fossil fuel used to make it, while American corn ethanol provides only 1.3 times the energy of the fossil fuel used to make it. We do this even though sugar ethanol reduces greenhouses gases more than corn ethanol. And we do this even though sugar cane ethanol can easily be grown in poor tropical countries in Africa or the Caribbean, and could actually help alleviate their poverty.

Friedman calls this state of affairs "stupid." This is a word I usually avoid (for it is hard to use politely), but it does seem particularly apt here.

Sugar growers are also subsidized by consumers.  Their subsidies come through quotas on foreign imports at the expense of domestic consumers and foreign producers.  Mark J. Perry, a professor of economics and finance in the school of management at the Flint campus of the University of Michigan describes the program’s cost to American consumers (“Sugar Policy: Sweet Deal for Producers, Sour for Consumers”).

Due to protectionist trade policies that limit the amount of sugar imports entering the United States at the much lower world price, the American sugar producers are protected from more efficient foreign sugar growers in Central America, Africa, and the Caribbean who can produce sugar at half the cost of beet sugar farmers in Minnesota, North Dakota, and Michigan…

Last year, Americans paid an average of 53.3 cents per pound for domestic sugar, almost double the average world price of 27.7 cents per pound. Exactly how much did Americans pay last year for our “no cost” sugar policy? An astounding $4.5 billion…

That is approximately $150 per American.  If all the money went to the 4,700 farmers that grow sugar beets, that’s about $950,000 per farmer.  Now that’s a sweet deal for farmers! 
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A Trade Peccadillo?

Ninety-three percent of economists agree with the statement that "tariffs and quotas usually reduce general economic welfare" (Richard Alston, J. R. Kearl, and Michael Vaughn, "Is There Consensus among Economists in the 1990s?," American Economic Review, May 1992 or Dan Fuller Geide-stevenson, "Consensus Among Economists: Revisited," Journal of Economic Education, Fall, 2003).  Yet, protectionist trade policies remain popular in the general population and in many political circles in Washington.  A Reuters article, "US slaps duties on electric blankets from China," describes the most recent efforts in Washington to limit trade.

WASHINGTON, Jan 27 (Reuters) - The United States has set preliminary anti-dumping duties ranging from 90 to nearly 175 percent on about $30 million worth of electric blankets from China, the U.S. Commerce Department said on Wednesday.

The ruling is a victory for Jarden Consumer Solutions, a Florida-based subsidiary of consumer products company Jarden Corp (JAH.N). It filed a petition earlier this year asking for protection against its Chinese competitors.

The relatively small case is of one several ongoing U.S. investigations into charges that Chinese companies are selling their goods in the United States at unfairly low prices and benefit from unfair government subsidies.

The products covered by the probe include finished, semi-finished, and unassembled woven electric blankets of all sizes and fabric types, whether made of man-made fiber, natural fiber or a blend of both...

Commerce will make its final decision on duty levels in June, setting the stage for the U.S. International Trade Commission to cast a final vote in July or early August on whether to allow the duties.

The government is attempting to cover its peccadillo with the sackcloth of winning a more balance playing field for our producers.  Would it be good if the subsidies were eliminated? Yes, but these types of policies are often used to disguise protectionist policies.
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Pew Global Attitudes Project: Mexico

Economics students learn that trade of goods and services benefits trading partners. They generally do not consider models that examine the impact of resource flows such as labor through migration. Our economy draws Mexican immigrants like a giant magnet. With their proximity to our country, and handed down knowledge of family and friends who have immigrated, Mexicans understand that American society is freer of violence, and the need to have political connections to succeed. A Pew Global Attitudes Project titled, "Most Mexicans See Better Life in U.S.," reports interesting but not surprising results.

Facing a variety of national problems -- crime, drugs, corruption, a troubled economy -- Mexicans overwhelmingly are dissatisfied with the direction of their country. With drug-related violence affecting much of Mexico, large majorities describe crime (81%) and illegal drugs (73%) as very big problems, and Mexicans overwhelmingly endorse President Felipe Calderón's tough stance against drug traffickers.

Most believe life is better in the United States. Close to six-in-ten (57%) say that people who move from Mexico enjoy a better life in the U.S., up from 51% in 2007. And the vast majority of those who are in regular contact with friends and relatives living in the U.S. say those friends and relatives have largely achieved their goals.

A substantial minority of Mexicans say that if they had the means and opportunity to go live in the U.S. they would do so, and more than half of those who would migrate if they had the chance say they would do so without authorization.

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More on the US's Trade Dispute with China

(HT Drudge)  As would be expected, China has announced its opposition to the Obama administration's decision to place a 35% tariff on tires from China.  Geoff Dyer and Tom Braithwaite of the Financial Times in "US tyre duties spark China clash," outlines the issues in the trade dispute. 

In his first big test on world trade since taking office in January, Mr Obama sided with America’s trade unions, which have complained that a “surge” in imports of Chinese-made tyres had caused 7,000 job losses among US factory workers.

Chen Deming, China’s minister of commerce, condemned the decision, saying that it “sends the wrong signal to the world” at a time when Washington and Beijing should be co-operating to deal with the worst economic and financial crisis in decades.

“This is a grave act of trade protectionism,” Mr Chen said in a statement. “Not only does it violate WTO rules, it contravenes commitments the US government made at the [April] G20 financial summit.”

Economists often wonder if presidents listen to their economic advisors and this is a data point that suggests they do not.  Larry Summers and Christina Romer, two top notch economists, must be hiding under their desks and refusing calls from reporters.  The administration will be hard pressed to find economists who support the action.  Brad DeLong gives a simple numerical example to explain why the tariff is a bad idea.  After citing a reporter who notes that the tariff will add $3.50 per tire and save 5,000[1] U.S. jobs, DeLong does some back of the envelope calculations.

Let's see... 250 million cars in America... need 4 tires per car... need new tires every 2.5 years. 400 million tires a year... $1.4 billion dollars a year... 10,000 worker jobs saved... $140,000 dollars per worker-job per year.

Looks like we could (a) let the Chinese sell us tires, (b) tax each tire by $2.50, (c) pay each tire worker who loses his or her job $100K a year, and we come out ahead: American households have more money to spend on other things, China has more jobs to help what is still a very poor country grow, and tire workers have higher incomes and more leisure as well.

But, you say, it would be stupid to impose a $2 a tire tax and use the money to pay each laid-off tire worker $100K a year.

That's the point: when the policy you are adopting is worse for everybody than a policy you agree is stupid, the policy you are adopting is best characterized as really stupid.

Does the administration believe that we are the only country that has domestic producers who will complain when competition heats up with foreign producers?  Dyer and Braithwaite continue.

China said it would now investigate imports of US poultry and vehicles, responding to complaints from domestic companies.

The US earlier warned Beijing against taking retaliatory action. “Retaliation would be inappropriate, as the United States acted entirely within the bounds of trade laws and within the safeguard provision that China itself agreed to upon accession to the World Trade Organisation.

[1] The job numbers used by DeLong come from another article and differ by 2,000 from those cited by Dyer and Braithwaite. 
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The Obama Administration and Trade

Economists like trade. According to Alston, Kearl, and Vaughn, who surveyed economists in their 1992 American Economic Review article titled, "Is There Consensus among Economists in the 1990s?" 93% of economists agree with the statement that "tariffs and import quotas usually reduce general economic welfare."  Whether between households, states, or nations, it increases prosperity through specialization.

Those who oppose open trade succumb to Caplan's antiforeign bias, and perhaps antimarket, and make-work biases as well.  Politicians who support measures to limit trade may be voicing their constituents' biases or their special interests' wants but they are doing so at the expense of their constituents' well-being.

The Obama administration has nipped at the heels of our free trade policy.  According to the Wall Street Journal's editorial writers, ("A Protectionist Wave,"),

The White House leaked word late Friday evening that the U.S. will impose a 35% tariff on imported Chinese tires used by millions of low-income Americans. We wonder if President Obama understands the political forces he's unleashing with this blatant protectionism.

Mr. Obama is setting a precedent in the tire case because he is applying a previously unused part of the trade law known as Section 421. This allows U.S. industries or unions to seek protection from "surges" of Chinese imports, with a lower burden of proof than normal antidumping or countervailing duty cases. President Bush nixed the four Section 421 petitions that reached his desk, citing the national economic interest. Domestic lobbies had lobbied Mr. Obama hard to reverse that pattern and set a new protectionist precedent...

This threat will now be realized as other industries pursue the 421 solution to reducing competition. Some of the product categories that have seen import surges include shoes, lawn mowers, television monitors, hearing aids, musical instruments like keyboards and guitars, women's underwear, blouses and t-shirts, according to Greg Rushford, editor of a newsletter on trade policy. Oh, and trousers, women's knit shirts and bras, according to Cass Johnson, president of the National Council of Textile Organizations—another lobby that must be gleeful that Mr. Obama has unleashed Section 421.

As a candidate, Mr. Obama courted union support, and the United Steelworkers filed the tire case anticipating he would pay them back. Some in the business and policy communities thought Mr. Obama didn't really mean it, and that like Bill Clinton he would stand for the national economic interest in open trade once he became President. Mark that down as another misjudgment. In his first big trade test in the White House, Mr. Obama has allied himself with the protectionists, and the world will see his political surrender and rush to exploit it.

Consumers who buy Chinese tires, including millions of low-income Americans will be taxed through higher prices for tires that they freely chose to buy.  I disagree with one point made by the writers, that this was the administrations "first big trade test."  I believe that that honor goes to signing the stimulus bill (American Recovery and Reinvestment Act of 2009) with the buy American clause.  President Obama's economic advisors should remind him of the role that protectionism played in deepening and prolonging the Great Depression. 
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Gray's "Samuel Johnson and the Virtue of Capitalism"

Principle 5 of Mankiw's ten principles of economics states that "trade can make everyone better off."  It is an old claim in economics going back to Adam Smith, supported by empirical evidence and widely accepted within the economics profession.  Economists believe that trade leads to specialization and specialization to the creation of wealth.  Eliza Gray wrote a short article for the Wall Street Journal titled "Samuel Johnson and the Virtue of Capitalism," in which she demonstrates that Johnson, the author of the first authoritative dictionary in English, had a firm grasp of the economics of trade.  She writes,

Johnson also understood that what Smith would later call the division of labor was instrumental for human happiness and progress. "The Adventurer 67," which he wrote in 1753 at the height of a commercial boom (and 23 years before Smith published "The Wealth of Nations"), delights in the sheer number of occupations available in a commercial capital like London. The insatiable demand for the most specialized goods and services means employment for anyone who wants to make a living: ". . . myriads [are] raised to dignity, by no other merit than . . . contributing to supply their neighbors with the means of sucking smoke through a tube of clay."

"[E]ach of us singly can do little for himself," he wrote insightfully, "and there is scarce any one amongst us . . . who does not enjoy the labor of a thousand artists." He also saw the market as the only mechanism by which the diversity of human desires could be satisfied: "In the endless variety of tastes and circumstances that diversify mankind, nothing is so superfluous, but that some one desires it . . ."

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China and Trade Restrictions

Despite a great economic awakening, the Chinese government controls imports, hindering future growth.  The U.S. and the European Union have both filed complaints with the World Trade Organization over the Chinese government's trade policy.  (HT Drudge) A June 23, 2009 AP story titled, "US files WTO case against China over exports," reads,

The United States has filed its first trade case against China with the World Trade Organization, accusing the Asian power of restricting exports of certain raw materials to give Chinese manufacturers "unfair advantages."

Trade Representative Ron Kirk says the U.S. is "deeply troubled at what appears to be a conscious policy to create unfair advantages for Chinese industries" by restricting exports of raw ingredients used in steel, aluminum and chemicals.

Kirk said Tuesday dialogue was the preferred method to settle the dispute, but that China has not changed its policies despite the U.S. raising the issue repeatedly.

The European Union also requested formal WTO action with China on the issue.

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A Brief History of the "Buy American" Provision of The Stimulus

I have written several posts (here, here, here) about the buy American provision of the stimulus bill (The American Recovery and Reinvestment Act of 2009) that continues to rankle our trading partners.  This post presents a brief history of the provision.  The original bill required that all public projects use iron, steel, and manufactured goods produced in the United States.  Representatives of foreign governments, including Canadian prime minister, Stephan Harper, became concerned about the sections protectionist nature.  As the debate over the stimulus raged in Congress, President Obama was preparing to meet with Harper in Canada.  Roger Runningen and Hans Nichols write for Bloomberg in  "Obama Will Review Buy American Provision in Stimulus (Update1)," (January 30, 2009) that,

The administration “will review that particular provision,” Gibbs [President Obama's press sectretary] said today at his regular briefing. The president’s advisers understand “all of the concerns that have been heard, not only in this room, but in newspapers produced both up north and down south.”

He refused to say whether the administration supported or opposed keeping that part of the legislation intact. Nor did he say what the president would do if the provision remains once the bill clears the House and the Senate.

The issue may cloud Obama’s trip to Canada on Feb. 19, his first journey outside U.S. borders as president. Officials in Canada, the top U.S. trade partner, are criticizing a part of legislation that passed the U.S. House of Representatives Jan. 28 that requires the use of U.S.-made iron and steel in infrastructure projects.

On February 4, 2009, Sheldon Alberts of Canada.com reports in "U.S. Senate votes to soften 'Buy American' clause," that

American lawmakers on Wednesday voted to soften the controversial "Buy American" provisions in the proposed U.S. economic stimulus package over fears they could spark a trade war.

The change gives Canada, among other major trading partners, some comfort it would be exempted from a strict requirement in the $819-billion bill, which passed the House last week, that only U.S.-produced steel and iron be used in projects launched with funds from the economic stimulus.

The amendment, approved by the Senate, requires the Buy American provisions be "applied in a manner consistent with U.S. obligations under international agreements."

Senate Democrats had earlier in the evening voted down an amendment, proposed by Senator John McCain, that would totally strip the Buy American provisions.

The "Buy American" section  as passed by the Congress and signed by President Obama reads,

Sec. 1605. Use of American Iron, Steel, and Manufactured Goods. (a) None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.

(b) Subsection (a) shall not apply in any case or category of cases in which the head of the Federal department or agency involved finds that--

(1) applying subsection (a) would be inconsistent with the public interest;

(2) iron, steel, and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality; or

(3) inclusion of iron, steel, and manufactured goods produced in the United States will increase the cost of the overall project by more than 25 percent.

(c) If the head of a Federal department or agency determines that it is necessary to waive the application of subsection (a) based on a finding under subsection (b), the head of the department or agency shall publish in the Federal Register a detailed written justification as to why the provision is being waived.

(d) This section shall be applied in a manner consistent with United States obligations under international agreements.

While meeting with the Canadian prime minister, President Obama promised U.S. compliance with international trade obligations and related his hope that trade would continue to expand ("PM, Obama talk trade, Afghanistan, pledge 'clean energy dialogue'," CBCnews.ca, February 19, 2009.

On the controversial "Buy American" provision included in the U.S. stimulus package, Obama said he made clear that those measures will be consistent with Washington's obligations under the World Trade Organization and the North American Free Trade Act.

"I provided Prime Minister Harper an assurance that I want to grow trade, not contract it," Obama said.

Harper said those agreements do allow domestic purchasing preferences, but pointed out they are not allowed without limits.

"We have agreed in the G-20 countries to stimulate the global economy, not just benefit ourselves. If we choose to benefit ourselves at the expense of others, we will deepen the global economic crisis," Harper said.

Apparently, there is a lot of wiggle room in international agreements that allows nation to restrict trade when spending on government funded projects.  The provision is being applied and our trading partners are considering retaliation.  President Obama's supporters promised an empirical president.  Protectionism is a knee jerk reaction, that is not based on empirical evidence. 
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The "Stimulus" Trade War

Drudge highlights two articles concerning the buy American provision in the Stimulus package (The American Recovery and Reinvestment Act of 2009).  President Obama should have vetoed the bill for this provision alone.  Like most economists, I support trade.  Protectionist policies lower a country's standard of living.  During the Great Depression, the Smoot-Hawley Act began the beggar thy neighbor era in which countries responded to protectionism with protectionism.  Allan Dowd writes ("Canadians angered over "Buy American" rule," Reuters, June 6, 2009),

WHISTLER, British Columbia (Reuters) - Canadian municipal leaders threatened to retaliate against the "Buy America" movement in the United States on Saturday, warning trade restrictions will hurt both countries' economies.

The Federation of Canadian Municipalities endorsed a controversial proposal to support communities that refuse to buy products from countries that put trade restrictions on products and services from Canada.

The measure is a response to a provision in the U.S. economic stimulus package passed by Congress in February that says public works projects should use iron, steel and other goods made in the United States...

Trade Minister Stockwell Day told the group on Friday that Ottawa was actively negotiating with Washington to get the "Buy American" restrictions removed.

The measure's supporters agreed to modify it slightly by suspending implementation for 120 days, in order to give Canadian trade officials and U.S. critics of the "Buy America" rules more time to work on the issue.

Breitbart.com reports that Canada is not the only country concerned with the buy American provisions of the stimulus ("'Buy American' plan leads to ire, confusion," June 6, 2009).

The "Buy American" plan in US economic stimulus legislation is drawing increasing fire from US trading partners and also has led to confusion as government agencies try to implement the strategy.

Singapore was the latest among key US allies such as Canada and Japan to express concern over the restriction, warning that it could "beget other actions and then cause the situation to snowball in the wrong direction." ...

Without pointing at the United States, Lim [Singapore's trade minister] said it might be difficult to pin down countries that took steps that bordered on protectionism at the World Trade Organization, the global trade watchdog.

The Buy American clause originally said that infrastructure projects designed to kick-start the US economy out of a languishing recession could only use US-made manufactured materials.

But it was later watered down to show that such procurement could only take place in a manner consistent with Washington's international treaty obligations...

"The Buy American requirements are having a major impact on projects administered by state and local governments, resulting in declining trade and lost jobs for American workers," US Chamber of Commerce vice president Bruce Josten said..."Retaliation by Canadian municipalities could result in three billion dollars in lost business for US water and wastewater equipment manufacturers," he said..."We are sending exactly the wrong signal to our trading partners, and a retaliatory spiral may already be underway."

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Trade Policy Turning Protectionist

Since Adam Smith wrote the Wealth of Nations in 1776, economists have advocated free and open international trade, believing that trade allows a country to specialize in the production of goods and services in which it has a comparative advantage.  Increasing trade neither creates nor destroys jobs but transfers labor and other resources from newly importing industries to newly exporting industries.  This conclusion is supported by the high levels of employment that the United States enjoyed from 1983 through 2008, a period of expanding trade.  Trade benefits a nation by allowing it to specialize in what it does best, and to consume not only what it does best, but what other countries do best as well.  It makes countries wealthier.   

Trade policy in the United States currently seems to be directed by elected officials who do not understand or ignore the benefits of trade.  They seem to suffer from what Bryan Caplan calls antiforeign bias and make-work bias.  Antiforeign bias is a tendency to underestimate the value of economic interchange with foreigners.  Make-work bias focuses on jobs, whether or not they are productive, and ignores the benefits of conserving labor.  An excellent article focusing on U.S. and Canadian trade by Anthony Faiola and Lori Montgomery ("Trade Wars Brewing In Economic Malaise," Washington Post, May 15, 2009) illustrates how these biases seem to be guiding policy makers.  They give several examples legislation containing protectionist buy American clauses.  They include the stimulus package, a $14 billion program to fund clean-water projects, and a $6 billion program to fund environmentally friendly school construction.   Besides limiting trade, the buy American clauses value jobs over productivity.  A clean water project that uses only American products will result in less clean water and at a higher price than a project that buys the best resources regardless of their point of origin. 

Faiola and Montgomery provide an intriguing example of a buy American provision gone awry.

Take, for instance, Duferco Farrell Corp., a Swiss-Russian partnership that took over a previously bankrupt U.S. steel plant near Pittsburgh in the 1990s and employed 600 people there.

The new buy American provisions, the company said, are being so broadly interpreted that Duferco Farrell is on the verge of shutting down. Part of an increasingly global supply chain that seeks efficiencies by spreading production among multiple nations, it manufactures coils at its Pennsylvania plant using imported steel slabs that are generally not sold commercially in the United States. The partially foreign production process means the company's coils do not fit the current definition of made in the USA -- a designation that the stimulus law requires for thousands of public works projects across the nation.

In recent weeks, its largest client -- a steel pipemaker located one mile down the road -- notified Duferco Farrell that it would be canceling orders. Instead, the client is buying from companies with 100 percent U.S. production to meet the new stimulus regulations. Duferco has had to furlough 80 percent of its workforce.

"You need to tell me how inhibiting business between two companies located one mile apart is going to save American jobs," said Bob Miller, Duferco Farrell's executive vice president. "I've got 600 United Steel Workers out there who are going to lose their jobs because of this. And you tell me this is good for America?"

Protectionists have forgotten the lesson of the Smoot-Hawley Tariff Act, which its authors believed would create American jobs by making foreign goods more expensive.  Our tariffs led to retaliation and lengthened and deepened the Great Depression.  Other countries like Canada will react.

Outrage spread in Canada, with the Toronto Star last week bemoaning "a plague of protectionist measures in the U.S." and Canadian companies openly fretting about having to shift jobs to the United States to meet made-in-the-USA requirements. This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts -- the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.

We will not get out of the recession by attempting to push off our unemployment onto our friends.  Stimulus policy should focus on funding worthwhile projects at the lowest cost--the projects that most enhance productivity. These projects will set the stage for economic recovery and long-run growth.
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Fidel Castro Interprets Raul Castro's Remarks

Raul Castro responded to President Obama's modest policy changes that lift some restrictions on Cuban-Americans visiting families and remittances (Fabian Cambero.  "Cuba ready for U.S. talks on rights, prisoners," Reuters UK, April 17, 2009.

We have sent messages to the U.S. government in private and in public that we are willing to discuss everything, whenever they want.  Human rights, press freedom, political prisoners, everything, everything, everything they want to talk about.

Fidel Castro made similar overtures in a written response in a Cuban newspaper to a letter signed by 12 senior retired military officers under the direction of the New America Foundation and the National Security Network ("Fidel Castro: Soldiers with Correct Opinions," Invasor.cu, April 16, 2009 )("Cuba's Raul Castro: Let's talk," Foreign Policy, April 17, 2009).

...- the debate of ideas; we believe in our convictions and with them we have known how to defend and continue defending our homeland.

A group of high-ranking retired U.S. military were urging President Barack Obama to ‘support and sign’ a law to end the prohibitions on travel to Cuba by all U.S. citizens, arguing that the embargo against the island is of no use for political purposes or for Washington’s security.

Secretary of State Hillary Clinton interpreted the remarks in a manner supportive of the administrations goals, and responded positively to the Castro's remarks ("Clinton Receptive to Castro Overture to Discuss 'Everything', Foxnews.com, April 17, 2009).

We have seen Raul Castro's comments and we welcome this overture. We are taking a very serious look at it, and we will consider how we intend to respond.  We are continuing to look for productive ways forward, because we view the present policy as having failed. Engagement is a useful tool to advance our national interests.

Parenthetically, I would not have referred to past U.S. policy that was maintained through many administrations, including her husband's, as failed.  Although she is technically correct, it did not bring down the communist regime, it sounds like she is blaming the U.S. for Cuba's problems.  Cuba's biggest problem is its brutal, nasty communist government.  Instead I would have said that the policy needed to be amended with changing circumstances.  I imagine that the policy objective remains unchanged, to see Cuba evolve into a democratic, market oriented society with both political and economic freedom. 

Fidel Castro knows the dangers of opening trade and other relationships with the U.S.  The regime seems to want someone to blame for its failures more than it wants to improve the lives of its citizens through more interactions with the U.S.  As President Obama was leaving the Summit of the Americas, he asked Cuba to free political prisoners and reduce taxes on U.S. remittances.  Castro responded (Fidel Castro.  "Obama and the blockade," Digital Granma International, April 22, 2009)(AP.  "Fidel Castro says Obama misinterpreted his brother's remarks" Los Angeles Times, April 22, 2009).

Without any doubt, the president misinterpreted Raúl’s statement.

On affirming that Cuba is prepared to discuss any issue with the president of the United States, the president of Cuba stated that he has no fear of approaching any issue whatsoever. That is a demonstration of courage and confidence in the principles of the Revolution.

The Obama administration should be even more dynamic in offering to improve relations with Cuba; we should end the trade blockade.  The more we offer, the less they will take, and the more apparent it will become that Cuba's failed economy is a product of its own policy and not the U.S. blockade.  This is the worst outcome that we would achieve.  If the Castro regime accepted trade it would secure friends within the government of Cuba and between citizens in both countries.  Trade would result in a larger comparison between the two country's laws and institutions.  It is a comparison that we cannot fail to win.  Trade, even the threat of trade, and the Castro's would view it as a threat, would weaken the communist regime. 
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Castaneda on U.S. and Cuban Relations

Jorge expresses his views on policy that the U.S. should pursue towards Cuba in a Wall Street Journal article, "The Right Deal on Cuba."  The byline identifies Castaneda as a professor at New York University, a fellow at the New America Foundation, and Mexico's foreign minister from 2000 to 2003.  He believes, as I, that the U.S. should unilaterally lift the trade embargo on Cuba.  He argues that this action would pressure political leaders from Brasilia, Santiago and Mexico City to strongly promote to Castro the democratic ideals they quietly profess. 

It begins with a unilateral end to the embargo: Nothing is expected from Cuba. But in exchange for eliminating the embargo, key Latin American players would be expected to commit to actively seeking a normalization process between Washington and Havana, and to forcing Cuba to establish representative democracy and respect for human rights...

Would Brasilia, Santiago and Mexico City go along? Perhaps not, but nothing is lost by trying. All Mr. Obama would be asking is for moral consistency on the part of Latin leaders -- to uphold the values enshrined in their own constitutions and treaties.

Would the Cubans buy into this plan? While Fidel lives, it's unlikely. If they don't, Mr. Obama will have relinquished what many wrongly consider America's only leverage with nothing to show for it. And the Latin Americans could always wash their hands of the affair, arguing they tried their best.

But on the other hand, the pressure on Mr. Obama to unilaterally lift the embargo may become irresistible anyway. By shaming Latin leaders to stand up for their professed ideals, no one could pretend that the blame for the conflict still lies in the north. And in itself, the end to the embargo -- unlike what occurred in Vietnam and China -- may force Cuba to open its society.

I agree with Castaneda that Cuba would not open to U.S. trade while the Castro's live, but I also believe that attempts to open trade would benefit the U.S. and pressure the monarchic communist regime to reform.  Tirades against the U.S. would seem empty.  If trade opens, the first beneficiaries in Cuba are likely to be communist officials, both in the military and out.  We would gain a pro-United States interest group at the highest levels of the regime.  If Castro refuses to lift trade restrictions, communist officials will know that they have a potential to profit from trade when it opens.  We will still gain a pro-United States interest group within the regime.
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Pragmatism and Anthropogenic Global Warming

“U.S. to be pragmatic on Climate Issue,” is the headline that Roger Harrabin chose for his BBC article describing the Obama administration's policy on reducing carbon emissions. A pragmatic stance depends on the consequences of possible actions. If I am a smoker concerned with my health, a pragmatic response is to quit smoking. If a man in a neighboring community is a smoker who is knowledgeable about the health consequences and alternative programs to quit, a pragmatic response is to mind my own business. If my wife was an informed smoker, and her smoking affects my health, a joint solution is needed even if she is unconcerned with her health.  The final example describes an externality or spillover affect; a third party, me, the non-smoker, is affected by my wife's decision to consume tobacco.  It is the same problem caused by carbon emissions on an international basis; one country's consumption may affect other countries. 

There have been a great number of dire predictions of the climatic consequences of unabated carbon emissions.  The Stern Review is an important example of a document listing severe consequences.  The "Executive Summary" of the Stern Review estimates the cost.

The evidence shows that ignoring climate change will eventually damage economic growth. Our actions over the coming few decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century. And it will be difficult or impossible to reverse these changes. Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries. The earlier effective action is taken, the less costly it will be.

War Chronicles estimates World War II deaths, both civilian and military, at 48 million, or approximately 2% of world population.  If the same percentage of deaths occurs, the approximate deaths would be 167 million assuming a population of 8 billion.  GDP losses would be of a similar magnitude, and would be caused by flooding, declining crop yields, deaths from malnutrition, heat stress, and vector-borne diseases.  Irreversibility of climate change is often called a tipping point.  The Stern Review states that annual emissions would have to fall by 80% to achieve a sustainable world climate. 

Harrabin interviews Jonathan Pershing, the head of the U.S. delegation to the United Nations meetings on climate change.  A few quotes from the article suggest that the administration assessment is in line with the Stern Review, but it pushes off much of the cost on future administrations.

But he [Pershing] said the US should not make promises for 2020 that it could not keep: "It is not the point in time in 2020 that matters - it is a long-term trajectory against which the science measures cumulative emissions.

"The president has also announced his intent to pursue an 80% reduction by 2050.

"It is clear that the less we do in the near-term, the more we have to do in the long-term. But if we set a target that is un-meetable technically, or we can't pass it politically, then we're in the same position we are in now… where the world looks to us and we are out of the regime...

Mr Pershing did promise that the US would help poor countries to fund clean technology. He would not mention figures but he hinted the sums would be much less than many developing countries demanded.

"The notion that the USA would transfer funds to pay for the entirety of the world's development is implausible. The characterisation often made in these meetings [from developing countries] is that we will only do actions that are paid for. That's a limited vision and we'd like to turn that round."

In "The Cost of Cap-and-Trade," I note that current implementation of a cap-and-trade system is estimated at $2 trillion over an eight year period, about 175% of the cost suggested by the Stern Review that would be necessary to reduce carbon emissions by 80%.   Congressmen who always seem ready to spend and reluctant to tax has voiced considerable opposition to the plan.  
There are methods of forcing reluctant countries to fund their own "clean" technology.  Some are discussed in a note by The United Nations Framework Convention on Climate Change.  The note lists negative and positive consequences for poor countries of carbon reduction policies by wealthy countries.  To be sure, the note envisions large transfers from wealthy countries to the poor, and expresses concern that lowering carbon emissions will be used as a pretext to impose protectionist policies.  The note also describes how tax regimes could force poor countries to fund carbon reduction technologies.  The numbers refer to the paragraph of the note.

21.  Carbon taxes or levies have been implemented in several countries, and have been proposed in many others.  They are generally based on the carbon content of the covered items, and tend to be focused on energy products such as fuels.  Imported fuels are also subject to the schemes, as the tax is typically levied at the point of domestic sale.  The key overseas consequences of such taxes would fall upon foreign exporters of relatively carbon-intensive energy products such as oil and coal, who could see their market share drop as the relative prices of their goods increased.  Conversely, foreign exporters of environmentally sound energy technologies would see increased market share...

34.  Border carbon adjustment:  Countries that take strong measures to address climate change often also consider parallel measures to address what they see as competitiveness and carbon leakage problems.  Among these measures are two types of border measures that have been widely proposed to impose costs on imports equivalent to that faced by domestic producers.  The first, usually considered as a complement to a carbon tax regime, is a tax adjustment, which imposes a levy on imported goods equal to that which would have been imposed has they been produced domestically.  The second, considered as a complement to a cap-and-trade regime, is a requirement to buy offsets at the border equal to that which the producer would have been forced to purchase had the good been produced domestically.  The impact of such schemes would be functionally equivalent to an increased tariff: decreased market share for covered foreign producers.  While border carbon adjustments would involve negative consequences for foreign producers, such schemes would not likely be implement in isolation, but would function as parallel initiatives to climate change action in the implementing state.  If they were implemented fairly, such schemes would leave trade and investment patterns unchanged, being aimed at just offsetting the competitiveness impacts of domestic policies such as carbon taxes or cap-and-trade.

My pragmatic response is somewhat different based on what I believe to be a possible overestimation of the cost of AGW based on a lower probability of extreme negative costs, the positive externalities of trade, negotiating complexities, and the negative tendencies of politicians to follow populist and badly reasoned trade policies.

After a review of the IPCC cited papers used to support claims of drastic climate change, Kesten Green and Scott Armstrong researched ("Global Warming: Forecasts by Scientists Versus Scientific Forecasts," Energy and Environment, Vol. 18, No. 7+8, 2007 ) conclude,

The forecasts in the Report were not the outcome of scientific procedures. In effect, they were the opinions of scientists transformed by mathematics and obscured by complex writing. Research on forecasting has shown that experts’ predictions are not useful in situations involving uncertainly and complexity. We have been unable to identify any scientific forecasts of global warming. Claims that the Earth will get warmer have no more credence than saying that it will get colder.

Green, Armstrong and Soon, ("Validity of Climate Change Forecasting for Public Policy Decision Making," International Journal of Forecasting, forthcoming) find that a model predicting no temperature change is as accurate in short range predictions, and more accurate in long range predictions than the .03 degree Celsius per year rate of change claimed by the IPCC. The policy implication is that government should not take action to reduce carbon dioxide emissions.

Beginning with Adam Smith, economists have stressed the good economic and moral value of trade.  Specialization through trade makes countries wealthier, and wealthy people demand a cleaner environment.  Trade results in shared ideas which are often converted into new production methods and products.  Finally, trade may result in a lower probability of war, as positive associations between people in different countries create an economic constituency for peaceful international relations--a sort of anti military industrial complex complex. 

Negotiations to reduce carbon emission are very complex.  The citizens of some nations would benefit from a warmer climate.  Others may not trust the science behind AGW.  Still others would cheat on agreements, viewing cheating as beneficial to them if others live by the agreement.  It is the prisoners' dilemma problem on an international stage, and peaceful enforcement of any agreement would be difficult.

Finally, politicians do what's best for them.  That may include continued employment and wealth as well as the public interest.  If their constituents want to seek in protectionist trade restrictions, they are likely to get them.  If inefficient "green" technologies benefit some constituents, we are likely to see impoverishing "green" technologies supported through law and tax subsidies.  Unless carbon emissions result in dire consequences, the cost of a global solution is likely to be higher than any associated benefit.
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Progess on Trade with Cuba

Laura Meckler, writing for the Wall Street Journal in "U.S to Lift Some Cuba Travel Curbs," notes that,

President Barack Obama plans to lift longstanding U.S. restrictions on Cuba, a senior administration official said, allowing Cuban-Americans to visit families there as often as they like and to send them unlimited funds.

The March 11, 2009 budget bill contained legislation for limited trade liberalization (see, "Obama on Trade: One Tiny Step Forward, Two Steps Back" and "Obama May Lift U.S. Travel Restrictions to Cuba, Official Says").  The administration is hanging tough on further liberalization. 

President Obama doesn't intend to call for lifting of the trade embargo against Cuba, which would require congressional action, nor is any specific diplomatic outreach contemplated, the official said.

There is some bipartisan belief that it is time to ease trade restrictions.  Doug Palmer, writing for Reuters in "U.S. senators move to end Cuba travel ban," reports that,

A bipartisan group of U.S. senators introduced a bill on Tuesday to allow U.S. citizens to travel freely to Cuba and predicted Congress would approve it as a step toward ending the five-decade-old U.S. embargo.

"I think there's sufficient votes in both the House (of Representatives) and the Senate to finally get it passed," Democratic Senator Byron Dorgan said at a news conference.

Dorgan... introduced the bill along with fellow Democratic Senator Christopher Dodd and Republican Senators Richard Lugar and Mike Enzi. Seventeen other senators also are sponsoring the measure. A companion bill introduced in the House earlier this year has 121 co-sponsors.

I support liberalization because it is humane to allow families to reunite, and because I believe that increased contact between the two countries will emphasize our prosperity, making it more difficult for the Castro regime to maintain power.  Unilaterally reducing trade barriers would probably do little to increase trade, Raul Castro understands its democratizing influence. 
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The U.S., Mexico and Trucking

Like virtually all economists, I like trade. It doesn't matter if the trade is between my neighbor and me, or a Mexican and me, trade benefits me and by extension, all of society. President Clinton wisely and at some political risk signed the legislation creating NAFTA; it was one of his crowning achievements. Trade has benefited both nations.

Protectionist elements within the U.S. have slowed the implementation of NAFTA. Arturo Sarukhan, Mexico's ambassador to the United States, explains a long standing dispute that recently flared and in which the U.S. government has not acted in good faith (Sarukhan, Arturo. "Congress Doesn't Respect NAFT," Wall Street Journal," March 18, 2009).

Nobody can argue that Mexico hasn't worked tirelessly for more than a decade to avoid a dispute with the United States over Mexican long-haul trucks traveling through this country. But free and fair trade hit another red light this past week. The U.S. Congress, which has now killed a modest and highly successful U.S.-Mexico trucking demonstration program, has sadly left my government no choice but to impose countermeasures after years of restraint and goodwill.

Then and now, this was never about the safety of American roads or drivers; it was and has been about protectionism, pure and simple.

Are Mexican trucks and drivers really as safe at ours? Sarukhan reports on an experiment run jointly between the U.S. and Mexico.

[I]n 2007 an agreement was reached that included the implementation of a demonstration program in which up to 100 carriers from each nation would be allowed to participate. This program was designed precisely to address the concerns voiced by those opposed to cross-border trucking. The demonstration program, launched in September 2007, was an unmitigated success. During the 18 months that the program was in operation, 26 carriers from Mexico (with 103 trucks) and 10 from the U.S. (with 61 trucks) crossed the border over 45,000 times without any significant incident or accident. Moreover, according to reports of both the Department of Transportation's inspector general and an independent evaluation panel, Mexico's carriers participating in the program have a safety record far better than that of all other carriers operating in the U.S.

The people we elect to represent us should act more like they are governing the world's lone superpower and an international beacon of freedom by honoring the trade agreements that we have signed. We should hold them accountable at the ballot box when they do no
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Obama On Trade: One Tiny Step Forward, Two Steps Back

The Obama administration is taking one tiny step forward on trade and two steps back. Arthor Brice writing for CNN in "U.S. loosens restrictions regarding Cuba," (March 11, 2009) reports that the Congress passed and President Obama signed a $410 billion budget bill that liberalizes travel restrictions and trade with Cuba. On travel restrictions, Brice writes,

Under the new provisions, relatives will be able to go once a year and stay for an unlimited time. In addition, the definition of relatives has been broadened to include uncles, aunts, nephews and nieces. The new measures also increase the amount of money visitors can spend.

According to the AFP ("Despite bill, Cuba trade rules mostly unchanged: Geithner," March 11, 2009), expands on trade changes. He writes that Secretary of Treasury Geithner assured that the changes in trade were small.

...Treasury Secretary Timothy Geithner stressed in a letter last week to US lawmakers that the practical impact of many of the changes will be negligible.

Geithner's March 5 letter to US senators Robert Menendez of New Jersey and Bill Nelson of Florida, a copy of which was obtained by AFP, stressed that "current financing rules" remain in place when Cuba pays for imports of US products...

The bill also eases some restrictions on food and medicine sales to Cuba -- but Geithner said it "will seek to ensure that only travel for credible sales of food and medical products is authorized."

It is unfortunate that the administration must ensure Senators that the loosening of restrictions on Cuba is "negligible" immediately before President Obama attends the Fifth Summit of the Americas to demonstrate our willingness to "change." The President appears to believe in a trickle-down theory of diplomacy rather than bottom up through trade. Is the relationship between (Raul) Castro in Havana and Obama in Washington more central to a thaw than thousands of relationships that trade would foster between businessmen and consumers across the breadth of both countries?

Other news on trade is bad. Anthony Faiola writing for the Washington Post ("U.S. to Toughen Its Stance On Trade," Washington Post, March 10, 2009.) reports,

The Obama administration is aggressively reworking U.S. trade policy to more strongly emphasize domestic and social issues, from the displacement of American workers to climate change...

The shift underscores the mounting pressures confronting any effort to expand trade during the economic crisis. Even before the global economy went code red late last year, talks aimed at expanding global trade stalled as Western countries warred with emerging giants like China and India over how to further open markets.

Those divides appear to be more unbreachable than ever as world leaders move to protect their domestic industries from the ravages of the financial crisis, embracing new trade barriers aimed at imported goods and other measures meant to restrict the flow of capital outside their borders. In the United States, more Americans are blaming cheap imports for job losses at home and congressional leaders pressed successfully to include a "buy American" provision in the $787 billion stimulus program to give an edge to U.S.-made products.

The administration does not seem to understand how comparative advantage works. He wants poor nations to be like us on issues like labor relations and climate change to establish a level playing field before trade can occur. I thought that the Obama administration wound no longer dictate to the rest of the world (Kligman, Aimee. "The New Diplomacy: listen and don't dictate - will it work in Pakistan?," examiner.com, January 27, 2009.), but maybe that change only applies to the Muslim world.

Even in the midst of the current recession, we have the most successful economy in the world; if any nation has an advantage in trade it is us. The desire of the administration to have other nations look like us robs them of their comparative advantages and all nations of many of the benefits of trade. It would be like Tiger Woods forceing other golfers to use his clubs and club selection as they played.

Rather than creating new reasons to limit trade, the Obama administration should remember history, specifically how President Hoover widened and deepened the Great Depression by signing the Smoot-Hawley Act in what is known as the beggar thy neighbor era.

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