Free Markets, Free People

Trade


The folly of green protectionism

Here’s a formula for you to study:

Green groups want less forestry in the developing world. Industry wants green protectionism to cut the volume of competitive imports. Unions want green protectionism to stop imports to ensure they can keep workers in high-paying jobs.

So using the environment as an excuse, we have these three groups colluding to further their own agendas. Call it “green protectionism”.

In a recent case it has been to keep toilet paper made in foreign countries out of Australia.

That’s right, toilet paper.

Can anyone now figure, based on that formula, what the missing part of the equation might be? The part that is necessary to make such collusion pay off?

Yes, government. Certainly green groups can want less forestry in the developing world, and industry can wish for a way to cut the volume of competitive imports. And unions always hope to ensure high paying jobs.

But only one entity can actually make all those wishes, wants and hopes come true. If government becomes involved it has the power to fulfill the wishes and hopes of these three disparate special interest groups.

That’s what happened in 2008 when two Australian toilet paper manufacturers, Kimberly Clark Australia and SCA Hygiene as well as the Construction Forestry, Mining and Energy Union (CFMEU) and the World Wildlife Fund essentially colluded to keep foreign manufactured toilet paper, primarily from Indonesia and China out of the country. Their ostensible complaint was those countries were “dumping” their product in Australia.

For a short time they succeeded in getting imports restricted by the Australian Customs Service, until, it seems, the ACS did a study to determine the validity of the complaint. Their findings were significant. The Australian Customs Service report calculated that the potential downward pressure of imports could be as high as 42 percent of the price.

In other words, the collusion would cost consumers in Australia 42% more because the competitive pressure that kept prices low would have been removed. In addition, a recent report commissioned by the Australian government found that “illegally logged material” – one of the prime reasons these groups claimed Australia should ban imports of foreign wood products – only comprised 0.32 percent of the materials coming into Australia. In other words, the threat was insignificant.

That’s Australia, but what about here? Well, we’re hearing the same sorts of rumblings concerning “green protectionism”.

Sadly these campaigns appear to be part of a spreading green protectionist disease, where industry, unions and green groups work together. In the United States the disease was brought to life by the Lacey Act, which imposes extra regulation on imported wood and wood products to certify their origin and make them less competitive.

The Lacey Act is actually an update of a 1900 law that banned the import of illegally caught wildlife. It now includes wood products (2008). And that means, since extra steps and cost are incurred by foreign manufacturers, that consumers are stuck with the increased cost.

While the reasons for protectionism may sound good on the surface – save the forests, higher wages, less competition to ensure jobs – it isn’t a good thing. If freedom is defined by the variety of choices, what protectionism does is limit those choices and impose an unofficial tax on consumers. They end up paying the cost of collusive action between government and special interests.

So, each time your government announces that it is doing you the favor of limiting the imports of this commodity or that, based on “green” concerns, hold on to your wallet. Whatever the government is protecting you from, you can rest assured that the price of the domestic variety is headed up, since the other product of government intrusion is limiting competition. Rule of thumb: restricting free trade is rarely a good thing. And the only entity that can do so is government. “Green” is just the newest color in an old and costly game – protectionism.


Dumping The Dollar

While the Fed tries to assure us that when the time comes it can wring the excess money it has pumped into the economy without driving it into the ditch, Paul Krugman and others want more spending, and we’re staring at 9 trillion in additional debt, the rest of the worldhas seems to be quietly deciding that the dollar has become an unstable currency in which they’d rather not trade:

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

They’re talking about a whole range of different currencies to replace the dollar but the fact remains that the old buck ain’t what it used to be and those trading in oil are looking for a more stable means of trade.

The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

Which explains some of the growth in the price of gold. Of course this transition will take time as the various countries carefully get rid of their dollar reserves over the coming years. However, if they are as committed to this transition away from dollar as the base trading currency for oil as this article indicates, then obviously the strength of the dollar will be adversely effected over that transition period and beyond as dollars are dumped. Couple that with the excess dollars we’ve pumped into the system these past few months and you can begin to understand the possible economic disaster this may end portend.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America’s trading partners have been left to cope with the impact of Washington’s control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. “The Russians will eventually bring in the rouble to the basket of currencies,” a prominent Hong Kong broker told The Independent. “The Brits are stuck in the middle and will come into the euro. They have no choice because they won’t be able to use the US dollar.”

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time. The current deadline for the currency transition is 2018.

We’ve been talking and hinting about this since it first began surfacing and warning of the dire economic consequences such a move would have. Of course it is the result of our own profligate spending and financial mismanagement, but I don’t think, for the most part people understand the implications of this move to replace the dollar. And it also doesn’t appear we have ability (much less a plan) to reverse this trend toward this change of the economic guard.

~McQ


Will Waxman-Markey Inspire A Trade War?

Apparently it will according to some who have actually beaten their way through the entire bill and read the contents:

The Ways and Means Committee’s proposed bill language (pdf) would virtually require that the president impose an import tariff on any country that fails to clamp down on greenhouse gas emissions.

Of course in this full bore onslaught of major life changing legislation which the Democrats seem determined to push through the Congress as quickly as they can (citing the imminent crisis it will foment if they don’t), this issue seems to be lost in the shuffle:

“This is a sleeper issue that lawmakers have not been paying enough attention to,” said Jake Colvin, vice president for global trade issues at the National Foreign Trade Council, which represents multinational corporations like Boeing Co. and Microsoft Corp. advocating for an open international trading system.

“The danger is, you focus so much on leveling the playing field for U.S. firms, that you neglect the potentially serious consequences that this could have on the international trading system,” Colvin said.

Ya think?

Nancy Peolosi is aiming for a vote in the House this Friday, before the July 4th recess. That obviously will mean very, very limited debate, if any. As NRO notes:

Not content to tempt political fate by imposing huge carbon taxes on the American middle class, Democrats have added a provision which imposes stiff tariffs on our trading partners if they don’t adopt aggressive carbon restrictions of their own.

You heard correctly: progressives have authored a bill that earns the mortal enmity of domestic energy consumers and our most crucial trading partners at the same time. Economy-killing climate policies and a trade war — together at last!

The devil is in the details:

Leaks from Hill offices indicate that the president would now be forced to impose the carbon tariffs — and could only opt out of doing so with permission from both chambers of Congress. Carbon-intensive imports would be subject to penalties at the border unless the country of origin requires emission reduction measures at least 80 percent as costly as ours. (The original Waxman-Markey bill had a threshold of 60 percent.)

Brilliant. Of course, some are going to argue that such measures surely will not be in the Senate version and not survive the reconciliation process when the two versions are merged. With this Congress I wouldn’t bet the farm on that.

There’s some talk that the blue dogs are going to oppose this bill. Obviously you would expect the GOP to oppose it as well. Are there enough other Dems to oppose so as to defeat it? Pelosi may not be the sharpest knife in the drawer when it comes to many things, but over the years she has learned to count votes I’m sure.

Bottom line: this bill is an economy killer, plain and simple. But it is also a progressive wet-dream shared by Pelosi. She is going to do everything in her power to push it through the House.

~McQ


Trade War?

It would appear the first shots in what could develop into a global trade war have been fired:

Ordered by Congress to “buy American” when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions. In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.

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.

Reports are Canadian McDonalds are only using Canadian potatoes and calling them “freedom fries” – okay, I’m kidding. But this isn’t a kidding matter. You remember how, when caught with the “buy American” clause in the stimulus package, Obama tried to wave it away by saying it didn’t mean what it said and Congress promising to water it down?

Yeah, like many political promises made by Congress and the President, this one has now proven to be false.

The buy American provisions in the stimulus package, signed into law in February, were just the beginning. Last week, Obama unveiled a series of proposals aimed at increasing taxes by nearly $200 billion over the next decade on U.S. companies doing business abroad. At a White House event, Obama said the measures were designed to “close corporate loopholes” that permit companies to “pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.”

Those sorts of measures are sure to speed the recovery. [/sarc]

Clueless.

~McQ


Energy Policy – “10 Inconvenient Truths”

Sometimes the little surprises life hands you are the most pleasant. While in Houston at the Offshore Technology Conference, my trip sponsored by API, I happened to meet another blogger who introduced himself to me as a “raging liberal”. In the course of three days and a few good beers, Chris Nelder and I had some very enjoyable and interesting conversations. And, interestingly, Chris and I agree on where the policy debate stands as it pertains to energy. Chris wrote an outstanding article detailing his observations about the current situation, and, for the most part, I agree completely with his well thought out assessment. Here is his list of “10 Inconvenient Truths” that he feels all policy makers must understand before they can effectively plan for the future:

1. We have extracted nearly all of the world’s easy, cheap oil and gas, and now we’re getting down to the difficult, expensive stuff. The largest untapped resources that remain are in extreme places like deepwater and the Arctic, and marginal formations like shale. As a result, global oil production has for all intents and purposes peaked. Natural gas production will also peak in 10 to 15 years. Neither technology nor high prices will change that. Therefore we must begin to replace those fuels with renewables, and use what remains much more efficiently, with the expectation that most of the world’s oil and gas will be gone by the end of this century.

While I agree with Chris’s point about renewables, I’m not quite ready to buy into the idea that “most” of the world’s gas and oil will be gone by the end of the century, especially if we make progress developing cheap, renewable and clean alternatives. That’s not to say he might not be right, but I continue to look at the improvements in technology and the fact that the same sort of predictions have been made for decades and here we are. But on the main point of gearing up renewables, we agree completely. We must prepare for the possibility Chris is right and we need to do that now.

2. Drilling for oil and gas drilling in the OCS and ANWR must and will be done; our need for those fuels is simply too great to pass them up. An additional 2-3 mbpd will put a dent in the roughly 12 mbpd we now import, but if we drill for it now, it won’t come to market for 10 years or more. By that time, it probably won’t even compensate for the depletion of conventional oil in North America, nor will it do much to reduce prices. But it will be crucially necessary, and producing it won’t make an ugly mess of the environment.

You see someone on the left here who has studied the problem, understands the processes used and has formed an opinion that is outside his side’s political mainstream. He understands that technology has advanced to the point that the oil and gas industry can drill for oil and gas safely and with a very small footprint. In fact, advances in sub sea technology are almost to the point where the entire process can be safely and productively located under the waves. So, in a “comprehensive” scheme, the left has got to drop its almost knee-jerk resistance to such drilling and understand it must be a part of an overall energy solution.

3. Renewables are clearly the long-term answer, as is an all-electric infrastructure that runs on its clean power. However, it will likely take over 30 years for renewables to ramp up from a less than 2% share of primary energy today to 20% or more. They probably won’t even be able to fill the gap created by the decline of fossil fuels. Oil and gas currently provide about 58% of the world’s primary energy, and they will remain our primary fuels for a long time to come.

To believe “green fuels”/renewables are the immediate and total answer to today’s energy needs is to deny reality. We have to remember that there is going to be a growing energy gap as more and more nations come on-line in the first-world and demand more energy as a result. Oil, gas, nuclear and coal are going to play a large and significant part of bridging that gap even as we work to develop renewables. As a nation we cannot afford that sort of short-sighted thinking. It is critical that everyone understand that while the preference is for renewable, clean fuels, the reality is they’re still quite a ways off, while the energy demand continues to grow unabated and certainly with no concern for our personal energy preferences.

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Is It About What’s Best For America Or About Political Payback?

A closer look at the recent problem with Mexico – when the Obama administration, without consultation ended the NAFTA agreement which allowed Mexican trucks the ability to deliver in the US – reveals the answer to the question in the title:

We speak of the Democratic Congress’s recent approval of a law, signed by Mr. Obama, that killed any chance that long-haul freight trucks from Mexico could operate in the United States, as had been promised under the North American Free Trade Agreement. Giving U.S. and Mexican trucks reciprocal access to each other’s markets would save fuel and money. An international arbitration panel has also found that the United States is legally required to let Mexican trucks in.

Yet the Teamsters union bitterly resisted, claiming that poorly regulated trucks from south of the border would be menaces on U.S. highways.

To meet legitimate safety concerns and this country’s legal obligations, the Bush administration promoted a pilot project under which Mexican trucks, screened by U.S. personnel, could operate freely within the United States. The Mexican trucks compiled a safety record comparable to that of American rigs. Almost everyone was happy with the deal — except the Teamsters, for whom economic turf rather than safety has always been paramount.

So we now know that it was a payoff to the Teamsters for their help during the election. Mexican trucks had met the safety concerns of the critics and compiled an excellent safety record in the US. Given that, how else do you explain a move which may end up costing us billions of dollars in agricultural exports to one of our major trading partners for no apparent legitimate reason?

It certainly seems to me that at least in this particular situation, political payback took precedence over what was best for America.

Hope and change.

~McQ


Obama, NAFTA, Mexico, China, Trade and Tariffs

Our congratulations go out to the Obama administration on their latest foreign policy and trade triumph. Last week, apparently without consultation, they did away with a NAFTA pilot program which allowed Mexican trucks to deliver goods to certain areas of the US. Mexico has responded:

Mexico has released the list of U.S. products that will see tariffs of 10 percent to 45 percent. The move is in retaliation for the U.S. scrapping a test program allowing Mexican trucks to deliver goods beyond a U.S. border zone.

Among affected goods are certain fruits and vegetables, wine, juices, sunglasses, toothpaste and coffee, according to a government statement. Most tariffs are 10 percent to 20 percent, with unspecified fresh products subject to a 45 percent charge. The tariffs will apply to $2.4 billion of goods and take effect today.

Just what you need in a down economy – punitive tariffs for political stupidity. And there won’t be a solution anytime soon:

Talks to diffuse the first [self-inflicted -ed.] trade dispute of President Barack Obama’s administration can’t begin until the U.S. has a Commerce Secretary, Economy Minister Gerardo Ruiz Mateos said.

So far I’m really not at all impressed with the status of the “better relations” throughout the world promised by the Obama administration.

Oh, and for an encore, how about this little goodie:

Energy Secretary Steven Chu on Tuesday advocated adjusting trade duties as a “weapon” to protect U.S. manufacturing, just a day after one of China’s top climate envoys warned of a trade war if developed countries impose tariffs on carbon-intensive imports.

Mr. Chu, speaking before a House science panel, said establishing a carbon tariff would help “level the playing field” if other countries haven’t imposed greenhouse-gas-reduction mandates similar to the one President Barack Obama plans to implement over the next couple of years. It is the first time the Obama administration has made public its view on the issue.

“If other countries don’t impose a cost on carbon, then we will be at a disadvantage…[and] we would look at considering perhaps duties that would offset that cost,” Mr. Chu said.

Brilliant.

~McQ


The Coming Tax On Everything

Over the past few days, I’ve been highlighting the fact that the promise of tax cuts for 95% of Americans is illusory at best. If your bottom line is net spendable income, then despite the Obama promise, you’re going to have less of it when all his plans for your income are passed into law. Or, as I’ve been pointing out, while he’ll make a big deal of the tax cut for the 95% on the one hand, he’ll be taking what he’s cut back and more with the other.

The Detroit News editorial board seems to have figured that out:

President Barack Obama’s proposed cap-and-trade system on greenhouse gas emissions is a giant economic dagger aimed at the nation’s heartland — particularly Michigan. It is a multibillion-dollar tax hike on everything that Michigan does, including making things, driving cars and burning coal.

Tell me – who is it that has been whining for years about losing manufacturing jobs to overseas competitors? Who has thumped the podium about “outsourcing”? Who has claimed to be the champion of the working man?

The same crew that wants to enact draconian taxes which will affect the very companies and jobs they claim they want to save or create. And while the companies will do all they can to pass on the cost to the consumer (thereby negating any tax cut), they will have to absorb some of the cost to stay competitive.

Doing so will drive up the cost of nearly everything and will amount to a major tax increase for American consumers.

Or companies can go to countries who don’t have cap-and-trade laws such as China and India and set up there. Of course if they do, they’ll be called “unpatriotic” and the government who forced the issue will declare them the problem.

And the net result?

The proposed tax would take effect in 2012 and has the very real potential to throw the nation back into recession, if indeed the expected recovery has arrived by then. It’s impossible to raise costs for such basics as manufacturing and energy production by more than half a trillion dollars over a decade and not have the effects felt across the economy.

Economic common sense. But you see, the 2012 effective date is a result of political calculation. If we are seen to be climbing out of the recession by 2011, most likely the Obama administration will get a second term. After that they couldn’t care less how they or their policies are viewed. And it is far enough from 2016 that they think it may be politically survivable for the Democrats.

However it also means that if the GOP starts hammering on this now and making the same sense the Detroit News editorial board is making, there’s a chance they can use it as an issue to try to recapture power. That assumes, of course, they have the smarts and the spine to stand up, make the consequences known and ensure they frame the argument instead of letting the Democrats spin it away.

How likely is that?

Oh, and just for the record:

A similar program in Europe hasn’t worked. European automakers complained about carbon dioxide limits the European Union proposed in 2007 as damaging to the economy.

Ya think?

~McQ


Obama meets with Harper on “Buy American”

President Barack Obama made a trip to Canada this week to settle fears over the “Buy American” provision in the so-called “stimulus” package:

President Barack Obama on Thursday moved to reassure business and trade partners that the “buy American” provision of the economic stimulus package will not further harm the economy.

Critics of the measure, including foreign trade partners, business groups and even some U.S. industries that use steel and other products, have called “buy American” protectionist and complained it will drive up the cost of business.

Obama, who met with Canadian Prime Minister Stephen Harper for several hours in Ottawa, said he told his counterpart the United States would abide by existing trade pacts.

“I want to grow trade and not contract it,” Obama said. “And I don’t think that there was anything in the recovery package that is adverse to that goal.”

The provision mandates that any construction or infrastructure project in the “stimulus” bill would be required to use American metals, like iron and steel, unless costs were to exceed 25%. This misguided provision has sparked fears of a trade war.

In 1845, Frédéric Bastiat wrote the Petition of the Candlemakers, satire that pointed out the follies of protectionism to French lawmakers:

You are on the right track. You reject abstract theories and little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

We come to offer you a wonderful opportunity for your — what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, as for principles, you deny that there are any in political economy; therefore we shall call it your practice — your practice without theory and without principle.

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Competition spurs improvements and lower prices. Protectionism is what brought us the Smoot-Hawley tariff in 1930, an interventionist economic policy that exacerbated economic problems which eventually led to the Great Depression.

Policies like “Buy American” will only cause retaliation in other parts of the world. We cannot afford that in the middle of a recession.


The Farce Of A “Free Market”

We here at QandO are big fans of the free market.  But there are lots of enemies of the free market and they’re not just ideologies or governments.  Sometimes – no, many times – corporations or associations go into cahoots with government to use the power of government to limit competition.  Here’s an example of that:

A lot of focus has been directed toward the destruction of the world’s forests during the past few decades.  The truth is that deforestation is happening with alarming frequency.  Millions of acres of forest land are harvested illegally throughout the world every year, which contributes significantly to global warming and the destruction of wildlife habitat.  Because this activity adversely affects our environment, the National Wood Flooring Association worked diligently with several key organizations to promote the illegal logging ban with Congress. The ban was passed this past summer as an amendment to the US Lacey Act, which originally was mandated more than 100 years ago to prohibit the illegal trafficking of wildlife.  This new amendment has expanded the Lacey Act to include wood and wood products.  Specifically, the ban prohibits the import, sale or trade in the US of wood and other forest products that are harvested through illegal means.

This legislation is significant for a number of reasons.  First, and most importantly, it protects our world’s forests from irrecoverable loss of trees and wildlife habitat.  Second, it protects lumber buyers who verify the origin of lumber when importing wood into the United States from other countries.  Third, it eliminates the influx into the US of low-cost, low-quality wood flooring produced from illegally harvested forests.

The penalties for noncompliance with this new legislation are severe.  Penalties can include the forfeiture of the illegally harvested material, fines of up to $500,000, and jail time of up to five years.  From a consumer’s perspective, however, the ban helps you have confidence that the wood you are buying is not depleting our world’s forests.

This is classic stuff. Let’s look at their three “benefits”, shall we? First this ban no more “protects our world’s forests from irrecoverable loss of trees and wildlife habitat” than a gun ban keeps guns out of the hands of criminals. That’s because those who do actually engage in what this association would label “illegal logging” will simply sell to someone else. It’s not like wood isn’t in huge demand throughout the world or something.

The second “benefit” is a “join our club or pay the price” benefit at best. The obvious implication is if buyers don’t “verify the origin” to the satisfaction of the association (and the law), they’re open to accusations that what they’re bringing in are “illegal” whether true or not.

And, of course, in reality it all boils down to the last “benefit”. In fact it is a benefit only for the industry at the heart of writing this legislation. You the consumer, on the other hand, won’t get what the NWFA considers to be “low-cost, low-quality wood flooring” because, well, they’ve decided it just isn’t a decision which should be left up to you.

This is what passes for a “free market” these days. In this case, restricting the flow of goods to you in the name of a greater good, when, in fact, the greater good is just an excuse not to have to compete in the market place. It places the consumer’s right of access to such goods in second place to the association’s desire to “benefit” from special legislation which restricts that right.

When the price of that flooring you have been planning to buy goes through the roof, you’ll now know why.

~McQ

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