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FREE TRADE, the WTO AND SUBSIDIES

Posted by Steve Markowitz on May 22, 2010

Carl has written a response to an article posted on this Blog in September, 2009, Watch out for Protectionism.  It includes very good points so it is posted in full below.  Thanks Carl.

FREE TRADE, the WTO AND SUBSIDIES. This story reminds one of Ronald Reagan’s favorite descriptions of what happens when the Federal Government gets involved with a once profitable and productive industry: they tax it, they regulate it and end up subsidizing it!

WSJ: The Madness of Cotton (May 2010)

The Feds Want U.S. Taxpayers to Subsidize Brazilian Farmers….

U.S. cotton farmers took in almost $2.3 billion dollars in government subsidies in 2009, and the top 10% of the recipients got 70% of the cash. Now Uncle Sam is getting ready to ask taxpayers to foot the bill for another $147.3 million a year for a new round of cotton payments, this time to Brazilian growers.

We realize that in today’s Washington this is a rounding error. But the reason for the new payments to foreign farmers deserves attention. If it becomes a habit, it is unlikely to end with cotton.

Here’s the problem: The World Trade Organization has ruled that subsidies to American cotton growers under the 2008 farm bill are a violation of U.S. trading commitments. The U.S. lost its final appeal in the case in August 2009 and the WTO gave Brazil the right to retaliate.

Brazil responded by drafting a retaliation list threatening tariffs on more than 100 U.S. exports, including autos, pharmaceuticals, medical equipment, electronics, textiles, wheat, fruits, nuts and cotton. The exports are valued at about $1 billion a year, and the tariffs would go as high as 100%. Brazil is also considering sanctions against U.S. intellectual property, including compulsory licensing in pharmaceuticals, music and software.

The Obama Administration appreciates the damage this retaliation would cause, so in April it sent Deputy U.S. Trade Representative Miriam Sapiro to negotiate. She came back with a promise from Brazil to postpone the sanctions for 60 days while it considers a U.S. offer to—get this—let American taxpayers subsidize Brazilian cotton growers.

That’s right. Rather than reduce the U.S. subsidies to American cotton farmers that are the cause of the trade fight, the Administration is proposing that U.S. taxpayers also compensate /Brazilian/ cotton farmers for the harm done by the U.S. subsidies. Thus the absurd U.S. cotton program would dip into the Commodity Credit Corporation to pay what is a bribe to Brazil so it won’t retaliate.

Talk about taxpayer double jeopardy. As Senator Richard Lugar (R., Ind.) said recently, the commodity credit program was established to assist U.S. agriculture, “not to pay restitution to foreign farmers who won a trade complaint against a U.S. farm subsidy program.”

Mr. Lugar wants the subsidies to U.S. farmers cut by the amount that will have to be sent to Brazil. He adds that a better option would be to take on the trade-distortions of the cotton program. “I am prepared to introduce legislation to achieve these immediate reforms,” he wrote in an April 30 letter to President Obama.

This is probably tilting at political windmills, since Mr. Obama has shown no appetite for trade promotion, much less confronting a cotton lobby supported by such Democrats as Arkansas Senator Blanche Lincoln. (CEH: she’s now in a runoff primary for her Senate seat)

But we’re glad to see that at least Mr. Lugar is willing to call out the absurdity of U.S. taxpayers subsidizing foreign farmers to satisfy the greed of a few American cotton growers.

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5 Responses to “FREE TRADE, the WTO AND SUBSIDIES”

  1. THE NAFTA REPRESENTS THE FIRST AND THE ONLY LEGITIMATE AMERICAN TRADE AGREEMENT WHILE MERCOSUR STANDS UP FOR LATIN AMERICAN LEFTIST COUNTRIES SUCH AS LULA´S BRAZIL. THE AMERICAN GOVERNMENT HAS TO BE TOUGH, DEFENSIVE AND RESPONSIVE WITH LATIN AMERICAN LEFTIST CONSPIRACY COUNTRIES SUCH AS VENEZUELA, BOLIVIA, ECUADOR AND BRAZIL IN ORDER TO STAND UP FOR THE AMERICAN GROUND AT THE WORLD TRADE ORGANIZATION (W.T.O.) THROUGH THE NAFTA´S GROWTH AND EXPANSION. GOD BLESS THE NAFTA, THE ONLY LEGITIMATE AMERICAN TRADE AGREEMENT! GOOD LUCK FOR THE NAFTA´S GROWTH AND EXPANSION!

  2. THE NAFTA REPRESENTS THE FIRST AMERICAN TRADE AGREEMENT WHILE MERCOSUR REPRESENTS THE LATIN AMERICAN LEFTIST CONSPIRACY AGAINST THE USA. THE AMERICAN GOVERNMENT HAS BE TOUGH, DEFENSIVE AND RESPONSIVE AGAINST LATIN AMERICAN LEFTIST GOVERNMENTS SUCH AS VENEZUELA, BOLIVIA, BRAZIL AND ECUADOR NOT ONLY TO STAND UP FOR THE AMERICAN POLITICAL GROUND AT THE WORLD TRADE ORGANIZATION (W.T.O.) BUT ALSO TO STAND UP FOR THE AMERICAN LEGITIMATE COMMERCIAL LEADERSHIP IN THE WORLD THROUGH THE NAFTA´S GROWTH AND EXPANSION. GOD BLESS THE AMERICAN LEGITIMATE COMMERCIAL LEADERSHIP IN THE WORLD! GOD BLESS THE NAFTA´S LEGITIMATE TRADE AGREEMENT! GOOD LUCK FOR THE NAFTA´S GROWTH AND EXPANSION!

  3. Chris said

    http://online.wsj.com/article/SB10001424052748704596504575272991349796452.html?mod=googlenews_wsj

    Steve, I thought you and some of your readers would be interested in this article from the WSJ regarding jobs in America Samoa. Yet another example of the negative consequences of government on the free market economy and people’s lives.

    Instead of removing or fixing the law (removing minimum wage restrictions) that caused the problem in the first place, the government solution is to pass yet another law (while using our tax dollars/subsides!!!) to minimize the damage caused by the first law.

  4. Carl Hackert said

    Dear Steve,

    So now China wants to “help us” by allowing their currency to float a little so that their exports become more expensive? MAYBE, MAYBE NOT (just like the Chinese CO2 emissions promises)…Let’s see how much of the exploding US debt Communist China will buy as the the value of the dollar goes down relative to the Yuan. It was not that long ago that the Chinese warned Mr. Obama and the departing Obama budget chief Mr. Orzag against deficit spending.

    Americans and the Chinese must be nervous about what the effects will be of the 2011 expiration of Bush tax cuts and new Obama taxes on business and investment. “Unknowns” really bug investors. They understand the Dynamic Economic Model. They like predictable results and use actuarial data to fund investment and retirement plans. Politicians seem to only consider Static Economics as New York State did by raising cigarette taxes again – the budget expects that roughly the same number of cigarette packs will be sold in NYS therefore raising essential revenue. Never mind that smokers and neighboring states business people will find dynamic, creative ways to avoid the taxes, perhaps even stop smoking!

    Obama, by accident or design, has created many “unknowns” that must concern even the Chinese Communists. These include new taxes & fees, new Wall Street regulations, and open-ended wasteful stimulus spending programs which conceal state budget deficits and are payback to leftist Unions and Progressives (let’s call it socialist) fulfilling the Obama redistributive promises.

    Our high unemployment rate continues in spite of massive hiring by the government stimulus and agencies, and the massaging of the numbers. The job data Obama calls “saving and creating” is an “unknown”, for example. The census data is being statistically massaged by the White House’s Progressive agendists. Would a Chinese banker regard that massaged data as evidence of a recovery or the even makeup of our nation’s population?

    Less than two decades after Mr. Clinton added 100,000 more cops and Mr. Bush added more soldiers/firemen/cops/educators, taxpayers and businesses now have to cover the bloated budgets local, state, & federal governments resulting from contractual wages and benefit agreements with public employee unions. What would really happen if the states were to default and go bankrupt? Would the states, municipalities or schools be able to void those union contracts and renegotiate to lower the cost? How would the Chinese react? Would they demand payment or at the very least, demand higher interest rates?

    Domestically, we’ve got a lot to be worried about because Big Government rules, socialist benefit programs, weakened domestic energy and industrial production, and a declining dollar raises the cost of living and production in America. The “unknowns” of Obama appointed liberal activist judges invading our classrooms, homes, restaurants and workplaces should worry the Chinese bankers: are those Americans are getting dumber, more easy to brainwash, lazy and fatter?

    Obama’s failing policies in the Middle East and the War on Terror weakens the USA’s perception as a strong and reliable partner for protection against Islamic or Communist extremists. That’s a big “unknown”. Imagine if the next Al Queda attacks were to succeed: a dirty bomb, genetic/chemical weapon or an EMP hits Wall Street, DC, Chicago, Silicon Valley, power grid and/or poisons our air, water or farmland. Mr. Obama was lucky that the terrorist’s weapons failed in the recent Detroit and New York attacks. The Muslim extremist shooter was successful in the sad case of the Fort Hood massacre. The Chinese and Osama Bin Laden (who borrowed the 9/11 attack plan from two Chinese generals) must know that our Political Correctness is a vital element in any attack on the USA. To a Chinese banker the “unknown” is: how weak is American resolve? Maybe that’s why they seem to be testing us by supporting our enemies in Iran, Venezuela, Cuba, and North Korea.

    Let us not ignore a silly and politically inspired federal suit brought against the State of Arizona for enforcement of existing federal law, Obamacare’s destruction of the private health insurance and drug industries, rebirth of the “fairness” doctrine in FCC regulation of broadcasting, print and the Internet with new fees and implications on free speech. Pointy-headed liberal academics who have never worked in a meaningful business may not understand this but I’ll bet that the Chinese read our Founders’ words and studied US history: individual liberty, a common language, freedom of speech, private wealth. limited federal government, a strong military and protection of borders made the USA great. The “unknown” is: does Mr. Obama really understand or appreciate the US Constitution? Or is he and Mr. Axlerod more concerned with writing the Obama’s “narrative” (that word and the word “transparency” need to be retired for awhile).

    Then there’s the “unknown” of new global taxation and fees in the insuring, bailing out and regulation of banks. Where does the money come from? The USA, of course… and, borrowed, again from the Chinese?

    And the regulation, politicizing and monitoring of every aspect of American life: new rules regulating manufactoring/construction and materials, national ID card and a health database, favoritism by permitting intimidating Union card check or illegal voting or electioneering by groups like ACORN, new EPA rules for your farm, home, car, energy, water and sewer all justified under the cause of saving the world via Cap & Trade methane gas and CO2 gas taxation. Since humans exhale CO2 and produce methane and other waste products, just being alive will cost you. Yes, the Chinese will loan us the money to pay for every breathe you get taxed on. Meanwhile teachers and Al Gore will scare your children with a taxpayer funded curricula of Global Warming and evil US Capitalism, Obama songs and revisionist history. Thank you George Soros, Michael Moore and the Hollywood leftist elite.

    Then there’s the “unknown” of Obama’s “never waste a crisis” mentality in the BP disaster halting energy development and seizing control of $20 billion in compensation to be distributed by Obama’s people. No action will be taken on stable reliable forms of energy: nuclear, coal, coal liquification, hydro, gas or even a simple nuclear waste storage facility. Our economy and our vast nation relies on energy to cover its transportation needs – considering Alaska and Hawaii plus the oceans and Great Lakes of the Lower 48, we’re much larger than almost any other single nation and we have a relatively low population density as compared to the European countries Mr. Obama’s policies seek to emulate.

    This is part of a dangerous pattern of government takeover in key industries: international finance, banks and investment, home mortgage industry, auto manufacturing, healthcare and now energy. That’s gonna cost the average working US citizen and run up the deficit as Obama redistributes subsidies to illegals, the working and non-working poor, and the lower economic class of retirees.

    Again, we’ll just borrow $ from the Chinese who, by the way, are funding factories, energy development and drilling operations everywhere on the planet and they have never been known to worry about the ecosystem or human rights.

    Please read the AP story, below. I simply don’t trust them.

    Markets to watch Chinese exchange rates
    BY CHRISTOPHER BODEEN The Associated Press

    BEIJING — Currency markets will closely watch Chinese exchange rates today to see how far Beijing will allow the yuan to rise after announcing the end of its 2-year-old peg to the dollar.
    A stronger yuan would make Chinese exports more expensive and bring relief to foreign manufacturers that have been struggling to compete. But Beijing plans to disappoint them, saying Sunday there will be no dramatic rise.
    Beijing has long refused to allow the yuan to float and denied accusations that it is unfairly undervalued.
    But the Communist leadership finally acceded to foreign pressure to increase the exchange rate’s flexibility on Saturday, a week ahead of a G-20 summit at which President Hu Jintao was likely to have been hammered by critics of the currency policy.
    China, however, is still steering a path to economic recovery, and with workers at home demanding wage hikes — which would also increase the price of exports — the central bank sought to curb speculation of a major rise in the value of the yuan, also called the renminbi.
    “There is at present no basis for major fluctuation or change in the renminbi exchange rate,” the People’s Bank of China said in a lengthy commentary Sunday on its decision a day earlier.
    The statement implied that China considers the current exchange rate to be roughly where it ought to be, and economists said they don’t anticipate big swings in the yuan’s value.
    Keeping it at a “reasonable, balanced level” would contribute to economic stability and help restructure the Chinese economy to put greater emphasis on services and domestic consumption instead of exports, the statement said.
    It said China will rely more on a basket of currencies that includes the U.S. dollar to determine the exchange rate, rather than the dollar alone.
    China allowed the yuan to rise by about 20 percent beginning in 2005, but halted that two years ago to help Chinese manufacturers weather the global financial crisis.
    Since then, the yuan’s value has been pegged to the dollar at an exchange rate of roughly 6.83 to $1. The government sets the rate each day before the start of trading and retains powerful tools to control its movement.
    Any sudden rise in the yuan could ruin businesses already operating on razor-thin margins and cost job losses. It could also drive down the value of China’s $2.4 trillion in foreign exchange reserves.
    Because of China’s large trade surpluses, the central bank intervenes heavily in the exchange market, buying up excess foreign exchange earnings to keep the yuan’s value from rising.
    Although it mentioned few specific steps and set no targets, Saturday’s announcement generally won praise overseas — along with some criticism.
    President Barack Obama said the move would help protect the economic recovery, while the European Commission said it would benefit “both the Chinese economy and the global economy.”
    But with China’s economy growing at double-digit rates, boosted by $586 billion in stimulus spending and record bank lending to finance construction projects, Beijing can afford to move faster, some say.
    “Just a day after there was much hoopla about the Chinese finally changing their policy, they are already backing off,” U.S. Sen. Charles Schumer, a New York Democrat, said Sunday, adding that he plans to move forward with a bill that would punish Beijing for its currency policies.
    “It is only strong legislation that will get the Chinese to change and will stop jobs and wealth from flowing out of America as a result of unfair trade policies,” he said in a statement.
    Some Chinese experts criticized Saturday’s announcement as a cave-in to foreign pressure that would ultimately damage China’s crucial export sector.
    “From an economic angle, the appreciation of the renminbi will have a definite effect on exports, but in terms of politics and macroeconomic policy, it can be seen as a result of the need for balance,” said Zhao Xijun, deputy dean of the School of Finance of Renmin University.
    Also writing on the website of the National Business Daily, a leading business newspaper, economist Ye Tan said the move would pile pressure on exporters already contending with a roughly 15 percent appreciation of the renminbi against the euro, as well as rising labor costs.”

    • Carl,

      I’m a bit more optimistic than you are. The very scale of Obama’s failings is leading to a self-created implosion. He’s already a lame-duck before his second year has been completed.

      As for the Chinese, they will pursue their self-interests and ultimately that will force us to reconcile the imbalances of our economy.

      Just like Ronald Reagan, I’m always looking for a pony in all that poop!

      Steve

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