Free Trade Deals Unlikely Right Now

I have written before about the importance of free trade to our economic recovery.  However the current political climate is not amenable to making trade freer.  Unemployment and labor unions are preventing any progress which ironically might hurt them in the long run.  Mark Drajem wrote an excellent article on the difficulties which you can read here.

Do you think free trade is a good idea right now and is there any way to make it more politically feasible?

Some Quick Thoughts on Salt

In ancient Hebrew and Arabic, the words for war and peace derive from the words for salt and bread.  It is well known salt was incredibly important in the pre-modern world.  Roman soldiers jealously guarded the salt fields near Palestine and controlled the caravan routes that brought this commodity westward.  In fact, Roman soldiers were partially paid in salt which is where we get the word 'soldier' from the Latin sal dare (to give salt) and the word 'salary.'  In the Middle Ages, nations such as England built their foreign policies around the imperative of securing southern sea-salt supplies.  The phrase "to be worth one's salt" and the compliment "salt of the earth" arose out of the high value of salt.

Of course in modern times, though it is still incredibly important, salt is substantially cheaper because of its abundant supply.   My question is: What commodity today has such importance and high value in day to day life?  There is an obvious answer.  But there is also another resource that may be in short supply sooner than we think that could drastically affect the global economy...Comment with your guesses and thoughts!

Read the answer here

US Trade Policies Disadvantaged Companies

Ironically, it was the leadership role of the U.S. after World War II that led to the shift in trade positions. American policymakers have long seen the U.S. as the leading country in world power and trade. This opinion brought with it a sense of obligation to assist other countries with their trade efforts.

Retailers "Scream" Discrimination

This little story from 2002 illustrates the harms of trade restrictions:

For years, retailers from Wal-Mart and Target to tiny fancy-goods outlets have counted on low-cost imports from China to scare up sales at Halloween. A cheap polyester ghoul robe, along with a "Scream" mask retails for less than $20.  Classed as "flimsy festive articles," party-goods suppliers imported them duty free -- until U.S. Halloween giant, Rubie's Costume Company, got them reclassified as "fancy dress apparel."

What Does the WTO do?

The World Trade Organization (WTO) is the only international body dealing with the rules of trade between nations.  At the core of the WTO are agreements, negotiated and signed by most of the world's trading nations.  These documents provide legal ground rules for international commerce.  Their goal is to help the producers of goods and services, exporters, and importers conduct business in the global marketplace.

The WTO supplanted the General Agreement on Tariffs and Trade (GATT) in early 1995.  The WTO has three main purposes:

The End of Corruption?

I just attended a breakfast meeting with U.S. Secretary of Commerce Gary Locke and Angel Gurria, Secretary General of the Organization for Economic Co-operation and Development. The meeting was sponsored by Transparency International and focused on the need to continue reducing global corruption.

Several thoughts stand out:

Small Businesses Still Important

This is a preview of my new book, Global Business: Positioning Ventures Ahead to appear with Taylor and Francis in June of 2010. I will be posting little snippets from the book every once in a while. I encourage you to read, comment, share, and your thoughts to the comment section. And look for the book in June.
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The Commerce Department’s Exporter Data Base reveals that companies with fewer than 500 workers accounted for 97 percent of all U.S. exporters.

International Trade in Elephants

This is a preview of my new book, Global Business: Positioning Ventures Ahead to appear with Taylor and Francis in June of 2010. I will be posting little snippets from the book every once in a while. I encourage you to read, comment, share, and your thoughts to the comment section. And look for the book in June.
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Most people, on seeing this headline will immediately think of ivory and the trade in elephant tusks. Today, governments around the world subscribe to restrictive measures in ivory trade,  in order to protect elephants from poachers.

Here, however, we want to show that that elephants in their entirety have been an important part of international trade for millennia. In many international conflicts in ancient times, elephants were the “tanks” of the battle. Even disciplined Roman legionnaires took to flight when confronted with the giants pachyderms from Africa. For hundreds of years, Roman mothers threatened their children that “Hannibal ante portas esse” meaning that Roman archenemy Hannibal (from the key trading opposition city of Carthage) was in front of the doors of Rome. He and his tanks had devastated multiple legions during the second Punic War (218 – 201 BC)  and might have taken Rome itself, had he not been ordered back home by the leaders of Carthage.

Even earlier, the Egyptians were very active in international trade. A key priority in their trade was to acquire elephants from Ethiopia, which they transported using specially constructed boats, called elefantegos, and then used to attack the Greek empire in Persia.  

Millennia later, large discussions are ongoing, trying to assess whether nations with advanced military technology should be selling weapons systems to the world.  We all know, how such sales can dramatically affect not only the trade and capital accounts of nations, but also their politics and the freedom of their citizens.

Sources: William J. Bernstein, A Splendid Exchange: How Trade Shaped the World, Grove Press, New York, 2008; Titus Livius (Livy) , The History of Rome, Indianapolis, Hackett Publishing ,2006; J.B. Bury, S.A. Cook and F.E. Adcock, The Cambridge Ancient History, 7,1, Cambridge University Press, 2003 

It's Noble to Get a Nobel

U.S. President Obama will receive the Nobel Prize for Peace. Excellent! It is so nice to again receive happy telephone calls from abroad. The Prize is seemly to the person but also to the country and demonstrates a renewed popularity. Liking the U.S. is cool again, particularly in Norway, the country from where the Peace Prize is awarded.

Just like receiving an honorary degree is not necessarily indicative of a good thesis, rather it is reflective of the desire to establish closer, mutual ties. The Prize indicates how much the world is in need of hope and succor during times of uncertainty, frustration and economic hardship.

Typically, winners receive their Nobel prizes long after they have made their key contribution. Their best days often are behind them, and the Prize provides the warm afterglow of reminiscences. Things are quite different for President Obama. He is in a position where his best days may yet come. On receipt of the Prize, he does not have to inform his audience about what else he wishes he had done. Rather, he can address and change issues, policies, and outcomes. In his acceptance speech he can highlight his agenda for the future, and thus share the inspiration.

The prize offers additional gravitas to the future actions of President Obama. It also shows that there is a global focus on the United States and its leadership. Just imagine, if there is a cabinet meeting with secretary Cheu, and a visit by former Vice President Gore, there will be three Nobelists in the White House – what an awesome firepower!

Of course there are some who will claim that this honor has come too early. They will raise the question of what the President should do next. They wonder which mountains are left to climb. To them I say, that there have been several instances of individuals receiving more than one Nobel Prize.

The realistic next goal for President Obama is the Nobel Prize in Economics. Opportunities for distinction abound. Here are some areas for which President Obama could become prize worthy: for work in coping with deficits and restoring a acceptable global balance in trade and investment; for showing how to deal with large increases of spending while keeping inflation low; for implementing policies which nurture and encourage specific industries while not distorting the economy; for managing the steady depreciation of a currency while maintaining the domestic standard of living; for reducing large and continuous trade deficits through the systematic development of an export oriented economy; for convincing other nations to increase their domestic consumption, particularly through the acquisition of foreign products.

The challenges and the opportunities for key new contributions are many. Right now, the world has made a forward payment with great hope and enthusiasm. Perception can become reality, when enough people believe in it. The mantle of global leadership has been re-affirmed for both the United States and President Obama. There has been a payoff from a new willingness on part of the United States to learn and to listen to voices from around the world in order to integrate global perspectives into its thinking.

But, in spite of the enthusiasm, the world needs to understand that the U.S. leader is no longer able to bear policy gifts. U.S. leadership will exact a price. Supporters, friends and allies will need to make economic, sovereignty, and political sacrifices which not only reaffirm but also directly support such leadership. So it is time for countries to start to consider what policy concessions will be necessary to develop a new framework for U.S. leadership and then to offer the investments necessary to sustain mutual progress.

In sum, the Nobel Prize has given new impetus to the President and the country. Just like in the side mirror of a car, perhaps new directions are really closer than they appear. That makes it even more important for the President to be equitable and respectful of all players when raising new expectations. Right now, the Prize certainly represents a good start – let’s make this a successful event.

Academic Freedom

Academic freedom is close to the hearts of many. Being able to teach what "needs" to be taught, to speak out and to pursue thoughts to wherever they may lead are some of the most crucial components of academia. In light of this accepted axiom it is surprising to learn about opposition to the free exercise of higher education around the world.

Many countries are held back by vigorous resistance from their own universities. In their Statement on Behalf of Higher Education Institutions Worldwide, university associations from around the world proclaim fundamental disagreement with international competition: "Trade frameworks are not designed to deal with the academic, research, or broader social and cultural purposes of higher education." 

There are several reasons why universities don't want open markets for themselves. 

First is the reluctance to accept a role in an existing global framework. Administrators and professors around the world have consistently assured me that university issues are so special, specific and unique that the application of industry approaches to them would be heresy. As the editor of an important business journal put it, "Reviewers generally reject the notion that higher education is a 'service.' " 

Second is an overwhelming unwillingness by universities in most nations to consider the benefits of an entrepreneurial system. Rewards for university management come for the ability to manage coalitions and increase subsidies, rather than the capacity to raise funds or be market responsive. There are very few rewards for academic process innovation. 

Third is an ingrained opposition to competition and market forces. Little confidence exists in the power of the market to assure quality. To the world, the evidence is quite clear that central planning has not worked. Yet for ideological and historical reasons, many universities around the globe remain the last vestiges of central planning. 

Past centuries have seen few shifts in university structures and processes. There still is the classroom with the cathedra from which the professor expounds great thoughts and the seats from which students claim to listen. There still are the volumes to read, the papers to write and the ritualized exams to take. Mostly, one professor still offers only one field at one university, and most students still receive their knowledge in one-course increments which, as if by magic, last exactly one semester, and obtain their degrees from only one location.

All this in an era characterized by technology-driven knowledge generation and information dissemination, global reach, cross fertilization of fields, substantial productivity enhancements and Six Sigma quality-control levels. It might appear as if higher education has not innovated at the same pace as other industries. 

Universities need more funding, more competition and more insights from around the globe. Student mobility around the world needs to be reinvigorated. Professors and researchers should move about more. Program content should be internationalized with increasing ease through distance learning and online education. Universities should be able to open up branches abroad or join forces with foreign entities. Competition for resources and students between the best institutions with a minimum of governmental inhibitions must let ventures succeed or fail. Global market forces will lead to rapid improvements and growth in education. Education should be the next large expenditure category for all the TARP funds.

The G20 Supremacy: Fact or Wishful Thinking?

The G20 meeting in Pittsburgh has ended with a grandiose self promotion of the event and its future relevance. The participants declared the meeting from now on to be the world’s principal economic gathering. But designation alone is not enough. The real question is how the impact of the meeting will change.

Time was, that the host of an international summit could use the meeting to not only discuss pertinent issues but also initiate policy action. Such potential was also there for the Pittsburgh meeting. For example, as President Obama raised a global trade vision for economic recovery, job creation, and environmental sustainability, he could have demonstrated a commitment to these principles through the announcement of promising policies.

Yet, the Obama Administration’s decision to invoke safeguards and impose tariffs on Chinese tire imports dealt a major blow to such a vision. Many U.S. trading partners were hoping that ‘Buy America’ provisions of the economic stimulus legislation and the U.S. failure to live up to its NAFTA obligations on Mexican trucking were products of an increasingly trade-phobic Congress. Widespread expectations that the Administration could keep legislators on a leash, were far from met. The recent decision against tire imports from China was President Obama’s own, driven by union pressure. It reveals more precisely and loudly than any trade policy speech ever could, the details of the direction of U.S. policy.

It says that the U.S. now views the rules-based global trading system, which successive U.S. Administrations—both Republican and Democrat—placed at the center of U.S. global economic policy, as outdated and expendable. This takes place despite of the fact that rules are in large measure responsible for the post war global economic success.

It says that the U.S. has now created a subclass of economic interests. Manufacturers of auto parts, exporters of poultry, producers of aircraft are now at constant risk of international retribution. For example, in retaliation of the tire decision the Chinese are now threatening not to buy U.S. goods which are in demand and competitive. Motivated workers in successful industries now have their legitimate interests subrogated to the trade agenda of the major U.S. unions.

It says that the U.S. had its fingers crossed when signing on to the anti-protectionist pledge, and raises real doubts about future adherence.

It says that the “Yes we can” Administration has lost confidence in the American model of competitiveness.

China is absolutely right to choose this ground to challenge the U.S. on protectionism. While trade lawyers can argue the letter of the WTO commitment—it is absolutely clear that the spirit of the Safeguards Agreement has been violated in this case.

Unquestionably, there are numerous issues on which the U.S. can challenge China’s approach to trade—including subsidies, exchange rate issues, disregard for intellectual property rights and denial of equal treatment. But a safeguard action addresses none of these. It doesn’t identify any fault with the Chinese—only with the ability of U.S. workers to compete. When faced with competition from Chinese tire producers, the U.S. could not point to dumping or government supports, so the Administration went to the “no we can’t” option.

Larry Summers has said that the long term formula for U.S. economic recovery will be to become an export oriented economy. To do that, U.S. products will have to compete aggressively and successfully with other countries for world markets. Trading partners will also need to be convinced to open up their markets to international products.

There will have to be a reversal of the deepening slide into protectionism heralded by the tire decision. America needs to participate in a trade agenda that gets the world working again. Only then will the next G 20 meetings be relevant and of impact.

The New Pinball Economy

President Obama is setting a new pace for the United States and for people around the world. It is crucial to reconcile the apparent conflict between the responsible economic behavior of citizens and the responsible leadership of the economy.

The message of `save more', for example, was always helpful for economic stability. Yet, for the sake of economic growth, the necessarily complementary message of `spend less' was unacceptable in the past. With new excitement about social obligation, now may be the right time to offer and implement opportunities for sacrifice.

There is need for a national agreement that excessive expenditure, wars, and high commodity prices must result in dialing back expectations, expenditures, and excess. Active consumer expenditures will be important to keep the economy going.

The steep decline in vehicle sales demonstrates the disadvantages of too much consumer caution. One needs to prevent individuals and society from becoming cheap. Greater selectivity based on quality should be a key focus of enlightened self-interest.

There seems to be less reliance on market forces. But if one does not use market signals, there needs to be the development of secondary indicators. New non-market criteria encourage the productivity of think tanks, government offices and universities. At the same time, they are likely to lead to an increase in policy errors, performance uncertainty and outcome disputes.

Less faith in free markets affects currency values and exchange rates. Governments will tend to intervene more quickly and perhaps more severely to reach desired currency values. Such extraterritorial application of policy goals will be a new drawback for international trading partners.

Politics do not afford business the same high priority as in the recent past. A reduced linkage between policy and trade will provide allies with less preferential treatment and less market access.

Domestic changes affect international perspectives. Traditional core dimensions of American capitalism, such as risk, competition, profit and property are shifting. For example, the risk/reward relationship is likely to become less central to decision-making.

A reduction in incentives for competition may lead to more harmony, but perhaps also reduce the speed of innovation. More creative thinking about property rights will affect the development of medications, but may also precipitate the global migration of pharmaceutical firms.

A useful analogy may be provided by the traditional pinball machine: Several people can play, and when a player achieves a high score in competition, the machine issues an extra ball ― which allows the winner to further extend his lead.

Now consider what would happen if in a new approach the player who falls behind, receives the extra ball in order to catch up with the leader. Such a shift would not necessarily be uninteresting, but would produce very different rules of the game.

Then there is the key issue of paying for all the desired changes. Past decades of government policy have focused on reducing inflation. The new focus on employment generation will require a neglect of inflation concerns in favor of stimulative expenditures.

Over time, the budget implications of such a shift will require a substantial increase in public income. Doing so will be difficult, given the key commitments already made in the area of tax policy, but will happen nonetheless. Such measures are likely to affect the value of the U.S. brand, leading to more reticence of foreign direct investment.

There are also new expectations for higher standards of virtue, vision and veracity by individuals, corporations and government in order to restore faith and confidence. Yet, both domestically and internationally such values cannot be created overnight, but rather require gradual shifts in perspectives and cultures and global collaboration.

Regardless of the desire for quick action, an era of globalization demands the harmonization of approaches in order to eliminate the jockeying for local advantage.

The American name carries weight in the world. Global leadership has too often been sidetracked by narrow concerns. Inner strength, skills, and morality are essential for long-term leadership for the common good. May the years to come provide us all with social progress and reward.

International Trade is Crucial to Revival of Global Economy

President Obama concentrates on his economic stimulus plan. Nations around the world attempt to stabilize their economies as well. Typically, each nation’s emphasis rests with domestic issues. Though politically understandable (GM is more important to us than Toyota), a successful plan must reflect the powerful influence of international trade on the national economy. In the U.S., for example, trade related activities comprise more than 25 percent of its economic activities – which is more than the housing and banking sectors combined. Trade also accounted for the entire U.S. economic growth in the past year. Trade issues definitely qualify for the major leagues, but seem to be neglected so far. 

The world depends on continuity in trade. The global economic outlook, competition and consumer choice are shaped by trade flows and currency values. Competitive devaluations, for example, provide unfair advantages to exporters. For us, the promotion of U.S. exports must have a central place in the economic recovery package. 

The national debate about economic recovery includes many lessons from the Great Depression. The clearest of these is to avoid the beggar thy neighbor policies and the protectionism of the Smoot Hawley tariffs that turned a market crash in the U.S. into a global Great Depression. 

Global leaders give lip service to this conventional wisdom but there is a gap between communiqué language and on-the-ground practices. Indonesia and Russia have already begun to raise their protection of domestic industries – to the detriment of global trade. The Doha Round of international trade negotiations continues to be stalled – even though eight years of negotiations have placed great benefits within reach. 

The U.S. experiences some difficulties in its global position, but around the world there is hope, expectation and willingness for a re-emergence of US leadership. There is growing concern among U.S. trading partners that the new leadership in the Congress and in the White House might introduce a new era of U.S. protectionism. Global markets are parsing any announcement for signs of what the Obama Administration will mean for them.

The world economies are intertwined. Any stimulus measure of one nation is likely to rapidly affect others, and trigger responses. Economic activity is highly concentrated among a few players. The United States, European Union, Japan, China and Canada account for more than 75 percent of the world’s economy. A good domestic stimulus should not become an international distortion. Subsidies paid to farmers in one country, for example, can affect dairy related industries around the world. Once introduced, protectionism can quickly become contagious and be emulated around the world. 

The economic recovery plan is both an opportunity to send a signal to markets about what they can expect in terms of U.S. trade, and a chance to reassert U.S. leadership on a global stage. Discussions of U.S. economic improvements must include a focus on global recovery. Countries must be able and willing to buy each other’s goods – in an increasing quantity – if economies are to blossom. 

Here are some recommendations :

• Countries need to make unambiguous, consistent and clear statements that industry bailout packages will not include protectionist measures. In the U.S., the newly appointed performance czar should assess economic stimulus measures by the U.S. and its trading partners for any inappropriate subsidies of exports or discrimination against imports.
• We need a renewed commitment to the World Trade Organization and its stalled Doha Round of trade negotiations. Rules need to be consistent and strong. The key players in world trade need to re-energize the negotiations by making major commitments and taking “early harvest” of potential agreements on a plurilateral basis. One first step could be the elimination of tariffs on environmental goods and services.
• The U.S. must lead its economic partners on the basis of trust and fair play – applied to trade and investment rules as well as to currency values. We’re in this together. Many policy objectives – be they health care, education, retirement – require a sound economy which depends on global collaboration on trade.

Trade success can provide the momentum which keeps the U.S. economy from stalling out before the rest of the stimulus can kick in. Trade issues must move up to the front burner.