issue: Trade

Chinese-U.S. Exchange Rates and Knowledge Capital Flows: Why We Feel Poorer

Posted on by The Progressive Policy Institute

The short summary:   The Chinese policy of buying dollars can be best understood as an indirect purchase of U.S. knowledge capital–technology and business know-how.  That, in a nutshell, is why we feel poorer today. Unless the Obama Administration understands the link between the undervalued yuan and the global  flows of knowledge capital,  negotiations with China are doomed to fail.

Viewed in the usual economic light, Chinese exchange rate policy in recent years looks like a gift to the U.S..   By buying up dollars to keep the yuan low, China–still a poor country– is effectively lending money to the U.S.–still a rich country–to buy Chinese products.  According to the official statistics, the U.S. has run a cumulative $1.4 trillion trade deficit with China since 2005. But over the same period, Chinese ownership of  dollar-denominated financial assets in the U.S. has risen by $1.3 trillion.

To put it another way, the conventional statistics seem to be saying that  the U.S. is getting $350+ billion a year in cheap clothing, electronics products, and toys at no real cost today.  What’s not to like?

But if this explanation was really correct–if  that purchase of dollars  was a gift from China–the U.S. would  be feeling happy and prosperous right now.  We have received all of these cheap goods and services, without having to give up very many of our own resources.

But of course, the U.S. doesn’t feel rich and happy right now–we feel poorer, while the Chinese are feeling more prosperous. How can we explain this?

The  reason why the Chinese purchase of dollars seems like a gift is  because we have a 20th century statistical system trying to track a 21st century  global economy. We can do a decent job tracking the flows of goods and services and a passable job tracking financial flows.  But there is no statistical agency tracking global knowledge capital flows–and that’s where the real story is. Take a look at this diagram.

The first three boxes represent the conventional view: The U.S. gets cheap goods and services, and then pays for them by selling financial  assets.

But that leaves out the  the transfer of knowledge capital  from the U.S. to China. In effect, the Chinese purchase of dollars is a mammoth subsidy for the transfer of technology and business-know into China.

Consider this. When China keeps the yuan low, that’s an inducement for U.S.-based companies to set up factories and research facilities in China, both for sale in China and for imports back to the U.S. .  And that, in turn, requires a transfer of  technology and business know-how from the U.S. to China.

My favorite example is furniture makers.  Over the years, U.S. furniture makers had accumulated this vast storehouse of knowledge–for example, how to make  coatings on dining room tables that are less likely to chip or discolor from heat or liquids. That’s one of the differences between a low-quality and a high-quality table.

As the manufacturing of furniture was offshored to China, the knowledge capital had to be transferred as well.   And that, in turn, helped turn the Chinese furniture industry into a global exporting powerhouse.

Now, let’s stop and make  three points here. First, we need to compliment China. It is not easy to absorb knowledge capital from the outside and make good use of it.  Frankly, all sorts of other countries could have tried the same exchange rate trick, and it wouldn’t have worked for them.

Second, the transfer of knowledge capital to China doesn’t mean that the same knowledge capital  disappears in the U.S. However, our knowledge capital  does become less valuable because there is more global competition–and that’s why we feel poorer. (see my earlier post on the writedown of knowledge capital)

Third, what’s needed from Washington is a sophisticated  response that both focuses on rebuilding our own knowledge capital, while at the same time slowing down the exchange-rate knowledge capital pump. More to come on this.

crossposted at Mandel on Innovation and Growth

Labor Backs Trade (Yes you read that right)

Posted on by The Progressive Policy Institute

Last Friday the AFL-CIO and several big unions came out against the U.S.-Korea free trade deal.  As news, this was strictly “dog-bites-man” stuff.  The bigger story is the appearance of cracks in Labor’s usually monolithic opposition to trade pacts.

Several unions, namely the United Auto Workers and the United Food and Commercial Workers, endorsed the agreement after President Obama wrung concessions from Seoul on cars and U.S. beef earlier this month. Ford Motor Company, which strongly opposed the original deal negotiated by the George W. Bush administration on the grounds that it didn’t do enough to pry open South Korea’s auto market, is also on board.

The unusual split in Labor’s ranks makes it easier for Congressional Democrats to back Obama.   Although voting treaties up or down is the exclusive prerogative of the Senate, it’s significant that the deal also has the support of Rep. Sandy Levin (D-Mich), a tireless defender of the U.S. auto industry and long the House’s leading skeptic of free trade agreements.

If the Senate approves the treaty next year, it will be a major boost for Obama’s pledge to double exports over the next five years. It may also signal a shift in trade politics within the Democratic Party. As a candidate, Obama played to his party’s anti-trade gallery, even pledging to re-negotiate the 1994 North America Free Trade Agreement. Now, as President, he recognizes that opening overseas markets is integral to economic recovery. With consumers still winding down their debts, and businesses hoarding cash, a good part of the economic demand we need to create jobs must come from abroad.

In fact, the Commerce Department reported Friday that U.S. exports rose to their highest levels in more than two years. The U.S. trade deficit (in goods and services) fell to $38.71 billion, a more than 13 percent drop over the previous month and considerably less than the $44 billion economists had predicted.  Best of all, U.S. exports to China grew nearly 30 percent to reach a record high of just over $9 billion. Along with a slight decrease in Chinese imports, that narrowed the monthly U.S. trade deficit by 8 percent, to $25.52 billion. This was the best economic news we’ve had for some time, and it sent stocks soaring.

South Korea has the world’s 12th largest economy. By lowering its high tariffs and dealing with non-tariff barriers to U.S. communications and financial services firms, the deal could boost U.S. exports to South Korea by $10 trillion annually, the administration says. Crucially, thanks to Obama’s success in getting South Korea to modify its auto provisions, it exempts up to 25,000 U.S. vehicles from Seoul’s environmental and fuel economy standards, and builds in safeguards against a surge of imported cars from South Korea.

That was enough to satisfy the UAW and Ford though not, it seems, the rest of organized labor. Intriguingly, the automakers’ union also parted company from the AFL-CIO in backing another controversial Obama deal: his tax-cut compromise with Republicans. It’s another sign that, even within the progressive camp, arguments for spurring job-creating growth are prevailing over class warfare themes.

South Korea is more than a major trading partner. It’s also a key U.S. ally. North Korea’s recent artillery attack on one of its islands – and China’s refusal to condemn it – seems to have made Seoul more tractable about negotiating changes in the treaty.  In any event, the free trade pact also offers the United States an opportunity to cement relations with an prosperous market democracy that increasingly shares our apprehensions about Beijing’s propensity for throwing its weight around in the Asia Pacific.

The U.S.-South Korea free trade agreement would be worth ratifying on foreign policy grounds alone. But unlike several previous bilateral trade pacts with small nations, this one will deliver real benefits to America’s struggling economy.

Needed: A ‘Global-Compatible’ Tax System

Posted on by The Progressive Policy Institute

President Obama is thinking about a broad overhaul of the income tax system, closing loopholes and lowering rates. (“Obama Weighs Tax Overhaul in Bid to Address Debt”).

But in today’s global economy, any attempt to ‘fix’ the U.S. income tax system is fundamentally doomed. Financial and product markets are so deeply globally integrated that multinationals and wealthy individuals can easily  recognize their income in lower-tax countries, if they choose.

One simple statistic: In 2009 40% of U.S. imports and exports was ‘related-party trade’ –”trade by U.S. companies with their subsidiaries abroad as well as trade by U.S. subsidiaries of foreign companies with their parent companies.” That means companies are effectively trading with themselves, so they can choose which side of the transaction books the profits.

To put it another way, the global economy is the biggest loophole of all, and it can’t be closed without layer after layer of intrusive rules and regulations.  In a global economy, you can’t have a simple income tax system.

What we need is a ‘global-compatible’ tax system: That is, a tax system which acknowledges the existence of a global economy, so it doesn’t continually need to be patched to close loopholes.

The best global-compatible tax system that I know of is the value-added tax. The value-added tax, as the name suggests, taxes the value added in a country, not the income. Equally important, A VAT  taxes imports but not exports.  As a result,  it offers far less chances for gaming the system.

Now, countries can still compete on their level of VAT. Moreover, there are a lot of controversial issues that can seriously affect competitiveness. These include: How to make the VAT progressive; whether medical care and housing should be exempt; how to treat capital investment and R&D spending; and so on. Big important questions, but ultimately solvable.

If you want tax simplicity and fairness, global-compatible is key.

This piece is cross-posted at Mandel on Innovation and Growth

Obama’s Chance to Lead on Trade

Posted on by The Progressive Policy Institute

President Obama is in Seoul today for what promises to be a contentious meeting of the world’s leading economic powers. He probably won’t mollify China, Germany and other critics of the Federal Reserve’s plan to pump more money into the U.S. economy. But the President does have a chance to further his goal of doubling U.S. exports by bringing home an improved trade agreement with South Korea.

In addition to attending the G-20 summit, Obama is slated to meet with South Korean officials to finalize a bilateral free trade pact negotiated by President Bush. Congress has not ratified the treaty, which is snagged by concerns about U.S. auto exports to South Korea, as well as lawmakers’ eroding faith in the benefits of free trade.  The president said in June that he had instructed the U.S. Trade Representative to have all the outstanding issues “lined up properly” before he arrived for this week’s visit, so he could close the deal with Korea and present the agreement to Congress again in the coming months.

South Korea isn’t just a major trade partner, it’s also a key strategic ally and a counterweight to China’s growing heft in the Asia-Pacific. Since its tariffs traditionally have been much higher than ours, there’s little doubt that the agreement would spur U.S. exports and help offset weak economic demand at home. It requires South Korea to lower its high taxes on U.S. farm goods and open markets for insurance and other services to American firms.  As the treaty has languished in Congress, however, Seoul has been busy on other fronts, deepening economic ties with China and finalizing an important trade pact with the EU last month.

Although President Obama sounded an ambivalent note at best on trade during the 2008 presidential campaign, he understands that expanding U.S. exports is crucial both to creating jobs and shrinking America’s outsized trade deficits.  Now that he’s made the Korean deal a top priority, we’ll find out if the newly Tea Party-infused GOP will be more amenable to passing the treaty than Congressional Democrats were.

The agreement would lower tariffs on auto imports on both sides. South Korea’s are higher — 8 percent compared to 2.5 percent here. (The United States also would gradually lower a 25 percent tariff on imported pickup trucks.) Nonetheless, U.S. auto makers, especially Ford, have argued that the treaty would not bring down cultural and non-tariff barriers that have confined their sales to a sliver of South Korea’s lucrative auto market.

They have a point.  Seoul exports more than 400,000 vehicles (mostly Hyundais and Kias) to the United States each year, while manufacturing an additional 200,000 cars at U.S. plants. According the U.S. Commerce Department, U.S. auto makers sent a paltry 5,878 vehicles to South Korea in 2009. Ford’s Stephen Biegun notes that more than 70 percent of the cars made in South Korea are exported, while imports account for less than 10 percent of sales, well below the average of 40 percent in other economically advanced countries.

As an auto industry representative explained in testimony before Congress, Korea has an extensive web of non-tariff barriers that make it harder for foreign car makers to penetrate the Korean market.  Some of these are technical regulations like emissions standards and even license plate size. Establishing a clear link between such policies and the small U.S. market share in Korea isn’t always easy. But there’s no doubt that some of Korea’s policies reflect a well-entrenched hostility toward imports. For example, until recently anyone in Korea who bought a foreign car would automatically have their income taxes audited—a policy that chilled demand even after it was officially ended.

Ford, America’s healthiest car maker, sees itself as the chief victim of South Korea’s import-unfriendly policies. That’s because General Motors, through its Daewoo subsidy, makes cars in South Korea, selling more than 100,000 locally and exporting hundreds of thousands more elsewhere (including to the United States).

What can President Obama do to resolve the impasse over autos and get the U.S.-South Korea agreement through the Senate? He can’t reopen negotiations, but he can use the presidential jawbone to win binding side agreements with Seoul to remove non-tariff barriers to U.S. auto exports.  He could, in short, bring pressure on South Korea to fully liberalize its auto markets and embrace the reciprocal obligations that come with free trade.  Much like his powerful message in New Delhi that “India has emerged,” the president needs to make the case that South Korea has also fully emerged as a mature economy, and it can no longer justify the kind of protectionist and mercantilist trade policies that are more typical of poorer developing countries.

A more aggressive stance would show that the President is serious about doubling U.S. exports. But there’s a complicating factor: the global spread of auto production, design and supply chains. That makes it hard to say just how “American” any given car really is, or how many U.S. jobs are engaged in making cars.

Nonetheless, as long as the answer is “greater than zero,” the President has an obligation to ensure that major U.S. trade partners offer as much access to their domestic markets as we do to ours. And the Korean pact presents him with an opportunity both to restore U.S. global leadership on trade liberalization and to integrate America more deeply into the world’s fastest-growing markets in East Asia.

Photo credit: South Korea

Iran Buckles Under Sanctions Pressure

Posted on by The Progressive Policy Institute

The Obama administration won an important foreign policy victory yesterday as Iran skulked back to the negotiating table.  In other words, the latest rounds of sanctions imposed by the UN, United States, and European Union have worked.

To be clear, sanctions’ aim was never to “bring Iran to its knees,” as Supreme Leader Khamenei claimed in 2008.  Further, it’s easy to doubt their effectiveness when we we hear accounts that Tehran is skirting sanctions with fake bank accounts and false flags on ships’ registries. This narrative essentially implies that because Iran is evading sanctions, then they must not be working.

It’s exactly the opposite: Sanctions are imposed to make life difficult for Tehran, and stories about evasion are actually clear indications of their effectiveness.  Every second an Iranian official has had to spend time figuring out a way around a sanction is time he should be doing his regular job.

Sanctions have coincided with a significant economic reforms inside Iran, aimed at ending over $100b in government subsidies on everything from bread to energy.  Opaque attempts at economic reform appear to have been painful for average Iranians.  And while I am not enough of Iran expert to steadfastly link sanctions, a weakening domestic macro-economic situation, and Iran’s inclination to head back to the negotiating table, I’m happy to point out the not-so-odd coincidence.

Before we get too excited, it should be obvious that the outcome of new negotiations is far from certain.  Iran will likely play its tired game of engaging diplomatically while attempting to refuse meaningful compromise.  That’s why it’s crucial that the Obama administration, European Union, and UN not reward Iran just for talking.  To keep Iran from getting the bomb, the international community has to keep its boot on Tehran’s neck until the day it agrees to unfettered access to all of Iran’s nuclear facilities.

photo credit: Daniella Zalcman

Schwarzenegger Takes the Asian Express

Posted on by The Progressive Policy Institute

With his own state government deep in the red, Schwarzenegger needs cash to build a $40-billion high-speed railroad between San Diego, Los Angeles, San Francisco and Sacramento. Instead of resigning himself to critics’ attacks that now is not the moment to spend money on rail, the governor went abroad to strengthen California’s ties with overseas train builders and bankers. At a time when folks in Washington are scratching their heads over how to pay for high-speed rail, the Governor’s trip offers an instructive way forward.

On the first leg of his journey, Schwarzenegger cut a deal with the Japan Bank for International Cooperation to loan California funds for the rail project. (The exact amount was not revealed.) In return, the governor dangled the prospect that California would choose Japanese trainsets and a Japanese operator to run the railroad.

With this understanding in hand, the ex-actor marched to Beijing and struck what may be a better deal with the Chinese Rail Ministry. The agency announced that it could offer California a “complete package,” including financing, to build the high-speed railway. “What other nations don’t have, we have,” bragged a ministry spokesman. “What they have, we have better.”

Then it was off to Korea, where the governor rode on Korea’s fastest train, the KTX, with Hyundai executives and met with President Lee Myung-bak. Afterwards, he offered the assessment that Korea and California would “be a terrific partnership” and asked his hosts to be sure to bid on the California project.

Schwarzenegger is on to an old idea. In the 19th century, European governments, as well as private investors, helped finance America’s railroads. Competition was often ferocious between the different syndicates, which kept overall costs down while enriching the Wall Street middlemen who set up the investment tranches.

Schwarzenegger’s strategy of letting experienced rail operators propose financial deals to California in return for potential entry into its market comes in sharp contrast to the approach in Washington.

Ever since it proposed a high-speed rail program in April 2009, the Obama administration has kept foreign rail builders at arm’s length and peddled the notion that American manufacturers can upscale their expertise and produce their own state-of-the-art train systems.

So far, no domestic company has even remotely stepped up to this task. Pullman-Standard, the last U.S. manufacturer to build rail passenger cars, exited the business 25 years ago. General Electric makes world-class locomotives, but these are freight locomotives unsuited for speeds above 90 mph.

Schwarzenegger realizes that having invested tens of billions of dollars in their high-speed-rail industry, governments in Asia and Europe are ready to fight for a chunk of his state’s $40-billion project. Jobs and manufacturing opportunities in California will flow naturally from the demands of the new service – as long as it gets started.

Right now, nobody in Washington seems to know how to pay for high-speed rail. A paralysis is taking shape as the federal debt grows, with no long-range funding set up. Maybe the “governator’s” shrewd negotiations with Asian officials this week will bring some fresh ideas to policymakers.

Photo credit: Hyundai

China’s Switch from Importer to Exporter of Fast Trains Holds Lessons for U.S.

Posted on by The Progressive Policy Institute

In the world of high-speed rail, imitation can be an appealing form of flattery. While the Obama administration is literally tying the railway supply industry in knots by insisting on trainsets built solely of U.S. content, China opened its arms to foreign train manufacturers during the early stages of its high-speed rail program.

Now within the space of six years, China has become the fastest-growing exporter of rail equipment in the world. On Wednesday, Argentina signed a $12 billion deal to purchase locomotives, cars and infrastructure from state-owned Chinese railways. This triumph follows the country’s success in exporting its technology to Saudi Arabia, Turkey and Venezuela.

China’s ability to create a booming rail sector is a case study of how to leapfrog over established builders and stimulate domestic employment at the same time.

In 2004, China sealed a contract with a consortium led by Kawasaki Heavy Industries to build “bullet trains.” Local equipment makers soon mastered the know-how for their manufacture and licensed other design features from companies in Canada, France, Germany and Sweden.

Today, China operates the world’s fastest trains, with about 15 percent of the parts coming from overseas.

Cutting a Deal in California

On the global stage, China was a non-factor in high-speed-rail (HSR) manufacturing until about 20 months ago when it started bidding on projects overseas. With its cheap cost basis, China quickly made inroads against Siemens of Germany and Alstom of France – together with its former partner, Kawasaki, which reportedly could not imagine that the catch-up would be so fast.

The Chinese government recently signed a preliminary agreement to cooperate with California to help finance and build a HSR line between San Diego and Sacramento. China’s rail ministry has a framework agreement to license its technology to General Electric.

GE describes the agreement as requiring at least 80 percent of the components to come from American suppliers and final assembly in the U.S. GE itself would supply 200-mph electric locomotives using technology licensed from China.

Gov. Arnold Schwarzenegger is scheduled to lead a trade mission to Beijing in September to discuss China’s offer.

Insisting on All-American Content

The example of China provides an alternative model to the “do-it-yourself” approach of the Obama administration. Propelled by a desire to create jobs quickly, the administration says it will only fund rail projects where all manufactured parts – plus the underlining iron and steel – are produced in the U.S.

The 100-percent American rule was contained in Congressional legislation that authorized the spending of $8 billion in stimulus funds for HSR. The administration has told suppliers that it does not plan to use the law’s waiver to exempt some components, even though subway and light-rail trainsets funded with federal money may use up to 30 percent non-U.S. content.

America’s supremacy in railway carbuilding has long past. The last builder, Pullman-Standard Co., went out of business 25 years ago. A century before, George Pullman built the largest passenger railcar business in the world through his innovative Pullman sleeping car.

Without any current base to produce such equipment domestically, attempts to build a homegrown business are fraught with problems, according to many experts.

Last month, the Government Accountability Office (GAO) noted that it could take as many as nine years to build high-speed trainsets domestically. This included up to 21 months for testing the equipment and 42 months for production.

Easing Safety Rules

Complicating the situation are rules established by the Federal Railroad Administration that bar foreign trainsets on American rails because they do not meet the agency’s safety standards.

FRA requires massive amounts of steel in passenger cars so they can withstand a crash with a freight train on shared track. Foreign standards focus more on crash avoidance rather than crash survival, the GAO pointed out, making for lighter trains that nevertheless have stellar safety records.

The agency has shown some relaxation of its heavy-metal mindset by allowing California to operate European-style trains on a dedicated passenger line being planned between San Francisco and San Jose.

Opening the door to foreign suppliers of cars and locomotives, at least until American companies can digest the technology required for their manufacture, could speed up rail service and potentially re-position the U.S. in markets once ruled by George Pullman.

Photo credit: jiadoldol

Chinese Workers Flex Muscles

Posted on by The Progressive Policy Institute

PPI Special Report

The following is a guest column from PPI friend and sometime contributor Earl Brown, Labor and Employment Law Counsel for the American Center for International Labor Solidarity.

Over the last few months, thousands of workers, toiling in the Chinese factories of Japanese car manufacturers, have struck for improved wages, hours and working conditions—autonomously, without foreign input and with astonishing tenacity and shrewdness. These strikes have attracted much international media and scholarly commentary ranging from “nothing new” to “a new era dawns.” To adequately understand these strikes, however, we need to heed to the words of the strikers themselves.

Let’s look at the strike that garnered the most international coverage; the roughly two to three week strike at the Honda transmission plant in Foshan City near Guangzhou in the industrial province of Guangdong. Although Honda’s China operations are quite profitable and a key to Honda’s overall success, workers down its supply chain remain locked in a labor regime of low wages, speed-up and long hours. Of the roughly 1900 workers at the Foshan plant, some 800 plus are classified as “interns” and thus get even lower wages.

Facing announcements of a dramatic speed-up, the workers spontaneously struck. The strike at the Foshan transmission plant idled the whole Honda “just-in-time” system — a continuous production with low inventory — as completed transmissions could not be fed into the assembly plants. At first, Honda reacted with firings of strike leaders and threats, accompanied by minimal offers of wage improvements. When this didn’t work, Honda management, local government and the local government union used muscle.

Thick thirty-year-olds, connected to local government and decked in polo shirts and yellow hats, attempted to push and herd the massed, lean twenty-year-old striking men and women back into the factory. It didn’t work. At that point, Honda was desperate to get production back up as market analysts all over the world lasered in on Honda’s inability to crank out cars in China. Having exhausted heavy-handed labor relation’s tactics that weren’t working, upper management reached out to the elected representatives of these young, rights-conscious workers and quickly hammered out an agreement and a return to work.

Direct negotiation with real plant-level worker representatives, in the glare of international and national publicity, is a telling event. China has had many strikes. In the nineties, there were protests, which aimed at recouping unpaid wages from failed factories, or challenged privatization. More recently, strikes have occurred all over China for wage improvements in the logistics sector, in public transportation and, of course, in manufacturing. But this is the first time that workers, acting on their own, have compelled a major multi-national employer to deal directly and formally with their elected grass-roots representatives, on the stage of China and the world.

Many commentators, sensing the significance of this development, have looked to Poland and Detroit in the thirties to parse these events. These young Foshan workers, however, live in the China of now. They are imbued with a new rights consciousness, buttressed by recent advances in Chinese labor law. Operating within the framework of existing Chinese law, they want a decent life, not a wholesale revisiting of China’s history or political arrangements. In their very words:

“…. [our] fundamental demands are…salary raises…for the whole workforce including interns; improvements in the wage structure and job promotion mechanism; and last but not least, restructuring the branch trade union at Honda Auto Parts Manufacturing Co.’ Ltd. Another fundamental demand… [is]…non-retaliation and no dismissal of workers participating in the strike.”

Many outsiders have confused the demand for “restructuring the branch trade union at Honda Auto Parts Manufacturing Company” with insistence on an independent union, apart from the official sanctioned union. It is not. As Chinese law provides, these workers are asking for the opportunity to elect “branch” grass roots representatives, as is their right under Chinese labor law. In short, they have not asked for an independent union but a union that acts independently! A grass-roots union that speaks for them and not the employer or local government. More wages, more and better personal life and more “industrial democracy.”

In every industrial society thus far, underpaid industrial workers, without recourse to mechanisms for negotiating with employers, have struck as a last resort. Many strikes end without gains for workers. But where industrial workers can stop production, even in complex and diffuse supply chains, they are sometimes able to compel recalcitrant employers to recognize them as partners in the production process and make economic concessions. If we listen to the words of the striking Honda and Toyota workers in China, we will discover that this industrial drama is now being played out in China at the peak of its industrial system in auto manufacturing.

There are no outside agitators here, just young, educated and patriotic Chinese workers fashioning “industrial democracy” in China, on uniquely Chinese terms. They are doing so in front of a national and international audience. Because of this international context, these Chinese workers are also affecting the global economy. They could be leading the way towards an end to the global “race to the bottom” in working and living conditions for the world’s majority — at least as far as China is concerned. Our own Justice Brandeis, who at a similar stage in our industrial story put forward the need for industrial democracy and income equity, would welcome these Chinese events and be proud.

Death of Cap-and-Trade?

Posted on by The Progressive Policy Institute

When Sen. Lindsey Graham (R- S.C.) recently declared cap-and-trade “dead,” he may have been more right than he realized. Graham was referring to the political prospects for carbon pricing in this Congress, but cap-and-trade has been the tool of choice for limiting emissions of other pollutants — like sulfur dioxide and nitrous oxides — for almost 20 years. The EPA proposed a rule yesterday that could sharply limit the role of trading in markets for those pollutants.

The proposed “transport rule” would replace the existing Clean Air Interstate Rule (CAIR). Both are aimed at reducing emissions that affect air quality not locally, but in downwind areas (hence the “transport” and “interstate” in their names). CAIR was issued under the Bush administration but comprehensively rejected by the D.C. Circuit Court in North Carolina v. EPA. CAIR has been in effect since the ruling, but as a zombie regulation. The EPA needs to replace it with a new rule that fits the court’s view of the agency’s powers under the Clean Air Act. The transport rule released yesterday is the agency’s attempt to do this. The rule is massive — 1,300 pages — and reads like a long-form response to the court’s opinion.

So what does this have to do with cap-and-trade? Among the court’s major objections to CAIR was the inability of the EPA to guarantee each state would reduce its emissions sufficiently to prevent interference with air quality downwind. The emissions trading systems set up by CAIR was to reduce emissions overall, and prevent problematic transport of pollution generally, but the EPA couldn’t promise, as the court read the statute to require, that each and every state would reduce emissions sufficiently. The reason for this is interstate trading. CAIR would have allowed emissions sources in different states to trade with each other. This has obvious benefits, as a bigger market is generally more efficient, but it is impossible to know in advance where the emissions reductions will occur. If it is unexpectedly cheap to reduce NOx emissions in Ohio and unexpectedly expensive in Kentucky, trading will happen and Ohio will make deeper cuts. Knowing in advance where reductions will be cheaper is hard (this lack of information is the reason for having a market in the first place). Generally, this lack of foreknowledge is not a problem, since the overall cost of emissions reductions is lower. Under the court’s reading of the Clean Air Act, however, the agency has to know the outcome in advance, at least at the state level.

The transport rule addresses this by largely eliminating interstate trading. Intrastate trading is still allowed, but the rule would only allow interstate trading at the margin, within relatively narrow “variability limits.” The EPA seems to be doubtful that even this small amount of interstate trading will be permitted by the courts. The new rule lists alternative options that do not include interstate trading at all.

It looks like we’ll be lucky if the final version of the new rule includes any interstate trading. Without interstate trading, the emissions reductions achieved by the new rule will be more expensive than they otherwise would be — possibly a lot more (I look forward to analysis from economists on exactly how much). Since the transport rule would replace both of the major cap-and-trade programs currently in operation in the U.S., this would mean an end to interstate emissions trading, at least for the 31 states affected by the new rule. It’s only a slight overstatement to say that cap-and-trade as we now know it would end.

It’s hard to accuse the EPA of timidity or error here. The agency attempted in CAIR to create an interstate market and was (somewhat surprisingly) kicked in the teeth for it by the D.C. Circuit. Though I and many other lawyers disagree with the D.C. Circuit’s reading of the Clean Air Act that led it to reject CAIR, the reading isn’t unreasonable, so it’s hard to place all of the blame on the courts either. Congress ultimately has responsibility for either creating markets for pollution reduction, or giving the EPA sufficient tools to create them itself. The transport rule released yesterday makes it clear that the EPA does not have the tools it needs.

At least some in Congress are aware of this problem, however. The three-pollutant or “3P” bill written by Sens. Carper (D-DE) and Alexander (R-TN) would create new national cap-and-trade markets for SO2, NOx and mercury (a new EPA mercury rule was also rejected by courts). If this bill were passed, it would hopefully include a fourth “P,” carbon, but even without it, the EPA would have the tools it needs. Without it, the transport rule appears to be the best the agency can do. Twenty years after the 1990 Amendments to the Clean Air Act, that should be embarrassing.

This item is cross-posted at Weathervane.

Photo credit: Mhaithaca’s Photostream

A Red Card for Airbus

Posted on by The Progressive Policy Institute

Referees often make costly mistakes, as we’ve seen in the World Cup. But the World Trade Organization (WTO), which umpires international commerce, got a big decision right yesterday. It handed the United States a thumping victory in a long-standing, high-stakes dispute with Europe over aircraft subsidies.

At issue were some $20 billion and below-market lending rates — known as “launch aid” – that several European governments had provided to aircraft manufacturer Airbus. The WTO deemed launch aid to be an illegal subsidy, upholding a September 2009 interim ruling.

The largess of European taxpayers was critical to Airbus’ development of several of the companies’ main commercial jets. Without such favorable financial assistance, the WTO’s ruling said, it “would not have been possible for Airbus to have launched all of these models, as originally designed and at the times it did.” In other words, without government subsidies, Airbus would have never have become the world’s number 2 player in the lucrative market for commercial airframes. U.S. Trade Representative Ron Kirk has said that the subsidies have done “great harm” to competing U.S. manufacturing firms, especially number 1 Boeing.

The ruling is welcome, not just for Boeing and American manufacturers but because it boosts the credibility of the rules-based global trading system, which lately has shown signs of fraying at the edges. If the rules aren’t enforced, trade will become a zero-sum game as countries resort to mercantilist and protectionist strategies to protect their economic interests. That in turn could bring global prosperity crashing down. The WTO’s decision is important too because it serves as a warning to other countries — China, Brazil, and Russia — who might or want to subsidize their own aircraft producers.

In an ironic twist, even the unions were on board in support of freer trade in the Airbus case. As Will Marshall and I wrote back in September (when the interim ruling was announced), “Although organized labor often has taken a skeptical if not hostile stance toward international trade, Boeing’s unions strongly backed the U.S. government’s decision to file the case in 2004. The unions realized that Boeing competitiveness was suffering and that only fair and enforceable trade rules would ensure it.”

The WTO has no mechanism for enforcing its rulings,  but rather provides the legal justification for the United States  to even the playing field. It would be best, of course, if Airbus and its European patrons bowed to the WTO’s judgment and end the illegal subsidies. It would be a tragic irony if Europe were to embrace an economic unilateralism even as President Obama has put the United States back on a course of multilateral cooperation. But if Europe won’t play by the rules, the United States has three options.

First, our government could levy tariffs on Airbus imports to the United States. Second, it could spread the pain by taxing other European imports. And third, Washington could subsidize aircraft production by U.S. firms.

The first is far and away the best choice — taxing Airbus limits the trade dispute to an isolated sector of the market, and avoids a broader trade war over other products. Government subsidies for U.S. firms are the least attractive option, because other companies in other sectors may lobby for money based on that precedent, further distorting trade.

I don’t expect Europe to just roll over and play dead. Though the EU hasn’t officially decided whether or not to appeal the ruling, and there is the possibility that some governments will just ignore the ruling and continue to subsidize production. That’s a big gamble of course, because it would just provoke more stringent U.S. tariffs on imports.

But for now, the good news is that the worlds’ trade ump is on the job, sending off those who break the rules.

Photo credit: Caribb’s Photostream

Is 100% American Content the Best Route for High-Speed Rail?

Posted on by The Progressive Policy Institute

The Obama administration’s determination to enforce 100 percent American content for high-speed train systems is roiling the rail supply industry, with some executives saying the rule would be “impossible” to achieve and others wondering how much it will slow down high-speed rail (HSR) development and add to the sticker price.

“We’re living in a global rail industry,” said an official at a large U.S. transportation manufacturer that depends on foreign parts. “Insisting on all-American content could mean losing 10 years in building our HSR supply chain.”

Karen Rae, deputy director of the Federal Railroad Administration, surprised rail advocates when she announced last month that the White House has decided to enforce the “domestic buying preference” provision of the Passenger Rail Investment and Improvement Act (PRIIA), which authorized $8 billion in HSR grants to state governments earlier this year.

Rae said at a conference sponsored by America 2050 that the administration had determined there was “enough excess manufacturing capacity in the country” to permit HSR equipment to be made of U.S. content. As a result, the administration did not anticipate issuing exemptions from the domestic buying rule, as permitted under Section 504(2) of PRIIA.

While Rae lauded the decision as a tool “to help reenergize manufacturing in the U.S.,” executives canvassed in the railway supply business say the provision could have the opposite effect.

“We could wind up getting 100 percent of nothing,” said one executive who exchanged candor for anonymity.

Things We Don’t Make Anymore

He and others say the biggest obstacle to American content is simply that this country does not produce some critical components. Take computer chips. They are not made in the U.S. There are American-owned suppliers, such as Intel, but the product itself is manufactured in Asia.

Computer chips are everywhere in modern rail cars, controlling the electric doors, regulating the heat and air conditioning, monitoring the mechanical and electrical systems, managing the P.A. systems and customer-information signs, to say nothing of Wi-Fi and other electronics that would be required in any HSR car order.

Outside of components, the sad fact is that there has not been a builder of passenger cars since Pullman-Standard Co. completed an order for Superliner cars for Amtrak in the 1980s and then went out of business.

In place of Pullman-Standard and other former U.S. manufacturing powerhouses, such as the Budd Co., a number of foreign-based companies have developed facilities to assemble rail cars.

The German giant, Siemens, builds light-rail vehicles (streetcars) from imported parts at a factory in Sacramento. Japan’s Kawasaki assembles commuter railcars in Lincoln, Neb., and New York City subway cars in Yonkers, NY.

French-based Alstom built Surfliner shells for the state of California in Brazil, shipped them to Baltimore and trucked them to a former railroad shop in Hornell, NY, for final assembly.

Bombardier built the shells for Amtrak’s Acela trains in Quebec and then shipped them across the border to a plant in Vermont for finishing. Talgo builds in Spain, but can do final assembly in the U.S.

Morrison Knudsen tried to break into the car-building business 20 years ago, but failed when projects like the proposed “Texas Triangle” HSR line collapsed.

In short, while there are many abandoned manufacturing plants in the U.S., it would take time to convert these plants into usable spaces for HSR equipment. Even more time and treasure would be required to develop a workforce capable of building technology that has more in common with modern aviation than lumbering freight trains.

What’s Consistent with the Public Interest?

China has offered to supply the equipment and engineers to help build California’s proposed HSR line between San Diego and Sacramento. If California accepted China’s offer, would the state have to repay the $2.25 billion it was awarded in PRIIA funding?

The language of the federal law is broadly written. In carrying out a rail project “funded in whole or in part with a grant under this title,” PRIIA calls for recipients to purchase “only unmanufactured articles, material, and supplies mined or produced in the U.S.” or “articles, material, and supplies manufactured in the U.S. substantially from articles, material, and supplies mined, produced, or manufactured in the U.S.”

The U.S. Department of Transportation (DOT) can waive this rule under three conditions: if the article is unreasonably expensive, if it is not produced in sufficient quantities, or if the requirement is “inconsistent with the public interest.”

It was assumed by the supply industry that the administration would use the law’s exemption liberally in order to expedite development of HSR lines. But Rae said that DOT’s No. 2 official, John Porcari, has been working with the White House to develop plans for 100 percent content and did not plan to issue any waivers.

Unintended Consequences

According to several suppliers, the literal interpretation of PRIIA could actually discourage American companies from entering the HSR field.

“Who wants to go through all these hoops only to find out you’re disqualified because some component is not considered American by a bureaucrat,” asked an executive.

One of the clearest-cut beneficiaries of the rule would appear to be domestic steelmakers supplying new track and structural steel. But who or what is a domestic steelmaker these days? Is it a company that owns plants in the U.S., a company owned by U.S. stockholders, or a company domiciled in the U.S.?

At present, foreign-owned-and-headquartered corporations control more than 35 percent of steel produced in the U.S. What’s more, half of the steel made here originates from raw materials mined outside of the country.

Similarly, GE Transportation, based in Erie, Pa., does a brisk business selling heavy-haul freight locomotives to China, Mexico, Brazil and Australia. Creating barriers for foreign suppliers may mean that overseas railroads won’t buy American in retaliation.

Getting Back on Track

The Obama administration would be wise to break free from the protectionist impulses of PRIIA and let all domestic and global rail suppliers compete for HSR contracts. Out of such competition, the best equipment and lowest prices should emerge.

A robust government policy toward high-speed rail would do wonders to revitalize entrepreneurship and encourage the private sector to enter the field.

This is the true challenge facing the Obama administration — establishing a long-term strategy for HSR, including how to finance the system. Parsing what is and isn’t “100% American” isn’t sound policy, it’s crowd-pleasing politics that will only delay the implementation of the administration’s own program.

Photo credit: Center for Neighborhood Technology’s Photostream

A Look at the New U.N. Sanctions on Iran

Posted on by The Progressive Policy Institute

The new United Nations Security Council has adopted a new round of sanctions against Iran. And they have some bite. But how and if they’ll truly be effective remains an open question.

Let’s start with the nuts and bolts. The sanctions compel Iran to comply with international inspections and to cease uranium enrichment. Failure to do so gets them this:

  • A strengthened arms embargo, prohibiting nations from exporting to Iran battle tanks, armored combat vehicles, large-caliber artillery systems, combat aircraft, attack helicopters, warships, and missiles or missile systems.
  • The resolution imposes financial and travel sanctions on specific Islamic Revolutionary Guard Corps (IRGC) individuals and companies involved in Iran’s nuclear and missile program.
  • Nations are authorized to inspect suspicious Iranian air and sea cargo for illicit items, interdict shipments in port and on the high seas, and confiscate any banned items found.
  • The Islamic Republic of Iran Shipping Lines (IRISL) is sanctioned for its role in transferring nuclear and missile program components. IRISL vessels have also been repeatedly caught exporting weapons to Hamas and Hezbollah.

But it’s never that straightforward. Let’s take a look at what’s going on underneath the surface.

The Security Council resolution was adopted by a 12-2 vote, with an abstention from Lebanon, whose divided government includes members of Iranian-backed Hezbollah. The two “no” votes came from Turkey and Brazil, countries that had negotiated a uranium-exporting deal with Iran. Unfortunately, as you can read here, that deal fell woefully short of what the U.S. and rest of the international community needed to feel comfortable.

Frankly, the Obama administration mishandled Turkey and Brazil’s attempts to mediate. The White House should have cautioned the intermediaries not to go public until the deal was acceptable to the U.S. and Europe (you know, the countries Turkey is in NATO with…). American and European rejection of the deal has caused gnashing of teeth in Ankara and Brasilia (not to mention two “no” votes on the final resolution), splitting the global effort to rein in Iran.

Iran, as you might expect, remains defiant. Iranian President Mahmoud Ahmedinejad continues on his rhetorical hot streak, calling the sanctions “annoying flies.” And to a certain extent, he’s right. As Thomas Erdbrink and Colum Lynch’s excellent article in yesterday’s Washington Post details, Iran does a pretty darn good job getting around them. And then there’s the possibility that Iran could use the sanctions as a domestic political tool to rally Iranians against the “American oppressors.”

But perhaps atop the list of concerns sits Beijing. Sure, China voted for the sanctions, but at what price? Check out this post to see what sort of sweetheart loopholes China secured for its energy companies in exchange for its support. Phew. It’s a lot. A confusing mess of a lot. On the one hand, it seems like the international community has passed a resolution with some teeth, but could sanctions end up being ineffective or, worse, counterproductive?

In the end, sanctions’ benefits are often indirect, subtle and not guaranteed. To get a sense of why sanctions are passed, bear in mind the Obama administration’s real goal: It’s not to inflict direct economic hardship, but rather, to raise the burden Iran must bear to obtain a nuclear weapon.

Sanctions can help the international community do so in two clear ways:

  1. Diplomatic isolation. Of course, Iran has been fairly isolated for years and years now, but it doesn’t hurt to reinforce that sense of isolation from the international community on a regular basis. That’s why, incidentally, the Turkey/Brazil split and recruitment of China and Russia all matter. Getting the world on the same page against Iran sends a message of strength.
  2. When sanctions force Tehran to rearrange shipping contracts, sell vessels to front companies, move money, set up laundering and smuggling operations, stay at home from travel, etc., etc., those are all “costs.” To maintain a something close to the status quo, Iran has to invest time, money and political capital (both at home and internationally) to work around them.

The idea is that one day, Iran will wake up and say, “Huh. We’re alone in the world and working like hell to beat these things. Maybe we should sit down and talk this whole situation through.”

That day may never come, but it’s the best alternative the international community has.

Photo credit: wallyg

Congress Puts the Breaks on Iran Sanctions – But Is the UN’s Deal Any Better?

Posted on by The Progressive Policy Institute

The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2009, a potentially counterproductive Iran sanctions bill working its way through Congress, has been delayed. Versions of the law had been passed by both houses and were being reconciled in conference committee. A staffer I spoke to a few weeks ago suggested that the bill would be signed by Memorial Day.

But no longer. My friend Brian Wingfield at Forbes reported this week that bill sponsors Sen. Chris Dodd (D-CT) and Rep. Howard Berman (D-CA) have delayed their bill for at least a month.

A delay, and potential scuttling of the law, may not be the worst thing in the world. Read Pirooz Hamvatan’s and Ali K‘s piece on P-Fix a few weeks ago, where they point out the current bill’s flaws:

The new bill aims to cripple Iran’s economy in response to Iran’s refusal to halt its nuclear program. But the sanctions being proposed are not the right answer. Such a sweeping measure would end up only hurting ordinary Iranians, especially the middle class that the U.S. must shore up to improve Iran’s chances for reform.

The delay is thanks to the UN Security Council, which announced it had reached a multilateral sanctions deal with China and Russia. Dodd and Berman say they preferred the multilateral approach all along, and seem content to let that process play out. Both China and Russia have been reluctant partners, so the deal is a potentially big diplomatic win for the Obama administration.

However, it raises the question — why would these holdouts acquiesce to the UN sanctions package now? Did they suddenly see the light? With all the exemptions and loopholes for Chinese companies, it’s doubtful in at least Beijing’s case. Check out this TIME article for a good explanation:

Beijing extracted a significant price for its support. Not only has Beijing watered down the sanctions to be adopted by the Security Council in order to ensure they don’t restrain China from expanding its already massive economic ties with Iran; Chinese analysts also claim that, in the course of a protracted series of negotiations with Washington, their government also won undertakings from Washington to exempt Chinese companies from any U.S. unilateral sanctions that punish third-country business partners with the Islamic Republic.

The Russians must have not gotten such a great deal. Iranian President Ahmadinejad singled out Moscow as a “historic enemy” for supporting UN sanctions, but seems to have forgotten to mention Beijing.

In the end, we’re left with a potentially counterproductive bill out of Congress, or an imperfect UN package. I’ll take the UN version any day of the week — even though Chinese companies get exemptions, it’s better to forge a strong international coalition against Iran’s nuclear program.

And members of Congress who supported that bill can still campaign on their vote, whether or not it ever gets to the president.

Photo credit: Daniella Zalcman/ CC BY-NC 2.0

Confronting Iran: The Case for Targeted Sanctions

Posted on by The Progressive Policy Institute

The following is a guest column from Pirooz Hamvatan, a pseudonym for a Washington, D.C.-based analyst focusing on Iranian domestic and security issues, and Ali K., currently a business student in the U.S. and a supporter of Iran’s Green Movement who was severely beaten by the Basij militia during a peaceful demonstration in Tehran last year.

Congress is on the verge of sending a petroleum sanctions bill to President Obama that has wide bipartisan support in Congress. But far from posing a serious challenge to the regime, the bill could in fact inadvertently undermine long-term U.S. interests by weakening the Iranian civil rights movement and strengthening President Ahmadinejad and his cronies.

The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2009, currently in conference committee, will direct the president to impose sanctions on any entity providing Iran with “refined petroleum products” worth $200,000 or more per transaction, or $1 million per year. The bill defines refined petroleum products to include diesel, gasoline, jet fuel and aviation gasoline.

The new bill aims to cripple Iran’s economy in response to Iran’s refusal to halt its nuclear program. But the sanctions being proposed are not the right answer. Such a sweeping measure would end up only hurting ordinary Iranians, especially the middle class that the U.S. must shore up to improve Iran’s chances for reform.

Instead, our top priority should be helping to increase the space for the Iranian civil rights movement. That means moving beyond the limited focus on “solving” the nuclear issue. An Iranian government that is more accountable to — and representative of — its moderate majority would not pose a security threat to the U.S. and its allies. Rather than heavy-handed sanctions, the Obama administration should consider restrictions that are more targeted, which would hit the ruling regime where it hurts, and increase the possibility of change from within.

The Wrong Path

Introduced in the House by Rep. Howard Berman (D-CA) and in the Senate by Sen. Chris Dodd (D-CT), the sanctions bill currently in conference aims to limit Iran’s access to gasoline in the hopes that the suffering population will pressure the regime to give in to Western demands. But if the end goal is to induce Iran to be a more responsible regional actor that doesn’t threaten U.S. security interests, then petroleum sanctions are likely to achieve the opposite effect.

Just look at the experience of the last couple of decades. In 1995, in response to Iranian pursuit of nuclear technology and support of terrorism, President Clinton issued two executive orders prohibiting American investment in Iran’s energy sector and banning U.S. imports of most Iranian goods. The following year, Congress passed the Iran-Libya Sanctions Act (PDF), calling for sanctions on foreign firms investing more than $20 million per year in Iran’s energy sector. Although such measures have impeded the development of Iran’s economy, they have not caused the Islamic Republic to change course on its nuclear program or its funding of groups like Hamas and Hezbollah. In fact, in order to achieve their foreign policy and domestic goals, Iran’s leaders have repeatedly demonstrated their willingness to let the Iranian people suffer.

Just as important, history has shown that crippling sanctions undermine the middle class — the very people who are the backbone of civil society and the voices of moderation. International sanctions on Iraq weakened its population, making them more reliant on, and more vulnerable to, Saddam Hussein’s regime. Gasoline sanctions on Iran could have a similar effect, exacerbating inflation, lowering the quality of life for the middle class and pushing more people below the poverty line.

Gasoline sanctions would also distract Iranians from President Mahmoud Ahmadinejad’s own mismanagement of the economy — an important issue mobilizing people around the Green Movement — and divert blame to the U.S. Iran is already facing a 20-percent inflation rate, a crippled domestic industry, unemployment of over 11 percent (with 24 percent of 15-to-24 year-olds unemployed), and one of the worst rates of brain drain in the world. Many Iranians are still seething over the fact that, since becoming president in 2005, Ahmadinejad squandered unprecedented oil revenues that the Islamic Republic accrued as a result of high world oil prices. Amid all of this, Ahmadinejad has backed a controversial measure that would phase out government subsidies on gasoline and is likely to increase inflation. The Iranian people are already facing enough hardship without the U.S. adding to their woes and diminishing the pro-American sentiments of a wide array of Iranians.

Nor will the sanctions loosen the regime’s grip on power. Ahmadinejad’s faction would, in fact, fare better than the majority of the populace. Masters of smuggling, Iranian Revolutionary Guards Corps members would still be able to bring in gasoline through Iran’s porous borders, perversely enriching themselves even more.

The Right Path

But if broad sanctions are a heavy-handed tool that could only risk the development of Iran’s civil rights movement, what options do U.S. policy makers have to challenge the regime?

A preferred approach would be something more targeted against those responsible for Iran’s actions: the members of the ruling regime. Congress should consider the following:

  • Pass a bill calling on the U.S. State Department to identify Iranian human rights abusers (primarily from within the Revolutionary Guards; the Basij, the regime’s volunteer militia; and the judiciary) and impose travel bans on them. The bill should also seek the cooperation of our allies in enforcing the ban as widely as possible and place pressure on key countries like Dubai to block entry to these individuals. The list of targeted offenders should be made public in order to show the Iranian people that the U.S. is on their side.
  • Pass a measure calling for human rights abusers’ assets to be frozen. Because Iranian officials have gone to great lengths to distance themselves from the U.S. financial system, the U.S. Treasury may not have much of a role to play here. Rather, such a measure would simply be a first step in convincing banks in Europe and the United Arab Emirates — where many regime insiders’ assets are squirreled away — to enforce restrictions.

What specific effect will travel bans have on hardline officials and their mid-ranking employees? Besides being a major inconvenience, it would hurt their pocketbooks. This is because a large number of these individuals have side-businesses in which they smuggle goods from places like Dubai, Thailand, Indonesia and Syria — buying, for example, electronic goods and bringing them back to Iran through Revolutionary Guard-controlled customs stations without having to pay import duties. They then sell these goods at highly marked-up prices in the isolated Iranian market. A strictly enforced travel ban — including on individuals working for these human rights abusers’ front companies — would close off a lucrative source of income.

To be clear, the overall intent of this plan is not necessarily to deal a significant economic blow to the entire hardline establishment — that would be next to impossible. Neither will it convince, in the short term, current Iranian leaders to change course on the nuclear program — no outside pressure will. Rather the strategy is to increase the disincentives for individuals to participate in or condone oppressive behavior, with the goal of helping the Green Movement flourish.

At the same time, it is important not to target certain high level officials who may have the capacity to play a role in moving Iran toward reform. For instance, while it may be justified to sanction Judiciary Chief Sadegh Larijani for allowing hardliners to abuse Iran’s legal system to persecute reformers, his brother Ali Larijani — the pragmatic conservative Speaker of Parliament and bitter Ahmadinejad rival — has not been complicit in human rights abuses, and thus should not be snared by the sanctions net. This nuanced targeting will send a signal to the regime’s officials that they will be left alone if they refrain from abusing their fellow citizens.

Moreover, certain Iranian leaders are sensitive to international accusations of human rights abuses. This is not for altruistic reasons, but because they want the Islamic Republic to be seen as a role model to the Islamic world, and not simply another run-of-the-mill Middle Eastern dictatorship.

To be sure, human rights sanctions alone may not alleviate the pressure currently being placed on Iran’s Green Movement. Regime hardliners could blame the U.S. for fomenting post-election unrest and paint Iran’s dissidents as Western spies. Republican Guard members and Basijis could continue their human rights abuses regardless of travel bans and asset freezes. But that is the status quo in Iran. There is little cost to the U.S. if human rights sanctions don’t work — and much to gain if they do.

A Broader, Pro-Reform Agenda

Human rights sanctions are not a silver bullet. They will not bring the regime to its knees. But neither will gasoline sanctions. Fortunately, it appears that the Obama administration is asking Congress to slow down its push for unilateral gasoline sanctions as the U.N. Security Council deliberates over its own sanctions during the next few months. Meanwhile, targeted sanctions against human rights abusers is being pushed by Sen. John McCain, though not as stand-alone legislation but as an amendment to the flawed gas sanctions bill.

A human rights sanctions package can be an effective part of a broader effort to help Iran’s Green Movement chart its own course toward a better future for Iranians. Other essential pieces to this strategy would include:

  • Rep. Jim Moran’s (D-VA) Iranian Digital Empowerment Act, which seeks to help get information-sharing software and filter-breaking technology into the hands of Iranian reformers.
  • Rep. Keith Ellison’s (D-MN) Stand With the Iranian People Act, which (in addition to calling for human rights abusers to be sanctioned) calls for suspension of U.S. government funding to entities that sell censorship and surveillance equipment to the regime, and seeks to ease restrictions on American charities that want to work in Iran.

Bills focusing on the Islamic Republic’s human rights abuses have an excellent chance of passing in Congress because they are politically appealing — they help legislators look tough on national security while promoting American values of freedom and democracy. Moreover, they avoid the danger that is inherent with sweeping economic sanctions: that of harming the people they were intended to help.

Moreover, U.S. passage of human rights sanctions could lead allies in Europe to follow suit. Although the U.N. Security Council is unlikely to do so — China and Russia are adamantly opposed to interfering in others’ domestic affairs — if the U.S. and European allies banded together to pressure countries like Dubai to enforce travel bans, sanctions would have a greater chance of success.

In the end, it is important to remember that the members of the Green Movement are fighting for reform within the Islamic Republic system. Their demands include an independent electoral commission, the release of all political prisoners and freedom of speech. Acknowledging that it is up to the Iranian people to chart their own course, the U.S. can best protect its own security interests by helping to level the playing field in Iran, allowing the moderate, peace-loving majority of Iranians to continue their journey toward a better future for their country and the broader Middle East.

 

The views expressed here do not necessarily reflect those of the Progressive Policy Institute.

Trading Up

Posted on by The Progressive Policy Institute

For the past year, U.S. Trade Representative Ron Kirk has been the Obama administration’s equivalent of the Maytag repairman—a capable official with nothing to do. That is about to change.

As part of a broader push for job creation, the president yesterday unveiled an ambitious strategy for doubling U.S. exports over the next five years. Key elements include $2 billion more in export financing, an easing of export technology controls and a new Cabinet office to promote sales of U.S. products abroad. Obama also picked W. James McNerney, CEO of Boeing—one of America’s export champions—to chair the President’s Export Council.

The flurry of activity around trade is belated but welcome, since surging exports have been one of the few sources of job growth lately. It may also put to rest lingering doubts about Obama’s commitment to expanding trade.

During the 2008 campaign, candidate Obama sounded economic nationalist themes and indulged in ritual NAFTA-bashing. He even vowed to reopen that treat to get a better deal for U.S. workers, deeply alarming Canada and other trading partners worried about mounting protectionist sentiment in the United States.

But if Obama’s new push is reassuring to pragmatic progressives, anti-trade activists are donning their battle gear. Lori Wallach, president of Global Trade Watch, recently told Bloomberg News that the Obama administration must deal with the import side of trade to create U.S. jobs and increase innovation.

Obama yesterday invoked America’s economic travails to short-circuit a family squabble among progressives over trade. “We are at a moment where it is absolutely necessary for us to get beyond those old debates…Those who once would oppose any trade agreement now understand that there are new markets and new sectors out there that we need to break into if we want our workers to get ahead.”

In another positive development, House New Democrats this week released a trade agenda of their own. It emphasizes support for small business exports, the need to crack down on intellectual property theft, and, echoing a key PPI theme, the strategic benefits of expanding trade and economic opportunity across the Middle East.

Both the president and the New Dems call for efforts to rekindle progress on the stalled Doha round of global trade talks, and perhaps most controversially, for closing the deal on pending bilateral trade agreements with South Korea, Colombia and Panama. This is bound to provoke a reaction from anti-trade Democrats who see trade as a threat to U.S. jobs and wages. They have a powerful ally in the new House Ways and Means Chairman, Rep. Sandy Levin, a longtime trade skeptic.

Trade is not a panacea for America’s job woes. But as Obama and the New Dems understand, lowering foreign barriers to trade is integral to any credible strategy for U.S. economic growth and innovation. It’s also essential for the United States to resume leadership in forging a rules-based global trading system to keep everyone honest and prevent countries from adopting mercantilist strategies.

Finally, and most important for the long-run, boosting U.S. exports is also critical to re-balancing the global economy. Just as we export more and import less, Asian export powerhouses, especially China, need to import more and spur domestic consumption. Obama’s trade initiative is a small but vital first step toward moving world flows of trade and finance toward a sustainable equilibrium.

Conservative Crocodile Tears About “Corporatism”

Posted on by The Progressive Policy Institute

TNR published a piece I did the other day examining the ideological underpinnings of the left/center split in the Democratic Party over the propriety of a universal health care system based on regulated and subsidized private health insurers. I suggested there was a burgeoning, if questionably workable, tactical alliance between “social-democratic” progressives and some conservatives to derail much of the Obama overall agenda. Then I made this observation:

[O]n a widening range of issues, Obama’s critics to the right say he’s engineering a government takeover of the private sector, while his critics to the left accuse him of promoting a corporate takeover of the public sector. They can’t both be right, of course, and these critics would take the country in completely different directions if given a chance. But the tactical convergence is there if they choose to pursue it.

This statement has drawn considerable comment from people on both the Right and Left, mainly objecting to the argument that Obama’s critics can’t all be right.

Conservative theoretician Reihan Salam, writing for National Review, first argued that there’s not much substantive difference between the “New Democrat” deployment of private-sector entities in public initiatives and that favored by the privatizers of the Right. But then he pirouetted to make common cause with Obama’s critics on the Left:

It is entirely possible for both sets of critics to be correct. The concern from the right isn’t that the Obama approach will literally nationalize for-profit    health insurers. Rather, it is that for-profit health insurers will continue evolving into heavily subsidized firms that function as public utilities, and that seek advantage by gaming the political process. Profits, including profits governed by medical loss ratios, can and will then be cycled into political action, which leads to the anxiety concerning a “corporate takeover of the public sector.”

Salam’s friend Ross Douthat of The New York Times added an “amen” to this argument:

The point is that the more intertwined industry and government become, the harder it is to discern who’s “taking over” whom — and the less it matters, because the taxpayer is taking it on the chin either way.

But do conservatives really oppose this intertwining of industry and government? Rhetorically, yes, operationally — not so much.

Consider the default-drive Republican approach to health care reform, such as it is. It typically begins with federal preemption of state medical malpractice laws and health insurance regulation, the latter intended to produce a national market for private insurance (while also, not coincidentally, eliminating existing state provisions designed to prevent discriminatory practices). But the centerpiece is invariably large federal tax credits, accompanied by killing off the current tax deduction for employer-provided coverage, all designed to massively subsidize the purchase of private health insurance by individuals (with or without, depending on the proposal, any sort of group purchases for high-risk individuals). Another conservative pet rock is federal support for Health Savings Accounts, which encourage healthy people to pay cash for most medical services, perhaps supplemented by (very profitable) private catastrophic insurance policies. And most conservatives, when they aren’t “Medagoguing” Democratic proposals to rein in Medicare costs, favor “voucherizing” Medicare benefits—another gigantic subsidy for private health insurers.

Now some conservatives will privately tell you that all these subsidy-and-deregulation schemes are just an interim “solution” towards that great gettin’ up morning when tax rates can be massively lowered, all the tax credits, vouchers and other subsidies can be eliminated, and the government gets out of the health insurance business entirely. But don’t expect to see that on any campaign manifestos in the foreseeable future. In the meantime, Republicans generally support huge government subsidies to corporations without any public-spirited regulatory concessions in return.

Do anti-“corporatist” progressives really think they can make common cause with conservatives, beyond deep-sixing Obama’s agenda in the short term? Well, sorta kinda. Salon’s Glenn Greenwald, who rejected my “incompatibility” argument about left and right critics of “corporatism” as strongly as did Salam, is smart and honest enough to acknowledge there’s no real common ground with conventional conservatives or Republican pols. He instead offers a vision of an “outsider” coalition that includes anti-corporatist progressives and Tea Party types. This is, of course, the age-old “populist” dream (most famously articulated by Tom Frank inWhat’s the Matter With Kansas?) of a progressive takeover of the Democratic Party that attracts millions of current GOP voters (or nonvoters) who don’t share the economic interests of the Republican Party or the conservative movement but have seen little difference between the two parties.

All I can say is: Good luck with that, Glenn. Short of a complete and immediate revolution within one or both parties, complete with blood purges and electoral chaos, it’s hard to see any vehicle for a left-right “populist” alliance other than a Lou Dobbs presidential run. Barring that unlikely convergence, wrecking Obama’s “corporate” agenda would produce little more on the horizon than a return to the kind of governance we enjoyed during the Bush years, or maybe a bit worse given the current savage trajectory of the GOP.

Part of my intention in the original essay was to suggest that pro-Obama Democrats take seriously the views of intra-party rebels on health care and other issues, instead of insulting them as impractical and childish or obsessed with meaningless totems like the “public option” (which in the anti-corporatist context isn’t meaningless at all). But said rebels really do need to think through where they are going, and where they would take Democrats and the progressive coalition.

Meanwhile, conservatives need to be far less pious about their alleged objections to “corporatism.” Cheap rhetoric aside, their own agenda (when it’s not just preserving the status quo) is largely corporatism with any clear and enforceable public purpose cast aside whenever possible.

This item is cross-posted at The New Republic.