Educating Obama on NAFTA

Philip Levy explains why Obama is so far off on NAFTA. He also tackles one of the basic misunderstandings about trade agreements -- that they have an effect on employment.

If we want to find the true consequences of NAFTA, we need to disentangle this mess of events. We could be guided by the wisdom of economic theory, but it says, loud and clear, that trade agreements have no impact on overall employment. Trade substitutes better jobs for worse jobs, but leaves the job total unchanged.

This is the type of answer that drives politicians berserk. Economic policies are loved or loathed by the public on the basis of how many jobs they create. How can trade policies not affect overall employment?

The number of jobs in an economy is set by the size of the work force, the health of the labor markets, and macroeconomic fluctuations. Trade can certainly create new jobs with export opportunities or cheaper inputs. It can also destroy jobs when firms succumb to import competition. Lots of job creation and destruction occurs every year in the U.S. economy. In an average year, 17 million jobs are created and 15 million are destroyed, with a net job creation of 2 million. When net job creation matches growth in the labor force, the unemployment rate stays constant.

He explains in greater detail why Obama's claim of 1 million jobs lost does not hold water -- because unemployment has been so low that the Fed would have taken steps to slow economic growth:

What of Obama’s claim that NAFTA cost the United States 1 million jobs? Imagine this were right. Then, without NAFTA we would have had 1 million more jobs. In the year 2000, this would have made the unemployment rate just under 3.3 percent, rather than the 4 percent we actually enjoyed. But Federal Reserve governors would have been in a panic long before we got down to that level and would have raised interest rates to slow the economy. They would have known they had gone far enough when unemployment increased to a level they were comfortable with – the same as with NAFTA.

Then what happened to those US manufacturing jobs? Simple: they continued to migrate to lower-cost locations -- as they had been doing, and as they will do even if NAFTA were to be repealed:

But what about the factory workers in Ohio? Are they just imagining those lost jobs? Of course not. Manufacturing employment in the United States did hit a peak and then begin a steady decline. The problem is that the peak was in 1979, 15 years before NAFTA came into force. The long-term decline of American manufacturing jobs has much more to do with technological change than with trade. We’re producing more stuff with fewer workers.

An excellent summary of an issues that will never be discussed honestly in a presidential campaign.

CAFTA Leads to Trade Surplus

The story is over at the Shop Floor, but the graph shows it pretty clearly:



I don't believe it's important whether we maintain a trade surplus with a given country, or a range of countries. If for example, the US imports a huge amount of raw material from a resource-rich country, and sell little back to that country because it's relatively poor, we run a trade deficit. Is that a bad thing? Clearly not.

Nevertheless, for those who criticize trade deal as being ineffective at promoting a 'positive' trade balance, the CAFTA ought to satisfy your objections:

It’s official. With the trade data just released today by the U.S. Department of Commerce, the U.S. trade balance in manufactured goods with CAFTA (Central American and Dominican Republic Free Trade Agreement), has registered a $2 billion trade surplus. This is a sharp reversal from the pre-CAFTA situation, where in the years before the passage of the CAFTA agreement we averaged an annual manufactured goods trade deficit of about -$1.5 billion.

This agreement is the one that isolationist organizations have called “the job killer.” Just before the Congressional vote on CAFTA, one of these groups pronounced, “Like NAFTA, CAFTA is just another outsourcing agreement that will devastate U.S. manufacturing…CAFTA is a continuation of the failed NAFTA policy that drives our rising trade deficit and mounting job losses.”

This was always a silly statement, because the CAFTA countries already had one-way free trade into the U.S. market. The big deal in CAFTA was that in exchange for making their access to the U.S. market permanent, they would eliminate their trade barriers to Made-in-the-USA products. How we could lose in such a deal is beyond me.

Now the facts are in, showing that logic once again prevails over mythology. Far from being a “job killer,” CAFTA has been a real plus for the United States – as has NAFTA, another trade agreement for which these isolationist organizations have been unable to read the trade statistics.

The next step will be to try to explain to people why imports are actually GOOD for America.

Chamber of Commerce to Oppose 'Anti-Business' Candidates

The 2008 presidential campaign has taken a decidedly populist tone, with candidates from Edwards, to McCain, to Huckabee, to Obama railing against the powerful elites in Washington and on Wall Street, who are prospering at the expense of the little guy. If the momentum stays with the populist candidates, it may mean higher taxes on businesses, more regulation, and a further slowing of efforts to expand international trade. Certainly the Democratic Congress is willing to advance such an agenda, as soon as there's a willing president in the White House (or perhaps even sooner).

Rather than waiting to see if the prevailing winds change, the U.S. Chamber of Commerce is laying down a marker:

Reacting to what it sees as a potentially hostile political climate, Donohue said, the chamber will seek to punish candidates who target business interests with their rhetoric or policy proposals, including congressional and state-level candidates.

Although Donohue shied away from precise figures, he indicated that his organization would spend in excess of the approximately $60 million it spent in the last presidential cycle. That approaches the spending levels planned by the largest labor unions.

The chamber president is scheduled to announce the broad outlines of the organization's plans for the 2008 election and beyond at a news conference here today. Donohue also plans to fire a rhetorical warning shot across the bow of candidates considered unfriendly to business.

It may already be too late to influence the parties' selection of their presidential candidates. With Iowa and New Hampshire behind, the field of likely candidates for each party is rapidly shrinking.

But while the Chamber might end up stuck with candidates it doesn't like, that doesn't mean it's too late to influence the election agenda. Spending tens of millions of dollars on political donations and issue ads in the months and weeks before the election might significantly influence both the presidential election and congressional races. Given our string of close elections, the Chamber could back enough candidates to head off any truly egregious legislation.

But efforts like this are in danger of winding up as rearguard actions. Polls show a greater and greater percentage of the American public are distrustful of international trade. Similarly, trust in 'major companies' has been falling consistently since the Harris poll first began asking the question 40 years ago. The public view on these policy questions has continued to deteriorate even as the United States has enjoyed an extraordinary period of relatively stable, inflation-free growth for most of the last 25 years.

The large companies and multinationals that benefit greatly from the low-tax, low-tariff regime the U.S. has maintained for decades stand to be big losers if the American public becomes convinced that this is a zero-sum game. Increasingly, that is their view. Where consumers are the biggest beneficiaries from low-cost, high-quality products, most see imports as nothing more than a job killer. While workers benefit from higher wages when their employers are unencumbered by excessive taxes and regulations, many no longer believe this to be true.

The Chamber will be wasting its money if they spend it to curry favor with a few politicians, but fail to try to educate the public on why open markets benefit everyone.

Photo IDs for Cattle

You have to read it to believe it.

The Fruits of Protectionism

As a pro-free-trade Republican, I will frequently disagree with 'fair traders' -- both Republican and Democrat. Therefore it's no surprise that I disagree with representatives English (R-PA), Altmire (D-PA), Visclosky (D-IN), and Hayes (R-NC) on the use of Chinese steel in the border fence:

House members allied with the domestic steel industry blasted the Department of Homeland Security (DHS) on Thursday for building a fence on the Mexican border with steel products from China.

“By allowing the use of Chinese pipe, DHS is allowing the U.S. taxpayer to subsidize Chinese production at the expense of the American workers,” Rep. Phil English (R-Pa.) said at a press conference. “This is completely unacceptable.”

“This is outrageous, it’s offensive and it’s unacceptable,” charged Rep. Jason Altmire (D-Pa.).

“It is beyond outrageous that we’re using Chinese steel to build a border fence to protect us against illegal immigration,” said Rep. Robin Hayes (R-N.C.), who also joined the press conference...

DHS’s Office of Congressional Affairs indicated to English’s office that it had waived so-called Buy American rules, which normally require the use of U.S. steel in such projects, in order to use the Chinese pipe and tube, English said.

This is the funniest part of the piece:

Rep. Pete Visclosky (D-Ind.) said he was concerned about the safety of Chinese steel. However, when pressed, he and other lawmakers could not cite any specific safety problems that might result from the use of foreign pipe in a fence. Visclosky did note other safety issues that have recently come up with toys from China, while English said the use of Chinese inputs in U.S. infrastructure prompts broader concerns.

The safety of the steel? Can someone describe the potential safety concerns with a steel fencepost? Are they afraid it might explode? Or is the concern that it will collapse without warning -- potentially... bruising the head of the illegal immigrant attempting to bring down that section of fence?

Does the American steel industry need the help? It's enjoyed an unprecedented run of success since 2004 -- partly because the federal government helped bail the industry out of its overly generous pensions. US steel companies enjoyed record revenues and profits in 2006. Why aren't we treating steel like oil -- and imposing windfall profit taxes on the industry, to punish it for taking advantage of a highly-regulated market to gouge domestic consumers? After all, high steel prices damage the competitiveness of American industries that depend on steel -- such as autos. Aren't we trying to help the American auto industry?

More importantly, isn't there a strong public interest in ensuring that American taxpayers get the most 'bang for the buck' when it comes to spending their hard-earned tax dollars? Don't we want to buy the most border fence we can with limited revenues? Democrats are livid about deficit spending to fund the war in Iraq; why do they want us to add to the federal deficit to purchase more expensive steel from producers enjoying record profits?

I better not see any of these Members of Congress issuing press releases complaining that federal agencies are wasting taxpayer dollars, given that they favor wasting it here.

Hillary's Arrogant Foreign Policy

Read it at the Standard.

On the Debate -- Trade Follies

I enjoyed the debate today. I think the major Republican candidates acquitted themselves very well. Fred Thompson and Rudy Giuliani still seem to me to be the class of the field, although Mitt Romney came across to me as more impressive than he has before. Among the leading candidates, only John McCain hurt himself in my eyes -- and not because of any substantive mistake -- but because of his repeated problems in hearing questions from Maria Bartiromo. I understand the acoustics were tricky and all the candidates had problems hearing her, but it still reinforced his age to me.

On that point, Kathryn Jean Lopez has the line I wish I thought of:

I really wish John McCain didn't have that hearing problem! Maria B. looked like his granddaughter reading him the menu.

On the substance, I'll limit my comments to a policy area in which I have actually worked -- trade.

Governor Romney was pretty forcefully pro-trade -- which I like -- but I had to chuckle at his suggestion for greater involvement by businessmen in trade negotiations:

Well, I believe in trade, but I believe in opening up markets to American goods and services. And it's been calculated that the average family in America is $9,000 a year richer because we have the ability to sell products around the world.

And a lot of people in this country make their living making products that go around the world. But it's also true that the people who negotiate these agreements -- the people who sit down with the Chinese and sit down the Mexicans and others are people, by and large, who spent their life in politics.

And the politicians come together and try to understand how the economy works. I think I'm probably the only guy on the stage who spent most of his career in the business world. I understand how the economy works. I understand how if you make a certain adjustment in the agreement, it's going to have a huge impact on the United States.

And so if, for instance, we agree to sit down with China, I understand that if we don't get real careful and protect patents and designs and technology, that what we tend to sell the most of, those kinds of things -- intellectual property -- is going to get stolen by the Chinese or by others; that we have to recognize agreements have to be in our benefit, not just in their benefit.

And so as I look across the agreements we've made, I recognize we're going to have to do a better job. We're going to have to have people who understand how the business world works, how the economy works, and make sure that the playing field really is level by having people who know something about the economy and that understand the business world being part of that effort.

The point of trade negotiations is to expand trade -- to ensure that consumers and producers in the US and abroad can make the deals that they think are best for them, without undue taxation or government interference. By eliminating barriers to trade, we give consumers the best deal and encourage competition and efficiency.

But businesses don't want that. Businesses want to enhance profits --by maximizing their sales opportunities and by shutting out their competitors. Look at the lobbying of the US agricultural sector: the goal is to open foreign markets while 'protecting' our own. If American companies truly had their way in trade negotiations, the US market would be closed to foreign competitors whenever possible.

Romney's line sounds good -- and it's critical to have negotiators who understand the sectors they're negotiating. But it wouldn't be an especially good idea to have company people taking the lead in trade negotiations.

Duncan Hunter is -- as always -- highly critical of US trade agreements. He argues that the US has made bad deals, and he wants us to maintain the same tariff rates as our foreign trading partners. He blames China's exchange rate and bad trade deals for the loss of many high-paying jobs (transcript here):

But let me tell you, Chris, what is missing from this economy: 1.8 million jobs that have moved to communist China from the United States, including over 54,000 jobs from Michigan...

And I would say to my colleagues and Senator Thompson and the other senators, you all voted for "most favored nation" trading status for Communist China. That set the groundwork for 1.8 million high- paying manufacturing jobs moving offshore, going offshore, some of them never to return.

And what I would do is pass the Hunter-Ryan bill which would put countervailing duties on the Chinese when they cheat. They are cheating on trade right now. I'd bring those jobs back home to the United States and I would connect up the middle class of America with the Republican Party one more time...

And to all my colleagues who talk about the joy of free trade, that requires one thing: good business deals.

We've made the only business deal in the world with 132 other competitors where they get to have a rebate on their taxes and then put a block up of 15 to 20 percent tariff against our goods and we don't get to do the same thing.

That's why we have a trade deficit with countries that have higher labor rates than the United States.

So we're short on good businessmen, and I would junk those bad trade deals, bring them back to the table. And I'd practice mirror trade. If a country wants to put a 15 percent tariff against the United States, they're going to see that reflected back at them. If they want to take it down to 1 percent, we'll take it down to 1. But there's not going to be a one-way street any longer.

Trade skeptics always complain about jobs lost in the US. The US unemployment rate is 4.7 percent. If we had these jobs back, who would do them? Which jobs would we get rid of -- so that people could return to the factories where Duncan Hunter wants them to work?

And if some country wants to impose a 15 percent tariff on imports from the US -- effectively denying their consumers the right to purchase US goods at market prices -- why should the US deprive our consumers in the same way? Put another way, is the American economy stronger if products imported from China cost 30 percent more than today? Which Americans are returned to high-paying jobs here in the US?

A last point on Hunter's contentions: Hunter blames both bad trade deals and China for the problematic trade deficit. The National Association of Manufacturers has done yeoman work on the value of Free Trade Agreements. They note that the US trade deficit in manufactured goods is consistently lowest among the nations with which we have Free Trade Agreements.

“Geographically, our free trade partners and the EU continued to show the largest reductions in the manufactured goods trade deficit,” said Frank Vargo, the NAM’s vice president of international economic affairs. “Free trade agreements are a proven key to reducing the trade deficit and Congress has four agreements awaiting approval. It’s time for lawmakers to unlock these market opening agreements.”

In 2007, the deficit with U.S. free trade partners is 10 percent smaller than a year ago, while the deficit with the EU is 14 percent smaller. Overall this year, the January to July U.S. deficit in manufactured goods stood at an annual rate of $489 billion, compared to $505 billion for the same period of 2006.

According to the NAM, the trade balance with FTA partners has improved by $10 billion in the last two years, while it has deteriorated by $82 billion with the rest of the world. Experience suggests that if balance of trade is your concern, then the trade deals that we have are working well.

Also check out CQ.

Some debate highlights here. Count me among those who would rather hear from Fred Thompson -- who understands the free market -- than from Chris Matthews:


Link: sevenload.com

Mitt Romney: Catching the Protectionist Bug?

Has Mike Huckabee proved that populism is a winner in the Republican party? Is Mitt Romney afraid of being attacked as one of the 'Wall Street' Republicans? Has he read the recent Wall Street Journal article which attracted so much attention -- the one that reported on the weakening of support for free trade among GOP voters?

One can infer that he has, since one of his advisers -- the highly-intelligent, conservative former Congressman Vin Weber -- is interviewed by the Journal for the piece:

While rank-and-file Democrats have long blasted the impact of trade on American jobs, slipping support among Republicans represents a fresh warning sign for free-market conservatives and American companies such as manufacturers and financial firms that benefit from markets opening abroad.

With voters provoked for years by such figures as Pat Buchanan and Ross Perot, "there's been a steady erosion in Republican support for free trade," says former Rep. Vin Weber, now an adviser to Republican presidential candidate Mitt Romney.

One fresh indication of the party's ideological crosswinds: Presidential candidate Ron Paul of Texas, who opposes the Iraq war and calls free-trade deals "a threat to our independence as a nation," announced yesterday that he raised $5 million in third-quarter donations. That nearly matches what one-time front-runner John McCain is expected to report

After reading that, it should be no surprise to see Romney back off of free trade -- in favor of action to redress the 'unfair playing field:'



Romney is clearly avoiding the traditional rhetoric of leading Republican contenders for the White House. No promises to 'open markets to US exports,' and 'expand markets for American products abroad.' He has chosen not to use this language for a reason. Is it because he wants to sounds more 'fair trade,' while pursuing the same policies (a bait and switch), or is it because he doesn't agree with the trade policies pursued by Republican presidents since the 1970s, at least.

If Romney wants a fair playing field, why doesn't he talk about US agricultural subsidies, import quotas, and the other measures the United States employs to protect our own producers (and of course, damage our consumers)? While the US is more of a free trader than many leading trading nations, we are hardly blameless.

That's not to say he should smile and accept violations on the part of US trading partners; the US pushed for the creation of the World Trade Organization specifically to punish unfair practices such as the one he mentions. Let Romney promise to push the WTO aggressively.

This sounds suspiciously like someone who wants to seize the votes that go with pushing protectionism, without actually using language specific enough to scare those who support consumer choice. I hope the governor gets the chance to clarify his meaning.

Hooray! Weak Dollar Means Higher Prices, Less Choice

For years politicians have worried about the trade deficit. The answer from the economist has been two-fold:

1. Don't worry; it won't last forever; and,
2. The trade deficit will 'solve itself' when the dollar gets weak enough to drive up import prices so Americans can't afford as many imports.

Looks like politicians are getting their wish:

Weakness in the dollar means prices of imported goods, particularly oil, will go up, raising the risk of inflation. American consumers will be paying more soon, with the looming threat of paying even more later on.

"The inflation risk from higher import prices will be the dominant initial effect," said Howard Chernick, an economics professor at Hunter College in New York. "The most immediate effect is imports denominated in dollars -- mainly oil. We already saw a spike in oil prices. So a bit down the line, that's 10 to 15 cents more per gallon of gas at the pump."

A weaker dollar can help narrow the U.S. trade deficit by making America's exports more affordable abroad...

On the other hand, the pressure on the dollar is increasing the international buyout appeal of American companies and real estate -- and Main Street itself might end up on the auction block.

The weaker dollar will also affect Americans in the long term in ways they might not have even considered, if companies here have trouble affording capital goods.
Chernick cites as an example Europe's leadership in producing wind power technology. It's a cutting-edge niche market that is suddenly even more expensive for the U.S. energy industry as the euro gains more muscle.

"The cost of increased reliance on renewable energy just went up -- so more pressure to build more coal power plants," he says. The dynamic can have far-reaching consequences.

To be sure, the effect is not all one-sided. American exports become cheaper and more expensive, and foreign tourism to the US is likely to increase. However, a weak dollar and a narrowing trade deficit isn't something consumers should look forward to.

Services Surpasses Ag as World's Largest Employer

The International Labor Organization notes an extraordinary milestone in the history of mankind, met and surpassed with no fanfare:

So, firstly, modernization of large ecnomies [sic] is largely bypassing industrialization and going straight for service industries - in our western economies the service sector was about two-thirds of the economy, and has grown further (to 71.2%). But the so large parts of the world economy are moving straight to service industries that their roles have changed. Worldwide, in 1996 agriculture employed 42%, industry 21%, and services 37%. In 2006, the numbers are 36%, 22%, and 42%. So in the period, services has overtaken farming on a global scale.

To me this stuck out as the news of the day. This is a tremendous milestone. In the west we’re accustomed to the farming sector being 4-6% or so, but that certaintly not true in most of the word. You might think the industrial revolution was a long time ago, but the reality is that more people have continued to work in farming. Until sometime in these past few years that is.

And thus passes a tremendous milestone in the history of our species. Farming, invented around 8000 BC, quickly dominated human activity and has so continued to for the following 10,000 years (give or take a few). And we even find that the tradition agriculture->industry->services transition doesn’t hold up globally. The industry segment simply isn’t big enough, so many workers skip to services.

According to the United Nations Food and Agriculture Organization, world agricultural production has climbed steadily even as a smaller and smaller percentage of the world's workforce has been devoted to it. This is the definition of improved productivity of course -- a smaller workforce producing equal or superior results.

The United States and the advanced western world have devoted a larger share of their labor force to services than agriculture for many years. It's the sign of an advanced and wealthy economy that so many workers can focus on services to improve the lives of others. The fact that the world as a whole now enjoys this state is an indication that the globe is becoming a more comfortable place to live -- and will continue to improve.

That's not to say that there are not places of extreme poverty and starvation in the world of course; there are. Sub-Saharan Africa is one such place, as are parts of asia. The goal of us in the west should be to continue to promote the spread of western-style capitalism -- which allows the development of capital and the communication of tools for more productive agriculture. We should also continue to eliminate the barriers to trade, which allows all products to flow to where they are most needed.

Another Indian Company Creating Jobs in America

How many jobs do Indian companies have to create in the US before Lou Dobbs has to stop talking about outsourcing?

It would be easy to imagine Reno, Ohio, as the type of place that would be hit hardest by outsourcing - a small American town losing out to the invisible hand shifting jobs to places like Bangalore and Guangzhou. Instead, outsourcing is bringing the jobs to Reno. Across the street from an Army Reserve center and next to a farm, a customer-service call center hums, its 250 workers answering phones for online travel agency Expedia. The center's owner? Indian conglomerate Tata Group.

The phenomenon has a name: "insourcing," the term experts are starting to use when foreign multinationals open offices on U.S. soil and hire Americans, at a higher price, to do the very jobs they once lured overseas. In this case the center in Reno is targeted toward companies willing to pay a premium - its workers there cost up to 40 percent more than their counterparts in India - to give their U.S. customers a more culturally fluent, less frustrating 1-800 experience. (No more hearing someone read from a script ten time zones away.)

Add this story to the ones here and here.

According to the Organization for International Investment, US subsidiaries of foreign companies are responsible for more than 5 million jobs in the US. That's a relatively small percentage of the 150 million or so jobs in the US overall, but if you're one of the 5 million, you probably don't think so.

Three or four anecdotes suffice to create a panic about jobs leaving the US; will these accounts cause a sudden worry about skyrocketing wages as companies compete for scarce employees? If so, don't worry -- the American economy is awfully nimble; it takes more than a few million jobs insourced or outsourced to dent our prosperity.

International Trade Creates Jobs in America

Once is an anecdote, two is a trend:

One of India's largest IT services firms, Wipro Ltd., is in the advance stages of finalizing a plan to build a software center in Atlanta that is expected to accommodate up to 1,000 employees over the next three years. It's the first of four centers planned for the U.S.

Although Bangalore, India-based Wipro has 6,000 employees in North America -- part of a workforce of more than 72,300 -- they are spread among some 90 locations and provide sales and support.

Atlanta was selected because of its labor force and proximity to technical schools, said Sridhar Ramasubbu, Wipro's chief financial officer for the Americas and Europe. The center will be used for application development and maintenance, infrastructure support, and some research and development. The center is expected to be operating in about three months.

The rest of the article explains how WiPro is also ramping up its operations in China, and how it is becoming too large to offer the nimbleness that formerly gave it an advantage over companies like IBM. It's just another case of a large foreign MultiNational Company behaving more and more like its American counterparts. That includes wanting to have a significant presence in the US market -- meaning more jobs here.

Europe 'Liquidating' Surplus Wine

If this article sounds silly to you, remember that the lunacy stems from the EU's appointed role as the backer of the private market for wine. That's not all that different from US policies on sugar, peanuts, and dairy products:

Europe’s wine lake will be drained and millions of its vines uprooted in an effort to tackle the onslaught from producers in the New World, under plans unveiled on Wednesday by Brussels.

Mariann Fischer Boel, the farm commissioner, said sweeping reforms would put European wine “back ... on top of the world” by driving out the worst quality table wines.

The European Union still produces and consumes more than two-thirds of the world’s wine. But imports from Australia, the US, Chile and others have displaced traditional winemakers, especially in the budget range.

While Britain has become the top importer, its drinkers opt for the well-marketed and dependable New World brands. Consumption in traditional producers such as Italy and France is slumping, unwanted wine being turned into industrial alcohol...

The commissioner has proposed 5 per cent of Europe’s vineyards – 200,000 [hectares] – be pulled up in a voluntary scheme. Some €120m a year will be used to promote wine, and there will be a ban on adding sugar, used to strengthen wine in northern countries.

I've drunk wine that tasted like industrial alcohol -- but I don't think it was from France...

In a private, unregulated market, farmers could grow -- and vintners produce -- whatever consumers wanted. Would it be so terrible if Europe imported more wine, or the US more sugar?

"Don't Tell the British"

Glenn notes that a pro-consolidation European official has warned that while 'one can always explain that what is in the interest of Europe is in the interests of our countries,' 'Britain is different. Does that mean it's only Britain that has a conflicting interest, or only the British who cannot be convinced? If he means the former -- Britain should stay out; if he means the latter, then why did the French and Dutch reject it last time?

It looks like the British are about to get a taste of the same sort of furor that surrounded our immigration debate -- complete with voters wondering how the government got so out of touch. For their sake, I hope they take a lesson:

The Open Europe campaign and other pro-referendum groups aim to put maximum pressure on MPs before a likely Commons vote next year on ratifying the treaty.

As with Mr Blair before him, Mr Brown has insisted that Britain's negotiating "red lines" were not broken at last month's summit - and therefore no referendum is needed...

Last night, Open Europe served notice that anti-referendum MPs from all the main parties would face sustained pressure in their own constituencies in the coming months.

Lord Leach of Fairford, the Tory peer who is chairman of Open Europe, told The Daily Telegraph: "Gordon Brown should think twice before going back on his party's manifesto pledge to hold a referendum on a treaty that is the EU constitution in all but name.

Mr. Brown ought to avoid arguments that 'the people just don't understand the deal,' or 'we can't let talk radio run Britain.'

Update: I've been pretty harsh on Nicolas Sarkozy for not understanding trade and economic growth -- and showing that ignorance in his support for the 'Reform Treaty.' I just noticed that Peter Mandelson -- an early backer of Tony Blair and several times a Minister in his government -- also recently slammed Sarkozy and the Treaty:

Europe's economies depend on open markets, European Union Trade Commissioner Peter Mandelson said a week after French President Nicolas Sarkozy said a revamp of EU rules will let governments protect national companies. Sarkozy said on June 23 that his push to drop a clause making "free and undistorted competition'' a specific goal of an EU treaty, rather than a means to prosperity, may allow for the "emergence of European champions'' among the bloc's 27 nations. "Competition should indeed not be some sort of dogma or religion, but nor is it a dirty word,'' Mandelson said on Saturday in Paris. "Competition has helped make Europe rich and France one of the most productive economies in Europe'' and "is how we keep our markets efficient and dynamic.''

If Peter Mandelson is attacking the underpinning for the Treaty, that's a significant knock against it.

Indian Engineering Centers Moving to California

No joke:

The rising cost of paying engineers in Bangalore has prompted at least one Silicon Valley start-up to save money by closing its Indian engineering centre and moving the jobs back to California.

While this “reverse offshoring” remains unusual, it points to a broader belief in the US technology industry that the savings that drove software engineering jobs to India’s technology capital are quickly eroding.

Like.com, a search engine company that uses image recognition software to find pictures on the web, took the step of closing in India after seeing the wages of top-level engineers in some cases rise close to US levels.

“Bangalore wages have just been growing like crazy,” Munjal Shah, chief executive, complained in a blog post. In the next few months, Like.com would have had to lift the salary of one of its Bangalore engineers to 75 per cent of the US level, even though the same engineer earned only 20 per cent as much as an equivalent US-based worker two years ago, Mr Shah said.

It's almost as if there's this crazy... international labor market -- and higher value skills and greater value added lead to higher wages. And then when companies no longer save money by locating jobs abroad, the potential actually exists for them to return to the US.

The notion that offshoring or outsourcing ever constituted a major threat to the US labor market -- let alone US prosperity -- was always overblown. People always fear that companies will go wherever they can to cheaper labor. But the US has huge advantages over other nations in lots of areas -- transparency, low taxes, English proficiency (more or less), great infrastructure, skilled workforce, and proximity to the world's largest consumer market. Companies have a hard time rejecting those advantages; the wage difference needs to be awfully great to overcome them.

You might well ask (as the rest of the world does) how they can hope to compete with the US.

Democrats Earning the Obstruction Rep

It's the understatement of the year to observe that there's not much on which President Bush and Congressional Democrats have agreed. Just about the only significant legislation so far was the immigration bill. ('Nuff said.)

The other faint area of hope was trade, where Democratic leaders got surprising concessions from the President, and actually came up with something that could be called a bipartisan victory. It was the one area they were going to be able to point to when voters ask 'where did you set aside partisan differences and work together,' and 'what do you have to show for this Congress?'

Well, it looks like they don't have that anymore:

In a joint statement with House Majority Leader Steny Hoyer (D-Md.), Ways and Means Committee Chairman Charles Rangel (D-N.Y.) and Rep. Sandy Levin (D-Mich.), Pelosi indicated trade deals negotiated with Peru and Panama will not be taken up until autumn at the soonest, even though the administration and business groups have clamored for Peru to be approved this summer.

In addition, the statement said Peru and Panama would have to change their domestic laws to reflect a May deal between the administration and House Democrats before Congress would further consider the two deals. That agreement has come under intense criticism from some Democrats representing districts with manufacturing interests.

The statement also said Rangel planned to lead a congressional delegation to Peru and Panama in August. “We have every expectation that, in the coming weeks, both the Peruvian Parliament and U.S. Congress will do whatever it takes to make certain that the agreement is implemented fully,” it said.

The statement said a renewal of “fast track,” set to expire Saturday, is not in the cards. “Our legislative priorities do not include the renewal of fast-track authority,” the statement said. Fast track makes it easier to negotiate trade deals because agreements signed under it cannot be amended by Congress.

In May, the administration reached an agreement with Congressional Democrats that would increase attention to the environment and labor rights in all future trade agreements:

Democrats reached a broad agreement with the Bush administration last month that worker rights and the environment will be core parts of future free trade agreements. That improved prospects for congressional action on several of the accords, although there are still sticking points, such as violence against labor leaders in Colombia and South Korea's restrictions on U.S. auto imports.

You might have thought that such an agreement would help ensure renewal of Trade Promotion Authority (Fast Track) -- or at least guarantee prompt votes on these deals. You'd be wrong.

Even more disappointing, Congress will drag its feet on other trade agreements that have already been negotiated. This is an embarrassment to our trading partners and allies, and it's an abrogation of their responsibility to at least vote on these accords. It also (once again) puts the lie to their criticisms of Bush for alienating our allies. After all, you don't get much more 'key' than South Korea.

This action shows that the Congressional leadership isn't interested in promoting good relations with our allies, or with the President. And they'd rather kowtow to labor than pass agreements that will help enhance economic growth and competitiveness.

House Votes to Open Cuba Trade

Read it at the Standard.

Security vs. Trade

The immigration debate has focused a tremendous amount of attention on land borders, walls, and to a lesser degree, workplace enforcement. Few spend much time on the source of half of all illegal immigration: visa overstays. Considering that the 9/11 hijackers all entered the US legally, visa overstays warrant much more scrutiny.

In that context, Congress is looking more closely at the US Visit program, and plans for tracking which immigrants leave the US as required by the terms of their visas, and which do not:

James May, president and chief executive officer of the Air Transport Association, said requiring scans at airline check-in would reverse current efforts to streamline the process. He said that 30 percent of passengers currently check in online through their computers, cell phones or PDAs. Those passengers would not be able to do that if they had to undergo biometric scanning at the ticket counter.

May said his biggest concern was that the airlines had not been consulted before DHS announced its intention to make the biometric exit scan part of airline check-in. But he praised DHS for its collaboration with airlines during the implementation of the entry portion of US VISIT, and said he was surprised by the sudden change.

Airports may also feel a strain as the exit portion of the program is implemented.

"Airports are not designed to handle passenger departure controls," said Ana Sotorrio, associate director of governmental affairs for the Miami-Dade Aviation Department. "Passengers are already experiencing record delays and inconveniences."

Until very recently, the technology hasn't existed to even consider tracking departures. But now that it does exist, we need to make sure that it's implemented in the most efficient and minimally intrusive way possible.

Sarkozy Really Doesn't Get It

The Financial Times today provides some depth and detail to President Sarkozy's attempt to steer Europe down the drain, economically. In the new European Reform Treaty for which he served as midwife, large European firms will no longer try to compete with each other. Now it turns out, he doesn't want them to have to compete with foreign companies, either:

Mr Sarkozy expanded on his economic world-view later that day, calling for a “genuine European industrial policy” and urging European governments to get tough on economic rivals such as China and the US. “Naivety is over,” he declared. “Reciprocity has started...”

But with Brussels bracing itself for fraught debates over further liberalisation of the energy and postal services markets, trade policy and an overhaul of the Union’s budgetary priorities, Mr Sarkozy’s words pose important questions. Is the French president articulating a wider unease about the free-market policies espoused by the EU – and is the Union about to roll back its commitment to liberalisation and enter a new era of protectionism?...

Yet it is hard to ignore the cracks that are emerging in what was an almost unanimous coalition behing pro-competition policies. An end to Europe’s economic revival could intensify protectionist rhetoric.

The latest breakdown in the Doha round of global trade talks has put more pressure on Peter Mandelson, the EU trade commissioner, and has made reforming the common agricultural policy harder. Meanwhile, the rise of China’s manufacturing exports has increased protectionist voices in countries from France to Romania.

Mr Mandelson’s anti-China rhetoric has recently been turned up a notch with a claim that the growing trade deficit is “artificial”, sustained by Beijing’s protectionism and an undervalued currency. All the same, Mr Sarkozy has already called for Mr Mandelson’s head for offering big cuts in farm tariffs as part of the Doha round.

In other areas, the Commission is finding it increasingly difficult to complete the great liberalisation projects that underpin the internal market. Brussels’ plan to encourage competition in the energy sector by breaking up large groups such as RWE, Eon and EdF is meeting fierce resistance in Berlin and Paris. A plan to abolish the last monopolies in postal services in 2009 looks likely to be postponed.

If Europe really is about to try protectionism for a while, they will fall far further behind economically than they are to date.

Protectionism sounds good, but it ultimately means prospering the company ahead of the consumers, by forcing them to pay artificially high prices for inferior products. Let's assume for a minute that the EU could shut off competition from the rest of the world -- how long would European consumers put up with this raw deal?

But more importantly, Europe can't shut out the world. No nation can. The EU currently imports about $1.5 trillion annually -- from the US, China, India and a host of other nations. Those countries won't allow Europe to shut its markets; nor will the WTO. And in the face of competition from the world's best companies -- honed by competition in open markets -- the 'European Champions' are doomed to fail.

You can't fight the invisible hand of Joseph Schumpeter.

Europe's New 'Reform Treaty'

Good editorial at the Wall Street Journal. They note that Gordon Brown has previously said that he will not submit the treaty for ratification by voters, but instead have it considered in Parliament only. It would be a great mistake to snub the voters on so important an issue, on what is essentially his first act as PM:

Europe is back, all right -- back to its old tricks and undemocratic sleights of hand. It's quite clear that the "reflection" the EU imposed on itself after French and Dutch voters rejected its Constitution two years ago amounted to nothing more than a long look in the mirror.

This resuscitated Constitution, albeit by a different name, negates the results of those free votes. Just as worrying -- and a dangerous portent for the Continent's future prosperity -- the price of the compromise in Brussels will erode the free-market principles on which the European Community was founded 50 years ago...

There will be enormous pressure on all EU leaders not to allow mere citizens to muck up the plan devised in Brussels. Mr. Sarkozy himself shows no inclination to hold a repeat referendum in France. He and others on the Continent will lobby Gordon Brown, who takes over as British Prime Minister this week, to follow suit and avoid putting the treaty to voters. Bowing to Brussels, Mr. Brown has indicated that he'll ask Parliament to ratify, not British voters.

It is hard to imagine a worse start to Mr. Brown's tenure at 10 Downing Street than to see him wave through the EU's "Reform Treaty" without popular support. The real lesson of the 2005 votes in France and the Netherlands is that citizens wouldn't sign off on an ambitious expansion of EU political prerogatives. They took full advantage of a rare opportunity to say so. Applying a few cosmetic changes and moving forward as if nothing happened makes a mockery of democracy.

The piece expands on some of the points I made the other day. Read the whole thing.