Category Archives: Commentary

Seals, Morality, and the WTO

REUTERS/Paul Darrow

REUTERS/Paul Darrow

I recently returned from a conference in which a coauthor and I presented some research on clubbing seals to death. No, not on the methodology of the ugly business; instead, we were looking at the economic and legal questions raised by a recent pair of decisions by the World Trade Organization’s dispute settlement mechanism. The case raises issues of morality, extraterritoriality, and the dangers of a global trading system adrift.

To set the scene, Canada and Norway both engage in commercial seal hunts. The hunters ultimately sell the seal skins and furs commercially. In part to preserve those skins and furs, the hunters club the seals in the head to stun them before killing them.

More than a few people find this process offensive. In 2009, the European Union adopted measures to ban the sale of seal products in most cases (Foreshadowing: the “most” ends up mattering a lot). This prompted a formal complaint at the WTO later that year. Canada and Norway claimed, in effect, that the European Union had reneged on past promises of trade liberalization. The premise was that when Canada and Norway signed agreements such as the Uruguay Round of trade talks in the early 1990s, they did so on the understanding that their products would gain access to foreign markets. When Europe closed its markets to these particular products, the value of the original deal was diminished in Canadian and Norwegian eyes.

The European Union, which contains 28 countries but negotiates with a single voice at the WTO, responded that it was within its rights. The central trade agreement in question offered a number of exceptions that countries could use to justify the imposition of trade barriers. The language reads, “nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures…”—and then goes on to list the exceptions. Curiously, Europe did not opt for the one that concluded “…necessary to protect human, animal, or plant life or health.” Instead, Europe claimed that its seal trade barriers were “…necessary to protect public morals.”

The European Union recently ended up losing the case, both in front of the original panel and in front of the appellate body, though each used different reasoning. A key factor was the pliability of European moral concern. The original measures that banned seal product trade had, in fact, permitted it when hunts were performed by indigenous communities (e.g. Inuit) or when hunts were part of “marine resource management.” There was no evidence that these types of hunts were any more humane; they were just instances in which other European objectives (e.g. protecting indigenous communities) came into conflict with their expressed moral concerns.

A major challenge for the dispute panels was to figure out just how broad this “public morals” exception ought to be. Though it had appeared in trade agreements for a long time, it had not really been invoked much. Thus, its scope was ill-defined. This was what made the EU Seals case noteworthy; it grappled with a clause that, under an expansive interpretation, could blow an enormous hole in countries’ trade liberalization commitments. After all, countries are permitted to ban products that are dangerous or unhealthy, but there is a natural limitation to this license to block trade—one can test whether the products are, in fact, dangerous. But if countries can block products because they claim their citizenry has moral concerns about the way the product was produced, there are no such natural limits. As one of the conference participants had noted in previous work, a country could express moral concern about products made by trade partners who supported Israel or Taiwan. The intent of the original WTO agreement was clearly not to allow countries to reinstate protection whenever they felt like it. Yet the “moral concern” exception is there on the books. How to strike a balance?

The jurists decided that, at a minimum, the moral concern had to be pure. An abhorrence of seal clubbing, except when done by an Inuit, did not meet that test. This largely postponed the question. It served as a check against simple protectionist motives, in which moral concerns were put forward as an excuse for discriminating against imports. But it leaves open the extent to which countries can use their moral concern about the production methods, policies, and practices of other countries to justify barriers (which may, in turn, look a lot like sanctions).

The question is a difficult one. Judicial systems everywhere fill in blanks in the law when vague phrases demand interpretation. But they usually operate in conjunction with active legislatures, who can clarify the laws if they so choose. Further, justices often undergo careful selection and vetting procedures, as with the US Supreme Court, for which nominees are picked by the president and approved by the Senate. This process gives their interpretations some legitimacy (though, as this last week demonstrated, it hardly immunizes them against criticism).

The WTO dispute settlement mechanism does not enjoy either of these advantages. Global trade talks launched in 2001 have largely stalled and struggled to produce even modest results. The last two full global trade agreements concluded in 1994 and 1979. Policymakers have sometimes been tempted toward complacency about the lack of negotiation progress. The 1994 agreement strengthened dispute settlement; why not just let that system work and enjoy the benefits? The difficult questions of the EU Seals case show the dangers of such an approach. New political questions require new political agreements. Such an agreement at the WTO is long overdue.

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Europe–Too Soon for An “All Clear”

The economic crisis that once seemed poise to rip the euro zone apart more recently appears to have receded. Greece just successfully floated a bond issue and yields fell across Europe’s troubled periphery. The threat would seem to have been beaten back by bold central bank assertions. In the summer of 2012, European Central Bank President Mario Draghi announced a plan to do “whatever it takes” to save the euro zone.

Appearances can deceive. The Draghi plan (also known as OMT) restored a degree of confidence and stopped a sell-off of sovereign bonds. But the sovereign debt crisis was only one of three interlinked crises plaguing the euro zone. A crisis in the banking sector meant that European business had little access to credit. A crisis of growth meant that peripheral euro zone countries have been suffering from shocking and persistent levels of unemployment. None of these crises have gone away. In recent weeks each crisis has burbled and revealed a lack of policy coordination, either within the euro zone or internationally.

The sovereign debt crisis appears the most benign, as evidenced by this week’s nonchalance among bond investors in Portugal, Italy, Greece, and Spain. But in none of these countries does there appear to be an accepted plan to reduce debt to manageable levels, leaving them vulnerable to future crises of confidence. France and Italy have recently pushed for lenience on austerity rules (waivers for deficit targets), to the dismay of the Germans and the Finns.

Banking progress might seem promising, given that the members of the euro zone recently concluded arduous negotiations to craft a plan for banking union. They reached an agreement, but it appears unwieldy. For example, it grants euro zone banking authorities the power to close troubled banks, but only after a dauntingly extensive series of mandated consultations. At least one prominent commentator (Wolfgang Münchau) argues it is worse than nothing. In terms of international coordination, the US Fed clearly caught Europe off guard with its recent stress tests by setting tougher standards than the Europeans were inclined to impose.

Growth has been tepid, at best, and uneven throughout the zone. The latest IMF forecast, released this week, featured upward revisions, but only called 1.2 percent euro area growth in 2014 and 1.5 percent in 2015 (after -0.7 in 2012 and -0.5 in 2013). Those numbers are averages, with much of the strength coming from northern countries like Germany. Recently, the IMF Managing Director, Christine Lagarde, warned of the dangers of European deflation. The ECB, however, declined to lower rates (it did begin to muse about the possibility of quantitative easing). None of these moves signal confidence about an impending recovery. The Trans-Atlantic Trade and Investment Partnership (TTIP), upon which Europeans were placing their hopes for a boost to growth, is moving very slowly. There are serious conflicts over issues such as data protection, investor-state dispute settlement, and multiple facets of agriculture. TTIP has the potential to boost European growth, but that is likely well into the future. The countries could also pursue growth through structural reform, but this is impeded in countries such as Greece, Italy, and France by ideology or political weakness.

The euro zone has enjoyed a prolonged reprieve because of heightened global confidence, but core problems in sovereign debt, banking, and growth remain. Recent weeks have highlighted sharp differences of view over ways to address these concerns.  Without longer-term solutions, the problems simply await a fall in market confidence in order to reemerge.

The Cost-Benefit of Responding to Russia

In the wake of the initial events in Ukraine last week, I wrote about some of the options and challenges if the West were to attempt to prop up the country. Now, after Russia’s move into Crimea and the danger that its military involvement could spread further, there is the question of how to deter a Russian invasion.

Chicago Council President Ivo Daalder, former US ambassador to NATO, writes that Russian use of force “is a clear violation of international law and of Russia’s own commitments, and a grave threat to stability and security.” President Obama declared that Russia would suffer costs were it to proceed.

But what costs, exactly? There has been some skepticism about the options that are open to the President. How do we differentiate among the different proposals that have been put on the menu? There are some general principles that can be used to rank the alternatives for a Western response. The ideal policy would prove very costly to Russia and minimally costly to the West. The former requirement is obvious—the policy can only dissuade Russia from misbehavior if it inflicts some real pain, given the importance of Ukraine in Russia’s foreign policy. As to the latter point, it goes directly to the credibility of the policy. If the threat is too painful to carry out or to maintain, Russia will not deem the prospect likely enough to factor into its calculations. The ease of adopting a policy is especially important since the United States would likely need to hold a coalition together—with allied countries of Europe. That task becomes more difficult the more painful the measures are to adopt.

Consider, along these lines, a number of the prominent measures that have been discussed:

Military action. This is not really on the table. It would be very costly (not just financially) to the countries of the West. There is no doubt that US forces could inflict serious pain on Russia in such a contest, but it is a war that Russia could not afford to lose.

International Disapproval. Russia’s moves can be condemned at very little cost, but it is not clear that such condemnation inflicts much discomfort on Russia, either. It is important to reaffirm core principles—such as the importance of national sovereignty and territorial integrity—but this move should not be confused with deterrence.

Kicking Russia out of the G8. This would result in some loss of prestige for Russia, particularly since it is soon suppose to host a meeting in Sochi. But this does not seem the sort of thing over which Russian President Vladimir Putin would lose much sleep. How costly would it be for the United States? The answer depends on how one assesses some of the foreign policy initiatives of recent years. The Obama administration has taken great pride in expanding the inclusiveness of global summitry. It is not clear to me that the broadening of participation has accomplished much. Beyond summitry, such a move would almost certainly be followed by a cessation of cooperation with Russia on issues such as Syria and Iran. Again, these are initiatives, trumpeted by the administration, that seem to have accomplished relatively little. The costliness of the policy to the United States depends on how one assesses these likely repercussions.

Defense buildup and bolstering NATO border states. The Obama administration just released a budget that calls for reducing US military power. It had previously pulled back from missile defense in countries like Poland, a NATO member adjacent to Ukraine. These moves could be reversed. The downsizing had fiscal motivations; the missile defense stance was part of an effort to reach an arms-reduction accord with Russia. On the latter, one could particularly question the value of a treaty with Russia, given that Russia in 1994 had signed a treaty guaranteeing Ukraine’s borders.

Banking and economic sanctions. Many commentators have noted that Russia is far more integrated in the global economy than it used to be. This, in turn leaves it more vulnerable to economic sanctions. There was evidence of this vulnerability in the sharp drops of the Russian stock market and the ruble when the potential for conflict increased. Experience with Iran and North Korea have shown that moves to cut a country off from the international financial system (by denying bank access) can be particularly effective. Thus, these measures could certainly catch Russia’s attention. The difficulty, as noted by Sen. Chris Murphy (D-CT), is that “(u)nilateral US sanctions against Russia are not going to have much an effect if Europe remains a haven for Russian banks and Russian oligarchs to stash and invest their money.” Europe has far more extensive economic ties with Russia than the United States and would thus find tough sanctions more painful.

Targeted sanctions. One relatively modern innovation in sanctions has been to target them at the figures within a target country deemed most culpable, rather than just inflicting pain on the target country as a whole. Such sanctions can involve the freezing of assets or bans on international travel. This variation on traditional sanctions is seen as both increasing the cost to target-country decision makers (who often have the power to insulate themselves from less-focused sanctions) and decreasing the cost to the countries applying the sanctions (who find it painful to see the costs fall on innocents in the target country, as in antebellum Iraq). As with any sanctions, though, the effectiveness hinges on the breadth of participation. Europe could still balk at the prospect of retaliation that imposes hefty costs.

Exports of oil and gas. In the examples above, a principal means by which Russia might retaliate would be through its role as a principal supplier of gas to Europe and Ukraine. In the past, there was relatively little the United States could do to counteract this. That has changed, though, with recent energy developments. The United States has become a major gas producer. However, it maintains a range of restrictions on the export of oil and gas. The crisis in Ukraine has increased calls for loosening or lifting those restrictions. This is a policy that would impose costs on Russia—diminishing its economic power over European buyers—and benefit the United States. Such a policy could not be implemented immediately, but it could shift the balance of power over time.

This list is not necessarily comprehensive, nor is this an exhaustive consideration of the knock-on consequences that each action might have. The fear of unknown potential repercussions can always serve as a justification for inaction. President Obama has promised that Russian actions will bring costs. President Putin seems to have judged that the United States is eager to avoid involvement. The credibility of the US threat may hinge on the costs and benefits of the measures the President selects.

Today’s Economic Report Card

This has been an eventful week in economic news. This morning, we got a first, early look at US economic growth in the fourth quarter of 2013—and it proved a pleasing sight. The economy grew at a 3.2 percent annual pace. That was down from a 4.1 percent rate in the third quarter, but both numbers are the best we’ve seen in almost two years. These figures are interesting in their own right, but they also cast a revealing light on some big economic controversies of the last year, such as the government shutdown, fiscal austerity, and the Federal Reserve’s taper.

The period in question covers the government shutdown and debt debates of early October. Those antics, which were forecast at the time to be devastating for the economy, seem only to have had a marginal effect. Today’s numbers included a calculated impact of the shutdown—0.3 percent. That seems to suggest that, absent the shutdown, growth would have been 3.5 percent in the quarter. In fact, the underlying story is a bit more interesting. In a note, the Commerce Department says that it cannot quantify the effects of the shutdown. It generates the 0.3 number by looking at the reduction in federal labor services (employees not coming in to work). Since those workers were eventually given back pay, the note says it ultimately modeled the effect as “a temporary increase in the prices paid for federal employee compensation.” Qualitatively, at least, this bears some resemblance President’s proposal to raise the minimum wage for federal contractors, though that change is meant to be permanent. In retrospect, October’s predictions of catastrophe seem overblown.

Today’s report also covers a period in which the US government engaged in fiscal austerity. If one compares government budget numbers in the fourth quarter of 2012 to the fourth quarter of 2013, we saw a decrease in spending (from $909bn to $838bn, a 7.8 percent drop); we saw an increase in tax receipts (from $616bn to $665bn, an 8.0 percent increase); and a resulting decrease in the quarterly deficit (from $293bn to $174bn, a 40.8 percent drop). And yet the economy grew substantially faster (growth in 2012:4 was just 0.1 percent). Of course, these numbers hardly suffice to confirm or reject Keynesian claims about how one spurs or slows the economy. Multiple factors play into economic growth and some of those factors are not contemporaneous—they can kick in with a lag, or they can even work in advance, when people change their behavior based on expectations of future changes. But these numbers, on their face, certainly do not lend strong support to the assertion that a smaller government role dooms the economy to stagnation.

Before today’s GDP report, the big economic news of the week was the Federal Reserve’s decision to continue with its “taper”—the program of cutting back by $10bn per month in the amount of money it pumps into the economy (quantitative easing). In both the case of GDP and that of the Fed, the news came exactly as forecast by market watchers. The Fed had to act first, without the benefit of the GDP report. It proceeded in spite of some pressure to reconsider. The December jobs report, released earlier in the month, had been surprisingly weak. Further, if the Fed looked abroad, the view was more alarming. Emerging markets, along with some major Asian exchanges, have been crashing this last week. Among the explanations that have been offered were the tightening of the global money supply (directly affected by the Fed taper) and weakening growth in China. This highlights the challenge faced by the Fed. Its actions do work with a lag—perhaps 18 months. That means it must react not to current conditions, but rather to its forecasts for years to come. Furthermore, it has really just one tool—the money supply—with which to target domestic prices (inflation), unemployment, plus the well-being of the global economy, and that last one isn’t even part of its official mandate. The problem of getting the timing right led one past Fed chairman to say that the central bank’s job was “to take away the punch bowl just as the party gets going.”

So what hints of the future are there in today’s GDP report? The Bureau of Economic Analysis helpfully breaks down the contributors to GDP growth (Table 2). One of the most striking contributors in the last quarter of 2013 was the importance of international trade for the US economy. Net exports of goods and services accounted for 1.3 percent of the overall 3.2 percent growth. Most of that came from exports growing at an extraordinary 11.4 percent annual rate. Looking ahead, that driver of growth now looks threatened, both with faltering economies abroad (someone has to buy those exports) and an endangered agenda for gaining new market access through trade agreements.

The TPP and Evel Knievel – Up in the Air

Last night, as part of the Chicago and the World Forum, Ian Bremmer proclaimed that the most important region of the world for US foreign policy was Asia. Further, he said, the most important US undertaking in Asia was the Trans-Pacific Partnership (TPP) trade agreement. At roughly the same time that he was speaking, TPP ministerial negotiations in Singapore were coming up short. The disappointment came on the heels of a successful weekend WTO deal in Bali that had led some to proclaim a Trade Renaissance.

The twelve assembled TPP ministers didn’t admit defeat, of course. They heralded “substantial progress.” In a briefing, USTR Michael Froman said, “If I had to describe the outcome of the meeting, I would say ‘great momentum.’”

No doubt progress was made. But it can be notoriously difficult to figure out just how much. Herewith, some points to consider:

  1. We’ve been here before. We haven’t been at this level of progress, with this set of participants, exactly. But in November 2011, the United States was hosting the APEC meetings in Hawaii, TPP negotiations had been active for almost two years, and there were serious hopes that the agreement among the nine participants would be concluded then and there. Participants knew that beyond those meetings lay a US election and few deadlines that would force tough choices. As it happened, the negotiations could not conclude and the leaders were left praising themselves for good progress.
  2. Are they 65% done? Japan’s Vice Economy Minister just gave that figure as the degree of agreement among TPP participants. But what does that mean? Appropriately cautious, Amb. Froman reminded that “the thing about trade negotiations…is that nothing is agreed to until everything is agreed to.” To see the issue, think of the late daredevil Evel Knievel. He would pull off stunts like jumping his motorcycle over 15 cars parked in a row. To do so, he would rev his motorcycle along a straight-away, ride up a ramp, then, if all went well, fly over the cars and land on the other side. For Knievel, would 65% done mean the straightaway, before he mounted the ramp? It was certainly important for him to pick up speed that way, and that would have been 2/3 of the measured distance. But it would hardly have counted as 2/3 of the difficulty of the task.
  3. Ambition vs. Conclusion. In 2011, there were nine participants in the TPP negotiations. Since then, Canada, Mexico, and Japan all joined, bringing the number to twelve. When Japan joined, one former USTR privately predicted that the negotiations would now not conclude during the Obama presidency. Reportedly, delegations in Singapore were upset with Japan’s limited offers of liberalization. The 2011 delay posed a dilemma, however. As long as the negotiations were to conclude soon, it was reasonable to ask allies like Canada, Mexico, and Japan to wait to join. As the talks dragged on, such a stiff-arm seemed undiplomatic. Further, the three countries’ admission undoubtedly raised the level of ambition of the talks and the potential economic impact of the TPP. But when they were allowed in, the talks became significantly harder to conclude.  Now, as a 2013 deadline passes, S. Korea has expressed interest in joining…
  4. This is level one of two. Robert Putnam helped clarify the difficulty of international negotiations by describing “two-level games.” International negotiators need to reach agreement among themselves, and among critical constituencies at home. So far, the Obama administration has neglected the consensus-building at home on trade. One indication of this is the domestic drumbeat for enforceable measures against ‘currency manipulation.’ There is no indication such measures are on the TPP agenda, nor would the other countries likely accept them.

None of this implies that TPP is a lost cause. However, it does imply that President Obama will need to make TPP a top priority for the new year and devote substantial time to the project if it is to have a chance. Given the centrality of TPP for Asian relations and the centrality of Asia in this administration’s foreign policy, that’s not an unreasonable prioritization.

Global Trade enters Crunch Time

Those who enjoy sports will be familiar with the rhythm of a season. In the period before the first games are played, every squad is filled with ambition and whispers about exciting new players. Then there are the initial games when those hopes are put to the test. Ultimately, one reaches the point in a season when the team must either win a big game or forget thoughts of post-season glory for at least another year.

The global trade agenda is entering an analogous critical stage.  There was a joyous pre-season with calls for new, improved, 21st century trade agreements. There were predictions of fabulous trophies for the successful – hundreds of billions of dollars in economic growth, countless new jobs!

The analogy to sports gets a little strained in one particular dimension, though. Following the progress of trade undertakings like the Trans-Pacific Partnership (TPP), the Trans-Atlantic Trade and Investment Partnership (TTIP) with Europe, or the WTO talks differs from a sports season in that one doesn’t actually get to watch the games. Instead, it’s the equivalent of being kept on the outside of the stadia where the games are played and just hearing the occasional rumor – “That player took a big hit!”; “Someone just made an amazing play!”; “I hear cheering! That has to be a good sign.”

The negotiations themselves are conducted in secrecy – a tradition that has become a sore point with complaints about the lack of transparency. Devotees are left to parse the emanating rumors or to wait for an established deadline, when the players who have been battling out of sight will all emerge beaming and victorious, with their helmets raised above their heads – or they will stagger out looking battered and dejected.

We are just now reaching one such key deadline. Next week, trade luminaries are scheduled to gather in Bali for a World Trade Organization Ministerial meeting. Cheering for a WTO agreement has recently been as fulfilling as backing the Cubs for the World Series. Yet lately there has been legitimate cause for hope. Even though the grand ambitions of the Doha talks, launched in 2001, were stymied years back, there was a recent move afoot to try for a less ambitious package, one that would demonstrate that the WTO was still relevant. Not only that, but there was a new manager. The Brazilian Roberto Azevêdo took over the WTO this fall from the Frenchman Pascal Lamy.

At The Chicago Council’s recent conference on the Frontiers of Economic Integration, former US Trade Representative Susan Schwab highlighted the importance of the Bali meeting, to be held Dec. 3-6. She said that the potential for a modest package was as important as anything that had gone on in global negotiations for the last two decades. She showered Azevêdo with praise, stating that if anyone could pull off the difficult feat of bringing 150 countries together, he had the skills to do it.

But the latest news coming out of the negotiating arena sounds grim. The negotiators involved failed to agree on a text for ministers to take up at the ministerial next week. Azevêdo was quoted as saying that members had “stopped making the tough political calls.”

In the sporting world, a setback like this would invariably be followed by predictions of redoubled effort and renewed hope next season. But the opportunities on the global trading scene are fewer and farther between. Instead of such bromides, Azevêdo warned of dire consequences from a Bali failure, both for the multilateral trading system and the global economy.

It is an inauspicious start for the critical phase of the global trade season. The TPP talks were intended to conclude by the end of this year. Senate Finance Committee Chairman Max Baucus (D-MT) has been saying he would like to get agreement on US trade negotiating authority by the end of this year as well, though past deadlines have already been missed. And the TTIP talks are meant to wrap up before the European Commission turns over in late 2014. Trade fans will be listening, increasingly nervous, for hopeful news. They will take little consolation from suggestions to just “wait for next year.”

Congress and the Currency Manipulation Craze

At last month’s trade conference and then on this blog, former Missouri Gov. Matt Blunt, now President of the American Automotive Policy Council, explained why US auto producers would like to link rules against currency manipulation to new trade agreements. “From an automotive perspective, currency manipulation both subsidizes our competitors’ exports to the US and around the world, and puts US exports at an equal cost disadvantage.”

He described growing congressional support. A filibuster-busting 60 US senators last month sent a letter to Treasury Secretary Jacob Lew and US Trade Representative Michael Froman asking for new enforceable rules in trade agreements to attack currency manipulation.  A majority of House members signed a similar letter in June.

Blunt and the senators cite a Peterson Institute study arguing that foreign currency manipulation has already cost between one and five million jobs. “A free trade agreement purporting to increase trade, but failing to address foreign currency manipulation, could lead to a permanent unfair relationship that further harms the United States economy,” the senators write.

But how would such a policy work? Will we have trade dispute panels sitting in judgment of core macroeconomic policies? Should we be fixated today on the economic philosophy of Roberto Azevêdo (new head of the World Trade Organization) rather than Janet Yellen?

If every currency depreciation were accompanied by a finance minister shouting: “Ha! Take that you foreign exporters!” then the manipulation determination would be relatively easy.  In practice, however, currencies can move for any number of reasons. Fixed exchange rates can deviate from “ideal” values when central banks are slow to move them, or when countries have different inflation rates. Market-determined currencies can swing with trader sentiment, or depreciate when central banks drop interest rates or engage in quantitative easing.

What happens if a central bank decides an economic recovery is too slow and unemployment is too high and it responds with massive purchases of bonds and other financial instruments? Such a move is highly likely to drive down its currency. Will that country be guilty of manipulation?

If you were thinking of Japan while reading that last paragraph, you were thinking like a member of Congress. If you were thinking of Chairman Bernanke’s September decision to postpone tapering, you were thinking like finance ministers all around the world. When the United States first engaged in quantitative easing, it was Brazil’s finance minister, Guido Mantega, who decried the launch of “currency wars.”

In fact, the world trading system already has a rule governing currency manipulation. It says that a country’s exchange arrangements should not frustrate the intent of the agreement. Adjacent provisions say, roughly, ‘We have no idea what this means; please ask the International Monetary Fund.’

Herein lies the problem. There is no agreed-upon proper value for a currency. One can construct some useful reference values, like the exchange rate that would make a specific bundle of goods in Japan cost the same as an identical bundle in the United States (so-called ‘purchasing power parity’).  But there is no good economic reason to demand that such rates hold all the time. Further, market-determined exchange rates fluctuate so much that no reference value will be held for long. There have been attempts to set multilateral currency policy standards – at least implicitly – as recently as the G-20 meetings in Seoul in 2010. They failed. If a trade dispute panel were to sit in judgment on a currency manipulation case, it would have very little guidance in how to rule.

The core problem with Congress’ recent approach is the belief that any determinant of trade flows ought to be subject to international regulation. In the past, trade rules carefully distinguished between measures that specifically supported a product or industry (such as a production subsidy) and broader policies that affected costs (such as education or roads). Monetary policy and exchange rates properly fall in the latter category.

Congress has constitutional authority over trade and needs to be taken seriously on this. There may be a case for another attempt at tighter global rules governing countries’ monetary policies. With a little reflection, though, we will probably decide we do not want those rules to be written and enforced by small committees of international trade lawyers.

Reading the Jobs Report Card

This was to be the morning when we received the bill for last month’s government shutdown shenanigans. All those who had irresponsibly failed to agree upon a budget by the Oct. 1 start of the fiscal year were to learn what damage they had wrought. How many more Americans would be looking for work because of their inability to find common ground? And the verdict was…

204,000 new jobs in October!  The number was dramatically above forecasts of 125K and above the 190K/month average of the preceding twelve months. This seems the equivalent of partying all night before a test, never cracking open the textbook, and then finding out you got an A on the exam. What gives? Three thoughts below.

1. Approach monthly job numbers with caution
The closely-watched report actually has a margin of error of around 100K jobs. As the economist Justin Wolfers reminds: “There’s a lot of noise…Don’t overinterpret every blip in the data.”

This is not just a technicality. Every release features revisions of past releases. This one was no different: The August employment number was revised up from 193K to 238K, while the September number went from 148K to 163K. So, on top of the 79K unexpected October jobs, it turns out there were another 60K jobs from before that we had not counted on.

2. The “but for” challenge
Numbers such as the jobs release are rarely dispositive in economics. Given the impossibility of running a controlled experiment (“Let’s try October again, this time without a shutdown!”) we are left to speculate about what would have happened “but for” the shock that occurred. To do that, we rely upon models that are often unreliable. There is always room for someone to say: “Just think how high the number would have been without the shutdown!”

The challenge is even more difficult when other policies change. One celebrated prediction of the shutdown’s impact called for 900K jobs lost and the unemployment rate jumping by 0.6 percentage points (it actually stayed unchanged at 7.3%). One mechanism by which such havoc would be wreaked was that interest rates would rise as markets were overcome by fear and uncertainty. And yet the benchmark Treasury 10-year interest rate was roughly 30 basis points lower throughout the shutdown than at its early September peak. Of course, there was a major policy move in the interim: the Federal Reserve postponed its “taper.” There was speculation that, in doing so, it was casting a wary eye on Washington developments. Perhaps so.

But how does one then disentangle the net effect of the shutdown? Should it be the combined effect of the shutdown and postponed taper? It seems unlikely that the Fed would have reneged on its earlier taper commitment had there been a new budget firmly in place for FY2014 and ample room under a new debt ceiling.

3. What did you expect?
With all of the above caveats, there is a deeper question about how markets and the public approach temporary measures.

In an unusual attempt to increase pressure on Republicans early in the shutdown, President Obama gave an interview with CNBC in which he urged markets to worry: “This time I think Wall Street should be concerned…When you have a situation in which a faction is willing to default on US obligations, then we are in trouble.” Presumably the intent was to invoke the wrath of the markets and terrify opponents as indices tumbled.

Markets refused to comply. The S&P 500 actually rose slightly over the first couple weeks of October. That index reflects a huge number of daily transactions, so it would be foolish to give a single reason for the way it moved. But market participants clearly expected that the standoff would be short-lived and that the United States would make good on its debts. Had someone taken the President up on his invitation to panic, they would have ended up selling low and then buying high when the crisis passed. That’s not what they’re there for.

These same questions of expectations and “but for” analyses have bedeviled discussions of stimulus. In a Keynesian approach, the citizenry is first surprised by the burst of government spending, then surprised again later when taxes go up to pay for that spending. In a “rational expectations” approach, citizens are not surprised, nor are they so responsive to policy maneuvers.

Returning to the question of jobs, Paul Krugman has a piece in today’s New York Times in which he laments the staggering cost of persistent high unemployment. In that, he’s clearly right. He then goes on to attribute the unemployment to a lack of greater government spending and the influence of “deficit scolds.” Others would differ sharply in their diagnosis. Today’s job numbers seem to warn against facile analyses and overconfidence that we can pair each act of government with a market response.

Guest Commentary: Importance of Strict Currency Manipulation Rules in TPP

By Former Governor of Missouri Matt Blunt, President of the American Automotive Policy Council

The fate of the Trans-Pacific Partnership (TPP) may be decided over the next few months, possibly even before the end of the year. TPP has the potential to be the most important trade pact since NAFTA and could create thousands of jobs in the United States, boosting exports and the overall economy. Regrettably, these benefits are in jeopardy unless the agreement includes strong and enforceable currency disciplines.

From an automotive perspective, currency manipulation both subsidizes our competitors’ exports to the US and around the world, and puts US exports at an equal cost disadvantage. The Peterson Institute estimates that foreign currency manipulation has resulted in a loss of 1-5 million jobs in the United States, and an increase of between $200-500 million in the US trade deficit.

Japan has a long history of intervening in its currency markets to sustain its export-driven economy. Japan’s inclusion in the TPP makes it vital that the TPP include a strong and enforceable currency discipline.

There is growing support for addressing this 21st century trade barrier. A broad, bipartisan majority of the US Congress has called for strict currency manipulation rules in the TPP. One letter signed by 230 US House members and another signed by 60 US Senators called for a high standard agreement that includes strong and enforceable currency disciplines. As a broad swath of America’s elected officials have acknowledged, trade is key to our future economic growth, but it needs to be done right.

Everyone agrees, the Trans-Pacific Partnership could be an economic boon throughout the Pacific Rim. However, the negotiating members must ensure that currency manipulation rules are in place and enforced. Otherwise, years of work and negotiations will not deliver on the economic growth that will benefit us all.

Taking a Byte Out of Trade

Europeans have reacted to accusations of US spying with revulsion. In today’s Financial Times, Chicago Council President Ivo Daalder explores the degree to which European leaders’ surprise might be disingenuous, but also whether governments should refrain from crossing certain lines as they inevitably gather intelligence.

The furor over allegations that the United States has tapped Spanish phones or listened in on German Chancellor Merkel’s cell conversations touches on trade in at least two ways. First, alleged US government actions threaten a rift between the United States and the European Union at a time when the two are supposed to be racing ahead with a trade agreement, the Transatlantic Trade and Investment Partnership. Second, the dispute over government actions can color discussions about privacy concerns when setting rules for the private sector.

As part of the upcoming conference on “Frontiers of Economic Integration,” we will have a breakout panel devoted to issues of data privacy and electronic commerce. On the question of whether the spat over spying will impede the negotiations, one of the panelists at Wednesday’s session, Hosuk Lee-Makiyama, this summer argued that it should not. Hosuk, director of the European Center for International Political Economy, wrote:

European bluster over NSA spying is unlikely to decide the fate of trans-Atlantic trade talks, which faced huge obstacles long before Edward Snowden started leaking security briefs. For those of us who work within the narrow circles around Brussels, the only real surprise is that someone would actually bother to eavesdrop on us when every journalist and embassy intern seems to have access to the EU’s own ‘classified’ documents.

Hosuk also cautioned last month against letting the reaction to revelations serve as an excuse to block data flows.

Both Hosuk and fellow panelist Stephen Ezell have addressed broader questions about digital trade in the US and global economy in testimony before the US International Trade Commission (here and here). Stephen, a senior analyst with the Information Technology & Innovation Foundation (ITIF), has also co-authored a report on “How to Craft an Innovation Maximizing TTIP Agreement.”

There are a range of interesting policy and economic questions surrounding electronic commerce that did not necessarily arise back in the day, when countries just shipped manufactured goods in exchange for commodities. With such knowledgeable panelists – as they say these days – it should be interesting to listen in.