Category Archives: philipilevy

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.

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.

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.