Can WTO Trade Sanctions Save the Planet?

Felix Salmon wonders if Joseph Stiglitz is on to something:

Kyoto intransigence as illegal subsidy, by Felix Salmon, Economonitor: The CGD's Lawrence MacDonald reports on one of Joe Stiglitz's bright ideas:

U.S. trade partners [should] ask the WTO for authority to impose countervailing duties on exports of U.S. steel and other energy-intensive products that benefit unfairly from Washington’s refusal to join the Kyoto Protocol limiting carbon and other greenhouse gasses.

The logic is kinda fabulous:

There is a precedent for such duties, Stiglitz said, because Washington previously obtained a World Trade Organization ruling in support of a U.S. ban on the import of shrimp caught in Thailand using nets that killed endangered species of turtles. "I asked one of the (WTO) appellate judges (involved in the decision) whether he understood what the implications were for global warming, because clearly if you can impose a trade sanction to save a turtle, you can impose a trade sanction to save the planet," Stiglitz told a standing-room only audience. “And the judge said, yes… we were aware of where this was going.”

MacDonald says this is Stiglitz's "most interesting and important" idea – could it really happen?

Lawrence MacDonald has the answer. Referring to Stiglitz' book, he says:

The book contains a detailed explanation of the proposal--and an interesting discussion of the response his idea has received so far from senior officials:

I have discussed this idea with senior officials in many of the advanced industrial countries that are committed to doing something about global warming. And while, almost to a person, they agree with the analysis, almost to a person they also show a certain timidity: the proposal is viewed by some as the equivalent, in the trade arena, of declaring nuclear war. It is not. It would, of course, have large effects on the United States, but global warming will have even larger effects on the entire globe. It is just asking each country to pay for the full social costs of its production activities. Following standard practice, the pressure of trade sanctions could gradually be increased; and almost surely, as America recognizes the consequences, its policies would be altered--as they have been in other instances where the United States has been found in violation of WTO rules.

Until there is a change in leadership in the U.S., little will change.

Comments

[Stormy]

"But the trade imbalance between China and the United States cannot be solved by relying solely on appreciation of the Chinese currency, said Morgan Stanley chief economist Stephen S. Roach.

"In fact, a major part of China's trade surplus is created by multinationals as they eye low labor costs in the country and choose to produce their labor-intensive products in China," said Wu Xiaoling, deputy governor of the People's Bank of China, the country's central bank.

"Attracted by low labor costs, multinational companies began shifting their manufacturing to China in the 1980s, opening factories to process materials and export the processed products.

"The fact is China's trade surplus mainly comes from the processing trade and most exports by these multinationals have been included in China's trade figures. A high proportion of export profits in fact stay in the pockets of multinationals," said Mei Xinyu, a trade expert with the Ministry of Commerce.

http://english.people.com.cn/200610/01/eng20061001_308029.html

End of story.

The rest of the story: Until economists and free marketers address this issue directly—and stop the inane defense of free trade as practiced—and stop being the apologists, paid or otherwise, of multinational business interests, we haven’t a chance in hell of fixing this.

[ninjaplease]

Seeing as how the US was able to completely ignore the WTO on the issues of Online Gambling, I wouldn't hold my breath that the WTO can change anything for the benefit of normal people, normal as in, not super wealthy multinationals

[Bruce Wilder]

"How that slick, a highly toxic cocktail of petrochemical waste and caustic soda, ended up in Mr. Oudrawogol’s backyard in a suburb north of Abidjan is a dark tale of globalization. It came from a Greek-owned tanker flying a Panamanian flag and leased by the London branch of a Swiss trading corporation whose fiscal headquarters are in the Netherlands. Safe disposal in Europe would have cost about $300,000, or perhaps twice that, counting the cost of delays. But because of decisions and actions made not only here but also in Europe, it was dumped on the doorstep of some of the world’s poorest people.

"So far eight people have died, dozens have been hospitalized and 85,000 have sought medical attention, paralyzing the fragile health care system in a country divided and impoverished by civil war, and the crisis has forced a government shakeup."

Externalizing costs has long been a favored business strategy, and, in my experience, conservative libertarians are in the habit of minimizing its importance. I'm sure the same pollyannas, who never saw a sweatshop that wasn't raising people out of poverty and who never saw a minimum wage as anything but a barrier to raising people out of poverty, will soon enough invent some rationale or other.

I've been wondering how long before Marginal Revolution has a great piece explaining how our insistence on driving SUVs has actually aided the 150 million people living in the Ganges Delta, by finally forcing them, after thousands of years to get out of the swamp.

[John Konop]

Bruce,

"Externalizing costs has long been a favored business strategy, and, in my experience, conservative libertarians are in the habit of minimizing its importance. I'm sure the same pollyannas, who never saw a sweatshop that wasn't raising people out of poverty and who never saw a minimum wage as anything but a barrier to raising people out of poverty, will soon enough invent some rationale or other".

YOU ROCK !!! That topic could be a great book. You should write it !!!! That is the core problem !!

[Emmanuel]

Stiglitz is a good guy, but he's starting to become too much of an "America-basher" for my tastes. First he blames the IMF's failures on Clinton administration intervention ("Globalization and Its Discontents"). Next, he says China shouldn't allow the yuan to float freely because the current trade imbalance is mostly America's fault. Now he wants a trade organization to impose environmental sanctions on America?

When you start bashing people left and right indiscriminately, you'll be co-authoring "How to Lose Friends and Repulse People." Some subtlety, diplomacy, and tact would serve Stiglitz well.

[Stormy]

Labor, environmental and tax arbitrage--all sanctioned by the WTO--are screwing the planet in terms of distribution of wealth and the environment.

At the heart of all this is the multinational and its entrenched lobbyists who merely change hats as they move between government and business.

Providing intellectual cover are the economists who haven't a clue as to how the power and rape game distorts all their simplified number pushing.

This game has a ways to go--there is more stuff to grab in the name of free trade, globalization, and the ownership of even the rain.

Yes, even the rain was up for sale. Try the spat in Boliva when peasants were told to ante up for the rain water they were collecting. (Try Googling it.)

And where were the economists then? Singing how free enterprise and globalization will raise all boats. Singing how government should get out of the way and let business do its thing.

My first post in this thread was intended to show exactly where all those Chinese profits were really going--where precisely the trade deficit lies.

Now, go breathe the air in China for a followup.

Globalization and the free market system are broken. It is about time that some honest economist step up and admit it.

[georgist]

I'm not sure about labor and environmental arbitrage, but tax arbitrage has a very simple solution. Land cannot flee to a tax haven, unlike capital.

[John Konop]

Stormy.

ie level playing feild !!!!

[Emmanuel]

Very Stormy indeed, my fellow poster :-)

I have been going to China for many years, and it is true that the air there is getting worse. But, multinationals were by no means solely responsible for that mess. Chinese government policies encouraging economic growth while forgetting about the environment played their part. Whether cleaner air is more desirable than helping lift millions of people out of poverty is, to me, not the question. How China can help its citizens raise their standards of living while taking care of its environment is. Closing China off to the world again doesn't seem like the solution to me, although it would probably be for Pat Buchanan.

I know about that example of water privatization in Bolivia. I even saw the movie covering it, The Corporation.
But, it was the World Bank and not the WTO promoting that wacky idea.

It is hard for those who are not in either the anti-globalization (think Naomi Klein) or pro-globalization (think Martin Wolf) camps to stake positions that are immediately graspable by others. Stiglitz has this problem. He isn't anti-trade. In fact, he wants there to be "Fair Trade for All". He isn't even anti-globalization. He is keen on "Making Globalization Work". The problem for me is that while he often diagnoses what is wrong correctly like entrenched corporate interests or uneven trade rules, many of his proposals--like this one--are unrealistic. For example, he seems to enjoy one-sidedly attacking the US while he's at it. How about China? Why not apply sanctions against China as well? After all, isn't it the second largest polluter in the world? Why give China a free pass just because it’s a developing country? Like America, Australia isn’t a signatory either and it’s a developed country, so why not impose sanctions on it as well? This is a slippery slope, and once you start on it you’re likely to end up in a worse position than from where you started.

There is no doubt that trade should be done in a manner which is better than it is being done today. But, demonizing parties and using attack-dog rhetoric doesn't help very much. It would be very easy for me to recycle Naomi Klein (free trade is war) or Martin Wolf (globalization is awesome) stuff, but I can't because I don't believe in either extreme position.

Obviously, many persons of good character work in corporations, so I am interested in knowing how these folks do turn out decisions that have bad consequences instead of saying multinationals are inherently bad or are bent on destroying the world through globalization. Clearly, it would be senseless of them to do so as they would lose out as well.

Stiglitz is a genius. After all, he's won a Nobel Prize. But, I do hope that he'd present less abrasive and more realistic arguments that could help make trade fair and globalization work as he wishes.

[anne]

Clarifying possibly the importance of the comment by Bruce Wilder:

http://www.nytimes.com/2006/10/02/world/africa/02ivory.html?ex=1317441600&en=289c998a5513d683&ei=5090&partner=rssuserland&emc=rss

October 2, 2006

Global Sludge Ends in Tragedy for Ivory Coast
By LYDIA POLGREEN and MARLISE SIMONS

ABIDJAN, Ivory Coast — It was his infant son's cries, gasping and insistent, that first woke Salif Oudrawogol one night last month. The smell hit him moments later, wafting into the family's hut, a noxious mélange reminiscent of rotten eggs, garlic and petroleum.

Mr. Oudrawogol went outside to investigate. Beside the family's compound, near his manioc and corn fields, he saw a stinking slick of black sludge.

"The smell was so bad we were afraid," Mr. Oudrawogol said. "It burned our noses and eyes."

Over the next few days, the skin of his 6-month-old son, Salam, bloomed with blisters, which burst into weeping sores all over his body. The whole family suffered headaches, nosebleeds and stomach aches.

How that slick, a highly toxic cocktail of petrochemical waste and caustic soda, ended up in Mr. Oudrawogol's backyard in a suburb north of Abidjan is a dark tale of globalization. It came from a Greek-owned tanker flying a Panamanian flag and leased by the London branch of a Swiss trading corporation whose fiscal headquarters are in the Netherlands. Safe disposal in Europe would have cost about $300,000, or even twice that, counting the cost of delays. But because of decisions and actions made not only here but also in Europe, it was dumped on the doorstep of some of the world's poorest people....

[anne]

Notice a parallel in Tennessee:

http://select.nytimes.com/2006/10/02/opinion/02herbert.html

October 2, 2006

Poisoned on Eno Road
By BOB HERBERT

Dickson, Tenn.

If you stand outside the Holt family home late at night, after everyone has gone to sleep, with the sound of a soft wind drifting through the trees and the damp sweet smell of abundant grass heavy in the humid air, you can easily imagine what this area was like in the days of slavery.

And then the quiet is broken by the sudden eruption of dogs barking and howling on nearby property, and you're reminded that the tiny population of blacks in Dickson County, even after all these years, is still frequently treated — literally — like garbage.

The property adjacent to the Holt family home is a government-owned landfill. The howling dogs are housed in a pound right next to the landfill. The noise is a nuisance, but it's the least of the family's problems.

Toxic chemicals from the landfill have polluted the pristine water that was once drawn from the Holt family well. Unaware that the water was contaminated, the family drank it for years. Now the Holts are convinced that the poisons that seeped for so long from the landfill into the groundwater are responsible for the potentially deadly diseases that have struck several members of the family.

The Holts were not just unaware that their water was contaminated; they had been assured by federal environmental officials way back in 1991 that the water had been tested and was safe to drink.

"They told us," said Sheila Holt-Orsted, who grew up on the property, "that the water wouldn't hurt us, and that we shouldn't worry about it."

In fact, government records show that dangerous levels of trichloroethylene (TCE), a suspected carcinogen, had been found in the water as early as 1988. The family drank the poisoned water for more than a dozen years after that.

During that time, the government warned white families that the water had been contaminated and provided them with an alternate source of drinking water. The Holts, who are black, were left oblivious to the danger. Welcome to the world of environmental racism, a subject that doesn't get nearly enough attention.

The Holts' property is on Eno Road, a quiet rustic area with an interesting history. Hundreds of acres of land along the road were acquired by blacks in the post-slavery period. Only recently freed, they were proud of being landowners. The Holts have lived in the community for many decades.

Blacks make up just 4.5 percent of the Dickson County population, and they have always been clustered in the vicinity of Eno Road. This has been a great convenience for the whites, who have run the local governments. For six decades, the Eno Road community has been designated as the place for whites to dump their garbage....

[anne]

Issues of race may be fading to issues of class in the South, but race is there still if for no other reason than entrenched class differences that dissipate slowly even when pains are taken against the differences. We are however far too little taking such pains now. Race and class sadly still blend.

[John Konop]

anne,

A very good point,

"Issues of race may be fading to issues of class in the South, but race is there still if for no other reason than entrenched class differences that dissipate slowly even when pains are taken against the differences. We are however far too little taking such pains now. Race and class sadly still blend".

[Movie Guy]

I am laughing outloud.

We're worried about U.S. steel exports??? And steel products? I mean, come on. Aluminum jets, maybe.

Kyoto Treaty? Name the countries that are on schedule with that one. The list is SHORT. What a joke.

Someone should take some aerial photos of China's industrial plants and send them to poor Joe Stiglitz. Better yet, Joe should just go the hell over there and take a good look. Give him a mask. He will need it.

WTO has no teeth on environmental standards. That's the problem on this front.

And this nonsense about any significant differences in U.S. and WTO trade policies of Republican and Democrat leadership in the U.S. is just that - nonsense.

What does Stiglitz not understand about the following chart?

Global Carbon Emissions, 1990-2100

What does anyone not understand about the chart?

[NinjaPlease]

The crowded future stings my eyes
I still find time to exercise
In uniform with two white stripes

Unlock my section of the sand
It's fenced off to the water's edge
I clamp a gasmask on my head

[Chorus]
On my beach at night
Bathe in my moonlight

Another tanker's hit the rocks
Abandoned to spill out its guts
The sand is laced with sticky glops

O' Shimmering moonlight sheen upon
The waves and water clogged with oil
White gases steam up from the soil

[Chorus]

I squash dead fish between my toes
Try not to step on any bones
I turn around and I go home

I slip back through my basement door
Switch off all that I own below
Dive in my scalding wooden tub

My own beach at night
Electric Moonlight

There will always be a moon
Over Marin

[calmo]

The chart looks like the one Enron lived by Movie --only some believed in projections to 2060. But point taken about Stiglizt/WTO.
But I'm still cornered by Salmon's phrase "kinda fabulous" logic (easy for you fleet of foot to step around this remark, but we old cloggers...). Recall how everything is connected people?
Well jimminey! Plug back in and see it for yourself!
And ninja helps me with that poem to recall (and murder another perfectly good memory about) the beat of a butterfly wings in Tanzinia (this may still be a country, but the butterfly may no longer exist, I concede) has repercussions for the thump of a man's (even an economist's!) heart.
Nay, even more: his actions and your responses; your responses and my clogging footsteps to decipher them; my decipherings and your blossoming urges to throw something at me.

Mighty fabulous.

[johnchx]

Stormy wrote:

My first post in this thread was intended to show exactly where all those Chinese profits were really going--where precisely the trade deficit lies.

Indeed. But, if I understand the claim correctly, it is wrong.

First, let me try to spell out what I think is being claimed -- it's not quite clear to me from the smattering of quotes assembled in the first comment, so correct me if I've misunderstood.

The claim is that China's trade surplus is accounted for (and explained by) profits earned by foreign firms which own assembly and processing plants (that is, profits on foreign direct investment (FDI) in China).

For example, let's say a foreign owned plant in China "imports" $900k in parts, assembles them at a cost of $10k (cheap wages!), and "re-exports" the finished goods to the U.S. for $1 million. In addition, China imports $10k worth of something, so that the employees of the factory have something to spend their wages on. So, we've got a trade deficit of $90k ($1 million exported minus $910k imported), and $90k in profit for the multi-national that owns the plant. This scenario fits the claim: the trade surplus is accounted for by the profits of the multi-national.

Here's the problem: a country's balance on current account is defined as the sum of its net exports (exports minus imports) plus its net income from investments abroad (income received minus income paid out). Profits on foreign direct investment -- even if not distributed to the parent companies -- are deducted from a country's current account.

In our example above, China would show a trade surplus of $90k, but its current account would be zero ($90k net exports - $90k FDI profits). That is, if China's net exports were really accounted for by profits on FDI, China's current account would be zero -- i.e. in balance. Is this the case?

China's balance of payments can be viewed here. In 2005, China ran a current account surplus of $160.8 billion. This surplus is actually higher than the surplus on goods & services ($124.8 billion). So, not only does profit on FDI not account for China's trade surplus, China's income on investment abroad exceeds the investment income accruing to foreigners.

It's pretty clear that profits on FDI earned from exports play a relatively minor role in China's trade surplus and -- in net -- don't affect China's current account at all (since those profits exactly balance the value of the corresponding net exports).

[John Konop]

johnchx,

At the end is not China's policy pushing wages down?And since they are not really free market(100% private companies) as you pointed out, how would market logic apply?

[John Konop]

sorry (no 100% private companies )

[johnchx]

John Konop wrote:

At the end is not China's policy pushing wages down?

Good question.

I think the first point is that the answer doesn't depend on whether our bilateral trade with China, or our multi-lateral trade with the entire world, is balanced, in surplus, or in deficit. To see this, imagine a scenario in which we have an export surplus with China.

Let's say that we export $150 billion worth of goods and services to China, and import $100 billion, so we're running a $50 billion surplus. Now let's analyze the factor content of the trade flows. To keep things simple, let's say that all tradeables are produced with capital and low-skill labor (just to keep the high-skill vs. low-skill issue to one side for the moment). The goods and services we import from China are "composed of" 90 billion hours of labor (at $1/hour) and capital services valued at $10 billion. Our exports include 10 billion hours of labor (at $10 per hour) and capital services valued at $50 billion.

In this scenario, even though we run a trade surplus with China, we're still net importers of cheap labor (80 billion hours worth). We would expect that to weigh on the domestic price of comparable labor.

The key point is that the effects of trade on domestic factor prices depend on the factor content and the relative factor prices in the different countries, not on whether there is a trade deficit or surplus.

To answer the question, I'd say that I don't know for sure, but it seems likely that trade with China is lowering wages to low-skill labor in the U.S. It is also lowering prices on consumer goods, which benefits most income groups in the U.S. to some degree. Will the benefits outweigh the costs (in total)? The generic answer is, "yes, certainly," but we can talk through a more-or-less realistic example of how this might work.

Suppose we were buying shirts from a domestic factory, paying $10 million a year in wages. We offshore this to China, pay one-tenth as much ($1 million). So, at a first approximation, domestic labor loses $10 million (we close the factory), and the price of shirts drops by an aggregate of $9 million. (Yes, I'm assuming no monopoly power exists in the market for mass-produced shirts. I think this is a pretty fair assumption, but if you like you can assume that some of the $9 million gain accrues to monopolist sellers. The total is the same in any event). Bottom line so far: $10 million in lost wages, $9 million in benefits shared between shirt consumers and shirt producers.

But wait: in real life, total employment is rising, not falling. Offshoring costs some jobs, but new jobs are being created to replace them. (Honest, count the jobs. There are problems with the rate of job growth having been lackluster, to say the least, during the Bush Administration. That being said, the economy does in fact remain in the range that economists think of as "full employment.") However, many who lose jobs due to import competition find that their wages are lower. As an approximation, let's guess that the average replacement wage is 50% of what it was before. (Remember, we're talking about a shirt factory, not a GM plant. Our displaced workers weren't making enormous incomes to begin with.) So the total losses to those workers is actually $5 million, not the whole $10 million we assumed earlier.

Bottom line at this point in the analysis: we've got a "potential Pareto improvement." The winners have gained $9 million (I'm not counting the Chinese workers among the winners for the moment), and the losers have lost $5 million. Which, of course, is another way of saying that the workers at that particular shirt factory have been shafted big time. Let's not sugar coat that.

One thing to notice about this illustration: there's actually nothing "trade specific" about it. The same dynamic is endemic to any form of competition. Competition can always hurt those who lose out.

For example, suppose that instead of offshoring our shirt factory to China, we simply built a new one next door with exciting new technology that allows us to produce just as much as before, but with 10% of the labor. We close the old factory, lay off 90% of the workers, bring the remaining 10% into the new factory (where we pay them exactly what we used to pay them -- no new skills are required, so we're hiring out of the same pool of labor and the equillibrium wage doesn't change). The end result is essentially the same (except that the recipients our residual 10% payroll are in the U.S. rather than in China; for the 90% who are laid off, there's no difference.)

John also asked

And since they are not really free market(100% private companies) as you pointed out, how would market logic apply?

Also a good question. Let me rephrase it a little: what aspects of the traditional economic case for trade depend on the trading partners being market economies (or at least behaving like them)?

I think it's fair to say that the traditional economist's case applies to each country individually if it is a market or market-like economy, regardless of whether its trading partners are market economies.

In the context of the U.S. - China relationship, that means that trade is "good" (in the usual "aggregate, ignoring distributional effects" sense) for the U.S., but it need not be "good" for China.

To see why this might be, consider that we can invent an imaginary market-economy country which behaves, in terms of trade, exactly like China -- that is, a country which buys and sells exactly what China does at exactly the prices China buys and sells at. Presumably there's some combination of factor endowments and technologies that would produce that result. From the point of view of the U.S. (and thinking in "merely" economic terms), trading with this imaginary country is just like trading with China.

Things look a little different inside China, of course. Our imaginary pseudo-China, because it is market-like, only imports or exports (and borrows or lends) when it makes economic sense to do so...i.e. when the transaction improves the condition of both transactors. In real-life statist China, there's no such guarantee. Transactions happen because the government wants them to happen. Which means that the transactions may be welfare-destroying for the Chinese.

As an example, consider the pollution externality. In the U.S., the government does a fair-to-good job (not perfect by any stretch of the imagination) of preventing transactions whose environmental costs would outweigh the economic benefits to the transactors. Certain factories simply don't get built here because, even though they would have benefits for both factory owners and wage-earners, the environmental spill-over effects would make the investment a net loser for the community as a whole. Our political system has some mechanism for ensuring that these considerations enter into the economic calculus somehow. (Again, neither economists nor environmentalists, nor investors, think these mechanisms are flawless. However....)

In China, by contrast, the mechanisms for introducing environmental costs into economic decisions are weak to invisible. Which means that there's no reason whatsoever to assume that a factory built in Shenzhen is welfare enhancing. Its pollution profile -- and resulting health impacts -- could make the investment a net loser.

The policy question, then, is how much we care. In other words, if trade is good for us, how much should we care whether it is "really" good for our partners? My own opinion is that it is really a matter of degree. At some point, it stops being an economic issue and starts being a human rights issue.

Getting agreement on where to draw that line, however, is very, very difficult, especially when -- as in real life -- many billions of dollars are involved.

[Movie Guy]

johnchx,

Good post.

[John Konop]

johnchx,

You are one smart dude!

In the west you have companies driven by ROI and growth, who can go to markets with
no rules, why would they not go to the most unregulated cheapest market for as much as possible to lower cost? Also is this not why we have even lost the tec industries to China? How do we turn this around?

Now China is controlled and not driven by ROI .And they seem only focused on growth. One without ROI principals you will get into trouble ie growth without profit. So what happens when this catches up with China and the U.S is co-dependent on their debt?

I hope you do not mind the questions. BTW you should write a book

[gordon]

A short version of Stiglitz' proposal can be downloaded from Economists' Voice.

[piglet]

Stiglitz' proposal is anice provocation. Ofcourse, we all know that none of this is ever gonna happen. I do know, however, a powerful "trade sanction" for punishing environmental sinners: rising oil prices. Let's pray they will rise fast enough to give the planet a break.

[tv guide]

this is the worst info ever