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Fast track Bush?

New York Times, David Stout, 7 May 2001

Renewing his quest for wider trade-negotiating authority from Congress, President Bush said today that open trade was not just an avenue for greater prosperity but was "a moral imperative" for the United States. Mr. Bush plans to formally ask Congress to give him the authority to negotiate trade deals that could be voted up or down by lawmakers without changes. Chief executives from Gerald Ford to Bill Clinton had such "fast-track" authority, but it lapsed during the Clinton administration. Mr. Bush bemoaned what he called "a new form of protectionism" that has crept into American political thinking. "When we promote open trade, we're promoting political freedom," he said.

Commentary. Free trade opens a country to the outside world because of the increased communication. Bush does not want Congress to nit pick free trade agreements because each Representative wants to protect their own import competing industry.

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Ecuador goes bananas

The Economist.com online news, 3 May 2001

Ecuador dropped its opposition to the agreement reached between America and the European Commission to end their long-running banana dispute. The commission agreed to grant substantial preferences to imports of Ecuador’s bananas during the EU’s transition to a quota-free market.

Commentary. Europe has a history of promoting its own investments through trade restrictions. Europe has investments in African banana plantations and has kept out bananas from Central America. As part of the GATT and the WTO agreements, Europe is slowly eliminating its quotas that keep out Central American bananas. Ideally consumers would be able to choose the bananas they like best. African bananas cannot compete effectively in North America because of the distance, with Europe located about equidistant from Central America and Africa.

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Pego the peso

The Economist.com online news, 19 April 2001

Domingo Cavallo, Argentina’s economy minister, said he would like to see the peso, at present pegged at par to the dollar, linked instead to a currency basket, made up half of dollars and half of euros—once the euro has reached par with the dollar. Investors looked baffled, but then seemed to accept that this was not a covert devaluation.

Commentary. If the euro reaches par with the dollar, then $/euro = 1. Pegging to the 50/50 basket would peg the peso at 0.5 (peso/$) + 0.5 (peso/euro). If the dollar and euro stay at par then pegging to either or both would make no difference. If the euro depreciates, however, the peso is devalued compared to a dollar peg. Investors generally expect the euro to depreciate relative to the dollar at least long term. Devaluing the peso allows the Argentine government to run budget deficits, increasing peso supply and inflating the currency. The best peg for a currency is the largest trading partner’s currency and Argentina is increasing its trade with Europe. The peg has to be supported by central bank transactions and there may be increasing central bank balances of euros in reserve. Baffled investors had better be cautious if the Argentine government does not have fiscal and monetary discipline.

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Strong dollar hidden in bush?

The Economist, 18 January 2001

Paul O’Neill, George Bush’s Treasury secretary-designate, said that he favored a strong dollar, no doubt hoping to scotch suggestions that he was a friend of exporting manufacturers. On cue, the yen fell to its lowest level against the dollar for 17 months, breaking through ¥119 in intraday trading. The euro also fell back against the dollar, reversing recent trends.

Commentary. Exporters like a weak dollar because US exports are cheaper in foreign currency. Of course, importers like a strong dollar and foreign traders have opposite preferences. As for O’Neill, watch what he does not what he says. The Treasury does some trading in the foreign exchange market and may have some independent influence on bond markets. Perhaps more importantly, O’Neill will be part of the Bush economic team. Lots of sports analogies but nobody knows what game they are playing.

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Brussels sprouts lobbies

The Economist, 18 January 2001

EU plans to liberalize trade with the world’s poorest countries are down if not out. Following complaints from farm lobbies, Pascal Lamy, Europe’s trade commissioner, pushed back a proposed transition period for his “everything but arms” market-opening to 2006-08. The original plan was to eliminate tariffs on most goods by 2004.

Commentary. 2008 is more likely, and by then maybe people will forget the plan. The farm lobbies are powerful in Europe and the US. Farmers in the developed countries do not want to have to compete with imports from poor countries. The poorest countries lose out on the chance to sell in the markets with the highest prices for their products.

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El Salvadollars

AP, 30 November 2000

SAN SALVADOR, El Salvador — El Salvador on Thursday became the third Latin American country to adopt the U.S. dollar as an official currency. Amid protests, 49 of 84 legislators approved the measure proposed by President Francisco Flores last week. The currency will go into effect next year. "This law strengthens our monetary system, the productive sector, and will allow people to refinance their debts," said Congressman Gerardo Suvillaga of the ruling Nationalist Republican Alliance, or ARENA. The move met fierce opposition from legislators from a party of former leftist rebels of the Farabundo Marti National Liberation Front, or FMLN, who argued that the people should have the right to vote on it. But many people said if given the option, they would do the same.

Commentary. Governments enjoy the seignorage of spending the money they print. Latin American governments have enjoyed it too much and the historical result has been high and erratic inflation. Zero inflation should be the main if not only goal of government economic policy. Expect El Salvador to enter an era of sustained economic growth.

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Pick Apec

CNN, 16 Nov 2000

BANDAR SERI BEGAWAN, Brunei (CNN) -- Leaders of the 21-member Asia Pacific Economic Cooperation (APEC) forum on Thursday reached a compromise on a new round of global trade talks that would include the interests of developing nations. Led by U.S. President Bill Clinton, developed nations had entered the annual summit hoping to urge the World Trade Organization (WTO) to begin new talks by 2001. Less-developed nations, led by Malaysia, feared new trade talks would require provisions on environmental protection and workers' rights -- rules they said would suffocate their economic development. In a compromise, APEC leaders agreed that an agenda addressing the interests of developing nations should be drawn up before trade talks begin. APEC is a loose grouping, but its leaders have been pushing for fair and free trade on both sides of the Pacific Rim -- by 2010 for developed nations and by 2020 for developing countries. Formed in 1989, the grouping represents two-thirds of the world's population, nearly two-thirds of its wealth and almost half its trade. APEC members are: Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, South Korea, Taiwan, Thailand, the United States and Vietnam.

Commentary. After all the fuss over the WTO summit in Seattle, why won't this global trade thing just go away? The answer is that there is too much to gain from free trade. Among the list of APEC members are countries that only 20 years ago were closed to trade and the "evils of capitalism."

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Euro yoyo

USA Today, 16 Oct 2000

NEW YORK — The euro fell to the lowest level in three weeks against the dollar after European Central Bank President Wim Duisenberg indicated the bank may not buy euros soon to prop up the currency. The euro fell to 85.31 U.S. cents, from 85.69 cents in London Friday. Against the yen, it fell for an eighth day to as low as 91.82 from 92.31. The dollar rose to 108.12 yen from 107.71 late Friday.

Commentary. Why would a central bank have to "prop" up its currency? The European central bank prints the euro. After all, it is cheaper to print currency than to buy it in the foreign exchange market. Foreign exchange purchases by central banks are another form of hidden tax. The price of the euro on the foreign exchange market will ultimately be determined by its purchasing power, regardless of periodic buying and selling by central banks.

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WHO is WTO?

The General Agreement on Tariffs and Trade (GATT) is an international treaty that has the goal of lowering trade barriers around the world. The World Trade Organization (WTO) is the arm of GATT organized to settle disputes, similar to a court. Why is are the GATT and WTO necessary?

The political economy of protection makes it difficult for countries to move to free trade by themselves. Industries pay politicians quite a bit for protection with tariffs and quotas. Lawmakers pass tariffs and quotas in exchange for cash and votes. If the country is committed to lowering protection through an international treaty like GATT or NAFTA, imposing protection becomes more difficult.

Some people dislike the WTO because they see it as an evil arm of powerful multinational firms stealing national jobs. Others dislike it because they see it as an international government diluting national power. Still others see WTO as promoting environmental disaster. Others favor free trade but believe WTO is not necessary if countries would simply eliminate wasteful trade barriers on their own.

WTO seems unlikely to go away soon because there is so much to gain from international commerce. Anti-protectionism is the political movement favoring free trade pushed by commercial interests that gain from trade. Nevertheless, the protests against the WTO will continue for all the various reasons. From the viewpoint of improving international commerce, the WTO will become the international court to settle civil disagreements such as bankruptcy and ownership claims.