Brookings: Experts - Joshua Meltzer

A Conversation on President Obama’s Trip to Mexico and Costa Rica

Joshua Meltzer, Diana Villiers Negroponte, Ted Piccone and Neil Ruiz — Wed, 01 May 2013 17:59:00 -0400

In advance of President Obama’s trip to Mexico and Costa Rica later this week, Brookings scholars Ted Piccone, Joshua Meltzer, Neil Ruiz and Diana Negroponte discuss the main priorities on the agenda between the United States, Mexico and Costa Rica. Topics covered include: expanding trade and economic cooperation between the U.S., Mexico and Central America, U.S. immigration reform, border security, drugs, crime and violence in Mexico and Central America, energy cooperation, and local politics in Mexico.

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“I think there has a been a view around for awhile now that the bilateral relationship at least with Mexico has been dominated by drugs and violence. And I think there is going to be a concerted effort here to refocus attention on to the depth and size of the economic relationship.” — Joshua Meltzer

“It’s a second term trip for the president, but its early in his second term and I think he’s got a lot of heavy lifting still to do on issues that are particularly important to Latin America and especially important to Mexico and Central America. These issues [jobs and the economy, immigration, security] are not the typical ones on the foreign policy agenda. These are issues that are bread and butter, hot-button domestic political issues but they are very important to the Latins, particularly in Mexico and Central America.” — Ted Piccone

“Immigration is a hot button issue of course. It’s something that is still alive here in the U.S. There’s no reform yet to report back to Mexican and Central American leaders. But these meetings actually set the stage for building the relationship for working together once immigration reform is implemented into law.” —Neil Ruiz

“This is a time when Enrique Pena Nieto, the newly elected Mexican president, has got a chance to really celebrate the strength of the Mexican economy: 3.5 percent GDP growth this year, 3.9 percent GDP growth last year… [and] a growing middle class, which means more people with a car and an ability to take a vacation, with iPods, with cellular telephones, and more mobile.” —Diana Negroponte

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A Conversation on President Obama’s Trip to Mexico and Costa Rica

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Value-Added Trade and Its Implications for International Trade Policy

Kemal Derviş, Joshua Meltzer and Karim Foda — Tue, 02 Apr 2013 15:20:00 -0400

Reported Trade and Value-Added Trade

In 2012, the U.S. exported $2,196 billion and imported $2,736 billion worth of goods and services, producing a trade deficit of $540 billion. This U.S. trade balance with the world comprises the sum of all the bilateral trade balances the U.S. runs with its trading partners, some of which are in surplus and others that are in deficit. For instance, in 2012, the U.S. had bilateral trade in goods deficits with China ($315 billion), Japan ($76 billion), Mexico ($61 billion) and Germany ($60 billion), and bilateral trade surpluses with Australia ($22 billion), Brazil ($12 billion), Chile ($10 billion) and Panama ($9 billion).

The reported trade balances of the U.S., and all other countries for that matter, are based on the gross commercial value of the goods and services as they depart and enter the country. What these reported trade balances don’t adequately capture is the complex nature of the global economic relationships of international trade today. Quite often goods and services move across multiple national borders in order produce a final product that is then exported. WTO Director-General Pasqual Lamy has described this phenomenon as goods being “made in the world”.

For instance, the U.S., Canada and Mexico are economically very integrated with goods and services often crossing their borders many times in order to produce a final product. According to reported trade data in 2009, [1] the U.S. had a trade deficit with Mexico of $48 billion and a trade deficit with Canada of $22 billion. This would suggest the U.S. simply buys more from Mexico and Canada than it sells to these countries. However, the economic ties between producers, manufacturers, and consumers across borders mean that this is only part of the story. In many cases, U.S. imports from Mexico and Canada are of intermediate goods that are used to produce products which the U.S. then exports back to Mexico and Canada, or the rest of the world.

Reported trade data also fails to capture the role of third countries in bilateral trading relationships. For instance, Japan exports goods to South Korea that are then exported to the United States.

Reported trade data also fails to capture the role of third countries in bilateral trading relationships. For instance, Japan exports goods to South Korea that are then exported to the United States. In these cases, Japan is exporting to South Korea but is also exporting to the U.S. via South Korea. However, the way that the U.S.-South Korea trade balance is currently reported does not adequately capture the role of Japanese inputs into Korean exports, which in value-added terms are Japanese exports to the U.S.

Value-added trade data reveals these economic relationships. But to date developing value-added statistics has been difficult to compile for a range of reasons, including obtaining what can be considered commercially sensitive data, the absence of a common statistical framework, and challenges in distinguishing between intermediate and final goods. Recent joint work undertaken by the WTO and the OECD assists with calculations of value-added trade.

For example, under a value-added calculation for 2009, both Mexico’s and Canada’s exports to the U.S. actually decline by around 25 percent each. Additionally, the value-added data reveal that 12 and 8 percent of total exports from Mexico and Canada to the world, respectively, reflects U.S. value-added trade. Moreover, in value-added terms the bilateral U.S. trade deficit with Japan would increase dramatically by 60 percent, from $23 billion to $36 billion.

The following table explains these differences between reported and value-added trade:

The table above explains how a country’s reported exports comprise three elements: domestic value-added that stays overseas; domestic value-added that returns home via imports; and foreign value-added incorporated into its exports. Similarly, reported imports includes the foreign value-added that remains in the country of import, the domestic value-added incorporated in its imports, and the foreign value-added in the imports that are later re-exported. In contrast, a country’s value-added exports capture only the domestic value-added that stays overseas and value-added imports are only the foreign value-added that remains in the country of import.

This table also explains why a country’s overall trade balance will be the same in reported and value-added terms, as the over and under accounting of exports and imports that arises from the inclusion of domestic and foreign value-added goods are themselves imports and exports that cancel each other out over a country’s total trade. This is to be expected as the current account balance, which equals the trade balance and net factor income, the latter unaffected by the conversion to value-added, is a function of the gap between domestic savings and investment and does not depend on whether trade is calculated in reported or value-added terms.

While a country’s trade with the world is the same in reported and value-added terms, bilateral trade balances can diverge greatly under value-added and reported data. But as the sum of a country’s reported and value-added bilateral trade balances sum to the same overall trade balance, a reduced bilateral trade deficit using value-added data with one country must be offset with changes in other value-added bilateral trade relationships. For instance, both reported and value-added trade data will still see the U.S. running the same overall trade deficit and China the same overall trade surplus, even when the value-added data shows a reduced U.S.-China bilateral trade deficit.

Trade Policy Implications for U.S.-China Trade

Differences between reported and value-added bilateral trade relationships have important implications for trade policy. As noted, value-added trade data captures the value traded and thereby reveals the income generated by trade in multiple countries and industries.

There is no bilateral trade relationship of greater economic and political significance for the U.S. than with China. For example, in 2012, U.S.-China trade in goods deficit was $315 billion, the largest bilateral deficit the United States has ever had. And it is the size of the trade deficit that feeds all manner of concerns in the U.S. about declining competitiveness, job losses, and unfair trade practices by Chinese companies. China is also the world’s largest exporter and a global center for the manufacturing and assembling of goods for export. In addition, manufactured exports tend to have higher levels of foreign value-added due to the role of imported intermediate goods and services in their production.

As a result, calculating the U.S.-China trade deficit using value-added data reduces the deficit by 25 percent. However, as China’s overall trade balance remains the same under reported and value-added trade data, a reduced bilateral trade deficit with the United States also means that China has greater bilateral trade surpluses (or reduced deficits) with other countries. This suggests that while China is exporting less domestic value to the U.S., it is adding more value to its exports to other countries.

One of the important trade policy insights here from the value-added data is that barriers to Chinese imports will often harm U.S. consumers through higher prices for final goods.

One of the important trade policy insights here from the value-added data is that barriers to Chinese imports will often harm U.S. consumers through higher prices for final goods. In addition, U.S. manufacturers would end up paying more for intermediate goods, which would reduce the competitiveness of their final goods in the U.S. and in export markets overseas. Furthermore, to the extent that U.S. trade barriers reduce demand for Chinese imports, they also reduce demand for the U.S. goods and services incorporated into China’s exports.

Value-added trade also reveals why it is also in China’s interest to reduce its trade barriers. Given the significant trade in intermediate goods and services used in China, reducing its trade barriers would make Chinese products even more competitive domestically and overseas.

This is only one example of how value-added data can change the way we understand how the international economy works, the role of trade and with important implications for trade policy. Reported data gives the impression that each country is wholly responsible for the production of its exports and this is now significantly out of a step with an international economy that increasingly relies on disaggregated supply chains spread across many countries where goods and services are trade across borders multiple times. In contrast, value-added data calculates these economic linkages and reveals the contribution that countries make to global processes. Economists since David Ricardo in the 19th century have demonstrated the economic gains to countries from trade. Value-added trade data reaffirms these insights and reveals how in today’s economically-integrated world trade barriers are also often barriers against goods and services that domestic industry had a role in creating.

These realities may also help explain why protectionist pressures have been relatively subdued during the difficult economic period after the 2008 global crisis. Does this mean that international trade comes with no problems? Not at all. Whether in value-added or traditional final products form, trade supports a process of “creative destruction” where national wealth increases but some firms and households lose out to others. There are, therefore, strong ethical and political arguments for assisting the “losers” in their needs to adjust and providing a social safety net to those who are not in a position to adjust. The increasing importance of international value chains raises tax avoidance issues for multinationals. This is a big topic but suffice it to say here that international cooperation to avoid excessive tax avoidance is reasonable. Finally, while international value chains make it easier for some poorer countries to “break-into” the world economy, it may also make it more difficult for them to develop national economic strategies aimed at reaping the benefits of agglomeration of economic activities and deepening their industrial production.

Footnote

[1] The most recent value-added trade data is from 2009

References

Benedetto, John. July 2012. “Implications and Interpretations of Value-Added Trade Balances,” Journal of International Commerce & Economics, Vol. 4, No. 2. U.S. International Trade Commission.

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Image Source: © Paulo Whitaker / Reuters

Japan to Join the Trans-Pacific Partnership – Finally!

Joshua Meltzer — Mon, 18 Mar 2013 10:27:00 -0400

Japanese Prime Minister Abe’s statement of his country’s willingness to join the Trans-Pacific Partnership (TPP) negotiations is good for the U.S., Japan and the TPP. It follows former Japanese Prime Minister Noda’s announcement at the Asia-Pacific Economic Cooperation (APEC) in 2011 of Japan’s interest in the TPP negotiations and almost two years of discussions between the Japanese government and the other TPP parties on their expectations should Japan join the trade agreement. The TPP parties currently include the U.S., Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

Japan’s participation in the TPP will boost the agreement’s economic and strategic significance. The TPP aims to be the 21^st century trade agreement that sets the rules for trade and investment in the Asia-Pacific region going forward. Achieving this goal will require other major economies in the Asia-Pacific region to join the agreement with the intention of the TPP ultimately becoming a Free Trade Agreement of the Asia-Pacific (FTAAP), and Japan’s participation in the TPP will give added momentum towards this goal. For one, with Japan the TPP will cover 8.6 percent of global trade and almost 40 percent of global GDP. Japan’s entry into the TPP is also likely to give further impetus to other countries joining the TPP. In particular South Korea, which already has an FTA with the U.S., should now see the TPP as a key opportunity to negotiate new market access opportunities with Japan, with which it has a $108 billion trading relationship. Other countries such as Colombia, the Philippines and Thailand are also watching the TPP negotiations careful with an eye to joining.

Japan’s participation in the TPP is also of economic significance for the U.S. Without Japan’s participation in the TPP the market access opportunities for the U.S. are limited because the U.S. has FTAs with six of the 10 TPP parties. Should the TPP lead to new market liberalization beyond what has already been promised in their current FTAs with the U.S., the already significant liberalization committed to under these FTAs means that any new market access gains for the U.S. will be minimal.

In contrast, the U.S. does not have an FTA with Japan, which is the world’s third largest economy with significant tariff and nontariff barriers in areas of key export interest for the U.S., ranging from agriculture to automobiles to financial services. As a result, an ambitious outcome in the TPP could provide the U.S. with important new markets. Its potential economic value is highlighted by the size of total bilateral trade of $220 billion in 2012 and a trade deficit of $80 billion. But this understates the size of the trading relationship as many Japanese goods and services are now inputs into final goods exported from countries such as China and South Korea. Value-added trade data more accurately captures these dimensions, and on a value-added basis the U.S. trade deficit with Japan increases by approximately 60 percent. Additionally, there is a significant bilateral investment relationship, with U.S. foreign direct investment (FDI) in Japan valued at $134 billion in 2010 and Japanese FDI in the U.S. valued at over $240 billion

Japan’s participation in the TPP is also good for Japan. It will provide new market access opportunities for Japanese exporters amongst the TPP parties. But even more significantly, the TPP should become a key driver of domestic economic reform – something the Japanese economy sorely needs. The TPP will lead to economic reform in Japan through a number of channels. For instance, the TPP will lower tariff rates on goods and liberalize Japan’s services sector, which constitutes 72 percent of Japan’s GDP. The TPP will also eliminate many nontariff barriers – behind the border regulations that act as barriers to trade. These measures will lead to greater competition which should increase the productivity of the Japanese economy, improving its competitiveness, including in its export sector and boosting GDP. Additionally, the TPP will include new ambitious market access for investment, rules on intellectual property, competition, telecommunications and regulatory coherence, to name a few. In fact, the TPP is better understood as a comprehensive economic integration agreement that will touch most areas of economic life.

Prime Minster Abe’s decision to commit Japan to joining the TPP should also be understood as a necessary compliment to his efforts to stimulate the Japanese economy with monetary easing and the related depreciation of the Yen. These efforts alone, without the type of economic reform the TPP will lead to, are unlikely to produce long-term improvements in Japan’s growth prospects.

A further consequence for the TPP of Japan’s participation will be a delay in finalizing the agreement. Efforts to conclude the TPP this year were always ambitious given the range of difficult issues still on the table, such as on intellectual property and state-owned enterprises. Following Japan’s announcement of its intention to join the TPP, the Obama administration will now follow a 90 day consultation period with Congress, which means that the September round of TPP negotiations will be the first opportunity for Japan’s formal participation. Irrespective of whether Japan is prepared to simply sign on to progress-to-date in the TPP, the needed new market access negotiations with Japan, combined with the existing challenges outlined above, makes completing the TPP by the end of 2014 a more realistic end date.

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Joshua Meltzer

Image Source: © Toru Hanai / Reuters

A European Union-United States Free Trade Agreement

Wed, 27 Feb 2013 14:00:00 -0500

Event Information

February 27, 2013
2:00 PM - 3:00 PM EST

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

The United States and the European Union are the two largest economies in the world with the largest global trading relationship, worth $636.8 billion in 2011. President Barack Obama’s State of the Union address called for further increasing the economic relationship by negotiating a comprehensive transatlantic trade and investment partnership with the EU. A U.S.-EU Free Trade Agreement would further reduce barriers to trade and investment and provide an opportunity to develop international rules on a range of global challenges such as access to energy and climate change.

On February 27, Global Economy and Development at Brookings hosted a discussion on the challenges and benefits to a U.S.-EU Free Trade Agreement. Panelists included Simon Smits, vice minister for Foreign Economic Relations in the Netherlands Ministry of Foreign Affairs and András Simonyi, managing director of the Center for Transatlantic Relations at the School of Advanced International Studies at Johns Hopkins University. Koen Berden, senior partner at ECORYS, provided brief comments on the benefits of an EU-U.S. Free Trade Agreement. Brookings Fellow Joshua Meltzer moderated the discussion.

How Do Government Restrictions Harm International Online Trade and Commerce?

Tue, 26 Feb 2013 14:00:00 -0500

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February 26, 2013
2:00 PM - 3:30 PM EST

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

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The trading of goods and services over the Internet is now routine in the global marketplace and a highly important facet of international commerce. The Internet’s capacity to move data across borders securely and efficiently is an important enabler of international trade. Despite the Internet’s significant contribution to international trade and the free flow of goods across borders, governments are employing a range of potentially damaging restrictions that reduce the ability of businesses to use the Internet as a venue for international commerce. Of these various restrictions, which are the most salient and harmful to online international commerce? How are these restrictions being used to prevent cybercrime or protect intellectual property, are they effective, and are there unintended consequences to these regulations?

On February 26, the Center for Technology Innovation at Brookings hosted a discussion on how governments can best enable online global commerce while also taking precautions to maintain security, national interests and intellectual property rights. A panel of experts discussed the increase in international trade and propose steps that governments should take to strengthen international trade rules and norms for the Internet.

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The Internet, Cross-Border Data Flows and International Trade

Joshua Meltzer — Mon, 25 Feb 2013 00:00:00 -0500

The Internet is becoming a key platform for commerce that is increasingly happening between buyers and sellers located in different countries, thereby driving international trade. Additionally, as the Internet enables cross-border data flows this is also underpinning global economic integration and international trade. For instance, cross-border data flows are now intrinsic to commerce, from Internet-based communications like email and platforms such as eBay and Facebook that bring buyers and sellers together, from the financial transaction to purchase the product in other countries to the downloading of the goods and services.

Despite the growing significance of the Internet for international trade, governments are restricting the Internet in ways that reduce the ability of businesses and entrepreneurs to use the Internet as a place for international commerce and limits the access of consumers to goods and services. Some of these restrictions are being used to achieve legitimate goals such as preventing cybercrime or restricting access to morally offensive content, but may be applied more broadly than necessary to achieve those objectives. In other cases, Internet restrictions are targeting foreign businesses and the sale of goods and services online in order to benefit local ones. Such Internet restrictions are discriminatory and harm international trade.

In this paper I discuss the importance of the Internet and cross-border data flows for international trade. I propose steps that governments should take to apply existing international trade rules and norms and identify where new trade rules are requires to further support the Internet and cross-border data flows as drivers of international commerce and trade.

Building on the international trade law developments I describe in the paper, the following outlines the key challenges that remain and proposes ways trade policy and law could address them:

Develop binding commitments with exceptions: trade rules should establish cross-border data flows as a mandatory legal norm while providing sufficient policy space for governments to restrict data flows where necessary to achieve other legitimate policy goals. Such restrictions should also be designed and applied in a non-discriminatory, least trade restrictive and transparent manner.
Intra-Country Data Flows: commitments on cross-border data flows should include a commitment to also not restrict intra-country data flows. There is no commercially sound reason for rules on cross-border data flows to not also apply to their movement within a country. And once data is allowed across-borders, many of the reasons for government restrictions on intra-country data flows diminish if not entirely disappear.
International standards: global industry standards and interoperability criteria will underpin growth in cross-border data flows, such as the ability of users to access and use digital content across devices. Governments should commit to developing international standards with the aim of underpinning technology development that is consistent with Internet operability.
Location of Data Centers: requiring data center to be located domestically undermines the cost-effectiveness of cloud-based computing services where so-called location independence is important. Under KORUS the parties have addressed this issue for the financial sector by agreeing to allow financial institutions to transfer data across their borders for data processing. Governments should commit to similar rules for all cloud-based computing services.
Rules on transparency: Internet restrictions on cross-border data flows are often implemented in an arbitrary and non-transparent manner. Some FTAs have sophisticated rules requiring transparency and due process, but this is yet the norm. Moreover, Internet restrictions on cross-border data flows raise specific issues that require additional commitments in the following areas:
- A designated contact point in the government agency responsible for restrictions on cross-border information flows.
- Provision of advanced notice of any proposed measures affecting cross-border data flows, including the reasons for the proposed restriction.
- Opportunities for interested parties such as businesses or individuals to present their views on the proposed restriction and a requirement for written and reasoned responses.
- Opportunities for administrative review of Internet restrictions.
Develop Norms on Cross-Border Data Flow: governments should also prioritize developing norms of conduct amongst governments with respect to the Internet. In addition to the role of binding trade rules here, governments should develop principles governing access to and use of the Internet. For example, the US and Japan have agreed to Internet principles that emphasize the preservation of an open and interoperable Internet and a balanced approach to issues such as privacy and intellectual property rights so as not to impede the cross-border flow of information.
Address the digital divide: For businesses in developing countries, non-tariff costs such as inadequate logistics and transportation services have a significant impact on the costs of exporting. As noted, increasing Internet access in developing countries can reduce costs of exporting by up to 65 percent. Assisting developing countries better integrate into the global trading system should therefore include increasing Internet access and the provision of cheaper mobile devices to access the Internet.

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Joshua Meltzer

Image Source: © Thierry Roge / Reuters

The United States After the Great Recession: The Challenge of Sustainable Growth

Joshua Meltzer, David Steven and Claire Langley — Fri, 15 Feb 2013 11:58:00 -0500

“Never before has our nation enjoyed, at once, so much prosperity and social progress with so little internal crisis and so few external threats,” President Clinton argued in January 2000 in his final State of the Union address.

Despite this optimistic prognostication, the millennial decade was one of profound crisis, with serious consequences for the United States’ economy and society, and for the environmental sustainability of the American dream.

This paper starts from the following assumptions:

First, though the United States’ economic model has many strengths, its resilience has been weakened. Acute economic, social and environmental challenges will need to be addressed in either the short or long term.
Second, the United States’ response to this era of crisis will be an important factor influencing how other countries react, given the size of its economy, its position as a “necessary but not sufficient” actor on most global issues and its potential for innovation.
Third, it is necessary to gain an understanding of the drivers of and obstacles to change in American society to draw conclusions about its response to crisis.

We identify four trajectories (scenarios) the U.S. could take over the coming decades:

The United States could continue to try and muddle through, reacting to the external environment, rather than trying to shape it.
It might aggressively focus on going for growth in order to meet the aspirations of its growing population, with only limited regard for environmental consequences.
Alternatively, intelligent design would lead the U.S. to place greater value on sustainability at national and global levels, adopting reforms that begin to push its economy onto a new trajectory.
Finally, shocks could drive an emergency response, as renewed breakdown in global financial systems, serious conflict or state failure, or a series of extreme weather events dominate the government’s agenda.

All trajectories are plausible, but the intelligent design scenario is most desirable. This paper makes recommendations that, although challenging to implement, are politically feasible and if implemented would place the U.S. growth model on a new sustainable trajectory at an acceptable cost.

To reach this goal this paper focuses on four areas for action:

Increasing employment, which is the most urgent priority to accelerate recovery from the Great Recession, while addressing underlying structural issues that have led to a decade of poor economic outcomes for most citizens.
Investing in the future, as the key marker of whether the United States is prepared to make farsighted decisions to improve education, build new infrastructure and increase innovation.
Maximizing an increased energy endowment in a way that grows the economy, while reinforcing the trend towards reducing resource demand and reducing greenhouse gas emissions.
Fiscal rebalancing, where the United States must insulate economic recovery from the process of fiscal reform while reducing and stabilizing debt over the long term.

Finally, we argue that President Obama can re-energize America’s global leadership if he builds on a platform of domestic actions that enhance the sustainability of America’s society and economy.

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A Trade Policy for President Obama's Second Term

Joshua Meltzer — Fri, 09 Nov 2012 14:18:00 -0500

President Obama's trade policy in his first term included working with Congress to pass free trade agreements with South Korea, Colombia and Panama, continuing negotiations on the Trans-Pacific Partnership and expanding it to include Canada and Mexico. Moreover, Obama set a goal of doubling exports by 2014, established a trade enforcement council and increased WTO dispute settlement to enforce existing international trade laws. He also effectively managed the complex U.S.-China economic relationship, getting China to more effectively protect U.S. intellectual property rights and ending China's so-called indigenous innovation policies. During the next four years the president should build on this progress and develop a comprehensive trade policy that does three things: 1) builds greater cooperation with China 2) pursues comprehensive and high quality free trade agreements; and 3) articulates a vision for moving the WTO Doha Round forward.

The U.S.-China Trade Relationship: The size of U.S.-China trade makes building this bilateral relationship key to achieving Obama's goal of doubling exports and for making progress on broader U.S. goals on an international level. But the size and growing trade deficit - which in 2011 was $295 billion and is on track to be even larger in 2012 - feeds concerns about unfair Chinese business practices and American economic and manufacturing decline, which ultimately makes advancing the economic relationship with China rather difficult.

The challenge for Obama is that the size of trade deficit is unlikely going to change much in the next four years because of China's role in global supply chains as the major assembly point for goods made from components sourced from South East Asia, Europe, the U.S. and Japan. In this light, the U.S.-China trade deficit is the accumulation of declining U.S. trade deficits with countries like Japan, South Korea and Malaysia as businesses in these countries have shifted production to China. This shift to more efficient and cost-effective production conditions has led to significant decreases in the prices of these imported goods to American businesses and consumers.

One way to reduce the bilateral trade deficit would be to address China's undervalued currency. An undervalued renminbi (RMB) has the effect of making Chinese imports cheaper and American exports to China more expensive. Therefore a revaluation would reduce the deficit by increasing U.S. exports to China and reducing imports from China. The dispute about China's undervalued currency has also negatively affected broader U.S. trade goals, such as concluding the WTO Doha Round since the undervalued RMB caused developing country to resist further reductions in tariffs due to concerns about competition from cheap Chinese imports. That said, the net economic impacts of China's undervalued currency for the U.S. are unclear as a lower RMB also leads to cheaper goods for American consumers and businesses. While an appreciating RMB will likely lead businesses to relocate to lower cost countries and thereby reduce the U.S.-China trade deficit, it will not lead to a decrease in the overall U.S. trade deficit.

But reducing these U.S. concerns about the RMB and the trade deficit, other areas for cooperation with China like clean energy should open up. President Obama supports developing green energy in the U.S. and China's 12th Five Year Plan includes ambitious domestic renewable energy goals. These goals could be complimentary with the U.S. specializing in high-end green technologies and services and China manufacturing components like solar photovoltaic cells. A liberalized trading regime in green energy would underpin this outcome, leading to the most efficient allocation of resources and reducing the costs of renewable energy in both countries. But concerns in the U.S. about Chinese subsidies for renewable energy and a U.S. focus on developing green manufacturing capacity has already led to WTO litigation. Both countries should instead use the trading system to support this common goal and build on the recent agreement in APEC to reduce tariffs on a range of environmental goods by expanding the list of environmental goods and addressing other trade barriers affecting green energy goods and services.

Free Trade Agreements: Currently, the Trans-Pacific Partnership is the only significant free trade agreement (FTA) the U.S. is pursuing and completing the negotiations should certainly be a priority for the next Obama administration. The main outstanding issue is whether Japan will join the current negotiations. While Japan's participation would slow down the talks, it would secure Japan's support for the trade and investment rules that the U.S. wants for the Asia-Pacific region and provide economic heft to the TPP. All this would increase the incentive for other countries to join the TPP and create further momentum toward an Asia-Pacific FTA, reinforcing Obama's broader strategic "pivot" towards Asia.

A big potential new FTA is with the EU - the U.S.'s largest bilateral trading partner. Most tariffs between the U.S. and the EU are already low, so improving market access will require addressing so-called behind the border regulatory measures such as on genetically modified organisms, vehicle safety standards and pharmaceutical health and safety laws. Prior experience addressing trade barriers in the Transatlantic Economic Council suggests that making progress on these issues will not be easy. However a U.S.-EU FTA would certainly deliver economic benefits for the U.S. and European Union.

Multilateral Trade: President Obama can be expected to continue to efforts to conclude parts of the WTO Doha Round, focusing on a services agreement, expansion of the international technology agreement and trade facilitation. However, only multilateral trade liberalization will deliver the largest economic benefits for the U.S. and globally, and the U.S. - as the necessary leader and largest beneficiary of the multilateral trading system - should develop a strategy for concluding the WTO Doha Round during the next four years.

Authors

Joshua Meltzer

Publication: Huffington Post

Image Source: © Romeo Ranoco / Reuters

Global Trade

Joshua Meltzer — Fri, 02 Nov 2012 13:59:00 -0400

Editor's Note: This is an excerpt from a chapter titled "Global Trade" from The Encyclopedia of Sustainability, Vol. 10: The Future of Sustainability.

In 2011, total world exports amounted to almost $US18 trillion dollars, representing over a quarter of global GDP and an increase of almost 500 percent since 1991 (author’s calculations). This exponential increase in trade has been at the forefront of globalization, which has created economic growth, raised standards of living, and exposed people to new goods, services, ideas, and lifestyles. At the same time, global trade has presented a range of challenges, especially through its impact on the environment. How countries reap the benefits from trade while managing it in ways that are environmentally sustainable is a key goal of sustainable development. The World Trade Organization (WTO) is the primary multilateral agency responsible for regulating world trade. Based in Geneva, Switzerland, and comprising 155 members, the WTO plays an important role in balancing the development and growth opportunities from trade while allowing members the scope needed to regulate access to their markets in order to achieve environmental goals.

International Trade and Sustainable Development

The linkages between international trade and the environment are key elements of the broader question about how international trade contributes to sustainable development. The rising global environmental consciousness can be traced back at least as far as the 1972 United Nations (UN) Conference on the Human Environment, which agreed to a set of principles that made protection of the environment central to human development and recognized the need for international cooperation to address transboundary and global environmental challenges. Recognition of the need for economic growth to address development issues while also protecting the environment was the beginning of the economic and environmental strands of what is referred to as sustainable development. Yet the implication of international trade on the environment was little explored at this time and was not mentioned in the report on the UN Conference on the Human Environment.

Authors

Joshua Meltzer

Publication: Berkshire Publishing

Image Source: © Romeo Ranoco / Reuters

Campaign 2012: The Global Economy and China

Tue, 09 Oct 2012 13:00:00 -0400

Event Information

October 9, 2012
1:00 PM - 2:30 PM EDT

Falk Auditorium
Brookings Institution
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United States-China relations have been at the forefront of domestic and foreign policy discussions throughout this campaign season. Since joining the World Trade Organization in 2001, China’s economy has been established as a major player in the global economy and continues to grow. The country’s rise has significant implications for U.S. trade and defense policies, particularly on contentious issues like the global financial crisis, nuclear proliferation, military operations in nearby waters and air space and intellectual property rights. As both nations face daunting political and economic challenges, how can the next president improve relations with China while ensuring America’s success in the global economy?

On October 9, the Campaign 2012 project at Brookings held a discussion on the global economy and China, the last in a series of forums that have identified and addressed the 12 most critical issues facing the next president. Campaign 2012 Project Director Benjamin Wittes moderated a panel discussion with Brookings experts Kenneth Lieberthal, Jonathan Pollack, Richard Bush, and Joshua Meltzer, who presented recommendations for the next president.

Participants may follow the conversation on Twitter using the hashtag #BIChina.

Download papers from the event:

Establishing Credibility and Trust, by Kenneth G. Lieberthal and Jonathan Pollack
Continue Progress on an Key Trade Relationship, by Joshua Meltzer
Thoughts on China and American Elections, by Richard Bush

Campaign 2012: Twelve Independent Ideas for Improving American Public Policy is an indispensable guide to the key questions facing White House hopefuls in 2012.

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Campaign 2012: The Global Economy and China

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Uncorrected Transcript (.pdf)

Event Materials

Prohibiting Compliance with the EU Emissions Trading Scheme: Why This is Not a Good Idea

Joshua Meltzer — Thu, 13 Sep 2012 11:25:00 -0400

On January 1 this year, the European Union included aviation within its cap-and-trade system (known as ETS), which prices carbon and caps the amount of CO2 that can be emitted annually. According to the legislation that extended the EU ETS to include CO2 emissions from aviation, all planes entering and departing EU airspace must now account for their CO2 emissions over EU airspace, the high seas and third country territories. Applying the EU ETS to both EU and non-EU airlines, however, has led to significant push-back from the U.S. Both U.S. Secretary of State Clinton and U.S. Secretary of Transportation LaHood have stated that they “strongly object on legal and policy grounds” to the application of the EU ETS to U.S. airlines and urged the EU to halt, suspend or delay its application. [1]

Congress has also been actively involved, threatening to make it illegal for U.S. airlines to comply with the EU ETS. Prohibiting compliance with another country’s laws is something the U.S. rarely does – the two most significant cases related to laws prohibiting compliance with the South African apartheid regime and the 1973 Arab boycott of Israel. In both these examples, compliance by U.S. persons would have breached domestic U.S. anti-discrimination laws. The U.S. position could therefore be understood as an effort to prevent U.S. companies complying with the laws of regimes that were, from a domestic view point, not only illegal but also particularly morally repellant.

The EU ETS does not fall into this category. In fact, Congress attempted to adopt a cap-and-trade system for CO2 emissions when the House passed a cap-and-trade bill in 2009. Moreover, California has introduced a cap and trade system and there is a cap and trade system already operating for CO2 emissions from electric utilities amongst northeastern states. Additionally, the congressional scheme would have also applied the domestic carbon tax to imports from countries that were not making a comparable effort in reducing their CO2 emissions.

Another important issue is the cost of prohibiting U.S. airlines from complying with the EU ETS. In the most recent U.S. legislative effort (the European Union Emissions Trading System Prohibition Act 2011, or Prohibition Act), the secretary of transportation is required to prohibit U.S. airlines from complying with the EU ETS when the secretary determines the prohibition to be in the public interest. The secretary is also required to take “other actions” that are in the public interest to hold airline operators “harmless from the emissions trading scheme”. Read together, these provisions indicate that the U.S. government, having decided that it is the public interest to prohibit airlines from complying with the ETS, should also find that it is in the public interest to reimburse airlines for penalties from their non-compliance.

So what are the costs of the ETS? Analysis by Merrill Lynch concludes that the costs to airlines of purchasing the carbon permits needed to comply with the ETS will add approximately $5.00 to ticket prices.[2] However, failure to comply leads to a €100 penalty per ton of CO2, plus the ongoing obligation for airlines to submit permits that cover their CO2 emissions. Whatever the final costs for complying with ETS are for airlines, the costs of non-compliance includes an additional €100 per ton of CO2 , and should the airlines fail to comply the EU can seize airline’s assets.

Secondly, there is the question of who will bear the costs of the ETS. In the event that the airlines comply, the costs can be expected to be reflected in ticket prices. Conversely, in the event that airlines are prohibited from complying with the ETS, the costs will not only be higher, but they would be borne by all taxpayers. In this sense, the Prohibition Act is also regressive as while airlines passengers tend to be more affluent, all taxpayers will be responsible for the costs of airlines non-compliance.

Prohibiting U.S. airlines from complying with the ETS might also have geopolitical implications. For instance, it could set a precedent for other countries to imitate when faced with an environmental scheme that places additional burdens on foreign businesses. And in this regard, India and China have already indicated they will prevent their airlines from complying with the EU ETS.

For these reasons, prohibiting U.S. airlines form complying with the EU ETS is bad policy. Instead of picking fights with the EU, the time and energy of Congress would be much better spent supporting U.S. efforts to negotiate an outcome with the EU on aviation emissions and in providing the tools necessary to reduce U.S. CO2 emissions from aviation such as through the development of biofuels, satellite navigation at airports, and R&D into new more fuel efficient aircraft.

[1] Letter dated 16 December 2011 from US Secretary of State Hilary Clinton and US Secretary of Transportation Raymond La Hood.

[2] Merrill Lynch, “Aviation in the EU ETS: An Incentive for Efficiency”, September 2008

Authors

Joshua Meltzer

Regulating CO2 Emissions from Aviation in the European Union

Joshua Meltzer — Fri, 31 Aug 2012 00:00:00 -0400

INTRODUCTION

The EU recently extended the scope of its cap and trade system to cover all airlines’ CO2 emissions. This has led to significant international condemnation, diplomatic interventions, and threats of a trade war. U.S. airlines have also challenged the legality of the Aviation Directive before competent courts in the EU. This Insight provides an overview of the Aviation Directive, explains why the EU extended it to non-EU airlines—the most controversial element—and outlines how the Aviation Directive could be challenged under the rules of the World Trade Organization (“WTO”).

Why Target Aviation?

According to the Intergovernmental Panel on Climate Change (“IPCC”), aviation represents approximately 2.5% of global greenhouse gas emissions and 13% of all CO2 emissions from the transportation sector. In addition, CO2 emissions from aviation are growing at approximately 3 to 4% annually. Airlines also emit NOx, which can encourage the formation of ozone, an important contributor to global warming. Moreover, aircraft produce contrails, which can diffuse into cirrus-like clouds that contribute to global warming. The combination of these effects could be two to four times the impact of CO2 emissions alone.

Read the full paper » (PDF)

Authors

Joshua Meltzer

Publication: American Society of International Law

Image Source: Eduardo Munoz / Reuters

The WTO Ruling on U.S. Country of Origin Labeling (“COOL”)

Joshua Meltzer — Wed, 18 Jul 2012 14:58:00 -0400

Introduction

The WTO dispute on country of origin labeling (“COOL”) requirements for imported livestock is the latest in a series of cases dealing with the Agreement on Technical Barriers to Trade (“TBT Agreement”). The Appellate Body Report was circulated on June 29, 2012. This case pitted U.S. cattlemen against large packers and food processors and raised questions about the significance of country of origin labeling when it comes to integrated and international supply chains. This Insight provides an overview of the key issues addressed by the Panel and the Appellate Body (“AB”).

Read the full piece at asil.org »

Authors

Joshua Meltzer

Publication: American Society of International Law

Image Source: Denis Balibouse / Reuters

Carbon Pricing in Australia: Lessons for the United States

Joshua Meltzer — Mon, 02 Jul 2012 10:42:00 -0400

Australia’s Climate Change Policy – Laggard to Leader

Over the last five years Australia has gone from dragging its feet on climate change to being a leader in climate change policy. Prior to 2007 – when Australia signed the Kyoto Protocol – it was the only other country along with the U.S., Afghanistan and Sudan not to have done so. Australia’s transformation into a climate leader was capped off on July, 1 2012 with the implementation of an A$23.00 carbon tax, which will rise 2.5 percent per year and will transition to a cap and trade system on July, 1 2015.

Carbon pricing is the main policy adopted by the Australian government to reach its national target of reducing its greenhouse gas (GHG) emissions to 5 percent below 2000 levels. Reaching this target by 2020 will require a total reduction in GHG emissions of approximately 13 percent given Australia’s Kyoto Protocol target of 108 percent over 1990 levels. [1] Similar to the EU, Australia has also committed to more ambitious but conditional mitigation targets for 2020 based on two different scenarios. In the event of an ambitious global agreement to stabilize atmospheric concentration of GHG emissions at 450 part per million, Australia will aim for a reduction of 25 percent below 1990 levels; if there is a global agreement that will not stabilize emissions at 450ppm but does involve “major developing countries committing to substantially restraining their emissions and advanced economies taking on commitments comparable to Australia’s,” it will aim for 15 percent below 2000 levels. Australia has also set itself a goal of reducing its GHG emissions by 80 percent below 2000 levels by 2050.

In comparison, the U.S. has adopted a target of reducing its GHG emissions by around 17 percent below 2005 levels by 2020 and by 80 percent below 2005 levels by 2050. But unlike Australia, the U.S. is not using a carbon price to achieve its GHG mitigation target and instead is relying on a range of regulatory measures, such as Environment Protection Agency standards for CO2 emissions, tighter vehicle fuel efficiency standards and promoting energy efficiency.

Both Australia and U.S. targets are enshrined in the so-called Cancun Agreements that came out of the Cancun U.N. climate change negotiations in December 2010.

Why What Australia Does Matters for the U.S.

Australia’s climate change leadership and particularly its carbon pricing should be of deep interest for the U.S., not only for its contribution to reducing global GHG emissions but also because Australia and the U.S. share enough similarities when it comes to addressing climate change that Australia should, in many respects, be seen as an important laboratory and learning opportunity for those in the U.S. thinking about climate change and energy policy.

Given that most economic activity produces GHGs, from driving cars to heating houses to running businesses, reducing GHG emissions will require significant economic and social transformations. How countries respond to these challenges will be influenced by factors such as geography, culture and lifestyle. In this regard, Australia and the US share a number of similar characteristics that makes reducing GHG emissions particularly challenging. For one, Australia and the U.S. are both large continents – Australia is almost the same size as the U.S. lower 48 states. The U.S. population of 315 million is almost 15 times larger than Australia’s population of 22 million, but Australia and the U.S. have the first and second highest GHG emissions per capita. Moreover, the space and size of Australia and the U.S. have underpinned the need for long roads, large cars, and allowed for living in houses in extended suburbs. Australia and the U.S. have been built for this lifestyle – the infrastructure, systems of government and businesses are geared to servicing, providing for and maintaining this scheme. As a result, Australia and the U.S. will face similar costs in reaching the ambitious GHG mitigation targets set for 2050 not only in economic terms, but also in terms of lifestyle and ultimately national outlook as increased urban density and use of public transport become necessary.

These similarities also underpin the two country’s similar GHG emissions profiles. As can be seen below in Table 1, emissions from the electricity, industrial and commercial and residential sectors comprise very similar percentages of each countries total GHG emissions. And while Australia produces significantly more GHG emissions from agriculture than the U.S., this sector has been exempted from the carbon tax.

One of the key challenges for Australia and the U.S. in reducing their GHG emissions will come from the electricity sector, where alternatives to coal – the largest source of GHG emissions in both countries – are not yet economically viable (see Table 2). Moreover, coal fired power stations are sunk capital costs and will remain online for decades to come, which means coal will only slowly decline as a share of each country’s electricity generation. In addition, carbon capture and storage – the most promising solution to CO2 emissions from power generation – remains untested.

Australia is also significantly more dependent on coal as a source of electricity than the U.S. – which represents 75 percent of its electricity generation compared to 42 percent in the U.S. (see Table 2). Australia, like the U.S., also has large natural gas resources, however, it has no nuclear power – a source of base-load low carbon energy. Although Australia has approximately 23 percent of the world’s uranium reserves, there is currently no political support for building nuclear power stations. These factors highlight that reducing CO2 emissions from the electricity sector will be significantly more challenging for Australia than for the U.S.

Why Now?

Given Australia’s challenges to reducing its GHG emissions, it is worth considering why Australia – a country that produces a mere 1.5 percent of global GHG emissions – has decided to forge ahead while there is limited climate change progress in the U.S. and in the U.N. climate change negotiations. As will be demonstrated, the key factors that have motivated Australia’s climate change policy are also present for the U.S. and could be expected to drive more ambitious U.S. climate change action over time.

Economic factors have been a key driver of Australia’s decision to introduce a price on carbon. On the one hand, those opposed to climate change action have emphasized its costs. However, it is clear that the costs of reducing GHG emissions to meet the type of targets outlined above become costlier over time, meaning it is cheaper to start addressing climate change immediately. Economic modeling by the Australian Treasury has concluded that delaying global action by three years will increase the first year’s mitigation costs by 30 percent. Moreover, the cost of a carbon price is expected to slow Australia’s average income growth by only around 0.1 percent per year. [2]

Australia’s decision to price carbon was also influenced by its growing role as a major exporter of primary energy, with coal and liquefied natural gas (LNG) being the largest and second largest export earners. Pricing carbon is a strategy to avoid these exports becoming subject to the type of border tax adjustments that were proposed in the 2009 U.S. Waxman-Markey Climate Change bill, which would have extended the domestic carbon price to carbon intensive imports. The EU’s recent inclusion of all airlines departing and leaving EU airspace in its cap and trade system– which includes all EU airlines and those non-EU airlines coming from countries without a comparable carbon price on airlines CO2 emissions – is another example of how a failure to price carbon domestically can lead to exports being subject to a carbon price in foreign jurisdictions. Similarly, as the U.S. becomes an LNG exporter – and possibly expands its exports of coal – the relationship between domestic climate change action and U.S. energy exports should feature more prominently in its climate change debate. [3]

The Australian government is also committed to the productivity and competitiveness improvements that flow from pricing carbon. In economic terms, pricing carbon is an efficient market outcome that internalizes the social costs of GHG emissions. This should drive structural changes in the Australian economy as resources move away from carbon intensive industries towards sectors that will become increasingly competitive as a result of a carbon price, such as gas production, renewable energy and associated services industries. Reducing the carbon intensity of the Australian economy is also consistent with the global push towards green growth in international settings such as the G-20 and Asia-Pacific Economic Cooperation. President Obama’s support for climate change action is also focused on restructuring the U.S. economy in ways that will reduce U.S. GHG emissions and create an industrial base that can take advantage of the economic opportunities created by the expected growth in demand for green goods.[4] This has led the U.S. Government to invest in renewable energy, support the U.S. battery industry and expand clean energy research and development.

Climate change also has national security implications for Australia, particularly in the Asia-Pacific region. Rising sea levels from ice-melt caused by climate change threaten to completely inundate some pacific islands and Australia would be expected to bear a fair share of these costs, including accepting climate change refugees. Even in the absence of such catastrophic outcomes, rising sea levels combined with a warmer and more volatile climate will pose new risks for already fragile states in the Pacific such as Papua New Guinea, Fiji and even Indonesia. While Australia’s climate change efforts alone will be too small to stave off such outcomes, leadership on climate change, such as demonstrating that a GHG intensive economy can reduce emissions at low cost, can have important effects for more ambitious climate change action in other countries, including the U.S. The national security implications of climate change can also be expected to increasingly drive the climate change debate in the U.S. Recently, US Defense Secretary Leon Panetta has declared climate change to have a dramatic effect on U.S. national security, as rising sea levels, droughts and melting of the polar ice caps increase demands for humanitarian assistance and disaster relief. [5]

The Politics of Pricing Carbon

The politics of climate change are particularly difficult because of its temporal nature - the costs are immediate and identifiable - and the benefits are longer term and more difficult to quantify. Such a paradigm fits poorly with the focus of politicians on two to six year election cycles. Australia’s political experiences in negotiating the politics of climate change also provide some lessons for the U.S.

Pricing carbon is a major economic reform. But the fact that governments on the political left are advocating for market mechanisms such as pricing carbon to address climate change and conservative parties are opposing these measures speaks to the challenges of building political consensus on this issue. In Australia, the left leading Labor government drew on its history of leadership in economic reforms to emphasize pricing carbon as an important economic issue. This allowed the government to shift the debate towards the economic advantages of pricing carbon, including the development of new industries such as renewable energy. However, and as outlined above, there are immediate costs to pricing carbon, which means that governments need to also ensure that there is broad understanding of why people will, over time, be better off with a carbon price.

This leads to the key lesson from Australia’s political battles over carbon pricing: a strategy that seeks to reach agreement amongst key stakeholders only – what in Washington would be considered an inside-the-beltway strategy – will likely fail. This is what characterized the Australian Rudd government’s initial failed attempts to pass a cap and trade bill, as well as the failed efforts by the U.S. democrats to get enough votes in the Senate to pass a cap and trade bill. It is the challenges of pricing carbon outlined above – the temporal mismatch between costs and benefits and the need for climate policy to apply for the long term – that requires buy-in from the broader community into why pricing carbon is important.

Secondly, the economic dimension of climate change and carbon pricing should be front and center of any messaging. This means that the U.S. Treasury and key economic players in the White House would need to lead any renewed push for climate change legislation. A narrative that emphasizes pricing carbon as a market driven response and highlights the economic opportunities will also be important.

How Australia fares in reducing its GHG emissions and at what cost will only become clear over time. But certainly the challenges for Australia will be no less than what the U.S. will face should it decide to price carbon and aim for similarly ambitious GHG mitigation targets. These reasons alone recommend close U.S. attention to Australia’s experience.

[1] 1990 is the baseline year used in the Kyoto Protocol. Australia’s post-Kyoto targets use 2000 as the baseline. Australia’s GHG emissions grew by 1 percent from 1990-2000.

[2] Australian Government Treasury – Strong Growth, Low Pollution: Modeling a Carbon Price, July 2011.

[3] Charles Ebinger, Kevin Massy, Govinda Avasarala, “Liquid Markets: Assessing the Case for U.S. Exports of Liquefied Natural Gas”, Brookings Policy Brief 12-01, May 2012.

[4] President Obama’s State-of-the-Union Speech 2012.

[5] Speech at the Environmental Defense Fund, May 2, 2012 - www.defense.gov/news/newsarticle.aspx?id=116192

Authors

Joshua Meltzer

The G-20 Los Cabos Summit 2012: Bolstering the World Economy Amid Growing Fears of Recession

Fri, 08 Jun 2012 14:48:00 -0400

Leaders will head to the G-20 Summit in Los Cabos, Mexico, among renewed serious concern about the world economy. The turmoil that started with the U.S. subprime mortgage crisis has resulted in now almost five years of ongoing instability. The emerging market economies fared much better than the advanced economies and pulled out of the crisis already in 2009, but the slowdown we are now facing in 2012 is again global, demonstrating the interdependence in the world economy. The emerging market economies have stronger underlying trend growth rates, but they remain vulnerable to a downturn in the advanced economies. The center of concern is now squarely on Europe, with a recession threatening most European countries, even those that had reasonably good performances so far. After an encouraging start in 2012, the U.S. economy, while not close to a recession, is also showing signs of a slowdown rather than the hoped for steady acceleration of growth. And the slowdown is spreading across the globe.

At a time like this it would be desirable and necessary that the G-20 show real initiative and cohesion. The essays in this collection look at the challenge from various angles. There is concern that the G-20 is losing its sense of purpose, that cohesion is decreasing rather than increasing, and that policy initiatives are reactive to events rather than proactive. Let us hope that at this moment of great difficulty, the G-20 will succeed in giving the world economy a new sense of direction and confidence. It is much needed.

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Image Source: Andrea Comas / Reuters