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Elliott was with the Peterson Institute for many years before joining the Center full-time. Her books published there include Can International Labor Standards Improve under Globalization? (with Richard B. Freeman, 2003), Corruption and the Global Economy (1997), Reciprocity and Retaliation in US Trade Policy (with Thomas O. Bayard, 1994), Measuring the Costs of Protection in the United States (with Gary Hufbauer, 1994), and Economic Sanctions Reconsidered (with Gary Hufbauer and Jeffrey Schott, 3rd. ed., 2007). She served on a National Research Council committee on Monitoring International Labor Standards and on the USDA Consultative Group on the Elimination of Child Labor in US Agricultural Imports, and is currently a member of the National Advisory Committee for Labor Provisions in US Free Trade Agreements. Elliott received a Master of Arts degree, with distinction, in security studies and international economics from the Johns Hopkins University, School of Advanced International Studies (1984) and a Bachelor of Arts degree, with honors in political science, from Austin College (1982). In 2004, Austin College named her a Distinguished Alumna.
The United States is not using trade as effectively as it might to promote development. The executive and legislative branches of the US government have long recognized that trade can be an important tool to help poorer countries generate resources, create jobs, and reduce poverty. They also recognize that growth in developing countries contributes to global prosperity and growing markets for US exporters as well. Despite that, the few significant US trade barriers that remain often target agricultural and labor-intensive products in which developing countries have a comparative advantage.
In this series of briefs, Center for Global Development experts present concrete, practical policy proposals that will promote growth and reduce poverty abroad. Each can make a difference at virtually no incremental cost to US taxpayers. Together, they can help secure America’s preeminence as a development and security power and partner.
Last week, the Environmental Protection Agency (EPA) finally released proposed targets for blending biofuels with gasoline and diesel for 2014 (18 months late) and for the current year (6 months late). Despite delays and extensive consultation with stakeholders, farmers, the biofuel industry, and oil companies are all criticizing the proposed rule, and litigation is almost certain. I don’t have a dog in that fight, but I am concerned about the possibility of policy-induced biofuel demand contributing to more food price spikes or increased deforestation and climate change. Bottom line, the US policy is not working and Congress needs to reform or repeal it.
The problem, as I describe in a new CGD brief, lies in the growing gaps between the biofuel blending targets and what the markets are able to supply, in the case of cellulosic biofuels, or absorb, in the case of corn-based ethanol. The statutory mandate for using cellulosic biofuels in 2014 was 1.75 billion gallons, but only around 30 million gallons were actually produced. Meanwhile, the mandate for conventional, corn-based ethanol in 2014 was over 14 billion gallons, but just 13 billion gallons were blended with gasoline. When Congress expanded the mandate in 2007, gasoline consumption was just 140 billion gallons and expected to rise to over 150 gallons by 2015. Instead, as a result of higher gasoline prices (until recently) and increased fuel efficiency, consumption has fallen to just over 130 billion gallons. And since ethanol blends higher than 10 percent can cause corrosion problems for automobile engines, as well as boats, lawn mowers, and other machinery, the US market for ethanol is saturated.
The EPA responded by drastically lowering the cellulosic biofuel mandate, as it has had to do repeatedly since the policy started because of the lack of supply. The agency also, for the first time, lowered the target for conventional ethanol, while setting the 2015 and 2016 targets at levels that will push up against the 10 percent “blend wall.” Farmers don't like the first part of the compromise. Oil companies, which will either need to find an expanded market for ethanol or pay a fine for not meeting the mandate, are unhappy about the latter part.
There’s clearly a need for policy change. In the CGD brief, I recommend four steps Congress should take to make the biofuels mandate more flexible and less costly:
Eliminate the current volume-based targets and set an overall 10 percent blend target for renewable fuels. The biofuel industry has already been the beneficiary of billions of dollars in government subsidies over many years; let the market determine the level of demand for higher ethanol blends.
Refuse to renew the $1 per gallon biodiesel tax credit and save American citizens $1 billion to $2 billion per year in subsidies that often put pressure on tropical forests.
Use a more flexible mechanism to encourage cellulosic biofuels within the 10 percent target.
Give higher priority to food security concerns by making it easier for the Environmental Protection Agency to waive the mandate when food prices spike.
In the wake of the food price spikes in 2007-08, few American policymakers saw increased food insecurity among the poor in developing countries as a reason to rethink the biofuels mandate. It turned out that high food prices weren’t enough to spark real reform, but an old-fashioned slugfest among some of the most powerful lobbies in DC — oil companies and the livestock industry against corn and soy growers and the biofuel industry — might.
The Senate approved the much-debated, and delayed, trade promotion authority (TPA) bill just in time to head off for the Memorial Day recess. The fate of the bill in the even more fractious House of Representatives remains uncertain, as does the US role as leader of an open, rules-based trade system.
TPA allows Congress to articulate objectives and consultation procedures for the negotiation of US trade agreements. And it assures trading partners that Congress will vote on the final deal in a set period of time and without amendments. President Obama wants TPA now to help him conclude the negotiations to create a Trans-Pacific Partnership (TPP) trade deal that would lower barriers and create new trade rules for the 12 Pacific Rim countries negotiating it. But many Democrats in Congress oppose TPP, and TPA to facilitate it, because of concerns about the impact on jobs, wages, and inequality.
In CGD’s 2008 book, The White House and the World, I devoted substantial space to discussing the need for stronger domestic policies to bolster the US commitment to a liberal trade policy. I argued that policymakers need to strengthen the safety net for those left behind by globalization and provide all Americans with “the tools needed to grasp globalization’s opportunities,” such as access to quality education, and pension and healthcare benefits that are not tied to one’s job.
The Council on Foreign Relations’s Edward Alden recently offered a similar argument for why this year’s TPA debate is so charged:
The argument in favor of freer trade, and it’s a powerful one, is that the aggregate benefits outweigh the costs. But success in a more competitive global economy requires a commitment to help the losers as well – through job retraining, income assistance, targeted subsidies and other measures that soften the blow.
But as Alden also pointed out — the title of his piece is “Stuck in a Time Warp on Trade” — this debate is not a new one. Almost two decades ago, President Clinton was negotiating the Free Trade of the Americas when he tried, and failed, to get fast track legislation from a Republican-majority Congress. E.J. Dionne’s column from November 14, 1997, paraphrased Barney Frank (former Democratic congressman from Massachusetts) on why so few Democrats were willing to support the president:
If business and the administration want more open trade … the socially responsible (and politically necessary) trade-off is to offer real help to those who, with reason, fear it most — families in vulnerable economic situations.
Frank explained bluntly: "We're in a bargaining situation…. We're willing to hold globalization hostage to equity."
President Clinton never did get fast track legislation and the Free Trade of the Americas agreement never came to fruition. In 2002, trade promotion authority sought by President George W. Bush squeaked through a Republican-led Congress by just 3 votes and with only 27 Democrats voting in favor.
Today, inequality is higher, and the safety net for American workers and their families is more fragile than ever. Failure to pass TPA would be a blow to America’s global leadership, and therefore to developing countries that depend on an open trade system. Sadly, that could be another result of ignoring trade’s losers for so long.
Even as Congress was mandating large increases in the consumption of biofuels a decade ago, the world was changing. In the early 2000s, replacing fossil
fuels with biofuels made from corn, sugar, or oilseeds seemed like a good idea. Increased crop demand would prop up prices for farmers, and replacing
petroleum with renewable energy would reduce greenhouse gas (GHG) emissions and promote energy independence.
Trade is a key tool to bring food security to an estimated 800 million people around the world that remain chronically
undernourished. Many countries need reliable access to international markets to supplement their inadequate domestic food supplies. Better
policies to make agriculture in developing countries more productive and profitable, including via exports, would also help alleviate food insecurity and
reduce poverty. Stronger international trade rules would help by constraining the beggar-thy-neighbor policies that distort trade, contribute to price
volatility, and discourage investments in developing-country agriculture.
A healthy US agricultural sector is critical to global food security. American farmers help keep food affordable around the world, but they also receive public assistance that too often comes at the expense of American taxpayers and consumers, as well as millions of poor farmers in developing countries. While the farm bill is not the primary vehicle for setting policy on biofuels or antibiotic use, Congress could use the legislation to advance smart policy changes that set the stage for broader reforms.
While the misuse of antimicrobials in human health is a key factor accelerating the emergence of drug resistance, we should not overlook the role of agriculture. This paper makes the case for a global treaty to reduce antimicrobial use in livestock.
Over the course of one week, world leaders convened in Los Cabos, Mexico, for the G20 Summit and in Rio de Janeiro, Brazil, for the United Nations Conference on Sustainable Development. The outcomes of these two high-level meetings have potentially important implications for poor people in the developing world in three key areas: food security and agriculture, energy, and green growth. Please join U.S. representatives to the Los Cabos G20 and Rio+20 summits, and other distinguished speakers for an assessment of these summits and the road ahead.
Having analyzed the debate over globalization and labor standards for some years now, I was not in the least surprised by the recent revelations about dangerous and unfair labor practices at Apple’s supplier factories in China. Like many other brand-name companies, Apple has a code of conduct for its suppliers and it responded to the allegations of abuses by stepping up audits of factories in its supply chain. But does this really do anything to fundamentally change the conditions in the factories?
Multinational companies vary in the effort that they put into monitoring their suppliers and enforcing codes of conduct, but very few of them integrate corporate social responsibility (CSR) into their buying arms. The CSR arm of the company typically tells supplier firms that they need to treat their workers a certain way, while at the same time the purchasing arm tells the them they need to deliver a product next week at the lowest price. A recent New York Times article quoted a former Apple executive as saying, “you can set all the rules you want, but they’re meaningless if you don’t give suppliers enough profit to treat workers well.”
To profit, I would add time. Suppliers demand their workers stay on the job for 12+ hours a day for 6 days a week when necessary to meet a buyers’ delivery deadline, contract terms that tend to be enforced with significantly more vigor than codes of conduct. Supplier factories get away with this because, as amply documented by former Financial Times reporter Alex Harney, CSR audits are often scheduled in advance and suppliers often keep two sets of books. This way of operating isn’t cheaper (at least not if management pays the legal wage) and it isn’t more productive, as tired workers are bound to make more mistakes. The only reason for operating this way is that brand name retailers compete by constantly selling consumers on the hottest new fashion, whether in clothing, footwear, or electronics.
But what else is happening? Workers are getting fed up and are finding other jobs. Even in a country as large and populous as China, growth is leading to shortages of skilled workers in some sectors and alternatives are opening up for workers in other sectors, gradually contributing to improved conditions. Thanks to the attention from global activists and concerned consumers, pressure can also be brought to bear to improve conditions more directly, as we've seen with Apple, Nike, and other firms.
So globalization brings benefits as well as costs, but it is reasonable to ask what it would take to speed up the improvements just a bit. First, consumers have to demand more from the brands they buy than just the latest, new gadget. And if they really mean what they say, brand name firms have to actually change the way they operate and not just send out a handful of auditors every year or so. The New York Times story reported that, in the last quarter, Apple made $13 billion in profits on $46 billion in sales. Maybe a 25 percent profit rate would do?
I was out of town while trade negotiators were in Maui trying to bring the Trans-Pacific Partnership agreement to a close, but apparently I didn’t miss much. Although the twelve Pacific-rim countries involved are purportedly trying to negotiate a 21st Century trade agreement, the negotiations foundered over old-fashioned concerns about protecting favored industries—autos for Mexico, sugar for the United States, dairy for Canada and Japan, among others. The US demand for 12 years of extra protection for biologic drugs was also unacceptable for many other countries, as it should be.
After initial reports that negotiators might try to meet again in August, Inside U.S. Trade (gated) reports that Assistant US Trade Representative Barbara Weisel told a Hill briefing that was unrealistic. Given the procedural rules for approving trade agreements in the United States, along with electoral politics next year, that likely means that it will be up to the next president to close the deal and get Congress to approve it. Deborah Elms of the Asian Trade Centre has a good analysis here.
But if you’re a small country, and particularly a relatively poor one, trade negotiations are trickier. And if you are a poor country outside the negotiations, you have no say at all on how the negotiations will affect your interests.
Vietnam and Market Access
Of the 12 countries negotiating the TPP, Vietnam is the poorest by far. (Peru, the next poorest, has a per capita income three times as high as Vietnam’s $1,890, according to World Bank data.) And in a recent Pew Research poll, 89 percent of Vietnamese surveyed thought a TPP agreement would be good for the country, more than any other country involved in the talks.
But calling these regional deals “free trade agreements” is a misnomer, and Vietnam is likely to get less new market access in key areas, therefore creating fewer jobs, than it hoped. Clothing accounts for almost one-third of total Vietnamese export to the United States, but previous experience tells us that some of the liberalization gained through tariff cuts will be lost to restrictive provisions known as rules of origin.
These rules are among the technical, nitty-gritty details of trade agreements to which few pay attention, but they are critical in determining real-world market access. Here’s how it works.
When negotiating trade agreements, US negotiators insist on a “yarn forward” rule of origin for clothing items. What that means is that all the components, from the yarn to the fabric to the final item, must be produced in one of the parties to the agreement. But many poorer developing countries participate in the final stage of clothing supply chains, assembling the final item from imported components, often from China.
Since that is also true of Vietnam, the yarn forward rule would means its producers would have to buy their fabric and other components from the United States (or maybe Mexico), ship them across the Pacific to their clothing factories, and then ship them back across the Pacific to their American buyers. The higher input and transportation costs would often more than offset any lower costs for Vietnamese exports arising from tariff reductions.
The likely outcome of the TPP talks on clothing is that Vietnamese producers will (eventually) get duty-free access for their clothing exports, but they will be limited by quotas on how much fabric, and what type, they can use from outside the TPP region. That in turn will effectively cap the increase in clothing exports that Vietnam can expect as a result of the TPP.
Intellectual Property and Access to Drugs
US demands for stronger intellectual property protections in trade agreements is another area of concern in many developing countries — as it should be in the United States. Many in Congress and the executive branch have fallen for industry arguments that the strongest possible IP protection should be the goal. That may be true for IP owners, but it is absolutely not true for society as a whole, in this country or any other. Rather, IP rules should strike a balance between offering incentives for innovation, via the temporary monopoly of patents and copyrights, and ensuring the broadest possible diffusion of beneficial new technologies. And the balance that is appropriate for the United States is highly unlikely to be appropriate for a developing country with little or no innovative activity to protect.
At least in this area Vietnam is not alone. Other TPP parties oppose US demands in this area and the outcome will be less far-reaching than US negotiators wanted, and provide more flexibility for developing country parties than they originally envisioned. Nevertheless, it would have been better if the Obama administration had stuck with the deal that President George W. Bush reached with the Democratic majority in Congress in May 2007, as some in Congress are recommending. That deal essentially preserved the flexibilities contained in the WTO agreement allowing countries to adapt the degree of intellectual property protection they provide to their level of development.
Protecting Other Poor Countries from Harm
While Vietnam’s gains in market access for clothing and other exports will probably be less than they want, it is important to ensure that additional access for Vietnam does not come at the expense of even poorer countries in the region. The United States has agreed on multiple occasions at the World Trade Organization (WTO) that it should provide duty-free, quota-free market access for the world’s poorest and most vulnerable countries, as all other rich countries have done. Yet it has failed to follow through for a number of Asia’s least developed countries, including Bangladesh, Cambodia, and Nepal. Finally, doing so as part of a legislative package to implement the TPP agreement would help to mitigate any negative impact on Vietnam’s poorer neighbors.
Strengthening the multilateral trade system is an even more important step for the majority of developing countries that are outside this and other regional deals. Even if Hawaii turns out not to be the endgame for TPP after all, the time and political capital already spent will keep the negotiators from giving up. I can only hope that the TPP negotiators will be as committed to reaching agreement on a WTO work program in Nairobi later this year.
Despite six decades of trade liberalization, trade policies in rich countries still discriminate against the exports of the world’s poorest countries. Much remains to be done to achieve the goal of meaningful market access for the poorest countries, including reformed rules of origin that facilitate rather than inhibit trade.