A Modern Approach to U.S. Trade Policy

From the New York Times:

A World Trade Organization panel ruled on Wednesday that China had violated international free trade rules by limiting imports of books and movies, in a decision that buttresses growing complaints from the United States and Europe about Chinese trade policies.

The W.T.O. decision in Geneva is a victory for the United States at a time when a growing number of business executives and politicians perceive China as becoming increasingly nationalistic in its trade policies.

The restrictions also required foreign financial news services to operate through a government-designated distributor.

Ron Kirk, the United States trade representative, praised the panel’s legal finding. “This decision promises to level the playing field for American companies working to distribute high-quality entertainment products in China,” Mr. Kirk said, “so that legitimate American products can get to market and beat out the pirates.”

The W.T.O. ruling can be found here.

President Obama, President Calderon of Mexico, and Prime Minister Harper of Canada met in Guadalajara, Mexico, and, as is the standard procedure, yesterday released a joint statement. The leaders affirmed their commitments to trade, intellectual property, and a solution to climate change:

On IP:

We will cooperate in the protection of intellectual property rights to facilitate the development of innovative economies. We commend the progress achieved on reducing unnecessary regulatory differences and have instructed our respective Ministers to continue this work by building on the previous efforts, developing focused priorities and a specific timeline.

On trade:

North American trade is a vital component of our economic well-being and we pledge to abide by our international responsibilities and avoid protectionist measures. We reiterate our commitment to reinvigorate our trading relationship and to ensure that the benefits of our economic relationship are widely shared and sustainable. We will seek to promote respect for labour rights and protection of the environment with a continuing dialogue to address the functioning of the Labor and Environmental side agreements. This dialogue must result in mutually agreeable and cooperative activities with the aim to enhance the well-being and prosperity of our citizens and the economic recovery of our countries.

On Climate Change:

We recognize climate change as one of the most daunting and pressing challenges of our time and a solution requires ambitious and coordinated efforts by all nations. Building on our respective national efforts, we will show leadership by working swiftly and responsibly to combat climate change as a region and to achieve a successful outcome at the 15th Conference of the Parties of the UN Framework Convention on Climate Change. We also recognize that the competitiveness of our region and our sustainable growth requires a greater reliance on clean energy technologies and secure and reliable energy supplies across North America. Today, in agreeing to the "North American Leaders’ Declaration on Climate Change and Clean Energy", we reaffirm our political commitment to work collaboratively to combat climate change.

The aforementioned agreement on climate can be found here. For more on trade policy, take a look at yesterday's GAO report on recent Free Trade Agreements.

Michael Pettis, a Peking University professor who I had the good fortune to meet as part of a college program in Beijing, writes in the Financial Times that it's time to get ready for lower Chinese growth. Pettis spells out the change that is likely to occur and hints at ramifications for policymaking in China and beyond:

For 20 years, and especially in the past decade, rapidly rising debt has allowed America’s consumption growth to exceed economic growth, with a concomitant rise in the country’s trade deficit. One consequence of this too-rapid growth in American consumption has been that the non-US global economy was able to grow faster than non-US global consumption. This was especially true for Asia, the main beneficiary of the US consumption boom, and for China in particular.

While Chinese consumption was growing at an impressive 9 per cent a year over the past few years, Chinese gross domestic product growth substantially outpaced it, clocking in at 10 per cent to 13 per cent annually. China was able to do this in large part because as it poured resources and cheap financing into manufacturing, and in so doing produced many more goods than Chinese households and businesses were able to consume, the balance was exported abroad, where much of it was absorbed by US consumers.

But everything has changed. Whether America likes it or not, US debt levels will decline over the next several years. As a result American consumption will grow substantially slower than the US economy, and so the trade deficit will decline. For the rest of the world, even ignoring the possibility of a decline in global investment, a contraction in the US trade deficit will bring with it a period in which economic growth will be less than consumption growth.
...

Over the next five years or more Chinese economic growth will necessarily be lower than growth in Chinese consumption. The massive but unsustainable investment in infrastructure and new production facilities that characterises the Chinese fiscal stimulus package will not be able to change this fact. From its dizzying heights during the past two decades, the world needs to prepare itself for a decade during which, if all goes well, China grows at a still respectable but much lower rate of 5-7 per cent. If the current fiscal stimulus package retards China’s adjustment process, as many analysts argue that it does, growth rates may be much lower.

The Council of Economic Advisors, the National Economic Council, and many others have told us that the American economic recovery will export driven. It seems that, for the sake of the economic future of both the U.S. and China, policymakers need to thing about getting as many of China's 1.3 billion people into the (low-carbon, sustainable) consumption game as possible. For more on China and the U.S.-China Strategic and Economic Dialogue, take a look at pieces from Michael Moynihan and Robert Shapiro this week.

Oh, and you should certainly buy the newly released, paperback version of Shapiro's Futurecast, which focuses a great deal on China.

The fault lines in this week's "strategic dialogue" between American and Chinese leaders remained largely unseen, like a low-grade infection that can flare up without warning. Those fault lines matter mightily, however, because the United States and China are the critical players in the globalization process shaping every economy in the world.And despite America's insecurities about China's rising power, the fact is, we retain most of the advantages in a complicated relationship best described by the Financial Times this week as "adversarial symbiosis."

The convergent interests of the United States and China are obvious and a cause for satisfaction at this week's talks. Most important, each is an enormous purchaser of the other's goods, so that domestic demand in one is a source of employment in the other. Nevertheless, the trade relationship will continue to have a sharp political edge so long as China sits on the other side of America's largest bilateral trade deficit. Yet, it really shouldn't be. We import more from China than from anywhere else, because China is both the world's largest producer of many cheap goods that Americans hardly make at all anymore - tee shirts and toys, for example - and a favored place for U.S. multinationals to assemble more complex products for the U.S. and other markets. In fact, nearly half of the high-tech products imported from China - computers, televisions, cell phones, and so on - are goods that U.S. producers merely finish or assemble there, sometimes using advanced parts made in America.And so long as the American economy is three to four times the size of China's, and much more weighted to consumption, no one should be surprised at our importing four to five times as much from China as China imports from us.

The economic truth is that America runs huge trade deficits with the world, because for years we have insisted on consuming much more than we produce, and imports are the only way to make up the difference. The flip side of this high consumption has been our low savings - at least until the current recession decimated so many people's savings and wealth - creating another fault line in the U.S.-Sino relationship. That low savings forces us to borrow abroad to finance some of our consumption, along with our budget deficits and business investment; and China with the largest surplus savings in the world has become our largest creditor. No one thinks of their creditors as their buddies - or the other way around - producing an unfamiliar and unpleasant dependency on an autocratic regime we don't trust. We cannot ignore that if China were to decide to abruptly reduce its lending to us, we would quickly find ourselves in deep economic trouble. But China needs us just as much economically, and not just to keep on buying Chinese goods.Just as important, China has to rely on the U.S. following economic and currency policies that will preserve the value of all the American assets - Treasury securities, stocks, real estate, and companies -- that China buys with the dollars we pay her for her goods.

China is dependent on the United States in other critical ways as well.American companies have been and remain a major source of Chinese modernization, through U.S. foreign direct investments (FDI) that transfer many of the world's most advanced technologies, equipment, and ways of doing business from here to there.China depends on these transfers as the ultimate source of much of its growth, and sustaining strong growth is a central factor for the legitimacy for its leaders' authoritarian regime.

China's reliance on the U.S. is also geopolitical. Chinese leaders desperately want and need peace, especially in Asia and the Middle East, so they can continue to direct most of the country's resources to their gargantuan modernization project. These leaders have long recognized - and said so - that American superpower has become the only force in the world capable of projecting the military and economic might required to contain local conflicts and terrorist threats that could threaten regional or global stability. That's why the last U.S.-Sino military confrontation occurred 13 years ago, when President Clinton sent the Independence carrier battle group into the Taiwan Straits and the Nimitz to the South China Sea, and why we rarely hear Chinese criticism anymore about "American imperialism" or "U.S. warmongering."

In no area is China's dependence on American superpower more important to China than the U.S. Navy's guarantee of the world's sea lanes. These are the routes not only for most of China's exports to the rest of the world, but also for the oil shipments from the Middle East, Africa and Latin America that fuel much of China's economy. Yet, energy also is an increasingly important fault line in the U.S.-Sino relationship. For the last decade, China has aggressively pursued long-term supply relationships with state oil companies across much of the world, including joint ventures, extended leases, and other arrangements. In some cases, China develops another country's oil fields in exchange for sole or heavily-favored access to whatever is found. (In Iran's case, China also sweetened the development deal by building a new Tehran subway system.) China's emerging global network of oil-supply relationships could become a point of conflict in the next global oil crisis.Beyond such a crisis, China's rising economic influence in countries that the United States sees as vital to its own geopolitical plans and interests will almost certainly create new fault lines in future U.S.-Sino relations. But it also could foreshadow a time when China will constructively engage in a number of serious global matters, from climate change and terrorism to intellectual property rights and currency adjustments, where the United States and most of the rest of the world would welcome their contribution.

Yesterday, the US and China concluded high level talks between Secretaries Geithner and Clinton and China's State Councilor Dai Bingguo and Vice Premier Wang Qishan on the relationship that President Obama said, at the outset of meetings, will define the 21st century.  The President is right.  How the US and China manage their relationship will determine the balance of growth and contraction, war and peace and freedom and its opposite in the 21st Century.  This then was an important set of meetings raising the deeper question of what should the US do about China.

China's rocket-like growth over the last decade has been extraordinary. However, beyond the sparkling towers, new roads and designer airports lies the fact that China's rise has inextricably altered the economic and diplomatic balance of power of the 20th century.  According to economist Steven Roach, China's growth alone is likely to keep global growth above zero this year.  China, America's largest creditor, holds about $2 trillion in US dollar debt, an amount growing daily. To put that sum in perspective, the entire balance sheet of the US Federal Reserve prior to the financial crisis was less than $1 trillion.  China is quite simply rocking the global economy.

Rapidly emerging powers, by definition, alter the status quo and in prior epochs success or failure in accommodating that change has proven critical to global stability.  At the end of the 19th century, Europe mismanaged the rise in power of Germany which (with Bismarck's dismissal by the erratic Wilhelm II) contributed to World War I.  Then in the early 20th century, the world failed to recognize Japan's emergence as a major power after she defeated Russia in 1905 and began building airplanes capable of crossing the Pacific.  In contrast, through the post war framework of the Bretton Woods institutions including the GATT, the Bank for International Settlements (designed to lessen exchange rate imbalances), the IMF and the World Bank and the UN as well as the European Union and other organizations, the world did a much better job of accommodating the rise of Japan, the NICs and the peripheral European states at the end of the 20th Century.

Now, with China's emergence, however, the world faces a new rebalancing of political and economic power.  And the task, as President Obama suggested, is to manage it in a way that benefits the US, China and the world.  

Economic theory--in contrast to the popular notion of competing nations--teaches that one country's rise should benefit others.  A richer China should consume more US goods.  It should produce more and through spillovers and the creation of knowledge, contribute to the global commons. 

One country, moreover, cannot succeed as China has without others.  China remains dependent on the US as the major market for its exports.  In some ways the US China relationship is deeply symbiotic.  We design goods.  China makes them cheaply.  We buy them, allowing US consumers to get more for less.  However, to the extent that the Chinese consistently sell more to us than we buy--as a result of the Yuan being kept artificially low, America gets more stuff but loses industry, China gets less stuff but gains industry and China ends up holding US dollar denominated debt.  That is the story of our recent relationship in a nutshell.  Chinese economic officials, waking up their huge exposure to the value of the US dollar, have scolded the US about its deficits which could weaken the dollar and have floated the idea of diversifying into other currencies.  The threat to unseat the dollar as the world's reserve currency is a serious shot across our bow.  Besides these economic issues, other matters on the table in Washington this week included nuclear proliferation and climate change.

In many ways, China in its economic strategy has followed the same trajectory of Japan and the other Asian tigers.  She has pursued a policy of export-oriented growth leveraging her low cost base built on the four pillars of a cheap currency, high savings financed through suppressed consumption, an aggressive state role in the economy, and a policy of securing technology transfer for market access.  The strategy is neo-mercantilist which is to say, its practical effect is to generate a trade surplus and accumulate hard currency.  (The original mercantilism practiced in Europe prized trade surpluses to accumulate gold and silver.) 

However, China's story is qualitatively different than that of Japan and the NICs in certain respects.  First, on the political track, beginning as a Communist country, China has, so far, not followed South Korea and the other NICs toward authoritarian democracy.  China remains a totalitarian police state. And second, she is simply larger in scale and scale changes everything.  Long before China reaches western standards of living, her overall GDP will be the largest in the world.  And, unlike the other Asian NICs, she is so large and her labor supply so abundant that her cost of labor can stay low even as her exchange rate appreciates.

On the political side, China does not appear aggressive in foreign policy.  Like the 19th Century resource-hungry European powers, she has been courting natural resources in Africa to fuel production.  However, she has pursued a commercial as opposed to political strategy.  While she is a nuclear power, she appears more preoccupied with economic growth currently than military objectives.

In many ways, the relationship with the US has proven beneficial for both.  An example of positive symbiosis would be the manufacture of the Apple iPhone.  Designed in the US, it is made in China by a company called Foxconn.  Both the US and China benefit from the success of the iPhone.  As an example of the political and human pitfalls of the relationship, however, one can point to the case of a Foxconn employee recently hounded to the point of defenestration by police and company security after he lost an iPhone prototype. Afterward, Apple issued a statement saying it was awaiting results of an investigation into the employee's death.

The US China meeting this week made no news on the issue of climate change or nuclear proliferation, a complex initiative that will take time.  The principle outcome was that the US pledged to work to lower US budget deficits to protect the value of the dollar and China pledged to increase domestic demand.

With respect to the US concession, the very fact that the US had to apologize for our deficits shows how the balance of power in the relationship has changed.  As for the Chinese concession, it is indeed the right policy for the US and China to pursue.  As a result of the massive stimulus package enacted in China of close to $600 billion, some 88% of China's GDP growth this year will occur in investment, much of it in infrastructure.  Most of the rest of the growth will come from exports.  Virtually none will come from consumption and increased living standards for the Chinese people.  This must change.  By allowing its people to consume more and buy more of the world's products, China can help its own people live better and the rest of world produce more.

For its part, the US has to stop living beyond its means which means borrowing less both to fund government and imports.  That will put the US back on track toward more sustainable growth.

Economically, what remains unresolved is the depressed Yuan which continues to drive the Chinese trade surplus and the US deficit.  Clearly the Yuan has to appreciate to the point where US goods are competitive with Chinese ones.  The US should exert its negotiating leverage sooner rather than later on this point because the more US debt China accumulates, the worse the negotiating position of the US will become. 

The one issue not explicitly on the table--apart from sympathy expressed by the US toward Chinese minorities--but that ultimately must underscore our relationship with China is how Chinese success will impact the US commitment to freedom and democracy.

The strategy not only of the US but of the West in general has been to encourage economic growth in China while hoping this will lead to greater freedoms.  This policy of engagement as opposed to containment is  the right strategy for now because it would be absurd for the US to disengage when China is moving in the right direction. However, China has moved far more slowly than many hoped and the US posture toward China has, all too often lacked even a semblance of muscularity. 

The US has been a poor or non existent negotiator on behalf of US companies in standing up for values we hold dear such as freedom of expression.  The government has left companies such as Google and Yahoo to cut individual deals with the Chinese to gain market access.  Our government has also been missing in action when it comes to allowing companies to negotiate away technology in exchange for access to the Chinese market.  The US could be doing far more to strengthen the negotiating position of US-based companies which ultimately would benefit not only us but the Chinese people by widening their access to goods and information.

President Obama is right that the US China relationship will be critical to shaping the 21st century.  And ultimately, this is about accomodating China's rise without sacrificing America's values or our standard of living.  This week's meeting was a useful first step.  Still problematic, however, are the huge trade imbalances resulting from an exchange rate imbalance and China's negotiating position toward US firms that is far tougher than ours in the opposite direction  As we go forward, we should accelerate action to move the two countries toward a truly sustainable, long term partnership.

This past weekend, Secretary of State Hillary Clinton traveling in India received the message, courteous but firm, that India has no intention of capping carbon.  The rationale provided is that India has low per capita emissions.  This is, to be sure, India's best argument.  Her overall emissions are soaring as her population spirals upward--India only two thirds as populous as China a decade ago, will pass China to become the world's most populous country of almost 1.5 billion people in 2030.  India's per capita emissions are rising too from industrialization.  But they remain below those in developed countries.  China, the other key holdout on capping emissions can make a similar per capita argument though it recently passed the US to become the world's largest emitter and its emissions are soaring as it develops.

While the posture of India and China are problematic on their own, they make it harder for other countries to take action.  After all, if the world's two most populous and dynamic economies growing at about 7% (down admittedly from China's 13% growth in 2007), won't opt in, why should the US which contracted last quarter at a 5.5% rate.  With America's standard of living under siege putting America at a further competitive disadvantage--no matter how much carbon we emit per capita--is a tough sell to voters.  And what emerges is a classic collective action stalemate.

This dilemna highlights one of the diferences between greenhouse gases and other environmental issues. Unlike cleaning the air or water where the benefits are realized locally, keeping costs and benefits within one country, reducing emissions benefits the entire planet but costs whomever does it growth.  This is what makes a global solution--such as that promoted by the UN through the Kyoto and now Copenhagen process so attractive.  However, if China and India won't come to the table, what should the US do?

One solution attracting interest of late is the use of trade policy to punish carbon havens. Indeed, at the last minute, the House inserted into the Waxman Markey bill a provision to impose tariffs on countries that do not take action to limit emissions.  In announcing his support for the House bill after its passage, President Obama flagged the provision as troubling insofar as it runs counter to free trade principles.

So is trade policy a valid tool in climate policy?  The New York Times recently argued it is if enacted multilaterally but not if unilaterally.  Paul Krugman, my professor of trade policy at Princeton, has endorsed the idea in theory.  My view is that trade policy is a problematic tool from a practical standpoint that would require significant new infrastructure to work at all.

The problem with using trade policy for an environmental purposes are fourfold.

First, trade actions have an unfortunate tendency to invite retaliation and provoke trade wars even in a multilateral context.  No matter how good your case, other countries can respond in kind.  The result is then a lengthy negotiation or WTO process that ultimately harms both parties.

Second while the temptation to use trade policy to protect clean domestic industries against dirty foreign ones may be great, the track record for mixing the environment with trade is poor.  More often than not, environmental regulations have functioned as non tariff trade barriers.  Domestic companies claim them when threatened economically and verifying them becomes a political football. 

Third, as with food safety regulations, labor regulations and other hard to measure quantities, measurement is labor intensive and becomes an impediment to good regulation.  This would complicate administering any tariff.  It might overwhelm the WTO.

Fourth, increasing the price of an import to protect a domestic industry can have the adverse consequence of increasing the price of inputs for other domestic products.  A classic example is that when the US slapped a tariff on LCDs to protect LCD domestic manufacturers in the 1980s, it drove American laptop manufacturing offshore.  Taxing imports from carbon havens to protect domestic industries could raise manufacturing costs for other companies causing the latter to shift their production to carbon havens. 

Those are the arguments against. On the other hand, giving imports a total pass not only harms domestic producers but is tantamount to a cordial invitation to domestic companies to shift production--and jobs--offshore.  This issue came up, of course, in the NAFTA debate.  Ideally, there ought to be some middle ground.

To view how a tariff might succeed or not, consider the case of electricity intensive aluminum production.  Rio Tinto as one example, produces aluminum using a hydro power in Canada but coal-based power in Australia.  Were the US to slap a tariff on aluminum produced with coal-based power (hard enough to determine in and of itself), aluminum produced with hydro power would be cheaper. One outcome would be for Rio Tinto to phase out coal in favor of hydro in the production of aluminum.  Were that to occur, one might call a US tariff an environmental and economic success.

Another possible outcome, however, would be for Rio Tinto to fulfill US demand with an unchanged mix of product that would cost buyers more due to the tariff.  In that case, US companies might decide to shift the production of products using aluminum overseas.  This would be an environmental and economic failure.  The deciding factors between the two outcomes would probably be Rio Tinto's ease of substituting zero carbon energy source for coal and the domesic companies' difficulty of moving production of products using aluminum oversas.

In short, it is hard to predict in advance just how the tariff would impact the market, but it is clear, the more carbon havens exist, the greater the likelihood that production will seek them out.

Currently a workable regime is not readily at hand.  Were a trade regime to ultimately be invoked, here are some thoughts to guide its development.

First, as with the capping of carbon emissions themselves, putting a price on emissions in imports should be pushed as far up the value chain as possible. This is because as products grow more complex, tracking their carbon footprint becomes more difficult and trade restrictions multiply.  Any trade-based taxes on carbon intensive goods should be directed upstream at basic goods such as steel or aluminum, not at finished products made from those commodities.  While this could drive downstream industries overseas, on balance, I think, it would be far less distortionary to address a few commodities than many products.

Second, some sort of standardized process for measuring carbon footprints needs to be devised.  However, it would be preferable for some private body to administer standards rather than a governmental organization.  A number of creative startups are trying to devise novel ways of tracking carbon.  One such ventures is Greenerone.com which uses crowd sourced information--or information gleaned for free by numerous reporters to track the environmental profile of products.  Others are working on more industry-focused products.  Whatever system is used should involve as little bureaucracy as possible consistent with being stable and standardized. 

Another idea, admittedly bold, would be to devise some sort of average duty--product independent--to penalize countries that choose not to limit their emissions during production.  Such an approach would have to be administered multilaterally, lest it lead to an immediate trade war, thus it is not something the US could do in and of itself.

The very complexity of using a trade hammer shows that it is far preferable to develop a coordinated multilateral regime than to use trade policy.  Free trade has created wealth since the days of the Minoans and since then for the Athenians, Carthaginians, Romans, Indians, Venetians, Portuguese, Spanish, British and yes, Americans to name only a few.  It is, in contrast, a clumsy tool for achieving environmental goals.  Nonetheless, if India and China--and for that matter the US,  refuse to address the problem of a changing climate, the pressure to use trade policy to achieve those goals will only increase.

Simon Johnson, former chief economist at the IMF, says why bother:

The L’Aquila summit seems likely to achieve nothing, i.e., nothing that could not have been agreed upon in a conference call among deputy ministers.  Just because there’s a communiqué does not mean it has any real content.  Does this kind of expensive pageant make politicians today look important or frivolous?

More broadly, three longer-run shifts mean the G7/G8 is increasingly anachronistic.

First, emerging markets have obviously risen in both respectable clout and ability to make trouble.  China’s exchange rate policy is a leading example, but think also about Mexico, Brazil, or India.  Having a global economic discussion (e.g., on climate change or aid to Africa) without these players fully at the table does not really make sense – particularly as the G20 now operates effectively at the heads of government level.  And inviting these countries to a dinner or other event on the fringes of the main meeting just adds insult to injury.

Second, the Europeans are now organized into a loose political union and all of the major economies – except the UK – are in a currency union.  What is the point of sitting down with Italy, Germany, France, and the UK separately?  It is much more effective when they – and other Europeans – work out common positions and bring those to the table collectively.  The European Union belongs to the G20 but not the G7.

Third, the idea that the US and its allies “lead” by any kind of economic policy example is plainly in disarray.  The recent crisis focuses our attention, but we’ve seen two or three decades with irresponsible credit and throwing fiscal caution to the winds across these countries.  These countries traditionally position themselves as “G7 models” worth emulating; this message needs to be toned down.

President Obama obviously has a talent for diplomacy (e.g., at the April G20 summit).  He should use the Pittsburgh G20 summit in September to transition away from the dated emphasis on the importance of a G7/G8 heads of government meeting (e.g., reduce the excessive display of nothingness, lower the hype, have it feed into the G20 more explicitly).  Canada, chair of the G7 next year and usually very sensible on these kinds of issues, can help.

In the Financial Times, Citigroup’s William Rhodes argues that the G8 can demonstrate leadership on global trade, and, in the words of the WTO’s Pascal Lamy, “come back to the table at a political level.” Rhodes’ op-ed warns against the mistakes of Smoot-Hawley, bemoans that lack of movement on FTAs and the Doha round, and speaks of the dangers of protectionism:

Meanwhile, protectionism continues its rise in insidious ways. Very recently, the House of Representatives included trade protectionist provisions in the climate change and energy conservation bill, while earlier this year such provisions were added to the economic stimulus package. Fortunately, Mr Obama has been swift to speak out against these measures, but the congressional actions reflect rising political pressures today. Other countries are implementing similar protectionist regulations or requirements, including calls to “buy domestically” or to limit the issuance of work visas.

It is precisely the danger of one country retaliating against another’s trade restrictions, leading to an ever more threatening spiral of restrictions and tensions, that is now the gravest risk. There are indications of this, for example, in the financial area. In response to the financial crisis, governments, one by one, are moving to stabilise their domestic situations by imposing inward-oriented measures on financial services firms, such as requiring them to curb foreign lending and boost domestic credit. Such provisions penalise developing countries in particular, while, more generally, undermining the flow of capital across countries. This raises the costs of trade finance and it undermines foreign direct investment. These measures exacerbate the more than 10 per cent plunge in global trade that is likely this year.

The proliferation of domestic-oriented finance measures not only fragments the international financial system, but risks its disintegration. This will compound the damage done by rising nationalistic trade actions. Combine the finance and trade protectionist measures, and the potential for a slowing of economic recovery moves from a risk to a certainty. It could prolong the pain of the economic downturn on the millions of people and businesses who are suffering from the current crisis, while threatening the fabric of international understanding and co-operation between governments.

Already today we learn that a climate agreement was not in the cards at the summit (although the headline on the story is a little misleading.)

Update: So, there was a climate agreement of sorts, but no committment from developing countries.

News came yesterday that the bill containing coverage for the line of credit being extending to the IMF is being slowed because some sadly misinformed members of Congress are concerned that the money is, "a bailout that could line the pockets of terrorist regimes around the world." (John Boehner, courtesy of The Hill.) This scare tactic with no basis in reality would be funny, if the IMF money weren't going to be used in large part to maintain stability in fragile countries in the midst of a global economic crisis. Of course, it's that instability in fragile countries that could actually lead to terrorism.

In the spirit of educating on international economics, please find today's economic backgrounder:

• Douglas Alexander Delivers Major Speech on Conflict, Fragility, and Development, 4/27/2009 - Alexander, the United Kingdom's Secretary of State for International Development, argued that governments aiding failed and fragile states must do more than work to support economic growth and provide basic services such as clean water, health and education; they must now "support political institutions and processes -- parliaments, political parties, civil society and the media."

• The Politics of the Bottom Up Go Global by Simon Rosenberg, 4/3/2009 - Rosenberg, reflecting on President Obama's town hall in Strasbourg, writes that Obama has begun the transformation from President of the United States to the paramount leader of the world's peoples.

• Shapiro Speaks on G-20, Need for Global Economic Action, 4/1/2009 - At an NDN event on "The G-20 and Beyond: Challenges Facing the Global Economy," Shapiro delivered wide-ranging comments on the global Great Recession, its causes, and the global leadership necessary to combat it. The event also featured U.S. Rep. Adam Smith, Foreign Policy magazine Editor-in-Chief Dr. Moisés Naím. 

• U.S. Rep Adam Smith at The G-20 Summit and Beyond, 4/1/2009 - Ahead of the G-20 Summit, Smith, a Congressional leader on trade, terrorism, and international development, speaks on international trade and the need for a globally coordinated development strategy.

• The Fallout of the Great Recession for Trade by Dr. Robert Shapiro, 2/11/2009 - Shapiro argues that the world is currently experiencing the economic symptoms of protectionism without actual protectionist measures being put in place, which could have dangerous consequences for the global economy.

• Recovery Without E-verify and Buy American by Simon Rosenberg, 2/10/2009 - Rosenberg advocates for the removal of "Buy American" and E-verify provisions from the stimulus, provisions that will not stimulate the economy and will do more harm than good. 

• The Global Economic Crisis and Future Ambassadorial Appointments by Simon Rosenberg, 11/26/2008 - With the mammoth task of rebuilding international financial architecture and recovering from a global recession awaiting the new President, Rosenberg points out the the ambassadors to the G20 nations will be key members of the economic team.

• Harnessing the Mobile Revolution by Tom Kalil, 10/9/2008 - Tom Kalil, now the Associate Director for Policy of the White House Office of Science and Technology, authored this paper for the New Policy Institute. The paper argued that mobile communications technology can be a powerful tool for addressing some of the greatest challenges of the 21st century.

• The Idea-Based Economy and Globalization: The Real Foundations of American Prosperity in the 21st Century by Dr. Robert Shapiro, 1/23/2008 – In this important paper, NDN Globalization Initiative Chair Dr. Robert Shapiro examines how and why U.S. companies and workers lead the world in developing and applying new intellectual property, and why this leadership in innovation constitutes a critical U.S. advantage in globalization.

• The New Landscape of Globalization: The Real Foundations of American Prosperity in the 21st Century by Dr. Robert Shapiro, 6/20/2007 – Shapiro offers this forward-looking paper on the current state of globalization and how America can thrive in this new economic era.

NDN's Dr. Rob Shapiro recently discussed on how the Great Recession has created protectionism without passing any protectionist laws. In today's Wall Street Journal, British Prime Minister Gordon Brown writes to American audience, arguing that, "The collapse of global trade is the most immediate issue we face. We must show once again our determination to fight back." An excerpt:

The simple truth is that trade is the most serious casualty of the global financial crisis, with a vicious circle emerging of falls in exports leading to falls in production and rising job losses leading to further falls in consumer demand, exports, etc. We used to think that the countries most affected by the global financial crisis would be those with the largest financial sectors. But it has become increasingly clear that the countries hardest hit are those most reliant on exports.

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Developing countries have been particularly hard hit as a result of declining world trade and falling commodity prices. Some 100 million more people are in poverty as a result of the crisis. All the progress we have made to reduce poverty is in danger of being wiped out.

Just a few months ago, the WTO forecast global trade to fall by 9% in 2009. In simple terms, a banking crisis has become a trade crisis.

There can be no recovery in the global economy without a revival of world trade. Trade was the driver of postwar recovery in Japan, Germany, the rest of Europe and the U.S., and the engine of growth in Asia in recent decades. We must ensure that a revival of world trade leads the global economy once again out of recession.

More here.