AMERICAN.COM

It never fails. Every time oil prices rise or fluctuate, politicians are quick to blame speculators trading oil futures contracts for the high prices and price swings. If politicians are correct about speculators and they were able to pass legislation outlawing all oil futures trading, what would happen to the volatility of oil prices in the future—would it be higher or lower? Probably much higher if we look at the historical volatility of the prices for onions, which is one of the only commodities that has no futures market, thanks to legislation passed by Congress in 1958 that banned all futures trading in onions.

The chart above displays the monthly percentage changes in oil and onion prices over the last decade, and clearly shows that despite the ban on onion speculation, the volatility of onion prices has actually been significantly higher than the volatility of oil prices, even though thousands of speculators are taking positions every day on the future price of oil. Futures markets for oil and other commodities that allow speculation play a very beneficial role in the economy by smoothing out commodity prices over time. That was the main motivation for starting the Chicago Board of Trade back in 1848—to stabilize volatile commodity prices with futures trading. The extreme price volatility of onions in the chart above gives us an idea of how wildly oil prices might fluctuate in the future without the stabilizing effects of speculative trading in oil futures contracts—and that’s a “speculation-free” future that would make us all much worse off than we are today.

The Obama administration made an important step yesterday in unblocking the U.S. trade agenda. It asked Congress to begin technical discussions on passing the free trade agreement (FTA) with Colombia.

This was the move that trade advocates on the Hill had been waiting for. After a long history of stalling on trade issues, the administration negotiated some minor revisions and embraced the FTA with Korea at the end of last year. In the process, they won the backing of the United Auto Workers. Congressional leaders urged the administration not to stop there; they wanted the pending FTAs with Colombia and Panama to move as well.

The administration ultimately consented, but the Colombia agreement faces unified opposition from the U.S. labor movement. In explaining this opposition, AFL-CIO President Richard Trumka in March gave the graphic example of a Colombian unionist named Dario Hoyos who was murdered.

Dario was assassinated. It was on a bus. …They stopped the bus with all the workers on it, make you kneel down on the ground, and they put a bullet through Dario’s head. …

And (the Colombians) called us and said: We have great news. We’ve convicted the men that have killed Dario Hoyos. And I was excited about that, until I found out that they convicted them in absentia. They are still at large. They named four people convicted and then said, that one’s solved; let’s move to the next one.

… That’s why we oppose (the agreement) and that’s why we think before you go with a partner, you should choose them carefully so that you don’t aid and abet that type of thing.

Colombia is a violent country. It has made great strides in addressing that violence, but violence still remains. Dan Griswold and Juan Carlos Hidalgo of Cato have documented the country’s progress. Among their findings:

Union members enjoy greater security than other vulnerable groups of Colombian civil society, such as teachers, councilmen and journalists. … economists Daniel Mejía and María José Uribe of the Universidad de los Andes in Colombia … found no statistical evidence supporting the claim that trade unionists are targeted for their activities.

Trumka’s reasoning seems to be that it is unconscionable to deal with a country where there are murders. Yet, in its latest statistics, the FBI reports that there were 13,636 murders in the United States in 2009, in 20 of which employers were known to have murdered employees. The question, in both Colombia and the United States, is whether these crimes were supported or condoned by the government, or whether they were instances in which it proved impossible to enforce laws perfectly. In both cases, it appears that the governments are working hard to stop such crimes, with significant but partial success.

In neither country should the stubborn persistence of violence serve as an excuse for forgoing the closer relations and mutual benefits that a free trade agreement would bring.

World trade negotiators are to gather this week in Geneva to make a last-ditch effort to conclude the decade-old talks, the Doha Round. If that news inspires a sense of déja vu, you may be a veteran trade-watcher. There have been enough “last ditches” to inspire visions of a deeply furrowed field.

Prospects this time around do not seem much brighter. Global trade diplomacy has not flourished under the Obama administration’s “lead from behind” approach (with a hat tip to the New Yorker’s Ryan Lizza for the felicitous phrase). Even if expectations are low, however, the stakes may still be high. That’s a message of a new (free!) e-book compiled by Richard Baldwin and Simon Evenett on the Vox website. It has contributions from me, my colleague Claude Barfield, as well as luminaries such as Anne Krueger and Ernesto Zedillo.

This is unlikely to be enough to get the round out of its last ditch (the pen isn’t that mighty), but it will at least provide guidance on whom to blame and the implications of the failure.

The CPB Netherlands Bureau for Economic Policy Analysis released its monthly report today on world trade and world industrial production for the month of February. Here are some of the highlights:

1. World trade volume increased in February for the seventh consecutive month, bringing global trade to a new all-time record high (see chart below).  This was also the third month in a row that world trade was above the previous peaks during early 2008, when the U.S. recession and financial crisis started spreading, causing world trade to drop by 20 percent in 2009.

2. World trade in February was 10.5 percent above its year-ago level, and marked the 14th consecutive month of double-digit annual growth starting in December 2009. Compared to the cyclical high in April 2008, world trade volume has recovered to a level that is now 2 percent higher than its previous peak. Compared to the cyclical low in May 2009, global trade has increased by 28 percent through February of this year.

3. World industrial output was the same in February compared to January, but was above its year-ago level by 7.4 percent. World output in the first two months of 2011 established a new, all-time record high level, which is 5.2 percent above the previous cyclical high of 134.4 in March 2008 (see chart above).  After dropping by 12 percent during the global recession in 2008-2009, world output has increased by almost 20 percent during the last two years of a strong global rebound. Global output has increased in almost every month compared to the previous month during the worldwide recovery that started in 2009, with only one month of decline in industrial output in the last two years.

Bottom Line: Based on the ongoing and solid improvements in both international trade and world output, especially the fact that both are at all-time historical highs, I think we can safely say that the world economy has made a complete recovery from the financial crisis and global slowdown in 2008 and 2009. The remarkable recovery in the global economy over the last few years is a testament to the ability of markets to recover from even a severe financial crisis and the worst economic slowdown in generations. There are still many uncertainties and headwinds moving forward, but the strong world economic recovery to date is both remarkable and encouraging as we hopefully enter a new cycle of global growth, expansion, and prosperity. To paraphrase Warren Buffett, “The world economy’s best days lie ahead.”

Just after I posted “The Big Downside of the Colombia FTA” on Friday, Scott Lincicome, who writes a much-read blog on trade issues, generously reposted it and sent it out. Thanks to Scott—but Scott also raised a very pertinent issue: he pointed out that “this type of FTA bullying” was not new, noting similar tactics have been employed as a result of forced commitments in the U.S-Peru Free Trade Agreement (FTA). On this point, Scott is quite right.

As I stated at the outset of my blog post, I intend to write on the issue of labor and trade more fully in the coming weeks. But in light of Lincicome’s valid query, let me add several points and an excerpt from a 2007 piece of mine warning of the consequences of actions taken with regard to the Peru, Colombia, and Panama FTAs.

This all goes back to the (misbegotten) May 10 agreement between the Bush administration and House Democrats in 2007. To the irritation of the Bush U.S. Trade Representative’s office, my colleague Phil Levy and I opposed the so-called labor “compromise,” arguing that it set a very bad precedent and that the Bush administration would get very little in return (no movement on Colombia or Panama, and also continued holdup on Korea).

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I will write more on this subject in the future, but I want to flag a big downside in the just-announced agreement to move forward with the U.S.-Colombia Free Trade Agreement: that is, the highly intrusive and largely ill-advised provisions of the so-called “Action Plan” for Colombian labor laws and regulations. Yes, I know that the Colombians—browbeaten and desperate to assure permanent access to the U.S. market—have agreed to go along. But in many ways these provisions represent a callous trampling on Colombia’s sovereignty and the right to determine for itself specific priorities and obligations in the domestic labor market.

Among the more egregious demands, Colombia has acquiesced to “criminalize” (with prison terms of up to five years) any acts that “undermine the right to organize and bargain collectively.” It must also pass a law dictating prison terms for anyone who “offers a collective pact to non-union workers that is superior to terms for union workers.” No definition of “undermine” or “superior terms,” of course, is set forth. Such vague mandates are an invitation to harassment and extortion. Further, Colombia must assume heavy administrative and enforcement obligations that will stretch resources and constrict the government’s flexibility to adjust as labor (or other) conditions change in the future—including mandates on the number of inspectors, prosecutors, and police labor investigators, a plethora of new legislative actions, programs, analyses, directives, and consultations/meetings in the labor relations area. Some of these ideas have worth, but the attempted straitjacket of mandated priorities will breed endless disputes down the road.

Two closing questions: the first, related to the above, is what will happen when Colombia, through its own democratic process, wants to adjust programs and mandates in the future? Will the United States intervene to stop or control such changes? And second: beyond Colombia, the United States in the future—starting with the TPP—will attempt to conclude more FTAs. Does the Obama administration really think that Australia or Chile (and later possibly Indonesia and India) will stand for this intrusive trampling of sovereignty and democratically established laws and regulations? Good question—with an obvious answer.

I should add that, ironically, even this is not enough for U.S. labor unions, who have unanimously announced their opposition to the Colombia FTA even with the action plan.

Representative Sander “Sandy” Levin (D-Michigan), former chairman of the House Ways and Means Committee, now ranking minority member—and the leading voice on trade for House Democrats—gave an admirable speech at the Peterson Institute Tuesday. Admirable for its candor and its blunt partisanship, and for an attempt to set forth a “new model” for future U.S. trade agreements.

Right off the mark, in the first sentence, he accused House Republicans of “holding hostage” the more important Korean free trade agreement (FTA) for flawed (in his judgment) FTAs with Colombia and Panama. For Levin, this stance is part and parcel of “the old conventional wisdom on trade.” I’m not going to detail a rebuttal to this twisted version of the Korea/Colombia FTA history here: for that, see Phil Levy’s American.com piece a few weeks ago.

What is more important are the elements of Levin’s new trade model, to the degree that one can discern them, as they are scattered throughout the speech and in the question period that followed. One should note first that, as with many (even supposedly more sophisticated) trade critics, Levin attacks the “traditional” Smith/Ricardo model based upon comparative advantage: “Globalization has challenged the very premises of this model.” Moving on, as the speech progresses, I picked up the following components of the new model: greater use of trade actions (anti-dumping and safeguards) to protect U.S. industries (such as tires which we no longer make here); industrial policies to foster (subsidize) and protect strategic U.S. industries; enforceable labor rights provisions that would allow the U.S. to intervene in the legislative and administrative procedures and policies of trading partners; the assumption international legal obligations that would allow challenges to U.S. labor laws (right-to-work, collective bargaining for public unions); mandatory adherence to UN environmental treaties and agreements; large new U.S. expenditures for social programs (viz, trade adjustment assistance, expanded unemployment insurance) as recompense to trade “losers”; and reinstituting “managed trade” (i.e., tying continued U.S. market opening to specific increases of exports to individual trading partners). There is more, but this gives the thrust.

Levin, whose trade experience was forged by the perception of America’s decline in the 1980s, ended his speech by vowing “not to let what happened in our trade policy toward Japan happen to our trade policy in this decade”—i.e., Japan won. This is a bizarre conclusion, given Japan’s economic history since 1990. No matter, for Sandy “active” intervention to subsidize and protect and “managed trade” in economic diplomacy “were right then … and are right now.”

As I said upfront—this is an admirably forthright speech. Those of us who still believe in the “old model” of Adam Smith at least can’t say we weren’t warned.

Politico’s John Maggs is a very good reporter, but he has written a flawed, misleading article on the connection between the recently concluded KORUS and the similarly pending Colombia free trade agreement (FTA). The thrust of his piece is that House Republicans “threaten” the Korea pact by linking it with passage of the Colombian pact (and less controversially, the pending Panama FTA). Maggs argues that combining the two (three) agreements would “galvanize” House Democratic opposition and views this is a tactic to “force the White House to choose between its liberal base and the business community … [and] a way to make President Obama’s new embrace of trade costly for him with his own party.” This thesis is at best incomplete, and in building supporting evidence Maggs ignores or twists the history of the Colombia FTA.

First, he suggests that Republicans merely want to shore up “Colombia’s conservative government  … despite the history of anti-union violence.” And, in stats straight out of union/Nader propaganda, he cites the “fact” that some 2,800 union officials have been murdered since 1986. Well, Republicans also pushed hard for the KORUS in 2007, despite the fact that the then-Korean president, Roh Moo-hyun, espoused “liberal” policies antithetical to their views on both foreign and domestic policy. Of greater import, however, is the use, or misuse, of statistics on murder and violence. Yes, if one goes back to 1986, the figure 2,800 is accurate. But this disguises the fact that since 2001, according to a study by the Cato Institute (buttressed by other independent assessments), assassination rates of union and business leaders have dropped 80 percent and the murder rate overall has come down some 40 percent. As Cato noted, it is now probably “safer for a union leader to walk the streets of Medellin than those of our own capitol.” All of this occurred as the Colombian government under Presidents Uribe and now Santos fought and finally won a war against drug lords and the Venezuelan-backed FARC guerrillas—and capped it all with a fair and free election in 2010 that saw the “conservative” Uribe voluntarily give up the presidency.

Finally, Maggs accuses the Republican leaders of jeopardizing a new “bipartisan” approach to trade, citing the support of the United Auto Workers union (UAW) and the food workers union for KORUS after the administration extracted “concessions” from Korea. The concessions amounted to a retreat to protectionism but, more important they certainly have not secured a change in union opposition to trade agreements—yes, the UAW and food workers union now support KORUS as a result of this extended protection. But the AFL/CIO federation, including all the major industrial unions—steel, communications, and machinists—all vowed to actively oppose the agreement. And I would bet that the UAW will find some bogus reason to oppose Colombia and Panama, despite the protectionist payoff with Korea.

Having said all that, my own view is pragmatic: if the congressional Republicans have the votes, they should move all three of the agreements in the spring, because of their undoubted benefits for the United States, whatever their side effects on the fractious elements of the Democratic coalition. And I hope John Maggs will celebrate these victories after the “threats” are surmounted.

When the president announced that the United States and South Korea had finally reached a deal on KORUS free trade agreement, the administration touted the fact that it broke new ground by gaining the support of both industry and labor: i.e., the Ford Motor Company, which had led the opposition in the truncated U.S. “native” auto sector, and the UAW, the auto workers union. Well, not so fast: while the food and commercial workers union did endorse the pact, the major industrial unions, led by the AFL-CIO federation, have come out in strong opposition. Virtually identical statements from the AFL-CIO, the steel workers, the machinists, and the communications workers not only decline to endorse (which might have signaled passive opposition), but also vow to “actively oppose” the agreement—meaning that their full lobbying resources will be mobilized against the pact in Congress. And while the UAW will support KORUS, it will be interesting to see if it has changed its position on the pending Panama and Colombia agreements.

Down the road is the Trans-Pacific Partnership, a free-trade agreement under negotiation by nine trans-Pacific nations, with others waiting in the wings. I’ll bet that the UAW will find some (bogus) reason to distinguish its KORUS support from allegedly flawed other agreements, such as TPP. Bottom line: President Obama almost certainly will face strong opposition on any future trade liberalization from this key constituency as he moves to bolster an already frayed Democratic coalition for 2012.