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GUEST POST: The following article is authored by current University of Rochester Senior Alex Armlovich.

From Bloomberg Businessweek

…Eizenstat and his fellow negotiators faced a barrage of lobbying from U.S. companies and trade groups that wanted specific language written into the agreements to protect their products or give them an edge over their rivals.
The smallest tweak to the wording in some buried passage can mean the difference between tens of millions of dollars in sales or being shut out of a foreign market altogether…Take the humble candy bar. Sugar growers lobbied trade officials for a rule that would stop U.S. candy makers from getting around U.S. import quotas and using too much imported sugar in their products. Eizenstat says that was a deal breaker for big chocolatiers such as Hershey’s and Mars, which buy ingredients, including cheaper sugar, from all over the world. In the end, the negotiators devised a compromise: At least 65 percent of the sugar in products containing cocoa powder must be from U.S. growers to be considered American-made. Otherwise tariffs will apply, which could make the product prohibitively expensive. But no such restrictions apply on sugar that’s used to make candy bars. In other words, a packet of instant hot chocolate that contains 64 percent U.S.-grown sugar is not considered American under the deal. But a chocolate bar made with 100 percent foreign sugar is.

For decades, Korea went out of its way to make it a hassle for its citizens to buy foreign-made vehicles. The government taxed them heavily and audited Koreans who bought them. It restricted the square footage of dealerships, enforced fuel efficiency standards that American manufacturers could not meet, and even tried to change the size of Korean license plates to make them too big to fit on American bumpers. “It was always one thing or another,” says Representative Sandy Levin (D-Mich.), the ranking member on the House Ways and Means Committee. The more serious barrier to trade, says Levin, was South Korea’s constantly shifting regulations: Government officials would make sudden changes to the nation’s safety and fuel economy standards, requiring U.S. manufacturers to adapt on the fly with costly engineering changes to make their cars fit for sale in Korea. “From one year to the next, you find out the rules have changed,” says Stephen Biegun, vice-president for international governmental affairs at Ford Motor (F).
The tactics were effective. In 2009, the Congressional Research Service says, automobiles accounted for nearly three quarters of that year’s $10.6 billion U.S. trade deficit with South Korea. In 2010, U.S. automakers exported fewer than 14,000 cars to South Korea, while South Korea exported 515,000 cars to the U.S.
Ultimately, the two sides worked out a head-scratcher of a compromise. The U.S. agreed to something the Koreans wanted—a removal of the 2.5 percent tariff on Korean auto imports. Korea will withdraw its tariffs on U.S. cars. What American car companies really wanted, though, was an end to Korea’s practice of unexpectedly changing auto standards. The Korean negotiators wouldn’t agree to that. Instead, they will allow each foreign automaker to sell 25,000 cars per year in Korea that don’t have to meet the country’s safety regulations.
Odd bargains indeed. The forces that shape safety regulations often aren’t even about safety! This article is one of countless cases of seeking wealth not through praiseworthy innovation, but through nonmarket manipulation of laws, regulations, taxes, and subsidies to obtain special privilege. The OWS protesters should seize upon this kind of privilege: the “1%” in question–corporate and political elites–collaborate strategically at the expense of the rest of the public. It’s not the ladder of income inequality generally that should be attacked; it’s the wall against which it leans that we should be wary of. Innovative, industrious, entrepreneurial people deserve for their endeavors whatever their counterparties wish to give in free exchange. There is no merit in the alternative: the manipulation of statutory privilege backed by coercion.
This particular example, the refusal to apply the stable rule of law in making auto standards actionable for future foreign investment in South Korea, is illuminating. The classic “bootleggers and Baptists” argument about regulatory policy has never been clearer–they didn’t even bother pretending to hide corporate welfare behind the “Baptists”/safety advocates for regulation. Korean regulators boldly permit ‘unsafe’ American vehicles in–but not in sufficient numbers to compete against Hyundai, Kia, and Daewoo.
This policy is not attributable to uniquely foreign corruption or anti-Americanism. US agricultural policies on Brazil’s sugar are not so different from South Korea’s safety and environmental policies on US autos. Businessweek began its candy lobbying narrative mid-stream, where sugar import quotas are already a fact of life. They are in fact a small window in the larger web of dubious international agricultural policy.
As we hear from food activists, high-fructose corn syrup has become the substitute of choice for sugar in American processed foods. It is little surprise then, that the infamously powerful corn lobby is the muscle maintaining tariffs pushing US sugar prices to roughly double the world price. The cascade of defensive lobbying that follows is a consequence of this; it seems that Hershey’s and Mars applied enough pressure to get candy bars special exemptions from the damaging sugar tariffs. Alas, Businessweek recounts that hot cocoa couldn’t get its hands in the exempted candy jar. Perhaps Nestle and Swiss Miss need to hire better K Street firms.
What to do?
Where we must begin diverging from the popular anti-corporate narrative is in the call for additional agencies, commissions, and regulatory schemes. Well-meaning people wish for reform: if only we had the right people in power; if only we had the right mix of regulations; if only our media culture prioritized efficiency and transparency to bolster voter monitoring. We worry about ill-informed, emotional consumers being manipulated by Big Business, who will pollute the environment, cut corners in safety, and engage in anti-competitive practices. We put the responsibility for preventing this in the hands of legislators and unelected bureaucracies who are ostensibly altruistic, better-informed, and impartial in general. It’s forgotten that the government elite is composed of the same people as the corporate elite. These legislators and bureaucracies are limited in the pursuit of self-interest only by voter, media, and NGO monitoring with the associated risk of scandal and electoral loss or disciplinary dismissal. We expect those same allegedly ill-informed, emotional consumers with scarce attentional resources to monitor the legislators and bureaucrats. With the centralization of these decisions, the problem of the ill-informed consumer becomes the problem of the ill-informed voter, indeed in a less direct channel. Who has better information and motivation in monitoring and shaping agricultural subsidies and trade–industrial agribusinesses or the median voter? Who is more effective in monitoring and shaping safety and fuel efficiency standards–auto manufacturers with billions on the line, or the median voter?  Those closest to the consequences of a decision, by circumstance or by personal passion, are those with the greatest incentives to become informed and sufficiently motivated to act upon that information. Even in a perfectly informed world, policy decisions are bundled up in a single vote. Concerns about product safety, environmental standards, tax policy, and social issues all get thrown together in a given electoral choice– hence the debate in every victory and loss about which policy has earned a “mandate” from the voters. In a properly free society–where consumers regulate by voting with their wallets and by supporting NGOs and other elements of voluntary society that specialize in monitoring corporate action–each ‘regulatory’ decision of patronizing or boycotting a business can be made pluralistically on its own merits.
It is for all the above reasons that the decentralization of power is so important. When Departments and Bureaus stagnate and fail, we have no legal alternative. This contrasts with free enterprises that gain a competitive edge by providing a credible commitment to safety and quality. To this end, third-party organizations and NGOs like Consumer Reports, IIHS (private-sector crash testing), ISO, Angie’s List, and so on emerge as non-coercive means for establishing marketplace trust. Consumers themselves don’t have to be experts; in addition to referencing NGOs, we leverage our social networks to ask the specialists among us. Buying a car? Ask your uncle, the mechanic. Buying a computer? Ask your computer-building nephew. Outside of social networks, it’s easy to find large forums and online communities dedicated to product reviews, tech support, and boundless information. Enterprises that ignore their consumers or fail to innovate create the opportunity for disruptive competitors, or at the extremes risk boycotts and guerrilla anti-marketing by watchful NGOs. Social media can easily become the human microphone of brand-destroying consumer malcontent, prompting corporations to encourage official online communities and to follow public Facebook and Twitter feeds for negative sentiment–in order to improve product support and stay ahead of unexpected product defects. Microsoft’s stagnation and crummy pricing in the OS and office software spaces provided the opening for the resurgence of Apple, spurred the creative energy of the open source community, and paved the way for Google’s open-source Android project and the Google Apps suite. Cell companies, in turn, are bounded by the threat of free VoIP and ubiquitous WiFi enabling cheap calls and data on smartphones should 4G data caps and charges get out of control.
In fairness to policy activists, there are specific externality and public good cases where an argument for collective action can be made–including carbon taxes, proper R&D tax credits, proper K-12 vouchers, and some scope for technocratic infrastructure funding–on the condition that this legislation passes a CBO cost-benefit test without special exceptions that distort behavior and award unfair privilege. I will personally support them as soon as governments can credibly commit to such an intervention whose execution and precedent are expected to do more good than harm in light of our current experience. We cannot settle for idly wishing for a more effective media culture. We cannot settle for wishing that the right people be in power. Neo-conservatives should be wary of giving future Obamas the police powers of the Patriot Act. Modern liberals should be wary of giving future Bushes the power to mandate individual product purchases. (Then again, perhaps Bush fans already regret ethanol mandates that pre-date the insurance mandate…)
The point is that market failure and government failure are both real phenomena caused primarily by information problems, externalities/underprovision of public goods, and imperfect competition. Media monitoring and NGO action can help with both kinds of failure; NGOs could lobby the EPA much like they have pressured Nike on child labor. The media “watchdogs and gatekeepers” can break stories and direct attention on public fraud much like they can on private fraud, and this is important to any good society. But even given those institutional aids, people are better equipped in their “fallible consumer role” to monitor the enterprises they touch every day than they are in their “fallible and apathetic voter role” to meta-monitor the unelected agency monitors whose political leaders they only touch in bundled fashion on election day. Quis custodiet ipsos custodes? We do. And we could do it better through civil society and proper free choice. We should nuance our calls for levelling the income ladder, and focus instead on finding a better wall with a better income ladder: an equal-opportunity institutional structure with incentives corresponding to productive activity–not legislated privilege.

4 Responses to “Guest Post: The Odd Bargains Behind Trade Deals”

  1. Michael says:

    One of my bigger complaints about government intervention is that it short-circuts the development of non-government institutions, whcih can often be better or at least more adaptable than government solutions.

  2. Harry says:

    Great piece.

    If only we had the right philosopher king and a few more terabytes of RAM…

  3. Harry says:

    I had bypassed the top section of this theunbrokenwindow post, ignoring Wintercow’s red letter acknowledgement to the author. I read it through as critically as I would any Rizzo piece, which is a compliment. Yes, when I am on a Holland America Cruise, I read Maureen Dowd or Paul Krugman, because that is the only material around to read, but it is so predictable and old sixties stuff. The reason why I read Rizzo is that there is something new. Not always, but often.

    This was a worthy, informative piece on free trade, and much more.

    Wintercow should be proud to be instrumental in getting his students to think for themselves.

  4. […] public policy, and philosophy among other things. I bring the perspective of a liberal libertarian: my guest post about a year ago gave a good outline of my view on politics. I do believe that state institutions […]

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