Argument

Trade Winds

It’s taken four years, but President Obama is finally coming around to a pro-trade economic agenda. And it could be his greatest legacy.

The U.S. economy grew at 2.5 percent in the first quarter of this year. That's better than the 1.7 percent rate of all of 2012, but with unemployment still at a hefty 7.6 percent, it's still awfully anemic nearly four years after the recession officially ended. Help, however, may be on the way. The Obama administration is at last turning to a surefire way to increase growth: more trade with the rest of the world.

During the first three years of his first term, Barack Obama talked about boosting exports, but did little to expand trade. Unlike every president since Franklin Roosevelt, he declined to pursue trade promotion authority, necessary for any significant trade deal because it forces Congress to take an up-or-down vote, without amendments. Unlike his recent predecessors, he didn't push for multilateral agreements like the Doha Round, which focused on increasing trade links with developing countries. And he took nearly three years to get approval for the bilateral deals with Panama, Colombia, and South Korea that had been negotiated during President George W. Bush's tenure.

But in a dramatic about-face, Obama has embraced two large agreements that would open new markets to U.S. exporters. The Transatlantic Trade and Investment Partnership (TTIP) would remove tax and regulatory barriers with the European Union, while the Trans-Pacific Partnership (TPP) would increase trade with 11 Asian and Latin American countries. In February, President Obama and European leaders announced they would pursue a sweeping free-trade agreement, and on April 12, the United States approved Japan's entry into TPP negotiations, where it joins Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, and Vietnam; the deal will likely be completed by December.

These are trade openings on a grand scale. The E.U. is the largest economy in the world, the United States is second, and Japan is fourth. The dozen nations in the Trans-Pacific Partnership account for some 40 percent of global GDP. This joint-lowering of trade barriers would be the most powerful step taken to restore economic growth since the 2008 financial crisis, both for the United States and its partner countries. "Countries that liberalized their trade regimes experienced average annual growth rates that were about 1.5 percentage points higher than before liberalization," according to an often-cited study by Stanford's Romain Wacziarg and Karen Horn Welch in 2008.

More open trade lets Americans reap additional revenues from foreign sales, while profiting from the lower costs that imports provide -- both for finished consumer goods and for inputs into U.S. manufacturing. It's a lesson the Japanese have absorbed as well, as they embrace one of the greatest trade-expansion opportunities in history. In March, Prime Minister Shinzo Abe decided to boost trade, in order to re-ignite Japan's smoldering economic embers: the country's GDP has grown at an average annual rate of just 1 percent since 1990.

The Pacific deal faces opposition from Japanese farmers, as well as U.S. automakers and unions, but Obama and Abe, in hopes of sparking a new Japanese Miracle, are hanging tough.

Japan has a reputation as a closed market. In 2012, the United States exported $70 billion in merchandise to Japan, a new record but an increase of only 8 percent since 2000. Imports from Japan over the same period have been flat. Lately, however, there have been signs of progress. Exports of U.S. pork to Japan now total $2 billion, making it our highest-value foreign market, and in January, Japan loosened its controversial restrictions on U.S. beef imports. Exports of U.S. services, such as licensing fees and royalties, rose 50 percent from 2002 to 2011, while Japanese foreign direct investment in the United States, a potent form of trade, have nearly doubled.

Still, the United States is running a $76 billion merchandise trade deficit with Japan. More worryingly, Japan has fallen from the second largest recipient of U.S. exports and number-one provider of U.S. imports in 1989, to fourth in both categories. In trade, the critical metric is the total value of what is exchanged, and U.S.-Japan trade could be a great deal higher than it is today.

The problem is obvious: major barriers to trade remain on both sides. U.S. insurance companies complain that the Japanese government gives regulatory preferences to Japan Post, the government postal service, which also operates a huge insurance subsidiary. Meanwhile, the United States slaps 2.5 percent tariffs on Japanese automobiles and 25 percent on light truck imports. Although Japan has no tariffs on U.S. automobiles, it has erected other barriers to trade, including environmental standards and arduous certification procedures.

Japanese officials argue that their consumers simply do not like U.S. cars. Regardless, the non-tariff barriers also hurt sales. The United States exported just $1.5 billion in auto products into Japan, while importing $41 billion from Japan. Rep. Sander Levin (D-MI), the ranking member of the House Ways and Means Committee, which handles trade issues, points out that in 2012 American automakers sold only 13,637 cars in Japan. That's fewer than 40 a day. Japanese automakers, on the other hand, sold 5.4 million, including those produced at U.S. plants.

Zeroing in on non-tariff barriers make sense for both the Pacific and the European agreements. These barriers -- regulations, government subsidies for domestic industries, and import limitations -- increase prices of foreign goods and services, and keep them out of home markets.

For the European agreement, non-tariff barriers are equally important. Europeans have strong regulations limiting the import of genetically modified foods, and requirements that television networks "reserve for European works a majority proportion of their transmission time." In the telecom sector, "a barrier-free transatlantic market in telecommunications services has yet to emerge" despite technological and regulatory advances, according to a forthcoming study by the Foundation for Social Studies and Analysis, a Spanish think tank. With the possible exception of Vodafone, no European or U.S. telecom company has significant operations on both continents.

The truth is that tariffs throughout the world are relatively low. (The average tariff rate on foreign imports into the United States is only 3 percent.) But a study of non-tariff measures in 91 countries found that these barriers had the same impact as tariffs averaging 12 percent.

The real work of these two trade agreements will not be in bringing down tariff rates, but in harmonizing regulations. The E.U. tends to give governments more control over businesses, provides more subsidies, and operates on the risk-averse "precautionary principle," which often prohibits production distribution when a product might be hazardous, even when data is lacking. 

In negotiating the Pacific and European agreements, the United States has the opportunity to shape global regulatory policy, and determine whether the world will go down a path that emphasizes state economic control, or free-market dynamism. Abe of Japan looks like a brave partner in that endeavor.

These two agreements could give the American economy the boost it needs to get to 4 percent growth -- the level that will reduce the deficit, cut unemployment, and extend prosperity and opportunity. The deals may help Japan end its own reign of stagnation. And they are also an opportunity for the United States to show global leadership. If negotiations succeed, freer trade could become the most important achievement of the Obama administration.

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Democracy Lab

It's Not Business As Usual At the World Bank

The improbable controversy over the World Bank's flagship business survey.

Last week's Spring Meetings of the World Bank and the International Monetary Fund came with the usual signs of big international gatherings: tight security, politicians, celebrities, uplifting declarations, and lots of television cameras. But as is often the case, the real action took place behind the scenes. This year, for example, the Spring Meetings in Washington D.C. provided the venue for a meeting of an independent panel charged with the task of reviewing Doing Business, one of the World Bank's most prominent publications. Businesses, development specialists, and policymakers rely heavily on Doing Business as a guide for understanding potential barriers and for proposing and implementing practical institutional reforms. Any recommendations made by the review panel would be closely watched for clues about the future course of the Bank. Some insiders say that there's talk of outsourcing the survey to some other organization -- or perhaps even axing it altogether.

In publication since 2003, Doing Business was inspired by academic research into the importance of sound legal environments for economic growth. The survey currently synthesizes expert assessments by roughly 10 thousand contributors from 185 countries into a picture of the ease of doing business around the world. It serves as a guide to important requisites such as the costs of starting a business, obtaining permits, hiring and firing, and so on. The project thus brings together a large amount of data that either didn't really exist before or weren't comparable across different countries and presents them in a way that is easy to understand and use.

Of late, however, the Doing Business project has come in for a lot of flak. "It's not just that some reforms promoted by the Doing Business rankings might be irrelevant for the majority of businesses in developing countries," says Christina Chang, an economist at CAFOD, a large UK-based aid organization. But "in some instances they're actively harmful to poor men and women." It's a criticism shared by many in the realm of non-government aid organizations.

In the run-up to the tenth anniversary of Doing Business, the World Bank's recently appointed president, Jim Yong Kim, appointed a panel to conduct a thorough review of the project. Chaired by Trevor Manuel, a broadly pro-market former finance minister from South Africa, the panel includes several prominent scholars, including Timothy Besley of the London School of Economics. Rather oddly, though, the process has given a uniquely democratic platform to the survey's most vocal critics -- above all humanitarian groups such as CAFOD, Oxfam, Christian Aid, Save the Children, and others.

A joint submission by these organizations to the review panel claims that the Doing Business assessments are "mostly irrelevant to the majority of businesses struggling to do well in developing country markets." The groups call for the World Bank and other donors to stop using Doing Business as a benchmark assessing the 185 countries covered in the study. The critics claim that the project s gives government incentives to skew policy away from the needs of the majority of the poor and towards thoughtless institutional fixes aimed at helping countries improve their Doing Business rankings, such as corporate tax cuts or deregulation.

This controversy comes at an odd time. Since 2000, many previously poor countries have made enormous economic progress -- above all in Africa. Some of the new wealth was, admittedly, the result of a rise in commodity prices. According to a 2010 report by the consulting group McKinsey, however, "resources accounted for only about a third of the newfound growth. The rest resulted from internal structural changes that have spurred the broader domestic economy" -- just the sorts of changes that Doing Business tends to highlight.

Many of those changes have their roots in sounder macroeconomic management. Compared to the 1990s, deficits and debt burdens went down in most of Sub-Saharan Africa. Policymakers across the continent succeeded in reducing inflation from an Africa-wide average of 22 percent in the 1990s to 8 percent in this century. More importantly, they also undertook institutional reforms of the kind recommended by the Doing Business project: corporate tax cuts, reduction of red tape, streamlining of licensing and issuance of permits, and the liberalization of labor markets.

Some African countries, including Mauritius and Rwanda, have used Doing Business as a focal point for their reform programs. Through a comprehensive set of reforms, Rwanda improvedits position from 150 in the 2008 edition of the Doing Business report to 52 in 2012. On the same ranking, Mauritius comes in at 19th place. These aggressive reformers have not only seen significant economic growth, but have also witnessed dramatic improvements in governance and a fall in corruption. Mauritius now enjoys an average income per capita of $15,600 and ranks 43rd on Transparency International's Corruption Perception Index (higher than Lithuania, Croatia, and Hungary).

It may be a coincidence that the review, which may prompt significant changes in the Doing Business project, comes after a change in the leadership of bank. But perhaps it's not. The new president of the Bank, Jim Yong Kim, has, in the past, sounded like a harsh critic of pro-market reform policies prescribed to developing countries by the World Bank or the International Monetary Fund. " Even where neoliberal policy measures have succeeded in stimulating economic growth, growth's benefits have not gone to those living in ‘dire poverty,'" he wrote in the introduction to a 2000 volume he edited, entitled Dying for Growth: Global Inequality and the Health of the Poor. Among other things, the book sings praises of Cuban healthcare system, which, according to Kim, "prioritizes social equity." 

Critics of the Doing Business project raise a variety of substantive objections. For example, the CAFOD submission claims that the project's measure of the ease of employing workers ("Employing Workers Indicator") encourages countries to reduce worker protection legislation, whereas there is "no proven" link between such reforms and "jobs, growth, or other economic outcomes."

That is a somewhat curious argument by CAFOD, as most economists would expect a strong relationship between the two. An influential 2004 paper (partially supported by the World Bank) by Botero, Djankov, La Porta, Lopez-de-Silanes, and Shleifer in the Quarterly Journal of Economics examines the experience of 85 countries and concludes that "heavier regulation of labor is associated with lower labor force participation and higher unemployment, especially of the young." 

The critics also urge the World Bank not to represent business taxation as "an unnecessary burdensome cost to business that needs to be minimized." Because the "Paying Taxes Indicator" used by the Doing Business project measures, in part, the tax rate facing businesses, it is feared that the report "can incentivize states to progressively reduce tax rates that affect corporations to an arbitrarily low level."

Among many economists, however, denying the existence of costs of business taxation is akin to denying evolution. A huge body of evidence shows the debilitating effects of high income taxes on investment, growth and employment (see here, for example). Measuring business taxation is not a sneaky way of advocating zero tax rates on corporate income but simply a way of accounting for the real cost that taxes impose on entrepreneurs. Even if one believes that corporations in developing countries should be taxed at relatively high rates, they ought to understand the economic trade-offs that such policy entails.

The weakest element of the critique is the recommendation that Doing Business should not be used to rank countries, and that neither the Bank nor donors should use it as an assessment. Aldo Caliari, a director at the Center of Concern, one of the signatories of the joint submission to the review panel, called the information provided by Doing Business rankings "illusory" during a discussion at the World Bank's Spring Meeting.

But what is supposed to be the alternative to providing the public, policymakers, and donors with this metric however imperfect it may be? Unless we have a superior way of measuring the quality of business environment, ignoring the information contained in the Doing Business rankings hardly seems like sound advice.

And that seems to be the core of the problem with ongoing discussions about the Doing Business project. It is true that Doing Business is not an ideal metric of business environment: Nothing is. Yet over the past decade the survey has proven an extremely useful tool both for scholars and businesspeople who want to compare the ease of actually conducting business in different countries, and for policymakers trying to foster the development of the private sector. Unless someone comes up with a better alternative, discarding or watering down this metric is likely to lead to less well-informed choices about policy.

We may disagree about the relative importance of a good business environment for poor countries. Yet few would suggest that it should be simply ignored. It's difficult to avoid the impression that Doing Business is currently coming under attack by groups with ulterior motives, groups who are inimical to a pro-market and pro-growth policy agenda. Given the extraordinary economic and human progress achieved in the last few decades through deliberate improvements to business environment, one hopes that the Doing Business project remains central to the World Bank's portfolio of activities.

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