Trade | Council on Foreign Relations

The Rise of Economic Security

Countries have collectively announced an average of three thousand economic restrictions per year over the past half decade. The trend is likely to continue as tariffs take center stage.

by Jonathan E. Hillman Jan 21, 2025

What Are Tariffs?

President Donald Trump has begun his second term with a raft of tariff threats. Here’s how these taxes work and how they’ve been used historically.

by Anshu Siripurapu and Noah Berman Apr 1, 2025

A Risky New Era of Broken Trade Norms

A raft of new tariffs imposed by President Donald Trump could shatter the era of a rules-based order with global economic ramifications.

by Edward Alden Feb 3, 2025

United States

The Tobacco Wars: International Trade Disputes and Tobacco Control

Attended by representatives from the private sector, academia, and government and legal communities, this meeting explored the increasing number of international trade disputes involving tobacco control measures and the challenges that governments face in balancing international trade and tobacco control objectives.

Event with Carlos Gianelli The Honorable Derois, Joshua Sharfstein and Thomas J. Bollyky June 21, 2012
Trade

Morning Brief: Economists’ Expectations for Fed Meeting

A majority of economists surveyed by Bloomberg expect the Federal Reserve to decide today to extend Operation Twist, but not to initiate another round of quantitative easing. Operation Twist is an effort by the Fed to lower long-term borrowing rates by selling up to $400 billion of short term bonds to buy longer-term instruments such as 10-year treasury bonds (NPR). The survey also found that 71 percent of economists did not expect Greece’s election to affect Fed policy. CFR’s Center for Geoeconomic Studies analyzed worsening employment reports since the April meeting of the Federal Reserve’s Open Markets Committee (FOMC), and also expects the FOMC to extend Operation Twist. California Creates Muni Bond Uncertainty As California slashes its budget, it may threaten payments on municipal bonds (FT). Last year’s Californian budget eliminated redevelopment agencies (RDAs). Legislation required the repayment of outstanding debt in bonds issued by the RDAs, but uncertainty over how tax revenues should be split among the unwinding RDAs and municipalities has led to political fights and ratings downgrades on much of the estimated $20 billion in outstanding RDA debt. The growing problem of municipal bankruptcy and North Carolina’s successful approach were discussed by Steven J. Markovich in the latest Policy Initiative Spotlight. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. Infrastructure Reid and Boehner want Transportation Bill House Speaker John Boehner (R-OH) and Senate Majority Leader Harry Reid (D-NV) want a new transportation bill before the current temporary extension expires at the end of the month (WashPo). The party leaders pressed joint-committee chairmen Sen. Barbara Boxer (D-CA) and Rep. John Mica (R-FL) to make compromises to finish their work on the bill by the end of the week. Debate continues over the size of infrastructure investment, transit funding and how to shore up the Highway Trust Fund. The first Renewing America Progress Report and Infographic Scorecard, released last week, assesses at the current state of U.S. transportation infrastructure policy. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. Corporate Regulation and Taxation The Case for Elimination Bloomberg’s editors argue for eliminating corporate tax and broader tax reform. They propose setting the tax rates on dividends and long-term capital gains equal to the ordinary income tax rate, ending the preferential tax treatment of investment income. These changes would simplify taxation, increase fairness, eliminate double taxation, and end distortions, according to the authors. With the highest statutory corporate tax rate in the world—35 percent for federal taxes only—the United States is at a competitive disadvantage. This CFR Backgrounder by Jonathan Masters discusses the effect of current policy, and proposals for U.S. Corporate Tax Reform. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Innovation Thiel Launches Later-Stage VC Firm Noted Silicon Valley financier Peter Thiel launched Mithril Capital Management, a later-stage venture capital firm (FT). Thiel—who encourages promising entrepreneurs to drop out of college—sees a gap between early stage and late stage investors. Mithril will help fund and guide growing companies before they begin to consider an IPO. His co-founder explained: “We want to help companies have more flexibility as they make decisions that could have a significant impact on their evolution. It’s much harder to make those decisions in the glare of the public markets.” In the face of persistently high unemployment, policymakers and workers look to innovation and entrepreneurship, the primary engine of U.S. job growth over the past thirty years. This CFR Backgrounder by Steven J. Markovich discusses how entrepreneurs create and finance startups and the ramifications of policies such as the JOBS Act. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

by Renewing America Staff June 20, 2012 Renewing America
China

Brazil’s Stability is Success

In the most recent July/August issue of Foreign Affairs, many people including Richard Lapper, Larry Rohter, Ronaldo Lemos, and myself respond to Ruchir Sharma’s May/June article “Bearish on Brazil,” which predicted that Brazil’s rise would end as soon as global commodity prices leveled out. In my piece, “Stability is Success,” I argue that while it is true that challenges remain for Brazil, its recent reforms and social programs have helped develop the economy and middle class in such a way that the country will no longer rise and fall solely on the basis of external market fluctuations. Ruchir Sharma ("Bearish on Brazil," May/June 2012) argues that Brazil’s incredible rise over the past ten years has depended on the sale of commodities, and that as commodity markets begin to slow, so, too, will Brazil’s growth. Sharma correctly notes that in the coming years, Brazil will likely need to confront a decline in commodity purchases from China. But he fails to recognize that economic stability has also driven Brazil’s growth. Throughout the late twentieth century, Brazil suffered from failed stabilization policies and devastating bouts of hyperinflation. In 1994, however, Brazil introduced a new currency, the real, which has kept inflation in check. Around this time, the government also began lowering tariffs, opening up markets, and privatizing industries, policies entrenched over the next decade by former Brazilian President Luiz Inácio Lula da Silva. These reforms convinced local and international skeptics that Brazil would not return to the days of closed markets and inflation—an evolution that, more so than the commodity craze, has spurred Brazil’s economic boom over the last decade. Sharma argues that the very measures Brazil has taken to reach this stability will hold the country back. In particular, he claims that Brazil’s spending on welfare programs, such as Bolsa Família, an initiative that provides cash transfers to low-income parents who get their children vaccinated and keep them in school, has reduced inequality at the expense of development. Yet history suggests that to achieve sustainable growth, governments must care for the young, the old, and the less fortunate. European countries and the United States began building their own social safety nets at far lower levels of per capita income than those of emerging-market states today, thus expanding productivity and boosting demand. Indeed, numerous studies conducted by the World Bank and others suggest that the reduction of inequality in middle-income countries, such as Brazil, actually boosts economic progress. What is more, several studies of Brazil itself, performed by Fundação Getulio Vargas, a Brazilian research institution, demonstrate that Bolsa Família has increased self-employment and domestic consumption. Other studies, such as ones conducted by the International Food Policy Research Institute, show that the children of the families that receive aid from Bolsa Família are healthier and spend more time in school—offering the best hope for the increase in skilled workers that Sharma prescribes. Meanwhile, Sharma compares Brazil to China, arguing that Brasília has restrained development whereas Beijing has promoted it. Yet in making that contrast, Sharma overlooks the disparate levels of average income between Brazil and China, especially for the poor. According to the International Monetary Fund, per capita income in China, where GDP has risen rapidly over the past two decades, remains less than half of that in Brazil. And over the past ten years, the average income of Brazil’s bottom 20 percent has grown by around 10 percent, the same rate as China’s total GDP growth. Brazil has also outperformed China in enlarging the size of its middle class. According to a study performed by the Brookings Institution, roughly half of Brazil’s population is now considered middle class, compared with less than ten percent in China. Brazil has brought so many people out of poverty not just by selling commodities but also by diversifying its economy, expanding its financial and service sectors, and reducing inequality. Such policies have created a strong base of domestic consumers that has helped power Brazil’s economic rise and tempered the effects of external shocks, such as the 2008 global financial crisis. Despite all of this, Sharma mentions the Brazilian middle class only once. Brazil faces many problems, from poor education and infrastructure to a complex bureaucracy and complicated tax regulations. The question is whether the country can solidify its gains and attain long-term growth—an outcome that will depend on far more than commodity markets. Click here to read Ruchir Sharma’s response to this piece, as well as his reaction to Richard Lapper’s, Larry Rohter’s, and Ronaldo Lemos’ articles.

by Shannon K. O'Neil June 19, 2012 Latin America’s Moment

Trade

Free Trade and Regulation: Making Both Better

Freer trade and effective government regulation have been seen by many critics as antithetical. In “Better Regulation for Freer Trade,” a Policy Innovation Memorandum released today by the Renewing America initiative, Thomas J. Bollyky argues that this is a false choice. Opponents of new trade rules warn that giving governments, or worse corporations, the power to challenge national regulations that interfere with the movement of goods could trigger a “race to the bottom” in which nations would be forced to degrade environmental, health, and safety laws to abide by trade rules. Bollyky argues that instead, progress on trade and effective regulation of products are "mutually dependent." The issue is again coming to the top of the international trade agenda. The United States and the European Union are considering the launch of bilateral free trade negotiations, and the issue of what to do over divergent – or unnecessarily duplicative -- consumer and environmental protection standards will be perhaps the toughest issue in the negotiations. The long-standing trans-Atlantic dispute over the safety of genetically-modified organisms in food crops is only one of a long list of issues. Similarly, in the Trans-Pacific Partnership talks linking the United States to many Asian economies, improved regulatory coherence is a major U.S. goal. Those negotiations resume with a 13th round in San Diego in early July. Bollyky urges the United States to use the TPP and other regional negotiations to drive the adoption of international standards, with reporting requirements that would hold countries accountable even as enforcement of standards and regulations remains entirely within national authority. He notes that trade agreements that have adopted these models have produced a nearly 8 percent rise in trade flows among members. Like commerce, Bollyky writes, regulatory problems have increasingly jumped national boundaries, and international cooperation is needed not just to facilitate trade and development, but to protect health and safety as products criss-cross borders. The recalls five years ago involving imports of Chinese toys, toothpaste, and tires show how quickly poorly inspected products can become major public health concerns. Bollyky, the senior fellow for global health, economics, and development at the Council on Foreign Relations, calls on the White House to build on a recent executive order with a policy that would strengthen international cooperation -- including the adoption of international standards and appropriate mutual recognition of testing and inspection regimes – in the areas of food and drug safety. Doing so, he argues, would boost trade flows and better protect public health. The issue will remain a difficult one. Both advanced and developing countries have mutual interests in increasing trade and enhancing effective consumer and health regulations. Reconciling the two requires complex negotiations involving multiple government policymakers and regulators, all of whom are facing pressures from competing outside interests. But there are no good alternatives to such an approach. In an increasingly global economy, progress on trade and regulation must move hand in hand.

by Edward Alden June 19, 2012 Renewing America
Trade

Morning Brief: Congressional Leaders Try to Save Transportation Bill

Congressional leaders will meet today to resolve differences on the transportation bill (AP). House Speaker John Boehner (R-OH) and Senate Majority Leader Harry Reid (D-NV) will join committee chairmen Sen. Barbara Boxer (D-CA) and Rep. John Mica (R-FL) in a discussion to try to find a consensus that has eluded the forty-seven member joint-chamber committee. The ninth temporary extension of federal transportation funding will expire on June 30, more than 1,000 days since the expiration of the last multiyear comprehensive law that supported highways and mass transit projects across the nation. The first Renewing America Progress Report and Infographic Scorecard, released last week, assesses at the current state of U.S. transportation infrastructure policy. Hurdles to Natural Gas Cars Shale gas production is surging and yielding record low prices, but cost remains a barrier to fueling autos with natural gas (WSJ). Compressed natural gas (CNG) vehicles need a hefty storage tank that adds more than $5,000 to the car’s price and requires nine years to pay back through lower fuel costs. Refueling is another problem, as fewer than 1.3 percent of service stations are CNG equipped; home refueling requires $4,000 in equipment, plus installation and fuel costs. CNG continues to make inroads into commercial fleet vehicles, however, from bus systems to garbage trucks (WSJ). In a new paper published by the Brookings Institution’s Hamilton Project, CFR’s Michael A. Levi—the David M. Rubenstein Senior Fellow for Energy and the Environment—argues that the economic benefit of allowing natural gas exports exceeds the potential benefit from CNG expansion. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. Debt and Deficits States Make Progress on Healthcare Costs Since 2008, most states have cut Medicaid benefits and reimbursements (Stateline). Some are launching innovative programs to crimp costs and improve patient outcomes. Oregon’s “coordinated care organizations” will charge a fixed fee per customer to cover medical, dental, behavior health, and substance abuse services. New Jersey and Nevada are preparing similar programs for those with certain chronic illnesses and behavioral health problems. Health care costs are a significant burden to the federal government. More than half of all Medicare spending comes from general revenues; payroll taxes only supply a third (TaxVox). California’s Bad Pension Bet In 1999, California enacted retroactive increases to the pensions of hundreds of thousands of state workers to be paid for by expected future investment gains that failed to materialize (Bloomberg). Investment gains were only 75 percent of what was hoped, costing the Golden State over $20 billion. Popular policies that have faraway consequences can be dangerous; as Warren Buffett put it, “Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that problems will only become apparent long after these officials have departed.” Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. International Trade and Investment Nuclear Titans Bring in Chinese Partners in Bid for UK Project U.S. based Westinghouse (a Toshiba subsidiary) and France’s Areva are bringing in Chinese partners to help fund bids for a U.K. nuclear project (Reuters). Both firms had previously licensed their designs to these firms for construction of plants in China. It’s an example of the ability of Chinese firms to leverage their deepening experience in infrastructure construction, large foreign exchange reserves, and access to Western designs to create business opportunities in developed economies. For the United Kingdom, it’s a chance to use Chinese investment and potentially lower construction costs to expand electrical capacity in a time of austerity. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Innovation Microsoft Unveils Surface, its iPad Competitor To combat the success of Apple’s iPad that elegantly marries software and hardware, Microsoft announced its own tablet, the Surface (NYT). The growth of tablets and smartphones threatens the PC market that Microsoft dominates, particularly as lucrative business customers increasingly switch to iPads. Analysts believe that Microsoft does not think that its hardware partners are able to challenge Apple. One analyst said: “This was clearly a referendum on Microsoft’s partners. Microsoft felt they could not rely on others to deliver on their vision for Windows 8 in mobile computing.” Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

by Renewing America Staff June 19, 2012 Renewing America
Trade

Better Regulation for Freer Trade

See CFR Senior Fellow and Renewing America Director Edward Alden's accompanying blog post here. Changes in the way the world trades have increased the importance of regulation in international commerce. Fewer goods and services originate "from" any one place or any one supplier, but rather consist of components and tasks from multiple suppliers scattered across several countries. Consistent, adequate, and predictable regulation is essential to the success of these global supply chains, but remains elusive. Without international coordination, national regulations and private standards have proliferated. The resulting cacophony has done little to promote U.S. exports or effective regulatory oversight. The United States should pursue regulatory integration on a regional basis and in the areas where the interests of trade officials, national regulatory authorities, and exporting nations overlap. A new White House initiative on international regulatory cooperation launched this month provides the opportunity to implement this strategy. The Era of Global Supply Chains Over the past three decades, the production of goods—from electronics to food, clothing to cars, and medicines to furniture—has changed. Low-cost shipping, fast and reliable information communication technologies, and tariff reductions have allowed companies to unbundle and outsource manufacturing stages and intermediate services to specialist suppliers around the world. These global production models now dominate international commerce, with intermediate products comprising 56 percent of the global goods trade and 73 percent of global services trade. These changes have produced significant benefits for U.S. businesses and consumers alike. Unbundling allows businesses to scale economies, institute just-in-time production, and have greater flexibility in meeting consumer demand. Consumers benefit from more affordable goods. U.S. firms often coordinate and lead production networks and specialize in design, branding, and other high-margin activities. Economists estimate that Apple captures nearly 60 percent of the value-added in iPad production, while the dozens of firms that manufacture and assemble the iPad components and parts split the remainder. Unbundled production models keep the prices of U.S. goods low and competitive globally. Less developed economies benefit as well. Once, Japan, Taiwan, and South Korea needed to build a broad and deep industrial base in order to produce and export finished products that could compete in the world economy. The unbundling of production has reduced the barriers to competition, enabling China, Vietnam, and other less developed nations to industrialize through participation in global supply chains, lifting millions of their citizens out of abject poverty. The Challenges of Global Regulation Sustaining the benefits of global supply chains will depend on the adequacy, predictability, and efficiency of the regulatory oversight in the countries involved. The mechanisms that ensured accountability for products in the past—tort liability and companies' investments in the good reputation of their brands—do not easily extend to intermediate suppliers in countries where access to courts can be limited. Regulation and product standards are essential tools for promoting public health and safety, safeguarding the environment and rights of citizens, and ensuring the proper functioning of markets. But regulating effectively is far more difficult in this new global market. Unclear, excessive, or duplicative regulatory requirements can impede new global production. In unbundled global supply chains, intermediate services and parts crisscross borders multiple times. As the number of countries and transactions multiply, so do the costs of inefficient and divergent regulations. The proliferation of uncoordinated regulations can challenge even sophisticated multinationals. The high costs of regulatory compliance can keep small and medium-sized U.S. businesses from entering new markets altogether. The White House has cited unwarranted health, safety, and technical regulations as the largest obstacle to achieving its goal of doubling U.S. exports by 2014. The scale and complexity of global supply chains are also overwhelming U.S. regulatory authorities. The volume of U.S. Food and Drug Administration (FDA)–regulated imports, for example, quadrupled (from six to twenty-four million shipments) over the past decade and now involves more than 300,000 facilities in 150 different countries. There are legal and practical limits on the ability of the U.S. regulatory authorities to conduct inspections of these producers and suppliers. With the worldwide growth in trade, other national regulatory authorities face the same daunting challenges. The adequacy of health, safety, and environmental regulations in one country increasingly depends on the adequacy of those regulations in other countries. Inefficient or ineffective regulatory systems can keep developing countries from participating in international commerce, undermining development and delaying their citizens' access to medical and agricultural technologies. Efforts to address these problems have been inadequate. U.S. trade and regulatory officials have traditionally gone about their respective duties in wary parallel. Trade officials have looked to reduce barriers to international commerce and have not concerned themselves with the adequacy of trading partners' regulations or their enforcement. Regulators have sought to implement the most effective domestic regulation, usually without consulting other trading partners. This approach is no longer sustainable. National regulations and private standards have proliferated without international coordination. U.S. trade initiatives have not succeeded in reducing the inefficient, duplicative, but otherwise nondiscriminatory regulations that increasingly hinder trade in multicountry supply chains. The White House estimates that the divergence of safety labeling requirements internationally, for example, costs the U.S. chemical industry $475 million annually. And U.S. popular support for trade liberalization is diminishing without accompanying efforts to ensure that liberalized goods and services benefit the U.S. public health and welfare. A recent public opinion poll found that more than two-thirds of Americans worry about import safety, ranking it higher than concerns about pandemic flu or natural disasters. The Way Forward In early May 2012, President Barack Obama issued an executive order establishing an interagency working group, led by the White House's Office of Information and Regulatory Affairs, to promote international regulatory cooperation in order to reduce unnecessary cross-border differences. Participating U.S. agencies are charged with implementing its recommendations. To address the challenges of global supply chains, this working group should adopt the following strategy. Focus first on international standards and regulatory burden sharing in the food, drug, and biotechnology sectors. The working group should focus its efforts on the sectors and approaches where the interests of the critical actors most overlap. U.S. and other national regulatory authorities will participate more meaningfully in international regulatory initiatives if the objective is also to address their transnational regulatory challenges. Cooperation must likewise be in the economic interests of exporters and their governments if it is to succeed. An early priority should be improving international cooperation on food and drug safety regulations, a step that the Institute of Medicine recently concluded would have compound benefits for U.S. trade, global health, and international economic development. The White House initiative should also seek reductions in the international regulatory inconsistencies on biotechnology, which would help U.S. exports and improve agricultural productivity in poor countries. Promoting the adoption of international standards and pursuing agreements to rely on trading partners' testing of goods and inspection production facilities are ways that the United States can provide predictability for exporters and investors, improve and simplify regulatory compliance, and reduce duplication of scarce regulatory resources. Use trade talks to drive adoption of international standards in these priority sectors. Asia-Pacific Economic Cooperation (APEC) has pioneered a successful model in which member economies commit to adopt international standards, agree on the priority areas for doing so, and establish the reporting requirements that hold countries accountable for following through. Trade agreements can establish the structures and incentives necessary to implement this model successfully. According to the 2011 World Trade Organization (WTO) annual report, trade agreements that have adopted this model to reduce regulatory barriers have yielded significant benefits for production networks, increasing trade between member countries by an average of almost 8 percent. New U.S. trade talks, known as the Trans-Pacific Partnership (TPP), provide an excellent opportunity for the new White House working group to implement this model to improve regulatory cooperation in the food, drugs, and biotechnology sectors. U.S. trade officials have already identified improving regulatory coherence as one of their TPP negotiation objectives. Since all the TPP parties are also members of APEC, the reception to this model should be favorable. The model is consistent with U.S. law, since TPP member governments retain their full authority to adopt and enforce standards and regulations. Increase the ability of U.S. regulators to engage in burden sharing with foreign counterparts. Sharing knowledge and collaborative regulatory decision-making are powerful ways to promote regulatory convergence and better oversight among trading partners in priority sectors such as food, drug, and biotechnology. Congress should grant the FDA and the U.S. Department of Agriculture more authority to share with foreign counterparts inspection reports and proprietary information concerning important public health risks. Modest travel and training support would help developing countries to participate effectively in international standard-setting organizations. Increasing U.S. technical assistance to regulatory cooperation initiatives, such as the African Regulatory Harmonization initiative, would be a low-cost way to expedite the delivery of U.S.-funded medical and agricultural technologies to the poor. Focus on the regional level. U.S. policymakers should implement these trade and regulatory burden-sharing initiatives regionally. Improvements in shipping and information communication technology have made the world smaller, but proximity still matters. Supply chains are generally regional in nature. Regional institutions are also more promising venues for regulatory cooperation than multilateral institutions, such as the WTO, which require agreement among many more states with diverse economic and regulatory interests. The TPP talks, which include mostly Asian countries, and the Pan American Health Organization are examples of promising regional platforms for regulatory cooperation. Conclusion In the era of global supply chains, U.S. trade, regulatory, and development objectives are mutually dependent. Pursuing them as such in the new White House initiative would help U.S. policymakers avoid the race to the bottom on regulation that many public health advocates fear, and increase international adoption of the consistent, predictable, and science-based regulations needed to achieve U.S. trade goals, protect U.S. consumers, and advance the prospects of the poorest countries.

Policy Innovation Memorandum by Thomas J. Bollyky June 19, 2012 Renewing America

Trade

Morning Brief: Delaying the Fiscal Cliff

Current legislation calls for over $500 billion in spending cuts and tax increases at the end of 2012, a “fiscal cliff” that The Economist argues politicians should postpone. While acknowledging that the United States faces long term budget challenges, the article describes the risk of recession under current law. Compromise is unlikely before November; the campaigns of both parties stress different budget priorities. The authors argue for delaying the fiscal cliff to March of 2013, to allow a new Congress, and perhaps a new President, to negotiate a long term solution. Earlier this year, CFR’s Edward Alden discussed the CBO report on the budget impact of current legislation if Congress does not act. While he states that no action would be bad policy, he suggests that Congress take the current law as a budget baseline. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. International Trade and Investment Arguments for a U.S.-EU FTA The editors of Bloomberg recommend a free-trade agreement (FTA) between the United States and the European Union. Before the end of June, officials from both continents will recommend whether to pursue a FTA. While existing tariffs are relatively low, a FTA could increase trade by more than $120 billion within five years, according to a U.S. Chamber of Commerce study. Reduced regulatory barriers could accelerate trade further. Likely hurdles include traditional disputes over agriculture, subsidies to Boeing and Airbus, access to service markets, internet privacy concerns, and public procurement contract rules. Possible Dollar Shortage? Bloomberg discusses the possibility of a shortage of U.S. dollars, even though Federal Reserve programs have created more than $2 trillion in additional currency since 2008. Foreign central banks are acquiring more U.S. dollars to build their foreign exchange reserves amid increased concerns over the euro. The accumulation of dollars by central banks appears to be crowding out demand from the private sector. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Corporate Regulation and Taxation Regulations Push More Small Banks to Consolidate With more than ninety deals announced so far, 2012 is expected to have the most bank mergers since 2007 (WSJ). Industry analysts expect further consolidation among the nation’s 6,643 small banks in response to new regulations, weak loan demand, low interest rates and profit margins, and limited growth prospects. The Federal Reserve proposed applying new Basel III international capital standards to all small banks. The JOBS Act raised the shareholder limit for avoiding SEC filings from 500 to 2,000, simplifying deals between private banks. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

by Renewing America Staff June 18, 2012 Renewing America
Trade

Morning Brief: Foreign Investment Rises in United States

The first quarter of 2012 was the twelfth straight quarter of positive foreign direct investment (FDI) flows into the United States, with the second quarter looking even better (WSJ). FDI includes long term investment into the U.S. economy through long-term bets such as corporate acquisitions and real estate. As the top destination for FDI, the United States economy benefits through greater investment: “It's almost like a reindustrialization of the U.S., with the help of foreign money," said one analyst. This CFR Independent Task Force report encourages the Obama administration and Congress to adopt a “pro-America” trade policy that brings to more Americans the benefits of global engagement and investment. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Infrastructure ASCE Predicts a D Grade for U.S. Infrastructure Greg DiLoreto, the president-elect of the American Society of Civil Engineers (ASCE), expects U.S. infrastructure to keep its near failing “D” grade in 2013 (Bloomberg). In 2009, ASCE said that the United States needed an extra $2.2 trillion to be spent on capital projects, significantly higher than the $1.6 trillion it thought was needed in 2005. DiLoreto said: “We haven’t really invested additional money, so I would be hard-pressed to believe that the grade would improve. Not everything is falling apart -- you can find examples of agencies spending money. But the D represents an overall condition of America’s infrastructure.” The Renewing America Initiative’s first Progress Report and Scorecard, “Road to Nowhere” highlights the failure of the nation to continue to invest in the infrastructure that has enabled economic strength in past decades. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. Education and Human Capital H1-B Visa Cap Reached Bloomberg Businessweek discusses what options firms have since the 85,000 cap on H1-B visas for highly skilled immigrant workers was reached earlier this week. It took two and half months for the cap to be reached, a possible indication of improving job prospects; last year it took seven months to reach the cap, while in April of 2008, it only took one day. Without an H1-B visa, a U.S. firm could place a foreign worker in an overseas office, and then bring him/her to the United States the following year under a L-1B visa for key personnel, a cumbersome process. Current U.S. immigration policy makes it difficult for many firms to hire the best workers, and leads to a system that does not always humanely deal with migrants. CFR Senior Fellow and Renewing America Director Edward Alden recently commented on the untenable positions both parties have taken. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Innovation Innovation Lessons from Skunkworks and Startups Established firms that struggle to innovate beyond their current core offerings should learn lessons from startups and skunkworks (HBR). Skunkworks of the 1970s and 1980s allowed a team of employees to focus on new technologies and offerings outside the core product line, but they lost favor in the 1990s as business leaders pursued focus. Amazon’s Lab126 and Google X are high profile, modern examples. Startups focus on product innovation first, and as they grow, their attention shifts to process innovation to scale up the business and rein in costs. In the face of persistently high unemployment, policymakers and workers look to innovation and entrepreneurship, the primary engine of U.S. job growth over the past thirty years. This CFR Backgrounder by Steven J. Markovich discusses how entrepreneurs create and finance startups and the ramifications of policies such as the JOBS Act. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Debt and Deficits Public Pensions May be Unfulfilled Promises The Economist explains how lax accounting standards and poor investment returns have led to underfunded public pensions in the United States. Average annual real net investment return was negative for pensions from 2001 to 2010. Many governments did not dramatically raise their pension contributions to compensate, because they continued to assume an 8 percent annual investment return. Private firms face tougher accounting rules, which require more realistic assumed rates of return, often cited as one reason many have shifted investment risk to workers through defined contribution plans. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

by Renewing America Staff June 15, 2012 Renewing America
Trade

Morning Brief: A Strategy for U.S. Natural Gas Exports

In a new paper published by the Brookings Institution’s Hamilton Project, CFR Senior Fellow Michael A. Levi assesses the costs and benefits of natural gas exports, and recommends allowing exports with appropriate risk mitigation actions. Levi’s framework includes six dimensions: macroeconomic, distributional, oil security, climate change, foreign and trade policy, and local environment. While supporting exports, he cautions that the potential job gains will be less than many expect. The report also explains some less obvious effects of natural gas policy. For instance, preventing natural gas exports would weaken U.S. arguments against China’s export restrictions on rare earth metals. The transformation of the U.S. energy market created by the new extraction techniques for oil and gas has some predicting a renaissance for U.S. manufacturing based on lower, stable energy costs. Renewing America contributor Steven J. Markovich examined those claims and argued that the impact will likely be modest in a Policy Initiative Spotlight. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Corporate Regulation and Taxation Dimon Testimony Revives Regulatory Debate JPMorgan Chase CEO Jamie Dimon’s testimony before the Senate Banking Committee has revived debate over financial regulations. The New York Times chided the questioning Senators for not pressing Dimon hard enough on his opposition to new rules. The Wall Street Journal praised Dimon for taking responsibility and battling against new regulations, including his argument that the Volker Rule will be inadequate in banning proprietary trading. On Bloomberg, William Cohan argues Wall Street is still a black box to regulators while another piece proposes restructuring regional Federal Reserve banks to reduce bankers’ influence. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Infrastructure Highway Bill Negotiations Appear to Stall The lead highway bill negotiators for the Senate and House accused each other’s party of delaying the bill (TheHill). Senator Barbara Boxer (D-CA) said there is “a definite lack of urgency in the House and a definite lack of leadership like we had in the Senate.” Rep. John Mica (R-FL) said he was disappointed that “Senate negotiators have yet to move significantly on key House reform proposals.” In a press conference yesterday before these comments, Boxer was more upbeat: “Everybody is moving toward one another — that’s good… They’re sending us language, we’re sending them language, and we’ve done it for about, say, 75 percent of the bill.” CFR Senior Fellow and Renewing America Director Edward Alden recently discussed political dysfunction in Washington, including the inability of Congress to expand infrastructure investment despite the support of labor unions and business groups. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. Innovation United States Ranks Seventh in Innovation Bloomberg released its global innovation index; overall, the United States ranks seventh on a list of eighty-one countries, trailing: Finland, Singapore, South Korea, Japan, Sweden, and Germany. The United States earned the top rank for “High-tech density” (the percentage of publically listed firms in high-tech sectors), and strong marks in productivity, R&D intensity, and researcher concentration. Manufacturing capability and the graduation ratio of STEM were America’s weakest spots. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

by Renewing America Staff June 14, 2012 Renewing America
Trade

Morning Brief: Dimon to Call Bad Trades an “Isolated Event”

JPMorgan Chase CEO Jamie Dimon will testify before the Senate’s banking committee today on his firm’s recent unexpected trading losses (TheHill). In his prepared remarks, Dimon will be apologetic, but will argue that the bad trades, with estimated losses of more than $2 billion, were an isolated event for the financial giant, which earned $19 billion in 2011 (Reuters). Dimon will also say that profits from the firm’s trading strategy helped it weather the financial crisis in 2008 and that “We will lose some of our shareholders’ money — and for that, we feel terrible — but no client, customer or taxpayer money was impacted by this incident.” Shifting Tax from Corporations to Owners? In an opinion piece in the New York Daily News, noted economist Luigi Zingales proposes reducing the corporate tax rate from 35 to 10 percent while increasing the individual capital gains rate from 15 to 35 percent. Zingales argues that the large size of many corporations means they can individually realize more potential benefit from tax loopholes than wealthy individuals, and have greater incentive and ability to lobby for such breaks. Josh Barro does not dispute Zingales’ main arguments, but cautions against relying upon capital gains taxes for significant revenue because they can be deferred or circumvented (Bloomberg). With the highest statutory corporate tax rate in the world—35 percent for federal taxes only—the United States faces a potential competitive disadvantage. This CFR Backgrounder by Jonathan Masters discusses the effect of current policy, and proposals for U.S. Corporate Tax Reform. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Infrastructure U.S. Solar Market Expected to Double in 2012 Government subsidies and falling panel prices are expected to double the U.S. solar market in 2012 (WSJ). Surging panel production—much of it in China—and reduced demand in other nations due to expiring government subsidies, has pushed average solar panel prices down by half since 2011. U.S. developers are expected to double solar installations this year to 3.3 gigawatts—an 11 percent share of global production—making the U.S. the fourth largest solar market. 2013 is expected to be difficult if tariffs proposed by the Department of Commerce are implemented. The CFR’s Campaign 2012 discusses how the debate over support for the solar industry and other alternative energy sources will affect the upcoming U.S. presidential contest. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. Education and Human Capital How the Obama Administration Approaches School Reform Through No Child Left Behind (NCLB) waivers and competitive grants such as Race to the Top, the Obama administration has used stimulus funds and executive authority to reform education (Education Week). Obama’s agenda includes greater teacher accountability for student performance, expansion of charter schools, aggressive intervention in failing schools, and common academic standards. Projected GOP nominee Mitt Romney has criticized the effectiveness of elements of the president’s agenda and spending, while teachers’ unions are unhappy about linking student performance to teacher evaluations, and the growth of charter schools. More States Pursuing School Choice Stateline discusses the efforts of many state lawmakers to enact greater levels of school choice. While only thirteen states have voucher or tuition tax credit programs today, Virginia’s new tuition tax credit plan will go into effect this year, and New Hampshire legislators recently passed their own plan. Earlier this year, Louisiana made its voucher program statewide, and raised the income threshold. Tennessee and Michigan will open programs this fall based upon Louisiana’s example, while Alabama and other states are considering similar measures. Choice-based school reforms have attracted considerable debate among experts. The state of Louisiana has become a kind of national laboratory for proponents of choice-based reform. Renewing America contributor Steven J. Markovich discussed recent Louisianan educational reforms in a Policy Initiative Spotlight. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Innovation Prescriptions for Innovation Ails Wim Roelandts, the former CEO of semiconductor maker Xilinx, drew upon his long career to distill five principles of innovation to revitalize what he sees as the U.S. high-tech’s ailing innovation culture (HBR). He believes that the majority of employees want to do a great job, and are often willing to bear personal costs to make a contribution even if discouraged by management, but that the work must have meaning and value. He thinks corporate leaders need to give employees a sense of community and empower them to act as owners while stressing learning throughout the organization. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

by Renewing America Staff June 13, 2012 Renewing America
Corporate Governance

Interview: Pressures Mount for the U.S. Economy

The dragging U.S. economic recovery was dealt another blow after jobs data for May, released June 1, showed an increase in the unemployment rate to 8.2 percent (CBS). The U.S. economy is simultaneously facing mounting external pressures related to the ongoing eurozone sovereign debt crisis and a growth slowdown in the developing world. In the following CFR.org interview with Christopher Alessi, CFR's Distinguished Visiting Fellow A. Michael Spence says, "You have extreme uncertainty and macroeconomic risk in the global economy, which shows up in volatility in a variety of financial markets." He notes that this climate "causes conservative behavior on the consumption and investment side." Spence also faults Washington for continued political gridlock. "There isn't very much aggressive public policy or public investment action, even taking into account the constraints of a sensible fiscal rebalancing program." Can you give an overview of the U.S. economic picture in light of the May jobs report? There [are] two things going on in the American economy post-crisis. One is deleveraging--leveraging up was an aspect of the dynamics that went into the crisis. That's fairly far along, depending on which sectors you're talking about. There are still issues, and the housing market's not helping. The other is structural adjustment of the economy, and that involves both demand and supply-side changes--so the demand side is going to have to eventually rely on a different mix of domestic demand and external demand and a different mix of investment and consumption. There are signs of market-driven structural adjustment. Wages and incomes are flat. There are some bits of evidence that manufacturing is recovering, and even manufacturing exports are getting a little more competitive. Exports have actually grown above their pre-crisis levels, and imports have not grown the same amount, so the current account deficit is coming down. So all of this is a lengthy process with a really big problem on the employment side, because underneath it all are all these labor-saving technological and global market forces. You've got a double problem: to pay for past excesses and try to invest in things that will generate growth and employment in the future. Employment was always going to be a struggle because of these global forces. We really haven't had a recovery in the construction sector, which is labor-intensive and important. And finally, nothing much is happening in Washington. There isn't very much aggressive public policy or public investment, even taking into account the constraints of a sensible fiscal rebalancing program that would make the restoration of a sustainable pattern of growth, employment, and momentum faster, and the quality of the result better. What policy prescriptions would you recommend the U.S. take to alleviate the employment piece and the larger economic situation? I don't believe you can solve a structural problem overnight. By structural, I mean where it generates employment, where it's competitive on the tradable side. If you've taken a terrific wallop, in part because you were in a defective growth path--meaning one that's self-limiting, can't go on forever, and includes overconsumption and leverage--then you've got a double problem: to pay for past excesses and try to invest in things that will generate growth and employment in the future. That's a pretty big burden, and it's a hard problem, but the main thing is you've got to decide how the burden gets shared. We have to find a somewhat fairer way to share the burden rather than just impose it on the unemployed, especially the young--redistributing income to the extent we can, going after skills upgrading and retraining. The political process [involves sitting down and deciding] who's going to pay the bill. If you don't do anything, then the unemployed pay the bill. We have to find a somewhat fairer way to share the burden rather that just impose it on the unemployed, especially the young, redistributing income to the extent we can [and] going after skills upgrading and retraining. You want to plan to invest in infrastructure. We need a change in attitudes about labor [that encourages investment in the labor sector by focusing skills and job training]. Tax reform would be a good thing that doesn't necessarily cost money. How is the United States being affected by the eurozone crisis and the slowdown in the developing world? Adversely. Europe is our biggest trading partner, so the slowdown in Europe is a direct negative effect. The emerging economies are an important growth engine, so their slowdown is not positive either. Then you have extreme uncertainty and macroeconomic risk in the global economy, which shows up in volatility in a variety of financial markets--exchange rate volatility, the Asian stock markets are highly volatile, and even ours is even relatively volatile. All of this has created uncertainty, and that then causes conservative behavior on the consumption and investment side, so that doesn't help either. There's nothing that's happened yet that's a massive hit to the American economy, but it doesn't help that everybody is slowing down at the same time. What policy prescriptions would you give for the eurozone situation? Greece may or may not decide to exit. That can cause contagion that's sort of similar in general terms to the contagion that occurred in the Asian crisis in the late 1990s. That has to be contained or it could get out of hand, and that means deploying the European funds [the European Financial Stability Facility and the European Stability Mechanism] and the ECB to stop it. They have to stop it on two sides: the banking side to prevent financial distress, but also on the sovereign debt side. Properly responded to, Greece does not have to bring down the eurozone. There's nothing that's happened yet that's a massive hit to the American economy, but it certainly doesn't help that everybody is slowing down at the same time. Italy and Spain are large, and they both need fiscal rebalancing and reforms that are designed to restore their growth, and those go together. It's hard to restore stability and balance on the fiscal side without some growth momentum. What will make this go wrong is if the political systems in Spain and Italy turn against the euro and reform process and say, "We don't want to play this game, we're going to play another game." Then the game is over with respect to the eurozone as it was envisaged. What's the next step in coordinating a coherent response to the debt crisis? These reforms take time to take effect. Even if they're getting it done, there's a risk that the yields will run up, because private investors are still uncertain and afraid and not really investing. Most of the money that goes into European sovereign debt is going into the German sovereign debt and a little bit in the Nordic countries. So Germany and the ECB are very reluctant to intervene in the sovereign debt market. But I believe that they will intervene to prevent a flip to a bad equilibrium, where expectations shift the mark, the yields run up, it destroys effectively all the fiscal consolidation that's been done, and eventually shifts the incentives of the countries that are in trouble or need rebalancing. The ECB has a mandate to intervene in the banks to prevent extreme financial distress. They have done that on a fairly massive scale, and they're prepared to do that again--but their willingness to do that is heavily based on serious commitment to reform in these countries. So it's a kind of chicken-and-egg problem.

by Renewing America Staff June 12, 2012 Renewing America
Trade

Morning Brief: United States Falling Short on Basel III

The Basel Committee on Banking Supervision found weaknesses in implementations of Basel III (Bloomberg). Its report to the G20 leaders—who will meet next week in Mexico—described weaknesses in implementation by the United States, the European Union, and Japan as well as developing economies. Basel III implementation will begin in 2013 and last until 2019. Concerns about U.S. implementation include: not including enough U.S. banks, the Dodd-Frank Act ban on external credit ratings in assessing riskiness of capital, and the lack of published rules for Basel III regulations as well as market risk assessment updates to Basel II. In December of 2010, the CFR’s Maurice R. Greenberg Center for Geoeconomic Studies held its World Economic Update, a panel discussion in which experts analyzed the effect of the Basel III accords and new U.S. federal regulations. Meeting videos and a transcript are available. SEC Proposes Derivatives Regulations The Securities and Exchange Commission (SEC) proposed new regulations of over-the-counter (OTC) swaps (NYT). The new rules would require most derivatives contracts to be traded through regulated exchanges such as the Chicago Mercantile Exchange, and to go through clearinghouses, which would backstop contracts if a party defaults. The Dodd-Frank Act required the SEC to write these new rules by last summer and implementation dates have not yet been proposed. Separately, the Commodity Futures Trading Commission expects to release new rules governing derivatives at the end of the year, may forgo cost-benefit analysis (Bloomberg). Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Innovation Funding Portals May Boost Startups As part of its Understanding Entrepreneurs special report, the Financial Times discusses the emergence of funding portals to provide crowdfunding for startups. April’s Jumpstart Our Business Startups (JOBS) Act legalized the use of registered internet portals for venture investment. The portals open up a new source of finance to startups unable to secure angel or venture capital investment, but may place the general public at risk for fraud. In the face of persistently high unemployment, policymakers and workers look to innovation and entrepreneurship, the primary engine of U.S. job growth over the past thirty years. This CFR Backgrounder by Steven J. Markovich discusses how entrepreneurs create and finance startups and the ramifications of policies such as the JOBS Act. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Infrastructure Wind Market to Die Down with PTC Expiration The CEO of Vestas, the Danish firm that is the world’s largest producer of wind turbines, expects the expiration of U.S. production tax credits (PTC) at the end of 2012 to trigger an 80 percent decline in wind projects (Reuters). The PTC gives utilities a 2.2 cent per kilowatt-hour benefit for the first 10 years of operation. The wind market has been hot this year, as utilities accelerate projects before PTC termination. When the PTC was eliminated in 2002, the wind market declined by 75 percent. Scott Thomasson, the president of NewBuild Strategies and an expert on infrastructure funding, recently authored "Encouraging U.S. Infrastructure Investment," a Policy Innovation Memorandum released by the CFR’s Renewing America initiative. Thomasson proposes new initiatives to address crumbling U.S. infrastructure. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. Education and Human Capital U.S. STEM Gender Gap is Among the Largest Test scores indicate the persistence of a STEM achievement gender gap is the United States that is among the largest in the world (EducationWeek). On international tests, American boys outperform girls, while in other nations the gender gap is smaller, or non-existent. On all STEM Advanced Placement (AP) tests, U.S. males outscore females. While some experts believe the recent, rapid growth of the number of female STEM AP test takers may be weighing down scores, others point to stereotypes and cultural attitudes. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. International Trade and Investment Burgernomics 101 Since 1986, The Economist has published the Big Mac index, a tool for economists to understand international differences in wages and prices. Purchasing-power parity (PPP) theory argues efficient markets shift prices and currency values until standardized goods have roughly the same cost. Few products are as ubiquitous and standardized as McDonald’s Big Mac. With the Big Mac index, economists have found that relative to the U.S. dollar, the Swiss franc is overvalued while the Chinese yuan is undervalued. Standardizing wages in terms of Big Macs per hour shows real U.S. wages declined from 2000 to 2007, while rising in many developing economies. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

by Renewing America Staff June 12, 2012 Renewing America
Trade

Morning Brief: Corporations Helping to Shape University Curricula

To help fill their pipeline of young engineers and scientists to replace retiring baby boomers, large corporations are helping to shape the curriculum of technical programs at major universities (Bloomberg). Firms are engaging students early in their academic careers, and pushing universities to develop more industry focused curricula. As Boeing’s senior Vice President for Human Resources explained: “[Universities] need to provide our students with hands-on, real-world practical application from day one. So, when they show up at the first job, not only can they find information, not only can they develop it, they can actually do real work.” CFR Senior Fellow and Renewing America Director Edward Alden discusses the shortage of skilled workers in the U.S. manufacturing pipeline and the need for firms, governments, and unions to work together to encourage young people to pursue manufacturing careers, and schools to increase relevant education. Vouchers Drive Catholic School Growth After decades of decline, enrollment in Catholic schools in on the rise, helped by new voucher programs (WSJ). In the nine states with voucher programs, Catholic schools tend to benefit disproportionately because they are usually urban, have openings, are established in their communities, and are usually less expensive than other private schools. Catholic schools generally outperform public ones on test scores and graduation rates, but critics argue that vouchers drain public school resources while tending to go to the brightest students with the most engaged parents. Choice-based school reforms have attracted considerable debate among experts. The state of Louisiana has become a kind of national laboratory for proponents of choice-based reform. Renewing America contributor Steven J. Markovich discussed recent Louisianan educational reforms in a Policy Initiative Spotlight. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Debt and Deficits Economists Debate Further Fed Intervention Nobel laureate Gary Becker argues against a further round of quantitative easing (QE3). Becker believes QE3 would be ineffective, because interest rates cannot go significantly lower, and bank reserves are already swollen. While acknowledging that past quantitative easing did little to stimulate the economy, former chairwoman of President Obama’s Council of Economic Advisers Christina Romer advocates for QE3 (NYT). She believes the Fed must act because changes in fiscal and housing policy will not occur before the election, and that QE3 can be made more effective by not specifying its size and duration. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. Innovation Silicon Valley Bank Opens UK Branch Silicon Valley Bank (SVB)—which helped finance the growth of tech giants such as Cisco and Electronic Arts—opened its first European branch in the UK (FT). SVB’s entry is expected to boost UK startups; SVB has developed the capability to lend to young firms without revenues by a thorough evaluation of their protectable intellectual property. SVB’s contributions to U.S. job growth were highlighted by the Export-Import Bank of the United States, which awarded SVB its small business lender of the year award in 2011. In the face of persistently high unemployment, policymakers and workers look to innovation and entrepreneurship, the primary engine of U.S. job growth over the past thirty years. This CFR Backgrounder by Steven J. Markovich discusses how entrepreneurs create and finance startups and the ramifications of policies such as the JOBS Act. Tech Eyes Turn to Apple This week, Apple will host its annual week-long conference for technology developers, WWDC. Apple is one of the most influential tech firms, and rumored innovations in its operating system (TechCrunch), and hardware (TechCrunch) are likely to shape industry trends. CEO Tim Cook’s keynote address with occur today at 1pm ET, 10 am PT. Websites such as Wired, CNET, and ABC News will live blog the event. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

by Renewing America Staff June 11, 2012 Renewing America
International Organizations

Everyone Agrees: Ratify the Law of the Sea

It is high time the United States joined 162 other states and the European Union in becoming party to the UN Convention on the Law of the Sea (UNCLOS)—thirty years after the Reagan administration first negotiated the treaty. On May 23, the White House dispatched its big guns to the Senate Foreign Relations Committee, where Senator Kerry is holding hearings on UNCLOS. The message from Secretary of State Hilary Clinton, Secretary of Defense Leon Panetta and chairman of the Joint Chiefs of Staff, General Martin Dempsey, was unequivocal: Acceding to the treaty is profoundly in the U.S. national interest. That, of course, is the unanimous view of every one of their predecessors, under both Democratic and Republican administrations. And yet the treaty continues to face stubborn opposition from a vocal conservative minority of purported defenders of U.S. sovereignty, still trotting out long-discredited talking points. All of the uniformed services—and especially the U.S. Navy—are solidly behind UNCLOS. American military leaders have always been discriminating when it comes to treaties, traditionally resisting those (like the Rome Statute of the ICC) that might put U.S. servicemen and women at risk. But they support UNCLOS because it will enable, rather than complicate, their mission. Because the United States was the principal force behind the negotiation of UNCLOS, it contains everything the U.S. military wants, and nothing that it fears. The treaty’s primary value to the U.S. military is that it establishes clear rights, duties, and jurisdictions of maritime states. The treaty defines the limits of a country’s “territorial sea,” establishes rules for transit through “international straits,” and defines “exclusive economic zones” (EEZs) in a way compatible with freedom of navigation and over-flight. It further establishes the “sovereign inviolability” of naval ships calling on foreign ports, providing critical protection for U.S. vessels. More generally, the treaty allows states party to exempt their militaries from its mandatory dispute resolution provisions—allowing the United States to retain complete military freedom of action. At the same time, the treaty does nothing at all to interfere with critical U.S.-led programs like the Proliferation Security Initiative (PSI). Nor does it subject any U.S. military personnel to the jurisdiction of any international court. Some have argued that UNCLOS has already become “customary international law,” and thus the United States has little to gain from formal accession. But custom and practice are far more malleable and subject to interpretation. Other states may soon push the Law of the Sea into new, antithetical directions if the United States does not ratify the treaty. China, a party to UNCLOS, rejects U.S. interpretations of the treaty’s freedom of navigation provisions, and continues to assert outlandish claims to control over virtually the entire South China Sea. But it is hardly alone. Countries as diverse as Brazil, Malaysia, Peru, and India have resisted freedom of navigation within their EEZs, in contravention of their obligations. As it has for years, the United States Navy regularly conducts Freedom of Navigation Operations (so-called FONOPS) to challenge excessive claims of territorial exclusivity. But as non-party to the treaty, the United States lacks any legal standing to bring its complaints to an international dispute resolution body. More broadly, U.S. Navy and Coast Guard officials complain, non-membership complicates everyday bilateral and multilateral cooperation with scores of international partners. If these security benefits were not enough, the U.S. business community is unified in its support for the treaty for two reasons. First, UNCLOS would protect U.S. rights to sole commercial exploitation to all resources on and under its extended continental shelf (that is, beyond two hundred miles). This area—estimated to be twice the size of California—is rich in oil, gas, and other exploitable resources. Second, accession to the treaty would allow the United States to sponsor its own national companies to engage in deep sea-bed mining. Last week, the chairman of Lockheed Martin sent a strongly worded letter to the Senate saying his company wanted to join the race for undersea riches, but could not assume investment risks until it was clear that it would have a clear legal title to its findings. This coming week, Senator Kerry will hold a second round of hearings on UNCLOS, featuring an array of military commanders, treaty champions like John Bellinger--former legal counselor to the State Department and National Security Council under the George W. Bush administration--and critics, like Steven Groves of the Heritage Foundation. The hearings offer a golden opportunity to put to rest the canards of treaty opponents. Securing a two-thirds Senate majority will not be easy. Opponents are pulling out all the stops, invoking the GOP’s patron saint to scuttle its prospects. According to Edwin Meese, former attorney general for Ronald Reagan, the Gipper abandoned the treaty as “a direct threat to American sovereignty”—conveniently ignoring that the offending provisions were written out of the current treaty in a 1994 negotiation, precisely to alleviate U.S. concerns. One enduring shibboleth is that the International Seabed Authority (ISA) created under UNCLOS is an unaccountable supranational bureaucracy that will defy U.S. wishes and redistribute undersea wealth to developing countries. This is pure nonsense, since the United States is the only country guaranteed (if it accedes to the treaty) a permanent seat on the ISA, a body that takes decisions by consensus—giving the United States an effective veto over its decisions. It is true that the ISA collects royalties for deep sea mining, but these remain extremely modest—as one would expect from an arrangement that was effectively negotiated by U.S. oil companies. Nevertheless, Senator Jon Kyl of Arizona has proposed an enticing but misguided “compromise,” whereby “Congress could enact a statute that makes the navigational parts of the treaty…the law of the land,” and thereby “separate the wheat from the chaff.” This purported solution is a sheer mirage. It would secure no diplomatic or international legal benefits for the United States. Nor would it secure maritime exploration rights to which Lockheed Martin referred. Still, Kyl has already obtained the signatures of twenty-seven colleagues, just seven short of the number needed to scuttle the treaty. Treaty defenders must expose this gambit as an alluring but ultimately destructive siren song. Senator Kerry has promised that he will delay any vote on UNCLOS until after the election, to avoid the “hurly-burly of presidential politics.” This is a calculated gamble, given the potential constraints of a lame duck congressional session. Champions will need to keep the pressure on, and hold Congress’s feet to the fire to disregard the absurd objections of treaty skeptics.

by Stewart M. Patrick June 8, 2012 The Internationalist
Trade

The North American Market: A Competitive Edge That Shouldn't Be Squandered

If there’s a golden rule for economic competitiveness, it's this: “Always exploit your advantages.” Yet for more than a decade, the United States has systematically undermined one of its biggest – our proximity to a wealthy, resource-rich partner to the north and a developing, labor-rich partner to the south. Robert Pastor’s fine recent book The North American Idea, makes a compelling case that the strong U.S. economic growth of the 1990s was directly linked to growing economic integration with Canada and Mexico, and that the weak growth of past decade is in no small part the result of disintegration, brought about largely by unwarranted fears over NAFTA and the unfortunate U.S. response to the 9/11 terrorist attacks. Two documents released this week drive that home. The first is a paper by Erik Lee of the North American Center for Transborder Studies and Christopher E. Wilson of the Woodrow Wilson Institute called “The State of Trade, Competitiveness and Economic Well-being in the U.S.-Mexico Border Region.” It lays out succinctly the benefits of what is essentially a joint production system between the two countries in sectors like automobiles, aerospace, and medical devices, with a supply chain that straddles the border. Cross-border production has allowed for more efficient location of business activities in ways that enhance productivity, lower costs, and help North American-based companies to compete more effectively with Asia and Europe. Over the past decade, however, that deep integration has become considerably shallower. From 1993 to 2000 bilateral trade grew at 17 percent annually; from 2000-2008 it grew at just 4.5 percent. Some of this was the impact of China, which became increasingly attractive as a platform for exports to the United States. But a big factor was the hardening of the border that occurred after 9/11. Northbound car traffic has fallen by one-third since 2000, and truck traffic has barely grown. And even as the Border Patrol doubled in size to discourage illegal immigration, few inspectors were added at the ports of entry to help commerce and lawful travel. While estimates vary, increased border restrictions and the resulting congestion has cost the U.S. economy tens of billions of dollars annually, and almost certainly pushed some production out of North America. Chart Source: "The State of Trade, Competitiveness and Economic Well-being in the U.S.-Mexico Border Region" The second document is the new “Northern Border Strategy” prepared by the Department of Homeland Security. The economic story at the northern border is broadly similar to the southern border. U.S.-Canada trade flows recovered more quickly after 9/11, but were also hampered by rising border costs and delays. Economic research suggests that U.S.-Canada trade volumes from 2000 to 2007 were about 12 percent below what would have been expected given economic growth and exchange rates. The costs for complying with new border requirements have been estimated to add 3 to 4 percent to the cost of cross-border trade, weakening the North American advantage vis-à-vis Asia and Europe. The new DHS strategy makes all the right noises about promoting both growth and security, and strongly endorses the U.S.-Canada Beyond the Border initiative, a promising government-to-government effort to strengthen security and enhance trade and cross-border travel through much closer cooperation between the two countries. Encouragingly, the DHS strategy calls for new performance measures that focus more clearly on assessing the efficiency of border crossings. While the threat of terrorist attacks remains real, it can never be repeated too many times that the 9/11 terrorists did not enter the United States from either Canada or Mexico. Terrorism is also, as my CFR colleague Micah Zenko nicely highlighted this week, a rather low probability threat in North America (as he drily notes: “the number of U.S. citizens who died in terrorist attacks increased by two between 2010 and 2011; overall, a comparable number of Americans are crushed to death by their televisions or furniture each year”). In contrast, the current unemployment rate of 8.2 percent, and a real rate that is probably double that, is a serious threat to the well-being of millions of Americans. With some multinational companies rethinking their China strategies in the face of rising costs and regulatory obstacles, the United States has a real opportunity to attract more business and create badly-needed jobs. A seamless continental market would strongly reinforce that encouraging trend.

by Edward Alden June 8, 2012 Renewing America